Timeshare Conflict of Interest

 

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Defn: Conflict of Interest: A situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. This includes when an individual’s personal interests or concerns are inconsistent with the best for a customer, or when a public official’s personal interests are contrary to his/her loyalty to public business.

Simply put, a conflict of interest exists when one’s duty to act in your best interest is compromised by some other factor, typically money. In the case of Diamond Resorts International, such a conflict is evident in every aspect of what they do, particularly in the management of their resorts.

Here’s what we mean: You, as an owner of a timeshare, have certain rights, particularly voting rights, in association with the election of condominium association board members, which in turn make decisions concerning the management of the timeshare. Of these decisions, the most significant is the appointment of a professional ‘management’ company to maintain the facilities.

Generally, a homeowners association or condo association has a fiduciary duty to its constituents. This means that it must, to the extent reasonable, minimize the maintenance expenses without compromising the value rendered for those expenses. In this regard, the association will typically take bids from competing management companies, and select the best value.

But with DRI, that’s not exactly how it works. Rather, Diamond will invariably install itself as the management company running its resorts, even though it lacks a majority ownership interest in any given resort that would legally qualify it to do so. How can this be, you ask? If they don’t own most of the units, they can’t even control the vote. By what legal authority can they do anything at all to control the management of the resort?
 Here is their rationale, taken from language contained in most recent annual report of filed with the S.E.C.:
 
HOAs. Each of the Diamond Resorts managed resorts, other than certain resorts in the European Collection, is typically operated through an HOA, which is administered by a board of directors. Directors are elected by the owners of intervals at the resort (which may include one or more of the Collections) and may also include representatives appointed by the Company as the developer of the resort. As a result, the Company is entitled to voting rights with respect to directors of a given HOA by virtue of (i) its ownership of intervals at the related resort, (ii) its control of the Collections that hold intervals at the resort and/or (iii) its status as the developer of the resort. The board of directors of each HOA hires a management company to provide the services described above, which in the case of all Diamond Resorts managed resorts, is the Company. The Company functions as an HOA for two resorts in St. Maarten, collects maintenance fees, earns management fees and incurs operating expenses at these two resorts.
 
        Almost every statement in the foregoing ‘rationale’ is a non-sequitur. The disclosure makes a statement that the directors are elected by interval owners, which is an accurate statement of how things are supposed to work. But it then goes on to say that “As a result, the Company (Diamond) is entitled to voting rights with respect to directors of a given HOA…”
Stop right there. The fact that the owners elect directors does not entitle Diamond to ‘voting rights’ except to the limited extent to which it actually has title to intervals in the resort. On information and belief, in no case does Diamond actually own a majority of intervals in any resort that they manage. But it get better: In trying to explain the legal basis for its control of the resorts, the disclosure goes on to say that it’s ” …[because] i. its ownership of intervals at the related resort” (duly noted and refuted)… [and] ii.  its control of the Collections that hold intervals at the resort and/or … (so it’s control of the management company gives it the right to control the board of directors — not vice versa????? …[and] iii. its status as the developer of the resort”.  So the developer, not the owners,  of a resort now has status to forever control the board of directors. Maybe they can cite some legal authority for that one.
        In practice, what happens is this:  Diamond will endeavor to circulate a number of  ‘proxy’ proposals binding your vote as an owner to elect one of their insiders to the board. This they can do, even with ownership of a single interval. Invariably Diamond’s stooges will then appoint Diamond’s “U.S. Collections” arm to manage the resort.
        Unlike Diamond, you the owner of a resort interval are ‘out of the loop’. You don’t have a roster of other owners, and thus no way to communicate with them. Thus, there is now way to galvanize opposition to the status quo. And the cycle repeats itself year after year.
        If any of this resonates with you, please call free of charge. We will discuss your legal options.

 

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