PHILADELPHIA - A ruling by a federal appeals court says enough evidence was presented during a jury trial to show that the CEO and CFO of a bankrupt nursing home in Pittsburgh breached their fiduciary duties and deepened the solvency issues by not disclosing complete financial information.
The U.S. Court of Appeals for the Third Circuit reached its ruling in an opinion filed Monday by Judge Thomas Vanaskie.
The court also upheld the $750,000 in punitive damages against Mel Lee Causey, former CEO of Lemington Home for the Aged, and $1 million from CFO James Shealey.
Punitive damages of $2.25 million collectively against 14 members of the home's board of directors were vacated, however, because the verdict was not supported by evidence sufficient to establish that they acted with “malice, vindictiveness and a wholly wanton disregard of the rights of others,” Vanaskie writes.
According to court documents, the Lemington Home for the Aged was established in 1883 and was the oldest nonprofit, unaffiliated nursing home in the United States dedicated to the care of African-American seniors. It had struggled financially for decades but was supported by contributions from the City of Pittsburgh, Allegheny County and private donors.
The problems amplified in the early 2000s, according to the court opinion, coinciding with the hiring of Causey in 1997 and Shealey in 2002. The Pennsylvania Department of Health cited the home several times for deficiencies, at a rate almost three times greater than the average nursing home operating in the state.
In 2004, Causey began working part-time in her capacity as administrator, despite state law requiring all nursing homes to employ full-time administrators. That year, two patients died under suspicious circumstances while residing at Lemington, resulting in investigations by the Pennsylvania Department of Health. The patient record-keeping and billing were also disorganized and mismanaged.
The board elected to close the home in January 2005, filing a Chapter 11 bankruptcy notice the following April. During that time, patient census dropped to just 37 patients.
The closure was approved by the Bankruptcy Court in June 2005, but information was later revealed that the filing of monthly operating reports for May and June was delayed until September.
According to the opinion, those documents would have shown that the Home received nearly $1.4 million in Nursing Home Assessment Tax payments, which could have increased its chances of finding a buyer.
A committee of unsecured creditors brought an adversary proceeding against Causey, Shealey and the board of directors, claiming they had breached their fiduciary duties by failing to disclose the information in a timely manner and overall failure to properly manage the facility.
The Third Circuit reversed the trial courts initial dismissal in favor of the defendants, and a six-day jury trial in 2013 ended with compensatory damages and punitive damages against the defendants.
In the following appeal, attorneys representing Causey and Shealey argued there was insufficient evidence to show that the officers breached their duty of care. The appellate court denied the appeal, saying that the evidence presented at trial demonstrated that Causey fell far short of fulfilling these responsibilities.
Throughout Causey’s tenure, Lemington was not in compliance with federal and state regulations. The home was cited repeatedly for failing to keep proper documentation of residents’ clinical records.
In 2004, the Department of Health launched an investigation following the death of patient Elaine Carrington. According to Vanaskie, the review concluded that “Causey lacks the qualifications, the knowledge of the PC regulations and the ability to direct staff to perform personal care services as required.”
The court also concluded that the jury heard sufficient evidence to determine that Shealey breached his duties of care and loyalty as Chief Financial Officer. Testimony from William Terrence Brown, a nursing home consultant who had conducted an assessment of the Home on behalf of a major creditor in May 2005, showed that during his review, Brown requested financial records from Shealey, but they were not provided to him.
When he confronted Shealey, the testimony says, the CFO admitted that he had not kept a ledger for months. Brown also testified that Shealey had failed to bill for Medicare since August 2004, resulting in the loss of at least $500,000 due for services rendered.
"Shealey’s decision to stay on as CFO despite his inability to competently fulfill the duties with which he was charged gave the jury a sufficient basis for concluding that Shealey acted in self-interest, breaching his duty of loyalty to the home," Vanaskie writes.