Ask RedWeek / October, 2017

When will owners see restitutions from the Manhattan Club?

Thanks for letting us know about the Manhattan Club settlement, but we need details! Who will get restitutions and when??

Some new details in the Manhattan Club settlement have finally been released. Let's start with the most important new revelations:

  • Owners will have to wait up to three years to get partial restitution for their complaints
  • The Eichners agree to sell the club to a timeshare company approved by the New York Attorney General

No Quick Relief For Owners

Two months after concluding its fraud investigation of sales-and-reservation practices at the Manhattan Club, the New York Attorney General's Office released details of its settlement with the embattled mid-town high-rise.

The Oct. 5 court filing, prompted by owners and attorneys who filed Freedom of Information Law claims to force disclosure of the settlement, gives owners some sense of the future at TMC, but no hard answers on how much restitution they'll receive, or other relief, as a result of the AG's successful investigation of the club. The future ownership and management of the club remain puzzles, as well.

The only certainty contained in the Assurance of Discontinuance (AOD) settlement, signed by the AG and the Manhattan Club's operators --- Ian Bruce Eichner, relatives and business associates ---is that TMC owners will have to wait, as much as three years, to weather the conclusion of the case. The AOD sets forth a three-year timetable for Eichner to sell the club, relinquish management of the club's day-to-day operations, and provide owners with $6.5 million in restitution payouts. Half of the money will be distributed to owners in year one for nights they could not use. The remainder will be distributed in years two and three to owners in good standing as partial reimbursement for the maintenance fees they paid between 2011 and 2014.

The AG's office announced that "hundreds" of TMC's 14,000-plus owners would share in the settlement as restitution for their inability to reserve rooms and resell their intervals. Doug Wasser, a Manhattan attorney who represents several dozen TMC owners, estimated that the payouts could go as high as $1,500 --- but that will depend on many factors, including whether owners paid all maintenance fees, previously and now, during the AG's four-year investigation of the club's sales practices. The payouts will be determined by a to-be-named claims administrator who will determine owner eligibility.

Wasser also said that the payouts, while small on a per-owner basis, pale in comparison to the AG's achievement in getting the Eichners to give up control of the club. This is the first time in the industry's history, he said, that a state regulator has forced a timeshare developer to get out of the business --- forever. Industry officials said they had no historical knowledge of a tougher outcome, either.

"I think this is a process, not a final settlement," Wasser said. "It's also significant that all sponsor-appointed officers and directors will resign and the new TMC purchaser will appoint new directors."

While making history in the timeshare universe, the outcome roiled owners who vented their feelings on RedWeek.com and other social media channels. Many owners, perhaps exercising wishful thinking, hoped they would get back their purchase money or be able to sell their timeshares to the club for fair market value.

"I'm concerned about what a pittance we're going to be handed," said Chris Volpe, a Long Island resident and ardent Manhattan Club owner who has long complained about the Eichners and, recently, advocated an owner protest against the settlement. "We have no idea what the (claims) administrator will decide."

Many owners who contacted RedWeek.com also anticipated a rollback in maintenance fees that, in recent years, soared to nearly $3,000 per week. The AOD acknowledges the rapid rise in maintenance fees, but is silent on what fees should be paid in the future. That, too, will depend on the new buyer.

An Unnamed Timeshare Company Will Buy and Manage the Manhattan Club

The AOD discloses, for the first time, that the club will be sold to a "third party operator of timeshare properties" that must be screened and approved by the AG's office. If the new buyer defaults on the purchase, the AG retains jurisdiction to appoint a monitor to run the club and take control of all books, records and personnel decisions. In addition to selling their stakes in the club --- which are unknown, since most of the deeds were sold to timeshare buyers --- the Eichners agreed to transfer the club's management agreement (run by an Eichner-managed company known as Urban) to the timeshare company that buys TMC. The Eichners also agreed to remove all business associates from the club's HOA board. Their replacements will be named by the buyer.

In summary, the AOD represents a clear-cut win for the Attorney General, a loss for the Eichners and, at least on paper, a positive result for the 14,000 or more owners who spent $400 million on TMC timeshares between 1996 and 2014.

Background: What Went Wrong at the Manhattan Club?

In its heyday, the Manhattan Club was one of the only luxury timeshare operations in Manhattan (the Hilton Club, a neighbor, is the other). Buyers were eager to purchase a slice of Manhattan for use every year, with maintenance fees initially subsidized by the Eichners. But instead of gaining easy access to the Big Apple, owners eventually hit roadblocks. Reservations got harder while the club continued to push new sales and ramped up nightly rentals to non-owners through online travel agencies. At the same time, owner maintenance fees escalated, year after year.

That AG's office started investigating the club's sales practice in 2014 after receiving hundreds of owner complaints. That led to an undercover sting operation where AG investigators posed as potential buyers and recorded the club's sales pitches. On the strength of those secret recordings, the AG got a court order in July 2014 that shut down the timeshare operation and froze the club's bank accounts pending additional investigation by the AG. Over many months, the AG filed court documents indicating that the original civil probe --- into violation of consumer protections in New York's Martin Act --- had expanded into a potential criminal investigation.

The criminal probe turned into a stalemate when Eichner's attorneys objected to the AG taking depositions that might force the Eichners to make statements, under oath, that could be used against them in a criminal proceeding. In addition to fighting the depositions, Eichner's attorneys filed petitions to unfreeze the club's bank accounts so the lawyers could get paid. It never happened.

Several months ago, both sides agreed to cancel pending court hearings in order to pursue settlement talks. Those discussions led to the AOD, which was announced in mid-August but not disclosed until this month.

Complicated Schedule for Eligible TMC owners to Receive Restitution

The restitution program has three parts. During the first year, $3.25 million will go to reimburse owners in good standing who could not secure reservations between 2011 and 2014 and did not use all their allotted nights. The maximum reimbursement for unused nights is $250 per night.

The second- and third year restitution distributions will provide $1.625 million each for owners as partial reimbursement for their maintenance fees. In each case, the claims administrator will determine the exact amounts of the pro rata distributions.

Findings in AG's Case Could Trigger Additional Litigation

While giving some money back to owners, the case could spawn additional lawsuits against the club, according to lawyers interviewed by RedWeek. The AOD, they said, includes specific admissions of wrongdoing that could become evidence in future lawsuits. Here is an example of the stipulated findings in the AOD: the court document says that "certain sales staff" sold timeshare intervals without providing a copy of the offering plan to prospective buyers. Other sales people, meanwhile, made misleading oral statements to buyers about the rescission period, the investment value of TMC timeshares and the club's "willingness to buy back the timeshare interest at the price paid by the purchaser."

The AOD settlement identified several violations of New York's anti-fraud Martin Act, including these findings:

  • The sponsor's sales staff failed to provide copies of the offering plan to purchasers.
  • The club's reservation agents did not abide by the terms of the offering plan, did not always provide reservations to owners on a first-come basis and gave preferential treatment to certain owners through a new-owner hotline.
  • In annual budgets, the sponsors under-reported reserves for bad debts (defaults on maintenance fees). In 2011, the reserve for bad debts was $600,000, while the actual bad debt exceeded $2.09 million. In 2012, the budgeted reserve was $900,000 while the bad debt expense rose to nearly $3.95 million. In 2013, the bad debt reserve was $1 million while the actual debt was $5.17 million. And in 2014, the reserve for bad debts was $1 million while the actual bad debt ballooned to $5.27 million.
  • The court settlement also says that the sponsor implemented aspects of the transient rental program "in an improper manner," but provides no specifics.

Between 2011 and 2014, the club's management arm, New York Urban Ownership Management, LLC, managed by Eichner, received an annual management fee that ranged between 13.8 percent and 18.1 percent of all maintenance fees -or approximately $6.5 million per year, the same amount as the restitution fund. Those payments, with a 15 percent cap on management fees, will continue.

Owners who sifted through the settlement document immediately raised questions that will take time to answer. Here is a sample:

What will happen to owners who declined to pay maintenance fees after the AG shut down the club? Are they entitled to any relief for the 2011-2014 restitution years? Will the club, or its new owners, create a surrender or deed-back program to facilitate owners who can no longer use (or sell) their intervals? How will the claims administrator determine eligibility for restitution? Will there be any changes to reservation processes to ensure that owners gain access to their timeshares?

While these questions hang in the balance, one fact has already emerged: the club is contacting owners to pay their maintenance fees, and threatening to file negative credit reports if they don't.

"This agreement is not going to satisfy a lot of people," Wasser acknowledged. "But I am hopeful that whomever purchases the Manhattan Club will take action to re-establish confidence and a smooth operation of the club, and that they'll work out steps to address owner concerns and re-establish market confidence."

Manhattan Club Back in Business?

The Manhattan Club, amid all the turmoil, continues to operate in full hotel mode, taking reservations online and over the phone from non-owners seeking nightly rentals. Some owners report that they have had more success making reservations since the AG shut down the timeshare operation. The club's operators, however, are not answering questions about any of the owner issues raised in this article. No owner, moreover, has reported receiving a single email about the club's four-year drama with the AG's office.

The settlement and dismissal of the AG's legal investigation also lifts the freeze on the club's bank accounts and thaws 15 sales contracts that were thrown into limbo by the AG's court action. Those buyers will have 30 days to proceed or rescind.

AG Eric Schneiderman declared that "the owners of the Manhattan Club lured thousands of timeshare buyers with false promises and shady sales tactics that violated New York law. While timeshares can be legitimate enterprises, scams like this one are common."

About the author

This answer was provided by RedWeek's Chief Correspondent, Jeff Weir. Jeff is a California-based journalist who has covered California, Congress, and the White House. He also has roots in Silicon Valley, where he directed public relations and marketing programs for high-tech companies. He is also a timeshare owner and member of RedWeek.com.

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    5 Comments

  • Avatar for beckyf76
    beckyf76
    Oct 11, 2017 (1 week ago)

    Thank you Redweek for keeping us informed. As an owner of a Penthouse-7 days per year, and in good standing between the dates specified in the settlement (2011-2014) I would like to keep my unit and receive none of the settlement except perhaps an adjustment on the fees I did pay. Going forward, I'm reluctant to pay maintenance fees that are currently outrageous and simply unaffordable. would you recommend that they be paid? Is this a question for the AG or is there any hint in the information you've received that would suggest that owners should hold back paying the fees until the new owners are established. It seems ridiculous to pay these fees, especially since you can't use your unit, without any promise of some restitution.

  • Avatar for nathanz2
    nathanz2
    Oct 12, 2017 (1 week ago)

    Thanks Jeff! So, if I understand your summation, the operation of the MC is being shopped around to prospective buyers and a claims administrator will manage distribution of the settlement funds. Fair enough. This will most likely be a time-consuming process. Who is, or will be, monitoring the operation of the MC until it is transferred to the new operators? The AG will vet the new purchaser but who is making certain that the egregious management practices do not continue until then?

  • Avatar for williamm465
    williamm465
    Oct 13, 2017 (1 week ago)

    Thanks Jeff!.

  • Avatar for michaelc414
    michaelc414
    Oct 13, 2017 (1 week ago)

    One of my tow Manhattan Time Shares is due for renewal on 11/18/17. On 10/02/17 I received a letter from the Manhattan Club stating that a payment must be sent "to avoid any interest or late fees being applied to your account. The additional fees would consist of 16% interest being applied to the Timeshare charges in the amount of $347.86 along with a $50.00 late fee bringing the total amount due to $2,774.51" Since there is no indicated final payment date, can I assume these penalties will be assessed after the renewal date? If I elect not to renew, I realize I cannot use the contract to book any rooms, but why I should pay maintenance fees on a room that I am not using? I have had these 2 contracts for approximately 16 years+. It appears that no consideration is being given to .owners before 2014.

  • Avatar for luisd59
    luisd59
    Oct 15, 2017 (1 week ago)

    RedWeek,

    Another timeshare company that needs to be investigate is the Holiday Inn Club Vacation in their operation of the Silverleaf Resorts and treatment of these owner vs Holiday Inn Club owners. It seems HICV is renting units to anyone and owners are second place. Thanks!