The Bankruptcy

Even though The Club was solvent, the threat of losing it’s income was enough that The Club (their attorney) decided to file for bankruptcy – to protect it’s income.

One of several reasons The Club presented to the court, was that property owners have the right to encumber their properties if they so wish.  This is all well and good.  However, the opposite is also true: property owners also have a right to remove encumbrances as well.  Unfortunately, The Club doesn’t agree with this premise and now controls the election process for board members.

The court decided, however, to allow a single opt-out election during the bankruptcy. (Bear in mind that all the documents written “by” the court, don’t exist because they are all written by the attorneys for the parties involved.)

The Club History

This section of the bankruptcy shows the court where The Club came from, the predicament it was in, and what it thinks necessary to extract itself.

V. DESCRIPTION AND HISTORY OF THE COMMUNITY CLUB, AND EVENTS LEADING TO THE BANKRUPTCY REORGANIZATION FILING

The Club

The Community Club is a private, Washington nonprofit corporation providing primarily recreational services and facilities to its members, who are owners of property at Ocean Shores. Although there are other entities serving the tourist industry within the confines of the City of Ocean Shores, the Community Club has no competitors(1).  The Community Club depends upon payment of dues and assessments by its members, but is not dependent upon any customer or industry for its continued success.

Our Comments

1. At the time the club filed for bankruptcy, there was probably no competition, except the Elks club for social functions.  There were no city swimming pools or recreational facilities.  All of these, however, were available 20 miles away in Aberdeen and Hoquiam.  Additionally, Ocean Shores is a tourist town and the businesses are geared to tourism and not local residents.  Residents must shop in Aberdeen 20 miles away for even some of the basic – like men’s underwear or shoes and much more.  The local grocery store is expensive – both because of the location and clientele.  The point is: people drive 20 miles to purchase just about everything, so why not recreation as well?  Why forced people to pay for a local facility if they don’t want one?

The Community Club was organized as a Washington nonprofit corporation in April of 1960. Since that time, the Community Club has performed what it believes to be its only obligation to its members under its Articles of Incorporation and its Bylaws, as amended: it provided recreational services and facilities. According to the Articles of Incorporation and Bylaws and Membership Certificates, the Community Club is only obligated to provide recreational services and facilities to its members (2).

2. The club was obligated in the beginning, as described in the next paragraph.  The club pretty much acted like a city government.  That all stopped when Ocean Shores incorporated.  Once the city incorporated, the club only provided recreational services and nothing more.  Property owners now felt like they were paying for something no longer provided by the club, so the law suits to remove liens began with the Cottons.

It should be noted, however, that at the time of incorporation, the City of Ocean Shores had not yet been incorporated. In addition, the original Articles of Incorporation empowered the Community Club to build and maintain roads and bridges, collect and dispose of garbage, to prevent and suppress fires, to provide police protection, to provide street lighting, provide weed and animal control, to regulate signs and billboards, to acquire and maintain water generation and distribution facilities, to acquire and maintain parks, playgrounds and a wide variety of other recreational facilities, and to do anything else necessary and incidental to the peace, health, comfort, safety, and/or general welfare of its members.

It is clear that pursuant to its original Articles of Incorporation, the Community Club had the power to perform all of the preceding functions. But, its Bylaws have since been amended to provide that the Community Club is only obligated to provide recreational facilities and services which brings its duties into conformance with its Membership Certificates. The original sales contracts and Membership Certificates provided that the Community Club was to provide recreational facilities and services, but did not provide that the Community Club was obligated to perform any of its other enumerated powers. (The Plan proposes Amended and Restated Articles of Incorporation and Bylaws, which make it clear that the primary obligation and purpose of the Community Club in the future will be to provide recreational facilities and services.)

In the late 1970s, a few property owners stopped paying dues. They believed that the Community Club was required to, and had failed to, provide certain of the services and functions set forth in its Articles of Incorporation and Bylaws. The primary desire of these persons has always been that they no longer wish to be members of the Community Club and they want the lien removed. As noted, the original Articles of Incorporation provide that an owner of property cannot withdraw from membership in the Community Club unless the owner sells the land, in which case the new buyer becomes the member.

In 1981, the Cottons filed a lawsuit in Grays Harbor Superior Court, which alleged, among other things, that the Cottons should no longer be obligated to pay the Community Club’s then $40.00 per year dues and that the Community Club should quiet title in the two lots owned by the Cottons. The Cottons made no claim for damages under any legal theory, nor did they seek payment of their fees and costs. In 1984, the Grays Harbor Superior Court held for the Cottons, quieted title in them and ruled that the Cottons were no longer required to pay dues(3).

3. This sounds like the Cottons won because the club was no longer providing services.  Partial true, but it also opened a can of worms for the club because under Washington law, the only organizations that can have membership enforced by lien are HOME and CONDOMINIUM owners, but not PROPERTY associations.

The Cotton case basically gutted the club’s ability to force membership and it’s sole source of income, threatening The Club’s income.

More cases were filed and The Club needed to stem the flow of withdrawals, filed for bankruptcy. Once the bankruptcy started, ALL other cases filed against The Club came to a halt.

Because this decision carried serious implications for the future of the Community Club beyond the small amount of dues the Cottons would no longer be required to pay, the Community Club appealed the decision to the Washington State Court of Appeals. Oral argument was not heard until December 1986 and a decision was not reached until December 1987 when the Court of Appeals, in an unpublished 2-1 decision, upheld the Grays Harbor County Superior Court decision. Judge Brown filed a vigorous 56-page dissent(4).

4. The first thing The Club does is admit it would lose its income.  Although they only mention the Cottons, it is obvious they are talking about the whole income gained from all members.

The wording here, “vigorous 56-page”, is interesting, as if to make it more important than the other opinions.  We are talking about ignoring previous court cases where The Club lost.  What’s more astounding is the club’s use of the dissenting opinion as a reason to open a bankruptcy case.

In April of 1988, the Cunningham class action members moved to certify its class action to include all owners of property at Ocean Shores. Before the motion was to be heard in May 1988, the Community Club filed its petition for reorganization under Chapter 11 on May 13,1988.

The original Articles of Incorporation and the Bylaws provide that the only persons who are and can be members of the Community Club are the owners of lots in Ocean Shores. They further provide that no member may withdraw from membership except upon transfer of title to the real property to which the membership is appurtenant; a member need not be given a Certificate of Membership. In the Cotton case, however, the court found that membership In the Community Club and payment of dues were not a covenant running with the land or an equitable servitude for Carl and Medora Cotton, and that the Cottons were no longer obligated to pay dues to the Community Club and that the Community Club had to quiet title in their favor.

The counsel for the Ocean Shores Lot Owner’s Association (“OSLOA”), an entity that is not affiliated with the Community Club, believe that its members have a right to a legal determination of the validity of their membership in the Community Club. After the decision in the Cotton case, they began the Cunningham class action to determine the validity of their membership in the Community Club. (This action was stayed by the filing of the Community Club’s reorganization case.) They have sought to return to state court to have the current class of plaintiffs in the Cunningham class action determined as a final class or to have it expanded to include persons other than their membership. Counsel for the OSLOA believed the state court was the best place to make this determination. The Community Club believes that a return to state court, however, would mean that the validity of each and every owner’s membership claim would have to be individually tried. This would be expensive and time consuming(6).

6. The club has lost two cases and three appeals concerning membership and dues, of course they didn’t want it to go back to state court. Aside the expense and time, the club was well aware that under state law, they could not exist by forcing members to pay dues.

Note in the second paragraph, that Club members are NOT allowed to withdraw from the Club.  Whoever buys the home, the new owner will be come a member AUTOMATICALLY.  This means the lien “runs with the property”.  Unbelievably, there are people in the real estate industry that don’t understand “runs with the property” and that leads to even more difficulties.

Add the fact that if the case went back to state courts, The Club would have to pay to sue each and every member and the motives for “expanding” The Club’s value is going to be primary.

The ultimate Issue is membership in the Community Club. The Community Club’s Plan affords all members and owners of property at Ocean Shores the right to make their own decision as to their membership in the Community Club.  The Community Club has never sought to enforce the collection of dues through the actual foreclosure of its lien on any piece of property In Ocean Shores(7). The Community Club has insisted upon pay merit out of closing when a member transfers title to a lot or through letters from its attorneys advising that a foreclosure or collection action would be commenced If dues were not paid(8).(In the Cotton and Cunningham cases, one of the Community Club’s counterclaims was, however, to foreclose its lien.)

7. This hasn’t been true ever since the bankruptcy and probably not before then.  If  the bank had purchased first position on the mortgage, then the banks would step in before foreclosure by the club and the club wouldn’t show as the one foreclosing.  But after the bankruptcy, the court records tell a different story. There are over 200 foreclosure cases filed by the club since 1991.  There is no arbitration or reduction.  The club turns the delinquent member over to, guess who!, the club’s attorney, who then tacks on somewhere between three and 12 thousand dollars in fees – depending on the time line of history.

8. There is no record that I could find of the club ever using this option.

Prior to the bankruptcy filing, the Community Club’s Board of Trustees determined that the future of the Community Club should be left in the hands of Its members and that the best method to do so would be through a Plan of Reorganization to be submitted for the approval of its members(9).

9. How magnanimous of them!  Allowing the members to exercise their property rights!  It turns out that the members could only exercise those rights ONCE, even though they are supposed to be able to change the club as described in the By-Laws, Articles of Incorporation, and Covenants at any time.

If the Community Club Is able to confirm its Plan with at least 6,000(10) members, the people who remain members of the Community Club will have property that should be more readily saleable than the property of those owners who do not(11). While current owners of property may not want to use the Community Club’s facilities, their successors- in-interest very well might. Therefore, the Community Club’s plan will give owners of property and their successors-in-interest who wish to withdraw from the Community Club the ability to rejoin the Community Club. Any owner of property or successor-in-interest who rejoins the Community Club will be bound by the Community Club’s Amended and Restated Articles of Incorporation and its Amended and Restated Bylaws(12).

Decree

Decree Cover

10. Since property owners only get one vote (another control scheme), regardless of how many properties they own, this means that 6,000 property owners or half of the lots had to approve the scheme.  That didn’t happen. And the club knew it wasn’t going to happen, so they came up with a scheme to insure their continuance: tacit approval.

11. “…more readily saleable than the property of those owners who do not…”  This is the first appearance of THE BIG LIE: membership in the club increases the value of the property.  “Don’t you want to increase the value of your property?” was the first question the club’s attorney asked me during our first and last meeting.  To tell you the truth, I was a bit flustered because, logically, it doesn’t make sense to appose increasing the value of your property.

After a brief moment, I responded with a negative answer.  Why?  A basic tenet about a piece of property is that an encumbered property is not as valuable as a similar unencumbered property, unless the purchaser perceives the encumbrance as a benefit.  I’m sure there are those that consider the club a benefit, but to allow a recreational club to encumber your property with NO WAY to release it, doesn’t make sense to me at all.  And, it seems, real estate appraisers feel the same: it isn’t even a factor, so it can’t possibly add value to ones property.  All it does is to force one to sell his property to someone who understands the club and it’s ramifications.  Agents admit, that if they are honest (and there are few of those in Ocean Shores) they lose about 1/3 of clients because of the club.  That’s a big incentive not to mention or just lie about the club.

12. Anyone who joins the club, CAN’T GET OUT.  I can’t emphasize this enough: you can not resign at you’re will from the club without risking the loss of your home through foreclosure. Under this dubious extortion scheme, anyone who’s property is not in the club and joins the club, obligates that property forever (with this scheme).

The Club assumed that open membership would not provide the income it needed to maintain The Club’s properties and that it would need to keep liens on members properties to insure survivability. That faulty assumption runs today.  (See my opinion page to the North Coast News to demonstrate how The Club can survive.)