The Continental Country Club in Flagstaff is bankrupt. The question is why.
A July 14 article for the Arizona Daily Sun explored the issue through testimony from the country club owners’ association executive and other residents. In short, Continental’s response was that the prohibitive cost of maintenance and the legal battles over their inability to maintain the leaking Elaine man-made lake were insurmountable. He asked residents to vote to approve a $2,000 special assessment payment and a 20% increase in annual dues to help the country club emerge from bankruptcy and turn Lake Elaine into something less expensive. .
But some lake residents on the other side of the legal battle have a different perspective. They say Lake Elaine can be fixed and Continental can afford it, but is using bankruptcy to evade legal obligations established in 1990, suggesting the Lake Elaine problem is being used to distract from a bigger problem. important: decades of financial mismanagement.
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Much of these allegations of mismanagement are based on an October 2020 reserve study of Continental’s reserve fund to assess how it would “maintain reserves above an adequate and not excessive threshold for one or more years.” significant expenses.
In 2020, Continental knew it had big expenses coming up, and the study was designed to help it understand how to keep money in the bank.
“A reserve study is not something to be taken lightly,” said Dan Penoff, a lakeside resident who has nearly 30 years of experience serving on association boards. owners outside of Continental.
For him, the results of this 2020 study were “disturbing”.
Not only did the reserve study show that Continental had monumental expenses ahead — including a lump sum payment of $600,000 due in 2021 — but that to reach a recommended level of around $5 million in reserve funds by 2050, Continental is expected to begin making massive annual fund contributions ranging between $310,000 and $1 million per year. At the time of the study, Continental’s reserve balance was $54,291. By the end of the year, they expected to be able to increase that figure to $125,000.
“I just see it being mishandled,” Penoff said. “Honestly, I can’t imagine a professional management company letting that happen. One who was, you know, competent.
Financial mismanagement goes back further than the 2020 study, said resident John Nilsson. He recalled “clear statements” in Continental’s board meeting minutes that “reserves were grossly insufficient in 2014.”
“There was no follow-up and the reserves are still woefully insufficient,” Nilsson said. “Lake Elaine is not the reason the Continental Country Club went bankrupt, it was just a straw after years of what I believe is gross mismanagement.”
The Legionaries of the Lake
The perceived pattern of mismanagement plays into the perspective put forward in court by the lakeside landowner class – the “lakeside legionnaires”, as they call themselves.
In their amended disclosure statement, the Legionnaires say the problem with Lake Elaine is not that it is unsustainable, but that “the Association [Continental] simply failed to do any real repairs or maintenance of the lake for almost 30 years. They say their view was upheld in 2020 by the courts, noting that “[Continental] argued then, and now argues, that he did not have enough money to fund the repair of Lake Elaine, but that did not convince the Coconino Superior Court, which found that the Association knew that she had the responsibility to maintain the lake but did not do so. The Court further concluded that failure to plan does not amount to failure to comply. »
While Legionnaires don’t deny Continental’s precarious financial situation, they don’t believe it prevents or excuses them from meeting legal obligations surrounding Lake Elaine. In their statement, they note that shoreline owners “have been very willing to work with [Continental] negotiate a creative solution that would allow for the repair of the lake as part of a holistic approach [Continental’s] great financial challenges.
In their view, Continental refused to meet with them halfway and “tried to use the bankruptcy process to block enforcement of the 1990 settlement judgment and the 2020 contempt judgment.”
“The owners of Lakeside have attempted to negotiate flexible options that allow the lake to be repaired over time,” reads the Legionnaire’s statement. “But [Continental] withdrew from those discussions and instead filed for bankruptcy.
One such “flexible option” that Legionnaires believe would be acceptable to them is a plan to fill Lake Elaine at a lower elevation below where the majority of lake liner failures and leaks occur. are produced. A 2019 report by engineering firm Terracon assessed that the lake’s lower elevation would have “relative stability.” The same report, however, concluded that any plan “should include the possible replacement of revetment below this elevation”.
Outlined in its amended disclosure statement, Continental has included a “small lake” option in its plan to emerge from bankruptcy, but with one caveat: the club no longer wants to be responsible for maintaining the lake. As part of the option, he would cede the Lake Elaine footprint to the lakeside owners and provide them with $2.5 million from proposed payments of $2,000 so Legionnaires can implement a larger lake. small” or any other solution the Lakefront Group deems appropriate with available resources. , and thereafter maintain such improvements as they deem appropriate without further input from [Continental] or its broader membership.
Based on their statement, the reason Continental wants to part ways with its responsibility to maintain Lake Elaine has to do with its skepticism about the possibility of a “long-term sustainable lake.” They stick to the claim that maintaining the lake in the manner described in 1990 is “no longer physically possible, economically feasible, or ecologically sound”.
Although the court concluded that it was possible to maintain the lake and that Continental had a responsibility to do so, the engineering reports that informed the decision paint a more complex picture. The aforementioned 2019 Terracon report indicates that there are viable solutions to infilling Lake Elaine – including the short-term use of the existing liner or a longer-term “geomemembrane liner” – but is quick to say that the porous limestone and geological conditions in the area are “problematic for a lake or reservoir”. He goes on to say that “it can certainly be argued that this site was a poor choice for a lake or waterhole of any significant size.”
Another 2019 engineering report from Natural Channel Designs came to similar conclusions, saying that “the geological and environmental setting of the lake presents significant challenges to its continued existence.”
Place and time
The issue is further complicated by the fact that Continental and Legionnaires don’t seem to agree on the cost of repairing and maintaining even a “small lake” option. In their disclosure statement, Continental says they are “informed and believe that the Lakefront Group has separately evaluated [the small lake option] and concluded that the costs of implementing [this option] are significantly lower than [Continental’s] Estimated at $3 million, but discussions between the parties to date have failed to reconcile these differences.
In either case, for Legionnaires, handing over the deed to the lake is not an attractive option, and it requires shoreline property owners to “address the problem that [Continental] established.” What they want is for Continental to take responsibility for repairing the lake and “also pay money for the Lakeside owners’ attorney fees – which are damages that the Lakeside owners suffered as a result of [Continental’s] rejection of the settlement order of 1990.
But for Continental to do all that, they will need the money, and they don’t deny that they need the money for more than Lake Elaine.
In a statement to the Arizona Daily Sun, Continental’s public relations manager Heidi Goitia said, “While Continental certainly has obligations other than those of the Lakefront Group, such as managing its appropriate capital reserves to ensure the good maintenance of its equipment and common areas, this was not the main cause of the bankruptcy filing.
For these reasons, they continue to urge mainland residents to vote to approve the $2,000 special assessment payment and 20% increase in annual dues, suggesting it is the fiscally responsible thing to do.
“The dues increase and dues increase are an important step to fund the reserves,” Goitia’s statement said. “It is dishonest for a group to put the blame on the reserve study and then not vote to fund the maintenance and improvements identified in the study.”
On this point, the legionaries agree. They might dispute the right way to move forward with Lake Elaine, but they seem to agree that voting to approve the special assessment is necessary to help Continental emerge from bankruptcy.
“It’s not true that the Lakeside Homeowners want to go bankrupt [Continental]“, indicates the press release of the legionnaire. “The owners of Lakeside Homeowners would lose as much as any other homeowner if bankruptcy ends in liquidation.”
In a recent newsletter to Continental residents, Chief Executive Tahlia Murray confirmed that if she cannot emerge from Chapter 11 bankruptcy and is forced to file for Chapter 7 bankruptcy, Lake Elaine’s lawsuit will cease, because “the HOA cannot be sued by the owners of Lake Elaine or any other entity” under Chapter 7
Yet Chapter 7 and the ensuing liquidation of assets is in no way in Continental’s best interests.
In the same bulletin, Murray quoted Patrick A. Clisham of Engelman Berger, the Continental Country Club’s legal counsel, as saying, “Chapter 7 means chaos. There are no positives.
As dissatisfied as legionnaires may be with the current state of Lake Elaine and the solutions offered by Continental, “A successful vote is actually in everyone’s best interest,” said Legionnaire and lakefront resident Tim Harrington in an email to the Arizona Daily Sun. “We support the vote for additional funds for the homeowners association.”
Whether Continental will get the votes it needs to avoid Chapter 7, what will ultimately happen to the controversial Lake Elaine, and whether the organization will be able to repair its long-term financial situation remains to be seen.
Voting to approve these additional funds ends on July 28. More information on the voting process for neighborhood residents can be found at continentalflagstaff.com/the-voting-process-on-the-two-fees/.