Another Look at What Can Happen to Refundable Fees In Troubled CCRCs

Over the weekend, a reader asked about the ultimate outcome of a Chapter 11 Bankruptcy reorganization, involving Sears Methodist Retirement System's CCRC properties in Texas, that we reported on back in 2014.  The specific question was "what happened to the refundable entrance fees?"

The bankruptcy court approved escrow and repayment terms of refundable fees for "certain" residents as part of a proposed reorganization plan, with the purchaser(s) of one or all of the 8 involved CCRCs having the option of "assuming" or reaffirming resident agreements; but I need to research more to find out the ultimate outcome, once the dust settled.   I've reached out to a few folks to see if there was a final accounting. 

In picking up the research on the Sears Methodist case, that reminded me I had not reported in this blog on another CCRC bankruptcy court proceeding, filed as a reorganization under Chapter 11 in late 2015 involving what was then known as Westchester Meadows CCRC in New York.

The August 23, 2016 opinion for In re HHH Choices Health Plan, LLC  is interesting, thoughtful, and remarkably accessible for nonlawyers.  The issues addressed carefully include:

• Where the debtor in the Chapter 11 proceeding is a nonprofit organization, what rules apply for possible for-profit and nonprofit bidders?   For example, could state law governing and limiting transfers of assets of a nonprofit organization apply?  The Court concludes that although a new operator would need to comply with state laws (such as the Department of Health's licensing rules), the Bankruptcy Code controls bidding and sale of a bankrupt debtor's assets.
• What standards apply if one bidder, for a lower price, would continue operations as a nonprofit, while the other bidder, for a higher price (and thus more attractive to unsecured creditors), would convert to for-profit operations?  Here, the Court observes that New York state law makes it "clear that price alone is not determinative, and that fulfilling the corporate mission can be decisive if creditors are all being paid in full."   However, that rule was "clear" only if all the debtor's creditors would be fully paid, which would not be the outcome here.  After careful consideration of case precedent, the Court concludes it can confirm a lower-priced sale of the assets, where the buyer satisfies certain standards and is better aligned with the charitable mission of the operation, including in this instance protection of the interests older residents.

The Court's concludes:  

So, while reasonable people could differ, based on the entire evidentiary record and the considerations discussed above, I have decided to approve the Bethel [Bethel Methodist, the nonprofit bidder's] proposal.

 

The Bethel proposal is consistent with the [Debtors'] Board [of Directors'] decision. While I have decided that the Board is not entitled to full deference, it is entitled to some deference. The different effects of the different proposals on general unsecured creditors are negligible, at most. The Bethel proposal was more consistent with the mission of the company. The [for-profit bidder] Focus proposal may be better for some current residents, but on the whole, I believe that the current residents' interests are better served by the Bethel proposal.

 

The financial issues are very hard to measure, but ultimately, seem to be pretty much a wash for all of the different contract holders. While the Focus proposal is better for some contract types, in terms of the immediate payment of the refund claim, there are many residents who would lose the care benefits without compensation; or even if they obtained compensation, they would lose, as I said, part of what they bargained for, which may be very difficult to measure, but is, nevertheless, very real. So, if the effects, other financial effects, were more significant, I might weigh them differently. But given the evidence in front of me, that is my decision. I thank you all for your participation.

The for-profit bidder, for the higher price (and thus attractive to a larger number of creditors) had proposed assuming the obligation to repay 65% of the resident's (90%) refundable fees. The nonprofit bidder proposed 100% repayment of promised amounts, but subject to renegotiation (rather than mere "assumption") of the contracts.

So, what happened to the refundable entrance fees in the Westchester Meadows CCRC once the nonprofit purchaser's bid was confirmed?  The court order permitted (actually, required) a renegotiation process, aimed at easing the "short term" burden of any near-term refunds through renegotiation of payment terms.  

The history of the Westchester Meadows CCRC bankruptcy, including the "renegotiation" effect on refundable fees with the new operators, is well outlined in a September 2016 presentation by the New York State Department of Health's director of Nursing Home Licensure and Certification and CCRC Programs.  

As in most tough questions under the law, for the question about what happens to "refundable fee agreements in CCRC contracts when a bankruptcy occurs?," the answer can be summarized as "it depends."  Frustrating, but at least the above cases are better news than what happened in the Pennsylvania bankruptcy case of Covenant of South Hills, where the new operator continued the agreed care for existing residents, but did not agree to payment of refundable fees.