The Fiduciary Duty of a Charitable Corporation’s Sole Corporate Member: New Law and New Questions

Wednesday, April 18, 2012

By Julia R. Hesse and David S. Szabo

Introduction

Brief Summary of Facts Underlying the Lifespan Case

Lifespan v. NEMC is a case about the break-up of a hospital from a hospital system – and, ultimately, about the fiduciary duties owed by that hospital system to its member hospitals.  Lifespan Corporation is a non-profit hospital system based in Rhode Island.  In 1997, New England Medical Center (“NEMC”, and now known as Tufts Medical Center) affiliated with Lifespan.  By all accounts, the affiliation did not work out and in 2002 Lifespan and NEMC agreed to disaffiliate.

Under the terms of the agreement ending the affiliation (the “Restructuring Agreement”), NEMC was required to pay Lifespan a series of break-up payments.  NEMC made most, but not all, of these payments – refusing to pay the final two installments of $3.66 million out of the total $30 million required by their Restructuring Agreement.  Lifespan initiated the lawsuit in 2006 on a breach of contract claim to compel NEMC to make the two missing payments.  NEMC admitted that it did not make these payments but counterclaimed that Lifespan had engaged in misconduct during the affiliation, which entitled NEMC to indemnification.

The Massachusetts Attorney General, invoking NEMC’s status as a public charity, intervened in the case on behalf of the public interest (pursuant to Fed. R. Civ. P. 24), and brought a counterclaim against Lifespan for breach of its fiduciary duty to NEMC, based on the same alleged misconduct.

The Court, holding that Massachusetts law governed all of the parties’ claims in the case, found that Lifespan did owe a fiduciary duty to NEMC because of the extent of control it exercised over NEMC and also because of the “‘faith, confidence and trust’ NEMC placed in its judgment and advice.”

Scope of Article: Fiduciary Duty of Parent to Subsidiary

This article will focus on the Court’s important holding that Lifespan owed a fiduciary duty to NEMC – and will analyze the scope and impact of that holding.  This is only the second court (and the first under Massachusetts law) to hold that the member of a non-profit corporation (i.e., its corporate parent) owes a fiduciary duty to its separately incorporated affiliated hospitals.4

Click here to read the full article in the Winter 2012 edition of the Health Law Reporter.