Jack Nelson Jones Professional Association

November 14-20, 2016

Progressive Eldercare Svcs. – Saline, Inc. v. Cauffiel, 2016 Ark. App. 523 (November 2, 2016)

This appeal comes from the Saline County Circuit Court, Honorable Gary Arnold presiding. This case concerns the charitable immunity doctrine.

Carolyn Sue Cauffiel was a resident of Progressive Eldercare Services in Saline County, doing business as Heartland Rehabilitation and Care Center (Progressive), from February 29, 2012, to July 22, 2012, and passed away on July 25, 2012. On June 14, 2013, Terry Cauffiel, Carolyn’s son, as administrator of her estate and on behalf of her wrongful-death beneficiaries, filed a complaint in the Saline County Circuit Court against Progressive. The complaint alleged numerous causes of actions, including negligence and medical malpractice. Progressive answered the complaint and subsequently filed a motion arguing it was immune from suit because of the charitable immunity doctrine. Cauffiel responded and argued that not only was Progressive not entitled to charitable immunity, it was abusing the charitable form to avoid liability. After a hearing, the circuit court denied Progressive’s motion because there were material issues of fact necessitating a trial before a jury or other factfinder. The foremost issue of fact was the argument that Progressive was simply a shell that was abusing its appearance of being a qualifying charity under the doctrine. Progressive appealed the circuit court’s ruling.

On appeal, the Court explained that the essence of the charitable-immunity doctrine is that entities created and maintained exclusively for charity may not have their assets diminished by execution in favor of one injured by acts of persons charged with duties under the entity. When determining whether a corporation is entitled to charitable immunity, Arkansas courts consider eight factors: (1) whether the organization’s charter limits it to charitable or eleemosynary purposes; (2) whether the organization’s charter contains a “not-for-profit” limitation; (3) whether the organization’s goal is to break even; (4) whether the organization earned a profit; (5) whether any profit or surplus must be used for charitable or eleemosynary purposes; (6) whether the organization depends on contributions and donations for its existence; (7) whether the organization provides its services free of charge to those unable to pay; and (8) whether the directors and officers receive compensation. Whether the charitable entity form has been abused is a “pivotal issue” in determining a defendant’s entitlement to charitable immunity. The Court added that the factors were illustrative, not exhaustive, and no one factor is dispositive.

Progressive argued that it fulfilled all the factors set forth under Arkansas law. Cauffiel did not contest the facts underlying the factors per se, but did argue that Progressive had structured its business in such a way to abuse the charitable form. Cauffiel asserted that Progressive’s profit was concealed by paying various related entities for rent, management, janitorial services, staffing services, and information technology services.

Cauffiel argued that, while Progressive’s articles of incorporation included the necessary statutory language for a nonprofit and charitable entity, it did not depend on contributions or donations for its existence, the majority of its revenue came from Medicare and Medicaid, its bad-debt expense was insignificant when compared to the amount of revenue generated, and it passed its profits to other related entities in order to maintain charitable status. Cauffiel explained that four of the five independent contractors on Progressive’s payroll—which received a combined total of over $4.5 million annually—were related entities, and three of these independent contractors were all incorporated by, and have the same registered agent of service as, Progressive. Cauffiel also noted that John Ponthie, Ross Ponthie, and Mark Thompson, owners of Progressive, were also owners of several of these independent contractors. Finally, Cauffiel explained that Progressive appeared to use a related “captive insurer” for its professional-liability insurance, which was consistent with a for-profit entity. According to Cauffiel’s accounting expert, the cost of Progressive’s insurance, $499,800, seemed extremely high for the amount of coverage provided, $150,000 per occurrence and $600,000 aggregate; this “captive insurer” method is generally used by for-profit entities for tax advantage purposes.

Cauffiel presented evidence that Progressive, which appeared on paper to not have a profit, was actually making a significant profit but was funneling its profits to other companies that it owned or that were related entities. Progressive contended that its payments to its related entities were reasonable. However, the Court pointed out that the reasonableness of payments to related entities was a question of fact. Cauffiel also presented evidence that Progressive was using a related captive insurer, which Cauffiel’s expert testified was a structure consistent with a for-profit company; not a nonprofit. According to the Court, this evidence also raised a question of fact on the issue of Progressive’s intent. Because this was a case in which genuine issues of material fact remained to be tried as to whether Progressive abused the charitable form and whether it was, in fact, a nonprofit, charitable organization, the Court affirmed the circuit court’s ruling.