Residents of the Palo Alto senior community Vi saw their class-action lawsuit against its company dismissed by a federal judge on Tuesday, Nov. 25.
Six residents of the posh senior-living center filed a class-action lawsuit against the company, CC-Palo Alto, on Feb. 19, after discovering that more than $190 million in refundable entrance fees were transferred to its corporate parent, CC-Development, in Chicago. The lawsuit claimed the transfer jeopardized the financial security of the residents.
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, 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.
But Judge Edward J. Davila of the U.S. District Court for the Northern District of California dismissed the entire case. The plaintiffs could not show injury, which is necessary to have "standing," the court ruled.
On Sept. 9, CC-Palo Alto's attorneys 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.
To live at Vi, residents enter into a Continuing Care Residency contract, which entails an entrance fee ranging from $745,500 to $4,620,800, and monthly fees ranging from $4,320 to $9,320, depending on the type of apartment.
The entrance fees are "loans" to CC-Palo Alto, with a portion repaid to occupants' heirs or estate upon death or if occupants chose to leave upon sale of their apartment.
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.
Since Vi opened in 2005, CC-Palo Alto has collected more than $450 million in entrance fees. Entrance-fee refunds come from subsequent occupants' fees, according to the documents.
The seniors alleged that CC-Palo Alto transferred more than $190 million of entrance fees to the Chicago parent without their knowledge and without obtaining security or any repayment promise. Consequently, CC-Palo Alto does not have enough money to refund the entrance fees when they become due.
Continuing-care communities are required by California law to maintain reserves as security for the entrance fees. But CC-Palo Alto now allegedly has a deficit of more than $300 million, according to the attorneys.
Sending the money to Chicago created a concrete detriment to the seniors' security interest in the entrance fees. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation, according to state law.
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, the seniors' attorneys said.
CC-Palo Alto lawyers, however, claimed the entrance fees are "unsecured loans," though the contract and promissory notes simply state they are "loans." CC-Palo Alto has always been able to return the money to residents or their families, so no harm has yet occurred, company attorneys said.
In his ruling, Davila found that the residents' argument that the contract's omission of the word "unsecured" indicates the loan is secured and creates a security interest was unpersuasive. The plaintiffs did not argue that collateral was provided in exchange for the loan or that other documents taken together with the contract established a security interest.
The residents also failed to argue whether the residency contract was a type covered under state law requiring reserves -- a so-called "refundable" contract -- but rather they only argued that the state law was violated, Davila said.
"Even assuming that Plaintiff's entrance fee constitutes a security interest, in order to have standing, Plaintiff's security interest must have been harmed," Davila wrote.
The court would assume in this case that the plaintiffs have a legally protected security interest established by the entrance fee, he said, but there is no indication that any plaintiff has terminated their residency contract and been denied repayment, so there was no actual injury.
The state's Ninth Circuit Court of Appeals has ruled that in some cases imminent harm or the threat of imminent harm could be considered an injury. But Davila did not find that to be the case at Vi.
"There is no indication that any Plaintiff has yet to resell their apartment or is in such critical health that termination is imminent. Accordingly, there is no indication that Defendants will further deprive Plaintiffs of a repayment," he wrote.
Vi residents also claimed the company artificially inflated their monthly fees dues through three improper charges. The Santa Clara County Tax Assessor increased assessment of CC-Palo Alto's property taxes based on its "entrepreneurial profit," after the company transferred $174 million to Chicago during its first three years of operations. The company has stated it will pass on $12 million in back taxes to residents through higher monthly fees. Prior to the assessment, the company returned operating surplus to the residents, but since then, there have been no surplus payments, attorneys said.
CC-Palo Alto also passed on earthquake insurance premiums to residents, even though residents should not incur insurance charges for anything other than furniture, fixtures or equipment under terms of the residency contract, their attorneys said.
The company also allegedly charged residents for marketing costs, ostensibly to promote Vi, but instead the money funded the parent company's national marketing campaign, according to the complaint.
The company's attorneys argued that residents "only speculate" they will be harmed by the increased taxes, not that they have already been harmed. The residency contract provides that real estate taxes are an operating expense of the community to be paid from monthly fees. The court agreed. Davila said the contact's language was clear and unambiguous.
The court found there is no harm resulting from the suspension of credits because any credit disbursals are at the company's discretion. Insurance-policy payments are also clearly defined as part of the operating costs under the contract, the Davila noted.
The contract states that an operating cost paid from monthly fees includes "any marketing costs" and is not specific to spending the money only on marketing Vi, the judge added.
Davila did leave room for the residents to file an amended complaint within 15 days. Neither side could be immediately reached for comment.
Vi seniors take case to federal court (September 2014)
Vi at Palo Alto files motion to dismiss lawsuit (March 2014)
Residents claim financial abuse at Vi at Palo Alto (February 2014)