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

November 14, 2012
by Caroline J. Berdzik, Esq.
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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.

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