SAN JOSE (CN) - A retirement community that charged new residents refundable entrance fees funneled $190 million to its corporate parent, putting the senior citizens' savings at risk, six residents claim in a federal class action.
Lead plaintiff Burton Richter, speaking for residents of the Vi at Palo Alto, claims that CC-Palo Alto Inc., which operates the 388-apartment independent living facility, failed to obtain assurances from Chicago-based CC-Development Group Inc. that the "upstreamed" money would be paid back.
"Defendants have taken hundreds of millions of dollars from a group of vulnerable senior citizens, deprived them of their security, and placed much of their lifetime savings at risk," the 38-page lawsuit states. Also sued is Classic Residence Management Limited Partnership, of Illinois.
The Vi at Palo Alto charges incoming residents entrance fees ranging from $745,500 to $4.6 million, depending on the number of rooms in the apartment, in addition to monthly fees of $4,320 to $9,320.
The entrance fees allegedly are loans that residents are promised will be paid back at 75 to 90 percent when they move out, or will be returned to their loved ones when they die. Over time, the refundable percentage of the fee decreases.
According to the complaint, entrance fees are part of residency contracts that are provided "on a 'take-it-or-leave-it' basis that does not permit negotiation. This adhesive quality coupled with the emphasis on the extensive waiting list for the Vi at Palo Alto, the limited-time availability of apartments, and the risk that the elderly prospective resident may unexpectedly become disqualified by illness, all create substantial pressure on prospective residents to sign the Residency Contract quickly or lose the opportunity."
Since opening in 2005, the Vi at Palo Alto has collected more than $450 million in entrance fees, the complaint states. California law requires continuing care retirement communities such as the Vi to maintain reserves as security for the entrance fees. But CC-Palo Alto transferred more than $190 million to CC-Chicago, as of December 2012, according to the complaint.
Residents, who typically join the community in their 80s, were not told that their entrance fees would be upstreamed to CC-Chicago, and now CC-Palo Alto has a deficit of more than $300 million and owes the residents $450 million, the class claims.
"As a result of this illegal upstreaming, CC-Palo Alto is financially incapable of honoring its debts to the plaintiffs and the class when the loans become due," the residents say in the lawsuit.
CC-Chicago claims that it bears no responsibility to repay the refundable portion of the entrance fees, which is solely up to CC-Palo Alto, according to the complaint.
The lawsuit claims that the approximately 500 residents at the Vi at Palo Alto must continue to pay ever-increasing monthly fees that have been inflated through increased tax assessments, earthquake insurance charges and marketing costs.
In the event of an earthquake, residents would be responsible for the deductibles, even though the residency contract makes residents responsible only for insurance premiums and deductibles related to furniture, fixtures and equipment, according to the complaint.
Residents have also been charged fees for marketing the Vi at Palo Alto, though that money actually helps fund CC-Chicago's national marketing program, according to the complaint.
Of the current 500 residents at the Vi at Palo Alto, 460 have demanded mediation under the terms of their residency contracts. The residents and CC-Palo Alto participated in a mediation session, but no agreement was reached, according to the complaint.
The residents seek compensatory and punitive damages for concealment, breach of contract, breach of fiduciary duty, negligent misrepresentation, financial abuse of elders, and violation of the Consumer Legal Remedies Act and California Business and Professions Code.
They are represented by Niall P. McCarthy with Cotchett, Pitre & McCarthy LLP.
CC-Palo Alto did not immediately return a request for comment.