432 Mass. 546 | Mass. | 2000
This case concerns the authority of a receiver appointed by the Superior Court under G. L. c. Ill, § 72R (the so-called Patient Protector Receivership Act [Act]), to sell a nursing home which has been placed under court supervision, because financial responsibility for the home was disclaimed by the owner, and the home’s residents were endangered. A judge in the Superior Court entered an order directing that the home be sold and reported the propriety of her order. Another judge in the Superior Court entered a subsequent order that the home be closed. We granted the plaintiffs’ application for direct appellate review because this is the first case that requires an interpretation of a receiver’s authority to deal with a facility under the provisions of the Act. We conclude that the order directing sale was proper, but that there must be further proceedings to decide whether the home should be sold or closed.
1. The following background provides an understanding of the issues in the case. In 1993, the defendant Michael Konig (Konig) purchased five nursing homes in Massachusetts. In each instance, Konig established a corporation to hold title to the real estate on which each home was located, and he created a separate corporation which applied for, and held, the license to operate each home. The Union Square Nursing Center (Union Square), a 150-bed long-term care facility in the Brighton-Allston section of Boston, was one of these nursing homes. In the case of Union Square, Konig established Reifer, Inc. (Rei-fer), to hold title to the real estate and tangible assets used in the operation of the home, and M.C.K., Inc. (MCK), to apply for, and to hold, the home’s license. Konig was the sole shareholder of both MCK and Reifer.
In 1995, the Department of Public Health (department) conducted its annual inspection survey of Valley View Nursing Home (Valley View) in Lenox, one of the five nursing homes purchased by Konig.
The department, and the defendants involved here, entered into a settlement agreement. In the agreement, MCK and Reifer agreed, that, as to Union Square, unless both had executed a purchase and sale agreement with a prospective buyer that had submitted a notice of intent to acquire a license for Union Square, MCK would submit to the department a notice of intent to close Union Square. MCK and Reifer also agreed to continue to retain a management company, which had been acting as temporary manager of each of the five nursing homes, until Union Square was either sold or closed. In exchange, the department agreed not to take further regulatory action against Konig, or his nursing homes, based on the prior documented violations. Konig signed the agreement in his capacity as president of all the multiple corporations involved in ownership of the nursing homes, including MCK and Reifer.
After passage of considerable time, Konig had neither closed nor sold Union Square. In a letter to the department dated June 12, 1997, and signed by Konig as president, MCK “disclaim[ed] responsibility and or liability with respect to . . . closure and any operations of this facility [Union Square].” By this com
The department and the Attorney General (Commonwealth) promptly filed a complaint in the Superior Court against MCK, Reifer, and Konig, seeking the appointment of a receiver under the provisions of G. L. c. 111, § 72M, and seeking injunctive relief and civil penalties under the provisions of G. L. c. 93A, §§ 2 and 4.
On March 18, 1999, the Commonwealth moved, under G. L. c. Ill, § 72R, to terminate the receivership of Union Square by a court-ordered sale of the nursing home, including its equipment, and the building and the real estate upon which the nursing home is located. A judge in the Superior Court determined that, while G. L. c. Ill, § 72R, clearly authorized a sale under court supervision of Union Square, the Act did not authorize a court-ordered sale of the separately owned real estate upon which the nursing home is located. The judge observed, however, that the language of § 72M might, in appropriate circumstances, justify disregard of a separate corporate entity, and so concluded that a lawful order to sell the real estate of Union Square, which is owned by Reifer, would require that the court first “pierce the corporate veil of Reifer, Inc.” The judge denied the Commonwealth’s motion to sell without prejudice; severed the receivership action from the Commonwealth’s separate claims under G. L. c. 93A; and ordered an expedited trial for a factual determination whether circumstances warranted treatment in law of MCK and Reifer as essentially one and the same.
After that trial, the judge, based on her finding and ruling that, “MCK and Reifer are in fact the alter egos of Konig and disregard of their separate corporate forms is warranted,”
2. We next summarize the relevant features of the Act. The Act authorizes the Superior Court, on a complaint by the Attorney General, the department, or other interested parties, to “appoint a receiver for any institution subject to licensing under section seventy-one, hereinafter called a facility,”
A receiver, with court approval, is authorized to “remedy
The Act further provides that the Commonwealth shall have a lien for any expenditure under the above provisions, on the building or the land upon which the facility is located, or on any fixtures, equipment, or goods used in the operation of the facility. G. L. c. Ill, § 72Q. As an additional remedy for recovering Commonwealth expenditures, the licensee, persons responsible for the affairs of the licensee, or the owner “may be held liable for such expenditures to the extent that any of these persons benefits financially from the expenditure.” Id. Recovery of expenses incurred by the Commonwealth is also available against any person who, prior to the appointment of the receiver, violated a legal responsibility to assure appropriate maintenance of the facility, if any such violation necessitated the expenditure by the Commonwealth, and against any person who was responsible for the abandonment of the facility. Id.
Finally, the Act sets forth conditions whereby the court may terminate a receivership, and provides that, if the receivership has not been terminated within twelve months of the appointment of the receiver, the court shall order “either that the facility shall be closed, after an orderly transfer of the residents to
3. We turn now to the decision of the issues on appeal.
(a) This case essentially concerns the propriety of the judge’s order to sell Union Square, including the real estate on which the home is located. The defendants claim that events subsequent to the entry of this order, namely, an order allowing the home to be closed; the transfer of all of the home’s residents to other placements; and the closing of the home, render the appeal moot. We disagree.
The receivership is still in effect, and, for reasons that we shall discuss shortly, whether Union Square remains viable as a long-term care facility, or whether its continued operation is still desirable to protect its residents, is a matter that the Superior Court should decide. Further, the overriding purpose of the Act is to safeguard the health, safety, and continuity of care of nursing home residents, and to protect them from adverse effects caused by transfer necessitated by the closing of a nursing home. Because it is clear that the closing of Union Square was due, in substantial part, to financial difficulties inherent in keeping the home open pending appeal of the receiver’s authority to sell, we conclude that the appeal presents important issues that are clearly “capable of repetition, yet evading review,” and that ought to be resolved. Karchmar v. Worcester, 364 Mass. 124, 136 (1973), quoting Southern Pac. Terminal Co. v. ICC, 219 U.S. 498, 515 (1911).
(b) General Laws c. 111, § 72R, authorizes a court to order the sale of a “facility.” The defendants maintain that the term “facility” refers solely to the entity that holds the license to operate a nursing home. Thus, while acknowledging that the court has the authority to order the sale of property owned by MCK, as the licensee, the defendants question the court’s authority to order the sale of property owned by Reifer, a separate corporation. The Commonwealth, on the other hand, maintains that the term “facility” encompasses not only the licensed entity but also the real estate on which it is located, irrespective of the identity of the landowner. Neither argument is quite correct. We conclude that the term “facility,” as used in
The precise statutory meaning of the term “facility” is elusive. A “facility” is defined in the Act as “any institution subject to licensing under section seventy-one.” G. L. c. Ill, § 72M. Section 71 provides for the licensing of nursing homes, and defines a “nursing home,” for purposes of § 72, as “any institution, however named, whether conducted for charity or profit, which is advertised, announced or maintained for the express or implied purpose of caring for four or more persons admitted thereto for the purpose of nursing or convalescent care.” Department licensing regulations, in turn, define an “institution” as “an establishment housed in a single building or in two or more adjacent buildings”; define a “facility” as a long-term care facility; define a “long-term care facility” as an institution; and list nursing homes as long-term care facilities. 105 Code Mass. Regs. § 150.001 (1994). The only certainty offered by the circuitous language set forth above is that the terms “facility,” “institution,” “long-term care facility,” and “nursing home” are, for our purposes, synonymous.
Common sense dictates that the authority to sell a “facility” cannot include, in every case, the authority to sell the building in which the home is housed, the land on which the home is located, and the personal property used in the operation of the home, regardless of its ownership.
While we recognize that the entity that holds the license is not required to be the owner of the real and personal property used in the operation of the home, the licensed entity must have a department-approved substantial ownership interest (a long-term lease, for example) in the property. The department requires that “[a]n applicant [for a license] or licensee must be the owner of the premises on which the facility is operated, or at least have such rights of ownership as the Commissioner or his/her designee finds necessary for the operation of a long-term care facility.” 105 Code Mass. Regs. § 153.008 (1994).
When, as is the case here, the licensed corporate entity owns nothing but the license to operate the nursing home, the statutory authority to sell the “facility” may include the power to sell other property necessary to operate the facility. This is so because the license to operate a nursing home is terminated by the imposition of a receivership, rendering the former licensee a corporate shell. The power to sell a shell corporation, that has no ownership rights in the real and personal property used in
The doctrine of corporate disregard is an equitable tool that authorizes courts, in rare situations, to ignore corporate formalities, where such disregard is necessary to provide a meaningful remedy for injuries and to avoid injustice. See My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 620 (1968). In certain situations, the doctrine may also properly be used to carry out legislative intent and to avoid evasion of statutes. See Packard Clothes Inc. v. Director of the Div. of Employment Sec., supra. See also C.A. Peairs, Jr., Business Corporations § 646, at 565 (2d ed. 1971) (“corporate entity will be disregarded when necessary to . . . consummate the objective of a statute or other overriding public policy which would be frustrated by observance of the entity”).
The judge here properly disregarded the corporate entities. She thoroughly reviewed the evidence and evaluated each of the twelve factors to be considered when a court is faced with the issue of setting aside corporate formalities.
We reject the defendants’ argument that, because the Commonwealth and the department were aware that MCK and Rei-fer were separate entities, the facts do not present an element of deception or fraud on the defendants’ part, which, they claim, is required before a court may disregard corporate formalities. The facts here present a situation where two corporations (MCK and Reifer) were formed to carry out the objectives and purposes of the person controlling them (Konig). No impropriety is attached, necessarily, to the use of the corporate form in this way. Nevertheless, when one of the corporations (Reifer) later seeks to disassociate itself from the other (MCK), in a way that leads to complete frustration of a statutory purpose, the court may be warranted in carefully scrutinizing the corporate form, regardless whether actual fraud has been shown. See My Bread Baking Co. v. Cumberland Farms, Inc., supra at 618-619. “Where there is common control of a group of separate corporations engaged in a single enterprise, failure (a) to make clear which corporation is taking action in a particular situation and the nature and extent of that action, or (b) to observe with care the formal barriers between the corporations with a proper segregation of their separate businesses (see Acton Plumbing & Heating Co. v. Jared Builders, Inc., 368 Mich. 626, 628-630 [1962]), records, and finances, may warrant some disregard of the separate entities in rare particular situations in order to prevent gross inequity” (emphasis added). Id. at 620.
It is true that the Commonwealth and the department knew that MCK and Reifer were, in theory, separate corporations. In several instances, however, the actions of the Commonwealth and the department demonstrate their reasonable assumption that, for practical purposes, MCK and Reifer were one and the same entity, and that both corporations were alter egos of Konig. First, the department granted a license to MCK to operate Union Square, in spite of the fact that MCK had no ownership interest in any of the real and personal property required for the home’s
We conclude that when, as here, the license, the real estate, and the personal property are held by entities that are treated as one, the court is authorized, pursuant to G. L. c. Ill, § 72R, to order the sale of the real estate and tangible property used in the operation of a nursing home.
(c) We also conclude that the receiver’s power to sell was not
A few examples will illustrate the point.
(i) Suppose the receiver determines that the facility in receivership needs major capital improvements in order to satisfy legal requirements and ensure the health and safety of its residents. The improvements are such that they cannot be done with the residents remaining in the facility, and so, in order to do the improvements, the residents are transferred. The improvements are made and the facility is ready to reopen. Surely, no one could persuasively argue that the judge, on proper motion by the receiver, could not allow the facility to be sold to a new licensed owner so that the facility remains available for any former residents, who are able to return, or for new residents.
(ii) Suppose that the receiver determines that the residents of the facility need to be transferred for reasons other than those given in example (i). Suppose then that the judge orders the facility to be sold, but that efforts to sell are frustrated by the owner or operator of the facility (or both) pursuing an appeal, as they have a right to do. The normal delay in the appellate process dampens the receiver’s efforts to sell, but the receiver believes and maintains, and the judge agrees, that the appeal having been decided in favor of the receiver, a renewed effort to sell should be made. Once again this presents a case of a
This last example is somewhat the case here. Sale was authorized by a judge under § 72R, but the receiver, due to the delay in the appeal, and, perhaps, other circumstances, was unable to find a suitable buyer.
As has been stated, the general purpose of the Act is to protect the residents of a long-term care facility from adverse health effects resulting from abrupt or unsuitable transfers. In her findings,
The judge further found that, because of the unique characteristics of Union Square’s resident population, suitable placement options did not exist for all residents. At the date of the hearing, there was no nursing facility in the relevant geographical area that had committed to taking the Chinese-speaking residents of Union Square as a group, or to taking Chinese-speaking staff. In addition, care of the high percentage of the home’s residents who had psychiatric diagnoses or were cognitively impaired (or both) required skills that were not available in the average facility. The judge found that Union Square’s residents were at an increased risk of illness and death from involuntary transfers that would result from the closing of Union Square.
The judge determined that Union Square was a viable nursing facility, and that the statutory scheme and purposes of the Act would best be effectuated by its sale. The question whether Union Square can, and should be, preserved as a viable facility is one that cannot be satisfactorily resolved on this record, but is one which should be explored further.
4. The case is remanded to the Superior Court to reconsider the conflicting orders in effect regarding Union Square. In accordance with this opinion, the receiver and the Commonwealth may, if they chose, apply to a judge to vacate the order closing the facility, to vacate the order to sell the facility, or both. The judge may, at his or her discretion, enter a new order directing Union Square to be sold on appropriate terms and conditions,
So ordered.
The Department of Public Health (department) is the State agency responsible for licensing and certification of nursing homes. See G. L. c. 111, § 71. The department also monitors the quality of patient care in nursing homes, and department representatives may inspect a nursing home at any time to ensure compliance with State and Federal laws. See G. L. c. 111, § 72.
Department regulations define “jeopardy” as “[a] situation or condition
Because jeopardy had been found at two of the nursing homes controlled by Konig, adequate grounds existed for the department to deem him, and each of the Konig-owned corporate entities holding licenses to operate facilities in the Commonwealth, unsuitable to establish and maintain a long-term facility, and to revoke the licenses of all of the nursing homes. See 105 Code Mass. Regs. §§ 153.014, 153.012(A)(2), (6), (7) (1994).
Konig also signed in his individual capacity for the limited purpose of agreeing to a portion of the facts set forth in the agreement, and for the additional purpose of agreeing not to operate any nursing homes in the Commonwealth for a period of ten years from the date of execution of the agreement.
The Commonwealth subsequently amended its complaint to include G. L. c. 93A claims against four other Konig-owned corporations arising out of Konig’s operation of those nursing homes in Massachusetts.
Thus, on this appeal, we are solely concerned with issues pertaining to the receivership and not with issues concerning the G. L. c. 93A claims.
The report is proper because a trial judge may report the propriety of an order of the sort in issue under Mass. R. Civ. R 64, as amended, 423 Mass. 1410 (1996). The pendency of the G. L. c. 93A claim for trial does not invalidate the report in our view because of the significance of the issues involved.
As the reason for his motion to close the nursing home, the receiver cited the department’s finding, in October of 1999, that physical plant problems at Union Square posed a danger to the health and safety of the residents, the statements of deficiencies issued by the department, the cost of correcting the problems, and the lack of sufficient funds to do so. The receiver also pointed to a decline in the resident population (due to the long period of uncertainty surrounding the future of the nursing home); the inability to retain staff (also due, in part, to the uncertain future of the nursing home); the deferral of significant long-term maintenance; and mounting expenses of the receivership.
The defendants Konig, MCK, and Reifer subsequently filed a motion to vacate the judge’s order for the sale of Union Square. This motion was denied, but, although notice was sent to counsel, the denial was not entered on the docket of the Superior Court.
Institutions subject to licensing under § 71 include a “convalescent or nursing home.” G. L. c. Ill, § 71.
An “emergency” means a “situation or condition which presents imminent danger of death or serious physical harm to patients, including but not limited to imminent or actual abandonment of an occupied facility.” G. L. c. Ill, § 72M.
If a receiver does not have sufficient capital for these repairs, the receiver may request that the court permit an application to the department for a loan. G.L. c. Ill, § 720.
A third-party landowner would never agree to lease property to a licensee, for the purposes of operating a nursing home, if such an agreement involved the risk of losing the property through a court-ordered sale, because of circumstances beyond his or her control.
The department’s requirement of separate reports to be filed by the licensee of a facility (RSC-1) and the real property owner (RSC-2) shows its expectation that ownership of a facility, such as a nursing home, may be held separately from the ownership of the real property on which the facility is located.
A court-ordered sale of the property of a third-party landowner could, in some instances, constitute an improper “taking,” in violation of the Fifth Amendment to the United States Constitution and art. 10 of the Declaration of Rights of the Massachusetts Constitution. As we shall explain, an order for sale does not implicate constitutional taking violations here.
The defendants point to a circular letter, dated April 18, 1995, from the director of the division of health care quality, interpreting this requirement to mean that “an applicant or licensee may lease the real estate (i.e., land and buildings) from the real property owner, [but] must own the ‘long-term care facility (LTCF) business’ ’’ (emphasis original). This interpretation does not change our understanding of the department’s ownership requirement, that a licensee must have a definite ownership interest in the land and the buildings used in the operation of a nursing home.
The relevant factors are (1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporation’s funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud. Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 14-16 (1st Cir. 1985) (categorizing criteria set forth in My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614 [1968]). Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 733 (1991).
The judge’s extensive findings included the following relevant facts. At
Konig executed several agreements on behalf of both MCK and Reifer, including the 1995 settlement agreement. MCK never paid dividends to its shareholders. Konig was the primary signatory on the bank account established for Union Square, determined which bills should be paid, and was the ultimate decision maker with regard to the operation of Union Square. MCK and Rei-fer did not have bank accounts in their names.
At some point after the receiver was appointed, Konig signed a lease between MCK and Reifer, on behalf of each entity. No written lease between MCK and Reifer existed prior to the receivership. Although the lease purported to be for a term of fifteen years and provided an annual rent of $200,000, Union Square actually paid rent in the amount of $283,876 in 1994. Konig has signed agreements relating to the potential sale of Union Square on behalf of both entities.
Konig hired a managing company, Long Term Care Consultants, Inc. (LTCC), to .provide administrative services for his nursing homes. LTCC set up bank accounts for each of the Konig-controlled homes. Frequently, at the request of LTCC, Konig would authorize wire transfers from Konig’s personal bank account to one of the homes’ accounts. Konig described these transfers as “loans,” although no loan documents were ever executed. On occasion, money was transferred from an account in the name of one of the Konig facilities to an account in the name of another.
Konig purported to “gift” all his stock in Reifer to the Moshe Isaac Foundation for no consideration. The trustees of the Moshe Isaac Foundation are Konig and his wife, and its address is Konig’s home address. Although Konig described the foundation as a charitable nonprofit corporation, he was not able to identify any such charity, with the exception of a single donation to an orphanage in Israel.
In the prereceivership period, Union Square was being operated by ADS, Inc. The temporary administrator of Union Square, an employee of ADS, had never heard of Reifer, and never dealt with anyone from MCK.
The defendants specifically challenge this finding, asserting that if MCK were, indeed, thinly capitalized, the Commonwealth never would have granted it a license to operate Union Square. This claim ignores clear evidence to the contrary, including Konig’s testimony in his deposition that he made numerous cash transfers from his personal bank account to Union Square bank ac
A lease was requested by the receiver on his appointment in 1997, and not produced until 1999. The lease is undated, unwitnessed, and signed by Konig on behalf of Reifer and MCK. In spite of the fact that the lease provided for an annual rent of $200,000, records produced by MCK showed that, in 1994, Union Square had paid rent in the amount of $283,876. The judge properly drew the inference that the lease in evidence was prepared at or about the time it was produced. The defendants referred to a lease at oral argument, but such a lease is not in the record and not part of this appeal.
Under the original settlement agreement, Reifer agreed to continue the management services of ADS Consulting, Inc., and also agreed to sell the real and personal property of Union Square to a suitable prospective buyer.
We reject the defendants’ claims that the doctrine of corporate disregard may not be applied to the facts of this case because the Commonwealth has asserted no monetary claims, or because the Commonwealth failed to assert this theory in the original complaint.
The defendants challenge the constitutionality of a court-ordered sale under G. L. c. 111. § 72R, as applied to the property of Reifer, claiming that it would amount to an unconstitutional taking. This argument lacks merit.
“A [regulatory scheme] amounts to a ‘taking’ if it fails substantially to advance a legitimate State interest or deprives a landowner of economically viable use of the land.” Greenfield Country Estates Tenants Ass’n v. Deep, 423 Mass. 81, 86 (1996). A sale of Reifer, MCK, and Konig’s property under G. L. c. Ill, § 72R, would substantially advance the Commonwealth’s legitimate interest in protecting the health and safety of the residents of Union Square. The fact that the home’s residents have been transferred, at least temporarily, does not eliminate the substantial State interest in their welfare, and in the welfare of future residents. Moreover, § 72R provides for just compensation by authorizing the sale under “reasonable terms approved by the court.” While a sale under § 72 may produce a purchase price below what might be negotiated on the open market, such an argument is purely speculative at this point. Further, Reifer, MCK, and Konig entered into the operation
A receiver who is faced with delay caused by an appeal may seek to expedite the appeal and may pursue any other measures available to a receiver, in the position of an appellee, who is confronted with time constraints and an appellant who may be advancing clearly untenable positions in order to defeat the sale. We do not suggest that the defendants’ arguments in this case fell into the latter category.
The judge’s findings were based, in part, on the testimony of a social worker from Union Square, as well as on the testimony of an expert in the field of gerontology.
The language of the Act supports the continuation of a receiver’s possession and control of a facility beyond an actual closure of the facility. Section 720 authorizes a receiver to “perform those acts necessary or desirable to accomplish the purpose of the receivership . . . and to exercise such additional powers and perform such additional duties, as the court may deem appropriate.”
