This is not a long-term care case.

In Forsythe v. Clark USA, Inc., 864 N.E.2d 227 (Ill. Sup Ct. February 16, 2007), the Illinois Supreme Court affirmed the court of appeals, finding that a parent corporation may be directly liable where it exerts eccentric budgetary control over its subsidiary. In Forsythe, the court said the parent “can be held liable if, for its own benefit, it directs or authorizes the manner in which its subsidiary’s budget is implemented, disregarding the discretion and interests of the subsidiary, and thereby creating dangerous conditions.” Mere ownership by a parent corporation is insufficient, as is having individuals serving on boards of both the parent and the subsidiary. Setting budgetary goals is likely insufficient. However, where a parent corporation specifically disrespects the actions of its subsidiary, using its ownership interest to command, then direct liability may be imposed over a specific controlled transaction. Under this theory, a parent is held liable for its own actions against a third party through “the agency of subsidiaries.”

Eccentric control is, most likely, a disregard of the subsidiary corporation’s independence concerning decisions that should be within it’s control. In determining what constitutes “eccentric” control, researchers should be mindful that this is a fact driven inquiry. State corporation codes and the subsidiary’s contract obligations should be reviewed. Under most State corporation codes, a board of directors must discharge their duties “in a manner the director reasonably believes to be in the best interests of the corporation.” see, e.g., T.C.A. § 48-18-301(a)(3). Thus, eccentric control likely exists if the conduct benefits the parent, but is adverse to the subsidiary since that conduct would not be in the best interests of the subsidiary. For example, if the parent siphons off funds that a subsidiary would need to fulfill its obligations (safety obligations in the Forsythe case), then control is likely eccentric. In parsing whether a “dual officer” is acting for the parent or the subsidiary, the Forsythe court said the “presumption that an act is taken on behalf of the corporation for whom an officer claims to act is stronger when the act is perfectly consistent with the norms of corporate behavior, but wanes as the distance from those accepted norms approaches the point of action by a dual officer plainly contrary to the interests of the subsidiary yet nonetheless advantageous to the parent.”

The Forsythe opinion cites to an environmental case where liability was imposed on a parent corporation and, while those cases are different (in light of CERCLA’s rules on strict liability), they remain instructive. In CERCLA cases, a person or corporation may be liable for environmental cleanup costs if he or it is an “operator.” This is a transaction-specific inquiry as in Forsythe. An “operator is simply someone who directs the workings of, manages, or conducts the affairs of a facility.” AMW Materials Testing, Inc. v. Town of Babylon, 2006 U.S. App. LEXIS 8545 (2nd Cir. 2006) (free access at LexisONE). In K.C. 1986 Limited Partnership, Plaintiff-Appellant, v. Reade Manufacturing, A Division of Reactive Metals & Alloys Corp. et al, 472 F.3d 1009 (8th Cir. 2007), the Eighth Circuit found that an operator is someone who “(1) had authority to determine whether hazardous wastes would be disposed of and to determine the method of disposal and (2) actually exercised that authority, either by personally performing the tasks necessary to dispose of the hazardous wastes or by directing others to perform those tasks.” Applying this definition, a defendant was liable for the cost of cleaning up hazardous wastes because “his approval was necessary for any decisions involving large expenditures,” and because he approved expenditures. Id. Similarly, another court found that in addition to involvement in the waste disposal process, the ultimate question is whether the defendant had the power to take charge of the process and assign funds to pay for removal.” U.S. v. Tarrant, 2007 U.S. Dist. LEXIS 30331 (D. N.J. April 25, 2007) (finding defendant liable). Conversely, someone who either had no control or, who did not exercise that control, should not be liable.

So how is Forsythe applied to nursing home cases? In Heritage Hous. Dev., Inc. v. Carr, 199 S.W.3d 560 (1st Dist. Tex. App. August 3, 2006), the court held that the evidence was legally insufficient to support a verdict against the nursing home’s parent corporation and reversed a $2.2 million verdict. In support of the verdict, Plaintiff argued that the employment paperwork the nursing home staff completed that had the parent corporation’s name (HHD) on it, or refers to HHD as the employer, demonstrates HHD’s employment of the nursing home staff and establishes HHD’s vicarious liability. Plaintiff pointed to employment-at-will statements, job description acceptance forms, substance abuse policy notices, Equal Opportunity Employment statements, acknowledgment of time clock procedures, no solicitation policy notices, ethics and conduct policies, disciplinary and termination forms, and receipt of employee handbook acknowledgments as evidence supporting a finding that HHD employed the nursing home staff. Plaintiff also observed that the nursing home used administrative manuals containing HHD’s policies and procedures, thus further indicating that HHD controlled the details of the work performed.” This, however, was insufficient because there was no evidence that HHD controlled “the details of the care.” The transaction specific inquiry found some elements of control (the first element), but none that related to the negligent care itself (the second element).

Where an injury results from insufficient staffing, if the parent assumes budgetary control which limits staffing, then the parent is controlling the details of care. There are now ample studies linking quality of care to appropriate staffing making dangers imposed by short staffing foreseeable. See, e.g., AHRQ, Nurse Staffing and Quality of Patient Care (March 2007) (See also Press Release describing study on how chain planning practices can hurt patient care). In light of a subsidiary’s contractual quality of care obligation to the Medicare and Medicaid programs, control that prevents the subsidiary from providing quality care under its provider agreements is likely eccentric.

Note: Other decisions examining direct liability: U.S. v. Bestfoods, 524 U.S. 51 (1998); Esmark, Inc. v. National Labor Relations Board, 887 F.2d 739 (7th Cir. 1989); Kingston Dry Dock Co. v. Lake Champlain Transportation Co., 31 F.2d 265 (2d Cir. 1929); L.B. Industries, Inc. v. Smith, 817 F.2d 69 (9th Cir. 1987); United States v. Sutton, 795 F.2d 1040 (Temp. Emer. Ct. App. 1986); Cher v. Forum International, Ltd., 692 F.2d 634 (9th Cir. 1982); D.L. Auld Co. v. Park Electrochemical Corp., 553 F. Supp. 804 (D.N.Y. 1982); International Union, United Auto., etc. v. Cardwell Mfg. Co., 416 F. Supp. 1267 (D. Kan. 1976); State v. Ole Olsen, Ltd., 35 N.Y.2d 979 (N.Y. 1975); Cooper v. Cordova Sand & Gravel Co., 485 S.W.2d 261 (Tenn. Ct. App. 1971); My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614 (Mass. 1968); Crescent Mfg. Co. v. Hansen, 174 Wash. 193 (Wash. 1933); Papa v. Katy Indus., 166 F.3d 937 (7th Cir. 1999); Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001); Boggs v. Blue Diamond Coal Co., 590 F.2d 655 (6th Cir. 1979); Commissioner v. RLG, Inc., 755 N.E.2d 556 (Ind. 2001); Estate of Countryman v. Farmers Coop. Ass’n, 679 N.W.2d 598 (Iowa 2004); United States v. TIC Inv. Corp., 68 F.3d 1082 (8th Cir. 1995); United States v. Kayser-Roth Corp., 910 F.2d 24 (1st Cir. 1990); Dassault Falcon Jet Corp. v. Oberflex, Inc., 909 F. Supp. 345 (D.N.C. 1995).