Michael Stratton of Stratton Faxon wrote a great article on their blog The Connecticut Legal Examiner on how private investment groups use corporate shells to hide from liability and accountability. Below is a reprint of the article.
“Private investment groups are replacing ‘mom and pop’ nursing home owners. Plaintiff lawyers may need to dig through the resulting complex ownership and management structures to identify – and hold accountable-the corporate entities that have harmed their clients
Private equity enterprise and large public companies are operating more nursing homes today, replacing the more traditional operators, individuals, and faith-based enterprises that are sensitive to the plight of the elderly.
With the continuing increase in demand for elder-care resources, these entrepreneurs are often more concerned with profits than resident care. And because occupancy levels in nursing homes are already high and government reimbursement rates are capitated, some ”vulture capitalists” try to increase their bottom line by lowering costs. This usually translates into cutting staff, since labor is the largest cost-component of the nursing home budget.
Because the nursing home business is primarily service oriented, cutting staff usually means cutting service. That, in turn, translates into poor resident care. When the quality of care suffers, the nursing home operator’s liability increases in both the civil and administrative arenas, to mitigate their exposure for potential liability, nursing home operators resort to complex corporate strategies to limit their liability.
The cornerstone of the nursing home industry’s “escape and evasion” strategy is creating an amalgamation of single purpose enterprises (SPEs) to prevent litigants from obtaining judgments against people or entities other than the nursing home licensee. The licensee is typically just a shell company. Nursing home operators have found that numerous SPEs are less attractive defendants than a single company with multiple operating interests and multiple real estate holdings.
Under the SPE structure, nursing home revenues are often placed into centralized accounts under the parent company’s control. Payments are made from those accounts on behalf of the individual nursing homes without regard to the revenues a particular facility generates. Monies are used for myriad purposes unrelated to resident care, including acquiring new facilities and servicing the debts of the parent and affiliated companies. Dividends are rarely paid to the parent by its subsidiaries because the parent has unlimited access to the funds in the centralized account.
Identifying the real culprit at the root of nursing home abuse is no easy task. It requires hard work, determination, and perseverance. Focus your case on the misconduct of these corporate predators. Even with the advent of more stringent disclosure provision, the nursing home industry will continue to obfuscate when it comes to identifying the parties that are truly responsible for the management and operational decisions in nursing homes.”
“Corporate issues related to SPEs in nursing home litigation have dramatically increased the complexity of these cases. These potential theories of liability will help increase the likelihood of holding the corporate parent or its officers accountable for the harm your client suffered:
Direct liability of corporate parents
Direct liability of corporate office/shareholder for tortious acts.
Vicarious liability of corporate parents.
Alter ego and piercing the corporate veil.
There are many places to look for evidence supporting the theories of liability outline above including:
Securities and Exchange Commission (SEC) fillings.
Patent office filings.
State licensure filings.
Other state filings.
Press releases and newsletters.
Websites of parents.
Corporate integrity agreements.
The nursing home chart.
Employee benefit plans.
Worker’s compensation claim filings.
Policies and procedures.
Incentive or bonus plans.
Code of conduct.