Secured vs. Unsecured Creditors for CCRCs or Life Care Communities in Reorganization: The Clare Oaks Example
Lately I’ve been wading through deep waters in the form of competing proposals for creditor relief in a bankruptcy matter involving “senior living.”
Clare Oaks, as described in recent court documents, is a “licensed life care facility composed of approximately 164 independent living units…, 33 assisted living units (including 16 memory care units) and 120 skilled care units,” located near Chicago, Illinois. In June 2019, Clare Oaks petitioned for Chapter 11 reorganization in Bankruptcy Courts, its second attempt at reorganization in 10 years. As with any Continuing Care Retirement Community (CCRC) or Life Plan Community seeking relief from debts, a central question will be whether residents are protected against loss, including loss of any large fees (“entrance fees” or “admission fees”) defined in their contracts as “refundable,” or, more dramatic, their right to continue to live in the community, especially if they cannot afford higher monthly service fees. Competing reorganization plans are coming before the Court for possible approval in the next couple of months. Many
Especially following the financial crisis of 2008-10 that hit CCRCs fairly hard, residents may feel the need to call upon experienced specialists to represent their interests as “unsecured creditors.” And this is true whether they have a refundable admission fee or a large nonrefundable or declining balance entrance fee; reorganizations always pose the potential for significant increases in monthly service fees. In the instance of Clare Oaks, some residents are members of an affiliated religious congregation (St. Joseph of the Third Order of St. Frances), but regardless of their membership status, counsel for the unsecured creditors group are proposing they be treated in the same way. They propose that instead of receiving payment of “refundable” fees due under the terms of their agreements when they move out of their units or pass away, they would be willing to accept a phased refundable fee, with the timing delayed to permit their unit to be re-sold (or re-occupied) by a new resident who has also paid an entrance fee. Under the proposed plan, individual residents would have a one-time option to opt out of this alternative; but, as a practical matter that option is not realistic as the bankruptcy court could and probably would simply discharge the repayment obligation as an unsecured debt where there are inadequate funds to repay them.
In the instance of Clare Oaks, bond companies are secured debt holders. Tax-exempt bonds are typically used for financing by nonprofit senior living companies. Such bonds tend to be associated with high yields, but also greater risks of defaults, as discussed here. Two of the bond companies have submitted their own, alternative plan. Bondholders Lapis Advisers and Amundi Pioneer Asset Management, Inc. have proposed a plan that ties any repayments to residents to agreements for restructuring of all debts.