SAN JOSE, Calif. (CN) – Despite seeing a raft of claims stricken and a few others dismissed, senior citizens suing a high-end retirement community earned a modest victory Monday when a federal judge allowed their core allegations of fraud to proceed.
U.S. District Court Judge Edward Davila denied the motion to dismiss submitted by Vi at Palo Alto and its parent corporations CC-Palo Alto and CC-Development Group, allowing the claims of senior citizens who paid hefty deposits to live in the high-end retirement community but had trouble recouping their money because of a practice called “upstreaming.”
Upstreaming involves a subsidiary collecting money for services and then funneling it “upstream” to its parent company.
Senior citizens, who rely on the 388-unit Vi at Palo Alto for a whole spectrum of retirement care, from a community to play golf with during early retirement to assisted living and even hospice services as they age.
The high-end retirement community charges an entrance fee and then monthly rates. The entrance fee is hefty, starting at about $750,000 and reaching up to $4.5 million, with monthly rates between $4,500 to $9,500.
CC-Palo Alto advertises the entrance fee as a loan, with promises that it will pay a portion of the fee back to the estates of residents when they die. However, some estates have had trouble recouping the portion of entrance fees that they are owed, prompting many residents to band together and file a class action.
The plaintiffs say the company is having trouble repaying those fees because it’s been funneling them to the parent company, Chicago-based CC-Development Group.
Davila dismissed the lawsuit with leave to amend, finding the injuries were more hypothetical than actual. However, the plaintiffs managed to change to show that the insolvency or near insolvency of CC-Palo Alto has potentially caused enough harm to survive a motion to dismiss.
“The second amended complaint contains enough facts to plausibly establish that CC-Palo Alto transferred, if not all of its assets, at least a substantial amount at a time when CC-Palo Alto was allegedly insolvent, or that it became insolvent as a result of the ‘upstreaming,’” Davila wrote in the 19-page order.
He said there is no evidence that CC-Palo Alto received an equivalent value from its parent company that would justify the upstreaming practice.
Davila exempted the corporate parent from some but not all of the claims, saying the law has established that parent companies cannot be held responsible for breach of fiduciary duty when their subsidiaries are tasked with the duty. The Palo Alto subsidiary will face that claim, Davila said.
But both the subsidiary and the corporate parent company can be held liable on the fraudulent transfer claims, he said.
Meanwhile, Davila granted the defendants’ motion to strike several claims that were subject to a dismissal without leave to amend order issued this past April.
Davila said the defendants’ arguments for the present motion to dismiss was too focused on the claims already dismissed.
“On the facts, the director defendants place entirely too much emphasis on the dismissed, and now stricken, class claims,” he wrote.
The defendants also attempted to argue the claims put forward are not ripe, and that the plaintiffs allege problems that can be resolved by the company outside the courtroom.
But Davila refuted this argument, saying CC-Palo Alto’s lack of solvency meant the claims must advance.
“Plaintiff’s point out that CC-Palo Alto’s 2014 financial statements show its ‘negative net worth’ had tripled, increasing from $106 million to $315 million,” Davila wrote. “Plaintiffs also allege that every year since 2005, ‘CC-Palo Alto has had insufficient funds to repay its borrowing from residents . . . as its obligations to such residents have matured upon death or departure of such residents.’”
Davila set a case management conference for Nov. 2.