Fiduciary Duties of Bankrupt Nursing Home's Officers, Directors

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