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Official Committee of Unsecured Creditors v. Baldwin

United States District Court, Third Circuit

May 17, 2013

OFFICIAL COMMITTEE OF UNSECURED CREDITORS, on behalf of the estate of LEMINGTON HOME FOR THE AGED, Plaintiff,
v.
ARTHUR BALDWIN; JEROME BULLOCK; ANGELA FORD; JOANNE ANDIORIO; J.W. WALLACE; TWYLA JOHNSON; NICOLE GAINES; WILLIAM THOMPKINS; ROY PENNER; MEL CAUSEY; JAMES SHEALEY; RENEE FRAZIER; CLAUDIA ALLEN; EUGENE DOWNING; GEORGE CALLOWAY; B.J. LEBER; and REVEREND RONALD PETERS, Defendants.

MEMORANDUM OPINION RE: DEFENDANTS' MOTION FOR JUDGMENT AS A MATTER OF LAW, NEW TRIAL, OR A REMITTITUR (DOC. NO. 646)

ARTHUR J. SCHWAB, District Judge.

I. Introduction

This prolonged litigation began on May 26, 2006, with the filing of an adversary proceeding in the United States Bankruptcy Court for the Western District of Pennsylvania by the Official Committee of Unsecured Creditors, on behalf of Lemington Home for the Aged ("Plaintiff") against former Officers and Directors of Lemington Home for the Aged ("Defendants"[1]). Doc. No. 1. On August 26, 2006, this Court denied Defendants' Motion to Withdraw the Reference. Official Comm. of Unsecured Creditors ex rel. Lemington Home for the Aged v. Baldwin (In re Lemington Home for the Aged), 06cv931, (W.D. Pa. Aug. 26, 2006). On June 10, 2010, the United States Bankruptcy Court for the Western District of Pennsylvania transferred the case to this Court. Doc. No. 279.

On October 25, 2010, this Court granted summary judgment to Defendants on all of Plaintiff's claims. Official Comm. of Unsecured Creditors ex rel. Lemington Home for the Aged v. Baldwin (In re Lemington Home for the Aged) ("Lemington I"), 2010 WL 4275252 (W.D. Pa. Oct. 25, 2010). The United States Court of Appeals for the Third Circuit reversed, holding that there was sufficient evidence to support Plaintiff's claims and that the case had to proceed to a jury trial. Official Comm. of Unsecured Creditors ex rel. Lemington Home for the Aged v. Baldwin (In re Lemington Home for the Aged) ("Lemington II"), 659 F.3d 282 (3d Cir. 2011).

On October 31, 2011, the Court set the case for trial. After an extended and deliberative pre-trial process, and on the eve of trial, Defendants filed a Petition for Leave to File an Interlocutory Appeal and a Petition for Writ of Mandamus on the basis of time limits for trial set by this Court. On March 23, 2012, the United States Court of Appeals for the Third Circuit dismissed Defendants' Petition for Leave to File an Interlocutory Appeal for lack of jurisdiction. Official Comm. of Unsecured Creditors ex rel. Lemington Home for the Aged v. Baldwin (In re Lemington Home for the Aged), 11-8098 (3d Cir. Mar. 23, 2012). On November 26, 2012, the United States Court of Appeals for the Third Circuit denied Defendants' Petition for Writ of Mandamus. In re Baldwin, 700 F.3d 122 (3d Cir. 2012).[2]

The case proceeded to a jury trial on February 19, 2013, and lasted six days. At the close of Plaintiff's case-in-chief, this Court granted Director Defendants' Motion for Judgment as a Matter of Law as to Count I - Duty of Loyalty, denied Officer Defendants' Motion for Judgment as a Matter of Law as to Count I, and denied all Defendants' Motion for Judgment as a Matter of Law as to Count II - Duty of Care and Count III - Deepening Insolvency. Doc. No. 585. Following the close of Defendants' case-in-chief, the Court granted Plaintiff's unopposed Motion for Judgment as a Matter of Law as to the defense of in pari delicto. Doc. No. 599. The Court denied all other Motions for Judgment as a Matter of Law made during the trial. Doc. No. 599.

After three days of deliberation, the jury returned a verdict against 15 of the 17 Defendants (all but Defendants Frazier and Allen), jointly and severally, in the amount of $2, 250, 000. The jury also awarded punitive damages in the amount of $350, 000, individually, against Director Defendants Baldwin, Bullock, Andiorio, Johnson, and Thompkins. The jury awarded punitive damages in the amount of $1 million against Officer Defendant Shealey and $750, 000 against Officer Defendant Causey. In total, the jury awarded $5, 750, 000 in damages to Plaintiff. Doc. No. 606.

Currently before the Court is Defendants' Motion for Judgment as a Matter of Law, New Trial, or a Remittitur (Doc. No. 646) which will be DENIED for the reasons set forth below.

II. Judgment as a Matter of Law - All Counts

A. Standard of Review

Defendants are entitled to judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b), if after the close of evidence, "there is no legally sufficient evidentiary basis for a reasonable jury to find for" Plaintiff. Rhone Poulenc Rorer Pharms. Inc. v. Newman Glass Works, 112 F.3d 695, 697 (3d Cir. 1997). If the record contains even "the minimum quantum of evidence upon which a jury might reasonably afford relief, " the verdict must be sustained. Buczek v. Continental Cas. Ins. Co., 378 F.3d 284, 288 (3d Cir. 2004) (quoting Glenn Distribs. Corp. v. Carlisle Plastics, Inc., 297 F.3d 294, 299 (3d Cir. 2002)); see also Marion v. TDI Inc., 591 F.3d 137, 146 (3d Cir. 2010); Eshelman v. Agere Sys., Inc., 554 F.3d 426, 433 (3d Cir. 2009).

A motion for judgment as a matter of law may be granted only if, viewing the evidence in the light most favorable to the non-movant and giving it the advantage of every fair and reasonable inference, there is insufficient evidence from which a jury reasonably could find liability. Wittekamp v. Gulf & W. Inc., 991 F.2d 1137, 1141 (3d Cir. 1993).

As set forth by the United States Court of Appeals for the Third Circuit:

In determining whether the evidence is sufficient to sustain liability, the court may not weigh the evidence, determine the credibility of witnesses, or substitute its version of the facts for the jury's version. Although judgment as a matter of law should be granted sparingly, a scintilla of evidence is not enough to sustain a verdict of liability. The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury could properly find a verdict for that party.

Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1166 (3d Cir. 1993) (citations and internal quotation marks omitted); see also Williamson v. Consol. Rail Corp., 926 F.2d 1344, 1348 (3d Cir. 1991); Perkin-Elmer Corp. v. Computervision Crop., 732 F.2d 888, 893 (3d Cir. 1984).

B. Discussion

1. Deepening Insolvency - Count III[3]

Defendants first contend that they are entitled to judgment as a matter of law with respect to Count III, deepening insolvency. As raised in pre-trial motions, Defendants again argue that a claim for deepening insolvency has not been recognized in Pennsylvania. This Court is bound by the precedential prediction of the United States Court of Appeals for the Third Circuit that the Pennsylvania Supreme Court would adopt such a cause of action. Cohen v. Sikirica, 487 B.R. 615, 629 n.9 (W.D. Pa. 2013) (citing Konold v. Superior Int'l Indus. Inc., ___ F.Supp.2d ___, 2012 WL 5381700, *10 (W.D. Pa. Oct. 31, 2012)). Furthermore, "[i]t is axiomatic that on remand for further proceedings after [a] decision by an appellate court, the trial court must proceed in accordance with the mandate and the law of the case as established on appeal." EEOC v. Kronos Inc., 694 F.3d 351, 361 (3d Cir. 2012) (second alteration in original) (quoting Bankers Trust Co. v. Bethlehem Steel Corp., 761 F.2d 943, 949 (3d Cir. 1985)). The United States Court of Appeals for the Third Circuit has held that a claim for deepening insolvency may be advanced against the directors and officers of a non-profit such as the Home. Lemington II, 659 F.3d at 294 & n.6. Thus, the law of the case doctrine requires this Court to recognize a claim for deepening insolvency as a viable cause of action.

Next, the Court will address Defendants' other arguments in support of their Motion for Judgment as a Matter of Law as to Count III.

a. Amount of Insolvency as of January 6, 2005

The United States Court of Appeals for the Third Circuit has stated that in order to recover on a claim for deepening insolvency, Plaintiff must show "that the directors' actions caused the deepening of insolvency." Lemington II, 659 F.3d at 294 (citing In re CitX Corp., 448 F.3d 672 (3d Cir. 2006)). Defendants argue that Plaintiff's claim for deepening insolvency fails as a matter of law because Plaintiff failed to prove the change in the debt, or amount of the insolvency, from January 6, 2005, (the date upon which Plaintiff argued that Defendants should have declared bankruptcy) as required. Defendants do not cite any authority in support of this argument.[4]

First, the Court finds that Plaintiff was not required to prove the amount of increased debt caused by Defendants' actions in order to succeed on its claim for deepening insolvency. While proof of such increased debt would certainly assist in proving causation, it is not necessary. The jury heard evidence that the Home continued to accrue increased indebtedness from January 6, 2005. The jury also heard evidence that potential buyers were concerned about the mounting debt. Doc. No. 654, 196. Thus, it was reasonable for the jury to conclude that, but for the increase in debt, a potential buyer may have been found, and the Home could have avoided liquidation. This constitutes sufficient evidence for the jury to reasonably conclude that the increased debt caused a definite harm, thereby satisfying the standard as articulated by the United States Court of Appeals for the Third Circuit.

Second, the Court finds there was ample evidence of the increased debt presented at trial. Indeed, the narrative that Defendants presented during trial was that the Home had been taking on additional debt, above and beyond the point of insolvency, for decades. It is inconsistent for Defendants to present evidence that the Home continued to accrue debt as a defense against liability and then argue in this post-trial Motion that this same evidence should not have been considered for the deepening insolvency claim.

Furthermore, the email from the Home's bankruptcy attorney demonstrates that he believed sending out notices to residents of the Home would have adverse consequences with respect to the underlying bankruptcy. P-131 ("I am obligated to advise you that the decision to send out the Notice to Residents has bankruptcy legal implications.[] If we send the notice without consulting with Touchstone and other parties in interest we are likely to be met with Motions from [creditors] saying we have not conducted an open process, have mismanaged and neglected the management, have not maintained financial records and have not discharged our fiduciary duties."). This evidence, although circumstantial, is also sufficient to demonstrate the causation element necessary for damages when considering a Rule 50 motion.

Although Defendants argue that Plaintiff did not prove the causation element of this claim, their argument is without merit. As discussed in further detail in Section III(B)(2), the Court instructed the jury that in order for damages to be awarded, Plaintiff had to prove that Defendants actions caused the damages. Therefore, the jury's verdict against Defendants necessitated a finding that Defendants' actions caused those damages.

The Court finds instructive the case of Crowley v. Chait, 2004 WL 5434953 (D. N.J. Aug. 25, 2004). In Crowley, the United States District Court for the District of New Jersey denied a motion for summary judgment on a claim for deepening insolvency. Id. at *22. The plaintiff attempted to recover the full amount of the insolvency from all the defendants. Id. at *2. The plaintiff argued that a run-off could have occurred, and the insolvency would not have been deepened, but for the actions of the defendants. Id. The Court found that the plaintiff could present that theory to the jury. Id. The run-off in Crowley and the potential purchase in this case are similar in that both would possibly have been able to recover the full amount of the insolvency but for the deepening of the insolvency by the defendants. Specifically, the Court finds that Plaintiff has presented sufficient evidence, especially the going concern testimony, Doc. No. 654, 60, that the Home could have recovered and become viable again but for the deepening insolvency. Thus, the exact amount of the change in the amount of the insolvency is immaterial and did not have to be proven by Plaintiff.

b. Element of Fraud

Defendants next argue that there was insufficient evidence of fraud to prove deepening insolvency. In Lemington I, this Court granted Defendants' Motion for Summary Judgment because the Court concluded that there was insufficient evidence of fraud. Lemington I, 2010 WL 4275252 at *11-12. However, the United States Court of Appeals for the Third Circuit disagreed and found that there was sufficient evidence of fraud such that a reasonable jury could find for Plaintiff. Lemington II, 659 F.3d at 293-95. The United States Court of Appeals for the Third Circuit set forth the standard for fraud in Pennsylvania as follows:

[F]raud consists in anything calculated to deceive, whether by single act or combination, or by suppression of truth, or a suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture. It is any artifice by which a person is deceived to his disadvantage.

Id. at 294 (quoting In re Reichert's Estate, 51 A.2d 615, 617 (Pa. 1947)).

The United States Court of Appeals for the Third Circuit found that the following evidence, when considered in the light most favorable to Plaintiff, was sufficient to meet the above standard for fraud: the failure of the Board to timely disclose its decision to close the Home in January 2005; the omission of certain information from a required debtor-in-possession bankruptcy filing; Officer Defendants' continued comingling of funds of the Home and related entities; Officer Defendants' continued breach of their fiduciary duties; Officer Defendants' continued contracts with vendors; and Officer Defendants' failure to collect Medicare receipts. Id. at 294-95.

i. Director Defendants

Plaintiff presented substantial evidence at trial to support all of these allegations of fraud. The parties stipulated that "[o]n January 6, 2005[, ] the Board of Directors decided to close the Home and to cease admitting new residents. The Board's pre-bankruptcy decision to close and wind up its affairs was not disclosed to creditors, governmental authorities, or the Bankruptcy Court." Doc. No. 597, §§ 39-40. As the United States Court of Appeals for the Third Circuit recognized in Lemington II, 659 F.3d at 294, evidence demonstrated that the Board informed other organizations of the plan to close the Home prior to the bankruptcy filing. This was supported at trial by the introduction of Plaintiff's Exhibits 88 and 89. The record also indicates that the Board did not include specific financial information in its monthly debtor-in-possession bankruptcy filing. The parties stipulated that "[o]n May 11, 2005, the Lemington Home received Nursing Home Assessment Tax payments of almost $1.4 million." Doc. No. 597, § 52. This information was not disclosed in the May, June, July, or August 2005 reports. P-138-P-141. A reasonable inference is that these funds, if disclosed to the creditors and the Bankruptcy Court, could have helped to avert the shuttering of the Home. These two facts, combined with the continuing breach of their fiduciary duties as discussed infra, constitutes more than sufficient evidence for the jury to find that the Director Defendants deepened the insolvency of the Home. Lemington II, 659 F.3d at 294-95.

ii. Officer Defendants

Turning to the Officer Defendants, as detailed more fully infra, evidence was presented at trial that both Officer Defendants continually breached their fiduciary duties. As Defendant Causey testified on direct examination, Officer Defendants continued to contract with vendors after the Home had decided to close but before filing for bankruptcy. Doc. No. 654, 188. Defendant Shealey testified that he was responsible for hundreds of vendors and that he input some of the bills from those vendors into his "spreadsheet, " but failed to maintain a general ledger. Doc. No. 653, 35. Officer Defendants also failed to collect Medicare receipts.

In sum, Defendants have attempted to re-litigate the decision of the United States Court of Appeals for the Third Circuit that the evidence available was sufficient to raise a material issue of fact for the jury to decide. That argument is not appropriate in a Rule 50 motion being made upon remand. Plaintiff presented evidence to the jury that the United States Court of Appeals for the Third Circuit previously held was sufficient to support a finding of liability against Defendants on this cause of action. Therefore, when taken in the light most favorable to Plaintiff, this evidence is sufficient to sustain the jury's verdict. Therefore, Defendants' Motion for Judgment as a Matter of Law with respect to the deepening insolvency claim, Count III, will be denied.

2. Duty of Care - Count II

Plaintiff alleged, at Count II, that all Defendants breached their fiduciary duty of care owed to the Home. This Court granted Defendants' Motion for Summary Judgment on the duty of care. Lemington I, 2010 WL 4275252 at *8-10. On appeal, the United States Court of Appeals for the Third Circuit reversed, holding that there was sufficient evidence for the duty of care claim to proceed to trial. Lemington II, 659 F.3d at 290-93.

a. Director Defendants

The Home had a bylaw provision protecting its Directors from certain legal claims; therefore, in order to prove that a Director Defendant breached his or her duty of care, Plaintiff was required to show that the individual's actions constituted self-dealing, willful misconduct, or recklessness. There was more than sufficient evidence, when taken in the light most favorable to Plaintiff, that the jury could properly find that 13 of the 15 Director Defendants (all but Defendants Frazier and Allen) breached their fiduciary duty of care by acting recklessly.

Director Defendants argue that they did not breach their fiduciary duties because they reasonably relied on the reports of Officer Defendants and other professionals. However, Directors may not rely on the reports of Officer Defendants if there is good reason to doubt the validity of those reports. In this case, evidence was presented that there was ample reason to doubt the Officer Defendants' reports to the Board. For example, the Board knew that Defendant Causey did not hire a nursing home administrator with the funds that had been given for that purpose. This is important, because Defendant Causey was filling many roles within Lemington affiliated entities, and a separate nursing home administrator may have ensured that an individual was focusing solely on the quality of care being provided at the Home. As to Defendant Shealey, he never provided the Board with appropriate financial information because the information did not exist. Evidence was presented that Defendant Shealey only kept a spreadsheet with a running bank balance and no general ledger.

A jury verdict for Plaintiff is supportable on this Count because it was unreasonable for the Board to rely upon such information given by Officer Defendants. Cf. Pereira v. Cogan, 2001 WL 243537 (S.D.N.Y. Mar. 8, 2001) ("sustained patterns of inattention to obligations by directors... or unreasonable blindness to problems that later cause substantial harm will create exposure to liability") (citing American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 401 at 155 (1994); Hanson Trust PLC v. ML SCM Acquisition, Inc., 781 F.2d 264, 274 (2d Cir. 1986)).

Furthermore, Director Defendants ignored the advice given by counsel regarding the legal implications that were involved with sending out notice to the Home's residents and to state agencies and instead unreasonably persisted on relying upon Officer Defendants' reports. P-131. The evidence presented at trial supports the jury's finding that the Board relied on incapable officers, and thus, the Board's actions were reckless and breached their fiduciary duty of care.

Evidence of the Board's recklessness was also supported by their lack of oversight of Officer Defendants. The Board had sufficient reason to know that they should have questioned the reports that Officers made at Board meetings. However, the extent of the Officer Defendants' deficiencies may not have been known because appropriate actions were not taken, i.e., setting up a finance committee as required by the Home's bylaws. Violating the Home's bylaws goes beyond basic negligence and meets the recklessness standard. This evidence, when viewed in the light most favorable to Plaintiff, establishes that there was sufficient evidence to support the jury's finding that Director Defendants breached their fiduciary duty of care. Therefore, Director Defendants' Motion for Judgment as a Matter of Law with respect to duty of care will be denied.

b. Officer Defendants

In order to prove that Officer Defendants breached their duty of care, Plaintiff was required to establish that Defendants Shealey and Causey did not act "with such care, including reasonable inquiry, skill[, ] and diligence, as a person of ordinary prudence would use under similar circumstances." Lemington I, 2010 WL 4275252 at *7 (citation omitted).

i. Defendant Causey

There was more than sufficient evidence to support the jury's verdict that Officer Defendants breached their duty of care. As to Defendant Causey, evidence was presented indicating that she failed to properly manage the Home in her position as nursing home administrator. One patient went 20 days without her medication. Doc. No. 651, 27. Medical records for other patients did not have complete information to ascertain whether the patient had received the correct medication. A reasonable inference is that this lack of record management contributed to the Home's failure to collect the total amount that should have been billed to Medicare and Medicaid, which increased its insolvency. Inspectors also found numerous other violations at the Home, and Defendant Causey was aware of these deficiencies because she discussed them with the Board. The number of deficiencies remained high throughout her term as nursing home administrator.

The lack of quality care at the Home resulted in the patient census continuing to decrease, even before it was determined that the Home should be closed, which resulted in financial hardship for the Home and increased debts. The jury heard evidence that: (1) Defendant Causey also failed to keep minutes of the Board meetings, which was her responsibility under the Board's practices; (2) Defendant Causey did not properly oversee Defendant Shealey or his actions; and (3) Defendant Causey was unaware that Defendant Shealey was not keeping the required financial records or billing Medicare and Medicaid for services that the Home was providing. A reasonable conclusion is that these actions left the Home in dire need of funds and ultimately led to the Home being forced to file for bankruptcy. A single one of the actions outlined above would be sufficient for a jury to find that Defendant Causey had breached her duty of care. When taken together, in the light most favorable to Plaintiff, this evidence provides overwhelming support for the jury's finding that Defendant Causey breached her fiduciary duty of care.

ii. Defendant Shealey

As to Defendant Shealey, evidence was presented that the main duty of a chief financial officer ("CFO") is to keep accurate financial records. The jury was presented with evidence of Defendant Shealey's lack of recordkeeping. Defendant Shealey did not keep a general ledger, and, instead, kept a running bank balance via an Excel spreadsheet. Doc. No. 650, 111. Taken in the light most favorable to Plaintiff, Defendant Shealey failed to properly bill Medicare and Medicaid for services that the Home had provided, which prevented the Home from receiving much needed funds to sustain operations. Defendant Shealey's lack of proper recordkeeping played a role in at least one potential buyer's, UPMC, decision not to purchase the Home. Doc. No. 654, 44-45. When a financial advisor came to investigate the Home's financial condition, Defendant Shealey locked his door, and stayed inside his office, instead of speaking to the representative. Doc. No. 650, 110. A reasonable conclusion is that if the Home was purchased, it could have prevented the Home from entering into bankruptcy or, at the very least, allowed the Home to emerge from bankruptcy after having paid its ...


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