Wednesday, July 25, 2018
A recent reader asked about what happened in the Sears Methodist Retirement System bankruptcy case in Texas for residents who had paid a "refundable" entry fee before the company filed for reorganization under Chapter 11 of the Bankruptcy Code. In addition to sharing some legal documents in a recent update, I promised readers to reach out to contacts to get more of the story. I heard from a long-time correspondent, Jennifer Young. Here is her important story:
I am Jennifer Young. Prior to retirement I worked in Human Resources. I am currently a resident of a CCRC in North Carolina. I moved to North Carolina in 2015 after an unsatisfactory experience in a CCRC in Texas.
Here is what happened to me in Texas. I was a resident of a CCRC, one of the Sears Methodist Retirement Service (SMRS) communities, operated under nonprofit tax rules. There were 5 CCRC operations in the SMRS system, along with 2 subsidized senior housing complexes, an Assisted Living facility, and the management of 3 state veterans’ homes. Eleven communities in all. I managed to move into my CCRC just two years before SMRS filed for protection in bankruptcy court under Chapter 11.
My community was a Type C, 90% refund contract. Our CCRC was brand new, with the entrance fees of those moving in pledged to debt service for the construction loan. SMRS’ decision to break ground on the newest of their CCRCs in 2009 (in the middle of a recession) should have been my first red flag, but I was too wrapped up in the process of choosing a desirable lot and influencing the construction of our future cottage in my own community to think about the long-term implications of that management decision.
As I learned the hard way, the unsecured status of entrance fees meant that residents were “unsecured creditors” in the bankruptcy process; hence, I was advised to apply for a seat on the court’s Unsecured Creditor Committee. I did and served on this committee from the summer of 2014 until it was dissolved in the spring of 2015. Per Bankruptcy Court procedures, these Committees routinely hire a law firm (with fees paid by the bankrupt estate). Residents were lumped in with all of the other unsecured creditors. Meetings were conducted telephonically because committee members were quite scattered geographically. For example, one vendor of therapy services wasn’t headquartered in Texas.
I don’t remember whether the judge issued a formal order about the pre-petition refundable entrance fees, but I know all parties did not want residents to be financially harmed. They were worried about the very negative impact of residents losing their entrance fees, as happened during the 2009 bankruptcy of a Pittsburgh, Pennsylvania CCRC, Covenant of South Hills. A second such outcome, especially for a large, multi-facility community, would have been devastating to the continuing care industry as a whole.
In the Texas bankruptcy process, the court set up an interim manager (not from SMRS) who worked closely with attorneys from all parties in reviewing the offers from potential new owners. As a member of the above-mentioned Committee, I would hear that new owners MUST be willing to accept the current Residency Agreements (contracts). So “applications” to buy were screened in that regard; however, the Committee and the open court procedures did not reveal details regarding all the letters of intent that were submitted. They may have been buried in tons of documents, but I don’t know for sure.
There was an announcement in the fall of 2014 that another Texas non-profit wanted the CCRCs, and all parties seemed content with this prospect. However, that fell through, as this potential new owner’s Board put the kabosh on the deal. To simplify the complexities of the process, let’s just say that for the communities that were not “picked off” during the fall months, there was an auction in January 2015. In contrast, SMRS’ Assisted Living facility was purchased without an auction and its Subsidized Housing facilities went back to HUD.
A For-Profit new owner obtained the CCRCs. They obeyed the “requirement” (?) that current resident contracts be honored. I often wonder if their willingness to do so was because the contracts were completely silent regarding the Marketing commitment of “Don’t worry, if you run out of money through no fault of your own you won’t be kicked out on the street,” a statement that is a hallmark of non-profit CCRCs. This kind of promise may not be part of the deal with a For-Profit owner. Not wanting to give notice during my service on the Unsecured Creditor Committee, I waited until its dissolution and the date of the new ownership to give the required 90-day notice of our decision to move out.
We moved to a non-profit CCRC in a state, North Carolina, that regulates the industry a lot better than Texas does. The contract here is NOT silent on the commitment to keep residents in place. Also, here the contract repays entrance fees upon the occupancy of a new resident, with a year’s maximum wait. I asked if this (the one-year maximum wait) was per state law. Answer: “No, we just didn’t think it was fair to ask an estate to wait more than a year.”
The Texas CCRC we left in our rear view mirror, under its new For Profit owner, did eventually honor our refundable fee contract. That meant we waited for new occupants for almost a year, but after they moved in, our 90% refund was sent to us in the summer of 2016.
Even though my part is over, the Bankruptcy Court proceedings did not resolve all issues. There was an action filed by the Texas Attorney General against the former CEO and some Board members alleging fraud; that may still be unresolved. Stay tuned if you are interested.
Thank you, Jennifer, for giving us a clearer picture from a resident perspective on what happened in the SMRS bankruptcy.
For more about the AG's suit, see the write-up on page 2 of this linked law firm newsletter.
When insolvency overtakes an operation, the ability of residents to retain a right to refundable fees depends on a host of subtle factors: the language of the contracts in question; state regulations related to those contracts; the strength of the overall market for CCRCs and other senior living entities (to generate new owners/managers); the willingness of a new operator to undertake, in whole or in part, a refund obligation that was not "secured" by the contract; and, sometimes, negotiations with creditors, including residents as creditors.