Tuesday, March 17, 2015
Third Circuit Affirms Multi-Million Damage Awards for Breach of Fiduciary Duties and Deepening Insolvency
Earlier this year, the U.S. Court of Appeals for the Third Circuit affirmed (for the most part) a multi-million jury damages award against the former officers and directors of the Lemington Home for the Aged. The Home entered bankruptcy in 2005, and the Bankruptcy Court later that same year granted the request of the Committee of Unsecured Creditors to file suit against the former Chief Executive Officer, the former Chief Financial Officer, and the former directors of the Home. After trial, a jury concluded that the two former officers had breached their duties of both care and loyalty, that the former directors had breached their duty of care, and that all of the defendants had deepened the insolvency of the Home by concealing the board's decision to close the Home and so defrauded the Home's creditors. The court therefore affirmed an award of $2,250,000 in compensatory damages against all but two of the defendants (jointly and severally) and punitive damages against the former CEO and CFO in the amounts of $1 million and #$750,000, respectively, rejecting only the award of $350,000 in punitive damages against five of the former directors.
The appellate court found that facts supporting the jury's verdict include repeated failures to comply with applicable federal and state regulations, the failure of the CEO to work full-time at the Home despite collecting her full salary and a state law requiring that she be full-time, and the failure of the CFO to provide a representative of a major creditor with basic financial information, to keep a general ledger for almost a year, and to bill Medicare for $500,000 owed. The court also found that the directors had failed to remove the CEO and CFO despite being aware of many of their failings, and the Home's failings, in part through independent reports documenting those failings.
This case therefore presents a rare but unfortunately actual case study in how officers and directors can fail to fulfill their fiduciary duties, and the liabilities they can incur as a result.