Bankruptcy Code Should Better Protect Continuing Care Patients

If a continuing care retirement community commences a bankruptcy case, the Bankruptcy Code doesn’t give much relief to residents of the CCRC who paid an entrance fee or buy-in fee—but the code should be amended to provide additional protection.

The code doesn’t explicitly mention buy-ins or entrance fees paid to a CCRC in its priority provisions. However, it does set forth various categories of claims that are entitled to priority in bankruptcy cases.

Section 507(a)(7) of the Bankruptcy Code might be relevant to CCRC entrance fees. The Bankruptcy Reform Act’s legislative history indicates that Congress intended to give priority status to certain types of consumer claims, but it doesn’t specifically mention CCRCs or similar arrangements. However, claims for entrance fees to a CCRC can be considered consumer claims, particularly when they involve issues related to the refund of those fees. Further, a priority claim for a consumer deposit is limited to $3,350—a small fraction of the entrance fee.

A health-care business is defined in the Bankruptcy Code as any public or private entity primarily engaged in offering facilities and services for the diagnosis or treatment of injury, deformity, or disease. It includes various types of facilities such as hospitals, ambulatory surgical centers, and long-term care facilities. A CCRC falls within this definition.

The code contains provisions unique to health-care businesses that reflect the public interest in maintaining the quality of health-care services and protecting patients during bankruptcy.

Patient Care

The appointment of a patient care ombudsman who monitors patient care and represents patients’ interests is required when the debtor is a health-care business. This role is particularly important when the debtor is a long-term care facility or hospital where a drastic reduction in the quality of care could create significant risks for patients.

A patient care ombudsman has a distinct focus from the financial and operational restructuring efforts typically involved in debtor-in-possession financing and plan negotiations. These financial aspects are managed by the debtor-in-possession, creditors, and other financial stakeholders, with oversight from the bankruptcy court. However, the financial and operational aspects of the case directly impact patient care.

Residents enter into contracts for the services and generally pay a large upfront fee and monthly maintenance fees. The fees vary depending on the type of contract, size of the housing unit, and nature of the services.

Federal law doesn’t regulate CCRCs, and state regulations vary. Several state legislatures have attempted to enact legislation aimed at protecting residents. However, because of the US Constitution’s Supremacy Clause, many of these statutes are likely to be preempted by the Bankruptcy Code’s protection of a debtor’s right to reject executory contracts. To date, no federal statute has been enacted to protect CCRC residents from the potential effects of bankruptcy.

It shouldn’t be disputed that selling long-term care contracts to seniors when the seller is insolvent or likely to become insolvent is an act of fraud. Fraud-related laws can be enforceable in bankruptcy proceedings, but their application is subject to the provisions of the Bankruptcy Code. Under Section 544(b)(1), a bankruptcy trustee is empowered to avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable state law by a creditor holding an unsecured claim.

Contracts between a resident and a continuing care retirement facility are generally considered executory contracts, in which both parties have ongoing obligations that haven’t yet been fully performed. CCRC residents typically agree to pay ongoing fees, which might include entrance fees, monthly maintenance fees, and service fees.

On the opposite side, the facility agrees to provide ongoing services such as housing, meals, health care, and other amenities. Because both parties have continuing duties under the contract, it is executory in nature.

However, determination can vary depending on the agreement’s specific terms. CCRC contracts with residents shouldn’t be subject to rejection because rejection comes at too high a financial cost for residents and jeopardizes their care.

More Protections

The Bankruptcy Code should be amended in several ways to provide additional protection for people who paid an entrance fee or buy-in to a CCRC.

The preference reach back period should be two years for payments to insiders.

If there is an unsecured creditors’ committee in the case, the UCC should be required to report to the court on the recoverability of dividends paid pre-bankruptcy to equity holders, money paid by the debtor pre-bankruptcy to redeem stock, and money paid by the debtor pre-bankruptcy to repurchase stock. If no committee has been formed in the case then an examiner or else the patient care ombudsman should be directed to do so.

Buy-in and entrance fees should have priority status over general unsecured claims. The amount of the priority claim should be the amount of the buy-in or entrance fee originally paid amortized over a 10-year period from the date on which the tenant first occupied the CCRC.

One hundred percent of the initial entrance fee received by the debtor during the two-year period preceding bankruptcy should have administrative status if received by the debtor while insolvent or likely to become insolvent at the time of receipt of the entrance fee.

The administrative claims of residents shouldn’t be subject to being primed except for new, additional money—not for a rollover of existing debt.

Contracts with people who paid an entrance fee to the debtor should not be subject to rejection except if the Chapter 11 case is converted to one under Chapter 7 or the resident receives a refund of the unamortized entrance fee.

A sale of the debtor’s assets as a going concern should be conditioned on assuming the contracts with residents.

The buy-in for a CCRC can reach hundreds of thousands of dollars and often represents a substantial portion of the life savings of senior citizens. Few senior citizens can afford to lose that money.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kenneth Rosen practices debtor and creditors’ rights law and advises companies on practical strategies for resolution of financial distress.

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