Tuesday, May 13, 2014

Eye of the Storm? Corporations & Liability for Negligence in Long-Term Care

One of the tough questions in the arena of "law and aging," which is arguably broader than "elder law," is the scope of liability for negligence or mismanagement in long-term care. A lot rides on this issue.  For example, recently one friend mentioned to me that a large law firm in his city was spending most of its litigation time defending nursing homes, not doctors or hospitals, on personal injury claims.  

Hints of the "scope" of corporate long-term care liability issues appear as early as 2003. In Cases and Materials on Corporations (LexisNexis 2d 2005) by Professors Thomas Hurst (Univ. of Florida) and William Gregory (Georgia State), in the chapter on "Piercing the Corporate Veil," the authors include the case of Hill v. Beverly Enterprises-Mississippi, Inc., 305 F.Supp. 2d 644 (S.D. Miss. 2003), in which the court permits a nursing home resident's personal injury case to go forward for trial against the nursing home's "administrator" and two "licensees." The court rejects the defendants' arguments that without direct involvement or personal participation in the plaintiff's care, no liability can attach. 

In the notes after the Beverly case, the textbook authors ask whether this ruling is an example of "piercing the corporate veil."  The answer appears to be no; rather, the point of the authors' inclusion of the case in that chapter is that high level administrators may still face personal liability without hands-on involvement, because they have statutory or common law "duties," such as hiring, supervision, or training of employees.  The court emphasized, "There is no requirement of personal contact, but rather of personal participation in the tort; and a breach by the administrator of her own duties constitutes direct, personal participation."

Fast forward 11 years.  As recently discussed in McKnight's News, a 2014 federal bankruptcy court recently issued a ruling analyzing parties' attempts to pierce a particular for-profit nursing home enterprise's corporate veil in order to collect some $1 billion dollars in judgments. Success in collection apparently depends upon the judgment holders' ability to recover from a "bankrupt" corporate defendant's current or former "parent" corporations, the former parent's shareholders, lenders (private equity firms), or other individuals and entities alleged to have received the bankrupt subsidiary's assets as part of a "bust-out scheme."  

In March 2014, the Bankruptcy Court for the Middle District of Florida ruled these more remote defendants can face potential liability.  The court concludes that while the plaintiffs have failed to state a claim permitting "veil-piercing," the plaintiffs have stated a claim for relief against corporate directors and "upstream" entities on either a direct allegation of breach of fiduciary duty (for a director who served in multiple boards) or on an indirect theory of liability, "aiding and abetting a breach of fiduciary duty."  The court also permits the plaintiffs to proceed on theories of fraudulent transfers or conspiracy to commit fraudulent transfers against the parent company, successor entities, and certain individuals who appear to be corporate officers or directors. Of course, a decision on a pretrial motion to dismiss does not mean the defendants will ultimately be found liable.

The judge takes pains to outline the series of corporate entities and transactions, which appear to include overlapping officers or directors, that were used to build a national long-term care empire, but also, as alleged by the plaintiffs, to give separate entities control over physical assets or daily operations or incoming revenue, and to isolate and limit liability for debts.  To highlight one of the alleged sham transactions, the court describes the debtor corporation's "sole shareholder" as "an elderly graphic artist who currently lives in a nursing home" and who may have had some recollection of being asked to invest in "computer equipment," but who did not, in fact have or spend any money for his shares. 

The Bankruptcy Court's memorandum opinion, in In re Fundamental Long Term Care Inc., Jackson v. General Electric Capital Corp., 507 B.R. 359 (M.D. Fla. March 14, 2014), is "colorful" in the way that only legal geeks probably appreciate, although at one point the court observes that the "'bust-out' scheme alleged in the complaint . . . has all the makings of a legal thriller."  Plus, there are political implications of the Florida decision reverberating in Illinois, as described by the Chicago Tribune, here.  Scott Turow, this is in your backyard.  Are you taking notes? 

As for the $1 billion in judgments that triggered the collection efforts, they apparently represent 6 separate cases, and it appears that at least one was entered when no lawyer appeared to defend the nursing home at a jury trial against claims of negligence, as explained in a Tampa Bay Times news account in 2012 about one of the cases, where a wheelchair-bound resident was alleged to have fallen to her death in an unlocked stairwell. 

And by the way, just because a nursing home is organized as a nonprofit corporation does not mean that it can necessarily escape liability for officers and directors, as we recounted last December in discussing In re Lemington Home for the Aged. 

http://lawprofessors.typepad.com/elder_law/2014/05/eye-of-the-storm-corporations-liability-for-negligence-in-long-term-care.html

Federal Cases, Health Care/Long Term Care, State Cases | Permalink

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