## Facts

- A Pennsylvania charitable nonprofit nursing home experienced prolonged financial distress and repeated regulatory citations for serious care and documentation deficiencies.
- The Home hired an Administrator/CEO in 1997 and a CFO in 2002; the CFO reported to the CEO.
- Reviews concluded the CEO lacked adequate qualifications to competently operate the facility; evidence showed she worked part-time for months while receiving full-time pay.
- The board obtained grant funding to search for a replacement administrator but did not conduct the search and did not remove the CEO despite persistent problems.
- The CFO failed to maintain proper accounting records, relying on a personal spreadsheet and monitoring primarily the bank balance rather than complete financial statements.
- The CFO stopped submitting Medicare claims, resulting in the loss of roughly $500,000 for services already rendered.
- The CFO explored a transaction in which a church would buy the facility and install him as CEO, raising conflict-of-interest concerns.
- In early 2005, as conditions worsened and residents left, the board voted to close the Home; a Chapter 11 filing followed after an approximately three-month delay.
- During the Chapter 11 case, management failed to timely file required monthly operating reports and initially did not disclose about $1.4 million in tax payments that could have been an estate asset and potentially affected sale prospects.
- An unsecured creditors’ committee sued the officers and directors for breach of fiduciary duty and “deepening insolvency”; a jury awarded $2.25 million compensatory damages and punitive damages against both officers and five directors.

## Issues

1. Whether the evidence was sufficient to support the jury’s findings that the officers and directors breached fiduciary duties and caused deepening insolvency.
2. Whether the evidence supported punitive damages under Pennsylvania law, particularly as to the directors.

## Decision

- The Third Circuit affirmed the liability verdicts against the officers and directors for breach of fiduciary duty and deepening insolvency.
- The court affirmed punitive damages against the CEO and CFO.
- The court vacated punitive damages against the directors, concluding the evidence did not satisfy Pennsylvania’s stringent punitive-damages standard for them.

## Legal Principles

- Officers and directors of a Pennsylvania nonprofit owe fiduciary duties of care and loyalty; when insolvency is present, creditor interests are central in evaluating misconduct that harms the estate.
- Deepening insolvency under Pennsylvania law may be found where defendants fraudulently or recklessly prolong a corporation’s existence in a manner that worsens the corporation’s financial condition and injures creditors.
- On appellate review of a jury verdict for sufficiency of the evidence, the court views the record in the light most favorable to the verdict and does not reweigh credibility determinations.
- Under Pennsylvania law, punitive damages require proof of highly culpable conduct demonstrating “malice, vindictiveness and a wholly wanton disregard of the rights of others”; serious mismanagement and poor oversight may support compensatory liability without meeting this punitive threshold.

## Conclusion

The Third Circuit held that the record permitted a jury to find that officers and directors breached fiduciary duties and deepened the nonprofit nursing home’s insolvency through mismanagement and material nondisclosures, but limited punitive damages to the officers because the directors’ misconduct, though actionable, did not meet Pennsylvania’s heightened standard for punitive punishment.


In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015)