Protecting Residents of Continuing Care Retirement Communities

Protecting Residents of Continuing Care Retirement Communities

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Continuing care retirement communities (CCRCs—also called "continuing care facilities") are an alternative to conventional assisted living facilities and nursing homes that have grown in popularity during the past 20 years for the housing and care of the elderly.1 In January 2001, more than 500,000 people resided in CCRCs.2 Residents of CCRCs pay substantial entrance fees (ranging from $20,000 to $200,000)3 plus monthly payments (ranging from $200 to $4,000)4 in exchange for housing, nursing care and other services (such as meals and entertainment) provided to them for the remainder of their lives. CCRCs are an attractive alternative to other living arrangements for seniors because they allow residents to live independently while they are able, and then to receive increasing levels of care as needed, up to and including the levels of care provided in nursing facilities.


A CCRC resident can make these transitions from lower to higher levels of care without leaving a single, familiar campus or building complex. Generally, a CCRC offers living quarters (including apartments or houses) of varying sizes for residents who can live with a high degree of independence, facilities for residents who require greater amounts of care, and common areas for all residents. A CCRC may appear to a prospective resident to operate as a condominium. However, in most CCRCs, "[t]he residents have no fee interest in the community; rather, each resident receives only a license to live in the community..."5

Residence in a CCRC requires substantial investment and, in some cases, a considerable risk. For most residents, the entrance fee required to enter a CCRC constitutes most or all of a resident's life savings. If a CCRC becomes insolvent and is forced to close, a resident can potentially forfeit all of this investment. The CCRC industry is particularly vulnerable to insolvency, and several CCRCs have failed, primarily as a result of poor financial planning.6

Particularly among new CCRCs, managers have underestimated the future costs of caring for residents and have misappropriated the apparent surpluses from residents' entrance fees to construct new facilities or to be treated as profits.7 In the industry's early years, CCRCs also tended to establish relatively low entrance fees, again due to underestimates of residents' future health care costs.8 On average, 10-15 years after the first residents of new CCRCs have begun occupancy, many CCRCs have found themselves unprepared for the increased health costs of their aging residents.9 Additionally, as health care advances have prolonged lives, CCRCs have experienced unexpectedly low turnover rates, and consequently have not realized expected levels of income from the entrance fees of new residents.10

There have also been some cases of fraud in the CCRC industry, mostly during the industry's earlier years. In one notorious case, the manager of seven CCRCs in Arizona, California and Hawaii operated what was later described by a chapter 7 trustee as "a modern day Ponzi scheme."11 "[O]ver a number of years the sponsors [of this CCRC] sold contracts promising lifetime care to new residents as a means of raising money to meet current obligations to previously existing residents."12 In another highly publicized case, the managers of a CCRC embezzled large amounts of CCRC funds for personal use.13

Whether because of fraud or (more often) poor financial planning, many CCRCs have experienced insolvency and have been forced to file for bankruptcy. In bankruptcy, a CCRC has the ability to reject executory contracts, including life-care contracts with its residents, pursuant to §365(a) of the U.S. Bankruptcy Code.14 In a number of cases, this has left residents homeless. Moreover, once a CCRC files for bankruptcy, the recourse of its residents is usually limited to general, unsecured claims against its bankruptcy estate. Most residents of a CCRC do not hold property interests in the CCRC facility, but merely occupy the facility under what amounts to a license.15 Under the priority scheme of the U.S. Bankruptcy Code, their interests are therefore usually subordinate to those of all of the CCRC's secured creditors and certain of its other unsecured creditors.16 These claims often entitle residents to only small fractions of their life savings.17

Several state legislatures have responded to the financial risks associated with CCRCs by attempting to enact legislation aimed at protecting residents.18 However, because of the Supremacy Clause of the U.S. Constitution, many of these statutes are likely to be preempted by the Bankruptcy Code's protection of a debtor's right to reject executory contracts.19 To date, no federal statute has been enacted to protect CCRC residents from the potential effects of a CCRC bankruptcy.

However, the CCRC industry and professionals advising CCRCs and their residents have responded by creating safeguards of their own. These precautions can minimize the risk of a CCRC becoming insolvent, thus lessening the danger to residents if a CCRC files for bankruptcy. As a precautionary measure, professionals advising both CCRCs and potential CCRC residents should be aware of the following safeguards when evaluating a CCRC's protection of residents' investments:

  • CCRCs should fully disclose their finances to all residents, potential residents and their advisors, regardless of the requirements of applicable state law. (Some states go a step further, requiring broader public disclosure of CCRC finances.)20
  • CCRCs should establish procedures for the reservation of adequate funds to care for residents in their later years, when health care costs tend to increase dramatically. Furthermore, CCRCs should not treat temporary surpluses as profits on their balance sheets.21 Some states have enacted statutes that only require reservation of funds sufficient to cover a facility's long-term debt for a period of one year. However, these statutes fail to require reserves for ongoing operating expenses.22 A CCRC should establish a more cautious approach designed to accommodate residents' needs over a longer period of time.
  • Periodic actuarial studies should be conducted to ensure that sufficient funds are set aside for residents' future needs. If these studies reveal a lack of adequate future funds, a CCRC should arrange for alternative financing.
  • If feasible, a CCRC should place a substantial portion of each resident's entrance fee in escrow or trust for the benefit of the individual resident, not to be shared pro rata by all residents. If properly instituted, these trusts or escrow accounts will act to protect the residents' investments from the claims of the CCRC's other creditors if it goes into bankruptcy.23
  • CCRCs should consider creating security interests in assets for the benefit of their residents.24 To be most effective, any such liens should attach to assets upon a resident's occupancy.25 A CCRC that offers this protection should warrant that the assets subject to the security interest are not otherwise encumbered, or at least disclose the priority of a resident's interest in relation to those of other secured creditors.
  • A CCRC should also consider procuring surety or fidelity bonds to help finance its residents' future care if the CCRC is forced to liquidate.26 Surety or fidelity bonds, as a reserve fund to help protect against the contingencies of bankruptcy, will provide further assurances to residents of the financial stability of their investments in a CCRC.
  • As now required under several states' laws, many CCRCs refund residents' entry fees up to a certain number of days after a resident has moved into a facility, if the resident decides to move out.27 Establishment of such a policy will provide uncertain prospective residents of a CCRC with some level of assurance to make them more comfortable investing in the CCRC, which often occurs well in advance of moving in.
  • Professionals should determine whether a CCRC has been accredited or is eligible for accreditation by the nation's only accrediting body in this industry, the Continuing Care Accreditation Commission (CCAC).28 Sponsored by the American Association of Homes for the Aging, the CCAC was created by the industry in 1985 to ensure standards and develop reputability for the industry.29 The CCAC has established standards by which it evaluates CCRC organizations over a five-year period for accreditation.30 One of three critical areas of the CCAC's evaluation of an organization is the review by a financial advisory board of the organization's overall financial resources and disclosures.31 In this evaluation, the CCAC considers an organization's current financial position, its long-term financial resources and its integrated strategic planning.32 The CCAC requires that an "organization's long-term financial resources [be] projected to be adequate to meet its obligations."33 According to one independent account, most of the institutions to which the CCAC denies accreditation (between 5 and 10 percent of applicants) are denied "because of shaky finances—in particular, too many liabilities and too few reserves to cover their health care commitments."34

Therefore, CCRCs may be able to create protections for their residents in the event of a bankruptcy filing or insolvency. Furthermore, these protections will be important for any CCRC seeking protection under the bankruptcy laws in order to keep residents, who often are entitled to refunds if they choose to leave the CCRC, and to attract new residents. For any CCRC seeking protection under the Bankruptcy Code to restructure, the retention and attraction of new residents will be the main challenge of the case and the key to its successful restructuring.


1 Martin, Nathalie D., "The Insolvent Life Care Provider: Who Leads the Dance Between the Federal Bankruptcy Code and State Continuing-Care Statutes?" 61 Ohio State Law Journal 267, 268 (2000). Return to article

2 "Is Assisted Living the Right Choice?" Consumer Reports, January 2001 at 26. Return to article

3 AARP, "Continuing Care Retirement Communities (CCRC)" (visited Jan. 13, 2003) ( Return to article

4 Id.; Consumer Reports, supra note 2 at 126. Return to article

5 Floyd, Michael D., "Should Government Regulate the Financial Management of Continuing Care Retirement Communities?," 1 Elder Law Journal 29, 46 (1993). Return to article

6 Floyd, supra note 5 at 29. Return to article

7 Floyd at 41; Martin, "The Insolvent Life Care Provider," at 278-79. Return to article

8 Floyd at 43. Return to article

9 Id.; Martin, Nathalie D., "Funding Long Term Health Care: Some Risk-spreaders Create More Risks Than They Cure," 16 J. Contemp. Health L. & Pol'y. 355, 380. Return to article

10 See "Comment: Continuing-Care Communities for the Elderly: Potential Pitfalls and Proposed Regulation," 128 U. Pa. L. Rev. 883, 920 (1980). Return to article

11 Life Care Communities: Promises and Problems, Hearing Before the Senate Special Comm. on Aging, 98th Cong., 1st Ses. At 115-116 (report of the Trustee of Pacific Homes), quoted in Floyd at 39. Return to article

12 Floyd at 39. Return to article

13 See Id. at 39-40. Return to article

14 11 U.S.C.A. §365(a) (2003). Return to article

15 Floyd at 46. Return to article

16 See 11 U.S.C. §507 (2003). Return to article

17 Martin, "The Insolvent Life Care Provider" at 270. Return to article

18 Martin, "The Insolvent Life Care Provider" at 270; see Floyd, supra note 5 at 20 (discussing the establishment of a guaranty fund by the state of Indiana to protect residents of bankrupt CCRCs). Return to article

19 U.S. CONST. art VI, cl. 2; but, see Martin, supra note 1 at 291-300 (discussing the Supremacy Clause and the conflicting principles of New Federalism, specifically the Police Power). Return to article

20 "Continuing-Care Communities for the Elderly" at 930. Return to article

21 Martin, "The Insolvent Life Care Provider" at 278. Return to article

22 Martin, "The Insolvent Life Care Provider" at 303-04. Return to article

23 Section 541(a) of the Bankruptcy Code defines "property of the estate" to include any property in which the debtor has a legal or equitable interest. 11 U.S.C. §541 (2003). In relation, §541(d) of the Code states that "[p]roperty in which the debtor holds...only legal title and not an equitable interest becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." Id. Therefore, any money deposited into trust accounts or escrow funds is owned by residents, not the CCRC. CCRCs should be careful not to commingle the residents' funds with those of the CCRC. Failure by the CCRC to segregate the funds may disrupt the protective nature of the escrow account or trust. Return to article

24 "Continuing-Care Communities for the Elderly" at 925. Return to article

25 Id. Return to article

26 "Continuing-Care Communities for the Elderly" at 922. Return to article

27 Martin, "The Insolvent Life Care Provider," 301-302. Return to article

28 AARP (formerly known as the American Association of Retired Persons) describes CCAC as "the nation's only accrediting body for CCRCs." AARP, "Continuing Care Retirement Communities (CCRC)" (visited Jan. 13, 2003) ( Return to article

29 Floyd at 53. Return to article

30 Continuing Care Accreditation Commission (CCAC), "Our Mission and Vision" (visited Jan. 13, 2003) ( Return to article

31 Id. Return to article

32 CCAC, "The Continuing Care Accreditation Commission Standards of Excellence, Required Documents, Self-Assessment Questions, Area II," pp. 13-19 ( (visited Jan. 19, 2003). Return to article

33 Id. at 15. Return to article

34 "An Empty Promise to the Elderly?," Consumer Reports, June 1991, at 425. Return to article

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Saturday, March 1, 2003