Careful structuring of business agreements can protect incoming operators seeking to mitigate risks associated with distressed properties of former operators, according to legal experts.
Arnall Golden Gregory LLP outlined a case in JDSupra, Milmoe v. Paramount Senior Living, involving a negligence lawsuit filed against both the current and former operators of a West Virginia senior living community. Ultimately, two courts ruled that the current operator could not be held liable for alleged misconduct that occurred under the previous operator.
The rulings offer some insight for other operators.
Lawsuit began in 2019
Toni Milmoe filed a negligence and wrongful death lawsuit in August 2019 against Passage Midland Meadows Senior Living in Ona, WV. The suit alleged that several elopements and falls resulted in medical expenses, pain and suffering, and, ultimately, death for resident Thelma Sturgeon in November 2017.
Toledo, OH-based real estate investment trust Welltower owned the community and sublet it to Delaware-based Passage. Passage filed for Chapter 11 bankruptcy protection in March 2017.
Shortly after Sturgeon’s death, a bankruptcy court granted Passage’s request to enter into an operations transfer agreement with Paramount Senior Living at Ona LLC, which took effect in January 2018. Paramount renamed the community Cabell Midland. Welltower remains the owner.
According to the JDSupra article, the deal transferred “nominal assets” in the form of community supplies to Paramount; it was not a purchase agreement. Those nominal assets included linens, consumables, medical and office supplies and maintenance inventory. Other assets, including cash, accounts receivable and stock, were excluded from the purchase agreement.
‘A clearer picture’ result
Milmoe’s lawsuit was filed after the deal was finalized between Passage and Paramount, naming both as defendants. The Circuit Court of Cabell County ruled in February 2021 that Paramount “was not responsible as a successor corporation for alleged wrongful conduct” by the previous operator.
The Supreme Court of Appeals of West Virginia agreed with the lower court ruling, finding on June 13 that “Paramount merely assumed operations of a failing senior care home that was formerly operated by Passage,” and that “merely hiring a former operator’s employees and serving its prior clientele is not sufficient to render a new operator a successor of the former operator.”
The court found that Paramount only acquired nominal assets and that all or substantially all of the previous operator’s assets must be transferred in order for the current operator to be considered a successor corporation.
“Milmoe offers incoming operators of senior living facilities in West Virginia a clearer picture of the ways to protect against risks of potential liability stemming from actions or inactions of insolvent prior operators,” the authors stated. “Incoming operators can strategically structure their business agreements or mitigate such liability.”
The authors said the case offers legal strategies for incoming operators, especially if the former operator is insolvent.
“Under Milmoe, when assessing potential successor liability risk, the incoming operator must consider the structure of the transaction and the agreement that must be put in place to protect itself,” the authors concluded.
