## Facts

- HealthSouth’s shareholders approved a plan allowing the company to loan money to corporate executives so the executives could purchase HealthSouth common stock.
- Richard Scrushy, a HealthSouth executive, borrowed more than $25 million from HealthSouth in 1999 and used the proceeds to buy HealthSouth shares.
- In June 2002, Scrushy asked HealthSouth’s board of directors to let him repay the loan early by transferring HealthSouth stock to the company.
- The board considered the proposal, agreed to the repayment-in-stock, and valued the shares using an average of the stock’s high and low trading prices on July 31, 2002.
- The transaction closed on August 1, 2002, with HealthSouth accepting Scrushy’s shares as repayment.
- Less than a month later, the public learned that HealthSouth had issued materially misleading financial information, and the market price of HealthSouth stock had been inflated.
- As a result, the shares HealthSouth accepted from Scrushy were worth far less than the loan amount once the inflation was corrected.
- Stockholders filed a derivative action against Scrushy asserting unjust enrichment and equitable fraud, seeking relief based on the allegedly unfair repayment.
- The stockholders moved for summary judgment; Scrushy opposed, arguing there was a genuine dispute about whether he had actual knowledge of the misleading financial information when he repaid the loan with stock.

## Issues

1. On a motion for summary judgment, must the stockholders show that Scrushy had actual knowledge (or at least prove the absence of a factual dispute about his knowledge) of HealthSouth’s misleading financial reporting to obtain judgment on unjust enrichment and equitable fraud arising from the stock-for-debt repayment?

## Decision

- The Court of Chancery denied the stockholders’ motion for summary judgment.
- The court concluded that Scrushy’s knowledge regarding the company’s misleading disclosures—and whether he knowingly benefited from an inflated stock price—presented a factual question material to the asserted equitable theories.
- Because that factual dispute could affect whether the repayment was unjust or fraudulent in equity, the claims could not be resolved as a matter of law on the summary-judgment record.

## Legal Principles

- Summary judgment is appropriate only when the record shows no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law; the court must view the evidence in the light most favorable to the nonmoving party.
- Unjust enrichment requires more than a disparity in outcomes; the plaintiff must show an enrichment and corresponding deprivation that lack a sufficient equitable justification under the circumstances.
- Equitable fraud is an equitable theory that can support remedies such as rescission or restitution when a transaction is induced or structured in a manner equity will not permit to stand; whether a defendant’s knowledge of material facts makes the transaction inequitable can be a material fact question.
- Where liability turns on what a corporate insider knew (or did not know) at the time of a challenged transaction, that state-of-mind question may preclude summary judgment if the record supports competing inferences.

## Conclusion

In Re HealthSouth Corp. Shareholders Litigation addressed whether shareholders could obtain summary judgment against an executive who repaid a large company loan with stock later revealed to have been priced in an inflated market. The Court of Chancery held that the executive’s knowledge of the company’s misleading financial reporting was a material disputed fact bearing on unjust enrichment and equitable fraud, so the case could not be decided on summary judgment.


In Re HealthSouth Corp. Shareholders Litigation, 845 A.2d 1096 (2003)