Mid-Atlantic Health Law TOPICS

Under the U.S. Bankruptcy Code as it currently exists, there are minimal protections for residents of a Continuing Care Retirement Community (CCRC) when a CCRC files for bankruptcy protection. 

Executory Contracts

Residents of a CCRC typically pay substantial entrance or buy-in fees as part of their agreement to secure housing and care services. However, these agreements are generally considered to be “executory contracts” in bankruptcy proceedings. Executory contracts are contracts in which both parties have continuing obligations to each other, such as the payment of rent on behalf of the residents and the provision of services on behalf of the CCRC.

Unfortunately, the U.S. Bankruptcy Code permits executory contracts to be rejected in a bankruptcy proceeding. This means a bankrupt CCRC can refuse to permit a resident to stay in their apartment and can refuse to provide any further services to the resident.

Entrance fees

In the event of a bankruptcy filing by the CCRC, residents may seek to recover their entrance fees, subject, however, to very serious limitations. More specifically, while it is possible that the Bankruptcy Code might allow the entrance fees to be considered consumer claims, even so, the residents would only be entitled to a priority claim for $3,350, which is far less than the typical entrance fees in a CCRC.

The remaining amounts would be unsecured claims which would not be fully recoverable in a bankruptcy proceeding unless there were enough assets to pay all of the CCRC’s debts. At best, the resident would likely receive some pro-rata percentage of the entrance fee depending on the financial condition of the CCRC and the restructuring or liquidation efforts through the bankruptcy case.

Ombudsman

Under the Bankruptcy Code, CCRCs qualify as health-care businesses which would require the appointment of a patient care ombudsman to monitor care quality and to represent the residents’ interests during bankruptcy proceedings. While this might provide some protection on the care to the residents, the residents are still vulnerable to their agreements being rejected, the facilities closing down, and losing the amounts invested through entrance fees and other expenses.

Further, the patient care ombudsman monitors the care of the residents but does not have any involvement in any of the financial aspects of the CCRC or in the reorganization or liquidation strategic efforts in the bankruptcy proceeding. Therefore, this role is limited and does not provide the residents with significant protection in the bankruptcy case.

Supremacy Clause

While state regulations may attempt to protect the CCRC’s residents, they are often preempted by the Bankruptcy Code under the Supremacy Clause of the United States Constitution since bankruptcy is a federal proceeding.

Need for Reform

Accordingly, there is a good argument that there should be more protections in place for residents who may have invested their life 
savings in entrance fees to secure their residency in a CCRC if the CCRC ends up filing for bankruptcy.

These protections could include, among other things, (i) providing administrative priority claims to residents for all, or at least a more significant portion, of the entrance fees, (ii) limiting the ability of the trustee to reject the residents’ agreements, and (iii) requiring any prospective purchaser of the CCRC in bankruptcy to assume all of the residents’ executory contracts in the event of an asset sale in the bankruptcy proceeding.

In the event, however, that the CCRC is unable to generate enough assets to pay creditors, cannot be sold, and decides to liquidate, there is not much that can be done to protect residents and the significant entrance fees invested in the CCRC.

Jodie E. Bekman
410-576-4082 • jbekman@gfrlaw.com