Official Comm. of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged)

• Decision Date: 26 January 2015
• Docket Number: No. 13–2707.,13–2707.
• Citation: 777 F.3d 620
• Parties: In re LEMINGTON HOME FOR the AGED. Official Committee of Unsecured Creditors, On Behalf of the Estate of Lemington Home for the Aged v. Arthur Baldwin; Linda Cobb; Jerome Bullock; Angela Ford; Joanne Andiorio; J.W. Wallace; Twyla Johnson; Nicole Gaines ; William Thompkins; Roy Penner; Melody Causey; James Shealey ; Eugene Downing; George Calloway; B.J. Leber; Reverend Ronald Peters, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

777 F.3d 620

In re LEMINGTON HOME FOR the AGED.Official Committee of Unsecured Creditors, On Behalf of the Estate of Lemington Home for the Aged

v.Arthur Baldwin; Linda Cobb; Jerome Bullock; Angela Ford; Joanne Andiorio; J.W. Wallace; Twyla Johnson; Nicole Gaines ; William Thompkins; Roy Penner; Melody Causey; James Shealey ; Eugene Downing; George Calloway; B.J. Leber; Reverend Ronald Peters, Appellants.

No. 13–2707.

United States Court of Appeals, Third Circuit.

Argued May 14, 2014.

Filed: Jan. 26, 2015.

Michael J. Bowe, Esq., [ARGUED], Jennifer S. Recine, Esq., Kasowitz, Benson, Torres & Friedman, New York, NY, John R. Gotaskie, Jr., Esq., Fox Rothschild, Pittsburgh, PA, Mark R. Hamilton, Esq., Rebecca S. Izsak, Esq., Philip J. Sbrolla, Esq., Cipriani & Werner, Pittsburgh, PA, Counsel for Appellants.

Robert S. Bernstein, Esq., Kirk B. Burkley, Esq., Nicholas D. Krawec, Esq., [ARGUED], Shawn P. McClure, Esq., Arthur W. Zamosky, Esq., Bernstein–Burkley, Pittsburgh, PA, Counsel for Appellee.

Before: SMITH, VANASKIE, and SHWARTZ, Circuit Judges.

OPINION OF THE COURT

VANASKIE, Circuit Judge.

This lawsuit, which concerns the mismanagement of a Pittsburgh-area nursing home and its ensuing bankruptcy, comes before the Court for a third time on appeal. In the present appeal, the Defendants, two former Officers and fourteen former Directors of the nursing home, present several challenges to the jury's verdict, which found them liable for breach of fiduciary duties and deepening insolvency. The jury also imposed punitive damages against the two Officers and five of the Directors.

We will affirm the jury's liability findings and the punitive damages award imposed against the Administrator and the Chief Financial Officer of the nursing home. We will, however, vacate the jury's award of punitive damages against the Defendants who served on the nursing home's Board of Directors. We conclude that the punitive damages award against those Defendants was not supported by evidence sufficient to establish that they acted with “malice, vindictiveness and a wholly wanton disregard of the rights of others.” Smith v. Renaut, 387 Pa.Super. 299, 564 A.2d 188, 193 (1989) (citations omitted).

I.

The Lemington Home for the Aged (“the Home”), established in 1883, “was the oldest, non-profit, unaffiliated nursing home in the United States dedicated to the care of African–America[n] seniors.” App. 857. As part of its mission statement, the Home sought to “[e]stablish, support, maintain and operate an institution that is able to extend nursing home care for persons who are infirm due to age and other reasons, without regard to age, sex, race, religion, and to do so regardless of whether such persons themselves have the ability to pay for such care.” App. 858.

Defendant Mel Lee Causey was hired to serve as the Home's Administrator and Chief Executive Officer in September 1997. Defendant James Shealey became the Home's Chief Financial Officer in December 2002 and reported to Causey.¹ Defendants Arthur Baldwin, Jerome Bullock, Angela Ford, Joanne Andiorio, J.W. Wallace, Twyla Johnson, Nicole Gaines, William Thompkins, Roy Penner, Eugene Downing, George Calloway, B.J. Leber, and the Reverend Ronald Peters all served as members of the Board of Directors of the Home (collectively, “Director Defendants”), and had “direct supervisory control, authority and responsibility” over Causey. App. 859.

The Home had been “beset with financial troubles” for decades, but had remained afloat with help from the City of Pittsburgh, Allegheny County, and donations from several private foundations. In re Lemington Home for the Aged (“Lemington I ”), 659 F.3d 282, 285 (3d Cir.2011). The Home's financial difficulties became particularly acute during the early 2000s, under the management of the Officer Defendants. The Home was cited by the Pennsylvania Department of Health 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, although state law required all nursing homes to employ full-time Administrators. That year, two patients died under suspicious circumstances while residing at the Home, resulting in investigations by the Pennsylvania Department of Health. The Home's patient recordkeeping and billing were in a state of disarray.

On January 6, 2005, the Board convened and voted to close the Home. However, its Chapter 11 petition was not filed until April 13 of that year. During the intervening period, the patient census dropped to as low as 37 patients. “At a Bankruptcy status conference held on June 23, 2005, no one expressed any interest in funding or acquiring the Home,” and the Bankruptcy Court therefore approved the Home's closure. Lemington I, 659 F.3d at 289. It was later revealed that the Home had “delayed filing its Monthly Operating Reports for May and June until September 2005,” although the reports “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. Id.

In November 2005, the Bankruptcy Court granted the request made by the Committee of Unsecured Creditors (“the Committee”) to bring this adversary proceeding against Causey, Shealey, and the Director Defendants claiming breach of fiduciary duty, breach of the duty of loyalty, and deepening insolvency. The District Court granted summary judgment in favor of Defendants on all claims.

On appeal, we vacated the District Court's grant of summary judgment in its entirety, concluding that “our independent review of the record discloses genuine disputes of material facts on all claims.” Id. at 285. On remand, the District Court set stringent time limits for trial, which the Defendants contested before this Court in a request for a writ of mandamus. We denied the Defendants' request but urged the District Court to consider increasing the time allotted for trial. In re Baldwin, 700 F.3d 122 (3d Cir.2012).

The District Court increased the time limits and the case proceeded to a six-day jury trial, which began on February 19, 2013. At the close of the Committee's case, the Defendants moved for judgment as a matter of law, which the District Court granted with respect to the breach of the duty of loyalty claim against the Director Defendants and denied in all other respects. Following the close of trial, the jury deliberated for three days before returning a compensatory damages verdict against fifteen of the seventeen Defendants, jointly and severally, in the amount of $2,250,000. The jury awarded punitive damages in the amount of $350,000, individually, against five of the Director Defendants. The jury also awarded punitive damages of $1 million against Shealey and $750,000 against Causey.

Following the verdict, the Defendants filed a motion for judgment as a matter of law, a new trial, or remittitur. The District Court denied that motion in its entirety. This appeal followed.

II.

“We exercise plenary review of an order granting or denying a motion for judgment as a matter of law and apply the same standard as the district court.” Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1166 (3d Cir.1993) (citation omitted). “[A] judgment notwithstanding the verdict may be granted under Fed.R.Civ.P. 50(b) only if, as a matter of law, the record is critically deficient of that minimum quantity of evidence from which a jury might reasonably afford relief.” Trabal v. Wells Fargo Armored Serv. Corp., 269 F.3d 243, 249 (3d Cir.2001) (quotation marks and citations omitted). “Because the jury returned a verdict in favor of the plaintiff, we must examine the record in a light most favorable to the plaintiff, giving her the benefit of all reasonable inferences, even though contrary inferences might reasonably be drawn.” Dudley v. S. Jersey Metal, Inc., 555 F.2d 96, 101 (3d Cir.1977).

III.

The Defendants first argue that the Committee introduced insufficient evidence at trial to establish that the Director and Officer Defendants had breached their duty of care and that the Officer Defendants had additionally breached their duty of loyalty. We disagree. The Committee presented evidence to the jury that was sufficient to support a rational finding that the Defendants had breached their fiduciary duties by failing to exercise reasonable diligence and prudence in their oversight and management of the Home.

A. Officer Defendants

Pennsylvania law provides:

[A]n officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.

15 Pa. Cons.Stat. Ann. § 5712(c). The duty of loyalty under Pennsylvania law “requires that corporate officers devote themselves to the corporate affairs with a view to promote the common interests and not their own.” Tyler v. O'Neill, 994 F.Supp. 603, 612 (E.D.Pa.1998).

The Committee presented extensive evidence at trial of Causey's mismanagement of the Home in her role as Administrator, clearly satisfying the “minimum quantity of evidence” required to sustain the jury's verdict on appeal. Trabal, 269 F.3d at 249. The jury heard testimony that it was Causey's responsibility as the nursing home Administrator to:

make[ ] sure that there are contracts in place, that the facility is being managed financially, that bills are being paid, that the nursing staff is adequate in its numbers as well as in their education and training, and that the facility is operating in compliance with both Federal and State regulations, which are really very extensive.

App. 1077.

Evidence presented at trial demonstrated that Causey fell far short of fulfilling these responsibilities. Throughout Causey's tenure, the Home was not in compliance with federal and state regulations. Causey began her role as...