Setback for Seniors|Suing Retirement Home

SAN JOSE (CN) - A federal judge dismissed senior citizens' putative class action accusing a Palo Alto retirement community of illegally funneling their six-figure entrance fees and four-figure monthly fees to its corporate parent.

U.S. District Judge Edward Davila dismissed with prejudice 10 of the 15 claims, and dismissed five claims with two weeks leave to amend in his March 31 ruling.

Lead plaintiff Burton Richter et al. live at the VI at Palo Alto, a 388-apartment independent living facility owned by lead defendant CC-Palo Alto.

Davila found, in part, that the plaintiffs lack standing because they allege hypothetical injuries rather than material harm.

Richter and five other named plaintiffs claimed that CC-Palo Alto's policy of sending their one-time entrance fees to its parent corporation would make it difficult for the complex to meet its debt obligations to those residents.

The VI at Palo Alto charges entrance fees of $745,500 to $4.6 million, depending on the number of rooms in the apartment, and monthly fees of $4,320 to $9,320, according to the complaint.

The entrance fees are called loans, 75 to 90 percent of which will be paid back when residents move out, or will be returned to their loved ones when they die, Judge Davila wrote in summarizing the complaint. Over time, the refundable percentage of the fee decreases.

CC-Palo Alto argued that none of the six plaintiffs was denied or was awaiting the promised refund. Their argument hinges on an alleged lack of financial reserves and the danger that the refunds might not be paid.

Davila agreed.

"In order to have standing, plaintiffs' interest must have been harmed," Davila wrote in his 35-page ruling. "Plaintiffs again fail to allege any such harm."

Richter also claimed the monthly fees were "artificially inflated," so they could contribute toward the corporation's property taxes, earthquake insurance and marketing costs.

But Davila found that the residency contract clearly stipulates that monthly fees can be used for operating costs, including taxes, insurance and marketing.

"Because these costs were expressly provided for by the plain language of the contract, plaintiffs have not alleged an injury arising from their monthly fees," Davila wrote.

Plaintiffs' attorney Ann Marie Murphy said that though she was disappointed with the ruling, the judge did find the retirement community is subject to laws guiding the establishment of reserves due to the nature of the refundable entrance fee contract.

"While we are disappointed in the decision, Judge Davila's Order resolves a crucial issue in favor of the residents of the VI at Palo Alto," Murphy told Courthouse News.

"Specifically, the continuing care contracts at issue are 'refundable contracts' under California's CCRC Law [Continuing Care Retirement Community], and are therefore subject to legal requirements for cash reserves."

Murphy said her clients are considering whether to file an amended complaint.

CC-Palo Alto's lead attorney James McManis did not immediately respond to an emailed request for comment.

Davila dismissed with prejudice the claims of financial abuse of elders, concealment, negligent misrepresentation, breach of duty, breach of contract, and breach of faith among others. He gave them until April 15 to amend creditor claims of breach of fiduciary duties or aiding and abetting breach of fiduciary duties, payment of illegal dividends, fraudulent transfer and corporate waste.

Murphy is with Cotchett, Pitre & McCarthy.

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