A U.S. District Court judge has dismissed a lawsuit against Palo Alto retirement community Vi for allegedly illegally giving entrance fees to its Chicago parent company, but one key ruling in its favor could still cost the company hundreds of millions of dollars.
Six seniors — Burton Richter, Linda Collins Cork, Georgia L. May, Thomas Merigan, Alfred Spivack and Janice R. Anderson — who are residents of Vi filed a class-action lawsuit on Feb. 19, 2014, after discovering that more than $219 million in refundable entrance fees as of December 2013 were transferred to its corporate parent, CC-Development in Chicago. CC-Palo Alto, the entity that runs Vi, allegedly “upstreamed” the millions of dollars to its parent company without establishing a reserve fund, as required by state law, according to the lawsuit. The suit claimed the transfer jeopardized the financial security of the residents.
The court agreed that CC-Palo Alto may well be in violation of state law by not maintaining a cash reserve, but it disagreed that the plaintiffs have standing to enforce that law. The state Department of Social Services (DSS) is the appropriate entity and is tasked with enforcement, the court wrote.
But in most other matters, the court ruled in favor of CC-Palo Alto. In his 35-page ruling on March 31, U.S. District Judge Edward Davila dismissed the case in 10 out of 15 claims, including financial abuse of elders, concealment, misrepresentation, breach of fiduciary duty and constructive trust, violations of the state Business and Professions Code and the state Consumers Legal Remedies Act, breach of contract and breach of the implied covenant of good faith and fair dealing. The claims were dismissed “with prejudice,” meaning they cannot be refiled.
Davila also dismissed the remaining five claims, but he gave the plaintiffs’ attorneys two weeks leave to amend: creditor claim for breach of fiduciary duty against the director defendants, aiding and abetting director defendants’ breach of fiduciary duty, payment of unlawful dividends, and fraudulent transfer of assets and corporate waste.
The plaintiffs had claimed that entity CC-Palo Alto funneled their entrance fees, which range from $745,500 to $4.6 million, and additional monthly fees to CC-Development, which they allege would jeopardize the company’s ability to pay back residents. About 75 to 90 percent of the entrance fees at the continuing-care retirement community, or CCRC, are to be returned by the company when a resident moves out. If the resident dies, the refund is given to the person’s family. But because CC-Palo Alto did not receive any promise of repayment from the parent company, it will be financially incapable of honoring its debts when they become due, the complaint alleges.
The plaintiffs argued that the money should stay in Palo Alto rather than be used by the parent company, which would put the repayment obligations at risk should the company become insolvent or have a cash-flow disruption.
The complaint also alleged that CC-Palo Alto overcharged the residents by improperly allocating tax assets, earthquake insurance and marketing costs to Vi as operating expenses and representing the charges as inflated monthly fees. The lawsuit alleges that CC-Palo Alto has been assessing the increased property taxes as a result of the transfer of funds and will pass along the higher tax liability to residents.
The lawsuit was filed on behalf of 500 residents, and it is believed to be the first of its kind in the Bay Area challenging a continuing-care retirement community’s financial practices.
But attorneys for CC-Palo Alto argued that they have always made their repayment obligations and that an injunction would be pre-emptive. The six plaintiffs were never denied the returned money and there was no imminent threat of default by CC-Palo Alto, attorneys for the company contend.
Davila had previously dismissed the plaintiffs’ lawsuit on Nov. 25, 2014, ruling that they could not show injury, which is necessary to have “standing,” but he gave attorneys leave to amend their case. In his March 31 ruling, he again supported the defendants. The plaintiffs lacked standing because they needed to show that harm was done or was imminent, which they had not proved, Davila wrote.
He also found that CC-Palo Alto could pass on tax assessments to the residents through their monthly fees. CC-Palo Alto is currently challenging a tax assessment with the state Assessment Appeals Board for $12 million in back taxes assessed after the company made real estate improvements to its property. Davila said that the company has not passed those tax increases on to the residents yet, and it had said that it would pay the back taxes if it loses the appeal. He called the allegation that CC-Palo Alto would pass the amount on to residents “speculative at best.”
But if CC-Palo Alto chose to pass on all or part of the tax burden to residents, it may be permissible, since the residency contract allows for real estate taxes, special taxes or assessments, and any other taxes CC-Palo Alto believes may be levied by the City of Palo Alto, County of Santa Clara, or State of California as part of the residents’ monthly fees, he noted.
“While this does not give Defendants license to unreasonably offload self-inflicted tax obligations or penalties on residents, the Contract clearly provides for considering and including tax liabilities and assessments when determining monthly fees,” Davila wrote.
The court also found that CC-Palo Alto can retain surpluses from the monthly fees to potentially pay the back taxes and it can use the funds for earthquake insurance for its buildings and improvements and marketing costs, which the contract allows as “operating costs.”
The plaintiffs alleged that marketing costs should be limited to marketing for the Palo Alto community and not for the parent company’s other assets as a whole, but Davila found the contract did not represent that the marketing costs incurred should only be for Vi in Palo Alto.
The court did find that CC-Palo Alto is required to establish reserve funds under state law, but that the plaintiffs lack standing in their civil claim because the California Department of Social Services has jurisdiction over any action to bring a CCRC facility under compliance. The department could, if it finds that CC-Palo Alto violated the regulations, choose to condition, suspend or revoke the facility’s license.
“DDS is the proper entity to enforce the non-compliance with the refund reserve requirement or other provisions of the statues governing CCRCs,” Davila wrote.
The state as enforcer would ostensibly help to protect residents against losses before any actual harm occurs, according to Davila’s interpretation because it can take direct action under law.
“Thus, a continuing care community cannot simply flout its statutory responsibilities with abandon — evading repercussion because the individual residents cannot yet point to direct harm,” he wrote.
Despite the dismissals, attorneys for the plaintiffs said that they are “extremely happy” with the judge’s interpretation of the law. Davila ruled in their favor in the critical aspect of the case: that CC-Palo Alto must keep a cash reserve.
“We are in the initial stages of the case. The key aspect was ruled overwhelmingly in our favor. Vi must as a matter of law keep a reserve, and it is violating that law,” said Niall McCarthy, an attorney for the plaintiffs. “The only issue is enforcement.”
Although Davila’s interpretation of the law found that enforcement falls to the DSS, a provision does allow for individuals to sue for enforcement — and to potentially recoup big money for damages.
California Health & Safety Code section 1793.5 states that if an entity abandons a continuing care community or its obligations under a continuing care contract, the entity is guilty of a misdemeanor. The entity is liable to the injured resident for the amount of damages assessed in any civil action, and the court may at its discretion award all costs and attorney fees if the resident prevails.
But Davila found that the section of law does not apply, as individuals would not have standing to sue unless there was evidence that the facility abdicated its responsibility in such an egregious manner that it rises to criminality.
McCarthy said the plaintiffs will pursue further litigation regarding whether DSS or the plaintiffs have the right to compel CC-Palo Alto to maintain a reserve.
Attorneys for CC-Palo Alto could not immediately be reached for comment.
Related content:
• Federal judge throws out Vi at Palo Alto lawsuit
• Vi at Palo Alto files motion to dismiss lawsuit
So if it is up to the DSS to enforce the law, then went aren’t they doing it?
VI sent their deposits to their parent company, that much is clear. Why? probably to make sure those funds are legally out of reach of residents in case VI went belly up, and of course to protect shareholder value, not residents security deposits. VI made promises to residents that it says it will honor, but in practice, may have no legal obligation to honor.
Pacific Gas and Electric Utility sent all of their profits to their parent company, Pacific Gas and Electric Corporation in the early 2000’s during the great Enron debacle, to protect corporate interests and yes, share holder value. PG&E Utility customers were left holding the bag while corporate bonuses were handed out like candy and the utility flirted with bankruptcy.
http://www.sandiegouniontribune.com/uniontrib/20040220/news_1b20earns.html