Creditors May Sue Directors of Pittsburgh Nursing Home With Questionable Finances - In Re Lemington Home for the Aged
As a Pennsylvania nursing home lawyer, I was interested to read an appeals court opinion about a historic "home for the aged" in Pittsburgh. The Lemington Home for the Aged was originally founded in 1883 as a rest home for elderly African Americans -- many of whom, at the time, were former slaves with limited means of making a living. The nursing home was relocated and expanded in 1983, after which it encountered financial trouble, staffing trouble and a series of health and safety violations that included the deaths of two patients in the home's care. After the home eventually filed for bankruptcy, a group of unsecured creditors filed a lawsuit against the home's directors and officers, alleging they breached their fiduciary duty by failing to act sooner. The district court dismissed In re Lemington Home for the Aged, but the Third U.S. Circuit Court of Appeals resurrected the claim.
The nursing home was unable to make as much money as expected in the 1980s and 1990s, in part because almost all its residents were on Medicaid. It received loans from the city of Pittsburgh, Allegheny County and private foundations, but ended up with $4 million in mortgage debt. To make matters worse, the federal government banned new admissions for a time in 1998, and the home's administrator declined to address staffing problems. A chief financial officer hired in 2002 failed to perform basic tasks; for example, Medicare bills were not submitted, and several employees quit because they were not paid. The home's Board lacked a treasurer during some of this time, ensuring no oversight. The administrator was frequently absent and not replaced. Furthermore, the home was cited for numerous safety deficiencies during this period, leading up to the June 2004 death of a patient whose resuscitation order was ignored, and December 2004 death that could have been caused by neglect.
The administrator proposed bankruptcy in May of 2004, but the board opted for a loan instead, eventually filing for bankruptcy 11 months later. A committee of unsecured creditors in that bankruptcy eventually filed an adversary proceeding against the home's directors and officers, alleging breach of fiduciary duty and deepening insolvency. The district court granted summary judgment to the home, finding that the fiduciary duty claim was barred and the deepening insolvency claim had insufficient support. The creditors appealed.
The Third U.S. Circuit Court of Appeals reversed that decision, finding that there were fact issues sufficient to let the case survive beyond summary judgment. Pennsylvania law allows directors to rely in good faith on information provided by their officers, who in turn must act in good faith in their jobs. The creditors argued that the administrator and the CFO breached their duties of due care; and that the board had breached its duty of due are by relying on the administrator, not intervening with the CFO, and diverting funds supporting the closed home to another home with an overlapping board of directors. The Third Circuit found that the creditors' evidence was enough to convince a reasonable jury that the administrator and CFO were not competent. This shows that the business judgment rule does not apply -- that is, the board cannot be said to have used reasonable diligence if they ignored signs that their officers were incompetent. It also disagreed with the district court that the in pari delicato rule applied. This rule bars plaintiffs from going to the courts over wrongdoing that they themselves had a part in. However, the Third Circuit said, the creditors have presented substantial evidence that the board was acting in its own self-interest, rather than for the good of the nursing home, when it moved the home's funding to another home its members also controlled. This is enough to present a genuine issue of material fact, the Third said, and thus it reversed summary judgment.
As a Philadelphia injury lawyer, I'm pleased that there will be some accountability for the board and the officers for apparent mismanagement of this home. A nursing home is not just a business or even a nonprofit; it is a home, and families entrust their vulnerable loved ones to it. By failing to take good care of basics like paying employees, the officers may have made Pennsylvania nursing home abuse or neglect more likely. After all, it's hard to provide good care if you have constant turnover and low morale. And of course, at least two deaths did take place at the home that may be traceable to mismanagement and neglect. As a Philadelphia medical malpractice lawyer, I hope those two families are able to get the answers they deserve.