Neal v. Davis Nursing Ass'n

Cite as 2015 Ark. App. 478

ARKANSAS COURT OF APPEALS
DIVISION IV
No. CV-14-985

GRACIE NEAL, AS PERSONAL Opinion Delivered September 16, 2015
REPRESENTATIVE OF THE ESTATE
OF JOHNNY NEWBORN, AND ON APPEAL FROM THE JEFFERSON
BEHALF OF THE WRONGFUL COUNTY CIRCUIT COURT
DEATH BENEFICIARIES OF JOHNNY [NO. CV 2013-217-5]
NEWBORN
APPELLANT HONORABLE JODI RAINES
DENNIS, JUDGE
V.
REVERSED AND REMANDED

DAVIS NURSING ASSOCIATION
d/b/a DAVIS LIFE CARE CENTER
APPELLEE

RITA W. GRUBER, Judge

This appeal follows an order granting summary judgment to Davis Life Care Center,

a long-term-care provider, based upon the doctrine of charitable immunity. The sole issue

on appeal is whether the trial court properly concluded that Davis was immune from suit.

After a de novo review, we conclude that the trial court erred in determining on summary

judgment that the charitable-immunity doctrine precluded Davis from suit. We reverse and

remand this case for further proceedings.

Johnny Newborn resided at Davis Life Care Center (Davis) from May 18, 2011, until

his death on December 6, 2011. Following his death, Gracie M. Neal, Mr. Newborn’s sister

and the appellant, was appointed as personal representative of his estate for the purpose of

pursuing a personal-injury, wrongful-death action.
Cite as 2015 Ark. App. 478

On April 25, 2013, Neal sued Davis on behalf of the estate of Johnny Newborn

alleging (1) negligence, (2) medical malpractice, (3) breach of the admission agreement, (4)

violations of the Long-Term Care Facility Residents’ Rights Act, and (5) breach of the

provider agreement. The essence of her case was that, while in Davis’s care, Johnny

Newborn suffered numerous injuries, including multiple infected bedsores, improper catheter

care that led to erosion of the penis, multiple urinary tract infections, malnutrition,

dehydration, aspiration, and ultimately, death. She sought compensatory and punitive

damages, attorneys’ fees, and costs.

On November 14, 2013, Davis filed a motion for summary judgment claiming

entitlement to charitable immunity. Neal opposed the motion. Ultimately, the trial court

granted summary judgment to Davis. In the order for summary judgment, the court

concluded that Neal did not provide any evidence that refuted the material facts proving that

Davis is a nonprofit organization created for charitable purposes. This timely appeal followed.

The doctrine of charitable immunity is premised on the idea that an entity created and

maintained exclusively for charity should not have its assets diminished by judgments in favor

of one injured by the charity’s agent. George v. Jefferson Hosp. Ass’n, 337 Ark. 206, 987

S.W.2d 710 (1999). Because the doctrine results in a limitation of potentially responsible

persons whom an injured party may sue, our courts give it a very narrow construction. Id.

The party seeking to benefit from the affirmative defense of charitable immunity bears the

burden of proving its entitlement to it. Carnell v. Ark. Elder Outreach of Little Rock, Inc., 2012

Ark. App. 698, 425 S.W.3d 787.

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Our courts have adopted eight factors to review when deciding whether a corporation

is entitled to charitable immunity. Masterson v. Stambuck, 321 Ark. 391, 401, 902 S.W.2d 803,

809 (1995). These factors include:

(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.

Id. These factors are illustrative, not exhaustive, and no one factor is dispositive of charitable

status. Id. at 401, 902 S.W.3d at 810. In addition to these factors, “whether the charitable

entity form has been abused” is a “pivotal issue” in determining a defendant’s entitlement to

charitable immunity. Watkins v. Ark. Elder Outreach of Little Rock, Inc., 2012 Ark. App. 301,

at 12, 420 S.W.3d 477, 484.

When addressing a question of law, we conduct a de novo review of an order granting

summary judgment. Ark. Elder Outreach of Little Rock, Inc. v. Thompson, 2012 Ark. App. 681,

425 S.W.3d 779. On review, we must determine if summary judgment was appropriate based

on whether the evidentiary items presented by the moving party left a material question of

fact unanswered. Id. Our supreme court describes the appellate court’s inquiry into

charitable-immunity status as follows:

While there may be fact issues involved, they are not matters of disputed fact.
Rather, they are differing legal interpretations of undisputed facts. In such cases, an
appellate court should grant summary judgment where reasonable persons would not
reach different conclusions based upon those undisputed facts.

George, 337 Ark. at 212–13, 987 S.W.2d at 713. We view the evidence in a light most

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favorable to the party against whom the motion was filed, resolving all doubts and inferences

against the moving party. Id. at 210, 987 S.W.2d at 712.

Our analysis begins with a consideration of the Masterson factors. It is undisputed that

Davis satisfies factors 1, 2, and 8. Davis’s charter limits its operation to charitable purposes and

contains a not-for-profit limitation. Additionally, its board members and officers serve

without compensation. The evidence as it relates to the remaining factors is not clearly in

Davis’s favor.

Whether Davis’s Goal Was to Break Even

We next consider whether Davis’s goal was to break even. Its articles of incorporation

and mission statement do not specifically address this issue, and Davis admits that it does not

strictly seek to break even. However, it presented affidavits from Kenny Bonds, a board

member since 2001, and Jay Hickey, a CPA who has consulted for Davis for seven years, that

indicate that Davis does not earn a profit. Davis uses this evidence to support its contention

that it intends to merely break even. Jay Hickey’s affidavit provided that Davis’s “charitable

business approach” resulted in it experiencing annual losses. Nowhere does Davis define how

the charitable business approach differs from a typical business approach. Furthermore, a

portion of Davis’s mission statement provides that it “must operate according to sound

economic principles.” Whether Davis’s goal was to break even is susceptible to different

interpretations by reasonable minds and is a question of fact.

Whether Davis Earned a Profit

Davis utilized affidavits from Kenny Bonds and Jay Hickey to establish that it does not

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earn a profit. They each testified that Davis has operated at a loss since its inception as a

nonprofit entity in 2001.1 One might inquire as to how Davis has had the ability to remain

operational after over a decade of financial losses. When discussing a nonprofit hospital in

George, our supreme court noted that modern hospitals are “complex and expensive,

technological, economic and medical enterprises that can ill afford to come short of [breaking]

even in their financial integrity.” George, 337 Ark. at 213, 987 S.W.2d at 713. This language

regarding hospitals is equally applicable to nursing homes. While this language was used in

George to illustrate that “the existence of a profit is not determinative of charitable status,” we

conclude that the lack of a profit in a longstanding business could cause reasonable minds to

question whether an entity is truly operating at a deficit each year or manipulating its financial

records to create the perception that it is operating at a deficit.

Whether Davis Must Use Any Profit or Surplus for Charitable Purposes

We must also consider whether Davis must use any profit or surplus for charitable

purposes. According to Davis’s financial records, it has never earned a profit, and therefore,

it has never had a surplus to use. Davis’s bylaws require that its board members and officers

serve without pay, and its articles of incorporation provide that no part of its net earnings will

inure to the benefit or be distributable to any of its directors, officers, or other private

individuals. Thus, Davis contends that any profits earned would be held and reinvested in its

continued operation. Even so, a question remains as to whether reinvesting profits is

sufficient to satisfy this factor especially if the evidence, taken as a whole, challenges the true

1
Prior to 2001, Davis operated as a for-profit entity.

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charitable nature of the facility.

Whether Davis Provides Its Services Free of Charge to Those Unable to Pay and Whether It
Depends On Contributions and Donations for Its Existence

Another consideration is whether Davis offers services free of charge to those unable

to pay. The affidavits of Kenny Bonds and Jay Hickey reflect that it gives some free care in

that it forgives bad debts of those who cannot or do not pay for its services and that it charges

its private-pay residents the lowest rate allowed, resulting in a reduction of its overall revenue.

The evidence before us indicates that Davis admits patients with the presumption that they

will pay their bills: all patients admitted to Davis are initially charged for their care, and only

when they cannot or do not pay are those debts forgiven. Davis failed to establish that

forgiving uncollectable debt is equivalent to providing free services. Moreover, the amount

of debt forgiven by those who do not or cannot pay is minuscule in comparison to Davis’s

overall revenue. The bad debt forgiven by Davis amounted to less than 1% of revenue in

2011, 5.76% in 2012, and 2.2% in 2013.2 We hold that reasonable minds could view this

minute amount of debt forgiveness as creating a facade of charity instead of a true charity.

Additionally, Davis clearly fails to satisfy the Masterson factor regarding dependence on

charitable donations. The evidence shows that it only received $100 in donations each year

in 2012 and 2013. These paltry donations could not have had any meaningful effect on

Davis’s finances. While Davis clearly fails to satisfy this factor, our supreme court has held that

2
In 2011, Davis’s total revenue was $9,389,273, and it forgave $90,000 in bad-debt
expenses. In 2012, its total revenue was $9,648,078 and $555,509 in bad-debt expenses was
forgiven. In 2013, Davis’s total revenue was $8,169,493, and it forgave $179,648 in bad-debt
expenses.

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it would be extremely difficult for a modern hospital to rely wholly or predominantly on

charitable donations for its operation. George, supra. This logic naturally extends to nursing

homes, which are similar entities providing similar services. We recognize that the failure to

satisfy this element does not necessarily negate an overall charitable purpose. However, when

this is considered in the context of Davis’s similarly meager amount of bad debt forgiven,

reasonable minds could conclude that Davis was not truly charitable or that Davis was merely

manipulating the charitable form to avoid purchasing liability insurance and to shield itself

from judgment, and therefore, presents a factual issue.

Whether Davis Has Abused the Charitable Entity Form

A final consideration is whether the evidence could cause reasonable minds to disagree

about whether Davis has abused the charitable-entity form. Watkins, supra. The flow of

money and the relationship between the facility and other service providers can be critical to

determining whether an entity is truly charitable or merely a conduit through which to funnel

money and divert profits. Of particular interest to us is a contract between Davis and

Morrison Management Specialists. Davis had a contract with Morrison Management

Specialists to provide dining, housekeeping, and maintenance services. The agreement

between Davis and Morrison provided these services to Davis, Hazel Street Nursing

Association, Garden Point Living Center, Whispering Knoll Limited Partnership, and The

Gardens Limited Partnership. Davis contends that each of these entities is separately owned.

However, Davis’s contract with Morrison Management Specialists provides that each of these

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entities was collectively doing business as Davis Life Care Services.3 Reasonable minds could

conclude that Davis Life Care Services was operating as a holding company. We know that

at least two of these entities are for-profit ventures. This contract, at the very least, raises

factual questions regarding whether Davis was abusing the charitable-entity form by utilizing

Davis Life Care Services as a means to conceal profits.

After a de novo review wherein we resolved all doubts and inferences against Davis,

we conclude that reasonable persons could reach different conclusions based upon the

undisputed facts presented. Considered together, Davis’s relationship to Davis Life Care

Services, its failure to ever earn a profit, its questionable characterization of free care and lack

of charitable donations, and its intentions as it relates to profitability could reasonably result

in the conclusion that Davis was not truly operating as a charity and, therefore, not entitled

to charitable immunity.

Accordingly, we reverse the order of summary judgment and remand this case for

further proceedings.

Reversed and remanded.

KINARD and HIXSON, JJ., agree.

Reddick Moss, PLLC, by: Brian D. Reddick, Matthew D. Swindle, and Robert W. Francis,
for appellant.

Anderson, Murphy & Hopkins, L.L.P., by: David A. Littleton and Mark D. Wankum, for
appellee.

3
Additionally, Davis shares a board of directors with at least one of the other entities
under the Davis Life Care Services umbrella.

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