The Birmingham law firm of Bradley Arant Boult Cummings (BABC) is using an unusual "fee for services" contract in an effort to collect on a $2.78-billion judgment against former HealthSouth CEO Richard Scrushy. The arrangement, according to a post at DonaldWatkins.com, has provided little in the way of benefits to BABC's client in the matter, but it has created a financial windfall for the law firm in the form of what might be called "open-ended legal fees."
Watkins, a longtime Birmingham attorney and businessman, writes in an editorial opinion under the headline "Did Bradley Arant Boult Cummings Rip Off Encompass Health for Over $100 Million?"
Former HealthSouth CEO Richard Scrushy was in the news this past week. HealthSouth Corp., now known as Encompass Health, was back in a Birmingham, Alabama, state court, once again, to collect money on a $2.9-billion civil judgment that was entered against Scrushy in the aftermath of the infamous HealthSouth accounting- fraud scandal.
In 2005, Scrushy was acquitted on all charges in a companion criminal case. However, the civil judgment was entered against Scrushy at the conclusion of a shareholder-derivative lawsuit four years later.
Last week, lawyers for Encompass went to court to chase down a rumor that Scrushy had control over a prisoner’s multimillion-dollar bank account. Scrushy denied this claim.
Encompass is represented in the post-judgment collection proceedings by the Birmingham-based law firm of Bradley Arant Boult Cummings, LLP (“Bradley”).
Encompass has received some benefit from collection efforts, but the company's law firm has been the big winner. How did that happen? Watkins sets the stage:
After the civil judgment was rendered in 2009, the law firms of Hare, Wynn, Newell & Newton and Bradley were able to quickly collect about $33 million from their post-judgment collection activities. No money has been collected from Scrushy in the past 10 years.
Encompass has paid Bradley more than $100 million for its legal work in the case. As a result, the law firm has gotten rich from this case.
Since 2009, the legal work in the case has focused on debt-collection activities.
BABC, it turns out, has long tentacles in the legal world, and that helped the firm pad its own bottom lie in the Schrushy civil matter. Writes Watkins:
Since 2009, two former Bradley partners have served as general counsel of HealthSouth/Encompass. The first one is John P. Whittington, who was general counsel from 2006 to 2016.
Patrick Darby succeeded Whittington as Encompass' general counsel in 2016. He, too, was a former Bradley partner.
Why does this matter? Watkins explains:
Rather than engaging Bradley's services for debt-collection work in Scrushy's case using the standard 15% contingency-fee contract, Whittington and Darby chose to reward their old law firm with an open-ended “fee for services” contract that has enriched Bradley by more than $100 million.
Bradley is gouging Encompass in the Scrushy case. Despite receiving more than $100 million from Encompass to collect about $33 million, Bradley has not collected one dime from Richard Scrushy in the past 10 years.
In recent years, the sole beneficiary of Bradley's debt-collection work has been the Bradley law firm itself.
Encompass is a New York Stock Exchange/Fortune 500 company. Its payment of more than $100 million in legal fees to Bradley in the Scrushy case has made it possible for the law firm to expand its offices into the Atlanta market -- courtesy of an open-ended gravy train provided by Encompass CEO Mark Tarr, former general counsel John Whittington, and current general counsel Patrick Darby.
How have Encompass shareholders fared in this scenario? Not so well, reports Watkins:
The $100 million or more in payments to Bradley for legal fees in Richard Scrushy's case have been detrimental to Encompass' shareholders for several reasons.
First: John W. Haley, the prominent Hare, Wynn, Newell & Newton attorney who won the civil case against Scrushy, reportedly told Bradley attorneys during a post-judgment discovery proceeding, "there is nothing here; we have gotten everything Richard Scrushy had."
Haley also called one of Richard Scrushy’s attorneys and told him that he [Haley] was cutting his losses and he was convinced they had gotten all they could get from Scrushy.
Afterwards, Haley resigned from the case. Bradley, riding the wave of an open-ended "fee for services" contract, pressed on.
The individuals who supervised Bradley's unproductive debt-collection work and who approved Encompass' payment of Bradley's invoices in Scrushy’s case are John Whittington and Patrick Darby – the two former Bradley partners.
The legal fees paid to Bradley have only served to subsidize the law firm. For more than a decade, there has been no direct or indirect benefit to Encompass shareholders from the company's payments to Bradley in Scrushy's case.
Second: The $100 million or more that Encompass has paid to Bradley could have built three Encompass rehabilitation facilities. Each one of these new facilities would have netted Encompass shareholders at least $10 million per year in free cash flow for each facility for a 50-year period.
Third: The $100 million or more paid to Bradley to collect $33 million raises plenty of red flags. Something is amiss here. This matter smells. Furthermore, this Encompass-Bradley payment arrangement warrants an internal review by Encompass's board of directors and an external investigation by the U.S. Securities and Exchange Commission. This is the only way Bradley's gravy train with Encompass will come to an end in the Scrushy case.
Fourth: Bradley’s “fee for services” contract should be terminated immediately and replaced with the standard 15% contingency-fee contract for post-judgment discovery and debt-collection proceedings.
Fifth: The amount of money Bradley has received from Encompass beyond the 15% standard fee on the $33 million that was collected more than a decade ago should be clawed back from Bradley, John Whittington, and Patrick Daniel, via a shareholder-derivative lawsuit.
As Bradley Arant's gravy train rolls swiftly down the tracks, what does it say about the law firm? Watkins provides a hard-edged answer to that question:
As it stands today, Encompass has rewarded Bradley with more than $100 million in shareholders' money for what some legal observers have characterized as "routine" debt-collection proceedings that normally are provided on a 15% contingency-fee basis.
A law firm that cannot find what it believes to be "hidden" money and assets after it has been paid more than $100 million to do so is sorely lacking in high-quality legal talent, or it is simply ripping off a client, such as Encompass.
If Bradley truly believes that Richard Scrushy has "hidden" $2.9 billion in wealth somewhere in the world, the law firm should be competent and confident enough to find it on a contingency-fee basis.
At some point, Bradley needs to demonstrate its expertise in something beyond sucking more than $100 million in shareholder money out of Encompass in one case.
Coming in Part Three: The Schnauzer describes his unsettling experience with Judge Allwin Horn in a matter separate from the Scrushy civil case. Was this judge fit to serve on the bench?