Thursday, December 12, 2013

Unsecured Creditors' Rights: A Question of Liability for Board Members of a Nonprofit Nursing Home

1625-Lincoln-Avenue-Lemington-HomeLemington Home for the Aged was a nonprofit nursing home in Pittsburgh with a long history, beginning, as one court described, with its "first incarnation [as] 'The Home for the Aged and Infirm Colored Women,' incorporated and dedicated on July 4 1883." The Home was founded by the daughter of an African-American abolitionist from the area, in recognition of the care needs of "Aunt Peggy," an aging friend and former slave. 

Unfortunately, by the late 1980s, the Home's finances were in trouble, triggering attempts to  modernize, move to a larger facility, and other steps taken in an effort to get the Home back on sound footing. Some of the Home's financial history is captured in a early dispute over Medicaid with the state department of welfare in the '90s.   In 2005, however, the Home filed a "voluntary Chapter 11 petition in the United State Bankruptcy Court for the Western District of Pennsylvania." The court approved closure of the Home and transfer of its residents to other facilities.

In the ongoing bankruptcy case, unsecured creditors initiated an adversary proceeding against several of the Home's former officers and directors. In 2010, the District Court granted the defendants' motion for summary judgment, finding that the "business judgment rule" and the "doctrine of in pari delecto" precluded liability on the facts alleged. The case seemed to be over, resolved by deference often accorded to nonprofit operations, especially as to "volunteer" directors or trustees.

The Third Circuit disagreed, however, and, in a precedential ruling, remanded for trial.  The Circuit found that genuine issues of material fact existed as to whether the defendants, by continuing to operate the Home once bankruptcy was recognized as inevitable, breached fiduciary duties.  The appellate court focused on allegations the individuals:

  • failed to exercise requisite care,
  • failed to be reasonably diligent, or
  • "fraudulently contributed to the deepening of the debtor's insolvency."

The application of the deepening insolvency theory was a matter of first impression for Pennsylvania.

As reported by TribLive, in March 2013 an 8-person jury awarded the Home's unsecured creditors a total of $5.75 million in damages.  The award included compensatory damages in the amount of $2.25 million against 15 of the 17 defendants, plus individual allocations of punitive damages against 2 former officers and 5 of the 13 individual former directors. 

In May 2013, the District Court denied the  defendants' post-trial motions for judgment as a matter of law, new trial or remittitur.  In concluding there was sufficient evidence to support punitive damages against the Board members, the District Court observed in part:

"As to the five Director Defendants against whom punitive damages were levied,  all of them were responsible for the Home's oversight. Evidence was presented  that they were aware that Defendant Causey [a corporate officer] was not sufficiently performing her job as nursing home administrator but none of the Directors took any action to remove her from that position.... The jury heard testimony that the Board never chose to seek bids on the Home from organizations that specialized in nursing home turnaround and that no due diligence book was ever created for potential buyers.... The Home continued to accrue debts after these actions were taken, which Defendants reasonably should have known would damage the Home's prognosis."

The defendants' latest appeal to the Third Circuit is now pending (Docket No. 13-2707).

The outcome of In Re Unsecured Creditors of the Lemington Home for the Aged would appear to have potentially interesting implications for other sectors of the long-term care industry.  For example, elderly residents of CCRCs, who have often paid large fees to cover future care or have paid "refundable" entrance fees, are usually unsecured creditors.  The question of "deepening insolvency" and fiduciary duties to creditors might, therefore, affect the interests of a group that could appear particularly sympathetic to a jury.      

This is an interesting case that bears watching for the outcome on appeal.

Ethical Issues, Federal Cases, Health Care/Long Term Care, Housing | Permalink

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