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|Thoughts on timeshare resales and relief companies|
by David Waller
senior hospitality lawyer
Baker & Hostetler, LLP
|Fans, vacationists, togetherers, experiencers, strugglers, and attritors – the six unique owner segments identified in the ARDA International Foundation’s Shared Vacation Ownership Owners Report, 2010.|
This new segmentation approach yields important insights into the characteristics of today’s timeshare owners. Consistent with past results, the study reports that 84 percent of U.S. timeshare owners are satisfied with their timeshare experience. But the segmentation approach helps the industry understand why a fan embraces the timeshare experience differently than a vacationist or an experiencer.
It also helps the industry understand that strugglers and attritors, which collectively make up an estimated 21 percent of timeshare owners, are now finding it more challenging to use their timeshares, whether due to the economy, age, change in family circumstances, or other reasons.1 Based on the attitude profile for attritors, the study suggests that the industry’s greatest opportunity may be to help these owners exit their ownership as quickly as possible so as to limit the market and regulatory effect of their negativity. Unfortunately, many timeshare homeowner associations (HOAs) are not in a financial position where they can accommodate this exit by simply accepting a conveyance of these timeshare interests in lieu of assessments. These owners are therefore forced to explore other options.
ARDA has stepped into the breach here. To help the industry better understand how owners pursue resales, the ARDA International Foundation has worked with The Research Intelligence Group to prepare the Shared Vacation Ownership Resale Study, 2010. ARDA has also put the finishing touches on its Model Timeshare Resale Act, which will help establish common standards and will assist enforcement authorities in identifying and prosecuting fraud.
But more can always be done, and in several cases it can be done better. This article illustrates two specific instances: the misdirected condemnation of advance fees charged in connection with timeshare resales and the HOAs’ attempts to deal with the market dynamics being capitalized on by relief companies.
There have been concerns about the collection of advance fees in real estate transactions for decades. In the 1950s, a congressional subcommittee reportedly sat “spellbound” as it was explained that the “advance fee racket” was bilking “the old, the infirm, the widowed and those who had simply reached the end of the line” out of $25-$50 million annually. According to the testimony, naïve landowners were pressured to “sign a contract on the spot. Because the misrepresentation was in the beguiling pitch rather than the written contract,” the Federal Trade Commission was, at the time, powerless to take action in most cases.2
Concerns about advance fees still resonate in the timeshare industry today. The following is a representative sample of warnings targeted to consumers:
- It’s preferable to do business with a reseller that takes its fee after the timeshare is sold. – Federal Trade Commission, Facts for Consumers – Buying and Selling Timeshares and Vacation Plans3
- An advance fee may be called a “marketing fee,” a “listing fee,” an “Internet advertising fee,” or something else. No matter what it is called, don’t pay it in advance. – Arkansas Attorney General, Timeshare Troubles4
- Don’t pay any upfront fee. – Florida Attorney General, Timeshare Resale Fraud – Do’s and Don’ts5
Because these warnings imply that there is something inherently wrong with charging advance fees, they contradict accepted advertising practices. Classified ads in print and commercials on television typically require payment of an advance fee. Annual meetings between television network executives and advertisers are even termed “upfronts” because their main purpose is to allow advertisers to buy commercial airtime several months before the television season begins.6
Rather than condemn the practice of collecting advance fees, these agencies should recalibrate their efforts to further the consumer’s ability to identify companies that purport to be timeshare resale companies, but actually have no business purpose other than to collect advance fees. In that regard, these outfits are simply a new generation of the “advance fee racket” discussed above.
In doing so, it is perfectly reasonable to explain that fraudulent companies are more likely than legitimate operators to charge an advance fee. However, the warning should not equate advance fees with fraud. Rather, the warning should explain that consumers have a choice. They can pay an advance fee, or they can choose to pay a commission that, in the event of a sale, will typically exceed the amount of the advance fee.
It is acknowledged that there are vocal opponents to this opinion who argue that once the advance fee is collected, the incentive to actively pursue the resale is necessarily lessened.7 That may turn out to be the case, anecdotally or generally. It may also be the case that the commission structure suffers from its own imperfections, the most obvious being that commission-based resellers usually choose to focus their marketing dollars and time on only a select number of timeshare projects. As a result, many timeshare owners may not have effective access to commission-based resellers.
The point is not that one compensation method is superior to another. It is that, in the real world, not all timeshare product is fungible, so it is likely that both methods must co-exist so that both the timeshare owner and the reseller are satisfied with the transaction economics in any particular instance. However, this balance should be left to the market to determine, without interference from well-meaning but misguided public officials.
While relief companies (also known as rescue or postcard companies) have been around for some time, the current economic crisis and its effect on timeshare owners have made these companies relevant. One such company, Timeshare Relief, even merited a ranking in the Inc. 5000 based on the assertion that it has over 50,000 customers.8
Relief companies are successful when they market themselves to timeshare owners who, as a result of failed attempts to sell their timeshare on the secondary market, believe that it has become a liability rather than an asset. The relief company will explain how, through the use of a limited power of attorney, the relief company or its affiliate can effectuate a conveyance of the timeshare on the owner’s behalf. Importantly, the timeshare owner does not receive any proceeds from the transfer of ownership. Rather, the timeshare owner will pay a relief company between $1,500 and $7,000, inclusive of a multiple of the annual assessment obligation.9 With these fees in hand, some relief companies look to increase their overall return while others attempt to fulfill quickly on their promise to transfer by, among other things, dumping the timeshare at absurdly low prices through eBay. In a worst-case scenario, however, the timeshare interest will be loaded into a Viking ship, an entity formed for the specific purpose of taking ownership of timeshares but without the liquidity to fulfill on the related assessment obligations. Once a Viking ship has been loaded with a sufficient amount of timeshare inventory, it is figuratively set afire and pushed out to sea.10
Some HOAs are attempting to deal with this market dynamic by attacking it on the front end. They are exploring, creating and implementing more effective resale strategies for their owners and identifying and endorsing supplemental third-party resale options, sometimes on advantageous terms. They are talking to their owners about their experiences with and attitudes about resale and why relief companies appear attractive. They are advocating on behalf of their owners for better regulation of resales and are conducting their internal affairs in such a way as to enhance resale values. While this is hard work, it promises to bear fruit, especially as the HOAs learn from their efforts and the efforts of others.
But success is not always immediate, and some timeshare owners are just intractable. In desperation, a few HOAs are using the Uniform Fraudulent Transfer Act to execute a “prevent and frustrate” strategy when dealing with relief company transfers.11 This law, which has been adopted by Arizona, California, Colorado, Florida and almost every other state, provides a creditor with redress in the event a debtor has transferred its assets with the intent of making those assets unavailable to the creditor for purposes of satisfying the debt.12 This defensive tactic operates as follows: if the HOA (as the creditor) identifies any basis - objective or subjective - to suspect that the transferee has a “bad intent” (i.e., no intention to pay assessments), it will impute that suspected fraud to the transferring owner (as the debtor), categorize the conveyance as a “suspect transaction,” and withhold estoppel letters and recognition of the transfer until the transfer satisfies a “heightened scrutiny” review.13
This defensive strategy is problematic for several reasons. From a legal perspective, the Uniform Fraudulent Transfer Act does permit courts to impute the intent of the transferee to the debtor under some circumstances.14 However, the Uniform Fraudulent Transfer Act also instructs courts to “take into account all indicia negativing as well as those suggesting fraud.”15 While circumstances will vary from case to case, the fact that the timeshare owner provided the relief company with funds to pay assessments would tend to be a material consideration in determining whether the timeshare owner intended to defraud the HOA.16
More significantly, the defensive tactic overlooks the basic intent of the Uniform Fraudulent Transfer Act – “the protection of unsecured creditors against transfers and obligations injurious to their rights.”17 HOAs are, in most cases, secured creditors that benefit from preferential statutory liens for assessments.18 Because a transfer, even if orchestrated by a relief company, does not adversely impact these lien rights, there is no actionable injury to the HOA’s security interest. Moreover, it is difficult to imagine a scenario in which an HOA with prudent collection policies could credibly argue that its lien rights leave it undersecured. Without injury, it is difficult to understand how the HOA can assert any rights under the Uniform Fraudulent Transfer Act. A relief company may have a greater likelihood of success in claiming that the HOA’s “prevent and frustrate” strategy constitutes an unreasonable restraint on alienation in violation of applicable state laws.
HOAs should also consider some very practical issues that have as yet gone unmentioned by those advocating the “prevent and frustrate” strategy. For one, the time necessary to identify a “suspect transaction” and engage in a “heightened scrutiny” review may compromise the HOA’s ability to collect assessments. In Colorado, an HOA is obligated to “furnish to a unit owner or such unit owner’s designee... a written statement setting forth the amount of unpaid assessments currently levied against such owner’s unit... within 14 calendar days after receipt of the request.” If the HOA fails to comply with this hard 14-day deadline, it “shall have no right to assert a lien upon the unit for unpaid assessments which were due as of the date of the request.”19
HOAs must also understand that, ultimately, offense is superior to defense when dealing with relief companies. Fundamentally, relief companies are just sales engines. As such, there is little chance that they will forgo fee generation opportunities (and related commissions) just because a timeshare owner owns at a project employing the “prevent and frustrate” strategy. To the extent an HOA has ignored making resale vitality a priority, relief companies will incorporate that into their pitch. Relief companies will also likely use the HOA’s deterrence strategy as a means of justifying activities that are otherwise harmful to the HOA, such as effectuating Viking ship transfers in the first instance as a matter of policy. Ultimately, the risks of a defensive posture will only be amplified to the extent that the relief company is as unscrupulous as the HOA suspects.
1The Study also indicates that 27% of all timeshare owners will be looking to sell one or more timeshares in the next two years.
2 Time, “Real Estate: The Advance-Fee Game.” July 28, 1958.
7 This was a central argument of the real estate regulators in Stroman Realty v. Annt, 2005 U.S. Dist. LEXIS 16048 *22. However, while they questioned Stroman’s 3.7% sales rate, the opinion does not indicate that the regulators demonstrated that commission-based realtors had a greater rate of success.
8 See “The Clean Up Crew” at www.inc.com/inc5000/2010/inc-5000-companies-growing-through-the-recession.html
9 While attorneys general have subjected companies such as Timeshare Relief and Apex Professionals to enforcement actions, it should be understood that these actions focused on marketing practices, not the underlying transfer business. In fact, based upon an Assurance of Discontinuance between Timeshare Relief and the Vermont Attorney General, it appears as though the AG does not believe that the transfer business is inherently illegal. See http://www.atg.state.vt.us/assets/files/Timeshare Relief AOD.pdf (“Acceptance of this Assurance of Discontinuance does not constitute disapproval of any business practice by Timeshare Relief other than the business practices identified on pages one through four [of the order].”)
10 The author worked with a real estate regulator with respect to one relief company that apparently deeded all accumulated timeshare inventory to a nonprofit. Conveniently, that nonprofit was operated by the wife of the relief company owner and shared an office address with that relief company.
11 See “Timeshare Crisis” at www.resorttrades.com/articles.php?showMag=Resort&act=view&id=688
12 See www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ufta.asp
13 See “Timeshare Crisis.”
14 See, e.g., Schempp v. Lucre Mgmt. Group, 75 P.3d 1157, 1162 (Colo. App. 2003). However, courts have also clarified that imputation does not mean the transferee’s intent “is interchangeable or synonymous with that of the debtor.” Id.
15 Schempp v. Lucre Mgmt. Group, 75 P.3d at 1162; See also Uniform Fraudulent Transfer Act, §4, cmt. 6, at www.law.upenn.edu/bll/archives/ulc/fnact99/1980s/ufta84.htm
16 It has also been argued that the typical relief company transaction lacks the necessary “bona fides” to qualify as a legitimate resale transaction. While this may have been one of several factors considered under the common law, the “badges of fraud” under the Uniform Fraudulent Transfer Act focus on: (a) attempts to conceal the transaction; (b) the existence of a pre-existing relationship between the debtor and transferee; (c) the debtor’s right to use the property after transfer; (d) whether the debtor was subject to, or threatened with, a lawsuit prior to the transfer; and (e) the debtor’s solvency after the transfer. See Uniform Fraudulent Transfer Act, §4(b). None of these issues is immediately apparent in a standard relief company transaction. Interestingly, the court in Schempp v. Lucre Mgmt. Group considered a transaction very similar to a relief company transaction, complete with a limited power of attorney, and found no evidence of fraudulent activity.
17 Uniform Fraudulent Transfer Act, §1, cmt. 3.
18 These liens are not only preferential; they are often times also deemed to be perfected through the recording of a declaration. See, e.g., CRS 38-33.3-316.
19 CRS 38-33.3-316(8).