There are many state and federal statutes which provide personal liability against the owners of businesses that are operated through corporate or other legal forms such as Limited Liability Company's ("LLC's"). One such statute is New York's Public Health Law §2808-a, which allows anyone seeking damages to make a claim against a "controlling person" of the nursing home. The definition of a "controlling person" is a person who has the ability to financially affect the operation of the nursing home. The ability to sue the owner of a nursing home is often used as a tactic to put pressure on the owners when there is no need to sue them because the recovery can be had against the nursing home. The statute, quoted in full below, and highlighted in bold to emphasize certain features, provides:
1. Every person who is a controlling person of any residential health care facility liable under any provision of this article to any person or class of persons for damages or to the state for any civil fine, penalty, assessment or damages, shall also be liable, jointly and severally, with and to the same extent as such residential health care facility, to such person or class of persons for damages or to the state for any such civil fine, penalty, assessment or damages.
2. For purposes of this section, a "controlling person" of a residential health care facility shall be deemed to mean any person who by reason of a direct or indirect ownership interest (whether of record or beneficial) has the ability, acting either alone or in concert with others with ownership interests, to direct or cause the direction of the management or policies of said facility. Neither the commissioner nor any employee of the department nor any member of a local legislative body of a county or municipality, nor any county or municipal official except when acting as the administrator of a residential health care facility, shall, by reason of his or her official position, be deemed to be a controlling person of any residential health care facility nor shall any person who serves as an officer, administrator or other employee or as a member of a board of directors or trustees of any facility be deemed to be a controlling person of said facility as a result of such position or his or her official actions in such position.
An important feature of §2808-a is that the liability of the controlling person is no greater than the liability of the nursing home itself. For that reason, if the nursing home has assets or is insured for an amount that will be sufficient to pay any claim, there really is no need for a lawsuit against the controlling person under §2808-a.
Who is a "controlling person"? Not everyone who operates a nursing home is a controlling person.
It is well established that a financial interest or ownership in the nursing home is required to impose liability under Public Health Law §2808-a. See, e.g., Gorton v. Fellner, 88 A.D.2d 742, 451 N.Y.S.2d 873 (Third Dep't 1982), where the Court held that a person who has no ownership interest in a corporation cannot be liable under Public Health Law §2808-a. See also Ocean Side Institutional Industries, Inc. v. United Presbyterian Residence, 254 A.D.2d 337, 678 N.Y.S.2d 653 (1998), where the Court held that the statute requires an ownerships interest and, citing from legislative history (which I could not locate) states:
"Legislative history reveals that the requirement that an individual have an ownership interest in order to be deemed a "controlling person" was imposed to ensure that liability and responsibility follow the capability to make a profit. (Mem of the State Executive Department 1976, McKinney's Session Laws of New York at 2342)."
If I am an owner, but have nothing to do with the business, am I still a "controlling person?" You may be. It depends on the facts.
The statute provides guidance for determining if someone who is not active in the business is a controlling person. The statute defines a controlling person as someone who "has the ability, acting either alone or in concert with others with ownership interests, to direct or cause the direction of the management or policies..." The key is the particular owner has the "ability" to direct management or policies. A person who has nothing to do with management but is closely related with a family member, for example a spouse or sibling, who runs the business may be construed as a controlling person by viewing that person as acting in concert with someone is directly controlling management and policies. On the other hand, a person with an ownership interest, but who is at odds with the majority of the owners, may have no ability to control management and policies and thus should not be construed to be a controlling person under the statute.
Doesn't the statute say there is no liability for "any person who serves as an officer, administrator or other employee or as a member of a board of directors or trustees of any facility"? Yes, but you have to read the statute carefully.
The statute has some wording that, at first blush, may be confusing. The statute states that officers or administrators of the nursing home shall not "be deemed to be a controlling person ... as a result of such position or his or her official actions in such position." That wording in the statute is intended for individuals who are simply employees hired as an officer or administrator of the nursing home. A person in that capacity has no ownership interest and therefore would not be a "controlling person." On the other hand, an officer or administrator with an ownership interest in the nursing is not "deemed" a controlling person because of his capacity. Such a person, however, may be a controlling person because of his ownership interest in the nursing home.
What damages are faced by a controlling person? The wording of the statute provides the answer. The controlling person is "liable...to the same extent as" the nursing home. This is an important limitation. The plaintiff cannot try to recover more from the controlling person. The statute limits his or her liability. This is important for another reason. If the nursing home has sufficient assets to pay the liability claimed or sufficient insurance, then there is no exposure to the controlling person and no reason for the courts to allow the plaintiff to maintain the lawsuit.
If I am sued as a "controlling person" will the nursing home's insurance policy cover me? The answer should be "yes." Liability insurance policies commonly provide coverage for the officers, directors and owners of a nursing home or other entity held in corporate form, LLC or any other business entity form such as an association. This raises another hurdle and adds further complication to the matter but the fact is that the officer or director should have coverage under the nursing home's policy. An example of standard language in a liability policy is as follows:
WHO IS AN INSURED
1. If you are designated in the Declarations as:
a. An individual, you and your spouse are "insureds."
b. A partnership or joint venture, you are an "insured." Your members, your partners, and their spouses are also "insureds," but only with respect to the conduct of your business.
c. A limited liability company, you are an "insured." Your members are also "insureds," but only with respect to the conduct of your business. Your managers are "insureds," but only with respect to their duties as your managers.
d. An organization other than a partnership, joint venture, or limited liability company, you are an "insured." Your "executive officers" and directors are "insureds," but only with respect to their duties as your officers or directors. Your stockholders are also "insureds," but only with respect to their liability as stockholders.
How can I fight a lawsuit against me under Public Health Law §2808-a? Your attorney should move to dismiss the lawsuit.
Plaintiffs' attorneys may see Public Health Law §2808-a as leverage in a lawsuit. The claim is against the individual and makes them fearful that they may be personally liable. The owners of nursing homes should not be made to fear personal liability when there is none and courts should not be burdened with these lawsuits. The only time a 2808-a suit makes any sense is if the legal entity which operates the nursing home does not have sufficient assets or insurance to pay a claim. Only in those circumstances does it make sense for a plaintiff's attorney to go after the individuals behind the business entity. In all other instances, a lawsuit against the owner should be viewed as motivated by harassment should be dismissed as duplicative and improper.