Employment Law | Expert Legal Commentary

March 22, 2010

People v. Highgate LTC Management: Making an LLC Criminally Liable

People v. Highgate LTC Management LLC

By Jeremy Gray of Zuber Lawler & Del Duca

People v. Highgate LTC Management: Making an LLC Criminally Liable

The New York Supreme Court, Appellate Division, has held that an LLC can be criminally liable for willfully violating health laws and falsifying business records in the operation of a nursing home. In People v. Highgate LTC Management LLC, 69 A.D.3d 185, 887 N.Y.S.2d 298 (2009), the Appellate Division of the New York Supreme Court expanded a state penal law regarding the criminal liability of corporations to cover a limited liability company as well. The Court found that an LLC is a “hybrid” entity, that case law has developed sufficient analogous principles between corporations and LLCs, and that this matter involved such an important public interest that the extension of the corporation law to LLCs was appropriate, despite the lack of legislative language authorizing that extension.

BACKGROUND

Highgate LTC Management LLC (“Highgate”), a limited liability company (“LLC”), operated several nursing homes in New York. After an investigation in 2005 regarding the gross neglect of a comatose patient in one of the facilities, five of Highgate’s employees were convicted of various crimes relating to the care. Hidden cameras documented that employees failed to perform certain required caretaking services, though they still falsely recorded in the patient’s medical records that the services had been performed.

The New York Attorney General subsequently charged Highgate with six counts of Willful Violation of Health Laws and three counts of Falsifying Business Records in the Second Degree arising out of Highgate’s employees’ acts. After a jury trial, Highgate was convicted as charged, sentenced to a one-year conditional discharge prohibiting it from operating nursing homes in New York, and fined $15,000.

Highgate appealed the decision, arguing that LLCs cannot be held criminally liable for the acts of its employees committed within the scope of their employment. Specifically, Highgate argued that the doctrine of respondeat superior cannot be relied upon to hold an LLC criminally liable when, as here, intent is an element of the crimes charged.

The Court Can Rely on Respondeat Superior to Hold an LLC Criminally Liable

In New York common law, there has been a “traditional reluctance to employ the doctrine of vicarious liability in criminal prosecutions” for crimes involving intent, because usually only the actual bad actors can have the requisite intent to commit the crime. People v. Highgate LTC Management LLC, 69 A.D.3d 185, 887 N.Y.S.2d 298, 301 (2009). A corporation can only act through its agents; it cannot form its own independent intent.

The exception to this was codified in New York in NY Penal Law section 20.20, which states that “[a] corporation is guilty of an offense when: (a) The conduct constituting the offense consists of an omission to discharge a specific duty of affirmative performance imposed on corporations by law; or (b) The conduct constituting the offense is engaged in, authorized, solicited, requested, commanded, or recklessly tolerated by the board of directors or by a high managerial agent acting within the scope of his employment and in behalf of the corporation; or (c) The conduct constituting the offense is engaged in by an agent of the corporation while acting within the scope of his employment and in behalf of the corporation, and the offense is (i) a misdemeanor or a violation, (ii) one defined by a statute which clearly indicates a legislative intent to impose such criminal liability on a corporation, or (iii) any offense set forth in title twenty-seven of article seventy-one of the environmental conservation law.” NY Penal Law section 20.20(2).

This penal law expressly states that it applies only to “corporations.” Highgate argued that while this code section could apply to hold a corporation criminally liable for the types of intentional acts committed by its employees, the law deviates from the common law and therefore should be strictly construed as not applying to LLCs.  Highgate, 887 N.Y.S.2d at 300.

The Highgate Court disagreed, referring to an LLC as “a hybrid entity” and citing both state cases and the U.S. Supreme Court as holding that “’corporations and other associations…can be guilty of ‘knowing’ or ‘willful’ violations of regulatory statutes through the doctrine of respondeat superior’” Id. (emphasis in opinion)(citing U.S. v. A&P Trucking Co, 358 U.S. 121, 125 (1958)). The Highgate Court pointed out that this theory acts to hold the entity liable for its own acts, rather than having the acts of another merely imputed on to it. Id. at 301.

The Highgate Court acknowledged that Penal Law section 20.20 was not directly applicable to an LLC, but stated that “long-standing analogous principles that have evolved through case law remain dispositive.” Id. Ultimately, the Court found that the code needed to be extended to the defendant due to the circumstances – apparently it just didn’t seem right to the Court that a corporation would be held liable here but an LLC would not. The Court stated: “given the important public interest at issue and the regulatory nature of the crimes committed by defendant’s employees, we agree with the People that there is no rational basis to exempt defendant from criminal liability under these circumstances, when a corporate nursing home operator would be held accountable.” Id. The Court thus upheld the conviction.

CONCLUSION

Highgate should serve as a reminder to all business entities that they can be held liable for the criminal acts of their employees. Businesses should strive to ensure proper supervision of employees and implement measures to minimize the risk of criminal liability. For guidance on whether your business is doing enough to protect itself, seek the advice of an experienced employment attorney.

But on a more unsettling note, Highgate indicates that the courts may ignore the legal corporate structure if they feel the circumstances warrant it. While certainly the defining line between corporations and LLCs seems increasingly blurry, the ability to take the dramatic step of extending criminal liability where there previously was none is typically the purview of the legislature, not the courts. However, courts may recognize that many state statutes have not kept pace with the recent surge of popularity of the LLC structure, failing to amend appropriate provisions to address or include LLCs. The Highgate decision seems to reflect this situation – a court having to apply a statute that, at least in the court’s view, has not been updated to include LLCs where certainly that would be intended.

Still, the Highgate decision may indicate a kind of slippery slope – is the statute equally applicable to both member-managed and manager-managed LLCs? Could it be extended to partnerships or LLPs if the facts were egregious enough? How does one determine whether the crime is of sufficient “important public interest” to warrant this statutory extension? Time will tell whether other courts will be willing to extend criminal liability in this manner, or whether legislatures will endeavor to update statutes to specifically address the newer LLC structure.

About the Author

Jeremy Gray is a Partner of Zuber Lawler & Del Duca, focusing on employment law.

Image Credit: ©iStockphoto.com/kirel

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