A class-action lawsuit filed by residents of Vi at Palo Alto, including a Nobel Laureate and a World War II journalist, alleges Vi's parent company, CC-Palo Alto, transferred millions of dollars in refundable entrance fees from the senior retirement community to its corporate parent in Chicago, jeopardizing the financial security of the residents.
The lawsuit, which was filed on Feb. 19 in the U.S. District Court, also claims that CC-Palo Alto overcharged the residents by improperly allocating tax assets, earthquake insurance and marketing costs to Vi at Palo Alto's operating expenses and representing the charges as inflated monthly fees.
The complaint, which was filed on behalf of 500 residents, is believed to be the first of its kind in the Bay Area challenging a continuing-care retirement community's (CCRC) financial practices. It is striking because of the scope of the alleged financial abuse and its prominent residents, said attorneys with Burlingame law firm Cotchett, Pitre and McCarthy, who are representing the plaintiffs.
The complaint alleges that $190 million dollars was "upstreamed" from the Palo Alto facility to the corporate parent in Chicago, leaving the residents financially vulnerable. Those funds were to be returned to the seniors when they moved out, or returned to their families when they died.
The complaint alleges that the Chicago company has refused to return the money to Palo Alto.
"The plaintiffs in this case entrusted hundreds of millions of dollars to the Vi-Palo Alto. As we stated in the complaint, residents only recently learned that the cash reserves were nonexistent," said Anne Marie Murphy, an attorney for the plaintiffs.
Of the seven named plaintiffs, the youngest is 77 years old and the eldest is 93, according to the court filing.
Prior to entering Vi, each resident is required to give CC-Palo Alto an entrance fee of several hundred thousand dollars or more. The plaintiffs claim they were promised that 75 to 90 percent of the fees would be refunded to their heirs or estates after they died, or would be returned if they left Vi.
Since opening in 2005, the plaintiffs claim they collectively paid $450 million in entrance fees. California law requires continuing-care retirement communities such as Vi to maintain reserves to act as security for the entrance fees they collect. But instead of maintaining the reserves, as of December 2012, CC-Palo Alto allegedly transferred $190 million to its corporate parent, CC-Chicago. As a result, CC-Palo Alto is financially incapable of honoring its debts to the residents when the loans become due, the lawsuit claims.
Nobel Laureate Burton Richter, 82, is one of the plaintiffs. He moved into Vi at Palo Alto in July 2005 and paid a $1.59 million entrance fee for himself and his wife. Under his promissory note, 90 percent of his fee is refundable, meaning he would expect to have $1.43 million returned. But he was never informed that CC-Palo Alto intended to transfer his entrance fees to Chicago, he said. Nor was he informed that CC-Palo Alto did not intend to maintain cash reserves to cover its entrance fee obligations.
Richter said the channeling of money was discovered in 2012, after the Residents Advisory Council noticed an ambiguity in the contract. When a resident is moved from independent living to a care center, his or her apartment is resold, but the money is not put into escrow. Company representatives in Chicago told the residents that it is not obligated to pay the channeled money back to Vi at Palo Alto, but it has always done so.
"That's when my jaw dropped, and so did everybody else's," Richter said. "When we looked and asked, we found the provider (Vi) gave the money to its parent in Chicago. The provider did not have a single note on the books. Their attorney said they had no legal obligation to return the money. This flabbergasted everybody. It looks like (Vi at Palo Alto) just gave it all away. That seems to be unreasonable," Richter said.
The suit also claims that residents continue to pay ever-increasing monthly fees, which have been artificially inflated. CC-Palo Alto has allegedly passed on increased taxes and improperly allocated earthquake-insurance premiums to the residents. In the event of an earthquake, residents would be responsible for the deductibles as well.
But the residency contract only makes residents responsible for insurance premiums and deductibles for furniture, fixtures and equipment, according to the lawsuit. The company has also allegedly charged residents for CC-Chicago's national marketing campaign.
Murphy said that she is not aware of another case like this one.
"It's the sheer scope of the financial abuse and the hundreds and hundred of millions of dollars involved. It's a cutting-edge case. There is not a lot of litigation with CCRCs," she said.
The controversy has been ongoing for a year. About 400 residents and their attorneys have met repeatedly with corporate representatives, and residents demanded mediation. Ultimately, a lawsuit became the only remaining remedy, Murphy said.
"We've met with hundreds of residents, and the discontent is widespread. ... This entrance fee represents a very large proportion of their savings. Residents thought it would make the retirement community sound and vibrant, and ultimately, it was for their heirs. Instead, the money went in the front door and out the back door to Chicago," she said.
The complaint alleges concealment, breach of fiduciary duty, negligent misrepresentation, financial abuse of elders and violation of the Consumer Legal Remedies Act, California Business and Professions Code and breach of contract, among others.
Murphy said the lawsuit stands out because of the plaintiffs, many of whom are highly educated, wealthy and accomplished. She called the actions of CC-Palo Alto "financial elder abuse."
Sam Singer, a spokesman for Vi at Palo Alto, said Thursday the company had not yet been served with the complaint.
"The lawsuit is completely unfounded, misleading and it is wrong. Vi is going to vigorously oppose the allegations, and we believe we will be victorious in court," he said.
"Vi at Palo Alto is extremely successful and has no bank debt, so the very premise of this lawsuit is false. Vi has always met its obligations. Since the inception of Vi, it has made $121 million in entrance fee repayments," he said.
The lawsuit is not the first brought against Vi, which operates 10 communities across the United States. In 2006, residents in La Jolla filed a class-action lawsuit alleging that residents had "deposited a collective $85 million that was supposed to go into a trust fund to provide them with prepaid long-term health care, but the ... operation squirreled the money out in the form of a secret 50-year, zero percent interest loan to themselves," according to the newspaper The San Diego Reader.
The residents and company reached a settlement agreement in that case.