Time-share owners sue Diamond Resorts over fees

KOLOA — Time-share owners have filed a federal class-action lawsuit over an assessment fee they claim was forced by a management-based board without approval of the owners.

The suit, filed April 6 in U.S. District Court in Honolulu by attorneys William M. McKeon and Keri C. Mehling, is on behalf of five plaintiffs and is open to “all persons who were billed for the 2012 Water Intrusion Assessment by the Association of Apartment Owners of Po‘ipu Point,” a 219-room vacation time-share resort and hotel managed by Diamond Resorts International that sits on 22 acres on the South Shore.

The class action challenges the imposition of a $65,822,529 water intrusion assessment required of vacation time-share interests. The defendants allege that the $5,893.32 per weekly interval assessment to owners of 11,169 intervals annually is being used to renovate Po‘ipu Point and is not part of their obligation.

The suit is seeking a court order to certify actual damages. It also seeks a judicial declaration to void the project and grant restitution to the owners.

The defendants listed include Diamond Resorts Corporation; Diamond Resorts Parent, Diamond Resorts Holdings and Resort Management International. Individuals are named in the suit for alleged violation of fiduciary duties as board members or management according to their respective bylaws.

“We believe this lawsuit is completely without merit and look forward to proving our case in court,” said Elliot Sloane, a spokesperson for Diamond Resorts. “And while we will not litigate this case in the media, it is important to note that the complaint is filled with inaccuracies and that we are extremely encouraged by the support of our membership base on this water intrusion assessment.”

The plaintiffs include Bruce Benedict, Joe Williams, Joseph Baglino, James Brown and Adrienne Schmadeke. They are leaving the suit open to time-share owners billed for the water intrusion assessment.

The Association of Apartment Owners of Po‘ipu Point (AAO) is a non-party group of all owners and points members that together determine management and policies. It is a Hawai‘i nonprofit corporation formed in 1994 and incorporated in 2007.

The suit alleges that the AAO board had no more than five members by virtue of ownership. It claims the majority of board members were DRI employees or persons acting on its behalf.

The Po‘ipu Point Vacation Owners Association formed in 1995. The suit alleges that the AAO and not the VOA, charged the Water Intrusion Assessment to the owners.

Diamond Resorts Hawai‘i Collection Members Association has a five-member board that is responsible for administration. The Nevada points-based vacation timeshare plan was created in 2006 by Club Sunterra and renamed after a merger in 2007.

Owners of Hawai‘i Collection memberships accrue points to use as currency at the resorts. Membership owners belong to DRHCMA.

Po‘ipu Point and three other resorts are members of the Hawai‘i Collection Trust and controlled by the DRHCMA board. The board has the authority to exercise voting power over intervals at AAO elections.

The suit alleges the board is hostile and intimidating in preventing members from utilizing their rights to take collective actions to oppose control of the AAO board.

This bloc of owners exercises AAO voting power to elect employees and others under its control to AAO director positions. The suit alleges that DRI prevents individual owners from organizing to elect AAO board members who are not controlled by DRI.

The nonprofit Concerned Owners at the Point at Po‘ipu formed in November 2011 to address its issues with the AAO board including a legal fund. It alleges that following the execution of an Acknowledgment of Financial Arrangement, the management fees paid by the AAO to DRI increased significantly.

COPP LLC’s goals include restraining orders against foreclosure threats, legal counsel, access to records and membership listings. It claims that approximately 2,000 members correspond with management to express opposition to the assessment, and perform outreach to government agencies and other AAOs on the issue.

The water intrusion assessment was presented at the Aug. 10, 2010, AAO board meeting at DRI’s corporate office in Las Vegas. According to DRI, its purpose is to restore damage resulting from water intrusion.

According to the five-year project guidelines, the water intrusion repair includes the phased removal and replacement of the building envelope for each structure, along with the waterproofing, exterior finish, insulation systems and sheathing. The roofs, framing, doors and windows will also be replaced, along with structural alterations and additions of shear walls.

Sloane said the AAP board contracted with a law firm, construction management firm, architects, building envelope specialists and structural engineers to complete the repair plan. The payment plan ensures deposits are available to enter into contracts and purchase engineering materials.

Work started with testing to determine the extent of the damage and required repairs, said Sloane. If not addressed, he said the structure faced disastrous consequences.

The AAO board filed an insurance claim and hired legal counsel to assist with the process. Sloane said the insurance carriers denied the claim for reasons of faulty workmanship, normal wear and tear and nonspecific damage.

It was determined the odds of prevailing in litigation against the insurance carrier were slim and potentially cost prohibitive, Sloane said. The  construction defect claim against the original developer was also ruled out since Hawai‘i has a two-year statute of limitations and a 10-year statute of repose on all construction defect claims.

The option of financing the repairs was also not possible, Sloane said. It is difficult for homeowners associations to obtain a loan of this magnitude without collateral.

The water intrusion assessment funds are being paid directly to the Po‘ipu homeowner’s association and not to Diamond or used to fund its acquisitions, he said.

Owners say that by not paying the assessment bill, they are not permitted to book vacations and are subject to late fees and potential collections actions. They would eventually be subject to permanent forfeiture of their intervals and interests, according to the lawsuit.

Owners were assessed more than $6,000 per interval in addition to owners’ usual assessments and fees, with $2,000 due before Jan. 1.

“To date, the home owners’ association has collected nearly 85 percent of the amount billed and due for 2012,” Sloane said.

The intervals not owned by individuals are assessed to the Hawai‘i Collection and unsold inventory is held by a related developer. Sloane said Diamond is paying approximately $10 million of the assessment.

The suit claims that management is using the assessment for renovations and upgrades and that repairs from damage caused by water intrusion is not the real need.

The suit also claims that the existence of water intrusion issues was hidden from owners or potential owners until after the assessment was approved.

According to one source, some owners have multiple-week intervals and are walking away, rather than assuming the assessment. Some owners are attempting to sell intervals for $1.

The project’s price tag includes construction costs, consultant fees, delinquency allowances, credit card fee allowances, administrative costs and fees. Owner complaints say the assessment is essentially the price of a new hotel.

The suit is alleging fiduciary violations on board control, unfair or deceptive trade practices, along with consumer fraud, for the assessment. It claims the management executives and members of the AAO and DRHCMA boards are representing an invalid water intrusion assessment charge against the owners.

A similar situation occurred in 2009 with the Hanalei Bay Resort, a time share where owners sued to force out its management company, Celebrity Resorts. It is now managed by Trading Places.

A Fall 2010 article printed in TimeSharing Today, reported similar opposition and litigation to a Diamond Resorts property on Sint Maarten, the Dutch colony on the Caribbean island of Saint Martin. Owners at the Royal Palm Beach Club and Flamingo Beach Resort were granted a court injunction against foreclosures resulting from not paying late fees associated with a 25 percent maintenance fee hike it ruled unreasonable, according to the report.

The court also ruled that management fee hikes be charged to developer and not the owners, said the article. It also ruled that maintenance fees and reserve accounts not be used for loans or channeled back to the United States.

• Tom LaVenture can be reached at 245-3681 (ext. 224) or tlaventure@thegardenisland.com.

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