Third Circuit Recognizes State Law Claim For Deepening Insolvency

In In re Lemington Home for the Aged, 2011 US App LEXIS 19312 (3d Cir, July 11, 2011), the Third Circuit in a published case held that the plaintiffs had established a genuine issue of material fact with respect to their claim for deepening insolvency against the defendant board of directors of a nonprofit facility. While the case involved a health care entity undergoing federal bankruptcy, the analysis may apply to other entities undergoing receivership, including those involved in state level insurance receiverships.

In May of 2004, after years of financial decline, an administrator recommended to the board of directors of the Lemington Home for the Aged that bankruptcy protection was necessary. Despite numerous warning from audits and outside studies, as well as citations from the state health department, the board refused to declare bankruptcy or conduct a viability study necessary to receive a loan to continue operations. After several patients died under