New Obstacles to Arbitration

| FROM THE PRINT EDITION |
 
 

Carin MarneySponsored Legal Report

It is common practice in long term care and other health care facilities for a resident or a resident’s family member to sign an arbitration agreement upon admission. Such agreements require the resident to arbitrate any dispute that may arise out of his or her stay or care received at the facility. Arbitration agreements have proven to be a cost-effective and efficient method for resolving disputes.

Arbitration agreements have long been favored under Washington state law. However, in May 2010, the Washington Court of Appeals in the Woodall case limited enforcement to claims asserted by the resident and/or statutory beneficiaries who actually signed the agreement. Prior to this, courts routinely enforced arbitration agreements in total by virtue of the resident’s signature, even as to claims asserted by non-signatory heirs. As a result, Washington courts are now splitting up, or bifurcating, claims asserted in lawsuits against health care providers.

In Woodall, nursing home resident Henry Woodall, 86, voluntarily signed a “resident and facility arbitration agreement,” in which he agreed to submit to binding arbitration in the event of a dispute. The arbitration agreement bound “all persons,” including “any spouse, children or heirs” of Mr. Woodall. After Mr. Woodall died in July 2007, his son sued the nursing home, bringing survivorship claims on behalf of his father and wrongful death claims on behalf of Mr. Woodall’s heirs. When the nursing home requested that the trial court compel Mr. Woodall’s son to participate in arbitration pursuant to the clear language of the arbitration agreement, the court denied the request, in part.

The court upheld the arbitration agreement, holding that Mr. Woodall’s survivorship claims, meaning those that he could assert on his own behalf had he survived, must be arbitrated because he signed the arbitration agreement. However, the wrongful death claims asserted by his surviving heirs who did not sign the agreement were not subject to arbitration.

The Court of Appeals upheld the trial court’s ruling, beginning with this basic principle: “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” With that principle in mind, the court held that: (1) because the survival claim was essentially Mr. Woodall’s own claim, it was covered by Mr. Woodall’s arbitration agreement with the nursing home; and (2) the wrongful death was a separate cause of action that belonged exclusively to Mr. Woodall’s heirs. Since Mr. Woodall’s heirs were not parties to the arbitration agreement, the court concluded that the wrongful death claims were not subject to binding arbitration.

The holding in Woodall reflects that arbitration agreements are indeed enforceable. However, the Woodall ruling has resulted in a cumbersome outcome. The claims of the resident and statutory heirs who signed the agreement are being tried in private arbitration, while the claims of the heirs who did not sign the agreement will be tried separately in the court system. Despite the court’s acknowledgment that public policy favors arbitration and resolution of claims in one forum, it determined that such a consideration does not overcome the policy that one who is not a party to an agreement to arbitrate cannot generally be required to arbitrate.

Providers must be aware that the traditional outcome of these agreements—arbitrating the claims of all plaintiffs in a wrongful death or personal injury lawsuit at one time—is not achievable at this time absent all potential heirs signing an arbitration agreement with the health care provider. While this process is not perfect, the advantages to arbitrating claims against health care providers still outweigh these new obstacles.

 

Sponsored

Legal Briefs: Private Foundations

Legal Briefs: Private Foundations

Taking them beyond checkbook philanthropy.
| FROM THE PRINT EDITION |
 
 
 
Today, we are seeing more sophisticated inquiries by founders of private foundations in line with the discussions surrounding social impact investing. For many years, high-net-worth individuals have used the same formula to set up private foundations. An individual or married couple — the donors — establish an entity whose assets are to be used for general charitable purposes, qualifying it as a tax-exempt foundation. The donors transfer assets — often appreciated stock — to the foundation. This stock is then sold, allowing the donors to avoid income tax on the gain. The donors retain distribution oversight by serving on the foundation’s board. The foundation essentially becomes their philanthropic checkbook.
 
Tax-exempt organizations must be organized and operated for an exempt purpose. A private foundation is an organization that qualifies for tax-exempt status under Internal Revenue Code (“Code”) §501(c)(3) but does not qualify as a public charity under §509(a). The rules and regulations applying to private foundations are much stricter than those that apply to public charities.
 
As private foundations, the “checkbook foundations” are subject to various excise tax rules, including Code §4942, which requires private nonoperating foundations to make certain minimum annual distributions for charitable purposes. The amount required to be distributed is measured by a percentage of the private foundation’s investment assets. Generally, the annual minimum distributable amount is equal to 5 percent of the aggregate fair market value of all of the foundation’s assets, reduced by certain adjustments. Private foundations that fail to meet this requirement are subject to an excise tax on the undistributed income.
 
Today’s donors question why they would want to drain their foundation’s funds, which seems to be the policy goal of the 5 percent distribution requirement. What about lending funds to a charitable organization recipient or investing directly in the underlying charitable cause?
 
 
 
Program-related investments (PRIs) have been used for many years. Generally, a private foundation that makes investments jeopardizing its ability to carry out its exempt functions is subject to an excise tax under Code §4944. However, PRIs are an exception to that rule. Under the regulations, an investment qualifies as a PRI if: (a) its primary purpose is to accomplish the foundation’s exempt purpose(s); (b) the production of income or appreciation of property is not a significant purpose of the investment; and (c) none of the purposes described in Code §170(c)(2)(D) (i.e., carrying on propaganda or otherwise attempting to influence legislation) are a purpose of the investment. 
 
Examples in the final regulations issued earlier this year illustrate a variety of PRI investment terms and structures, including equity investments, loans, loans with equity components and guarantee arrangements. Smaller foundations take comfort that the big name foundations were using PRIs long before the regulations were final. Since 2009, the Bill & Melinda Gates Foundation has complemented its grants budget with a substantial allocation for PRIs.
 
Foundations are also pushing the boundaries of permissible investments in the area of mission related investments (MRIs). MRIs are financial investments that further the foundation’s exempt purpose. Unlike PRIs, MRIs are included in the foundation’s investment assets and are not qualifying distributions for purposes of the 5 percent distribution requirement under Code §4942. In addition, MRIs must satisfy applicable prudent investment standards, although the IRS confirmed in Notice 2015-62 that foundation managers may consider the relationship of a proposed investment to the foundation’s charitable purpose when determining whether an investment is prudent.
 
Careful consideration of the foundation’s charitable purpose, investment policy, and proper use of PRIs and MRIs allow today’s foundations to take their philanthropy far beyond the checkbook-only days.