Established and Emerging

Corporate Veil Strategies

Caroline J. Berdzik
Goldberg Segalla LLP
902 Carnegie Center, Suite 100
Princeton, NJ 08540-6530
(609) 986-1314
cberdzik@goldbergsegalla.com

Caroline J. Berdzik is a partner with Goldberg Segalla, LLP in Princeton,

New Jersey specializing in employment defense, professional liability and risk
management for long term care providers and other ancillary senior care businesses.
Prior to joining Goldberg Segalla, she was the assistant general counsel of Care
One Management, LLC and its affiliates in Fort Lee, New Jersey where she was
responsible for managing the litigation portfolio and developing and implementing
proactive strategies to defend against employment, professional liability and other
claims, with a focus on minimizing risk and reducing legal spend. She is an active
member of the American Health Lawyers Association, and frequent speaker on a
variety of topics impacting the senior care industry.

Established and Emerging Corporate Veil Strategies

Table of Contents

I. Current Developments and Trends in Nursing Home Litigation..............................................................43

II. Piercing the Corporate Veil..........................................................................................................................44
A. History and Current Status...................................................................................................................44
B. Recent Cases..........................................................................................................................................44
C. Discovery Tactics...................................................................................................................................46
D. Successful Defenses...............................................................................................................................46
III. Naming of Owners, Shareholders, Directors, Members of the Governing Body and
Employees in Lawsuits.................................................................................................................................47
A. Trends and Repercussions....................................................................................................................47
B. Successful Defenses...............................................................................................................................48
C. Case Law................................................................................................................................................48
IV. Corporate Negligence...................................................................................................................................49
A. History....................................................................................................................................................49
B. Recent Cases..........................................................................................................................................49
C. Discovery Tactics...................................................................................................................................49
D. Successful Defenses...............................................................................................................................50
V. Direct Participant Liability...........................................................................................................................50
A. History....................................................................................................................................................50
B. Theories for Recovery...........................................................................................................................50
C. Discovery Tactics...................................................................................................................................51
D. Successful Defenses...............................................................................................................................51
VI. Impact of PPACA on Corporate Veil and Other Strategies........................................................................51
VII. Conclusion.....................................................................................................................................................52

Established and Emerging Corporate Veil Strategies Berdzik41

Established and Emerging Corporate Veil Strategies

I. Current Developments and Trends in Nursing Home Litigation

It is no surprise that one of the fastest growing segments of litigation is nursing home/ALF litigation.
Many states such as New Jersey have their own resident rights statutes which provide for shifting attorneys
fees if a plaintiff prevails and uncapped punitive and compensatory damages which render these types of cases
very palatable to plaintiffs attorneys. These statutes, coupled with the overwhelming undeserved negative
views of nursing homes and assisted living facilities, are resulting in irrational sky high verdicts.
The defense of these cases is taking its toll on the industry. Insurance companies in many states have
stopped issuing professional liability policies for nursing homes, leaving many entities uninsured in those
states where they are not mandated to carry liability insurance. The cost of litigation is negatively impacting
the ability of facilities to make capital improvements to the centers and hire additional staff, despite plaintiffs
protestations to the contrary.
Some facilities have closed their doors or simply moved their operations out of states with voluminous professional liability cases, an overreaching judiciary and exorbitant jury verdicts. In fact, Extendicare
announced in May 2012 that it planned on leasing all 21 of its Kentucky nursing homes to an experienced
third-party, long-term care operator based in Texas. The release also quoted a company official who said the
reason for leaving the state was because of, the combination of a worsening litigation environment and the
lack of any likelihood of tort reform in the State of Kentucky. HCR Manor Care is still fighting its appeal of
the astounding $90 million verdict which was rendered against it in West Virginia for a wrongful death case
involving an 87 year old resident who was at the facility for 19 days.
Some states are attempting to pass tort reform to help curb these runaway verdicts and to curtail
what is viewed by some as predatory practices by plaintiffs law firms capitalizing on liberally construed statutes and jurors emotions. For example, Pennsylvania has a bill pending in the legislature that would limit
punitive damages to no more than double the compensatory damages awarded, unless intentional misconduct
was found. According to an analysis done by Diederich Healthcare (www.diederichhealthcare.com), based on
information reported to the National Practitioner Data Bank, Pennsylvania states malpractice insurers paid
out $319.7 million for malpractice claims in 2011, mostly in settlements, second only to New York at $677.9
million.
Texas passed tort reform in 2003 and now has caps on non-compensatory damages at $250,000. The law
also eliminated the requirement of nursing homes to maintain liability insurance and also limited the introduction into evidence of regulatory findings at trial that were arguably not relevant to the matter at hand. If one were
to believe the articles written on the topic since tort reform passed in Texas, lawsuits against nursing homes in
the state have dropped precipitously and more physicians have established medical practices in the state.
While long term care providers look for ways to actively manage this risk and rely upon wellgrounded corporate law principles, the plaintiff s bar is continuing its relentless assault on these defenses and
is devising new strategies to try to attach liability to owners, officers, directors and the governing body and
obliterate the corporate structure. Some courts have held their ground and continue to uphold long established tenets of corporate law, while other courts have seemed to perform a contortion act to arrive at a holding that seems to contradict the law. This manuscript will discuss some of these theories, recent case law
developments and practical advice about implementing successful defense strategies in nursing home and
ALF litigation.
Established and Emerging Corporate Veil Strategies Berdzik43

II. Piercing the Corporate Veil

A. History and Current Status

Although not a new theory by far and certainly not the favored theory of the day, piercing the corporate veil tactics are still prevalent in nursing home and assisted living malpractice cases. This argument can
be raised by a plaintiff at varying points in the litigation. Arguments that are asserted include that the corporation or limited liability company is a mere instrumentality of the owners or alter ego of the owners and
therefore, should not enjoy the shield normally afforded these entities under corporate law. Other times piercing the corporate veil arguments are made after a judgment is obtained because the operating or licensing
entity is underfunded or underinsured and the plaintiff cannot collect on a judgment. In essence, this type of
allegation resembles more of a collection action.
In all states piercing the corporate veil is sacrosanct and there are many factors which need to be
weighed by the trier of fact before the veil can be pierced. Most elements that are reviewed and weighed by
courts are as follows: control (review who has the actual control, review of the capitalization of the entity,
analysis of whether corporate formalities are observed), whether the corporate structure is used to perpetuate
fraud or some other purpose contrary to the law and finally, causation between the control exercised, its purpose and damages or injury alleged.
Overall, plaintiffs have not had much success piercing the corporate veil and this theory has been
most susceptible to dismissal because causation cannot be demonstrated. Nevertheless, it continues to remain
a viable weapon in the plaintiff s arsenal and will continue to be used as a tool to increase the costs to litigate
cases and to render a straightforward case unnecessarily complicated.

B. Recent Cases
Florida recently had a notable case entitled Schwartzberg v. Knobloch, 2012 Fla. App. LEXIS 7829
(Fla. Dist. Ct. App. 2d Dist., May 16, 2012) in the District Court of Appeal for the Second District where a successful defense to piercing the corporate veil against the plaintiff s law firm Wilkes and McHugh was lodged.
Although the case focused more on personal jurisdiction principles, there was a healthy discussion on piercing the corporate veil. (See also Schwartzberg v. Brown, 2012 Fla. App. LEXIS 10117 (Fla. Dist. Ct. App. 2d
Dist., June 22, 2012) Similar case against sister facility where personal jurisdiction was not found for individual defendants or trusts.(
In this particular matter, the plaintiff filed suit against the operator of the nursing home and others
for alleged deficiencies in care which resulted in injury. The original complaint did not name any individuals.
A second amended complaint was filed a year or so later to name certain individuals, as well as other entities.
Two of the individuals, Harris Schwartzberg and Maxwell Stolzberg resided in New York and the other newly
named defendants were trusts created and registered in New York.
Although the Court stated that the corporate structure was complex and somewhat difficult to ascertain, it was able to determine that the individuals owned, either directly or indirectly interests in some of the
named entities. The individuals had an indirect ownership interest in the operating company for the nursing
home as well. The only connection the individuals had to Florida was indirect interest in the nursing homes
operating company.
The individuals primarily argued that they did not maintain offices in Florida, employ anyone in
Florida or operate, manage, or otherwise supervise activities at the nursing home in Florida and therefore,
there was no personal jurisdiction over them in Florida. The plaintiff rebutted these allegations with affidavits of information from public records including cost reports, controlling interest affidavits and the licensure
44 Nursing Home/ALF Litigation Seminar September 2012

application which showed these individuals as having interest in the nursing home and operating company.
The plaintiff also attached a newspaper article about the trend of complexity in ownership structures of nursing homes in support of its argument.
The District Court of Appeal reversed the Circuit Courts decision to deny the individuals motion to
dismiss on personal jurisdiction grounds. The District Court stated that a plaintiff could establish personal
jurisdiction in three ways, including establishing the test for long arm jurisdiction under Floridas statute, by
establishing facts that pierce the corporate veil or through a direct participant theory where the parent exercises
sufficient control over the subsidiary so that it is considered an agent or alter ego of the parent. The District
Court of Appeal determined that the only fact established by the plaintiff was that the individuals had indirect
ownership in the nursing homes operating and management companies. However, plaintiff could not casually
connect that ownership interest to any injury or damage which the plaintiff may have allegedly suffered.
In this particular case, the District Court of Appeal was able to comb through the record and determine that plaintiff had merely produced information showing an indirect ownership interest, and not anything connecting the ownership interest to any alleged wrongdoing or causing injury to the plaintiff. At least
in this particular case, the distraction technique employed by the plaintiff to draw away attention from the
underlying relevant facts and evidence, as opposed to a referendum on corporate structures in long term care
companies, was unsuccessful.
In an Oklahoma case from 2011, the plaintiff named individual shareholders, directors and officers
and tried to pierce the corporate veil after a lower court had previously denied plaintiff s request to amend his
petition to add parties and allegations to state a corporate veil claim. See Boulden v. Colbert Nursing Home,
Inc., 249 P.3d 105 (Okla. Ct. App. 2011). The allegations as to the individuals were that the defendants had
used the corporate entity to avoid public policy, failed to secure and maintain liability insurance, failed to adequately capitalize the corporation and had acted intentionally, recklessly and with malice.
When plaintiffs filed the amended complaint, the shareholders made a motion to dismiss arguing
that the statute of limitations had expired. Defendants subsequently made an argument that since the claim
was one of professional negligence that the plaintiffs needed an affidavit of merit which they did not have. The
Appellate Court reversed the dismissal of the amended complaint and found that plaintiffs should have been
permitted to amend the petition to add the affidavit of merit. Furthermore, the Appellate Court found that
the same operative facts that were in the amended complaint related back to the original 2007 complaint and
therefore, were not time barred.
Last year in New Jersey there was a case involving a nursing home and veil piercing in the context of
limited partnerships. Although the Court did not pierce the veil in this particular case, it opened the door to
veil piercing under the right set of circumstances for a limited partnership, which was a case of first impression in the state.
The case of Canter v. Lakewood of Voorhees et al., 22 A.3d 68 (N.J. App. Div. 2001) involved a negligence claim asserted by plaintiff against a nursing home. The operative facts are as follows: Lakewood of
Voorhees LP (Lakewood) is a limited partnership. Seniors Healthcare Inc. (SHI) is a limited partner in
the nursing home holding an 84.12 percent interest in Lakewood. SHI is the sole shareholder of Ozal of Lakewood, Inc (Ozal) and Senior Management-North (SMN). Ozal, the general partner of Lakewood, holds
a 1 percent interest in Lakewood. SMN functions as a management company, but does not own the nursing
home. Further, Steven Lazovitz is the sole director of Ozal but also maintains the director, officer and majority shareholder role in SHI, and had significant previous roles in Lakewood and SMN. Plaintiff s allegations
were that these were not separate legal entities, but that they were one seamless operation. In turn, SHI filed
a motion for partial judgment arguing that New Jerseys law on limited partnerships, the NJ Uniform Limited
Established and Emerging Corporate Veil Strategies Berdzik45

Partnership Law does not permit corporate veil piercing and that the statute specifically lays out those circumstances where the veil can be pierced.
The trial court denied SHIs motion for partial summary judgment and stated that the veil could be
pierced. It also found that there was a genuine issue of material fact as to whether SHI controlled the nursing
home enough that it could be liable for any negligence committed by Lakewood.
The Appellate Division looked to Delaware law in deciding the matter and held that there could be veil
piercing in the limited liability partnership setting under the right set of circumstances. The factors it found
that must be demonstrated by clear and convincing evidence are that the limited partner either participated
in the control of the limited partnerships business by taking or attempting to take action not within the safe
harbor of the law or by dominating the limited partnership and using it to perpetuate injustice, fraud and the
like. Dominance, like in so many piercing the corporate veil cases, is evaluated in terms of undercapitalization,
observance or lack of observance of corporate formalities and involvement in day-to-day activities of the nursing home. However, the Appellate Division reversed the denial of partial summary judgment to SHI finding that
there was no disputed issue of genuine material fact as to SHIs purported dominance of Lakewood. The Appellate Division found the businesses to be legitimate corporate structures and that they did not commit fraud.
Further, the Appellate Division stated that the plaintiff was unable to show any direct dealing with SHI.
Although in the limited partnership context, this is an important case for nursing home and assisted
living providers in New Jersey. The piercing of the corporate veil was expanded to the limited partnership
form, however, the case underscores that mere demonstration of commonality of ownership and individuals
is insufficient to clear the piercing the veil hurdle for plaintiffs. This case also shows that there is no corporate
form that is immune to the piercing the corporate veil strategies being employed by plaintiffs.

C. Discovery Tactics
When piercing the corporate veil becomes an issue in the underlying nursing home/ALF litigation it
is a guaranteed discovery nightmare. The requests for production of documents, request for admissions and
interrogatories will have a significant focus on corporate structure, how the corporate structure operates and
the individuals involved in the corporate structure. Rest assured that many depositions will be solely focused
on trying to untie the knot and attempting to paint a picture that there is something fundamentally improper
about utilizing multiple corporate entities in the nursing home setting, although this type of structure exists
across many different industries. This will be a way for plaintiffs to attempt to get financial information very
early on in the case to paint their usual profits over people and census over care mantras.
As a defendant, it is important to try and curtail superfluous expensive and mostly irrelevant discovery and keep the focus on the plaintiff, his or her medical conditions and the alleged damages. It is extremely
important that any employee who is going to be deposed who has no knowledge of the corporate structure
other than who is their employer is expressly counseled not to guess or try to be helpful by volunteering inaccurate information. Many times plaintiff s counsel will purposefully ask confusing corporate structure questions to a director of nursing or similar employee in a facility who will provide inaccurate or misleading
information which the plaintiff will attempt to later use in his or her favor. As defense counsel, you need to
figure out in every case who the individual is that is the most knowledgeable on the corporate structure and
become a master of the structure at its inception in order to be able to successfully handle the case.

D. Successful Defenses
Motion practice can be a successful way to get rid of the piercing the corporate veil theory in any
given case. Counsel can make a motion to dismiss for failure to prove one of more elements of the cause of
46 Nursing Home/ALF Litigation Seminar September 2012

action based on the pleadings. A motion to dismiss can also be made if the complaint tries to set this forth as a
separate cause of action since it is truly a derivative claim. See Strawbridge v. Sugar Mountain Resort, Inc., 243
F.Supp.2d 472, 479 (2003) , cert. denied 547 U.S. 1206 (June 19, 2006) (stating that piercing the corporate veil
as a method of imposing liability on an underlying cause of action). A motion to dismiss can be made if the
purpose of the claim is made solely to guard against insufficient assets to satisfy any outstanding judgment. In
this case, the argument would be that this claim is premature.
Motions for summary judgment can also be successful. Out of all of the elements that need to be
satisfied to assert a piercing the corporate veil theory, plaintiffs seem to have the most difficulty demonstrating the causation element because it is incredibly hard to show that lack of a formal structure or issues
such as undercapitalization actually caused physical injury or other damage to the underlying plaintiff in
the case.
There are also proactive measures companies can and should take from a corporate law perspective to reduce the likelihood of a successful piercing the corporate veil claim. These actions include, but are
not limited to, regular meetings of shareholders, directors and officers with minutes, creating by-laws, having separate banking and accounting records for the company separate and apart from owners, shareholders and the like. Further, the corporate structure should be honored and accounts and other matters should
be placed in the name of the operating company only, not any affiliate companies. It is likewise important to
make sure that admission agreements clearly refer to the individual nursing home and not any chain designation or management company.
Corporate formalities should be observed and employees should be paid from the operating entity
and not any management entity. Adequate capitalization and insurance is also important to defend against
a piercing the corporate veil claim. Any contracts or agreements that are entered into should be on behalf of
the operating entity only. One should also carefully review the amount of management fees and rent paid on
behalf of the operating entity to determine if the rates are higher than fair market value.

III. Naming of Owners, Shareholders, Directors, Members of the Governing

Body and Employees in Lawsuits
A. Trends and Repercussions
It seems that plaintiffs are routinely naming owners, shareholders and directors to increase anxiety among individuals, create possible dissention among the ranks and also to increase the costs of litigating
the matters. Depending on who is individually named in the underlying complaint, there may be a conflict of
interest among some of the named parties and additional counsel may have to be retained to represent one or
more of the named individuals. Not only does this increase the costs of litigation, it also creates the unfortunate illusion that there is not a unified defense and that someone must have done something improper when
in actuality the Rules of Professional Conduct may offer a company no other option then to have separate
counsel. Sometimes when individuals are named that have no connection whatsoever to the care that was
received by the plaintiff, it seems to be more as a harassment tactic or embarrassment tool. At times this strategy will back fire on plaintiffs and companies will play hard ball and not discuss early resolution of cases with
opposing counsel.
There is also a trend of naming medical directors, directors of nursing, administrators and even certified nurses aides. Employees that are named in these suits can become somewhat traumatized and distracted
by the litigation process. Furthermore, the turnover of employees in the industry is something that plaintiffs
Established and Emerging Corporate Veil Strategies Berdzik47

will use and to their advantage in prosecuting these cases. It could very well be that the director of nursing
who is named in the complaint is no longer employed with the company by the time the deposition, mediation or trial comes around. This can sometimes further complicate the defense of the matters and increase the
cost of litigation. Many plaintiffs will depose former disgruntled employees who will provide deposition testimony that is not related to the case at hand, but is negative to the facility.
Members of the governing body are also being named in nursing home litigation cases more frequently. The argument being made is that these individuals have a statutory duty under 42 C.F.R. 483.75(d)
to establish and implement policies regarding the management and operations of the facility. Companies must
be very circumspect in deciding who is actually on the governing body of the facility as it can cause an inadvertent piercing of the corporate veil. Furthermore, this is an area that regulators are now closely exploring as
they too look to pierce the corporate veil in Medicaid, Medicare and other licensure matters.

B. Successful Defenses
Obviously, to the extent a motion to dismiss can be made to clean up the named parties in the case
that can make the matter somewhat easier to handle going forward. Reasonable plaintiff s attorneys will generally agree to dismiss named officers, shareholders and directors without prejudice once they are provided
with evidence of insurability. Another argument that can be made when an individual is named is that the
individual did not owe a specific duty to the plaintiff. If there is no duty owed, there can be no breach of a duty
and therefore, no damages that flow from that alleged breach.
In terms of individually named employees at the center or regional level, typically those individuals
are not dismissed until a later point in the litigation when paper discovery and depositions have taken place.
However, every effort should be made through discovery to attempt to demonstrate that unless someone acted
outside the scope of their employment they cannot be held individually liable for their acts or omissions.

C. Case Law
A recent Supreme Court case out of Arkansas held that the sole member of the nursing homes governing body did not owe a personal duty to the resident who allegedly was injured due to negligent care at
a nursing home. See Bedell v. Williams, 2012 Ark. 75 (Ark. 2012). In this case, in addition to the corporate
defendants, the decedents representative filed a claim against Donald B. Bedell (Bedell), who was president and a member of the board of directors for each of the named defendants. It was argued by plaintiff that
he was responsible for the management and control of the nursing home and that he decided to cut budgets
at the nursing home which plaintiff alleged resulted in a decline in the decedents health. In November 2010,
the jury found the nursing home liable for $5.1 million in damages, $5 million in damages against Bedell and
$350,000 against the personnel leasing company.
The crux of the plaintiff s argument was that Bedell owed a duty to the decedent under 42 C.F.R.
483.75 (d) which discusses the need for nursing homes to have a governing body if they participate in Medicare and Medicaid programs. Bedell was the sole member of the governing board so plaintiff attempted to
hold him personally liable.
The Supreme Court ultimately overturned the finding of the lower court and opined that plaintiff
could not demonstrate that Bedell owed a duty to decedent and that this duty was breached. Although the
ultimate outcome of the case was favorable to nursing homes, it should be a caution to nursing homes that this
will be a continued area that plaintiffs will be exploring.

48 Nursing Home/ALF Litigation Seminar September 2012

 IV. Corporate Negligence

A. History
Other theories for asserting piercing the corporate veil including trying to demonstrate improper
conduct by the shareholders or owners which directly result in injury or death to the plaintiff. These claims
are typically geared toward managerial and administrative personnel, as opposed to the owners and shareholders. This type of claim is different than medical malpractice and negligence claims because the claim
seeks to target administrative policies which were or were not in place, decisions regarding staffing, training,
equipment and the like.
Unlike a piercing the corporate veil theory, this type of claim is a stand alone claim and is not derivative in nature. This claim is also different than an employment type claim alleging vicarious liability. What
makes these claims difficult to defend is that sometimes it is nearly impossible to discern what is a clinical
decision or function as opposed to what is really an administrative function.

B. Recent Cases
In Scampone v. Grane Healthcare Co., 11 A.3d 967 (Pa. Super. July 15, 2010), a Superior Court in
Pennsylvania held that a claim could proceed under a corporate liability theory against a management company and two entities, separate and apart from the nursing home itself due to allegations of the violation of
minimum staffing levels and insufficient oversight of care, primarily based on testimony from former employees (many of whom had been terminated). The nursing home defendants appealed that decision.
Arguments that were advanced in the appeal of the decision on the part of the management company and nursing home are that nursing homes and management companies are not total health care providers unlike hospitals where the doctrine of corporate negligence was first recognized in Thomson v. Nason
Hosp., 591 A.2d 703 (Pa. 1991). Appellants pointed out that patients in nursing homes, unlike hospitals, have
physician choice so nursing homes cannot always control the total health care of its residents. Amicus briefs
also argued that by expanding the doctrine of corporate liability to nursing homes and personal care homes
(Pennsylvanias equivalent of assisted living facilities) there will be a precipitous increase in litigation, as well
as overly broad discovery. The same issue regarding whether certificates of merit would be required in a corporate negligence case is something that is also raised by the decision of the Superior Court.
Furthermore, nursing homes provide nursing care, as opposed to medical care. As tenuous as it may
be to argue that corporate negligence extends to nursing homes, it is quite another thing to say it expands to
management companies as well. It is undisputed that management companies do not provide direct patient
care. Under the Pennsylvania regulations, the licensee is responsible for insuring compliance with the regulations, not the management company. Furthermore, according to the plain reading of the statute, this is a nondelegable duty.

C. Discovery Tactics
The very unfortunate part of this type of claim is that discovery is generally much broader, more
intrusive and much more expensive. Under this type of claim requests for documents include policy and procedure manuals, handbooks, budgets and other financial documents, QA materials and the like. Depositions
are routinely noticed for higher level positions such as regional directors of operations and regional clinical
services providers. Discovery becomes protracted, expensive and a distraction because it becomes more about
the company and its so-called deficient practices than the care that was actually provided to the plaintiff and
Established and Emerging Corporate Veil Strategies Berdzik49

the plaintiff s underlying medical condition. Additionally, under this theory financial documents may be
discoverable at a much earlier point in the litigation as opposed to any punitive phase because of allegations
sounding in understaffing and underfunding.
However, a downside for plaintiffs to complicated and expensive discovery is that it likely further
erodes any insurance that is available to pay out on a claim. Normally under most insurance policies, multiple
defendants do not increase the amount of available insurance proceeds and many insurance policies are eroding which means defense costs come off what is available under the actual policy.

D. Successful Defenses
A sometime successful defense of corporate negligence claims is a motion to dismiss the claim for
failure to include an affidavit of merit or expert. However, a plaintiff may argue that this is not medical negligence or professional negligence and instead is administrative in nature and therefore does not need an affidavit of merit or the like.
Obviously, plaintiff has the burden of proving all of the elements of the claim of a corporate negligence
allegation in order to succeed. Since this allegation does not focus on the medical aspect of the case it may be
difficult for a plaintiff to demonstrate causation between policies and practices of the management company
and say for instance, the fall of a resident in one of one its nursing homes that resulted in a broken hip.

V. Direct Participant Liability

A. History

Since corporate veil piercing claims can be difficult for a plaintiff to prevail upon, many plaintiffs are
now asserting direct participant liability claims as another way to try impose liability on corporate parents. The
seminal case for this theory is United States v. Bestfoods, 524 U.S. 51 (1998). This case held that there could be
liability when, the alleged wrong can be seemingly traced to the parents through the conduit of its own personnel and management. Furthermore, the parent must directly participate in the misconduct. Id. at 64. Although
Bestfoods dealt more with whether a parent company could be deemed an operator under an environmental
regulation, it nevertheless set forth some guiding principles which have been explored in tort liability cases.
For example, tort liability under a direct participant theory was explored in the case of Forsyth v.
Clark USA, Inc. 864 N.E.2d 227 (Ill. 2007) which involved the death of two workers at a subsidiary. The case
expounded on Bestfoods and discussed that it is necessary that the control exercised by the parent is different
than the typical control it normally exercises over the subsidiary and that the parent has some specific role in
the actual tortious conduct in order to find liability.

B. Theories for Recovery

Plaintiffs will typically try to use direct participant liability when they focus on the budgetary and
other controls set by the parent over the individual facilities. For example, a plaintiff will argue that the parent cut budgets in clinical operations which resulted in less staffing which culminated in a negative outcome
for a resident. Other direct participant liability theories that are espoused are policies and procedures from the
parent corporation that either are not implemented or not followed, lack of necessary supplies and equipment
or the purchase of inferior equipment or supplies. Direct participant liability can also be alleged when a parent company failed or did not conduct proper background checks which resulted in the hiring of an employee
who was either negligent or committed a criminal act.
50 Nursing Home/ALF Litigation Seminar September 2012

C. Discovery Tactics
Similar to the other theories mentioned above, direct participant liability claims only increase the
costs associated with prosecuting and defending the case because much of the focus is on budgetary and
financial information, as well as policies and procedures at the parent level. If such broad discovery is permitted by the courts, protective orders should always be requested in addition to an agreement that the plaintiff s
counsel will return all of these confidential materials and any and all copies of the documents in whatever format after the matter has resolved.

D. Successful Defenses
Motions to dismiss for failure to state a claim can always be made with these types of claims and have
enjoyed some more success since Bell Atlantic v. Twombley, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S.
662 (2009). These cases held that more than conclusory allegations that hint at the possibility of liability are
required when a claim is stated. If motions to dismiss are not successful, these claims can be positioned potentially for early motions for summary judgment if strategic discovery is taken (pointed admissions, document
requests, etc.).
Generally speaking, parent companies are not liable to third parties to make certain that subsidiaries act reasonably. So, if a parent corporation is not involved in the day-to-day care being rendered at the facility and the supervision of medical professionals, it is going to be difficult for plaintiff to show that there was
a duty owed by the parent company to the resident at the facility. Furthermore, simply because a parent has
budgetary responsibility over the subsidiary and does a poor job discharging these functions, this is not sufficient to impart direct liability on the parent. Finally, similar to other piercing the corporate veil strategies
discussed above, plaintiffs have a difficult time demonstrating causation of the parents so-called actions and
inactions and the alleged damages suffered by the plaintiff.
Offensively speaking, companies should be careful to observe any and all corporate formalities. Further, there should be good documentation showing that decisions impacting resident care are made at the
facility level and this extends to decisions made by the governing body.

VI. Impact of PPACA on Corporate Veil and Other Strategies

The Patient Protection and Affordable Care Act (PPACA) seeks to increase transparency with
respect to nursing home ownership and will likely lead to an increase of piercing the corporate veil type claims
in complaints. Under Section 6101-21, additional extensive information will need to be disclosed regarding
individuals and entities that own, control or manage the facilities. Further, companies will be required to disclose relationships between various entities. Disclosures are even extended to managing employees. However, the definition under the Social Security Act and PPACA is very different. Under PPACA, a managing
employee is an individual (including, but not limited to a business manager, administrator, director or consultant) who directly or indirectly manages, advises or supervises any element of the practices, finances or operations of the facility. There are also additional disclosures about the governing body, although no reference is
made to any existing or new definition of governing body.
Although there is still a bit to be hashed out, the ultimate result of these regulations will be to make it
easier for a plaintiff to assert piercing the corporate veil type allegations. It will also increase the potential pool
of defendants to consultants who may render clinical advice to a nursing home and perhaps even attorneys if
they provide or draft policies and procedures for the day-to-day operations of the centers.

Established and Emerging Corporate Veil Strategies Berdzik51

 VII. Conclusion
As evidenced by the foregoing, piercing the corporate veil strategies will continue to play a key role
in the prosecution and defense of nursing home and ALF litigation. Companies will need to remain vigilant
in honoring the corporate structure and continue to be aggressive in filing motions to dismiss claims that are
conclusory in nature with no basis for liability. Furthermore, defendants will need to manage the discovery
process from the outset to make sure that fairly straightforward cases do not become convoluted by corporate
conspiracy theories that focus more on pithy phrases than the critical issues at stake in these matters.

52 Nursing Home/ALF Litigation Seminar September 2012