In early March, the U.S. Bankruptcy Court for the District of Arizona granted Continental Country Club’s Motion to Reject the 1990 Amended Settlement Agreement and Judgment (1990 Agreement).
The order granting our Motion was filed on 3/7/22 and is available for our members to view in the Owner’s Portal as well as our website dedicated to the Chapter 11 Reorganization (links included at the end of this message). Many of us are wondering what this motion means to the HOA and to our ongoing bankruptcy, one aspect of which is finding a resolution for the Lake Elaine tract.
Before we explain the outcome of the Motion to Reject, we’d like to briefly review why the Motion was filed in the first place. As part of our bankruptcy reorganization in early 2021, we filed a Motion to Reject the 1990 Agreement which was the basis for a lawsuit brought against Continental in 2017 by some current lakefront property owners on or near the Lake. These Lakefront Owners (LFOs) brought a contempt action against Continental, alleging non-compliance with the 1990 Consent Decree and seeking to force Continental to reconstruct Lake Elaine.
Our Motion to Reject the decades-old agreement was filed on 2/10/21. On 1/26/22, Judge Eddward Ballinger conducted a hearing focused on determining whether the 1990 Agreement was executory and whether we, the debtor, were permitted to reject it in accordance with applicable bankruptcy law. In his 3/2/22 Minute Entry/Order, the Judge explains the criteria he considered before his ruling granting our Motion to Reject. As noted above, the formal order granting our Motion was filed on 3/7/22.
What does this mean to our HOA?
The decades between the 1990 Agreement and now have held considerable conflict for both the HOA members living on or near the lake (the LFOs) and the larger HOA membership. Much of the conflict has centered around the concept of maintaining Lake Elaine, what that maintenance looks like and who is obligated to pay for it. The LFOs asserted that the HOA was obligated to maintain the lake at the same level it was when first developed. The HOA maintained that the terms of the 1990 Agreement had been met and that the LFOs needed to be more flexible with changing conditions including the availability of water and problems with the lake liner, as the LFO’s ongoing cooperation to adjust for changing conditions was an express term of the 1990 Agreement.
In granting our motion to reject, the court recognized that the HOA’s obligation to maintain the lake was subject to “change based on unknown but anticipated impediments that likely would arise in the future relating to access to water, the cost of water, and deterioration to the lake substrate.” The court further found that the LFOs shared a duty to “accommodate changing conditions.”
The rejection of the 1990 Agreement probably won’t significantly alter how many of us feel about Lake Elaine, however it supports the HOA’s position that the HOA should not be required to maintain Lake Elaine without regard for the expense and burden its maintenance may have on the HOA. The rejection also resolves in the HOA’s favor any claims that the LFOs may have alleged for ongoing fines for non-compliance with the 1990 Agreement. The HOA is simply no longer obligated to comply with the agreement.
How does the rejection of the 1990 Agreement affect the ongoing settlement efforts with our LFO friends and neighbors?
In his 3/2/22 Ruling Granting the Motion to Reject, Judge Ballinger acknowledged the fact that our neighbors who purchased a more expensive lot on the lake “had a reasonable expectation of being able to enjoy the long-term use of an attractive, functioning, well-maintained water habitat.” He also acknowledged the HOA’s efforts to resolve the Lake Elaine situation. The LFOs have filed and can be expected to pursue a claim in the HOA’s bankruptcy case for damages resulting from the loss of Lake Elaine as it was designed under the 1990 Agreement.
At this time, we continue to try to find a solution to Lake Elaine with our LFO neighbors and colleagues that can be fair to them and also fair to all HOA members. Lake Elaine was one of three elements of our bankruptcy filing. The HOA is confident that the Sunwest Bank Loan and HOA Reserve Funds – the other two elements – will be satisfactorily addressed by its Plan of Reorganization.
What are the next steps in the bankruptcy process?
There are some legal steps that will take place beginning with a status hearing on our bankruptcy case scheduled for 4/14/22. Shortly thereafter, CCC will file an amended Disclosure Statement and an Amended Plan of Reorganization modifying our earlier versions to address certain objections raised in earlier filings and to incorporate either the terms of (1) a deal the HOA has been able to reach with the LFOs prior to 4/14/22 or (2) the HOA’s unilaterally proposed treatment of the Lake Elaine tract adjusted in light of the Court having granted the HOA’s rejection of the 1990 Agreement.
The HOA continues to strongly prefer the former over the latter. It is expected that the Court will approve the amended Disclosure Statement at a hearing in early-to-mid May. Once the Disclosure Statement is approved by the Court, we will then begin the voting process and solicit our members’ votes on the two fees that will be necessary to support the Amended Reorganization Plan. At this time, we estimate that the voting process could begin as early as mid-May, but we will keep you updated as things move forward.
Please continue to send your opinions, comments, and suggestions to board@continentalflagstaff.com – we appreciate hearing from you.
Informative references available on the Continental Country Club website dedicated to the Chapter 11 Reorganization: