Direct liability of parent corporation of facility

David McGuffey is a great nursing home and elder law attorney from Tn.  He is kind enough to share with other nursing home attorney his summary of important cases and legal theories.  Recently he wrote an article about direct liability of parent corporations in the nursing home industry.  Below are excerpts:

In Forsythe v. Clark USA, Inc., 864 N.E.2d 227 (Ill. Sup Ct. February 16, 2007), the Illinois Supreme Court affirmed the court of appeals, finding that a parent corporation may be directly liable where it exerts budgetary control over its subsidiary. In Forsythe, the court said the parent “can be held liable if, for its own benefit, it directs or authorizes the manner in which its subsidiary’s budget is implemented, disregarding the discretion and interests of the subsidiary, and thereby creating dangerous conditions.”  Mere ownership alone by a parent corporation is insufficient, as is having individuals serving on boards of both the parent and the subsidiary. Setting budgetary goals is likely insufficient. However, where a parent corporation specifically disrespects the actions of its subsidiary, using its ownership interest to command, then direct liability may be imposed over a specific controlled transaction. Under this theory, a parent is held liable for its own actions against a third party through “the agency of subsidiaries.”

So how is Forsythe applied to nursing home cases? In Heritage Hous. Dev., Inc. v. Carr, 199 S.W.3d 560 (1st Dist. Tex. App. August 3, 2006), the court held that the evidence was legally insufficient to support a verdict against the nursing home’s parent corporation and reversed a $2.2 million verdict. In support of the verdict, Plaintiff argued that the employment paperwork the nursing home staff completed that had the parent corporation’s name (HHD) on it, or refers to HHD as the employer, demonstrates HHD’s employment of the nursing home staff and establishes HHD’s vicarious liability. Plaintiff pointed to employment-at-will statements, job description acceptance forms, substance abuse policy notices, Equal Opportunity Employment statements, acknowledgment of time clock procedures, no solicitation policy notices, ethics and conduct policies, disciplinary and termination forms, and receipt of employee handbook acknowledgments as evidence supporting a finding that HHD employed the nursing home staff. Plaintiff also observed that the nursing home used administrative manuals containing HHD’s policies and procedures, thus further indicating that HHD controlled the details of the work performed.” This, however, was insufficient because there was no evidence that HHD controlled “the details of the care.” The transaction specific inquiry found some elements of control (the first element), but none that related to the negligent care itself (the second element).

Where an injury results from insufficient staffing, if the parent assumes budgetary control which limits staffing, then the parent is controlling the details of care. There are now ample studies linking quality of care to appropriate staffing making dangers imposed by short staffing foreseeable. See, e.g., AHRQ, Nurse Staffing and Quality of Patient Care (March 2007) (See also Press Release describing study on how chain planning practices can hurt patient care). In light of a subsidiary’s contractual quality of care obligation to the Medicare and Medicaid programs, control that prevents the subsidiary from providing quality care under its provider agreements is likely eccentric.

In today’s environment, the tangled web some nursing homes weave makes it difficult to track who’s really in control. The search for control is no longer limited to determining the identity of the equity owners. Now, contracts between related entities must be reviewed if a researcher wishes to know who’s really pulling the strings. One current method of asserting control over related entities seems to be through the use of lease agreements. Frequently nursing home operations are centered in one company (e.g., National HealthCare Corporation), while ownership of the facility may be in another entity (e.g., National Health Investors). (NOTE: Exemplar companies in this article are used for the sole purpose of demonstrating research methodology; we are NOT saying or implying that any company mentioned in this article has done anything illegal, improper or unethical). The real estate company will execute a master lease with the operating parent, which is then expanded to include each specific location. These lease agreements may include restrictions on spending, hiring, renovations or expansion, essentially placing all real economic control in the related real estate owner. See Kindred’s Press Release dated May, 9, 2006 for a description of how its master lease operates.