Affordable Housing Institute : US

By: David A. Smith

 

 

[Waves to Harvey and smiles]

“No, no, not yet. Not until me and Harvey get the rules straightened out.”
“Rules!?!? In a knife fight!?!? No rules.”

Butch Cassidy and Harvey Logan

 

Abject desperation yields a creativity verging on the laughable, as illustrated by this recent Wall Street Journal about residents whose developer has what can only be described as a Hole-in-the-Wall defense to liability:

 

NAPLES, Fla. — It’s not easy living on a golf course.

Bonita Bay Group, once a premier developer of upper-crust golf communities in this upper-crust town, is on the verge of collapse.

 

Through the 1990s and the earlier part of this decade, Bonita Bay was regarded as one of the leading developers in the Naples area, which has the highest per capita income of any locale in the country except Stamford-Greenwich, Conn. Bonita Bay launched seven Naples-area communities where houses sold for up to $12 million and came with access to exclusive golf clubs with restaurants, tennis courts and pools.  Its homeowners have included Richard Schulze, the billionaire chairman of Best Buy Corp., opera diva Kiri Te Kanawa and New Jersey Nets President Rod Thorn.

 

Planning to buying with your profits from the new arena in Atlantic Yards?

 

Mediterra is Bonita Bay’s most opulent community. The development also has a Mediterranean-themed park.

 

Mediterra is Bonita Bay’s most opulent community. The development also has a Mediterranean-themed park.

 

How very nice – if it’s fully built, which it isn’t.

 

Today, like many other Sunbelt developers, Bonita Bay is being squeezed by debt and plunging sales. But its biggest problem is a dispute over the deposits homeowners plunked down for memberships in the golf clubs, a marina and other clubs.

 

Note that the aggrieved investors already own homes.  The homes were located adjacent to forthcoming leisure-time amenities – golf clubs, marinas, and so on.  Unless those amenities are completed are planned, the homes already purchased will be worth quite a bit less than the owners paid.  But that’s not their grievance.  It’s actually much simpler:

 

Many members want to quit the clubs and get their money back for reasons ranging from cheaper golf elsewhere to the desire for ready cash.

 

That is a problem for the moneyed aristocracy: one’s lifestyle depends on either credit or ready money, and it’s the most baffling thing, when the credit dries up, so too does the ready money.

 

Lane. [Gravely.] There were no cucumbers in the market this morning, sir. I went down twice.

Algernon. No cucumbers!

Lane. No, sir. Not even for ready money.

 

In addition to its claim of infinite rule-amending power, Bonita Bay has a second and more effective argument:

 

The company says it will be forced to file for bankruptcy if it has to refund $245 million in golf-club membership fees some homeowners are demanding, in a battle that’s pitting residents against each other and against the company that sold them lavish dream homes during the height of the boom.

 

Bankruptcy risk is nothing new.  What’s new is Bonita bay’s theory.

 

In November 2008, the company told homeowners who had paid $245 million in club deposits that it would no longer redeem the fees on demand. The company says it had returned $77 million in such fees over the prior three years.

 

What did the documents say?

 

Documents?  Why do documents matter?

 

Their membership agreements say the deposits — up to $185,000 per member — are refundable on demand, a relatively unusual stipulation homeowners say was a big part of the appeal of joining.

 

Case closed.  Or is it?

 

Yet Bonita Bay says the agreements also stipulate that the rules “may be amended from time to time,” thus allowing it to cancel the refund policy at its discretion — and that at any rate, it can’t pay the money.

 

Someone count one two three go

 

[Butch immediately kicks Harvey in the groin]
Butch Cassidy: Well, if there ain’t going to be any rules, let’s get the fight started. Someone count one two three go.

Sundance Kid: [Quickly] One two three go!

 

Unlike a knife fight, however, real estate contracts in fact have rules:

 

Angry residents have filed at least 15 lawsuits against Bonita Bay seeking the return of their deposits and accusing the company of civil fraud.

 

Fraud is indeed a key element, because when the defendant’s downside from losing is nothing more than surrender of the money in dispute, there is no reason to fear the litigation.  With fraud, the stakes are raised – damages, attorneys’ fees, and the potential of criminal indictment as well.  Anyone pulling a Bonita Bay stunt in Massachusetts would be hit with a Chapter 93A consumer-fraud claim – treble damages, baby.

 

You guys will be liable for treble damages

 

[The plaintiff] say the right to amend the rules doesn’t apply to the refund policy.

 

Certainly, if the word ‘refundable’ can be amended to read ‘not refundable,’

 

The first resident suit against Bonita was filed in December. Mr. Lucas acknowledges that Bonita

Bay had promised refunds on demand in its membership agreements, but says that members also signed documents that disclosed that terms could be changed at any time.

 

The fraud claim gains strength because of the defendants’ own arguments. 

 

Plaintiffs in the lawsuit say that the terms that could be changed were limited and didn’t cover refunds.

 

In effect, the defendants are saying, we knew that the word could mean its exact opposite, and we did not tell you.  That knowledge – often called scienter in tort situations – undermines Bonita Bay’s defense. 

 

It’s your great ideas that got us into this mess. I never want to hear another one of your great ideas. Ever!

 

Bonita Bay now says that in the future it will refund a deposit to one member for every three new members who join.

 

Are you kidding?  You’ve announced that the rules allow you to amend the rules, and instead of giving people back 1-for-1, you’re going to give them 1-for-3.  Why should anybody believe you or anything you say?

 

Bonita Bay owner Michael Lissack, shown above with a colleague, has accused Bonita Bay of owing back taxes on golf fees.

 

One Bonita Bay resident and former Wall Street executive, Michael Lissack, has filed a whistle-blower’s complaint against the company with the Internal Revenue Service, saying it owes back taxes on profits it made by holding the deposits.

 

Mr. Lissack’s tactic is similar to a 93A action – he’s seeking to raise the stakes for Bonita Bay, so that if they lose the litigation, they lose more than the deposits they filched.

 

The Florida attorney general, responding to a citizen complaint, is investigating Bonita Bay to see whether the way it sold and refunded membership deposits was a Ponzi scheme.

 

Or a fraud upon the public.

 

In an interview, Bonita Bay Chairman David Lucas scoffed at the idea that the company is running a Ponzi scheme — in which investors are paid returns from money that comes from later investors — or doing anything else that is wrong.

 

What else would he do, confess?

 

Father, forgive me, for I stole all the deposits

 

Mr. Lucas says the deposits were used to meet operating costs, and aren’t taxable. He says the developer is simply in a financial bind as a result of bad land purchases combined with the real-estate downturn, and that members of his wife’s family, which owns the closely held company, have poured in funds to keep Bonita Bay going. He says losses in the past three years have “completely wiped out” prior profits.

 

Bonita Bay land sales.

 

Even assuming everything you say is true, how is any of that a defense to the claim of converting your clients’ money?

 

Bonita Bay has already closed the golf club at Twin Eagles, its latest development, where most of the lots are unsold and weeds are sprouting from the bunkers.

 

Sounds like excellent grounds to demand a refund of a refundable deposit.

 

That’s bad business!  If he’d just pay me what he’s spending to make me stop robbing him, I’d stop robbing him.

 

In addition to threatening a bankruptcy filing if it has to refund deposits at the other clubs, the developer says it might have to shut down the clubs entirely unless residents come up with millions of dollars to buy them — a prospect that has homeowners doubly steamed.

 

One had to admire their chutzpah.  After arguing that it had the right to convert a refundable deposit into a non-refundable one, then offering one refund for every three new fools who rush in, the developer puts the capper on by threatening to close down other clubs that it hasn’t defaulted on.

 

Golf-community developers typically sell golf clubs — courses and all — to members once the developments are completed, and convert membership deposits into equity stakes.

 

You just keep thinkin’ Butch. That’s what you’re good at.

 

All well and good – and logical.  You can’t make a membership deposit non-refundable until there’s a club to be a member of, and for that, you need the remaining development to be completed.

 

Living amid the swaying palms and bougainvillea, many well-heeled residents of Bonita Bay’s developments say they feel burned and trapped. Few are eager to pour fresh money into the golf clubs — but many believe that allowing them to close would take away the central attraction of the communities and further erode house values on the Bonita Bay sites.

 

Ladies and gentlemen, time to take a deep breath and buy the uncompleted golf club.  You didn’t want to be here, but you’re better served by becoming your own developer (and then contracting with a development company to be the operating partner) than lettering it languish.

 

“There have been severe cutbacks in services and in the condition of the facilities,” says Mr. Schulze, the Best Buy chairman, who hasn’t asked for his deposit back but also doesn’t want to pony up more money to buy the club at Bonita Bay, the developer’s oldest community. “Mold is growing in the bag rooms” where players store golf clubs, he says.

 

Was Bonita Bay a best buy, Richard?

 

At Bonita Bay’s Mediterra community, a committee of golf-club members initially proposed pushing nonmembers to join the club on a social basis and pay $2,500 or more to help fund the purchase.  They were told if they didn’t join, no future buyers of their homes would be allowed to become golf members.  A number of residents called the plan extortion, and the committee eventually dropped its demand.

 

Not exactly extortion, and not exactly enforceable, but rude, crude, and unattractive.

 

In April, Bonita Bay hired Tim Boates, of Alabama-based RAS Management Advisors, as “chief restructuring officer.”

 

In terms of confidence-inspiration, Mr. Boates’ official corporate biography offers these comforts:

 

Mr. Boates is a CPA, is fluent in German and holds a BSBA from the University of Houston.  He has acted as the Chief Restructuring Officer, Interim CFO and/or the Restructuring Advisor in many industries both in and outside of Chapter 11. 

 

Can you translate ’schweinhund’?

 

On Aug. 12, Mr. Boates, the new restructuring officer, sent a letter to the remaining five clubs’ 3,000 members saying the clubs would close unless members agreed to buy them by Sep. 30.

But with only one tentative agreement in place so far, the company recently dropped its Sept. 30 deadline, and says as long as members continue to pay their dues and to negotiate a purchase of the clubs in good faith, it will keep them open.

 

Closing the club would be a curious form of lose-lose.

 

However, a spokeswoman for Bonita Bay Group says, the company still needs the members to agree to buy the clubs at most of its communities, and it could close them otherwise.

 

Yes, it does.  Everything else is just eyewash

Some residents say they’d rather see Bonita Bay Group file for bankruptcy, because they think they could buy the clubs more cheaply then. Tom Melancon, a former Burberry Co. executive who was one of the first residents of Mediterra, says Mr. Boates “is trying to bully people and that’s not going to work.”

 

Kid, there’s something I ought to tell you. I never shot anybody before.
One hell of a time to tell me.

 

[Butch knocks Harvey out]
Flat Nose Curry: I was really rootin’ for you, Butch.
Butch Cassidy: Well, thank you, Flatnose. That’s what sustained me in my time of trouble.

 

I was really rooting for you, Butch.

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