With walkers and canes in hand, more than 40 seniors mobilized in the U.S. District Court in San Jose on Tuesday to show their displeasure with how the parent company of senior-care community Vi at Palo Alto is handling their money.
Lawyers from the company, CC-Palo Alto, tried to knock out a federal class-action lawsuit filed on Feb. 19 by seven residents of the high-end continuing-care retirement community located on Sand Hill Road. The suit alleges the company transferred more than $174 million in refundable entrance fees from the senior retirement community to its corporate parent, CC-Development, in Chicago, jeopardizing the financial security of the residents.
The lawsuit 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 financial practices.
CC-Palo Alto's attorneys Tuesday asked the court to dismiss the class-action suit on grounds that the case was "not ripe" for judicial hearing. The seniors have not been harmed by the transfer of millions of dollars in entrance fees to the Chicago headquarters, attorney James McManis told the court. The contract residents signed also does not actually specify that the money should be retained at the Palo Alto community or how it should be used, he added.
Residents (or their heirs when they die) are supposed to receive a portion of the entrance fee which can be millions of dollars when they choose to no longer reside at Vi. The first occupants of the 388-unit independent-living facility are supposed to receive as much as 90 percent, with subsequent occupants receiving a lesser amount on a sliding scale, according to court documents.
CC-Palo Alto collected $347 million in entrance fees during its first three years of operation, it told the Santa Clara County Assessment Appeals Board in 2012. More than $200 million was used to recover construction costs, with most of the balance, the $174 million, going to the parent company. Entrance-fee refunds come from the fees paid by subsequent occupants, CC-Palo Alto told the board, according to the documents.
The seniors' attorneys claim that this practice has destroyed CC-Palo Alto's finances, and CC-Palo Alto lacks the ability to cover the amounts due, the seniors' attorney Niall McCarthy said.
McManis argued that CC-Palo Alto has always been able to return the money to residents or their families, so no harm has yet occurred, he said. The court must follow the rule of contract law in its decision, he added.
But the seniors' attorneys said it isn't that simple. Sending the money to Chicago created a concrete detriment to the seniors' security interest in the entrance fees. California case law has recognized that lenders, such as the seniors, have a security interest in the property subject to the loan (the entrance fees) and that impairment of that security interest is a harm.
CC-Palo Alto lawyers, however, claim the entrance fees are "unsecured loans" though the contract and promissory notes simply state they are "loans."
A Santa Clara County Assessment Appeals Board in 2012 seemed to support the contention that the practice has caused a financial deficit at CC-Palo Alto. The company had appealed a tax-increase assessment by the Santa Clara County Assessor on its real property that would cause it to owe more than $3.4 million in back taxes. CC-Palo Alto claimed, among other things, that the $174 million it transferred from 2005-06 through 2007-08 should not be calculated into its property valuation and is kept on the books as a liability. But the Appeals Board found that the entry fees are essentially part of the real estate, and therefore should be part of the property's appraisal.
The company claimed the deficit was caused by insufficient cash flow coming in from investors.
In addition to the entrance fees, attorneys said, the seniors pay monthly fees that cover certain repairs. The seniors have also been harmed because they have paid inflated fees for earthquake insurance for the buildings at Vi, marketing charges that did not benefit the Vi at Palo Alto and the additional $3.4 million in property taxes caused by the diversion of funds to Chicago.
United States District Court Judge Edward Davila said he will issue a decision in writing at a date uncertain.