Bankrupt facility must pay up, judge rules

A federal appeals court has ruled that former officers and directors of a nursing home that closed after declaring bankruptcy are still liable for $2.25 million in compensatory damages.

Administrators at the Lemington Home for the Aged have been involved with litigation for close to a decade. After the troubled Pittsburgh facility closed in 2005, unsecured creditors charged that its leaders had breached their fiduciary duty through grave mismanagement.

The U.S. Court of Appeals for the Third Circuit agreed with the creditors, ruling that there was enough evidence.

However, the court also said in its January 26 ruling that while there's evidence to support the $1.75 million in punitive damages against two officers, it was insufficient to support $350,000 in punitive damages against each of five director defendants since they didn't engage in “outrageous conduct.”

The battle has been considered a test case for nonprofit nursing homes and their fiduciary obligations, with the defendants' attorneys repeatedly saying the officers did not act maliciously.

Nearly four years ago, however, appeals judges in the Third Circuit found that Administrator Melody L. Causey and CFO James Shealey bore responsibility for mismanagement that led the home to close. A series of recording, quality and financial problems predated two resident deaths. 

“The evidence of the numerous deficiencies, the death of a resident in the summer of 2004 that resulted in the placement of the Home's license on probationary status, the staff and operational deficiencies noted in the PrimusCare report, the fact that members of the Board knew that Causey was not working full time, and Shealey's failure to maintain even rudimentary but essential accounting records would enable a fact-finder to conclude that the directors had breached their fiduciary duty of care,” the court stated.