1

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 10-4456

____________ 

In re: LEMINGTON HOME FOR THE AGED 

OFFICIAL COMMITTEE OF UNSECURED CREDITORS, 

ON BEHALF OF THE ESTATE OF LEMINGTON HOME 

FOR THE AGED, 

 Appellant 

v. 

ARTHUR BALDWIN; LINDA COBB; JEROME 

BULLOCK; ANGELA FORD; JOANNE ANDIORIO; J.W. 

WALLACE; TWYLA JOHNSON; NICOLE GAINES; 

WILLIAM THOMPKINS; ROY PENNER; MELODY 

CAUSEY; JAMES SHEALEY; LEONARD R. DUNCAN; 

RENEE FRAZIER; CLAUDIA ALLEN; EUGENE 

DOWNING; GEORGE CALLOWAY; B. J. LEBER; 

REVEREND RONALD PETERS

___________ 

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. Civil Action No. 2-10-cv-00800)

District Judge: Honorable Arthur J. Schwab

___________ 
2

Argued July 11, 2011

Before: SLOVITER, FUENTES and VANASKIE, 

Circuit Judges.

(Filed: September 21, 2011)

Robert S. Bernstein, Esq.

Kirk B. Burkley, Esq.

Nicholas D. Krawec, Esq. Argued

Krawec Bernstein Law Firm, PC

707 Grant Street

Suite 2200, Gulf Tower

Pittsburgh, PA 15219-0000

 Counsel for Appellants

Mark R. Hamilton, Esq. Argued

Philip J. Sbrolla, Esq.

Cipriani & Werner

650 Washington Road

Suite 700

Pittsburgh, PA 15228

Todd M. Raskin, Esq.

Mazanec, Raskin & Ryder

100 Franklin‟s Row

34305 Solon Road

Cleveland, OH 44139

 Counsel for Appellee Arthur Baldwin
3

Suzanne B. Merrick

Thomas, Thomas & Hafer

301 Grant Street

One Oxford Centre, Suite 1150

Pittsburgh, PA 15219-0000

Counsel for Appellee James Shealey

___________

OPINION OF THE COURT

___________

VANASKIE, Circuit Judge.

The Committee of Unsecured Creditors (“the 

Committee”) on behalf of the Estate of the Lemington Home 

for the Aged (“the Home”) appeals the District Court‟s 

decision to grant summary judgment in favor of defendants, 

the officers and directors of the Home, on the Committee‟s 

breach of fiduciary duty and deepening insolvency claims. 

The District Court found that summary judgment was 

appropriate because the business judgment rule and the 

doctrine of in pari delicto barred recovery on the breach of 

fiduciary duty claims, and because the Committee was unable

to demonstrate a material issue of fact concerning whether the 

defendants committed the fraud necessary to support a claim 

of deepening insolvency. Because our independent review of 

the record discloses genuine disputes of material facts on all 

claims, we will vacate and remand for trial.
4

I.

The Home, a nonprofit corporation, has a storied place 

in history. As the city of Pittsburgh grew in influence as an 

industrial and manufacturing center in the 19th century, its 

diverse population swelled. By 1870, the city had a 

population of 86,076, a 74% increase in just ten years. 

Among this population were about 2,000 African-Americans, 

mostly free blacks who had been born in the North, a few 

post-Civil War migrants from the South, as well as some 

runaway slaves and their descendants. Many of these people 

did not share in the industrial prosperity enveloping the city, 

struggling both to make ends meet and to secure the civil 

rights guaranteed to them by the Constitution.

In 1877, Mary Peck Bond, a daughter of Pittsburgh 

African-American abolitionist and minister John Peck, is said 

to have discovered that her friend, former slave and thencentenarian “Aunt Peggy,” was living alone in squalor in a 

damp basement. Together with friends, Mrs. Bond worked to 

raise funds to provide a place of refuge for elderly members 

of the African-American community. This effort‟s first 

incarnation, “The Home for the Aged and Infirm Colored 

Women,” was incorporated and dedicated on July 4, 1883. 

Eventually, this facility would become known as the 

“Lemington Home for the Aged,” also known as “Lemington 

Center.” The Home was affiliated with Lemington Elder 

Care Services, with which it had an interlocking Board of 

Directors. In 1983, the Home was relocated to a facility on 

Lincoln Avenue in Pittsburgh, and expanded to about 180 

beds.
5

Almost immediately from the time of its relocation in 

1983, the Home was beset with financial troubles. In its first 

year at the new facility, the Home operated at a loss of 

$429,000. Although an initial projection had indicated that 

the Home would profit, this was based on “the Center being 

aggressively marketed to produce . . . a more even mix of 

Medicare, Medicaid, and private pay patients.” (Id. at 271.) 

Instead, “95% of [the Home‟s] patients receiv[ed] Medicaid, 

4.5% Medicare and 0.5% private payors.” (Id.)

This stagnation continued through the 1980s and into 

the 1990s. Because the Home‟s financial condition was 

rapidly deteriorating, the City of Pittsburgh, Allegheny 

County, and several private foundations periodically assisted 

to keep the Home in operation. By late 1986, the Home was 

again maintaining its own operations, but had $4 million in 

deferred mortgage debt.

Unfortunately, the Home‟s financial condition again 

deteriorated. The U.S. Department of Health and Human 

Services implemented a month-long ban on new admissions 

in September, 1998. A comprehensive long-range plan 

formulated at the Home‟s direction by Hershberg Salter 

Associates in 1997 found that the Home had image problems

within the community, and recommended, among other 

things, that it should hire an Administrator, a “quality human 

resources staff,” and outside specialists. (Id. at 280-81.)

Defendant Melody L. Causey was hired as the Home‟s 

Administrator in September, 1997. By 1999, the Home was 
6

insolvent. “Going concern” warnings1accompanied audits 

for fiscal years 2002 and 2003.2 As of June 30, 2002, the 

Home‟s total liabilities exceeded total assets by $1,941,959, 

and total liabilities exceeded total assets by $1,675,397 at the 

end of the 2003 fiscal year. In 2001, a study funded by the 

Pittsburgh Foundation recommended that the Board replace 

Causey with a “qualified, seasoned nursing home 

administrator,” (A. 1179) and “review, revamp and re-staff 

each department” (A. 1214). The Foundation provided a 

grant of more than $175,000 to hire a new Administrator. 

Causey, however, decided to use the grant for other purposes. 

In December of 2002, Defendant James Shealey 

became the Home‟s Chief Financial Officer. Shealey failed 

to maintain a general ledger, and the Home‟s financial and 

billing records were in deplorable condition. In March of 

2004, the Board was informed that employee insurance 

premiums were not paid even though payroll deductions had 

been made for that purpose.

Beginning in 2003, the Home was cited for numerous 

deficiencies “primarily as a result of staff failing to document 

services rendered.” (Id. at 1355.) Causey commented that 

“we continue to employ staff that should no longer be 

employed by our organization” and “in the last eighteen 

months, the nursing department alone caused the facility to 

receive[] 22 nursing care deficiencies.” (Id. at 1527.) 

According to Causey, in April or May, 2004, she informed 

 

1

The “going concern” notices are intended to warn 

that the “continued viability of an enterprise is in doubt.” (A. 

6.)

2

The Home‟s fiscal year ended on June 30th.
7

the Board of Directors that, due to health problems, she had 

been placed on part-time work status by her physicians. 

According to her administrative assistant, she was absent 

from the Home for periods of up to six or eight weeks at a 

time. She was not replaced, although state law required the

Home to employ a full-time, licensed administrator.

From November of 2003 to January of 2005, the Board 

position of Treasurer was vacant. The Treasurer was to chair 

the Board‟s Finance Committee. There is evidence that there 

was no meaningful oversight of the Home‟s financial 

operations during this period.

In May of 2004, Causey recommended that the Home 

file for bankruptcy. The Board opted to pursue other options 

at that time. One of the options was obtaining a $1,000,000 

loan from the Lemington Home Fund, which was 

administered by the Pittsburgh Foundation. Approval of the 

loan was conditioned upon the Board having a viability study 

conducted. The Board declined to pursue such a study.

The Home‟s problems came to a head on July 26, 

2004, when resident Terry Norwood, who suffered from 

advanced diabetes, was found unresponsive without a pulse. 

Although he had an advanced directive which specified that, 

if he ceased to breathe, he should be resuscitated, no such 

action was taken. Instead, a nurse left a message on a 

physician‟s pager. Because of this death, the Pennsylvania 

Department of Health cited the home for neglect, placed the 

Home‟s license on provisional status, and provided a 90-day 

window for the Home to correct its deficiencies.

The Home‟s accounting firm declined to continue to 

work for the Home in the Fall of 2004 due to non-payment of 
8

its bills. A medical records and billing consultant terminated 

her services in August of 2004 due to non-payment.

Another resident, Elaine Carrington, died at the Home 

on December 17, 2004, under circumstances suggesting 

neglect. Because of this death, the Pennsylvania Department 

of Health conducted another investigation. Among other 

things, the Department noted that “[a]n administrator, or a 

designee, is not present on the premises on a 24-hr. basis. In 

the administrator‟s frequent absence, staff are confused as to 

whom is to be in charge of the PC Unit.” (Id. at 1379.) The 

Department further noted that “[t]he Administrator failed to 

report . . . the unusual death of resident EC on 12/19/04” (id.

at 1385) and it “determined that the Administrator, Mel 

Causey, lack[ed] the qualifications, the knowledge of the PC 

regulations and the ability to direct staff to perform personal 

care services as required” (id. at 1393.) 

At the time of these incidents, records indicate that the 

Board itself was in disarray. Minutes of Board meetings were 

incomplete or non-existent. Administrator Causey noted in a 

deposition that minutes were never kept of executive sessions, 

at which compensation, among other issues, was discussed. 

Attendance at Board meetings was often below 50%. 

Although the Board‟s by-laws required a Finance Committee 

with the Board Treasurer as chairperson, the position of 

Treasurer remained unfilled. Instead, the Board relied on the 

advice of Chief Financial Officer Shealey, although, as Board 

Chair Arthur Baldwin noted in his deposition, the Board was 

aware as early as December 2004 that Shealey was not 

maintaining financial records.

At its meeting on January 6, 2005, the Board 

considered options in case a proposed merger with the 
9

University of Pittsburgh Medical Center did not occur. The 

Board considered two options: bankruptcy and restructuring. 

At this meeting, the Board voted “to close the nursing home 

and assisted living entities,” “to retain Eva P. Mitchell, 

community services [sic] and, if possible, Lemington 

Residential Corporation #2,” and “to continue pursuing 

UPMC for a possible merger/acquisition of Lemington.” (Id.

at 1371.) 

The Board did not approve the filing of a bankruptcy 

petition for another three months. Instead, at its January 

meeting, the Board “agreed to stop admissions to [the nursing 

home and assisted living facility] immediately.” (Id. at

1372.) At this meeting, the Board further noted that it was 

“informed that Mel Causey ha[d] been working from home on 

a part-time basis for several months and, as such, was not in 

control of the activities that were taking place at the 

facilities.” (Id.) The Board voted to terminate Ms. Causey. 

In March, 2005, the Board hired Elizabeth Garrett as an 

administrator. The Board informed Ms. Garrett that, because 

it had decided to declare bankruptcy, the facility would not be 

receiving new patients.

Handwritten notes from a Board meeting held on 

March 15, 2005 indicate discussion of plans to transfer the 

Home‟s principal charitable asset, the Lemington Home 

Fund, held by the Pittsburgh Foundation, to Lemington Elder 

Care, an affiliated entity. The members of the Home‟s Board 

were also directors of Lemington Elder Care. By March 17, 

2005, the Pennsylvania Department of Health determined that 

the Home‟s deficiencies had been corrected. On March 24, 

2005, a document called the “Lemington Elder Care 

Transition Action Plan” was created, which, among other 
10

things, provided for the “Lemington Elder Services 

restructuring process,” to “Close Lemington Nursing Home 

and Assisted Living Facilities,” “Obtain funding to assist with 

the transition and restructuring of Lemington Elder Care,” 

“Enlist all possible selling options of the Lemington Nursing 

Home and Assisted Living Facility,” “Conduct Bankruptcy 

Filing of Lemington Nursing Home & Assisted Living 

Entities,” and “Restructure Lemington Elder Care to include 

Community Services, Eva P. Mitchell and HUD #2 Project.” 

(Id. at 812-815.) Consistent with the plan to shift the Home‟s 

principal charitable asset to Lemington Elder Care, on May 

27, 2005, Chairperson Baldwin drafted a letter to be signed 

by the Pennsylvania Secretary of Aging, requesting that the 

Pittsburgh Foundation provide 

financial assistance to be used by Lemington 

Center for legal counsel, communications 

support, insurance and the services of a 

turnaround expert in order to orchestrate a 

caring, orderly and safe transition for its nursing 

home and assisted living residents as 

Lemington Center discontinues nursing home 

and assisted living services and works through

bankruptcy reorganization.

(Id. at 808.)

On April 13, 2005, the Home filed a voluntary Chapter 

11 petition in the United States Bankruptcy Court for the 

Western District of Pennsylvania. The Committee of 

Unsecured Creditors was appointed two weeks later. In early 

May, W. Terrence Brown was hired by one of Lemington‟s 

creditors to investigate the company‟s financial situation. 
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According to Brown‟s report, Shealey “admitted that the 

general ledger and accounting system had not been 

maintained „for some time‟ because of lack of staff and 

trained staff.” (Id. at 878.) Furthermore, Mr. Brown reported 

that he was unable to obtain “records of any checks written, 

deposits made, bank statements or bank statement 

reconciliations for any month of the current fiscal year. . . . I 

do know that accounting records problems go back to at least 

November 2003 and I do not know if the accounting system 

itself was maintained after November 2003.” (Id. at 879.) 

Importantly, Mr. Brown also related that “[t]he billing clerk 

also admitted and Mr. Shealey confirmed that no Medicare 

billings had been submitted to Medicare since at least August 

2004. . . . I estimate that during this period there were 

approximately 2,000 unbilled Medicare patient days.” (Id.)

On June 9, 2005, the Bankruptcy Court directed the 

Debtor-in-Possession to obtain a viability study from 

PrimusCare, a company previously hired by the Debtor. In its 

report dated June 22, 2005, PrimusCare first noted that “[t]he 

facility cannot operate in its current condition . . . and without 

an influx of anticipated Medicare Recovery Funds would be 

insolvent by the beginning of August. . . . Claim recovery 

efforts are currently underway.” (Id. at 1582.) Among other 

things, PrimusCare further opined that 

[t]he overall knowledge of the Department 

Heads appears to be limited. Many have been 

placed into positions without solid training on 

the main functions of their duties. Basic 

internal controls are missing in many key areas

including census tracking, accounts receivable, 

accounts payable, payroll, and resident trust 
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accounts. . . . Without these key internal 

controls in place the facility is unable to 

monitor and track financial performance. 

(Id. at 1594.)3

PrimusCare also highlighted a number of positive 

factors for the Home, including a high local population of 

senior citizens, support from local government officials and 

families, and local hospital interest in referring patients to the 

Home. Consequently, PrimusCare concluded, if the Home 

improved its image, recruited and developed qualified staff, 

and secured approximately $2 million in working capital 

needed to make necessary reforms, it could achieve the 90% 

occupancy rate necessary to continue operations. PrimusCare 

suggested that some of the necessary funding could be 

obtained by, among other things, collecting approximately 

$500,000 in unpaid Medicare reimbursements, appealing to

government sources for rate relief, and re-working the

Home‟s debt structure and the collective bargaining

 

3

This lack of records was underscored in a later e-mail 

detailing PrimusCare‟s efforts to reconstruct the Home‟s 

financial records: “The indicated available funds from 

[Medicare claims] . . . is substantially less than the amount 

estimated due [to] our discovery of the following: 1[.] The 

census data was not accurate. . . . 2. A number of the patients 

did not have appropriate documentation . . . . it is hard to 

appreciate the lack of any viable financial structure. Virtually 

all information we have sought in order to complete the 

claims for submission has required painful searching an[d] 

searching in order to construct/reconstruct the information 

required.” (A. 1849.)
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agreement. Notably, PrimusCare recommended that “board 

members with for-profit, long term care management 

experience” should be added, that “[e]ngaging a seasoned, 

long term care management company with local and diverse 

management experience is essential,” and that “[r]ecruitment 

of key personnel with tremendous experience is vital.” (A. 

1596.)

The Home delayed filing its Monthly Operating 

Reports for May and June until September 2005. If they had 

been filed, they would have shown that the Home received 

nearly $1.4 million in Nursing Home Assessment Tax 

payments.

At a Bankruptcy status conference held on June 23, 

2005, no one expressed any interest in funding or acquiring 

the Home. Consequently, the Bankruptcy Court approved 

closure of the Home and the transfer of its residents to other 

facilities.

On November 27, 2005, the Bankruptcy Judge granted 

the Committee‟s motion to commence an adversary 

proceeding against the Home‟s directors and officers. On 

August 27, 2007, the Official Committee of Unsecured 

Creditors filed its Second Amended Complaint on behalf of 

the Debtor, asserting causes of action against the directors 

and officers for breach of the fiduciary duties of care and 

loyalty and for deepening insolvency. On September 10, 

2010, the directors and officers filed a Joint Motion for 

Summary Judgment. On October 25, 2010, the District Court 

granted the motion, finding that the business judgment rule 

and the doctrine of in pari delicto applied to preclude the 

Committee‟s breach of fiduciary duty claims. The District 

Court also found that, even considering the evidence in the 
14

light most favorable to the Committee, the Committee would 

be unable to show that there was fraud necessary to support a 

claim of deepening insolvency. This appeal followed.4

II.

Our review of a District Court‟s grant of summary 

judgment is plenary. Official Committee of Unsecured 

Creditors of Allegheny Health, Educ. and Research Found. v. 

PricewaterhouseCoopers, LLP, 607 F.3d 346, 351 (3d Cir. 

2010). Summary judgment is governed by Rule 56 of the 

Federal Rules of Civil Procedure, which provides that “[t]he 

court shall grant summary judgment if the movant shows that 

there is no genuine dispute as to any material fact and the 

movant is entitled to judgment as a matter of law.” Fed. R. 

Civ. P. 56(a). A material fact is “[a] fact[] that might affect 

the outcome of the suit under the governing law.” Anderson 

v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For an issue 

to be genuine, “all that is required is that sufficient evidence 

supporting the claimed factual dispute be shown to require a 

jury or judge to resolve the parties‟ differing versions of the 

truth at trial.” Id. at 248-49 (quoting First National Bank of 

Arizona v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968) 

(internal quotation marks omitted)). 

Because Appellants have brought claims for breach of 

fiduciary duty as well as for deepening insolvency, we will 

examine whether summary judgment is appropriate for each 

of these in turn.

 

4

In this bankruptcy adversary proceeding, the District 

Court had jurisdiction pursuant to 28 U.S.C. §§ 1331 and 

1334(b). We have jurisdiction pursuant to 28 U.S.C. § 1291.
15

A.

Pennsylvania law, which codifies the fiduciary duties 

owed by directors and officers of a corporation, provides as 

follows for directors:

A director of a nonprofit corporation shall stand 

in a fiduciary relation to the corporation and 

shall perform his duties as a director . . . in good 

faith, in a manner he reasonably believes to be 

in the best interests of the corporation and with 

such care, including reasonable inquiry, skill 

and diligence, as a person of ordinary prudence 

would use under similar circumstances. In 

performing his duties, a director shall be 

entitled to rely in good faith on information, 

opinions, reports or statements, including 

financial statements and other financial data, in 

each case prepared or presented by any of the 

following: (1) One or more officers or 

employees of the corporation whom the director 

reasonably believes to be reliable and 

competent in the matters presented. (2) 

Counsel, public accountants or other persons as 

to matters which the director reasonably 

believes to be within the professional or expert 

competence of such person. . . . (b) Effect of 

actual knowledge. – A director shall not be 

considered to be acting in good faith if he has 

knowledge concerning the matter in question 

that would cause his reliance to be unwarranted.
16

15 Pa. Cons. Stat. Ann. § 5712(a)-(b) (2011). The standard of 

care for officers is set forth as follows:

[A]n officer shall perform his duties as an 

officer in good faith, in a manner he reasonably 

believes to be in the best interests of the 

corporation and with such care, including 

reasonable inquiry, skill and diligence, as a 

person of ordinary prudence would use under 

similar circumstances.

Id. § 5712(c). These fiduciary duties are owed not only to the 

corporation and its shareholders, but also to the creditors of 

an insolvent entity. See Citicorp Venture Capital, Ltd. v. 

Comm. of Creditors Holding Unsecured Claims, 160 F.3d 

982, 987-88 (3d. Cir. 1998). Certainly, then, it is material 

whether the directors‟ reliance upon the information provided 

by one or more officers or employees was in “good faith,”

and whether there was a reasonable basis for relying upon 

officers and employees of the corporation. It is likewise 

material whether the officers have exercised “reasonable 

inquiry, skill and diligence” in performing their duties.

In support of its claim of a breach of the duty of due 

care, the Committee contends that the Board relied on 

Administrator Causey‟s judgment, notwithstanding that it was 

aware that she was working part-time in violation of state-law 

requirements, and had a string of deficiencies on her watch. 

Furthermore, the Committee asserts that the Board failed to 

follow its established governance structure in not appointing a 

treasurer and a finance committee. It thus did not discover 

Shealey‟s complete failure to maintain financial and billing 

records and his failure to bill Medicare for over $450,000 in 
17

payables during one year. The Committee likewise argues

that, by eschewing their responsibilities, Causey and Shealey 

breached their duty of due care. As to the duty of loyalty, the 

Committee contends that the Board and its officers breached 

their duty in that the Board “consciously chose to close the 

home so that the [Lemington Home Fund, a charitable 

lending source] could be diverted to Elder Care [another 

organization which had an interlocking Board of Directors 

with the Lemington Home],” (Appellant‟s Br. at 33), and that 

the officers were dually employed by both the Home and 

Elder Care, with CFO Shealey allegedly commingling funds 

of the entities. 

The evidence produced by the Committee is such that 

a fact-finder could conclude that the Home‟s directors did not 

have a reasonable basis to believe that Causey and Shealey 

were reliable and competent. In this regard, the evidence of 

the numerous deficiencies, the death of a resident in the 

summer of 2004 that resulted in the placement of the Home‟s 

license on probationary status, the staff and operational 

deficiencies noted in the PrimusCare report, the fact that 

members of the Board knew that Causey was not working full 

time, and Shealey‟s failure to maintain even rudimentary but 

essential accounting records would enable a fact-finder to 

conclude that the directors had breached their fiduciary duty 

of care. This same evidence would support an inference that 

Causey and Shealey did not exercise “such care, including 

reasonable inquiry, skill and diligence, as a person of ordinary 

prudence would use under similar circumstances.” Finally, 

the evidence presented by the Committee pertaining to plans 

to divert the Lemington Home Fund to Lemington Elder Care 

suffices to create a triable issue on the duty of loyalty claim.
18

The District Court, however, found that the business 

judgment rule as well as the doctrine of in pari delicto applied 

to shield the directors and officers from liability. We 

disagree, and will discuss each of these doctrines to illustrate 

why they are inapplicable here.

1. Business Judgment Rule

Pennsylvania law provides that “[a]bsent breach of 

fiduciary duty, lack of good faith or self-dealing, any act as 

the board of directors, a committee of the board or an 

individual director shall be presumed to be in the best 

interests of the corporation.” 15 Pa. Cons. Stat. Ann.

§ 5715(d) (emphasis added). As explained in Cuker v. 

Mikalauskas, 692 A.2d 1042, 1048 (Pa. 1997):

The business judgment rule should insulate 

officers and directors from judicial intervention 

in the absence of fraud or self-dealing, if 

challenged decisions were within the scope of 

the directors‟ authority, if they exercised 

reasonable diligence, and if they honestly and 

rationally believed their decisions were in the 

best interests of the company. It is obvious that 

a court must examine the circumstances 

surrounding the decisions in order to determine 

if the conditions warrant application of the 

business judgment rule.

Id. at 1048. As we have observed, “underlying the [business 

judgment] rule is the assumption that reasonable diligence has 

been used in reaching the decision which the rule is invoked 

to justify.” Miller v. American Tel. & Tel. Co., 507 F.2d 759, 
19

762 (3d Cir. 1974). “Factors bearing on the board‟s decision . 

. . include whether the board . . . was disinterested, whether it 

was assisted by counsel, whether it prepared a written report, 

whether it was independent, whether it conducted an adequate 

investigation, and whether it rationally believed its decision 

was in the best interests of the corporation.” Cuker, 692 A.2d 

at 1046. “Whether the duty of care has been met is a question 

of fact to be determined by an examination of all the 

circumstances in the case.” Wolf v. Fried, 373 A.2d 734, 735 

(Pa. 1977).

The District Court relied upon the fact that the Board 

was assisted by counsel, conducted several meetings, and 

pursued various options before approving the bankruptcy 

filing. To be sure, this is the type of evidence that could 

support application of the business judgment rule as a matter 

of law. But it is countered by evidence that the Board 

received numerous red flags as to the competence and 

diligence of Causey and Shealey. The fact that the Board 

eschewed a viability study also calls into question the 

adequacy of a pre-bankruptcy investigation. And finally, 

there is the evidence that the directors favored Lemington 

Elder Care over the Home. Where, as here, there is evidence 

to support a rational conclusion that the directors did not 

exercise reasonable diligence, application of the business 

judgment rule cannot be decided on a summary judgment 

motion.5 See Keyser v. Commonwealth Nat’l Fin. Corp., 675 

F. Supp. 238, 259-61 (M.D. Pa. 1987).

 

5

The District Court erroneously held that the 

presumption of the business judgment rule is overcome only 

by evidence of gross negligence. The District Court cited a 
20

2. In pari delicto

In pari delicto, expressed in its most basic form, 

prohibits courts from “lend[ing] their good offices to 

mediating disputes among wrongdoers.” Bateman Eichler, 

Hill Richards, Inc., v. Berner, 472 U.S. 299, 306 (1985). For 

the doctrine of in pari delicto to apply in Pennsylvania, “the 

plaintiff [must] be an active, voluntary participant in the 

wrongful conduct or transaction(s) for which it seeks redress, 

and bear „substantially equal [or greater] responsibility for the 

underlying illegality‟ as compared to the defendant.” Official 

Comm. of Unsecured Creditors of Allegheny Health Educ. & 

Research Found. v. PricewaterhouseCoopers, LLP, 989 A.2d 

313, 329 (Pa. 2010) (quoting Bateman Eichler, 472 U.S. at 

306-07). 

With respect to in pari delicto in a bankruptcy context, 

“the „trustee stands in the shoes of the debtor and can only 

assert those causes of action possessed by the debtor. 

[Conversely,] [t]he trustee is, of course, subject to the same 

 

Delaware Supreme Court case which held that “under the 

business judgment rule director liability is predicated upon 

concepts of gross negligence.” Aronson v. Lewis, 473 A.2d 

805, 812 (Del. 1984) (overruled on other grounds). 

Pennsylvania, however, recognizes directors‟ and officers‟ 

liability for negligent breach of fiduciary duty. See, e.g., Wolf 

v. Fried, 373 A.2d 734, 735 (Pa. 1977) (“[E]ven in the 

absence of fraud, self-dealing, or proof of personal profit or 

wanton acts of omission or commission, the directors of a 

corporation may be held personally liable where they have 

been imprudent, wasteful, careless and negligent and such 

actions have resulted in corporate losses.”).
21

defenses as could have been asserted by the defendant had the 

action been instituted by the debtor.‟” Official Comm. of 

Unsecured Creditors v. R. F. Lafferty & Co., 267 F.3d 340, 

356 (3d Cir. 2001) (quoting Hays & Co. v. Merrill Lynch, 

Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154 (3d Cir. 

1989)).

As the District Court noted, however, there is an 

exception to the applicability of in pari delicto, when the 

complained-of action did not actually benefit the corporation. 

Thus, although “principals generally are responsible for the 

acts of agents committed within the scope of their authority,” 

PricewaterhouseCoopers, 989 A.2d at 333, “where an agent 

acts in his own interest, and to the corporation‟s detriment, 

imputation generally will not apply,” id. at 334. This 

“adverse interest” exception was set forth succinctly in 

Lafferty as follows: “Under the law of imputation, courts 

impute the fraud of an officer to a corporation when the 

officer commits the fraud (1) in the course of his 

employment, and (2) for the benefit of the corporation.” 267 

F.3d at 358. As to whether an officer‟s conduct is motivated 

by self-interest and benefits the corporation, the Pennsylvania 

Supreme Court has outlined that “the appropriate approach . . 

. is best related back to the underlying purpose of imputation, 

which is fair risk-allocation, including the affordance of 

appropriate protection to those who transact business with 

corporations.” PricewaterhouseCoopers, 989 A.2d at 335. 

Here, the District Court found that, because the 

“defendants[] [did not] receive any personal benefit from its 

[sic] decision to close Lemington,” the adverse interest 

exception to the doctrine of in pari delicto did not apply. (A. 

21.) The Committee has presented considerable evidence that 
22

the alleged breaches of fiduciary duty were from the 

defendants‟ self-interest and did not benefit the Home. For 

example, the Committee has presented evidence that the 

officers and directors were simultaneously affiliated with both 

the Home and Lemington Elder Care, and thus stood to 

benefit from a transfer of the Home‟s principal charitable 

asset to Lemington Elder Care. The Committee also sets 

forth that Shealey served as a Trustee of Mt. Ararat Church‟s 

community-outreach entity during the time that this entity 

was being pursued by the Board as a possible purchaser of the 

Home. The Committee also argues that Causey resisted the 

Pittsburgh Foundation‟s recommendation to replace her with 

another individual, and that Shealey neglected to maintain 

any financial records during his tenure. Thus, it is clear that 

the alleged actions of the directors and officers were not only 

harmful to the corporation, but also advanced their own selfinterest. The principles of fair risk allocation, moreover, 

would likely counsel against the Home‟s assumption of the 

risk that its directors and officers would consistently engage 

in actions so completely contrary to its benefit.

Because the Committee has tendered sufficient

evidence that the directors‟ and officers‟ alleged breaches of 

fiduciary duty did not benefit the Home but instead benefited 

their own self-interest, the applicability of the “adverse 

interest” exception presents a genuine issue of material fact. 

Summary judgment on this basis is therefore inappropriate.

B.

Finally, it is necessary to deal with the claim of 

deepening insolvency. This cause of action has not been 

formally recognized by Pennsylvania state courts. Lafferty, 
23

267 F.3d at 349. Nevertheless, relying on “decisions 

interpreting the law of other jurisdictions and on the policy 

underlying Pennsylvania tort law,” this Circuit has found that 

“the Pennsylvania Supreme Court would determine that 

„deepening insolvency‟ may give rise to a cognizable 

injury.”

6

 Id. We further clarified the mechanics of this cause 

of action in In re Citx Corp., 448 F.3d 672 (3d Cir. 2006). 

There, we stated that “deepening insolvency” in Pennsylvania 

is defined as “an injury to [a debtor‟s] corporate property 

from the fraudulent expansion of corporate debt and 

prolongation of corporate life.” 448 F.3d at 677. For such a 

claim to succeed, it is necessary to demonstrate that the 

directors‟ actions caused the deepening of insolvency. Id. at 

678. We also concluded that fraud is necessary to support a 

 

6 As Appellees have noted in their brief, courts and 

commentators have increasingly called into question the 

viability of “deepening insolvency” as an independent cause 

of action. See, e.g., In re Global Service Group LLC, 316 

B.R. 451 (Bankr. S.D.N.Y. 2004). Even if our precedent is 

erroneous, however, it can only be overturned by this Court 

en banc. See In re Merck & Co. Sec. Litig., 432 F.3d 262, 

274 (3d Cir. 2005) (“precedential cases cannot be overruled 

unless by the Circuit en banc”). Consequently, we are bound 

in our decision to follow Lafferty, which recognizes 

deepening insolvency as an independent cause of action in 

Pennsylvania. Moreover, because no party argued that the 

concept of deepening insolvency may not apply to, or may 

involve a different standard for, a non-profit corporation, we 

will not address that issue. See United States v. Albertson, 

645 F.3d 191, 195 (3d Cir. 2011) (“[W]e usually refrain from 

addressing an argument or issue not properly raised and 

discussed in the appellate briefing.”) (citation omitted).
24

claim of deepening insolvency, and that “a claim of 

negligence cannot sustain a deepening-insolvency cause of 

action.” Id. at 681. 

In Pennsylvania, 

[a]s a general rule, fraud consists in anything 

calculated to deceive, whether by single act or 

combination, or by suppression of truth, or a 

suggestion of what is false, whether it be by 

direct falsehood or by innuendo, by speech or 

silence, word of mouth, or look or gesture. It is 

any artifice by which a person is deceived to his 

disadvantage. 

In re Reichert’s Estate, 51 A.2d 615, 617 (Pa. 1947).

The Committee alleges that fraud “is apparent in the 

Board‟s failure to disclose to the creditors and the Bankruptcy 

Court the Board‟s decision made in January 2005 to close the 

Home and deplete the patient census, while delaying the 

bankruptcy filing until April 2005,” (Appellant‟s Br. at 38), 

and in “strategically omitting from the Monthly Operating 

Reports required by Debtors-in-Possession substantial fees 

paid post-petition to attorneys, accountants, and other 

consultants to transition the Home‟s resources to Elder Care,” 

(id. at 39.). The Committee points out that as early as 

January, 2005, the Board had apparently voted to cease 

admitting new patients. Without new patients and the 

governmental and insurance support that they would bring, it 

would be nearly impossible for the Home to generate the 

income needed to operate. The Committee also notes that a 

consultant stated that 
25

[f]rom my 2005 meetings with Arthur Baldwin 

it became clear to me that he was determined to 

shut the Lemington nursing facility down and 

had no interest in listening to or discussing any 

ideas or plans which could lead to its continued

operation. . . . Unknown to me at the time was 

that the Lemington Board had already decided 

to shut down the home.

(A. 893.) The Committee also noted that a February 24, 2005 

memorandum from the United Way of Allegheny County 

reflects that Chairperson Baldwin had already informed 

county officials that the Home would file for bankruptcy, 

“which will lead to the closing of Lemington long-term care 

and assisted living,” and result in the transfer of its residents 

to other county facilities. (A. 798.) The Committee further

points out that Attorney Robert Sable wrote a letter to 

Highmark Blue Cross Blue Shield, provider of health 

insurance for the Home, on March 30, 2005, advising them 

that employee health care coverage was needed for “only an 

additional 60 days until the transition can take place.” (A. 

1916.) The Committee thus asserts that, although the Board 

knew that its actions would cause further deterioration of the 

Home‟s finances to the detriment of its creditors, by its 

silence, the Board consciously defrauded the Home‟s

creditors by implementing these policies and delaying the 

filing of bankruptcy for a period of four months.

Furthermore, with respect to the officers, the Committee 

alleges that, inter alia, the officers continued to commingle 

the Debtor‟s funds with related entities, continued to breach 

their fiduciary duties, continued to do business with vendors 

although they knew that the Home was insolvent, failed to 

collect Medicare receivables, upheld the policy of no patient 
26

admissions, and directed the post-petition transfer of Debtor‟s 

kitchen and catering equipment, among other items, to related 

entities. 

Considering this evidence in the light most favorable 

to the Committee as the non-moving party, we find that there

is a genuine issue of material fact as to whether the directors 

and officers fraudulently contributed to deepening the 

insolvency of the Home. Summary judgment is therefore 

inappropriate with respect to the Committee‟s deepening 

insolvency claim.

III.

For the foregoing reasons, we will vacate the District 

Court‟s grant of summary judgment on the breach of 

fiduciary duty and deepening insolvency claims, and will 

remand for trial on these issues.