Becker & Poliakoff, P.A. L AW O F F I C E S Timeshare Update PRSRT STD B e c k e r & P o l i a ko f f , P. A . Emerald Lake Corporate Park A D V E R T I S E M E N T U.S. POSTAGE P.O. Box 9057 PAID Ft. Lauderdale, Florida 33310-9057 ADDRESS SERVICE REQUESTED JKG GROUP Timeshare Update W I N T E R 2 0 0 4 CURRENT NEWS FOR TIMESHARE ASSOCIATIONS w w w. b e c k e r - p o l i a k o f f . c o m b p @ b e c k e r - p o l i a ko f f . c o m What You Can Do to Stop Becker & Poliakoff, P.A.’s Unpaid Assessments from Timeshare Practice Group Harming Your Association B ecker & Poliakoff ’s Timeshare Practice Group focuses on serving the needs of owner-controlled resorts. The Group is based T he financial imperative of a Timeshare Association is to make sure that assess- ments are paid by all unit week owners. However, an Association often discovers that it has large Association debts caused by many unit week owners who have not paid in the Firm’s Orlando office and includes other attorneys in the firm’s offices throughout Florida. C. John Christensen, their assessments over the course of several years. This, in turn, can result in an increase who previously worked for the in assessments for those unit week owners who do regularly pay their assessments State examining developer because the extra income is needed to cover the shortfall and the Association’s attempts public offering statements for to recover the bad debt. new resorts, took his wealth of Timeshare experience with Nearly all Timeshare Associations employ the services of a collection agency. him to Vistana Resort and Collection agencies can be involved in ensuring the financial welfare of a Timeshare C. JOHN then to Becker & Poliakoff, AN ELECTRONIC VERSION OF THIS AND OUR OTHER NEWSLETTERS IS AVAILABLE ON OUR WEBSITE WWW.BECKER-POLIAKOFF.COM Association if they act quickly and efficiently. However, an overly aggressive collection CHRISTENSEN P.A. where he has been con- agency can alienate and anger owners with rude telephone calls or other unsavory tac- centrating his practice in tics. A good owner is a valuable asset to the Association. One that has fallen slightly Community Association Law behind should be gently brought back into the fold and not driven away by over-zealous for the last 14 years. He regu- The Election of Directors in a Florida Timeshare Association … Continued from page 3 collection agencies. As for the truly unrepentant deadbeat, that is another matter entire- larly assists clients with their As you can see, these statutes almost always defer to the timeshare doc- If an Association wants to use a limited proxy specifically identifying direc- ly. The owner who has been at the same address for the last five years and every year annual meetings, elections, claims that the “invoice must have gotten lost in the mail” must be dealt with firmly. interpretation of the law and uments, particularly the Articles of Incorporation and Bylaws, to establish tor candidates, (so long as limited proxies and nominating committees are not MARLENE the governing documents, and the method by which directors are elected. Thus, these documents will prohibited by the governing documents), a nominating committee could be Fortunately, under 721.16 of the Timeshare Act, the Association does have additional KIRTLAND amendments to their docu- typically govern timeshare elections. In this regard, timeshare documents appointed by the Board and charged with identifying unit week owners willing recourse against delinquent unit week owners. ments. Marlene Kirtland is the have been almost always drafted to permit the election of directors by use of and qualified to serve as directors (an example of an unqualified candidate could The first step in controlling bad debt is to “lockout” or “deny use” of the unit week to Group’s collection/foreclosure proxies, under the correct assumption that most unit week owners will be be one who is delinquent in the payment of assessments). Such nominating the delinquent owner. It is imperative for the front desk staff to check whether assess- attorney, but her significant unable to attend the annual membership meeting in person and therefore committee would then make its nominations before the mailing of the annual ments are current prior to an owner using or exchanging their unit week. If not, before a practice area encompasses will want to appoint another person who may be attending the meeting as a meeting notice package, so that the candidates nominated would be listed upon lockout can occur, the unit week owner must be given the required statutory notice. Once nearly every problem that can proxy-holder (frequently the Secretary of the Association) to vote for them. the limited proxy that would go out with the notice package. The Association the proper notice has been given, the Association may then rent the unit week and keep arise in the daily operations of the rental income to offset the delinquent assessments. This is a particularly useful tool a resort. Alex Costopoulos is Hence, timeshare associations will include a proxy form for the election of could also solicit “bios” from the candidates if it desired, to be circulated with the ALEX COSTOPOULOS the Editor of this newsletter directors in the materials notifying all unit week owners of the annual mem- annual meeting notice package and limited proxy, so that unit week owners where there is a mortgage on the unit week and it does not make economic sense for the and, along with Marlene bership meeting. Depending upon your governing documents, these proxies would have some basis upon which to choose one candidate over another. Association to initiate foreclosure actions. Kirtland, is the Group’s litigation attorney. He can be formatted as either “general” or “limited” proxies. Finally, whether a nominating committee, or general or limited proxies, are In this regard, prior to filing a lien or initiating a foreclosure action, the Association assists clients in all sorts of disputes involving A “limited proxy” is a proxy that contains a specific entry by which the used, any non-developer unit week owner attending the annual meeting in person must first determine if there is a mortgage on the unit week. This is because by law, debt boards and developers, management companies, unit week owner can either vote “for” or “against” any candidates listed on the can be nominated, or nominate himself or herself, from the floor. However, if a lim- owed to the mortgage holder (usually the developer) takes precedence over debt owed to employees, and vendors. The Timeshare Practice proxy; if the unit week owner votes either for or against a particular candidate ited proxy is being used, it would be a rare occurrence for a candidate nominated the Association. If an owner is not paying his assessments, he may not be paying his Group can be reached at (800) 232-5379, or at by checking the particular box, the proxy-holder (the person attending the from the floor (but not listed upon the limited proxy) to obtain enough votes to pre- mortgage either. In these instances, it is up to the developer to foreclose his mortgage email@example.com. meeting on behalf of the unit week owner) would be required to vote the vail over those candidates listed on the proxies, due to the tiny number of unit (which would extinguish the debt owed to the Association). Then, the developer exact same way. If, on the other hand, a “general proxy” is utilized, such proxy week owners who would be expected to attend the annual meeting in person as must pay all new assessments until the unit-week is sold when the new owner takes Becker & Poliakoff, P.A. has been representing would not contain any entries listing candidates, and a (non-developer) compared to the number who would return proxies instead. over the responsibility to pay. If there is a delinquent mortgage, it makes no sense for Owners’ Associations in Florida since 1972. proxy-holder could vote for or against any of the candidates identified at the As for those non-developer owners actually attending the meeting in the Association to foreclose its delinquent assessments because it would, in effect, From its offices throughout Florida and inter- annual meeting. Obviously, if candidates for the Board of Directors will be person, they should cast their votes by way of a ballot similar, but not identi- only be foreclosing for the developer, and the Association would reap no benefit. That national and affiliated offices, the Firm pro- nominated only at the annual meeting, which is perfectly acceptable in most cal, to a proxy; their ballot need not include spaces for the owners’ is why for unit weeks with both mortgage and assessment delinquencies, lockout vides a full range of legal services including timeshare Associations, there will be no way a proxy sent to the unit week signature(s) and other proxy related language. On a final note: if the total and rental is the Association’s best option. But what about assessment delinquencies commercial litigation, employment law, land owners prior to the annual meeting will be able to list any candidates, there- number of director candidates is equal to, or less than, the number of direc- where the mortgage is paid off? use planning and zoning, patent and trade- mark, real estate, corporate law, environmental by eliminating the possibility for the use of a “limited proxy” and necessitating tor vacancies to be filled at the annual meeting, no formal voting is needed; Once it is determined there is no mortgage, it is time for the Association to get seri- law, as well as many other areas. You may the use of a “general proxy.” all of the candidates can simply take office by “acclamation.” ous. Collection agencies cannot do legal work; your law firm needs to take the necessary contact us at www.becker-poliakoff.com. steps to rid your Association of the freeloaders. This begins by the Association placing a The material obtained in this newsletter is general and summary in nature and consists of highlights and information pertinent to the clientele of Becker & Poliakoff, P.A. It is not intended to be specific legal advice Continued on page 3 on any matters discussed. If you have questions regarding the contents of this newsletter, please contact your attorney at Becker & Poliakoff, P.A. at 800-432-7712 or firstname.lastname@example.org. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience. 2 3 The Election of Directors in a Florida Timeshare Association Directors’ and Officers’ Insurance: Are You Being Protected? T he procedure to elect directors in a Florida timeshare Association can be a matter of some confusion; the bottom line is that the elec- tion of directors will almost always proceed according to the provisions of Since the Timeshare Act and the Condominium Act provide no guidance, we must turn elsewhere. Whether a timeshare resort is a con- dominium or not, the association will almost always have been created across the country) but rather by the association’s employees. Association S erving on your association’s board of directors can be a thankless job. In addition to being time-consuming, it often leaves directors open to crit- icism from other unit week owners who don’t think the board is doing a employees can be sued for anything from discriminatory hiring practices to tortuously interfering with sales efforts. Some D&O policies make no men- the Association’s governing documents, usually described in the Bylaws. Most of the few exceptions to this general rule pertain to Boards which as a not-for-profit corporation. Florida not-for-profit corporations are governed by Chapter 617, the Not-For Profit Corporation Act. There are the Developer still controls (this is a separate subject which this Article various statutes in this Act which impact the election of directors in a good enough job or could be doing a better job. Oftentimes this is just a tion of association employees! Especially important is “employment practices will not address). timeshare Association. Some of the more important of these are: minor annoyance, but sometimes this can lead to real trouble when a law- coverage” which covers lawsuits involving employment discrimination, There is nothing in the Timeshare Act (Chapter 721 of the Florida 617.0721 Voting by Members – Members are not entitled suit is filed against the board. handicapped discrimination, racial discrimination, etc. This type of cover- Statutes) which addresses the procedure by which directors are elected. to vote except as conferred by the Articles of Incorporation or the A timeshare association is almost exclusively a not-for-profit corpora- age is extremely important in timeshares because association employees are However, many timeshare resorts are also condominiums. Therefore, it Bylaws. A member who is entitled to vote may vote in person tion whose board of directors is made up of a group of unpaid volunteers constantly in direct contact with enormous numbers of guests and the is often expected that the cumbersome statutory procedure for the elec- or, unless the Articles of Incorporation otherwise provide, may whose primary goal is to ensure that the timeshare is being well-maintained potential for lawsuits is great. tion of directors in whole-unit condominiums must be followed; howev- vote by proxy…If directors or officers are to be elected by for the benefit of the entire association. It is unfortunate but true that In this litigious society, it is paramount that board members take the er, that is not the case. The Condominium Act (Chapter 718 of the members, the Bylaws may provide that such elections may be boards and board members are occasionally the target of litigation. When necessary steps to protect themselves and the association. Here are a few tips: Florida Statutes) specifically states: “the provisions of this subparagraph conducted by mail… trouble arises, D&O (Directors’ and Officers’) insurance can be a board’s 1. Ensure that your association does carry D&O insurance. [referencing the procedure to elect directors] shall not apply to timeshare 617.0803 Number of Directors – Directors shall be elected best friend. Not only should every board make sure that its association is Surprisingly enough, many boards aren’t protected simply because a policy condominium associations.” or appointed in the manner and for the terms provided in the carrying D&O insurance, but the board should also be aware of the terms was carelessly allowed to lapse or assumed to be in place. Articles of Incorporation or the Bylaws. and limitations of that insurance. In order to adequately protect themselves 2. Determine what is covered by the policy and what is not covered Continued on page 4 from lawsuits by owners and other parties alike, board members need to by the policy. Do not rely on the oral statements of your management com- know what their D&O insurance covers and, more importantly, what their pany or your insurance agent. Get it in writing. If you have concerns over What You Can Do to Stop Unpaid D&O insurance does not cover. what the technical language in the policy itself means, ask an independent For example, prior to turnover, the board is controlled by a developer insurance advisor or your attorney. Be aware of limitations on lawsuits Assessments from Harming Your Association who appoints his own employees or agents to the board. The developer will amongst co-insureds, and change insurance carriers if these limitations will Continued from page 1 often find it cheaper to get D&O insurance for these appointees through mean there will be no coverage should the board be sued by the developer lien against the unit week and ultimately foreclosing upon the unit week if A Website Devoted the developer’s own policy. After turnover, leaving such a policy in place or its affiliates. (Also, limitations on co-insureds claims can allow the carri- the assessments are not paid. Once filed, the lien is in effect for five years may cause significant problems for an owner-controlled board. This is er to deny coverage if a single disgruntled board member chooses to sue the from the date of filing. The delinquent assessments, late fees, interest and to Timeshare Users because most policies will not cover claims amongst “co-insureds;” in this rest of the board, or if the current board chooses to sue a former board). attorneys’ fees continue to add up even after the lien is filed. After the lien is scenario, a developer and a Board utilizing the same insurance company 3. Determine what the deductible is and what the policy limits are. filed, the Association has five years to foreclose on the unit week. If the unit would be considered “co-insureds.” Hence, there could be no protection at You need to be sufficiently covered but you also want the best deal for your week owner pays the assessments before the foreclosure is completed, the www.tug2.net all if there were a lawsuit between the board and the developer or one of the Association. Your policy should be tailored to best fit your association’s spe- Association is still entitled to recover the late fees, interest, costs, and attor- developer’s companies! Clearly, as the composition and duties of the board cific needs. The coverage limit on your policy should be sufficient to pay neys’ fees, in addition to the delinquent assessments. In the vast majority of of directors changes, so do their insurance needs. both the cost of defending a suit as well as any eventual settlement or judg- cases where a lien is filed, the delinquent owner either enters into a payment Another important, yet often overlooked, facet of coverage is for asso- ment; be prepared for a worst-case scenario! plan to become current in his assessment obligations, or “quit-claims” his unit ciation employees. In a timeshare resort, much of the daily activity of the 4. Make sure your policy covers past, present, and future Board week (gives the deed back to the Association) to avoid foreclosure proceedings. resort is not done by the board members (who are typically scattered all Members; it is often a good idea to include their spouses in the coverage as In the rare event a foreclosure actually occurs, two situations can well. You should also be sure that committee members or other volunteers arise. The first is that the Association may purchase the unit week at the are covered. It is very important that your policy covers all association foreclosure sale (this usually occurs when no potential buyer is willing to employees who do not carry their own insurance, or who are underinsured. bid more than what the Association is owed). The Association will then sell This should include all full-time, part-time, seasonal, and leased employ- the unit week to a third party, retaining the profits from the sale to offset ees, past, present, and future. the bad debt. The Association can then look forward to collecting future 5. Make sure your D&O policy covers non-monetary claims. These assessments from the new unit week owner. This scenario also applies to include lawsuits for injunctions (an Order from the Court either forcing the the very common situation where the delinquent owner simply quit-claims association to do something or stop doing something) or for declaratory his unit week to the Association. The Association can then sell the unit statements (an opinion from the Court on a legal matter). This is important week to offset the debt and install a paying owner. The second situation is because oftentimes the legal fees expended in defending such non-mone- where the unit week is purchased by a buyer at the foreclosure sale. In this tary suits can be significant. scenario, the Association would then recover all of its outstanding assess- 6. If you are dissatisfied with the D&O coverage that you currently have, or are unsure whether you have a good policy or not, ask your manage- ments, interest, attorneys’ fees and costs due on the unit week from the new buyer and, again, look forward to also collecting all future assessments I n 1993, the Timeshare User’s Group (TUG) was creat- ed by timeshare owners and others to serve as an “unbi- ased source of consumer oriented information regarding ment company to “shop around.” You may be paying too much for the wrong from the new buyer. The goal in both situations is not just to recover the kind of coverage. debt, it is to stop the bleeding by getting rid of deadbeats and replacing timeshare resorts and the timeshare concept.” Their web- It is important to be aware that D&O insurance is not a magic suit of them with owners who will pay. Think of it like this – if your resort has site, www.tug2.net, is chock-full of tips, resources, advice, armor. It will not protect you from intentional wrongful acts. It can, howev- 15,000 unit weeks (about 300 units), and 10% are not paying an annual classified ads, and independent reviews and ratings of er, protect you from many types of costly litigation which are becoming assessment of $400, your resort is losing $600,000 every single year! more than 2000 timeshare resorts by TUG members. The more and more common. D&O insurance is a way to protect you and your If collection, lock-outs, liens and foreclosures are pursued aggressive- website also includes many helpful articles on topics rang- association, and can prove to be invaluable when your association has the ly, you can rid your Association of the worst of the freeloaders who do noth- ing from exchange programs to how to rent your unit week. right policy in place. ing but drag your resort down. The result is more owners pulling their own weight, and your Association can greatly increase its income without hav- ing to raise the annual assessments; and that makes everybody happy!