Killing the Goose That Laid the Golden Egg

Opening the floodgates to expanded hospital liability, the Superior Court Appellate Division adopted an enlarged view of the doctrine of apparent authority, and created a rebuttable presumption of reliance, shifting the burden of proof to the defense. See Cordero v. Christ Hospital, 403 N.J. Super. 306 (App. Div. 2008). In Cordero, the patient was admitted to Christ Hospital and underwent surgery to facilitate dialysis. Dr. Selvia Zaklama, an independent contractor, provided anesthesia services. The patient suffered brain damage after her blood pressure and heart rate dropped during surgery; she remained in a vegetative state until she died three years later.

The plaintiff sued the doctor and brought an apparent authority claim against the hospital. The trial court dismissed the claim for apparent authority, finding no evidence that the hospital actively held out Dr. Zaklama as its agent or misled the plaintiff into believing Dr. Zaklama was its agent. The Appellate Division reversed, finding that the hospital's inaction allowed the patient to believe Zaklama was acting on its behalf. Notwithstanding a significant settlement by the doctor, the case was remanded for further proceedings against the hospital.

The Cordero court stated, “when a hospital provides a doctor for a patient and the totality of the circumstances created by the hospital's action and inaction would lead a patient to reasonably believe the doctor's care is rendered in behalf of the hospital, the hospital has held out that doctor as its agent.” 403 N.J. Super. at 311. The court continued, “We also hold that when a hospital patient accepts a doctor's care under such circumstances, the patient's acceptance in the reasonable belief the doctor is rendering treatment in behalf of the hospital may be presumed unless rebutted.” Ibid. The court set forth factors to consider in determining whether the totality of the circumstance would lead the average patient to believe the doctor was acting on behalf of the hospital. Id. at 318-19.

At the time of the Cordero decision, many felt that it was contrary to logic, practicality and common sense. This was especially true considering that, in the years preceding this decision, many New Jersey hospitals had closed, and most of them were in underserved communities. With government resources tightening, many felt that expanding hospital liability would only increase the strain. Nevertheless, the decision withheld further scrutiny and has been extended to virtually any specialty that routinely sees a patient in the hospital as opposed to the office, absent proof that the patient either chose the specific provider or had actual knowledge of the provider's independence. The Cordero factors have become part of the Model Civil Jury Charge 5.50 regarding apparent authority liability in medical malpractice actions.

Insurance Consequences of Cordero and Its Ilk

Many people assume that hospitals remain largely unexposed to malpractice issues because of the ready availability of liability insurance. Even if this were true, insurers rate hospitals based on an evaluation of its employees. In most cases, independent contractors are not included in those ratings. Foisting liability on hospitals for independent contractors has increased ratings exposure and insurance costs.

Further, most hospitals have discovered that procuring first-layer liability insurance is extraordinarily expensive. Therefore, many, if not most, hospitals have funded self-insurance programs, and primary or first-layer coverage comes exclusively from hospital profit. The effort of taking any money available above expenses and setting it aside for liability exposure depletes the hospitals' ability to provide needed and expected care.

The Statutory Charitable Immunity Cap, and Its Detractors

Recognizing the importance of hospitals in our society, the New Jersey Legislature wisely enacted the Charitable Immunity Act, N.J.S.A. 2A:53A-7, et seq ., which provides limited hospital immunity for non-profit hospitals, capping their liability at $250,000. This cap applies only to liability assigned to the hospital itself, not liability of employees for whom the hospital either self insures or procures liability insurance.

The portion of the Charitable Immunity Act governing a hospital's limited liability is found at N.J.S.A 2A:53A-8, which provides in relevant part:

Notwithstanding the provisions of the foregoing paragraph, any nonprofit corporation ' organized exclusively for hospital purposes shall be liable to respond in damages to such beneficiary who shall suffer damage from the negligence of such corporation ' to an amount not exceeding $250,000, together with interest and costs of suit, as the result of any one accident and to the extent to which such damage, together with such interest and costs of suit, shall exceed the sum of $250,000, such nonprofit corporation ' organized exclusively for hospital purposes shall not be liable therefore.

The “foregoing paragraph” reference the preceding passage makes is to N.J.S.A. 2A:53A-7, which provides for absolute immunity for non-profit corporations organized exclusively for charitable, religious or educational services, as opposed to limited liability for those non-profits providing hospital services. It is this charitable immunity cap that is now increasingly under attack by the plaintiffs' bar in medical malpractice actions. There has been a repeated barrage in case after case seeking to erode or vitiate the cap, premised on the claim that the large hospital systems identified above have such a large income stream, derive so much “profit” above expenses and pay their CEOs like traditional for-profit companies, that their “non-profit” status is merely a statutory scam. Unfortunately, this mantra has gained some judicial traction of late and has encouraged the plaintiffs' bar to continue the forward momentum, against the backdrop of ever-increasing expansion of hospital liability.

The plaintiffs' bar has attacked the application of this cap in medical negligence tort suits against hospitals with the argument that the non-profit status is a fiction for federal tax purposes. Plaintiffs have argued that the size, methods of operation, compensation and other organizational attributes establish that they are not truly “non-profit” entities entitled to the cap. The argument continues that the non-profit hospitals act in near identical fashion to the for-profit hospitals, except in so far as tax status is considered. It is asserted that the “substantial profits” earned are instead distributed as additional salaries and expenses, as opposed to in payments to shareholders. Plaintiffs posit that the statute is ripe for constitutional challenge, since it unfairly discriminates against similarly situated for-profit hospitals, while the plaintiffs directly suffer harm from the equal protection violation.

Grist for the Argument

In support of applications to discover hospital finances, the plaintiffs' bar has been largely relying on Klein v. Bristol Glen, Inc., 2010 WL 3075582 (App. Div., Aug. 4, 2010), an unpublished decision in which the court ultimately granted the plaintiffs' request for financial discovery in order to determine the organization's source of funds, after finding that information to be critical in determining charitable status. Slip op. at 5.

The Appellate Division started its analysis by highlighting the fact that after “the New Jersey Supreme Court abrogated the doctrine of charitable immunity in the late 1950s, the Legislature responded by enacting the Charitable Immunity Act, N.J.S.A. 2A:53A-7 to -11, to restore charitable immunity as it existed at common law.” The appellate court set forth the statutory requirements which must be met: “To gain the protection of the Act's statutorily enumerated immunity the institution seeking immunity must demonstrate that it: 1) was formed for non profit purposes; 2) is organized exclusively for religious, charitable or educational purposes; and 3) was promoting such objectives and purposes at the time of the injury to Plaintiff who was then a beneficiary of the charitable works.” Id. at 6 (citations omitted).

The appellate court in Klein found “that an entity's non-profit and/or tax exempt status is irrelevant to the determination of whether that entity is organized exclusively for a charitable purpose.” Likewise, the fact that the entity performed a “valuable societal interest” was equally irrelevant to the ultimate question of immunity. Rather, the relevant inquiry focuses upon the defendant's method of operation, which must establish that the defendant's “dominant motive is charity [and not] some other form of enterprise.” Id. Critical to this inquiry, the court found, was the hospital's source of funds, since immunity will not apply if the amount of charitable donations are “too insignificant.” If most of the funding comes from either the government, insurance or the patient, the court held that immunity would not apply, since it would not have applied at common law. Id. at 5-6.

In ultimately reversing entry of summary judgment in favor of the hospital, and remanding the matter for further discovery into the organization's finances, the Appellate Division stated:

We agree with plaintiffs that in this case the trial court prematurely granted summary judgment in defendant's favor. Like the court in Abdallah'[Abdallah v. Occupational Ctr. of Hudson County, Inc., 351 N.J. Super. 280 (App. Div. 2002)], we are constrained to reverse and remand because 'the court's findings failed to address critical components of the charitable-status determination' which 'must be made based on an adequate and proper record.' The record is incomplete because plaintiffs allege they were denied the opportunity to present a clear picture of defendants' financial structure and 'source of funds.' Without that opportunity and discovery of financial information sought, the court could not have been in a position to determine whether defendants' 'dominant motive is charity [and not] some other form of enterprise.'

Id. at 6 (citations omitted).

In reality, Klein should have no bearing on whether a hospital qualifies for limited immunity. The Klein court analyzed whether a defendant was “charitable” within the meaning of N.J.S.A. 2A:53A-7, not whether a defendant was a “non-profit” corporation organized for “hospital purposes” within the meaning of N.J.S.A. 2A:53A-8. Indeed, the Klein decision does little to change the long-standing history of requiring courts to engage in a fact sensitive analysis in order to determine if an entity is organized exclusively for a “charitable” purpose. See, e.g., Ryan v. Holy Trinity Evangelical Lutheran Church, 175 N.J. 333, 343-46 (2003) (discussing the fact-sensitive analysis necessary to determine whether a corporation has a “charitable” purpose).

The court in Ryan distinguished corporations organized for a “charitable” purpose from those organized for “educational” or “religious” purposes. As the terms “educational” and “religious” have plain meanings subject to a literal reading, no further proof is necessary in order to establish the second prong of the charitable immunity standard ' that being that it is organized exclusively for those religious or educational purposes. 175 N.J. at 343-44, 346. On the other hand, a “charitable” purpose “is a more complex notion that defies precise definition.” Id. at 343. Therefore, “entities seeking the shelter of the Act by providing that they are 'organized exclusively for charitable purposes' must engage in the traditional factual analysis of Parker [Parker v. St. Stephen's Urban Dev. Corp., Inc., 243 N.J. Super. 317 (App. Div. 1990)], including a source of funds assessment.” Id. at 346.

Engaging in the same analysis, wouldn't “hospital” purposes also have a plain meaning, requiring no further analysis into the charitable nature? The answer is yes. But what plaintiffs have been doing is intermingling “non-profit” status with a “charitable” purpose. They have been relying largely upon the Klein court's statement that “an entity's non-profit and/or tax-exempt status is irrelevant to the determination of whether than entity is organized exclusively for a charitable purpose.” Klein, supra, at 5. This quote is being taken out of context. It simply separates the first prong of the test ' i.e., non-profit status ' from the second prong ' i.e., charitable status. In fact, they are specifically described as two separate elements by New Jersey's Supreme Court in Ryan, 175 N.J. at 342.

Tax-Exempt Status

Most courts faced with an application to discover the financial structure, or income stream, of a hospital system, have recognized this distinction and precluded discovery. However, a recent decision by the Tax Court of New Jersey has thrown a wrench into what used to be a simple inquiry, and has given the plaintiffs' bar another tool for its argument arsenal.

When determining whether a hospital is entitled to the $250,000 limitation of liability pursuant to N.J.S.A. 2A:53A-8, historically, courts have accepted proof of tax exemption in order to establish non-profit status. Then, in June of this year, AHS Hospital Corp. v. Town of Morristown, 28 N.J. Tax 456 (2015), was decided. In a matter of first impression, the New Jersey Tax Court denied the hospital's application for a property tax exemption, finding that the hospital failed to meet its burden of proof in establishing non-profit status.

Despite the prior separation of non-profit and charitable status, the Tax Court seemed to rely heavily on the state of hospitals, and their largely charitable nature, in 1913, when the federal income tax law became effective. The Tax Court also referred to a recent New Jersey Supreme Court decision, Kuchera v. Jersey Shore Family Health Center, 221 N.J. 239, 251 (2015), in which the State Supreme Court described “the evolving character of hospitals and healthcare.” The Supreme Court did so, however, to broaden what would constitute a “hospital purpose,” not challenge application of the cap on damages.

In ultimately concluding that the “subject property is being used substantially for profit,” the Tax Court found that the hospital system operated 21 facilities that were not hospitals, and operated in a virtually identical capacity to a for-profit facility. It paid its CEO nearly $10 million dollars and made routine capital improvements in the multiple millions of dollars. And it retained a portion of the profits from various contracts.

The court's conclusion was broad-reaching:

If it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions; and it is long established that “fictions arise from the law, and note law from fictions.” Accordingly, if the property tax exemption for modern non-profit hospitals is to exist at all in New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be. Clearly, the operation and function of modern non-profit hospitals do not meet the current criteria for property tax exemption under N.J.S.A. 54:4-3.6 and the applicable case law.

Id. at 536.

As a result of this recent decision, the plaintiffs' bar has asserted with much greater vigor an entitlement to financial data from hospitals as part of routine discovery in medical malpractice actions. Defendants have asserted in response that AHS Hospital Corp . is not determinative, as it dealt only with local property taxes; that prior rulings allowing discovery into finances of charitable institutions were under distinguishable circumstances; and that the Charitable Immunity Act is a remedial statute intended to be liberally construed.

Nevertheless, a recent trial court decision from August 2015 compelled a hospital system to comply with discovery requests seeking financial disclosures so that a plaintiff in a medical malpractice action could determine if the professed not-for-profit status should be upheld. See Shapiro v. Morristown Medical Center, MRS-L-3840-14 (Law Div. 2015)(unpublished). In that case, the defendant had refused to provide financial disclosures, arguing that it was not required to comply because it was an IRS 501(c)(3) organization. The trial court disagreed.

Conclusion

The aforementioned recent decisions have yet to be reviewed by New Jersey's highest court. However, it is clear from the trend that expansion of liability and limitation of defenses has been the goal of the plaintiffs' bar. From recent history, it is apparent that much success has been garnered in this war.

In this time of economic uncertainty, exposing one of our most precious institutions to further liability is a risky proposition. As physicians have begun to carry insurance with reduced limits of $1 million, the hospital defendant has quickly become the target defendant because of its perceived levels of self- and procured insurance. In many cases, it has the deepest pocket. But short-term gain for a few injured plaintiffs should not take precedence over the long-term health of an entire industry (pun intended). Different players in the industry have different profiles. The larger hospital systems may have an ability to pay or may function more like a for profit corporate empire than a small community hospital. Applying these conventions across the board irrespective of the size of the institution is not only dangerous, but ill conceived. Attacking even the largest of hospital systems could have a domino effect. One only needs to look at the recent history of asbestos litigation ' as the larger players have filed for bankruptcy, the smaller players in the industry have been elevated in the litigations and litigated nearly out of existence.

We are confident we do not want the same fate for our hospitals. Killing the goose that laid the golden egg is not a desirable outcome for any of the stakeholders.

Gary L. Riveles, a member of this newsletter's Board of Editors, is a partner in Dughi, Hewitt, and Domalewski, PC, in Cranford, NJ. Cyndee L. Allert is a senior associate with the firm. The opinions expressed in this article are those of the authors alone, and do not necessarily reflect the opinions of ALM, LJN or this publication.

Editor's note: Last month, the authors began discussion of a trend in New Jersey case law that, over the past several decades, has been moving that state toward the expansion of hospital liability through the continuous erosion of the statutorily imposed $250,000 charitable immunity cap. They continue their analysis of this trend and its consequences herein.

In Basil v. Wolf , 193 N.J. 38 (2007), New Jersey's Supreme Court rejected a claim for imputed liability against an insurer that had hired a physician to perform an independent medical examination. In doing so, however, the court explained that apparent authority imposes liability on the principal “not as the result of the reality of a contractual relationship but rather because of the actions of a principal or employer in somehow misleading the public into believing that the relationship or the authority exists.” The key question is “whether the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has the authority to perform the particular act in question.” Thus, in the context of a hospital and its independent contractor physicians, there would be apparent authority “in those cases where it can be shown that a hospital, by its actions, has held out a particular physician as its agent and/or employee and that a patient has accepted treatment from that physician in the reasonable belief that it is being rendered in behalf of the hospital.” Basil, 193 N.J. at 67 (citations omitted).

Cordero v. Christ Hospital

Opening the floodgates to expanded hospital liability, the Superior Court Appellate Division adopted an enlarged view of the doctrine of apparent authority, and created a rebuttable presumption of reliance, shifting the burden of proof to the defense. See Cordero v. Christ Hospital , 403 N.J. Super. 306 (App. Div. 2008). In Cordero, the patient was admitted to Christ Hospital and underwent surgery to facilitate dialysis. Dr. Selvia Zaklama, an independent contractor, provided anesthesia services. The patient suffered brain damage after her blood pressure and heart rate dropped during surgery; she remained in a vegetative state until she died three years later.

The plaintiff sued the doctor and brought an apparent authority claim against the hospital. The trial court dismissed the claim for apparent authority, finding no evidence that the hospital actively held out Dr. Zaklama as its agent or misled the plaintiff into believing Dr. Zaklama was its agent. The Appellate Division reversed, finding that the hospital's inaction allowed the patient to believe Zaklama was acting on its behalf. Notwithstanding a significant settlement by the doctor, the case was remanded for further proceedings against the hospital.

The Cordero court stated, “when a hospital provides a doctor for a patient and the totality of the circumstances created by the hospital's action and inaction would lead a patient to reasonably believe the doctor's care is rendered in behalf of the hospital, the hospital has held out that doctor as its agent.” 403 N.J. Super. at 311. The court continued, “We also hold that when a hospital patient accepts a doctor's care under such circumstances, the patient's acceptance in the reasonable belief the doctor is rendering treatment in behalf of the hospital may be presumed unless rebutted.” Ibid. The court set forth factors to consider in determining whether the totality of the circumstance would lead the average patient to believe the doctor was acting on behalf of the hospital. Id. at 318-19.

At the time of the Cordero decision, many felt that it was contrary to logic, practicality and common sense. This was especially true considering that, in the years preceding this decision, many New Jersey hospitals had closed, and most of them were in underserved communities. With government resources tightening, many felt that expanding hospital liability would only increase the strain. Nevertheless, the decision withheld further scrutiny and has been extended to virtually any specialty that routinely sees a patient in the hospital as opposed to the office, absent proof that the patient either chose the specific provider or had actual knowledge of the provider's independence. The Cordero factors have become part of the Model Civil Jury Charge 5.50 regarding apparent authority liability in medical malpractice actions.

Insurance Consequences of Cordero and Its Ilk

Many people assume that hospitals remain largely unexposed to malpractice issues because of the ready availability of liability insurance. Even if this were true, insurers rate hospitals based on an evaluation of its employees. In most cases, independent contractors are not included in those ratings. Foisting liability on hospitals for independent contractors has increased ratings exposure and insurance costs.

Further, most hospitals have discovered that procuring first-layer liability insurance is extraordinarily expensive. Therefore, many, if not most, hospitals have funded self-insurance programs, and primary or first-layer coverage comes exclusively from hospital profit. The effort of taking any money available above expenses and setting it aside for liability exposure depletes the hospitals' ability to provide needed and expected care.

The Statutory Charitable Immunity Cap, and Its Detractors

Recognizing the importance of hospitals in our society, the New Jersey Legislature wisely enacted the Charitable Immunity Act, N.J.S.A. 2A:53A-7, et seq ., which provides limited hospital immunity for non-profit hospitals, capping their liability at $250,000. This cap applies only to liability assigned to the hospital itself, not liability of employees for whom the hospital either self insures or procures liability insurance.

The portion of the Charitable Immunity Act governing a hospital's limited liability is found at N.J.S.A 2A:53A-8, which provides in relevant part:

Notwithstanding the provisions of the foregoing paragraph, any nonprofit corporation ' organized exclusively for hospital purposes shall be liable to respond in damages to such beneficiary who shall suffer damage from the negligence of such corporation ' to an amount not exceeding $250,000, together with interest and costs of suit, as the result of any one accident and to the extent to which such damage, together with such interest and costs of suit, shall exceed the sum of $250,000, such nonprofit corporation ' organized exclusively for hospital purposes shall not be liable therefore.

The “foregoing paragraph” reference the preceding passage makes is to N.J.S.A. 2A:53A-7, which provides for absolute immunity for non-profit corporations organized exclusively for charitable, religious or educational services, as opposed to limited liability for those non-profits providing hospital services. It is this charitable immunity cap that is now increasingly under attack by the plaintiffs' bar in medical malpractice actions. There has been a repeated barrage in case after case seeking to erode or vitiate the cap, premised on the claim that the large hospital systems identified above have such a large income stream, derive so much “profit” above expenses and pay their CEOs like traditional for-profit companies, that their “non-profit” status is merely a statutory scam. Unfortunately, this mantra has gained some judicial traction of late and has encouraged the plaintiffs' bar to continue the forward momentum, against the backdrop of ever-increasing expansion of hospital liability.

The plaintiffs' bar has attacked the application of this cap in medical negligence tort suits against hospitals with the argument that the non-profit status is a fiction for federal tax purposes. Plaintiffs have argued that the size, methods of operation, compensation and other organizational attributes establish that they are not truly “non-profit” entities entitled to the cap. The argument continues that the non-profit hospitals act in near identical fashion to the for-profit hospitals, except in so far as tax status is considered. It is asserted that the “substantial profits” earned are instead distributed as additional salaries and expenses, as opposed to in payments to shareholders. Plaintiffs posit that the statute is ripe for constitutional challenge, since it unfairly discriminates against similarly situated for-profit hospitals, while the plaintiffs directly suffer harm from the equal protection violation.

Grist for the Argument

In support of applications to discover hospital finances, the plaintiffs' bar has been largely relying on Klein v. Bristol Glen, Inc., 2010 WL 3075582 (App. Div., Aug. 4, 2010), an unpublished decision in which the court ultimately granted the plaintiffs' request for financial discovery in order to determine the organization's source of funds, after finding that information to be critical in determining charitable status. Slip op. at 5.

The Appellate Division started its analysis by highlighting the fact that after “the New Jersey Supreme Court abrogated the doctrine of charitable immunity in the late 1950s, the Legislature responded by enacting the Charitable Immunity Act, N.J.S.A. 2A:53A-7 to -11, to restore charitable immunity as it existed at common law.” The appellate court set forth the statutory requirements which must be met: “To gain the protection of the Act's statutorily enumerated immunity the institution seeking immunity must demonstrate that it: 1) was formed for non profit purposes; 2) is organized exclusively for religious, charitable or educational purposes; and 3) was promoting such objectives and purposes at the time of the injury to Plaintiff who was then a beneficiary of the charitable works.” Id. at 6 (citations omitted).

The appellate court in Klein found “that an entity's non-profit and/or tax exempt status is irrelevant to the determination of whether that entity is organized exclusively for a charitable purpose.” Likewise, the fact that the entity performed a “valuable societal interest” was equally irrelevant to the ultimate question of immunity. Rather, the relevant inquiry focuses upon the defendant's method of operation, which must establish that the defendant's “dominant motive is charity [and not] some other form of enterprise.” Id. Critical to this inquiry, the court found, was the hospital's source of funds, since immunity will not apply if the amount of charitable donations are “too insignificant.” If most of the funding comes from either the government, insurance or the patient, the court held that immunity would not apply, since it would not have applied at common law. Id. at 5-6.

In ultimately reversing entry of summary judgment in favor of the hospital, and remanding the matter for further discovery into the organization's finances, the Appellate Division stated:

We agree with plaintiffs that in this case the trial court prematurely granted summary judgment in defendant's favor. Like the court in Abdallah '[ Abdallah v. Occupational Ctr. of Hudson County, Inc. , 351 N.J. Super. 280 (App. Div. 2002)], we are constrained to reverse and remand because 'the court's findings failed to address critical components of the charitable-status determination' which 'must be made based on an adequate and proper record.' The record is incomplete because plaintiffs allege they were denied the opportunity to present a clear picture of defendants' financial structure and 'source of funds.' Without that opportunity and discovery of financial information sought, the court could not have been in a position to determine whether defendants' 'dominant motive is charity [and not] some other form of enterprise.'

Id. at 6 (citations omitted).

In reality, Klein should have no bearing on whether a hospital qualifies for limited immunity. The Klein court analyzed whether a defendant was “charitable” within the meaning of N.J.S.A. 2A:53A-7, not whether a defendant was a “non-profit” corporation organized for “hospital purposes” within the meaning of N.J.S.A. 2A:53A-8. Indeed, the Klein decision does little to change the long-standing history of requiring courts to engage in a fact sensitive analysis in order to determine if an entity is organized exclusively for a “charitable” purpose. See, e.g., Ryan v. Holy Trinity Evangelical Lutheran Church , 175 N.J. 333, 343-46 (2003) (discussing the fact-sensitive analysis necessary to determine whether a corporation has a “charitable” purpose).

The court in Ryan distinguished corporations organized for a “charitable” purpose from those organized for “educational” or “religious” purposes. As the terms “educational” and “religious” have plain meanings subject to a literal reading, no further proof is necessary in order to establish the second prong of the charitable immunity standard ' that being that it is organized exclusively for those religious or educational purposes. 175 N.J. at 343-44, 346. On the other hand, a “charitable” purpose “is a more complex notion that defies precise definition.” Id. at 343. Therefore, “entities seeking the shelter of the Act by providing that they are 'organized exclusively for charitable purposes' must engage in the traditional factual analysis of Parker [ Parker v. St. Stephen's Urban Dev. Corp., Inc. , 243 N.J. Super. 317 (App. Div. 1990)], including a source of funds assessment.” Id . at 346.

Engaging in the same analysis, wouldn't “hospital” purposes also have a plain meaning, requiring no further analysis into the charitable nature? The answer is yes. But what plaintiffs have been doing is intermingling “non-profit” status with a “charitable” purpose. They have been relying largely upon the Klein court's statement that “an entity's non-profit and/or tax-exempt status is irrelevant to the determination of whether than entity is organized exclusively for a charitable purpose.” Klein, supra, at 5. This quote is being taken out of context. It simply separates the first prong of the test ' i.e., non-profit status ' from the second prong ' i.e., charitable status. In fact, they are specifically described as two separate elements by New Jersey's Supreme Court in Ryan, 175 N.J. at 342.

Tax-Exempt Status

Most courts faced with an application to discover the financial structure, or income stream, of a hospital system, have recognized this distinction and precluded discovery. However, a recent decision by the Tax Court of New Jersey has thrown a wrench into what used to be a simple inquiry, and has given the plaintiffs' bar another tool for its argument arsenal.

When determining whether a hospital is entitled to the $250,000 limitation of liability pursuant to N.J.S.A. 2A:53A-8, historically, courts have accepted proof of tax exemption in order to establish non-profit status. Then, in June of this year, AHS Hospital Corp. v. Town of Morristown , 28 N.J. Tax 456 (2015), was decided. In a matter of first impression, the New Jersey Tax Court denied the hospital's application for a property tax exemption, finding that the hospital failed to meet its burden of proof in establishing non-profit status.

Despite the prior separation of non-profit and charitable status, the Tax Court seemed to rely heavily on the state of hospitals, and their largely charitable nature, in 1913, when the federal income tax law became effective. The Tax Court also referred to a recent New Jersey Supreme Court decision, Kuchera v. Jersey Shore Family Health Center , 221 N.J. 239, 251 (2015), in which the State Supreme Court described “the evolving character of hospitals and healthcare.” The Supreme Court did so, however, to broaden what would constitute a “hospital purpose,” not challenge application of the cap on damages.

In ultimately concluding that the “subject property is being used substantially for profit,” the Tax Court found that the hospital system operated 21 facilities that were not hospitals, and operated in a virtually identical capacity to a for-profit facility. It paid its CEO nearly $10 million dollars and made routine capital improvements in the multiple millions of dollars. And it retained a portion of the profits from various contracts.

The court's conclusion was broad-reaching:

If it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions; and it is long established that “fictions arise from the law, and note law from fictions.” Accordingly, if the property tax exemption for modern non-profit hospitals is to exist at all in New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be. Clearly, the operation and function of modern non-profit hospitals do not meet the current criteria for property tax exemption under N.J.S.A. 54:4-3.6 and the applicable case law.

Id. at 536.

As a result of this recent decision, the plaintiffs' bar has asserted with much greater vigor an entitlement to financial data from hospitals as part of routine discovery in medical malpractice actions. Defendants have asserted in response that AHS Hospital Corp . is not determinative, as it dealt only with local property taxes; that prior rulings allowing discovery into finances of charitable institutions were under distinguishable circumstances; and that the Charitable Immunity Act is a remedial statute intended to be liberally construed.

Nevertheless, a recent trial court decision from August 2015 compelled a hospital system to comply with discovery requests seeking financial disclosures so that a plaintiff in a medical malpractice action could determine if the professed not-for-profit status should be upheld. See Shapiro v. Morristown Medical Center, MRS-L-3840-14 (Law Div. 2015)(unpublished). In that case, the defendant had refused to provide financial disclosures, arguing that it was not required to comply because it was an IRS 501(c)(3) organization. The trial court disagreed.

Conclusion

The aforementioned recent decisions have yet to be reviewed by New Jersey's highest court. However, it is clear from the trend that expansion of liability and limitation of defenses has been the goal of the plaintiffs' bar. From recent history, it is apparent that much success has been garnered in this war.

In this time of economic uncertainty, exposing one of our most precious institutions to further liability is a risky proposition. As physicians have begun to carry insurance with reduced limits of $1 million, the hospital defendant has quickly become the target defendant because of its perceived levels of self- and procured insurance. In many cases, it has the deepest pocket. But short-term gain for a few injured plaintiffs should not take precedence over the long-term health of an entire industry (pun intended). Different players in the industry have different profiles. The larger hospital systems may have an ability to pay or may function more like a for profit corporate empire than a small community hospital. Applying these conventions across the board irrespective of the size of the institution is not only dangerous, but ill conceived. Attacking even the largest of hospital systems could have a domino effect. One only needs to look at the recent history of asbestos litigation ' as the larger players have filed for bankruptcy, the smaller players in the industry have been elevated in the litigations and litigated nearly out of existence.

We are confident we do not want the same fate for our hospitals. Killing the goose that laid the golden egg is not a desirable outcome for any of the stakeholders.

Gary L. Riveles, a member of this newsletter's Board of Editors, is a partner in Dughi, Hewitt, and Domalewski, PC, in Cranford, NJ. Cyndee L. Allert is a senior associate with the firm. The opinions expressed in this article are those of the authors alone, and do not necessarily reflect the opinions of ALM, LJN or this publication.