Nursing Facility Owners across New York State Prepare for a Wave of Investigations and Litigation by the New York Attorney General

The New York Attorney General's office has signaled a new era of aggressive nursing home oversight with its recent filing of two actions against Skilled Nursing Facility (SNF) owners, and the industry is predicting the targeting of many other homes in the near future. Particularly troubling for the industry are the AG’s moves against not only the operators of the facilities, but also the owners of the real estate occupied by those nursing facilities, i.e. the “PropCos” – entities typically considered insulated from the potential liabilities of the operating “Opcos”.

The AG has launched a two-front legal offensive: First, it appears that she seeks to expand the existing prohibition against real estate owners reaping financial benefits from the operation of nursing facilities on their property. And second, she appears to be attacking the way operators and property owners account for their respective revenue. So, now more than ever, it is vital that Propcos have the ability to clearly demonstrate separation from the operating entities, both in structure and in financial benefit.

Recently, the Attorney General commenced two actions in the Supreme Court of New York, Nassau County, and in both actions, her petitions point to the payment of “up-front profit” as evidence of fraud by owners under New York's Executive Law. The accusation that the upstreaming of payments to property owners constitutes fraud marks a significant development in the State's treatment of what has become common SNF practice in recent decades. In the petitions, the AG defines “up-front profits” as follows:

[T]he practice of making payments from the nursing home to Respondents under the guise of pre-determined and self-negotiated “expenses” and other transfers of funds, as a priority over, and without regard to, ensuring that the nursing home has used the public funds it received to meet the nursing home’s duty to provide required care, with sufficient staffing to render such care, to its residents is referred to herein as “up-front profit.”

In one of two petitions, the AG alleged fraud and related claims against the owners of both the facility's OpCo and PropCo, based on their simultaneous neglect of facility patients while “illegally converting” over $22.6 million in Medicaid and Medicare funds to benefit ownership. The petition alleges that such conversion was accomplished by utilizing (1) a fraudulent rent scheme through the PropCo, (2) a fraudulent promissory loan scheme, and (3) a fraudulent management/consulting company scheme. The State's fraud claims are predicated on the allegation that the above transactions “hide the facility’s true owners and operators from DOH” and because of the owners' “repeated filing of false documents and certifications in order to conceal their disguised conversion of funds.” Notably, the petition cites to the cumulative effect of inflated payments made to the OpCo and management as violating the cap, pursuant to PHL § 2808(5)(c), on owner's withdrawal of equity or assets exceeding 3% of a nursing home's annual revenue.

The same blueprint was used in the other Supreme Court action filed by the AG late last year. There, the AG juxtaposed alleged severe patient neglect with the “fraudulent” payment of Up-Front Profits by the conversion of $14,913,403 to a related OpCo, as well as salaries in excess of $1 million for no-show jobs held by the owners' family members. The petition alleges that “through false statements and clandestine financial arrangements,” equity or assets was diverted from the SNF in violation of PHL § 2808(5)(c). Like in the first matter discussed, the AG is seeking injunctive relief to prevent further patient neglect and conversion of funds as well as disgorgement of converted funds.

In both cases – and in the many believed to be on the horizon – the AG will have to show that the alleged illicit diversion of public funds, all of which were presumably accounted for in the books and records of the relevant entities, constituted fraud. As such, owners of both OpCos and Propcos are focusing on their records to confirm they clearly demonstrate their good faith use of State and Federal money.

In sum, the AG’s recent actions, combined with the State's announcement that it will begin enforcing a 2021 minimum staffing requirement, indicate that nursing homes in New York should prepare for a new period of scrutiny by the state government. As always, proactively preparing to face and respond to anticipated investigations before they arise will serve as the strongest and most efficient deterrent to actions taken by the AG, and will be essential to prevent or at least mitigate the effects of governmental scrutiny and any potential legal action that follows.

ZEK’s Healthcare and Government Investigations practice team members welcome any questions relating to governmental regulatory compliance, internal investigations, and preparation for and navigating a governmental investigation.

Robert Guttmann advises numerous healthcare operators, including of Skilled Nursing Facilities, in devising practical and cost-effective strategies to implement their goals whether in litigation, government relations or compliance-based issues. He has also advised clients on compliance issues arising from the Cares Act including eligibility for the Employee Retention Credit. For questions regarding this article, please contact Rob at

Attorney Robert Guttmann

J. David Morrissy is recognized throughout the country for his skillful navigation of complex commercial transactions, powerful litigation strategies, and insightful management of regulatory compliance matters. Mr. Morrissy has earned a reputation as a trusted counselor and legal and business resource for corporations and their principals, including nursing home owners and operators. For questions regarding this article, please contact David at

Attorney J. David Morrissy