Courts throughout the nation recognize that "the era of the locally owned, ‘mom and pop’ nursing facility is gone. Increasingly, private investment groups own large chains of nursing homes. With the end of the locally owned nursing home, it has become common for nursing facilities to have complex ownership and management structures," as the court held in Schwartzberg v. Knobloch, 98 So. 3d 173, 180 (Fla. Dist. Ct. App. 2012). Large, often publicly traded nursing home chains have gone through similar reorganizations, creating a plethora of facility-specific entities that are now often owned by investment groups or private equity firms.

Organizational segmentation can assume complex forms, but typically one entity is formed to own real property (often as a real estate investment trust that leases the property to other entities), one holds the license and operates the facility (possibly as a not-for-profit), another provides direct care consulting services, and another manages the finances and back-office administrative functions of the facility. (See "Corporate Structure: Maximizing the Protection of the Corporate Veil, Long-Term Care and the Law," by Andrew R. McCumber.) This segmentation limits tort liability and recoveries, as the entities that own assets are separated from the operation of the facilities. (See Sara Hoffman Jurand’s "Lack of Insurance Hinders Recovery in Nursing Home Cases.")

Nursing home plaintiffs, who once encountered single owners/operators or units of hierarchically organized, deep-pocketed chains, now encounter discrete facility operators with limited assets, much of whose revenue "passes through" to other entities that provide services or resources under contract. In response, plaintiffs seek to expand the "upstream" liability of related or parental entities. Despite their fondest wishes, plaintiffs cannot just "follow the money" as parent entities are generally not liable for the obligations of their subsidiaries, as in United States v. Bestfoods, 524 U.S. 51, 61 (1998).

The traditional plaintiff’s recourse is piercing the corporate veil. (See "Protecting Nursing Home Residents From Attacks on Their Ability to Recover Damages," by John A. Pearce II et. al (touting piercing remedies, with reference to Pennsylvania law, because they may succeed despite the law).) Plaintiffs counsel specializing in nursing home litigation frequently do not plead piercing claims, though they sue every upstream entity they can identify, as sustaining the claim is burdensome. In jurisdictions, such as Florida, that do not recognize "alter ego" piercing theories, plaintiffs must essentially prove a second tort unrelated to their alleged injury: that the parent used its subsidiary for "an illegal, fraudulent or other unjust purpose," as in Dania Jai-Alai Palace v. Sykes, 450 So. 2d 1114, 1120-1121 (Fla. 1984). "Alter ego" theories that support piercing through shams to reach controlling individuals are ill suited to reaching parental entities. Entity-to-entity piercing is most readily achieved on a "common entity" theory that Pennsylvania, for example, does not recognize. (See Advanced Telephone Systems v. Com-Net Professional Mobile Radio, 846 A.2d 1264, 1278 n. 9 (Pa. Super. 2004).) In any event, a nursing home plaintiff will be hard-pressed to show that the entity to pierce through is a "facade" if it actually operates a licensed nursing home facility.

Plaintiffs’ better solution for fixing upstream liability comes from a "direct participant" theory of liability. In Bestfoods, the Supreme Court recognized that a corporate parent could be liable for cleanup costs under CERCLA either as an "owner," through veil piercing, or as an "operator," without veil piercing, if the parent actively participated in and controlled a subsidiary’s facility. Direct participation liability turns on whether the parent’s intervention is "specific" to the alleged injury and whether the control exercised was "eccentric" compared to normal parent-subsidiary relations. This theory fits nursing home plaintiffs better than piercing as the kind of facts they allege — e.g., that parental budgetary or staffing decisions caused injuries in the facilities — are the kind of factors that participation theory weighs. However, mere parental budgetary or financial controls over a subsidiary are insufficient, as it is normal for parents to exercise budgetary or financial controls over subsidiaries and to exercise some level of supervision of operations "consistent with the parent’s investor status." The parent is only directly liable for the subsidiary’s actions where it "actively participated in, and exercised control over, the operations of the facility itself."

An Arkansas nursing home case, Scott v. Central Arkansas Nursing Centers, 101 Ark. App. 424, 434, 278 S.W.3d 587, 595 (2008), illustrates the application of direct participation theory to nursing home litigation. The principal and part owner of the facility also controlled one company that provided administrative services and another that provided nursing services. The court upheld a directed verdict in favor of the principal, because "what is missing is any evidence beyond conjecture that [the principal] was charged with staffing, training or supervision at [the facility] or that his actions proximately caused [the deceased's] injuries or death." It also upheld a verdict in favor of the administrative services contractor owned by the principal because there was no evidence that it supervised nursing home employees or controlled staffing levels at the facility during the plaintiff’s residency. On the other hand, the nursing services contractor entity could be liable because it was "directly involved in the provision of care at [the facility] during the time that [the deceased's] condition began to deteriorate." (See also Smith v. Heather Manor Care Center, 2012 Ark. App. 584 (2012) (provision of "policies and procedures" for subsidiary did not support liability absent direct participation in setting staffing levels, training or supervision at facility).)

The direct participation test, as applied in jurisdictional challenges in several Florida nursing home cases, showed that ownership cannot establish liability or, therefore, specific personal jurisdiction. In Resource Healthcare of America v. McKinney, 940 So. 2d 1139 (Fla. 2d DCA 2006), the estate of a nursing home resident sued a foreign corporation. The claim failed, as the only evidence was that the president of the foreign defendant was an officer of another entity that was the parent of the nursing home licensee and also had an interest in the facility’s management company. In Extendicare v. Estate of McGillen, 957 So. 2d 58, 65 (Fla. 5th DCA 2007), the plaintiff alleged that the foreign defendant operated the nursing home in which the plaintiff was injured. However, the evidence showed only that it was a corporate parent that reviewed the subsidiaries’ budgets, appointed individuals as dual officers of parent and subsidiary, and collected revenue from subsidies. Such oversight by corporate parents was held to be normal, and so it could not support liability or specific jurisdiction.

In Schwartzberg, the defendants included 20 foreign trusts that were upstream owners of the Florida nursing home where the plaintiff alleged he was injured, or they were owners of other entities involved with the facility. As the corporate connections formed a maze, the trial court denied the defense motions to dismiss because the foreign defendants had structured entities to "enable various nonresident individuals and entities to maintain operational and budgetary control over the facilities, to direct profits from the facilities upstream, but to avoid liability and financial responsibility for the consequences of their operations." The opinion stated the plaintiffs bar’s mantra. The court of appeals agreed with the trial court that "it has become common for nursing facilities to have complex ownership and management structures." The implication it drew, however, was that nursing home plaintiffs would have to prove either a basis for liability by veil-piercing or direct participation regardless of ownership. This failed, as the plaintiffs’ liability case was premised on ownership and "nothing about the appellants’ financial interests in the nursing home is related in any way to Ms. Knobloch’s claims."

While no Pennsylvania case applies these relatively exacting tests of the direct participation theory to upstream liability in nursing home litigation, the Supreme Court came close in its recent opinion in Scampone v. Highland Park Care Center, 57 A.3d 582 (Pa. 2012) permitting theories of "corporate liability" in nursing home litigation. The court applied the Restatement (Second) of Torts §323 relating to "one who undertakes … to render services to another." It held that nursing homes, like hospitals, could have a nondelegable duty of care to patients if they undertook to play a central role in "the total health care" of residents. That would seem to premise liability on the existence of a direct caregiving relationship that could impose a duty on an upstream parent of a facility only if it exercised direct control over the facility’s operations. Indeed, the court may have meant just that with the oblique statement that "this type of individualized inquiry into appellants’ duties of care ensures that multiple entities are not exposed to liability for breach of the same nondelegable duties." •

Bruce Bellingham is a litigation associate at Spector Gadon & Rosen, where he handles many appeals. He also has an arts law practice and was named Philadelphia Volunteer Lawyers for the Arts’ Volunteer Lawyer of the Year in 2009. Contact him at bbellingham@lawsgr.com or 215-241-8916.