Residents sue Palo Alto retirement community for ‘up-streaming’ $190 million

Feb. 21--Vi at Palo Alto residents -- including a retired Nobel Prize winner -- filed a class action lawsuit in federal court Wednesday alleging the continuing care retirement center funneled $190 million in refundable entrance fees to its corporate parent with no assurances they would be returned.

According to the 34-page complaint, CC-Palo Alto Inc., the entity that owns and operates the center at 600 and 620 Sand Hill Road, failed to obtain a repayment promise from Chicago-based CC-Development Group Inc., which maintains it has no obligation to give the money back.

But the fees were to be returned to the residents when they moved out or to their families when they died, the suit states.

CC-Palo Alto is now running a deficit of $300 million as a result of "up-streaming" the fees and owes more than $450 million to 500 residents, according to the complaint. A jury trial is being sought.

"These senior citizens were promised financial security," said Niall McCarthy of San Francisco-based law firm Cotchett, Pitre and McCarthy LLP. "Instead, their money was funneled out of state."

The complaint, which is believed to be the first of its kind challenging a continuing care retirement center's financial practices, also accuses CC-Palo Alto of inflating monthly fees through bogus charges.

For instance, the entity allegedly passed on additional taxes the Santa Clara County Assessor's Office ordered it to pay in 2011 for transferring fees out of state. The fees were dubbed "entrepreneurial profit."

The suit also claims residents are footing the full premium for earthquake insurance. The contracts they signed, however, only require them to pay for "furniture, fixtures and equipment," not exterior damage, according to the complaint. And since 2006, residents have allegedly paid millions of dollars for national marketing costs that were not spelled out in their agreements.

Burton Richter, 82, is among the affected residents. In 2005, the 1976 Nobel Laureate in Physics paid an entrance fee of roughly $1.59 million, 90 percent of which was supposed to be refundable.

"Dr. Richter was never informed that CC-Palo Alto intended to transfer his entrance fees upstream to (CC-Development Group)," the complaint states.

"Nor was he informed that CC-Palo Alto did not intend to maintain cash reserves to cover its entrance fee obligations. Dr. Richter expected CC-Palo Alto would maintain sufficient reserves."

The suit says California law requires continuing care retirement centers to maintain reserves for entrance fees they collect.

Vi at Palo Alto spokesman Sam Singer called the allegations contained in the complaint "false and misleading."

"We will vigorously defend against these inflammatory allegations and we strongly believe we will prevail in court," he said in an email Thursday.

The center has always honored its obligations to repay entrance fees when due, Singer added.

"Vi at Palo Alto is economically successful and has no bank debt," he said. "Since inception of the Palo Alto community we have repaid $121 million in entrance fee repayments."

Singer said the center knows it is "doing the right thing" based on a 2012 survey that found a nearly 95 percent satisfaction level among residents.

Formerly known as Classic Residence by Hyatt, Vi at Palo Alto opened in 2005. It is located on 22.4 acres of Stanford University land and houses both an independent living facility consisting of 388 apartments and a 106-unit "care center" for seniors who need assistance. Vi at Palo Alto is one of nine continuing care retirement centers operated by CC-Development Group in the U.S.

Email Jason Green at [email protected].

; follow him at twitter.com/jgreendailynews.

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