Piercing the corporate veil: Strategies to reduce corporate negligence claims in LTC lawsuits

Nursing home and assisted living operators are seeing a marked increase in “piercing the corporate veil” theories and corporate negligence claims in malpractice litigation. These causes of action are asserted by plaintiffs to attempt to hold owners, unrelated companies and even members of the governing body (hence the term “piercing the corporate veil”) liable for the injury or death of a resident.

Frequently, these entities and individuals have nothing to do with the day-to-day operations of the facility or the care that was given to the resident. The good news is facilities can and should employ strategies that can help insulate them from these claims.

CURRENT LITIGATION LANDSCAPE

Nursing home lawsuits are increasing. They are costly and a distraction to the daily functioning of a facility. A recent survey conducted by Aon Risk Solutions found that the per-bed general liability/professional liability loss rate has risen to $1,540 per bed. Some states, like Kentucky, have staggering loss rates of close to $5,000 per bed. High, multi-million-dollar verdicts in states such as West Virginia and Florida have provided operators with further cause for concern. Plaintiffs spend a great deal of time mastering the corporate structure of a particular facility and its related entities and will effectively use this information against the facility and employees in discovery and in trial settings. 

In the past, it was common for only the facility providing the care to the resident to be sued. Now plaintiffs are suing every individual or entity with any possible connection to the facility to try to increase the available amount of money for settlement or verdict. The naming of additional individuals and corporations only increases the already significant costs operators must spend in defending against these claims and, in most cases, further reduces any available insurance proceeds to pay out any settlements or verdicts.

Long-term care (LTC) facilities are more susceptible to these types of claims because plaintiffs’ attorneys have created an underlying tone that suggests that nursing home companies are improper or sinister. However, the structure of most facilities is typical of many companies in different industries and in accordance with well-established corporate law. Nursing home structure has evolved over time to a more decentralized control model, recognizing that each facility is unique and needs agility and flexibility to best respond to the needs of its residents.  However, it is more cost effective when legal, back office and human resources can be conducted through a management company or similar entity. Even though these companies help to provide key functions at the facility, it is critical for facilities to emphasize and document that the care being provided is rendered at the facility by facility employees. 

PREVENTIVE MEASURES

When plaintiffs attempt to pierce the corporate veil—that is, assert that a corporation is really the alter ego or extension of its owners and shareholders—they focus on several key areas including control, capitalization, corporate formalities and fraudulent conduct. If a parent company provides guidance, it should not completely dominate what is done at the facility level. Furthermore, each facility should be adequately capitalized and have sufficient insurance to cover any losses. Banking and accounting records for each nursing home should be separately maintained and any finance accounts should be in the name of the operating company only. Cost reports and HUD financing documents should be accurate and not describe incorrectly the corporate structure, because these public documents are routinely used by plaintiffs to the detriment of operators.

Corporate formalities should be closely observed, and documents memorializing the corporate structure should not be contradictory. Shareholders should hold regular meetings to discuss important items, and these meetings should be documented in minutes. Each entity should have its own corporate books and by-laws. Contracts should be facility-specific. Any admissions paperwork signed by residents or their authorized representatives should be with the particular facility and not contain any chain designation.

Facilities need to carefully review their marketing material and social media presence to make certain that the facilities maintain their own unique separate identity. Any reference to management or parent companies on websites should be minimized or eliminated. Additionally, documents provided to employees should not refer to entities other than the facility that is their employer. Employees should be employed by the facility, and their W-2 forms and pay stubs should reflect this information.

In many cases, successful plaintiffs have been able to point to contradictory documents or complete misstatements by employees. Employees need to be prepared to answer questions in court regarding the corporate structure. Many times only a few individuals truly understand the structure, which leads to unnecessary and dangerous speculation by staff who try to be helpful in deposition, but wind up providing incorrect and misleading information under oath that is used against the company. Owners need to be vigilant and do their best to ensure that their documents and employees are not their own undoing.

PREVENTING NEGLIGENCE CLAIMS FROM SUCCEEDING

Corporate negligence or direct participant liability claims are potentially more dangerous to providers because it is difficult to distinguish between the clinical decisions and functions and the administrative ones. Plaintiffs attempt to demonstrate that improper conduct by shareholders, owners or employees resulted in injury or death to the resident. These claims are stand-alone claims, are directed solely towards management and rely on ineffective or missing administrative policies and decisions. These policies and decisions in question are typically in the areas of staffing, training, equipment and budgets. 

Corporate negligence claims can arm plaintiffs with significantly more information about the facility at an earlier point in the litigation. For example, plaintiffs will request confidential policies and procedures, staffing records, budgets and other financial documents, which will quickly turn a case about alleged negligent care into a referendum on whether decisions to stop using a certain type of equipment in a different facility was appropriate. While a parent company may have budgetary responsibility over subsidiary facilities, it is vital that the facilities be involved with the budgetary process and make decisions about budgets at their respective facilities. Even more importantly, when it comes to resident care and decisions impacting quality of care at a facility, these decisions must be documented and made at the facility level. This will help bolster the argument that “corporate” policies did not cause injury or death to a resident.

Plaintiffs often attempt to hold employees and governing body members liable through direct liability claims. It is no secret that multiple defendants drive up the cost of litigation and also can create potential conflicts of interest where an attorney may not be able to represent the interests of the facility, the management company and an individual simultaneously. A recent Arkansas case, Bedell v. Williams, reversed a lower court’s decision where the president, director and sole member of the governing body was found liable for a resident’s death. On appeal, the individual defendant was able to successfully argue that the need for a facility to have a governing body is a Medicare/Medicaid requirement and does not create a duty in a negligence claim. Operators should carefully consider the composition of the governing body at each facility, and any participation by non-facility employees should be carefully reviewed.

Additionally, plaintiffs can name former employees as defendants in these matters or, alternatively, obtain the testimony of former employees who may be disgruntled or misinformed. Operators should make it a practice to have exit interviews for employees who leave their employment regardless of reason and request these departing employees to sign a document which basically states that they did not observe, participate or otherwise know of any conduct that they felt was inappropriate or contrary to any law or regulation. These documents can be very useful should that former employee provide contradictory information in litigation.

Lastly, the impact of the Patient Protection and Affordability Care Act (ACA) on these claims cannot be overlooked. It is likely that the ACA, which sets forth more transparency in ownership and management disclosures, will increase direct and indirect liability claims and theories. Currently, there are contradictory and broader definitions of key terms which will likely broaden the potential spectrum of defendants in these negligence cases. Additional parties that may need to be disclosed under the ACA include clinical consultants, accountants and attorneys reviewing and drafting policies to assist in the operations of the facility. Operators are advised to keep a close eye on further developments in this area.

CONCLUSION

Providers need to remain vigilant in not making it easier for plaintiffs to pursue or succeed on piercing the corporate veil or corporate negligence theories. While the LTC environment is fast-paced and 24/7, attention to detail is critical for documents that are either internally created or provided to the government or third parties. The stakes are high in these cases—but there are actions that operators can take to reduce their exposure.

Disclaimer: This article is not legal advice. Consultation with licensed and experienced legal counsel is advised.

Caroline J. Berdzik is a partner at Goldberg Segalla LLP and a former assistant general counsel for New Jersey’s largest privately held LTCcompany. She may be reached at cberdzik@goldbergsegalla.com.