In Re HealthSouth: Settlement Extinguishes Contract Rights of Non-settling Defendant

The U.S. Court of Appeals for the Eleventh Circuit extended the PSLRA further than any prior court, allowing the entry of a settlement bar order that extinguished a non-settling party’s contractual claims for indemnification and advancement of defense costs against a settling party. In In re HealthSouth Corp. Securities Litigation, 572 F.3d 854 (11th Cir. 2009), the Court determined that such an extension of the PSLRA was reasonable in light of the policy supporting settlements and against indemnification. The decision may have had a lot to do with the non-settling party at issue – HealthSouth’s former CEO Richard Scrushy, who had become particularly reviled in the proceedings, was thought to be a primary perpetrator of the fraud at issue, and was actually serving jail time on unrelated bribery, money laundering and racketeering charges at the time the order was entered. Despite the particular “villain,” however, the result leaves the corporate world wondering how to structure indemnification agreements with corporate directors and officers to better protect their rights from extinguishment.

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Josh Lawler

Joel B. Ginsberg

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