04_Berdzik

Established and Emerging Corporate Veil Strategies

Caroline J. Berdzik

Goldberg Segalla LLP

902 Carnegie Center, Suite 100 Princeton, NJ 08540-6530 (609) 986-1314 [email protected]

Caroline J. Berdzik is a partner with Goldberg Segalla, LLP in Princeton, New Jersey specializing in employment defense, professional liability and risk management for long term care providers and other ancillary senior care businesses. Prior to joining Goldberg Segalla, she was the assistant general counsel of Care One Management, LLC and its affiliates in Fort Lee, New Jersey where she was responsible for managing the litigation portfolio and developing and implementing proactive strategies to defend against employment, professional liability and other claims, with a focus on minimizing risk and reducing legal spend. She is an active member of the American Health Lawyers Association, and frequent speaker on a variety of topics impacting the senior care industry.

Established and Emerging Corporate Veil Strategies Berdzik 41


I. Current Developments and Trends in Nursing Home Litigation .............................................................43 II. Piercing the Corporate Veil .........................................................................................................................44

A. History and Current Status ..................................................................................................................44B. Recent Cases .........................................................................................................................................44C. Discovery Tactics ..................................................................................................................................46D. Successful Defenses ..............................................................................................................................46

III. Naming of Owners, Shareholders, Directors, Members of the Governing Body and Employees in Lawsuits.................................................................................................................................47A. Trends and Repercussions ...................................................................................................................47B. Successful Defenses ..............................................................................................................................48C. Case Law ...............................................................................................................................................48

IV. Corporate Negligence ..................................................................................................................................49A. History ...................................................................................................................................................49B. Recent Cases .........................................................................................................................................49C. Discovery Tactics ..................................................................................................................................49D. Successful Defenses ..............................................................................................................................50

V. Direct Participant Liability ..........................................................................................................................50A. History ...................................................................................................................................................50B. Theories for Recovery...........................................................................................................................50C. Discovery Tactics ..................................................................................................................................51D. Successful Defenses ..............................................................................................................................51

VI. Impact of PPACA on Corporate Veil and Other Strategies........................................................................51 VII. Conclusion ....................................................................................................................................................52

Table of Contents



I. Current Developments and Trends in Nursing Home LitigationIt is no surprise that one of the fastest growing segments of litigation is nursing home/ALF litigation.

Many states such as New Jersey have their own resident rights statutes which provide for shifting attorneys fees if a plaintiff prevails and uncapped punitive and compensatory damages which render these types of cases very palatable to plaintiffs attorneys. These statutes, coupled with the overwhelming undeserved negative views of nursing homes and assisted living facilities, are resulting in irrational sky high verdicts.

The defense of these cases is taking its toll on the industry. Insurance companies in many states have stopped issuing professional liability policies for nursing homes, leaving many entities uninsured in those states where they are not mandated to carry liability insurance. The cost of litigation is negatively impacting the ability of facilities to make capital improvements to the centers and hire additional staff, despite plaintiffs protestations to the contrary.

Some facilities have closed their doors or simply moved their operations out of states with volumi-nous professional liability cases, an overreaching judiciary and exorbitant jury verdicts. In fact, Extendicare announced in May 2012 that it planned on leasing all 21 of its Kentucky nursing homes to an experienced third-party, long-term care operator based in Texas. The release also quoted a company official who said the reason for leaving the state was because of, the combination of a worsening litigation environment and the lack of any likelihood of tort reform in the State of Kentucky. HCR Manor Care is still fighting its appeal of the astounding $90 million verdict which was rendered against it in West Virginia for a wrongful death case involving an 87 year old resident who was at the facility for 19 days.

Some states are attempting to pass tort reform to help curb these runaway verdicts and to curtail what is viewed by some as predatory practices by plaintiffs law firms capitalizing on liberally construed stat-utes and jurors emotions. For example, Pennsylvania has a bill pending in the legislature that would limit punitive damages to no more than double the compensatory damages awarded, unless intentional misconduct was found. According to an analysis done by Diederich Healthcare (www.diederichhealthcare.com), based on information reported to the National Practitioner Data Bank, Pennsylvania states malpractice insurers paid out $319.7 million for malpractice claims in 2011, mostly in settlements, second only to New York at $677.9 million.

Texas passed tort reform in 2003 and now has caps on non-compensatory damages at $250,000. The law also eliminated the requirement of nursing homes to maintain liability insurance and also limited the introduc-tion into evidence of regulatory findings at trial that were arguably not relevant to the matter at hand. If one were to believe the articles written on the topic since tort reform passed in Texas, lawsuits against nursing homes in the state have dropped precipitously and more physicians have established medical practices in the state.

While long term care providers look for ways to actively manage this risk and rely upon well-grounded corporate law principles, the plaintiff s bar is continuing its relentless assault on these defenses and is devising new strategies to try to attach liability to owners, officers, directors and the governing body and obliterate the corporate structure. Some courts have held their ground and continue to uphold long estab-lished tenets of corporate law, while other courts have seemed to perform a contortion act to arrive at a hold-ing that seems to contradict the law. This manuscript will discuss some of these theories, recent case law developments and practical advice about implementing successful defense strategies in nursing home and ALF litigation.

44 Nursing Home/ALF Litigation Seminar September 2012

II. Piercing the Corporate Veil

A. History and Current Status

Although not a new theory by far and certainly not the favored theory of the day, piercing the cor-porate veil tactics are still prevalent in nursing home and assisted living malpractice cases. This argument can be raised by a plaintiff at varying points in the litigation. Arguments that are asserted include that the corpo-ration or limited liability company is a mere instrumentality of the owners or alter ego of the owners and therefore, should not enjoy the shield normally afforded these entities under corporate law. Other times pierc-ing the corporate veil arguments are made after a judgment is obtained because the operating or licensing entity is underfunded or underinsured and the plaintiff cannot collect on a judgment. In essence, this type of allegation resembles more of a collection action.

In all states piercing the corporate veil is sacrosanct and there are many factors which need to be weighed by the trier of fact before the veil can be pierced. Most elements that are reviewed and weighed by courts are as follows: control (review who has the actual control, review of the capitalization of the entity, analysis of whether corporate formalities are observed), whether the corporate structure is used to perpetuate fraud or some other purpose contrary to the law and finally, causation between the control exercised, its pur-pose and damages or injury alleged.

Overall, plaintiffs have not had much success piercing the corporate veil and this theory has been most susceptible to dismissal because causation cannot be demonstrated. Nevertheless, it continues to remain a viable weapon in the plaintiff s arsenal and will continue to be used as a tool to increase the costs to litigate cases and to render a straightforward case unnecessarily complicated.

B. Recent Cases

Florida recently had a notable case entitled Schwartzberg v. Knobloch, 2012 Fla. App. LEXIS 7829 (Fla. Dist. Ct. App. 2d Dist., May 16, 2012) in the District Court of Appeal for the Second District where a suc-cessful defense to piercing the corporate veil against the plaintiff s law firm Wilkes and McHugh was lodged. Although the case focused more on personal jurisdiction principles, there was a healthy discussion on pierc-ing the corporate veil. (See also Schwartzberg v. Brown, 2012 Fla. App. LEXIS 10117 (Fla. Dist. Ct. App. 2d Dist., June 22, 2012) Similar case against sister facility where personal jurisdiction was not found for individ-ual defendants or trusts.(

In this particular matter, the plaintiff filed suit against the operator of the nursing home and others for alleged deficiencies in care which resulted in injury. The original complaint did not name any individuals. A second amended complaint was filed a year or so later to name certain individuals, as well as other entities. Two of the individuals, Harris Schwartzberg and Maxwell Stolzberg resided in New York and the other newly named defendants were trusts created and registered in New York.

Although the Court stated that the corporate structure was complex and somewhat difficult to ascer-tain, it was able to determine that the individuals owned, either directly or indirectly interests in some of the named entities. The individuals had an indirect ownership interest in the operating company for the nursing home as well. The only connection the individuals had to Florida was indirect interest in the nursing homes operating company.

The individuals primarily argued that they did not maintain offices in Florida, employ anyone in Florida or operate, manage, or otherwise supervise activities at the nursing home in Florida and therefore, there was no personal jurisdiction over them in Florida. The plaintiff rebutted these allegations with affida-vits of information from public records including cost reports, controlling interest affidavits and the licensure


application which showed these individuals as having interest in the nursing home and operating company. The plaintiff also attached a newspaper article about the trend of complexity in ownership structures of nurs-ing homes in support of its argument.

The District Court of Appeal reversed the Circuit Courts decision to deny the individuals motion to dismiss on personal jurisdiction grounds. The District Court stated that a plaintiff could establish personal jurisdiction in three ways, including establishing the test for long arm jurisdiction under Floridas statute, by establishing facts that pierce the corporate veil or through a direct participant theory where the parent exercises sufficient control over the subsidiary so that it is considered an agent or alter ego of the parent. The District Court of Appeal determined that the only fact established by the plaintiff was that the individuals had indirect ownership in the nursing homes operating and management companies. However, plaintiff could not casually connect that ownership interest to any injury or damage which the plaintiff may have allegedly suffered.

In this particular case, the District Court of Appeal was able to comb through the record and deter-mine that plaintiff had merely produced information showing an indirect ownership interest, and not any-thing connecting the ownership interest to any alleged wrongdoing or causing injury to the plaintiff. At least in this particular case, the distraction technique employed by the plaintiff to draw away attention from the underlying relevant facts and evidence, as opposed to a referendum on corporate structures in long term care companies, was unsuccessful.

In an Oklahoma case from 2011, the plaintiff named individual shareholders, directors and officers and tried to pierce the corporate veil after a lower court had previously denied plaintiff s request to amend his petition to add parties and allegations to state a corporate veil claim. See Boulden v. Colbert Nursing Home, Inc., 249 P.3d 105 (Okla. Ct. App. 2011). The allegations as to the individuals were that the defendants had used the corporate entity to avoid public policy, failed to secure and maintain liability insurance, failed to ade-quately capitalize the corporation and had acted intentionally, recklessly and with malice.

When plaintiffs filed the amended complaint, the shareholders made a motion to dismiss arguing that the statute of limitations had expired. Defendants subsequently made an argument that since the claim was one of professional negligence that the plaintiffs needed an affidavit of merit which they did not have. The Appellate Court reversed the dismissal of the amended complaint and found that plaintiffs should have been permitted to amend the petition to add the affidavit of merit. Furthermore, the Appellate Court found that the same operative facts that were in the amended complaint related back to the original 2007 complaint and therefore, were not time barred.

Last year in New Jersey there was a case involving a nursing home and veil piercing in the context of limited partnerships. Although the Court did not pierce the veil in this particular case, it opened the door to veil piercing under the right set of circumstances for a limited partnership, which was a case of first impres-sion in the state.

The case of Canter v. Lakewood of Voorhees et al., 22 A.3d 68 (N.J. App. Div. 2001) involved a neg-ligence claim asserted by plaintiff against a nursing home. The operative facts are as follows: Lakewood of Voorhees LP (Lakewood) is a limited partnership. Seniors Healthcare Inc. (SHI) is a limited partner in the nursing home holding an 84.12 percent interest in Lakewood. SHI is the sole shareholder of Ozal of Lake-wood, Inc (Ozal) and Senior Management-North (SMN). Ozal, the general partner of Lakewood, holds a 1 percent interest in Lakewood. SMN functions as a management company, but does not own the nursing home. Further, Steven Lazovitz is the sole director of Ozal but also maintains the director, officer and major-ity shareholder role in SHI, and had significant previous roles in Lakewood and SMN. Plaintiff s allegations were that these were not separate legal entities, but that they were one seamless operation. In turn, SHI filed a motion for partial judgment arguing that New Jerseys law on limited partnerships, the NJ Uniform Limited


Partnership Law does not permit corporate veil piercing and that the statute specifically lays out those circum-stances where the veil can be pierced.

The trial court denied SHIs motion for partial summary judgment and stated that the veil could be pierced. It also found that there was a genuine issue of material fact as to whether SHI controlled the nursing home enough that it could be liable for any negligence committed by Lakewood.

The Appellate Division looked to Delaware law in deciding the matter and held that there could be veil piercing in the limited liability partnership setting under the right set of circumstances. The factors it found that must be demonstrated by clear and convincing evidence are that the limited partner either participated in the control of the limited partnerships business by taking or attempting to take action not within the safe harbor of the law or by dominating the limited partnership and using it to perpetuate injustice, fraud and the like. Dominance, like in so many piercing the corporate veil cases, is evaluated in terms of undercapitalization, observance or lack of observance of corporate formalities and involvement in day-to-day activities of the nurs-ing home. However, the Appellate Division reversed the denial of partial summary judgment to SHI finding that there was no disputed issue of genuine material fact as to SHIs purported dominance of Lakewood. The Appel-late Division found the businesses to be legitimate corporate structures and that they did not commit fraud. Further, the Appellate Division stated that the plaintiff was unable to show any direct dealing with SHI.

Although in the limited partnership context, this is an important case for nursing home and assisted living providers in New Jersey. The piercing of the corporate veil was expanded to the limited partnership form, however, the case underscores that mere demonstration of commonality of ownership and individuals is insufficient to clear the piercing the veil hurdle for plaintiffs. This case also shows that there is no corporate form that is immune to the piercing the corporate veil strategies being employed by plaintiffs.

C. Discovery Tactics

When piercing the corporate veil becomes an issue in the underlying nursing home/ALF litigation it is a guaranteed discovery nightmare. The requests for production of documents, request for admissions and interrogatories will have a significant focus on corporate structure, how the corporate structure operates and the individuals involved in the corporate structure. Rest assured that many depositions will be solely focused on trying to untie the knot and attempting to paint a picture that there is something fundamentally improper about utilizing multiple corporate entities in the nursing home setting, although this type of structure exists across many different industries. This will be a way for plaintiffs to attempt to get financial information very early on in the case to paint their usual profits over people and census over care mantras.

As a defendant, it is important to try and curtail superfluous expensive and mostly irrelevant discov-ery and keep the focus on the plaintiff, his or her medical conditions and the alleged damages. It is extremely important that any employee who is going to be deposed who has no knowledge of the corporate structure other than who is their employer is expressly counseled not to guess or try to be helpful by volunteering inac-curate information. Many times plaintiff s counsel will purposefully ask confusing corporate structure ques-tions to a director of nursing or similar employee in a facility who will provide inaccurate or misleading information which the plaintiff will attempt to later use in his or her favor. As defense counsel, you need to figure out in every case who the individual is that is the most knowledgeable on the corporate structure and become a master of the structure at its inception in order to be able to successfully handle the case.

D. Successful Defenses

Motion practice can be a successful way to get rid of the piercing the corporate veil theory in any given case. Counsel can make a motion to dismiss for failure to prove one of more elements of the cause of


action based on the pleadings. A motion to dismiss can also be made if the complaint tries to set this forth as a separate cause of action since it is truly a derivative claim. See Strawbridge v. Sugar Mountain Resort, Inc., 243 F.Supp.2d 472, 479 (2003) , cert. denied 547 U.S. 1206 (June 19, 2006) (stating that piercing the corporate veil as a method of imposing liability on an underlying cause of action). A motion to dismiss can be made if the purpose of the claim is made solely to guard against insufficient assets to satisfy any outstanding judgment. In this case, the argument would be that this claim is premature.

Motions for summary judgment can also be successful. Out of all of the elements that need to be satisfied to assert a piercing the corporate veil theory, plaintiffs seem to have the most difficulty demon-strating the causation element because it is incredibly hard to show that lack of a formal structure or issues such as undercapitalization actually caused physical injury or other damage to the underlying plaintiff in the case.

There are also proactive measures companies can and should take from a corporate law perspec-tive to reduce the likelihood of a successful piercing the corporate veil claim. These actions include, but are not limited to, regular meetings of shareholders, directors and officers with minutes, creating by-laws, hav-ing separate banking and accounting records for the company separate and apart from owners, sharehold-ers and the like. Further, the corporate structure should be honored and accounts and other matters should be placed in the name of the operating company only, not any affiliate companies. It is likewise important to make sure that admission agreements clearly refer to the individual nursing home and not any chain desig-nation or management company.

Corporate formalities should be observed and employees should be paid from the operating entity and not any management entity. Adequate capitalization and insurance is also important to defend against a piercing the corporate veil claim. Any contracts or agreements that are entered into should be on behalf of the operating entity only. One should also carefully review the amount of management fees and rent paid on behalf of the operating entity to determine if the rates are higher than fair market value.

III. Naming of Owners, Shareholders, Directors, Members of the Governing Body and Employees in Lawsuits

A. Trends and Repercussions

It seems that plaintiffs are routinely naming owners, shareholders and directors to increase anxi-ety among individuals, create possible dissention among the ranks and also to increase the costs of litigating the matters. Depending on who is individually named in the underlying complaint, there may be a conflict of interest among some of the named parties and additional counsel may have to be retained to represent one or more of the named individuals. Not only does this increase the costs of litigation, it also creates the unfortu-nate illusion that there is not a unified defense and that someone must have done something improper when in actuality the Rules of Professional Conduct may offer a company no other option then to have separate counsel. Sometimes when individuals are named that have no connection whatsoever to the care that was received by the plaintiff, it seems to be more as a harassment tactic or embarrassment tool. At times this strat-egy will back fire on plaintiffs and companies will play hard ball and not discuss early resolution of cases with opposing counsel.

There is also a trend of naming medical directors, directors of nursing, administrators and even certi-fied nurses aides. Employees that are named in these suits can become somewhat traumatized and distracted by the litigation process. Furthermore, the turnover of employees in the industry is something that plaintiffs


will use and to their advantage in prosecuting these cases. It could very well be that the director of nursing who is named in the complaint is no longer employed with the company by the time the deposition, media-tion or trial comes around. This can sometimes further complicate the defense of the matters and increase the cost of litigation. Many plaintiffs will depose former disgruntled employees who will provide deposition testi-mony that is not related to the case at hand, but is negative to the facility.

Members of the governing body are also being named in nursing home litigation cases more fre-quently. The argument being made is that these individuals have a statutory duty under 42 C.F.R. 483.75(d) to establish and implement policies regarding the management and operations of the facility. Companies must be very circumspect in deciding who is actually on the governing body of the facility as it can cause an inad-vertent piercing of the corporate veil. Furthermore, this is an area that regulators are now closely exploring as they too look to pierce the corporate veil in Medicaid, Medicare and other licensure matters.

B. Successful Defenses

Obviously, to the extent a motion to dismiss can be made to clean up the named parties in the case that can make the matter somewhat easier to handle going forward. Reasonable plaintiff s attorneys will gen-erally agree to dismiss named officers, shareholders and directors without prejudice once they are provided with evidence of insurability. Another argument that can be made when an individual is named is that the individual did not owe a specific duty to the plaintiff. If there is no duty owed, there can be no breach of a duty and therefore, no damages that flow from that alleged breach.

In terms of individually named employees at the center or regional level, typically those individuals are not dismissed until a later point in the litigation when paper discovery and depositions have taken place. However, every effort should be made through discovery to attempt to demonstrate that unless someone acted outside the scope of their employment they cannot be held individually liable for their acts or omissions.

C. Case Law

A recent Supreme Court case out of Arkansas held that the sole member of the nursing homes gov-erning body did not owe a personal duty to the resident who allegedly was injured due to negligent care at a nursing home. See Bedell v. Williams, 2012 Ark. 75 (Ark. 2012). In this case, in addition to the corporate defendants, the decedents representative filed a claim against Donald B. Bedell (Bedell), who was presi-dent and a member of the board of directors for each of the named defendants. It was argued by plaintiff that he was responsible for the management and control of the nursing home and that he decided to cut budgets at the nursing home which plaintiff alleged resulted in a decline in the decedents health. In November 2010, the jury found the nursing home liable for $5.1 million in damages, $5 million in damages against Bedell and $350,000 against the personnel leasing company.

The crux of the plaintiff s argument was that Bedell owed a duty to the decedent under 42 C.F.R. 483.75 (d) which discusses the need for nursing homes to have a governing body if they participate in Medi-care and Medicaid programs. Bedell was the sole member of the governing board so plaintiff attempted to hold him personally liable.

The Supreme Court ultimately overturned the finding of the lower court and opined that plaintiff could not demonstrate that Bedell owed a duty to decedent and that this duty was breached. Although the ultimate outcome of the case was favorable to nursing homes, it should be a caution to nursing homes that this will be a continued area that plaintiffs will be exploring.


IV. Corporate Negligence

A. History

Other theories for asserting piercing the corporate veil including trying to demonstrate improper conduct by the shareholders or owners which directly result in injury or death to the plaintiff. These claims are typically geared toward managerial and administrative personnel, as opposed to the owners and share-holders. This type of claim is different than medical malpractice and negligence claims because the claim seeks to target administrative policies which were or were not in place, decisions regarding staffing, training, equipment and the like.

Unlike a piercing the corporate veil theory, this type of claim is a stand alone claim and is not deriva-tive in nature. This claim is also different than an employment type claim alleging vicarious liability. What makes these claims difficult to defend is that sometimes it is nearly impossible to discern what is a clinical decision or function as opposed to what is really an administrative function.

B. Recent Cases

In Scampone v. Grane Healthcare Co., 11 A.3d 967 (Pa. Super. July 15, 2010), a Superior Court in Pennsylvania held that a claim could proceed under a corporate liability theory against a management com-pany and two entities, separate and apart from the nursing home itself due to allegations of the violation of minimum staffing levels and insufficient oversight of care, primarily based on testimony from former employ-ees (many of whom had been terminated). The nursing home defendants appealed that decision.

Arguments that were advanced in the appeal of the decision on the part of the management com-pany and nursing home are that nursing homes and management companies are not total health care pro-viders unlike hospitals where the doctrine of corporate negligence was first recognized in Thomson v. Nason Hosp., 591 A.2d 703 (Pa. 1991). Appellants pointed out that patients in nursing homes, unlike hospitals, have physician choice so nursing homes cannot always control the total health care of its residents. Amicus briefs also argued that by expanding the doctrine of corporate liability to nursing homes and personal care homes (Pennsylvanias equivalent of assisted living facilities) there will be a precipitous increase in litigation, as well as overly broad discovery. The same issue regarding whether certificates of merit would be required in a cor-porate negligence case is something that is also raised by the decision of the Superior Court.

Furthermore, nursing homes provide nursing care, as opposed to medical care. As tenuous as it may be to argue that corporate negligence extends to nursing homes, it is quite another thing to say it expands to management companies as well. It is undisputed that management companies do not provide direct patient care. Under the Pennsylvania regulations, the licensee is responsible for insuring compliance with the regula-tions, not the management company. Furthermore, according to the plain reading of the statute, this is a non- delegable duty.


The very unfortunate part of this type of claim is that discovery is generally much broader, more intrusive and much more expensive. Under this type of claim requests for documents include policy and pro-cedure manuals, handbooks, budgets and other financial documents, QA materials and the like. Depositions are routinely noticed for higher level positions such as regional directors of operations and regional clinical services providers. Discovery becomes protracted, expensive and a distraction because it becomes more about the company and its so-called deficient practices than the care that was actually provided to the plaintiff and


the plaintiff s underlying medical condition. Additionally, under this theory financial documents may be discoverable at a much earlier point in the litigation as opposed to any punitive phase because of allegations sounding in understaffing and underfunding.

However, a downside for plaintiffs to complicated and expensive discovery is that it likely further erodes any insurance that is available to pay out on a claim. Normally under most insurance policies, multiple defendants do not increase the amount of available insurance proceeds and many insurance policies are erod-ing which means defense costs come off what is available under the actual policy.


A sometime successful defense of corporate negligence claims is a motion to dismiss the claim for failure to include an affidavit of merit or expert. However, a plaintiff may argue that this is not medical negli-gence or professional negligence and instead is administrative in nature and therefore does not need an affida-vit of merit or the like.

Obviously, plaintiff has the burden of proving all of the elements of the claim of a corporate negligence allegation in order to succeed. Since this allegation does not focus on the medical aspect of the case it may be difficult for a plaintiff to demonstrate causation between policies and practices of the management company and say for instance, the fall of a resident in one of one its nursing homes that resulted in a broken hip.

V. Direct Participant Liability

A. History

Since corporate veil piercing claims can be difficult for a plaintiff to prevail upon, many plaintiffs are now asserting direct participant liability claims as another way to try impose liability on corporate parents. The seminal case for this theory is United States v. Bestfoods, 524 U.S. 51 (1998). This case held that there could be liability when, the alleged wrong can be seemingly traced to the parents through the conduit of its own person-nel and management. Furthermore, the parent must directly participate in the misconduct. Id. at 64. Although Bestfoods dealt more with whether a parent company could be deemed an operator under an environmental regulation, it nevertheless set forth some guiding principles which have been explored in tort liability cases.

For example, tort liability under a direct participant theory was explored in the case of Forsyth v. Clark USA, Inc. 864 N.E.2d 227 (Ill. 2007) which involved the death of two workers at a subsidiary. The case expounded on Bestfoods and discussed that it is necessary that the control exercised by the parent is different than the typical control it normally exercises over the subsidiary and that the parent has some specific role in the actual tortious conduct in order to find liability.

B. Theories for Recovery

Plaintiffs will typically try to use direct participant liability when they focus on the budgetary and other controls set by the parent over the individual facilities. For example, a plaintiff will argue that the par-ent cut budgets in clinical operations which resulted in less staffing which culminated in a negative outcome for a resident. Other direct participant liability theories that are espoused are policies and procedures from the parent corporation that either are not implemented or not followed, lack of necessary supplies and equipment or the purchase of inferior equipment or supplies. Direct participant liability can also be alleged when a par-ent company failed or did not conduct proper background checks which resulted in the hiring of an employee who was either negligent or committed a criminal act.



Similar to the other theories mentioned above, direct participant liability claims only increase the costs associated with prosecuting and defending the case because much of the focus is on budgetary and financial information, as well as policies and procedures at the parent level. If such broad discovery is permit-ted by the courts, protective orders should always be requested in addition to an agreement that the plaintiff s counsel will return all of these confidential materials and any and all copies of the documents in whatever for-mat after the matter has resolved.


Motions to dismiss for failure to state a claim can always be made with these types of claims and have enjoyed some more success since Bell Atlantic v. Twombley, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). These cases held that more than conclusory allegations that hint at the possibility of liability are required when a claim is stated. If motions to dismiss are not successful, these claims can be positioned poten-tially for early motions for summary judgment if strategic discovery is taken (pointed admissions, document requests, etc.).

Generally speaking, parent companies are not liable to third parties to make certain that subsidiar-ies act reasonably. So, if a parent corporation is not involved in the day-to-day care being rendered at the facil-ity and the supervision of medical professionals, it is going to be difficult for plaintiff to show that there was a duty owed by the parent company to the resident at the facility. Furthermore, simply because a parent has budgetary responsibility over the subsidiary and does a poor job discharging these functions, this is not suf-ficient to impart direct liability on the parent. Finally, similar to other piercing the corporate veil strategies discussed above, plaintiffs have a difficult time demonstrating causation of the parents so-called actions and inactions and the alleged damages suffered by the plaintiff.

Offensively speaking, companies should be careful to observe any and all corporate formalities. Fur-ther, there should be good documentation showing that decisions impacting resident care are made at the facility level and this extends to decisions made by the governing body.

VI. Impact of PPACA on Corporate Veil and Other StrategiesThe Patient Protection and Affordable Care Act (PPACA) seeks to increase transparency with

respect to nursing home ownership and will likely lead to an increase of piercing the corporate veil type claims in complaints. Under Section 6101-21, additional extensive information will need to be disclosed regarding individuals and entities that own, control or manage the facilities. Further, companies will be required to dis-close relationships between various entities. Disclosures are even extended to managing employees. How-ever, the definition under the Social Security Act and PPACA is very different. Under PPACA, a managing employee is an individual (including, but not limited to a business manager, administrator, director or consul-tant) who directly or indirectly manages, advises or supervises any element of the practices, finances or opera-tions of the facility. There are also additional disclosures about the governing body, although no reference is made to any existing or new definition of governing body.

Although there is still a bit to be hashed out, the ultimate result of these regulations will be to make it easier for a plaintiff to assert piercing the corporate veil type allegations. It will also increase the potential pool of defendants to consultants who may render clinical advice to a nursing home and perhaps even attorneys if they provide or draft policies and procedures for the day-to-day operations of the centers.


VII. ConclusionAs evidenced by the foregoing, piercing the corporate veil strategies will continue to play a key role

in the prosecution and defense of nursing home and ALF litigation. Companies will need to remain vigilant in honoring the corporate structure and continue to be aggressive in filing motions to dismiss claims that are conclusory in nature with no basis for liability. Furthermore, defendants will need to manage the discovery process from the outset to make sure that fairly straightforward cases do not become convoluted by corporate conspiracy theories that focus more on pithy phrases than the critical issues at stake in these matters.

Nursing Home/ALF Litigation SeminarCourse Materials Table of ContentsEstablished and Emerging Corporate Veil StrategiesCaroline J. BerdzikTable of ContentsI.Current Developments and Trends in Nursing Home LitigationII.Piercing the Corporate VeilA.History and Current StatusB.Recent CasesC.Discovery TacticsD.Successful Defenses

III.Naming of Owners, Shareholders, Directors, Members of the Governing Body and Employees in LawsuitsA.Trends and RepercussionsB.Successful DefensesC.Case Law

IV.Corporate NegligenceA.HistoryB.Recent CasesC.Discovery TacticsD.Successful Defenses

V.Direct Participant LiabilityA.HistoryB.Theories for RecoveryC.Discovery TacticsD.Successful Defenses

VI.Impact of PPACA on Corporate Veil and Other StrategiesVII.Conclusion

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