For The Defense, July 2010 - DRI Today

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M E D I C A L L I A B I L I T Y A N D H E A LT H C A R E L A WCorporate StructureOnce upon a time, hospitals, nursinghomes and other health care institutionswere owned and operated under a relativelysimple “top down” structure wherein thecorporate parent essentially owned, operated,and controlled one or several healthcare facilities under a single roof. Today,this linear structure has been replaced byDirect participantliability will not attachunless the parent’s oversightof a subsidiary’s facilityis eccentric both in termsof degree and control.a more complex multi- layered model withseparate corporate entities—typically limitedliability companies—utilized for differentfunctions, which include ownershipof real estate, holding state licenses, managementand administration, provision ofsupplies or equipment, and employment ofmedical staff. In some cases, a separate realestate investment trust or REIT is createdto hold ownership of the building or facilityitself, which then leases the building to oneor more separate LLCs. This modern corporatestructure has at least two advantages:(1) the many different functions neededto operate a successful health care organizationare segregated into discrete corporateentities that can be operated moreefficiently and effectively than through thetraditional linear structure; and (2) thepotential liability of each separate corporateentity, and the structure as a whole, isminimized through the use of multiple corporateforms with distinct functions andresponsibilities.Traditional Corporate VeilPiercing TheoryIn “extraordinary cases,” courts will piercethe corporate veil and disregard the corporatestructure, treating the parent corporationand its subsidiary as a single entity.18 n For The Defense n July 2010Corrigan v. U.S. Steel Corp., 478 F.3d 718,724 (6th Cir. 2007). Generally speaking,a plaintiff seeking to pierce the corporateveil of a subsidiary to reach a parentcorporation or shareholder bears a heavyburden and is required to present evidencedemonstrating various factors suchas: (1) undercapitalization; (2) absence ofcorporate representation; (3) fraudulentrepresentation by corporate directors orshareholders; (4) use of the corporation topromote fraud, injustice or illegal activities;(5) comingling of assets or affairs; (6)failure to observe corporate formalities; or(7) shareholder conduct ignoring, controllingor manipulating the corporate form.See Community Care Centers, Inc. v. Hamilton,774 N.E.2d 559, 565 (Ind. App. Ct.2002). Because of these exacting standardsand the difficulties of marshalling admissibleevidence with respect to the multiplefactors required under this theory, plaintiffshave had limited success in piercingthe corporate veil in the context of litigationagainst health care entities.Direct Participant LiabilityRecognizing the difficulties involved in convincinga court to disregard the distinctionbetween a subsidiary and its parent, plaintiffs’lawyers are increasingly turning to thetheory of direct participant liability. Underthis theory, liability may be imposed when“the alleged wrong can seemingly be tracedto the parent through the conduit of its ownpersonnel and management” and “the parentis directly a participant in the wrongcomplained of.” United States v. Bestfoods,524 U.S. 51, 64 (1998) (citation omitted). Inother words, even if it is not liable under aveil piercing theory, a parent corporation,like all other persons and entities, may beheld liable for its own tortious conduct.The concept of direct parental liabilityfor the negligence or other wrong of asubsidiary is not new. In a seminal 1929law review article, Supreme Court Justice(then- professor) William Douglas surveyeda number of cases in which “the parent isdirectly a participant in the wrong complainedof.” Douglas & Shanks, Insulationfrom Liability Through Subsidiary Corporations,39 Yale L.J. 193, 208 (1929).Justice Douglas noted the following commoncharacteristics giving rise to parentalliability in these cases: (1) the use oflatent power incident to stock ownershipto accomplish a specific result; (2) interferencein the internal management of thesubsidiary; (3) an overriding of the discretionof the managers of the subsidiary; and(4) a close connection between the injuryand the interference. Id. at 209.In United States v. Bestfoods, infra, theSupreme Court cited the Douglas articleapprovingly while at the same time articulatingimportant limits on direct participantliability to ensure that its use isconsistent with the principle of limited liabilityfor corporations, which is “deeplyingrained in our economic and legal systems.”Id. at 61 (citation omitted). First, theCourt stressed that direct liability cannotbe based on the mere fact that the parentand subsidiary have directors and officersin common, a standard and unobjectionablecorporate practice. Id. at 69. Moreover,because courts presume that officersand directors are wearing their “subsidiaryhats,” and not their “parent hats,” whenthey are engaged in subsidiary- relatedactions, liability cannot be based on thefact that “dual officers and directors madepolicy decisions and supervised activitiesat the facilities.” Id. Next, the Court notedthat activities involving a subsidiary’s facilitythat are “consistent with the parent’sinvestor status, such as monitoring of thesubsidiary’s performance, supervision ofthe subsidiary’s finance and capital budgetdecisions, and articulation of generalpolicies and procedures, should not giverise to direct liability.” Id. at 72. In otherwords, to determine whether a parent maybe held directly liable, the “critical questionis whether, in degree and detail, actionsdirected to the facility by an agent of theparent alone are eccentric under acceptednorms of parental oversight of a subsidiary’sfacility.” Id.Although Bestfoods describes many ofthe important principles governing andlimiting direct participant liability, it isin many ways an atypical case because itrevolved around whether the parent couldbe considered an “operator” for purposesof CERCLA, rather than on whether itwas directly liable for any specific tort.Later cases, however, have relied on theprinciples articulated in Bestfoods, andelsewhere, and applied them to more traditionaltort contexts.
A notable recent case analyzing a corporateparent’s tort liability for an injuryoccurring at one of its subsidiary’s facilitiesis Forsyth v. Clark USA, Inc., 864 N.E.2d 227(Ill. 2007). In Forsyth, two mechanics whoworked at a refinery operated by the defendant’ssubsidiary were killed in an industrialaccident. Id. at 230–31. The decedents’estates alleged that the parent was directlyliable for the accident. They argued thatthe defendant breached its duty of care by(1) requiring the subsidiary to minimizeoperating costs, including those relatingto training, safety, and maintenance; (2)requiring the subsidiary to limit capitalinvestments, which allegedly prevented thesubsidiary from making adequate safetyexpenditures; (3) failing to properly evaluatethe subsidiary’s training and safetyprocedures; and (4) by forcing capital cutbacksthat resulted in unqualified employeesacting as maintenance mechanics. Id. at231. This theory, based on budgetary- typecontrols, is highly relevant in the healthcare context, where parents typically exercisesome control over budgetary mattersinvolving individual facilities or providers.The Supreme Court of Illinois had littledifficulty accepting that direct participantliability was, in principle, a valid theory ofrecovery. Id. at 236–37. The question waswhether, and in what circumstances, a parentcould be held liable for its control overa subsidiary’s budget. In canvassing thecase law on direct participant liability, theCourt took note of two principles. First, followingthe teaching of Bestfoods, a parentwill not be liable for actions that are consistentwith the normal control that a parentexercises over its subsidiary. Id. at 233–37.Accordingly, direct participant liabilitywill not attach unless the parent’s oversightof a subsidiary’s facility is eccentricboth in terms of degree and control. Id. at237. Second, the parent must actually havehad some hand in directing or authorizingthe specific conduct at issue. Id. at 234, 237.Considering both of these principlestogether, the court held thatWhere there is evidence sufficient toprove that a parent company mandatedan overall business and budgetary strategyand carried that strategy out by itsown specific direction or authorization,surpassing the control exercised as anormal incident of ownership in disregardfor the interest of the subsidiary,that parent could face liability.Id. at 237. (emphasis in original). This rulecombines the requirements of eccentricity(control deviating from the normal parentsubsidiaryrelationship), and specificity(specific direction or authorization of theconduct at issue). The Court stressed that“mere budgetary mismanagement alonedoes not give rise to the application ofdirect participant liability.” Id.Turning to the facts before it, the courtobserved that the parent’s president, whowas also CEO of the subsidiary, drafted adocument setting forth budget prioritiesfor the subsidiary that included a “survivalmode” business philosophy with a goalof replenishing the parent’s strategic cashreserves by $200 million. Id. at 238–40.The court determined that there was a factualquestion whether the president/CEOwas acting for the benefit of the parent,rather than the subsidiary, in setting andimplementing the subsidiary’s budgetarypriorities. Id. at 240. Reversing the lowercourt’s order granting summary judgmentto the parent, the court concluded that ifthis officer was wearing his “parent hat”rather than his “subsidiary hat” when hewas directing the manner in which the subsidiary’sbudget cuts were made, this wouldbe an eccentric level of control supportingdirect participant liability. Id.Budgetary control over a subsidiary isperhaps the classic ground for allegingdirect participant liability, but other formsof participation can give rise to a potentialdirect liability claim as well. For example,in Spires v. Hospital Corporation of America,a putative class of representatives ofestates of deceased hospital patients allegedthat the parent corporation had created acomputer program for staffing at subsidiaryhospitals that caused the hospitals toprovide an inadequate level of staffing. 289Fed. Appx. 269 (10th Cir. 2008). The TenthCircuit remanded the case for further considerationof the issue, but noted that if theplaintiffs did not allege “a level of controlbeyond ordinary involvement of a parentcorporation in the affairs of its subsidiaries,”the claim would not likely be viable.Id. at 272. Other bases for relief sometimesalleged by plaintiffs include, but are notlimited to: (1) a parent’s alleged failure toprovide supplies or services necessary toprovide appropriate medical care or treatment;(2) a corporate property owner’s negligentmaintenance of property leading toan unsafe or hazardous condition; (3) amanagement company’s negligent hiringor supervision of staff; and (4) a parent’sfailure to implement appropriate policiesand procedures.The Plaintiff’s PerspectiveIt can be reasonably argued that, in somecases, naming multiple corporate defendantsunder various theories of direct participantliability is far more trouble to aplaintiff than it is worth. Injecting theoriesof direct participant liability into agarden variety case involving a patient’sfall, a medication error, or an elopement,will not only significantly increase thecosts and burden of the discovery process,but may also have the effect of needlesslycomplicating what might otherwise be astraightforward case. In many cases, theinclusion of multiple corporate defendantsdoes not increase the amount of availableinsurance coverage because the affiliatedentities are typically additional namedinsureds under a single limit professionalliability policy covering the facility andstaff. Indeed, under some single- limit policies,the increased discovery costs coulderode the amount available for settlement.In other cases, particularly where thereis no clear cut deviation from the requiredstandard of care, or where the incidentor accident was unwitnessed, interjectingtheories of budgetary malfeasance orother corporate neglect may be viewed byplaintiff’s counsel as a useful distractionand enable the plaintiff to focus on favoritethemes such as “profits over people.”In terms of discovery costs, the burdensupon health care defendants in defendingagainst such claims far outweigh the marginalburdens on plaintiffs in assertingthem. If plaintiffs’ claims alleging directparticipant liability against multiple corporateentities survive a motion to dismiss,defendants can expect separate written discoveryrequests directed to each corporateentity, soon to be followed by multiple 30(b)(6) deposition notices covering an exhaustivelist of topics, many of which may haveno apparent relationship to the facts of thecase. If the case proceeds to trial, one ofthe plaintiff’s likely trial themes will beFor The Defense n July 2010 n 19
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