Official Committee of Unsecured Creditors v. Baldwin

Official Committee of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged), Case No. 13-2707, 2015 WL 305505 (3d Cir. Jan. 26, 2015) (precedential)
Affirming the jury's liability verdict and findings that defendants breached their fiduciary duties by failing to exercise reasonable diligence and prudence in their oversight and management of the debtor. Affirming the jury's punitive damages award against the debtor's two officers, the administrator and the chief financial officer, because adequate state-of-mind evidence was presented to support a finding that the officers acted "outrageously." Vacating the jury's award of punitive damages imposed against the five defendants who served on the debtor's board of directors in light of the lack of state-of-mind evidence and no evidence that the directors acted out of self-interest.
Procedural context:
The matter arises out of a lawsuit by the Official Committee of Unsecured Creditors against the officers and directors of a Pittsburgh-area nursing home debtor concerning mismanagement of the debtor. The matter involves an appeal by two former officers and fourteen former directors of the debtor of the jury's verdict, which found all of the defendants liable for breach of fiduciary duties and the tort of deepening insolvency, as well as the jury's award of punitive damages against the two officers and five of the directors.
Established in 1883, Lemington Home for the Aged (“Home” or “Debtor”) was the oldest, non-profit, unaffiliated nursing home in the United States dedicated to the care of African-American seniors. The Home experienced financial troubles for decades, but remained afloat with help from the City of Pittsburgh, Allegheny Country, and private donations. The Home’s financial difficulties became particularly acute during the management of Defendant Mel Lee Causey (administrator and chief executive officer since 1997) and Defendant James Shealey (chief executive officer since 2002). Specifically, the Home was cited with deficiencies by the Pennsylvania Department of Health at a rate almost three times greater than the average nursing home operating in the state. The Home did not recoup reimbursements it was due for care provided to Medicare patients, resulting in a $500,000 loss. The Home’s patient and billing record were in disarray. On January 6, 2005, the Home’s board of directors voted to close it. The Home’s petition for bankruptcy protection under chapter 11 of the Bankruptcy Code, however, was not filed until April 13, 2005. At a bankruptcy status conference held on June 23, 2005, no one expressed any interest in funding or acquiring the Debtor. Later, it was revealed that the Debtor had delayed filing its monthly operating reports for May and June until September 2005, even though the reports would have shown that the Debtor received almost $1.4 million in nursing home assessment tax payments, which could have increased the Debtor’s changes of finding a buyer. In November 2005, the Official Committee of Unsecured Creditors commenced the adversary proceeding against the Debtor’s former two officers and twelve directors seeking, among other things, compensatory damages for breach of fiduciary duty, breach of the duty of loyalty, and deepening insolvency, as well as punitive damages.
Vanaskie, Circuit Judge

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