What is the Function of “Liens” in Favor of Residents in Continuing Care or Life Plan Communities?
One of the points of tension during the current economy is the extent to which residents who pay large “entrance fees” and who often pay additional monthly “service” fees are protected in the event of insolvency of their Continuing Care Retirement Community (CCRCs) or Life Plan Community (LPCs). Residents are asking about “liens,” and pointing to an option for a statutory lien available under Texas law. Let’s take a look.
The Texas residents’ lien law dates back to at least 1994. In 2015, amendments to the Texas Law defining “continuing care” services, extended the lien option beyond customers who are “residents” of a CCRC facility, and making the protection available in “continuing care at home” contracts, where customers prepay for “continuing care” services to be provided in their own home. Texas law currently provides:
“To secure the obligations of the provider under any continuing care contract, a lien attaches on the date a resident first occupies a facility or receives services under a continuing care contract. The lien covers the real and personal property of the provider located at the facility. The provider shall prepare a written notice sworn to by an officer of the provider for each county where the provider has a facility. The notice must contain the name of the provider, the legal description of each facility of the provider, and a statement that the facility is subject to this chapter and the lien provided in this section The provider shall file for record the notice in the real property records of each county where the provider has a facility on or before the later of January 1, 1994, or the date of the execution of the first continuing care contract relating to the facility.”
In the event of bankruptcy proceedings, without such a lien, residents of CCRCs and LPCs who have paid large fees are usually classified as “unsecured creditors” even if they have “refund” rights under their contract with the CCRC or LPC. With such a lien, it appears they are still behind banks and bond holders who have qualified as secured creditors under the Uniform Commercial Code, but they would have priority over ordinary creditors such as service providers, food vendors, etc. Law Professor Nathalie Martin at University of New Mexico is the author of an important early article critiquing solvency concerns for CCRCs and pointing to the need for safeguards that could better protect CCRC residents in the event of insolvency.
There isn’t a lot of evidence available on whether or how such a lien actually works in practice. If a CCRC or LPC is “in” bankruptcy court, the troubled enterprise is usually filing under Chapter 11 to seek approval for a reorganization plan, and the hope is a new operator will emerge with adequate finances and a plan of recovery for ongoing operations, operations that may make it possible to honor past promises to residents.
Is is probably better as a resident or contract holder to “have a lien” than not to have a lien, but liens don’t solve ongoing financial problems and they could even mask the lack of an actuarially sound financial plan for future operations.
I was interested to observe that in a recent “talking points” document prepared by the trade association that represents a large number of nonprofit providers of aging services, LeadingAge described state laws as potentially important to protecting CCRC and LPC residents against insolvency concerns. The list of state law protections LeadingAge pointed to included “automatic liens in favor of … residents’ financial interests.”