A recent federal bankruptcy court decision addresses important principles of fiduciary conduct (and the benefits of a state exculpatory statute) in the context of a financially distressed not-for-profit hospital.
The case involved claims of negligence and breach of fiduciary duty by members of the board and management team of a not-for-profit hospital, filed by the hospital's liquidating trust. The claims were based on allegations that, essentially, management and the board were inattentive and unresponsive to multiple signs of financial problems (e.g., significant physician practice losses).
The court granted a motion to dismiss with respect to the claims against essentially all of the voluntary directors, but denied the motion with respect to certain other directors who were perceived to be compensated, and to one voluntary director who was alleged to have a conflict of interest (the director was the CEO of a local bank with which the hospital had entered into a controversial loan arrangement).
The court's opinion contains useful discussions of fiduciary duties, possible elements of negligence and the limitations of the business judgment rule (especially given well-pleaded allegations of abdication of authority or failure to act). Notably, the court relied on the exculpatory clause in the hospital's bylaws as the basis to dismiss the allegations against the voluntary directors.
What is particularly disconcerting from a governance perspective is that more than six years passed between the bankruptcy filing and the court's ruling; a long period of uncertainty for the officers and directors. As with the 2015 decision of the US Court of Appeals in Lemington Homes, creditors (in whatever form) are often relentless in their pursuit of claims based on breach of fiduciary duties by directors of financially distressed entities.
New Decision Affects D&O Liability
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