Group claims resort illegally controls hotel, association board failed chance to gain power
By Vicky Wedig
Editor
Depositions are being taken and a three-week trial is scheduled for June in a lawsuit Lake Lawn Resort condominium owners filed against current and former resort owners and the condominium association a year ago.
The suit, filed Sept. 26, 2012, in Walworth County Circuit Court, lists 45 individuals, couples or organizations who own 41 of the 222 guest units at The Lodges of Lake Lawn Resort Condominium. The condo owners are suing current resort owners, past resort owners, the resort’s management group, the association’s Board of Directors and its members.
“They’re suing everybody,” said former resort owner Jim Drescher, of Lake Geneva. “They’re suing their own condo board. It’s ridiculous.”
The condominium owners claim, among other things, that resort owners illegally maintain control of the association’s Board of Directors, the association board failed to buy the commercial units in the condominium when it had the chance, and board members were coerced into a contract that reduced condo owners’ revenue on their units.
The condominium – the Lodges of Lake Lawn Resort – has four commercial units and 222 guests units. The commercial units consists of the resort’s indoor and outdoor pools, the spa and some basement spaces including a laundry area.
Board control
Lake Geneva Attorney David C. Williams, who is representing the condo owners, said the commercial units make up a fraction of the space in the condominium but are owned by the resort owners, and the association bylaws afford the commercial unit owners four of the seven seats on the Board of Directors.
“So that means the resort owners, not the condominium owners, control the association that governs them,” he said. “We’re trying to declare that arrangement illegal.”
Williams said his clients want the 222 guest owners to be able to decide who is on the Board of Directors.
“With the resort owners also controlling the guest owners, we’re getting the short end of the shaft all the time,” he said.
For example, he said, the resort owners can lower the room rates when they see it in their best interest to do so to attract customers to their marina and restaurants. Condo owners would lose revenue on the deal but would have no say in the matter.
Williams said legally, after a certain percentage of units are sold, the owners are supposed to control the condominium.
‘Gift price’
In a second cause of action in the lawsuit, the condo owners say the members of the association’s Board of Directors failed to purchase the commercial units when they had the chance.
Williams said when Lake Lawn was under foreclosure by Anchor Bank, the former owners, who developed the condominiums, allowed the guest unit owners to control the four commercial units to avoid the appearance of a conflict of interest.
“So for the first time, we controlled our own board,” he said.
During that time period, Williams said, Anchor Bank proposed selling the four commercial units to the condominium owners – the four seats on the board would go along with them – to the association, for $400, or $100 per unit.
The association board decided to scrutinize the offer, Williams said.
“They were suspicious why they were offered this at a gift price,” he said.
By the time the association got around to looking into the matter, Drescher’s group had offered to buy the resort – including the four commercial units, thereby the four seats on the board.
“They accepted a better offer while our board was exercising due diligence,” Williams said. “Our board screwed up. Basically, they blew it.”
When Anchor Bank sold the resort to the Drescher group, Williams said, Drescher insisted on getting the four commercial units back to control the condominium association.
“Of course,” Drescher said. “We’re the owners.”
Drescher said the condo owners who are suing mistakenly believe they could have purchased the controlling seat. He said Anchor Bank entertained the idea because “they didn’t know what that meant,” but the bank’s legal counsel advised against selling the seat, saying no one would buy the property “if they can’t come in and control their own destiny.”
Drescher said his group would not have invested $12 million in a property that the condominium owners would run.
“That would be crazy beyond crazy,” he said. “No one would buy it.”
‘Inferior contract’
Also during the time period before Anchor Bank sold the resort, the association board was negotiating with Drescher’s group over the contract regarding revenue from renting guest rooms, Williams said.
He said the previous contract provided a 50-50 split of revenue from room rentals between the unit owners and the hotel management group.
“But the new resort owners claimed they needed a higher percentage than normal,” he said.
The board negotiated a contract with the new owners under which the resort management gets 70 percent of the revenue from room rentals, and the condo owners get 30 percent, Williams said.
“It’s our position that, frankly, our own association board screwed up,” he said.
Drescher said the new resort owners needed revenue to get the hotel and other amenities back up and running without incurring the debt that had saddled the resort in the past.
“We weren’t under an obligation to go along with the same deal,” Drescher said.
He said the owners negotiated a contract with the condo association board that called for a 70-30 split through 2012 but graduated back to a 50-50 split over four years.
“We crafted a plan that they could get back to that 50-50,” Drescher said.
He said three members of the ownership group negotiated the contract with the seven condo association members who were in place before Drescher’s group regained control of the four commercial seats. He said the majority of the board members and the majority of condominium owners agreed to the plan.
“We believe that everybody acted fairly and did the right thing to begin with,” he said.
But, the lawsuit sets forth multiple causes of action that allege how the condo board “screwed up,” Williams said.
He said the association could have changed its bylaws when it had control of the board to remove control from the commercial owners. The lawsuit claims the association breached its fiduciary duty to its members by failing to do so.
“Because they didn’t control their own fate, they were forced into signing an inferior contract,” Williams said.
Lawsuit status
The 46-page complaint in the lawsuit lists nine causes of action and seeks a declaratory judgment on each. Attached to the complaint are 170 pages of supplemental material including correspondence between attorneys for the parties and association board members, meeting minutes and the unit management agreement.
“The lawsuit is for everything under the sun,” Drescher said. “They’re throwing everything at the wall to see what sticks.”
Williams said he attached a large number of exhibits to the complaint because he anticipated a motion to dismiss, which the defense made about two months after the suit was filed. He said he was able to refer to those exhibits “to save our case,” and the motion to dismiss was denied.
The case is now in the discovery phase – depositions are being taken and are expected to be completed by the end of this month, Williams said.
“They’re deposing every single person that’s ever been affiliated with Lake Lawn,” said Drescher, who gave a three- to four-hour deposition in December.
Madison Attorney Bryan Nowicki, who is representing the defendants in the matter, did not return a phone call seeking comment.
Williams said the case is scheduled for a three-week jury trial in June. He said he expects the defense to make additional motions to dismiss the case and he will likely file for summary judgments between now and June.
