On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil Action No. 2-10-cv-00800) District Judge: Honorable Arthur J. Schwab
The opinion of the court was delivered by: Vanaskie, Circuit Judge.
Before: SLOVITER, FUENTES and VANASKIE, Circuit Judges.
The Committee of Unsecured Creditors ("the Committee") on behalf of the Estate of the Lemington Home for the Aged ("the Home") appeals the District Court‟s decision to grant summary judgment in favor of defendants, the officers and directors of the Home, on the Committee‟s breach of fiduciary duty and deepening insolvency claims. The District Court found that summary judgment was appropriate because the business judgment rule and the doctrine of in pari delicto barred recovery on the breach of fiduciary duty claims, and because the Committee was unable to demonstrate a material issue of fact concerning whether the defendants committed the fraud necessary to support a claim of deepening insolvency. Because our independent review of the record discloses genuine disputes of material facts on all claims, we will vacate and remand for trial.
The Home, a nonprofit corporation, has a storied place in history. As the city of Pittsburgh grew in influence as an industrial and manufacturing center in the 19th century, its diverse population swelled. By 1870, the city had a population of 86,076, a 74% increase in just ten years.
Among this population were about 2,000 African-Americans, mostly free blacks who had been born in the North, a few post-Civil War migrants from the South, as well as some runaway slaves and their descendants. Many of these people did not share in the industrial prosperity enveloping the city, struggling both to make ends meet and to secure the civil rights guaranteed to them by the Constitution.
In 1877, Mary Peck Bond, a daughter of Pittsburgh African-American abolitionist and minister John Peck, is said to have discovered that her friend, former slave and then- centenarian "Aunt Peggy," was living alone in squalor in a damp basement. Together with friends, Mrs. Bond worked to raise funds to provide a place of refuge for elderly members of the African-American community. This effort‟s first incarnation, "The Home for the Aged and Infirm Colored Women," was incorporated and dedicated on July 4, 1883. Eventually, this facility would become known as the "Lemington Home for the Aged," also known as "Lemington Center." The Home was affiliated with Lemington Elder Care Services, with which it had an interlocking Board of Directors. In 1983, the Home was relocated to a facility on Lincoln Avenue in Pittsburgh, and expanded to about 180 beds.
Almost immediately from the time of its relocation in 1983, the Home was beset with financial troubles. In its first year at the new facility, the Home operated at a loss of $429,000. Although an initial projection had indicated that the Home would profit, this was based on "the Center being aggressively marketed to produce . . . a more even mix of Medicare, Medicaid, and private pay patients." (Id. at 271.)
Instead, "95% of [the Home‟s] patients receiv[ed] Medicaid, 4.5% Medicare and 0.5% private payors." (Id.)
This stagnation continued through the 1980s and into the 1990s. Because the Home‟s financial condition was rapidly deteriorating, the City of Pittsburgh, Allegheny County, and several private foundations periodically assisted to keep the Home in operation. By late 1986, the Home was again maintaining its own operations, but had $4 million in deferred mortgage debt.
Unfortunately, the Home‟s financial condition again deteriorated. The U.S. Department of Health and Human Services implemented a month-long ban on new admissions in September, 1998. A comprehensive long-range plan formulated at the Home‟s direction by Hershberg Salter Associates in 1997 found that the Home had image problems within the community, and recommended, among other things, that it should hire an Administrator, a "quality human resources staff," and outside specialists. (Id. at 280-81.)
Defendant Melody L. Causey was hired as the Home‟s Administrator in September, 1997. By 1999, the Home was insolvent. "Going concern" warnings*fn1 accompanied audits for fiscal years 2002 and 2003.*fn2 As of June 30, 2002, the Home‟s total liabilities exceeded total assets by $1,941,959, and total liabilities exceeded total assets by $1,675,397 at the end of the 2003 fiscal year. In 2001, a study funded by the Pittsburgh Foundation recommended that the Board replace Causey with a "qualified, seasoned nursing home administrator," (A. 1179) and "review, revamp and re-staff each department" (A. 1214). The Foundation provided a grant of more than $175,000 to hire a new Administrator. Causey, however, decided to use the grant for other purposes.
In December of 2002, Defendant James Shealey became the Home‟s Chief Financial Officer. Shealey failed to maintain a general ledger, and the Home‟s financial and billing records were in deplorable condition. In March of 2004, the Board was informed that employee insurance premiums were not paid even though payroll deductions had been made for that purpose.
Beginning in 2003, the Home was cited for numerous deficiencies "primarily as a result of staff failing to document services rendered." (Id. at 1355.) Causey commented that
"we continue to employ staff that should no longer be employed by our organization" and "in the last eighteen months, the nursing department alone caused the facility to receive 22 nursing care deficiencies." (Id. at 1527.)
According to Causey, in April or May, 2004, she informed the Board of Directors that, due to health problems, she had been placed on part-time work status by her physicians. According to her administrative assistant, she was absent from the Home for periods of up to six or eight weeks at a time. She was not replaced, although state law required the Home to employ a full-time, licensed administrator.
From November of 2003 to January of 2005, the Board position of Treasurer was vacant. The Treasurer was to chair the Board‟s Finance Committee. There is evidence that there was no meaningful oversight of the Home‟s financial operations during this period.
In May of 2004, Causey recommended that the Home file for bankruptcy. The Board opted to pursue other options at that time. One of the options was obtaining a $1,000,000 loan from the Lemington Home Fund, which was administered by the Pittsburgh Foundation. Approval of the loan was conditioned upon the Board having a viability study conducted. The Board declined to pursue such a study.
The Home‟s problems came to a head on July 26, 2004, when resident Terry Norwood, who suffered from advanced diabetes, was found unresponsive without a pulse. Although he had an advanced directive which specified that, if he ceased to breathe, he should be resuscitated, no such action was taken. Instead, a nurse left a message on a physician‟s pager. Because of this death, the Pennsylvania Department of Health cited the home for neglect, placed the Home‟s license on provisional status, and provided a 90-day window for the Home to correct its deficiencies.
The Home‟s accounting firm declined to continue to work for the Home in the Fall of 2004 due to non-payment of its bills. A medical records and billing consultant terminated ...