Ask the legal expert: Are CCRC entrance fees protected when it files for bankruptcy or under debt restructuring?

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Attorney John Durso, Ungaretti & Harris LLP
Attorney John Durso, Ungaretti & Harris LLP

Q: Are continuing care retirement communities' entrance fees protected under law when a CCRC files for bankruptcy or restructures its debt?

A: The bankruptcy courts generally recognize the importance of protecting resident entrance fees. The inability of a CCRC to meet its obligations to refund resident entrance fees would severely reduce the CCRC's ability to market its services to prospective residents and thereby reduce its value to a prospective buyer or affiliate. Usually, prospective purchasers or affiliates of CCRCs in and outside of bankruptcy generally assume the contractual obligation to refund resident entrance fees.

In a recent bankruptcy case filed by Fairview Ministries Inc., the bankruptcy court granted a first-day motion, on behalf of the CCRC, to provide a repayout priority for existing and future entrance fee refunds. Hopefully, this will be a trend in the rare circumstance that a CCRC files for bankruptcy.

But such a result is not guaranteed. Over the last several years, there were approximately eight CCRC bankruptcies. In these cases, except Covenant South Hills, the residents' entrance fees were ultimately fully protected.

In the bankruptcy case of Covenant South Hills, the purchaser of the CCRC assumed the continuation of the life care contracts and a limited right to raise monthly fees, but not the obligation to refund resident entrance fees. 

At least eight lawsuits filed by the residents included claims of breach of contract, fraud, negligent misrepresentation, breach of fiduciary duty and violation of the Pennsylvania Continuing Care-Provider Registration Disclosure Act. The parties settled. The terms are confidential, but it's likely the residents received back some portion of their entrance fee refund rights in return for settling.

Please send your legal questions to John Durso at ltcnews@mcknights.com.

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