Ask RedWeek / August, 2014

Why is the NY Attorney General suing The Manhattan Club?

Why is New York's Attorney General suing the Manhattan Club, and what happened to the other lawsuit you reported on?

The high-profile litigation over the Manhattan Club's allegedly fraudulent business practices hit historic milestones in mid-summer. The owner-based class-action lawsuit we previously reported on fell apart while a second and outwardly stronger case — filed by the Attorney General of New York — brought timeshare sales and foreclosures at the Club to a grinding halt.

As a result, from late June to late July, Manhattan Club owners experienced both despair and elation as they faced the prospect of finally getting their day in court to vent their grievances against Manhattan Club developer Ian Bruce Eichner and a cohort of relatives, associates, and businesses affiliated with the Club. Most of them spent between $15,000 and $30,000 for seven nights a year in the Big Apple, but the whole experience soured as, over time, they couldn't get the reservations they thought they'd been promised.

After reviewing complaints from nearly 100 owners, and dispatching undercover investigators to video-record recent sales presentations, Attorney General Eric Schneiderman filed suit and obtained a court order July 24 that bans new timeshare sales and blocks any foreclosures against owners who were behind on (or refusing to pay) their maintenance fees. Manhattan Supreme Court Justice Arthur Engoron also ordered Eichner and his Manhattan Club principals to produce documents and testify under oath about the Club's sales-and-disclosure practices, reservation policies, rental programs, and owner inventory. The next hearing is tentatively set for August 15, 2014.

"When sellers use high-pressure tactics to sell timeshares, consumers should be wary that they may not be getting what they were promised," Schneiderman said. "We allege that the Manhattan Club, near New York City's iconic Carnegie Hall, is a particularly stark example of such a bait-and-switch timeshare scheme."

Disgruntled owners have complained for years — on websites, letters, formal complaints to government agencies, and in three civil lawsuits — that they were unable to secure timeshare reservations while the Club continued to sell new timeshares and rent out a sizeable portion of its rooms to non-owners. The lawsuits, now backed in spirit by the Attorney General's case, also claimed that the Manhattan Club deliberately oversold timeshares at its 286-unit complex at 200 W. 56th Street while maintenance fees skyrocketed 200 percent over 10 years, with some owners paying $2,000 per weekly interval.

Manhattan Club lawyers claimed, in response, that most of its 14,000 owners were extremely happy with their timeshares and that all necessary disclosures about reservations and rentals were included in the public offering paperwork provided to buyers at time of sale, or later.

In June, a New York appellate court dismissed a class-action lawsuit brought by owners who claimed they had been defrauded and duped into buying timeshares they could not use (read our initial write-up on this case). The ruling marked the third time that an owner-based lawsuit had been thrown out of court, prior to trial. To the discouraged owners who had launched a multi-year crusade against the Manhattan Club, it must have felt like the final scene in a bad nightmare.

The AG's office, meanwhile — and unbeknownst to owners — had secretly been seeking full-scale disclosures from the Club since at least January as the Club sought approval for the 89th amendment and 8th complete restatement, of its timeshare sales plan. The Club's answers — or lack thereof — ultimately prompted the AG's action to shut down the Club's sales efforts altogether pending a formal investigation.

In his petition to block the Club from selling more timeshares, the AG said that the public offering documents were used as a "shield" to protect the Club from private litigation. His investigators discovered during six months of undercover work that the public offering documents were inconsistent with, and contradicted by, what sales agents told Manhattan Club visitors on a daily basis in sales presentations. The AG's case hinges on the kind of evidence that would make most defense attorneys cringe: caught-in-the-act audio and video tapes of recent Manhattan Club timeshare pitches recorded by investigators who booked discount rooms at the Club in return for attending a Manhattan Club sales presentation.

To date, according to the complaint, the AG's investigation revealed that Manhattan Club "selling agents deliberately withheld the offering plan from prospective purchasers, violating the legal requirement that written disclosure be used in the offer and sale of real estate securities." Sales agents also misrepresented the equity or resale value of Manhattan Club timeshares and flatly declared that the Club does not rent rooms to non-owners. Worse yet, the complaint documents how sales agents blamed their high-pressure buy-today sales tactics on regulations from the New York Attorney General.

"In reality, it is extremely difficult if not impossible for Manhattan Club owners to actually reserve rooms," the complaint says. "The discrepancy between what Manhattan Club owners are getting, versus what they are paying for, is so extreme that a few owners have sold ownership interests back to the Sponsor for only $1, just to escape the burden of paying the common charges."

Sales agents were also recorded telling investigators their timeshares would increase in equity over time. In fact, according to records filed with the lawsuit, the Manhattan Club in recent years bought back 2,904 timeshare intervals from owners. The Club "always paid less than $1,000, usually paid about $100, and even paid as little as $1 on a few occasions."

Recorded deeds for rooms at the Club also show a pattern of overselling. For unit 2217, for example, the Manhattan Club sold 75.48 annual interests when the maximum legal allowable amount is 52 (for 52 weeks per year). Unit 1701 showed deeds for 59.48 annual interests, while unit 1205 had deeds for 60.5 interests per year.

The lawsuit also shows that the Manhattan Club was actively shopping portions of its timeshare inventory to other vacation companies, including RCI, Disney, and Bluegreen. Sales to those companies further exacerbated the inventory squeeze for existing owners at the Club, the lawsuit says.

Attorney General Schneiderman is operating under the broad authorization of the Martin Act, which compels the AG to investigate potential frauds in the sales of securities. On top of all the other allegations, the case claims that the Manhattan Club has been selling timeshares without a broker securities license for several years.

The AG's case was a bittersweet victory for the activist owners who have been petitioning the courts and law enforcement agencies — for years — to investigate alleged misleading business practices at the Club.

Irene Smalls, a Connecticut children's book author who has become a prolific Manhattan Club activist, is cautiously optimistic the AG's case will bring some relief to owners.

"I feel good about my efforts," said Smalls, who has posted hundreds of updates and entries on blogs and RedWeek.com forums to encourage owners. "I won't feel vindicated until I am made whole financially and the Manhattan Club timeshare scam is made to pay. I am excited about the Attorney General's case because the AG can get financial payments to defrauded owners."

For its part, the Manhattan Club continues to use public relations people to respond to requests for information about the lawsuit. The Club's front man, Eric Yaverbaum, told RedWeek.com: "We intend to fully cooperate with the Attorney General's investigation and look forward to bringing clarity to the entire issue."

Yaverbaum, speaking on behalf of Eichner, is the same PR person who told RedWeek.com back in April that Eichner would happily develop the Manhattan Club "all over again." At this point, the most Eichner can look forward to is reliving and recounting the development of the Manhattan Club, dating back to the salad days of 1996, during sworn depositions in front of New York's highest law enforcement officer.

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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