Lemington Home for the Aged v. , 777 F.3d 620 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-2707
_____________
In re: LEMINGTON HOME FOR THE AGED
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
ON BEHALF OF THE ESTATE OF LEMINGTON HOME
FOR THE AGED
v.
ARTHUR BALDWIN; LINDA COBB; JEROME
BULLOCK; ANGELA FORD; JOANNE ANDIORIO; J.W.
WALLACE; TWYLA JOHNSON; NICOLE GAINES;
WILLIAM THOMPKINS; ROY PENNER; MELODY
CAUSEY; JAMES SHEALEY; EUGENE DOWNING;
GEORGE CALLOWAY; B.J. LEBER; REVEREND
RONALD PETERS,
Appellants
_____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil No. 2-10-cv-0800)
District Judge: Honorable Arthur J. Schwab
_____________
Argued May 14, 2014
Before: SMITH, VANASKIE, and SHWARTZ, Circuit
Judges.
(Filed: January 26, 2015)
Michael J. Bowe, Esq. [ARGUED]
Jennifer S. Recine, Esq.
Kasowitz, Benson, Torres & Friedman
1633 Broadway
21st Floor
New York, NY 10019
John R. Gotaskie, Jr., Esq.
Fox Rothschild
625 Liberty Avenue
29th Floor
Pittsburgh, PA 15222
Mark R. Hamilton, Esq.
Rebecca S. Izsak, Esq.
Philip J. Sbrolla, Esq.
Cipriani & Werner
650 Washington Road
Suite 700
Pittsburgh, PA 15228
Counsel for Appellants
Robert S. Bernstein, Esq.
Kirk B. Burkley, Esq.
Nicholas D. Krawec, Esq. [ARGUED]
Shawn P. McClure, Esq.
2
Arthur W. Zamosky, Esq.
Bernstein-Burkley
707 Grant Street
Suite 2200, Gulf Tower
Pittsburgh, PA 15219
Counsel for Appellee
_____________
OPINION OF THE COURT
_____________
VANASKIE, Circuit Judge.
This lawsuit, which concerns the mismanagement of a
Pittsburgh-area nursing home and its ensuing bankruptcy,
comes before the Court for a third time on appeal. In the
present appeal, the Defendants, two former Officers and
fourteen former Directors of the nursing home, present
several challenges to the jury’s verdict, which found them
liable for breach of fiduciary duties and deepening
insolvency. The jury also imposed punitive damages against
the two Officers and five of the Directors.
We will affirm the jury’s liability findings and the
punitive damages award imposed against the Administrator
and the Chief Financial Officer of the nursing home. We
will, however, vacate the jury’s award of punitive damages
against the Defendants who served on the nursing home’s
Board of Directors. We conclude that the punitive damages
award against those Defendants was not supported by
evidence sufficient to establish that they acted with “malice,
vindictiveness and a wholly wanton disregard of the rights of
others.” Smith v. Renaut, 564 A.2d 188, 193 (Pa. Super. Ct.
1989) (citations omitted).
3
I.
The Lemington Home for the Aged (“the Home”),
established in 1883, “was the oldest, non-profit, unaffiliated
nursing home in the United States dedicated to the care of
African-America[n] seniors.” App. 857. As part of its
mission statement, the Home sought to “[e]stablish, support,
maintain and operate an institution that is able to extend
nursing home care for persons who are infirm due to age and
other reasons, without regard to age, sex, race, religion, and to
do so regardless of whether such persons themselves have the
ability to pay for such care.” App. 858.
Defendant Mel Lee Causey was hired to serve as the
Home’s Administrator and Chief Executive Officer in
September 1997. Defendant James Shealey became the
Home’s Chief Financial Officer in December 2002 and
reported to Causey.1 Defendants Arthur Baldwin, Jerome
Bullock, Angela Ford, Joanne Andiorio, J.W. Wallace, Twyla
Johnson, Nicole Gaines, William Thompkins, Roy Penner,
Eugene Downing, George Calloway, B.J. Leber, and the
Reverend Ronald Peters all served as members of the Board
of Directors of the Home (collectively, “Director
Defendants”), and had “direct supervisory control, authority
and responsibility” over Causey. App. 859.
The Home had been “beset with financial troubles” for
decades, but had remained afloat with help from the City of
Pittsburgh, Allegheny County, and donations from several
1
When discussed collectively, Shealey and Causey
will hereinafter be referred to as the “Officer Defendants.”
4
private foundations. In re Lemington Home for the Aged
(“Lemington I”), 659 F.3d 282, 285 (3d Cir. 2011). The
Home’s financial difficulties became particularly acute during
the early 2000s, under the management of the Officer
Defendants. The Home was cited by the Pennsylvania
Department of Health for deficiencies at a rate almost three
times greater than the average nursing home operating in the
state. In 2004, Causey began working part-time in her
capacity as Administrator, although state law required all
nursing homes to employ full-time Administrators. That
year, two patients died under suspicious circumstances while
residing at the Home, resulting in investigations by the
Pennsylvania Department of Health. The Home’s patient
recordkeeping and billing were in a state of disarray.
On January 6, 2005, the Board convened and voted to
close the Home. However, its Chapter 11 petition was not
filed until April 13 of that year. During the intervening
period, the patient census dropped to as low as 37 patients.
“At a Bankruptcy status conference held on June 23, 2005, no
one expressed any interest in funding or acquiring the Home,”
and the Bankruptcy Court therefore approved the Home’s
closure. Lemington I, 659 F.3d at 289. It was later revealed
that the Home had “delayed filing its Monthly Operating
Reports for May and June until September 2005,” although
the reports “would have shown that the Home received nearly
$1.4 million in Nursing Home Assessment Tax payments,”
which could have increased its chances of finding a buyer.
Id.In November 2005, the Bankruptcy Court granted the
request made by the Committee of Unsecured Creditors (“the
Committee”) to bring this adversary proceeding against
Causey, Shealey, and the Director Defendants claiming
5
breach of fiduciary duty, breach of the duty of loyalty, and
deepening insolvency. The District Court granted summary
judgment in favor of Defendants on all claims.
On appeal, we vacated the District Court’s grant of
summary judgment in its entirety, concluding that “our
independent review of the record discloses genuine disputes
of material facts on all claims.” Id. at 285. On remand, the
District Court set stringent time limits for trial, which the
Defendants contested before this Court in a request for a writ
of mandamus. We denied the Defendants’ request but urged
the District Court to consider increasing the time allotted for
trial. In re Baldwin, 700 F.3d 122 (3d Cir. 2012).
The District Court increased the time limits and the
case proceeded to a six-day jury trial, which began on
February 19, 2013. At the close of the Committee’s case, the
Defendants moved for judgment as a matter of law, which the
District Court granted with respect to the breach of the duty
of loyalty claim against the Director Defendants and denied in
all other respects. Following the close of trial, the jury
deliberated for three days before returning a compensatory
damages verdict against fifteen of the seventeen Defendants,
jointly and severally, in the amount of $2,250,000. The jury
awarded punitive damages in the amount of $350,000,
individually, against five of the Director Defendants. The
jury also awarded punitive damages of $1 million against
Shealey and $750,000 against Causey.
Following the verdict, the Defendants filed a motion
for judgment as a matter of law, a new trial, or remittitur.
The District Court denied that motion in its entirety. This
appeal followed.
6
II.
“We exercise plenary review of an order granting or
denying a motion for judgment as a matter of law and apply
the same standard as the district court.” Lightning Lube, Inc.
v. Witco Corp., 4 F.3d 1153, 1166 (3d Cir. 1993) (citation
omitted). “[A] judgment notwithstanding the verdict may be
granted under Fed. R. Civ. P. 50(b) only if, as a matter of law,
the record is critically deficient of that minimum quantity of
evidence from which a jury might reasonably afford relief.”
Trabal v. Wells Fargo Armored Serv. Corp., 269 F.3d 243,
249 (3d Cir. 2001) (quotation marks and citations omitted)).
“Because the jury returned a verdict in favor of the plaintiff,
we must examine the record in a light most favorable to the
plaintiff, giving her the benefit of all reasonable inferences,
even though contrary inferences might reasonably be drawn.”
Dudley v. S. Jersey Metal, Inc., 555 F.2d 96, 101 (3d Cir.
1977).
III.
The Defendants first argue that the Committee
introduced insufficient evidence at trial to establish that the
Director and Officer Defendants had breached their duty of
care and that the Officer Defendants had additionally
breached their duty of loyalty. We disagree. The Committee
presented evidence to the jury that was sufficient to support a
rational finding that the Defendants had breached their
fiduciary duties by failing to exercise reasonable diligence
and prudence in their oversight and management of the
Home.
7
A. Officer Defendants
Pennsylvania law provides:
[A]n officer shall perform his
duties as an officer in good faith,
in a manner he reasonably
believes to be in the best interests
of the corporation and with such
care, including reasonable
inquiry, skill and diligence, as a
person of ordinary prudence
would use under similar
circumstances.
15 Pa. Cons. Stat. Ann. § 5712(c). The duty of loyalty under
Pennsylvania law “requires that corporate officers devote
themselves to the corporate affairs with a view to promote the
common interests and not their own.” Tyler v. O’Neill, 994 F.
Supp. 603, 612 (E.D. Pa. 1998).
The Committee presented extensive evidence at trial of
Causey’s mismanagement of the Home in her role as
Administrator, clearly satisfying the “minimum quantity of
evidence” required to sustain the jury’s verdict on appeal.
Trabal, 269 F.3d at 249. The jury heard testimony that it was
Causey’s responsibility as the nursing home Administrator to:
make[] sure that there are
contracts in place, that the facility
is being managed financially, that
bills are being paid, that the
nursing staff is adequate in its
numbers as well as in their
8
education and training, and that
the facility is operating in
compliance with both Federal and
State regulations, which are really
very extensive.
App. 1077.
Evidence presented at trial demonstrated that Causey
fell far short of fulfilling these responsibilities. Throughout
Causey’s tenure, the Home was not in compliance with
federal and state regulations. Causey began her role as
Administrator in 1997. “[T]here were significant problems
identified by the Pennsylvania Department of Health, the
inspectors of the nursing home from 1998 through 2004 . . . .”
App. 1081. The Home was cited repeatedly for failing to
keep proper documentation of residents’ clinical records. In
2004, the Department of Health launched an investigation
following the death of patient Elaine Carrington. The review
concluded that “Causey lacks the qualifications, the
knowledge of the PC regulations and the ability to direct staff
to perform personal care services as required.” App. 1349–
50, 2283. This evaluation, citing Causey’s inexperience and
lack of qualifications, came after Causey had already been in
the role of Administrator for more than six years.
The jury also heard testimony that, at the time of Ms.
Carrington’s death, Causey was not working at the Home
full-time, despite holding the title of Administrator and
collecting her full salary. Pennsylvania law requires all
facilities of the Home’s size to employ a full-time
Administrator. But in an application for long-term disability
benefits she filed with the state, Causey represented that she
was working only “20 to 24 hours per week at Lemington”
9
for more than eight months in 2004. App. 1457. When
confronted at trial with this portion of her benefits
application, Causey avoided giving a precise figure for how
many hours she worked during this period, although she
eventually admitted, “I was working part-time.” App. 1820.
We are satisfied that the jury was presented with more
than sufficient evidence to conclude that Causey breached her
duty of care. Additionally, testimony regarding Causey’s
self-interested decision to stay on as an Administrator despite
being unable to serve full-time as required under state law
supported the jury’s verdict that she breached her duty of
loyalty by collecting her full salary while not in fact fulfilling
the duties of the role for which she was being compensated.
The jury also heard sufficient evidence to support its
determination that defendant Shealey breached his duties of
care and loyalty as Chief Financial Officer. The Committee
presented testimony from William Terrence Brown, a nursing
home consultant who had conducted an assessment of the
Home on behalf of a major creditor in May 2005. Brown
testified that during his review, he requested records from
Shealey, including “the latest financial statements, monthly,
internally prepared, the annual audits[,] . . . the last year’s
Medicare and Medicaid cost reports[,] . . . the nursing reports,
the census data[,] . . . accounts receivable and accounts
payable, [and] aging reports . . . .” App. 1196. Brown
testified that he repeatedly asked Shealey for this information,
but it was not provided to him.
Brown also testified that, towards the end of his review
of the Home, Shealey, in an attempt to avoid Brown’s
persistent requests for basic financial information, locked
himself in his office. Brown responded by “camp[ing]
10
outside” of Shealey’s office, waiting for him to leave in order
to speak with him about the Home’s finances. App. 1201.
Brown testified that when he finally managed to speak with
Shealey:
I said, Mr. Shealey, there really
aren’t any books; are there? And
he said no.
So I said, well, Mr. Shealey, you
got to have something that you
keep an idea of what kind of cash
is in the bank. So what do you
use for that?
And he said, well, I’ve got, you
know, a little Excel spread sheet I
use, only I try to keep a bank
balance.
Id. When pressed by Brown as to how long he had operated
without a general ledger that recorded the Home’s finances in
detail, Shealey admitted that “June 30, 2004, was the last time
they kept any books.” Id. Brown testified that Shealey never
provided him with the Excel spreadsheet he allegedly used in
lieu of a general ledger. Despite Shealey’s failure to provide
these documents to Brown, minutes from a Board meeting
following Brown’s visit state that Shealey informed the Board
that Brown had “received everything he requested.” App.
1870, 3088. Brown also testified that, under Shealey, the
Home had failed to bill for Medicare since August 2004.
Brown calculated that this resulted in the Home failing to
collect at least $500,000 it was due for services rendered.
App. 1206.
11
The Committee also introduced into evidence an email
that Shealey sent to a representative of Mount Ararat Baptist
Church (“Mt. Ararat”) in April 2005, before the Home had
filed for bankruptcy. The proposal suggested that Mt. Ararat
purchase Lemington “to create a revitalized faith based
retirement community” named Mount Ararat Retirement
Community (“MARC”). App. 6351. The proposal indicated
that Shealey would “assume the position of MARC President
and Chief Executive Officer.” App. 6360. Director Baldwin
testified that he believed Shealey’s involvement in this
potential sale was inappropriate, as Shealey would receive a
benefit if the Home was merged with Mt. Ararat. App. 1303,
1315.
The jury therefore heard sufficient evidence to find
that Shealey fell far short of fulfilling his duty to act “with
such care, including reasonable inquiry, skill and diligence, as
a person of ordinary prudence would use under similar
circumstances.” 15 Pa. Cons. Stat. Ann. § 5712(c). A person
serving as Chief Financial Officer with reasonable skill and
diligence would not fail to maintain a general ledger for over
nine months, refuse to meet with a consultant hired by a
major creditor of the Home, and forgo collection of upwards
of $500,000 due to the Home in Medicare payments.
Shealey’s decision to stay on as CFO despite his inability to
competently fulfill the duties with which he was charged,
combined with his proposal that Mt. Ararat purchase the
Home and elevate him to the position of President and CEO,
also gave the jury a sufficient basis for concluding that
Shealey acted in self-interest, breaching his duty of loyalty to
the Home.
12
B. Director Defendants
The evidence also supported a finding that the Director
Defendants breached their duty of care by failing to take
action to remove Causey and Shealey once the results of their
mismanagement became apparent.
Pennsylvania law provides:
(a) Directors.--A director of a
nonprofit corporation shall stand
in a fiduciary relation to the
corporation and shall perform his
duties as a director . . . in good
faith, in a manner he reasonably
believes to be in the best interests
of the corporation and with such
care, including reasonable
inquiry, skill and diligence, as a
person of ordinary prudence
would use under similar
circumstances. In performing his
duties, a director shall be entitled
to rely in good faith on
information, opinions, reports or
statements, including financial
statements and other financial
data, in each case prepared or
presented by any of the following:
(1) One or more officers or
employees of the corporation
whom the director reasonably
believes to be reliable and
competent in the matters
13
presented. (2) Counsel, public
accountants or other persons as to
matters which the director
reasonably believes to be within
the professional or expert
competence of such person . . . .
(b) Effect of actual knowledge.—
A director shall not be considered
to be acting in good faith if he has
knowledge concerning the matter
in question that would cause his
reliance to be unwarranted.
15 Pa. Cons. Stat. Ann. § 5712.
The jury heard testimony that the Board was
“responsible for the oversight of the nursing home
Administrator and for the hiring and firing” of the Home’s
management staff. App. 1076. The Directors were aware
that the Home had “three times the deficiencies” of the
average nursing home operating in the state during Causey’s
tenure as Administrator. App. 1872. The jury heard
testimony that an independent review of the Home in 2001
recommended that, due to the Home’s continued citations for
health violations, Causey should be replaced with a “seasoned
nursing home administrator.” App. 1095. The report further
urged that “[t]he facility cannot improve overall patient care
without a competent administrator on staff . . . .” App. 2210.
Although the Board sought and obtained a grant of $178,000
from the Pittsburgh Foundation to fund the search for a new
Administrator, the funds were never used to find a
replacement for Causey, who remained at the Home despite
14
increasing evidence that her “performance as the nursing
home administrator was poor.” App. 1095.
Although the date by which the Directors became
aware that Causey was working part-time from April through
December 2004 was contested at trial, some evidence was
introduced that the Board allowed Causey to continue to
operate and collect her full salary as Administrator with the
knowledge she was working part-time, in violation of state
law. Director Andiorio testified that Causey informed the
Board that she would be working part-time and the Board did
not intervene to replace her with a full-time Administrator.
App. 1867. The jury also heard testimony from Director
Baldwin that the Board elevated Shealey into a role as a
“CEO type figure” from December 2004 through May 2005,
even after the Board discovered that Shealey had not been
maintaining proper financial records for the Home in his role
as CFO. App. 1297.
This evidence supported the jury’s finding that the
Director Defendants did not exercise reasonable prudence and
care in continuing to employ Causey and Shealey. The
Director Defendants kept Causey in the role of Administrator
and CEO for six years in the face of abnormally high
deficiency findings. Even after she ceased working at the
Home full-time, in violation of state law, the Director
Defendants allowed Causey to continue in her role as
Administrator. This is not a case where directors, acting in
good-faith reliance “on information, opinions, reports or
statements” prepared by employees or experts, made a
business decision to continue to employ an Administrator
whose performance was arguably less than ideal. 15 Pa.
Cons. Stat. Ann. § 5712(a). The jury heard testimony that the
Director Defendants received several independent reports
15
documenting Causey’s shortcomings and urging that she be
replaced. The Director Defendants therefore had actual
knowledge of her mismanagement, yet stuck their heads in
the sand in the face of repeated signs that residents were
receiving care that was severely deficient. This is enough to
support the jury’s verdict that the Director Defendants
breached their duty of care to the Home.
IV.
The Defendants next argue that the Committee
introduced insufficient evidence to support the jury’s verdict
that the Defendants had deepened the Home’s insolvency.
“Even when a corporation is insolvent, its corporate property
may have value,” which can be damaged by “[t]he fraudulent
and concealed incurrence of debt . . . .” Official Comm. of
Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340,
349 (3d Cir. 2001). Thus, we have predicted that
Pennsylvania courts would recognize the tort of deepening
insolvency, defining it as “an injury to the Debtors’ corporate
property from the fraudulent expansion of corporate debt and
prolongation of corporate life.” Id. at 347.2 We are satisfied
2
As they did in Lemington I, the Defendants urge us to
revisit our prior decision in Lafferty, calling to our attention
the subsequent decisions of other courts which have refused
to recognize deepening insolvency as a tort. As we observed
in response to this argument in Lemington I, we continue to
be bound to follow Lafferty unless it is overturned by our
Circuit sitting en banc. 659 F.3d at 294 n.6. We also
reserved opining on the question of whether deepening
insolvency “may not apply to, or may involve a different
16
that the Committee introduced sufficient evidence to support
the jury’s deepening insolvency verdict.
The Committee presented evidence that the Director
Defendants concealed for over three months the Board’s
January 2005 decision to close the Home and deplete the
patient census. In Lemington I, we held that this evidence
could suggest to a jury that “although the Board knew that its
actions would cause further deterioration of the Home’s
finances to the detriment of its creditors, by its silence, the
Board consciously defrauded the Home’s creditors by
implementing these policies and delaying the filing of
bankruptcy . . . .” 659 F.3d at 295. Trial testimony from
Brown, the bankruptcy consultant for the major creditors,
supported the Committee’s theory that the Board’s decision to
deplete the patient census before it filed for bankruptcy
resulted in a “slow death” of the Home’s ability to generate
revenue. App. 1214. The Committee presented additional
evidence that, during the bankruptcy process, the Board failed
to disclose in its monthly operating reports that the Home had
received a $1.4 million Nursing Home Assessment Tax
payment in May 2005, which could have increased the
Home’s chances of finding a buyer. An email from the
Board’s bankruptcy attorney to the Board summed up the
mismanagement of the bankruptcy process, warning that “we
have not established a sale process in a manner that is
standard for, a non-profit corporation,” as no party had raised
the argument. Id. In the present appeal, the Defendants again
do not argue that a different standard should apply to
deepening insolvency in the non-profit context, so we will not
address that question.
17
customarily done in Chapter 11 cases. Nobody has had the
opportunity to bid and we have no meaningful financial
records.” App. 3208.
As to the Officer Defendants, the Committee presented
evidence that Causey and Shealey’s mismanagement of the
Home’s finances, inattention to recordkeeping and patient
billing, and failure to conduct a proper bankruptcy process
damaged the already insolvent Home’s value. Shealey did
not maintain a general ledger of the Home’s finances in his
capacity as CFO. As a result of the patient-documentation
errors repeatedly identified by the Pennsylvania Department
of Health during Causey’s tenure, the Home did not recoup
reimbursements it was due for care provided to Medicare
patients, resulting in an estimated loss to the Home of
$500,000. App. 1085–86, 1206. During the bankruptcy
process, Shealey refused to meet with Brown, the consultant
hired by the Home’s major creditors, and did not make
information about the Home’s financial condition available to
potential buyers. All of this conduct damaged the Home’s
financial viability after it had already become insolvent.
Thus, the jury’s verdict on the deepening insolvency claim
had ample evidentiary support.
V.
Finally, the seven Defendants against whom the jury
imposed punitive damages argue that the jury was not
presented with certain factual prerequisites necessary to
support a punitive damages award. First, the Defendants
argue that there was no evidence introduced of any
Defendant’s financial status, even though wealth is a relevant
consideration for punitive damage awards under Pennsylvania
law and the District Court instructed the jury that they could
18
consider the Defendants’ wealth in fixing the amount of
punitive damages. The Defendants also argue that the jury
was not presented with sufficient evidence of the Defendants’
subjective state of mind to justify the imposition of punitive
damages.
Although we conclude that wealth evidence is not a
necessary prerequisite for an award of punitive damages
under Pennsylvania law, we agree that the evidence presented
to the jury did not contain the minimum quantum of proof of
outrageous conduct necessary to support a punitive damages
award against any of the Director Defendants. We will
therefore vacate the punitive damages imposed against five of
the Director Defendants. However, because we conclude that
adequate state-of-mind evidence was presented to support a
finding that Shealey and Causey acted “outrageously,” we
will affirm the jury’s punitive damages verdict as to them.
A. Evidence Regarding Wealth of the Defendants
At the close of trial, the District Court instructed the
jury on the relevant factors they could consider in fashioning
a punitive damages award under § 908(2) of the Second
Restatement of Torts, which Pennsylvania has adopted. In
particular, the Court instructed the jurors that they could
consider “[t]he wealth of the Defendant or Defendants insofar
as it is relevant in fixing an amount that will punish him or
her, and deter him or her and others from like conduct in the
future.” App. 63. However, no evidence of the Defendants’
wealth had been introduced to the jury during the trial in any
form, either testimonial or documentary.
Defendants argue that the punitive damage award
cannot stand because the jury was not presented with any
19
evidence regarding the wealth of any Defendant and therefore
could not evaluate what amount of punitive damages would
serve as an appropriate deterrent. The wealth of a defendant
is indeed one of the three factors that “can properly [be]
consider[ed]” by the trier of fact in assessing an award of
punitive damages under § 908(2). Nonetheless, that section’s
use of the permissive “can,” rather than the compulsory
“must,” suggests that evidence of a defendant’s wealth is not
a necessary prerequisite to an award of punitive damages.
The weight of Pennsylvania case law agrees that “evidence of
a tortfeasor’s wealth is not a necessary condition precedent
for imposition of an award of punitive damages.” Vance v. 46
and 2, Inc., 920 A.2d 202, 207 (Pa. Super. Ct. 2007)
(collecting cases).
Despite § 908(2)’s permissive language, the
Defendants urge that evidence of wealth is a necessary
prerequisite to an award of punitive damages. The
Defendants point to case law which they claim suggests that
the fact finder is required to weigh a defendant’s wealth to
properly calibrate an assessment of punitive damages. In
Kirkbride v. Lisbon Contractors, Inc., 555 A.2d 800 (Pa.
1989), the Pennsylvania Supreme Court rejected a
defendant’s claim that a punitive damages award must be
proportional to an award of compensatory damages, noting
that such a requirement would undermine the deterrent
purpose of such awards:
If the purpose of punitive
damages is to punish a tortfeasor
for outrageous conduct and to
deter him or others from similar
conduct, then a requirement of
proportionality defeats that
20
purpose. It is for this reason that
the wealth of the tortfeasor is
relevant. In making its
determination, the jury has the
function of weighing the conduct
of the tortfeasor against the
amount of damages which would
deter such future conduct. In
performing this duty, the jury
must weigh the intended harm
against the tortfeasor’s wealth. If
we were to adopt the Appellee’s
theory [of proportionality to
compensatory damages],
outrageous conduct, which only
by luck results in nominal
damages, would not be deterred
and the sole purpose of a punitive
damage award would be
frustrated.
Id. at 803 (emphasis added).3
3
Kirkbride’s holding that a punitive damage award
does not need to be proportional to the compensatory
damages assessed in a given case has been subsequently
called into question by a string of Supreme Court cases
holding that, as a matter of due process, “courts must ensure
that the measure of punishment is both reasonable and
proportionate to the amount of harm to the plaintiff and to the
general damages recovered.” State Farm Mut. Auto. Ins. Co.
v. Campbell, 538 U.S. 408, 426 (2003). The Defendants do
21
Although the reasoning of the Kirkbride decision
evinced a concern with ensuring that a punitive damages
award must be sufficiently large to deter future wanton
conduct by a wealthy defendant, a decision from the Eastern
District of Pennsylvania has interpreted Kirkbride’s language
as a limitation on a court’s ability to impose punitive damages
absent any evidence of the defendant’s wealth. In Rubin
Quinn Moss Heaney & Patterson, P.C. v. Kennel, 832 F.
Supp. 922, 936 (E.D. Pa. 1993), the District Court noted as a
consideration in its decision declining to impose punitive
damages that “the record is devoid of evidence concerning
[the defendant’s] wealth.” Citing Kirkbride, the District
Court concluded that it was “required to assess the impact the
[punitive] damages would have on the Defendant's financial
position,” which it could not do given the state of the record.
Id.The weight of the Pennsylvania appellate case law,
however, interprets Kirkbride differently and concludes that
evidence of wealth is not required to assess punitive damages
under Pennsylvania law. In Vance, the Superior Court of
Pennsylvania rebuffed a claim that Kirkbride “requires that
the jury be presented with evidence of a tortfeasor’s wealth
before they can impose punitive damages.” 920 A.2d at 206.
not press a constitutional due process claim regarding
punitive damages as a part of this appeal, so we will “decline
to resolve the thorny issue presented by the apparent conflict”
between Kirkbride and the Supreme Court’s subsequent
pronouncements on proportionality in punitive damage
awards. Tunis Bros. Co. v. Ford Motor Co., 952 F.2d 715,
741 (3d Cir. 1991).
22
The Superior Court noted that Kirkbride was concerned with
the distinct question of whether “an award of punitive
damages had to be proportional to, or bear a reasonable
relationship to, an award of compensatory damages.” Id.Although the Vance court acknowledged that “wealth of the
tortfeasor is a relevant consideration in effectuating the
purpose of punitive damages,” it concluded that
“Kirkbride does not stand for the proposition that a jury
cannot impose punitive damages without evidence of record
pertaining to the defendant tortfeasor’s wealth.” Id. The
Superior Court later reaffirmed this holding in Reading
Radio, Inc. v. Fink, 833 A.2d 199, 215 (Pa. Super. Ct. 2003),
which held that “the polestar for the jury’s assessment of
punitive damages is the outrageous conduct of the defendants,
not evidence of a defendant’s wealth.” Similarly, in Shiner v.
Moriarty, 706 A.2d 1228, 1242 (Pa. Super. Ct. 1998), the
Superior Court “reject[ed] the suggestion that evidence of net
worth is mandatory” to impose punitive damages.
In light of the aforementioned decisions and the
permissive, rather than compulsory language of § 908(2), we
agree with the District Court that Pennsylvania law does not
require evidence of a defendant’s wealth before punitive
damages may be imposed. For whatever reason, parties may
make the strategic decision to not introduce such evidence at
trial, and that decision is not a basis for vacatur of a punitive
damages award on appeal.
B. Evidence of Outrageous Conduct by Defendants
“‘Punitive damages may be awarded for conduct that
is outrageous, because of the defendant’s evil motive or his
reckless indifference to the rights of others.’” Feld v.
Merriam, 485 A.2d 742, 747 (Pa. 1984) (quoting Restatement
23
(Second) of Torts, § 908(2)). “Punitive damages . . . are not
awarded to compensate the plaintiff for her damages but
rather to heap an additional punishment on a defendant who is
found to have acted in a fashion which is particularly
egregious.” Phillips v. Cricket Lighters, 883 A.2d 439, 446
(Pa. 2005) (citation omitted). “The state of mind of the actor
is vital. The act, or the failure to act, must be intentional,
reckless or malicious.” Feld, 485 A.2d at 748. “[W]e must
make a ‘careful analysis of the entire trial record’ and
examine whether the plaintiffs provided sufficient evidence to
support a punitive damage award.” David by Berkeley v.
Pueblo Supermarket of St. Thomas, 740 F.2d 230, 237 (3d
Cir. 1984) (quoting Berroyer v. Hertz, 672 F.2d 334, 341 (3d
Cir. 1982)). “‘[F]or punitive damages to be awarded there
must be acts of malice, vindictiveness and a wholly wanton
disregard of the rights of others.’” Tunis Bros., 952 F.2d at
741 (quoting Smith, 564 A.2d at 193) (emphasis added).
1. Director Defendants
As to the Director Defendants—Andiorio, Baldwin,
Thompkins, Johnson, and Bullock—insufficient evidence was
presented to support a finding that any of them possessed a
sufficiently culpable state of mind to warrant the imposition
of the “extreme remedy” of punitive damages, which
Pennsylvania courts have cautioned should be awarded “in
only the most exceptional matters.” Phillips, 883 A.2d at
445. In its decision affirming the punitive damages award
against five of the Director Defendants, the District Court
pointed to the same conduct that it held had supported the
compensatory damages award against all of the Director
Defendants. Specifically, the District Court noted the
Board’s failure to replace Causey despite awareness of her
poor performance as Administrator, the Board’s January 2005
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decision to close the Home which was not disclosed until
April, and the mismanagement of the bankruptcy process by
the Board. App. 42–43. Explaining the jury’s potential
rationale for imposing punitive damages against only five of
the members of the Board, the District Court concluded that,
based on its “detailed review of the exhibits,” the Director
Defendants against whom punitive damages were awarded
had “received more correspondence relating to the closure of
the Home than the other Defendants against whom liability
was imposed, but no punitive damages were assessed.” App.
43–44. The amount of information individual directors knew
is certainly relevant to establishing their liability for inaction
and fraudulent nondisclosure. Nevertheless, we do not think
that, on its own, evidence of the receipt of correspondence
provided the jury with a sufficient basis to conclude that any
of the five Director Defendants had engaged in “a quantum of
outrageous conduct in addition to that undergirding the . . .
liability . . . .” Tunis Bros., 952 F.2d at 741 (emphasis
added).
Our decision in Donaldson v. Bernstein, 104 F.3d 547(3d Cir. 1997), in which we sustained a punitive damages
award against a debtor’s two principals who had engaged in
self-dealing, provides a helpful point of contrast. Unlike the
evidence in that case, no evidence was presented in this
matter that the Directors against whom the jury assessed
punitive damages acted out of self-interest. Indeed, in a
decision that the Committee does not appeal, the District
Court directed a verdict in favor of all of the Directors on the
Committee’s claim that they had breached their duty of
loyalty to the Home. App. 1677. The District Court therefore
found the record could not possibly support an inference that
the Directors’ conduct was motivated by the intention to
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extract a personal profit at the expense of the best interests of
the Home. See In re Lampe, 665 F.3d 506 (3d Cir. 2011)
(directors’ duty of loyalty prohibits them from “directly or
indirectly, utiliz[ing] their position to obtain any personal
profit or advantage other than that enjoyed also by their
fellow shareholders” (quoting Tyler, 994 F. Supp. at 612)).
The absence of evidence of self-dealing by any of the
Director Defendants weighs heavily against the imposition of
the “extreme” remedy of punitive damages.
Moreover, the District Court acknowledged that three
of the Director Defendants against whom punitive damages
were imposed—Thompkins, Johnson, and Bullock—were
mentioned only fleetingly during the course of trial testimony.
The District Court cast the failure to call Thompkins,
Johnson, and Bullock as witnesses, or to ask questions of
other witnesses about their conduct, as a strategic decision
made by both parties, similar to the decision to not present
testimony regarding the Defendants’ financial statuses. But
unlike evidence of a defendant’s wealth, which “is not a
necessary condition precedent for imposition of an award of
punitive damages,” Vance, 920 A.2d at 207, evidence of
“outrageous or malicious conduct” is a necessary “legal and
factual prerequisite” for a punitive damages award. Tunis
Bros., 952 F.2d at 740. Therefore, it is the plaintiff who bears
the burden of proving that the defendants’ conduct was
outrageous in order to obtain a punitive damages award. A
vacuum of evidence at trial on this topic does not affect both
sides equally; rather, plaintiff loses, having failed to carry her
burden.
In light of the lack of state-of-mind evidence presented
by the Committee regarding the Director Defendants against
whom the jury imposed punitive damages, we will vacate the
26
jury’s award of punitive damages against those five
Defendants.
2. Officer Defendants
We have no such concerns about the punitive damages
assessed against the Officer Defendants. The
mismanagement of the Home by Causey and Shealey was the
focus of the Committee’s proof at trial. As detailed above,
the Committee presented sufficient evidence at trial to sustain
the jury’s verdict that both Officer Defendants breached their
duty of loyalty to the Home. In Donaldson, we held that
evidence of self-dealing by trustees provided sufficient
factual support for imposition of a punitive damages award.
104 F.3d at 556–57. Likewise, the evidence of self-dealing
presented at trial gave the jury a sufficient factual basis to
conclude that the Officer Defendants acted with the
outrageous motive of pursuing self-enrichment at the expense
of the non-profit nursing home to which they owed fiduciary
duties.
In addition to the evidence of self-dealing, the Officer
Defendants’ state of mind was illuminated by their own
testimony at trial. Both Causey and Shealey responded
evasively under cross-examination to questions about their
conduct, allowing the jury to infer that they had acted
culpably and continued to avoid recognizing the gravity of
their misconduct. For instance, the Committee questioned
Causey about the apparent conflict between her state-benefits
application and her trial testimony regarding how much time
she had worked during an eight month period in 2004.
Causey first attempted to claim that she had worked “a
minimum of 35 hours a week,” as required by state law,
throughout this period. App. 1819. When reminded that she
27
had signed a state-benefits application “under penalties of
law” claiming that she was working just 20 to 24 hours a
week during the same period, Causey admitted, “I was
working part-time.” App. 1820. Similarly, Shealey conceded
at trial that he had refused to give Brown, the bankruptcy
consultant for the creditors, the financial information he
requested. Although Shealey initially claimed this was
because Shealey “didn’t know who [Brown] was,” he later
acknowledged that he had continued to refuse to cooperate
even after being informed that Brown was a financial
consultant. App. 1556–57. Taken together with the other
evidence of their malfeasance, Causey and Shealey’s
obfuscations at trial offered further support for the conclusion
that they had acted outrageously, supporting the jury’s
imposition of punitive damages against them.
VI.
For the foregoing reasons, we will affirm the jury’s
liability verdict as to all Defendants and the punitive damages
award against the Officer Defendants. We will vacate the
award of punitive damages imposed against Defendants
Andiorio, Baldwin, Thompkins, Johnson, and Bullock.
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