Vinay Chopra, Too Late for a Fresh Start: Why the Bankruptcy Code Should Exclude Continuing Care Retirement Communities

• Jurisdiction: United States,Federal
• Publication year: 2011
• Citation: Vol. 27 No. 1

TOO LATE FOR A FRESH START: WHY THE BANKRUPTCY CODE SHOULD EXCLUDE CONTINUING CARE RETIREMENT COMMUNITIES

INTRODUCTION

Consider the following hypothetical: you are a seventy-five year old middle-class woman who retired fifteen years ago. You worked your entire life and earned a modest salary. You started saving when you got married so that you would be able to own your own home, send your children to college, and eventually retire. Your peers have always seen you as fiscally intelligent because you have never made any risky investments and have consistently resisted the urge to spend your year-end bonuses, depositing them into your savings account instead. In addition, you literally needed to be forced to purchase things for yourself. After sending your children to private universities, you continued to save while paying off your mortgage and your children's student debt. Finally, once you reached the age of sixty-five, you felt comfortable enough with your financial position to retire and spend your golden years with your husband.

A few years after you retired, you saw an advertisement for the Golden Years Retirement Community ("Golden Years"). With your husband confined to a wheelchair, you knew it would only get more difficult to care for him as time went on. Golden Years attracted you because it offered the benefit of living with your husband in an independent unit while still having access to increasing care as you needed it. Golden Years was a continuing care retirement community ("CCRC"), which required an initial entrance fee of

$150,000 per person and $2,000 in monthly payments thereafter. On the other hand, the local nursing homes that provided quality care cost upwards of

$9,000 per month, and you had heard terrifying stories about most of them. In- home care was also not a feasible option because you did not qualify for Medicaid,¹and paying out-of-pocket would have been too expensive to maintain for more than one or two years. After much deliberation, you decided to move into Golden Years. Your assets included your $400,000 house and your car, both of which you liquidated in order to finance your retirement at

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Golden Years. You and your husband signed Golden Years' continuing care contract, and moved into your new, final home-or so you thought.

Ten years after moving into Golden Years, you noticed its lower occupancy. While walking past the main office, you overheard a manager's conversation with a nurse and learned that people were not able to afford the entrance fees due to the economic recession and low housing values. Soon after, you received a letter from Golden Years' management describing its financial difficulties. The letter stated that Golden Years had been using the entrance fees from its new residents-who required very little care-to provide expensive medical care for its existing residents whose health had deteriorated over time. However, due to the recession, Golden Years did not have enough new residents to finance its scheme, and it was no longer able to afford payments to the bank that financed the purchase of the land on which Golden Years was built. Your husband, living in the nursing wing of Golden Years at the time, began to worry about what would happen next. Golden Years ended up filing for chapter 11 bankruptcy, and one month into the proceeding, your two favorite nurses were laid off. Soon, your husband began to complain that no one was changing his bed sheets. At this point, you realized that no one had come to check on you in days. Nine months into the proceeding and after much worry about your husband's deteriorating health, you were relieved to learn that Big City Equity, which primarily buys and sells securities, bought Golden Years in a bankruptcy auction. Unfortunately for you, Big City Equity did not have experience managing nursing homes. Big City Equity continued to lay off staff, which caused the level of care to worsen for residents. Furthermore, because of the expensive medical care your husband required, Golden Years told your husband that it was rejecting his life care contract as part of its reorganization²and asked him politely to arrange to leave the facility. You were shocked to learn that this was even a possibility. You asked for a refund of your entrance fees so that you could find a new home, but you were told: "The contract you signed does not have a refund clause, and besides, there is no money available to pay you even if there was one." The incoming Big City Equity management added: "We are honoring as many contracts as we can, and fortunately for you, we are able to keep you as a resident." In addition, your required monthly payment was doubled from $2,000 to $4,000 per month.

This is a common scenario that many elderly retirees in the United States face on a daily basis. Elderly residents living in retirement communities like

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Golden Years are extremely vulnerable to CCRC insolvencies. There have been requests for increased regulation for decades,³most notably after many CCRCs were plagued by financial scandals and mismanagement in the 1970s and 1980s.⁴Due to the recent economic recession, CCRCs are again facing financial trouble,⁵thus prompting a recent report by the U.S. Government

Accountability Office ("GAO").⁶The Bankruptcy Code, through its fundamental policy goals of giving debtors a "fresh start" and providing creditors with equal treatment through an orderly priority scheme,⁷does not adequately address the unique problems faced by CCRC residents when retirement communities become insolvent. Recognizing this issue, most states have enacted statutes to regulate CCRCs.⁸However, there is a lack of uniformity across the states, and some state statutes may be preempted by the Bankruptcy Code.⁹

Public spending on healthcare has been an issue of much contention since the creation of Medicare and Medicaid in the 1930s. Medicaid, the "means- tested" joint federal-state program, funds the nation's primary safety net for long-term care needs.¹⁰It is responsible for financing long-term care for low- income Americans and people who become poor due to the costs of medical or

74 EMORY BANKRUPTCY DEVELOPMENTS JOURNAL [Vol. 27 long-term care.¹¹Medicaid supported 44% of those on nursing-home care in

1998, and it covers approximately 40% of all long-term care spending.¹²In the above hypothetical, the husband would most likely be forced to rely on Medicaid to receive his necessary care.¹³

Because CCRC insolvencies affect a particularly vulnerable group and can result in potentially tragic outcomes, this Comment argues that Congress should enact comprehensive regulations to prevent CCRC insolvencies. The regulations would have both ex ante and ex post components. First, the regulations should prevent a CCRC from running its operations in such a way as to threaten insolvency. Second, if a CCRC violates these guidelines or actually becomes insolvent, the regulations should prevent the CCRC from filing for bankruptcy and instead bring it under the control of a receiver.

If a state has an adequate regulatory structure, the receiver would be a state official. Ideally, states would adopt a model act in connection with the congressional act. However, national legislation should provide for federal receivership in any state that does not have adequate regulation. Through additional oversight and confidence in CCRCs, Americans will be provided with an increased incentive to prepare for retirement and invest their savings in a CCRC, thereby creating a more robust market for private long-term care.

This Comment provides a comprehensive look at CCRCs and essentially asserts that national regulation is needed in order to protect elderly residents from the dire consequences that often accompany CCRC insolvencies. Part I details the background of CCRCs and the problems they face when entering bankruptcy. Part II then explains the inadequacies of existing protections and argues that merely amending the Bankruptcy Code's priority scheme would not solve these problems. Next, Part III asserts that the Bankruptcy Code frustrates effective state regulation; therefore, CCRCs should not be permitted to file for bankruptcy and instead should be subject to special regulations. Finally, Part IV explains why this proposal is not dangerously radical by detailing other entities that are also exempt from the Bankruptcy Code and analogizing these entities to CCRCs.

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I. INSOLVENT CCRCS LEAVE THE ELDERLY VULNERABLE TO DISASTROUS

CONSEQUENCES

CCRCs are financially complicated businesses that are especially susceptible to economic downturns and have been plagued by frequent bankruptcies over the past few decades. Because of the executory contract provisions of the Bankruptcy Code,¹⁴CCRC residents are vulnerable to losing their entrance fees if their continuing-care contracts are rejected, and can thus, effectively be forced into poverty.

A. Continuing Care Retirement Communities

CCRCs are an increasingly popular alternative to conventional assisted living facilities and nursing homes to house and care for the elderly.¹⁵CCRCs "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."¹⁶Typically, residents move in to a CCRC when they are still able to live independently.¹⁷As the CCRC residents age, they gradually receive assistance with daily living and nursing care when necessary.¹⁸Elderly people who can afford this type of care prefer it because they "can stay in the same community as their health deteriorates, and couples can avoid being separated in their declining years."¹⁹In most CCRCs, residents sign "a contract for a package consisting of housing, nursing care, and other services for the remainder of" their lives.²⁰In consideration for...