A recurring theme in our columns is how directors' and officers' fiduciary duties are examined as the corporation approaches financial distress. In fact, we have been writing for The Legal long enough that today we report again on a U.S. Court of Appeals for the Third Circuit case styled Official Committee of Unsecured Creditors on Behalf of the Estate of Lemington Home for the Aged v. Baldwin, No. 13-2707 (3rd Cir. Jan. 26, 2015), that we wrote on more than three years ago. In 2011, the Third Circuit reversed a decision by the U.S. District Court for the Western District of Pennsylvania granting summary judgment in favor of the defendants and remanded the matter for trial, which we wrote on at that time. Later, when the district court scheduled the case for trial, the defendants took action on mandamus to the court requesting that the trial schedule be relaxed. Finally, in a decision dated Jan. 26, the court considered an appeal from jury verdicts of liability and compensatory and punitive damage awards against the officers and directors of a nursing home facility that closed after filing for Chapter 11 back in 2005.

Summary of Facts

As we wrote previously, the Lemington Home for the Aged was, according to the opinion, “the oldest, nonprofit, unaffiliated nursing home in the United States dedicated to the care of African-American seniors.” Defendant Mel Lee Causey was hired as administrator and CEO in 1997. Defendant James Shealey became chief financial officer in 2002, and reported to Causey. The opinion notes that while the home had been financially troubled for decades, the home's financial difficulties became “particularly acute” during Causey and Shealey's tenure. It was during this time the home was cited by the Pennsylvania Department of Health at a rate almost three times higher than the average Pennsylvania nursing home. Two patients died under what the opinion calls “suspicious circumstances,” resulting in investigations by the department. The patient and financial records were in disarray. Finally, on Jan. 6, 2005, the board voted to close the home. The Chapter 11 bankruptcy petition was not filed until April 13, 2005.

Court Affirmed Jury's Verdicts on Liability

According to the opinion, the jury found that both Causey and Shealey breached their duties of care and loyalty, and the directors breached their duties of care. The Third Circuit began its analysis by stating the duty of care for corporate officers under Pennsylvania law, which applied in this case: “An officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.”

The court then noted that in Pennsylvania, the duty of loyalty requires “corporate officers devote themselves to the corporate affairs with a view to promote the common interests and not their own,” according to Tyler v. O'Neill, 994 F.Supp. 603, 612 (E.D.Pa.1998). In this case, the court ruled there was ample evidence that Causey and Shealey breached both duties.

With respect to Causey, the opinion notes that throughout her tenure, the home was not in compliance with state and federal regulations, and residents' clinical records were not kept properly. In addition, Causey admitted to working only part-time despite state law that requires the administrator must work full-time. This fact was sufficient to establish a violation of the duty of loyalty, which showed that Causey placed her own interest in collecting a full-time salary above the home's interests in her fulfilling her duties.