In re Lemington Home for the Aged

The Lemington Home for the Aged was a nursing home owned by a nonprofit corporation. The corporation’s board of directors had authority to supervise, hire, and fire the home’s staff. In 1997, the board hired Mel Causey (defendant) as the home’s administrator and the corporation’s CEO. While Causey was in these roles, the home was consistently noncompliant with government regulations and was repeatedly cited for failing to document its residents’ medical treatments. An independent report and a report issued by the state each concluded that Causey lacked the knowledge, experience, and qualifications to operate the home competently. For at least eight months, Causey worked only part-time but still collected a full-time salary. The board obtained a grant to fund a search for a new administrator, but it never conducted the search or removed Causey. In 2002, the board hired James Shealey as the corporation’s chief financial officer. Shealey did not maintain official financial books, tracking only the home’s bank balance and doing that on a personal spreadsheet. Shealey also stopped submitting Medicare claims, causing the home to lose $500,000 of income for services rendered. Shealey then tried to have a church buy the home and make him the CEO. In 2005, the board voted to file for bankruptcy but delayed the filing for three months, during which the home declined further and lost more residents. The board then failed to disclose relevant financial information in the bankruptcy proceedings, including a $1.4 million payment the home had received. This nondisclosure impaired the trustee’s ability to sell the home or pay creditors. In the bankruptcy case, the home’s unsecured creditors (plaintiffs) filed an adversary proceeding against Causey, Shealey, and 14 former directors (defendants), alleging they had breached fiduciary duties and worsened the home’s insolvency. The jury found that Causey and Shealey had breached their duties of care and loyalty and that the former directors had breached their duty of care. The court entered a $2.25 million judgment for the unsecured creditors. Causey, Shealey, and the directors appealed, arguing that the evidence did not support the jury’s verdict.