The Law of Fraud

Here’s a memo from LHCC’s former attorney, Steve Moriarty, to Howard Cihak, LHCC’s former GM. The topic: running water & sewer throughout Section 8A.

The plan then under discussion ran something like this:

  • convince lot owners to give their lots back to LHCC
  • LHCC runs water & sewer to all lots in the section
  • Selling the lots at “substantially higher prices”

The little wrinkle that would make this scheme work? Not candidly disclosing the plan to lot owners being asked to give their lots back to LHCC. As Moriarty himself said:

…[p]ublic disclosure of this plan would jeopardize its full potential.

The other complicating factor: the “buyer” would be represented by “directors who owe a fiduciary responsibility to the seller.”

In the end, Moriarty advised that it was a “brilliant way to take advantage of assets….” Are membership lot owners “assets” to be taken advantage of? Keeping in mind that LHCC was considering withholding utility extension plans from people it had a fiduciary obligation to serve and protect to get them to act against their own self interest, is it any wonder LHCC leaders were checking with their lawyer on the law of fraud?

We’ve covered LHCC’s longstanding shabby treatment of membership lot owners. In June of 2007 Wayne Poyer wrote that LHCC was “very aware of the troublesome plight in which Membership Lot owners find themselves. It only makes sense that LHCC has such awareness of that plight, because the organization Poyer leads schemed for years to manufacture it.

With a history and leadership like this, is it any surprise the community is plagued by problems?

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How Bill Masters Saved Lake Holiday $120,000

At the April board meeting, LHCC directors discussed a serious problem: they pledged the clubhouse (LHCC common area) as collateral for a loan from Wachovia without first obtaining owner consent. Several board members referred to this as a breach of their fiduciary duty, since common area can’t be mortgaged without first obtaining more than two-thirds consent of Lake Holiday’s owners and that consent was never obtained. GM Ray Sohl introduced the solution to this problem: “the board of directors has expressed an interest in re-collateralizing the existing clubhouse loan.”

The board’s solution: ask owners to retroactively approve mortgaging common area, and if approval were not obtained, to refinance the Wachovia loan at a great expense. Doing so would require paying about $18,000 in refinancing costs, paying approximately $20,000 more in annual debt service over 5 years, pledging 91 LHCC-owned lots, and allowing Wachovia to put a bank hold on $150,000 to $200,000 of LHCC’s cash. Add that up and you get a cash savings of $120,000.

That initial discussion of the problem was lengthy. Our nine video clips cover over an hour and ten minutes in Clubhouse Loan Pts 1-9:

By July, preparations were underway to put the re-financing to an owner vote. LHCC announced the upcoming vote on July 21st. At the July 28th board meeting VP Dave Buermeyer, guided by Wayne Poyer, proposed the specific language to describe the issue to owners. Right away he met with resistance from 2 board members, John Martel and Jo-anne Barnard. Martel claimed that the language gave the refinancing proposal an “air of legitimacy that it probably never really achieved.” Then, Martel did an abrupt about-face and retreated from that position when Poyer seemed to be bothered by his remark. Jo-anne Barnard called the referendum “meaningless” because despite the high cost, the board had already decided to do the refinancing even if owners didn’t approve it. Nevertheless, every other director was satisfied with the decision to proceed with the refinancing. Many felt no further discussion was necessary.

Barnard and Martel felt the significant cost of the refinancing did merit further discussion. Barnard corrected the cost estimate served up by Poyer and Buermeyer. She observed:

It doesn’t cost $20,000. It costs $20,000 and $18,000 in the near term every year at the same time that we have to do the dam.

Here’s the July discussion in clips Oct 08 Referenda Pts 1-5:

So what’s the biggest problem in refinancing the clubhouse balloon note to fix pledging the clubhouse without first obtaining owner approval? The clubhouse isn’t even pledged as collateral on that note. Either Poyer and Buermeyer weren’t being candid about their reasons for proposing the refinancing or they never even bothered to check the documents. If they had taken just a moment to read the collateral exhibit, they would have seen that it clearly contains a description of real estate that is not the clubhouse.

A cautionary word to the non-lawyers that try to comprehend an important legal document like the loan collateral exhibit: it’s a whopping 2 pages, and the description of the property used as collateral involves potentially hard-to-understand legal terms, such as “231 Redland Road.” Proceed carefully!

After watching the video of the July meeting, property owner Bill Masters did bother to check the documents, and the exhibit showing the collateral for the loan very clearly listed the collateral as 231 Redland Road, the location of Lake Holiday’s management office. Masters contacted GM Ray Sohl, and directors Barnard and Martel to understand how they missed this.

Sohl initially disputed Masters’ assessment and insisted the clubhouse was used as loan collateral. Masters had to show Sohl that the loan for which the clubhouse had been used as collateral was paid off and closed months ago. Keep in mind that Masters was making his argument to Sohl and several board members using documents he originally obtained from the Lake Holiday office in the first place.

Barnard and Martel were surprised by his claim but promised to investigate. To further support his contention, Masters supplied loan documents to Barnard and Martel and Frederick County tax maps, one of which appears nearby. In a few days, Sohl, Barnard, and Martel came to the same conclusion that Masters had: the clubhouse wasn’t pledged on the loan in the first place, so there’s no reason to spend all that money on the expensive refinancing supported by Poyer and Buermeyer.

The cash savings, as Barnard herself pointed out at the board meeting, is about $120,000 over 5 years. When Masters discussed with Barnard the significant cash savings, Barnard disputed her own number. Evidently, dollars that Masters saves don’t count as much as dollars that the board very nearly wasted. Beyond the cash savings, Lake Holiday retains clear title to its 91 lots and has unrestricted use of the $200,000 that it would have had to pledge to do the refinancing. Masters managed to accomplish all of this while holding down a full time job and not serving on the board.

Barnard’s attempt to discount the savings is just evidence of the board’s spin machine revving up. More evidence of that is Sohl’s email to Masters, thanking him for catching the “error,” but pointing the finger at Wachovia for not securing the loan with the right collateral. Maybe Wachovia’s Mike Wilkerson has a different opinion of who owns the “error.”

Much can be learned from this episode to improve Lake Holiday. LHCC directors voted to spend over $120,000 of the organization’s cash based on the erroneous belief that the clubhouse was pledged as collateral, a belief that reading the loan documents would have quickly corrected. While Barnard and Martel were against spending money on refinancing, at a minimum they and every other director are guilty of approving a significant expenditure without bothering to read the underlying documents. That’s wrong. If any director did read the collateral documents and recommended the refinancing based on a claim that he knew to be false, that would be far more troubling.

When Masters first called Ray Sohl, he encountered far too much resistance. Sohl spent too much time defending the position that the clubhouse was pledged as collateral, perhaps because the board had already invested so much time to approve the refinancing. If the clubhouse were not pledged, it would make all the resources devoted to the refinancing an embarrassing waste. Fortunately, Masters took the time to make the phone calls and send the emails to overcome Sohl’s resistance. Masters was in an exceptional position because he had previously requested the relevant documents and closely followed the board videos, two things for which he is often unjustly criticized. But it shouldn’t be that hard for owners to get the management office to reach an obvious conclusion. While this went from start to finish in about 3 days, that was too long because the loan collateral exhibit was so clear and unambiguous. The initial response involved too much defensive posturing. If Masters had not persisted after receiving Sohl’s initial response, the savings may have been lost.

Fortunately, Masters saved $120,000 of Lake Holiday’s cash. What the community learns from this affair may be even more valuable.

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What Judge Prosser Asked Us To Do

A short but interesting open forum kicked off the June 23rd meeting of LHCC’s board. The Bemis case was on a few minds. A woman named Pat, a member of the Alliance to Save Lake Holiday, encouraged owners to send out emails to support the passage of Sen. Jill Holtzman Vogel’s now tabled special interest legislation. Pat’s effort to support a side in the case was confusing to some audience members, because Pat, as a member of the Alliance, is on both sides. She, like every Alliance and Friends of Lake Holiday member, is both a defendant and a plaintiff.

Here are some excerpts of the discussion:

Property Owner: Which position are you supporting, the plaintiff or the defendant? Because from what I understand you’re both.

Alliance Member Pat: You’re asking who I’m with?

Property Owner: You’re telling us to go out and support “our” side. Ok, is it the plaintiffs’ side or the defendants’ side, because the way I understand it, most of the people here are on both sides.

Tom Wallace: You indicated that people are on both sides. There are people on both sides. We’re the defendants. The board is …

Property Owner: They have also cross-claimed as plaintiffs.

Tom Wallace: That doesn’t mean anything except…

Property Owner: It means that they’ve cross-claimed as plaintiffs so they’re on both sides.

Tom Wallace: Only a few of them.

Wayne Poyer: That has nothing to do with plaintiff, that’s a cross-claim. But you are technically correct. We don’t consider…I don’t think anybody who has made a cross-claim or counter-claim considers themselves part of the plaintiffs’ group.

Property Owner: Then why are they cross-claiming?

Wayne Poyer: Because that’s what Judge Prosser asked us to do.

Every member of the Alliance to Save Lake Holiday and every member of Friends of Lake Holiday has filed a cross-claim. That means every member of the Alliance and every member of Friends is a plaintiff against LHCC, the very organization they claim to be trying to save. The “Crossclaim against LHCC” for all Alliance members can be found buried on page 23 near the very end of their filing, and the cross-claim for all Friends members can be found in their pleading, “Cross Claim Against Defendant Lake Holiday Country Club Inc.” The cross-claims effectively repeat the arguments made by the original Bemis plaintiffs and make every party to the cross-claim a plaintiff.

These 2 groups include many former directors, every past president in recent memory, and every current director except Ken Murphy. In other words, in a case alleging that LHCC, run by its directors, has illegally collected assessments not authorized in the owners’ deeds, 10 of 11 current directors who are charged with collecting those assessments have adopted the position that LHCC has collected and is continuing to illegally collect assessments not authorized in the owners’ deeds. If that sounds ridiculous, it’s because it is.

Both current LHCC President Wayne Poyer and Tom Wallace, a former LHCC director, are members of the Friends group. When Wallace replied “only a few” in response to the comment about the position taken by current directors, he was wildly inaccurate. He also failed to mention that he himself is a plaintiff against LHCC. Was his distortion intentional? Or have pleadings been filed in his name that he doesn’t have knowledge of or agree with?

The exchange shown on the video triggered an email from a homeowner to Wayne Travell, the attorney representing the Bemis plaintiffs. The homeowner was troubled by Poyer’s statement that he did “what Judge Prosser asked him to do.”

This just didn’t seem right to me. I don’t know much about law, but it seems to me this is out of line.

Below is Travell’s reply:

Travell responded that “Mr. Poyer has never directly addressed the judge in open court nor vice versa.” He added that he does not believe the judge has engaged nor would engage in private communications with Poyer.

Wayne Poyer openly told his own neighbors at a public meeting that the judge in an active case asked him to take a particular course of action. Poyer suggested his status as a plaintiff was just a technicality. Former director Tom Wallace didn’t candidly acknowledge he is a plaintiff and distorted that 10 of 11 current directors share that position with him. Even Alliance member Pat failed to mention that she is a plaintiff.

How can homeowners separate fact from fiction with leaders like these?

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This Has To Stop

Whatever one may think of John Martel, he consistently manages to come up with great one-liners. Mind you, they’re not going to be heard on the big movie screen anytime soon. They’re just pithy observations on the problems at Lake Holiday. We took the title of this post from his remarks on the issue of ordering tote bags for new owners for the Welcoming Committee.

Too many bags were ordered at a price double what they should have cost because the wrong person ordered the bags.

Wayne Poyer described the mix-up:

A batch of bags was ordered which, based on the rate of people coming into the community, it’s going to last about 40 years.

As Martel said: “this has to stop, this has to stop.” We’ll go out on a limb and guess that the Welcoming Committee only welcomes new homeowners and not new membership lot owners with one of the too many totes ordered at an exorbitant cost.

The budget review was made a little more difficult when it was discovered that one of Mike Kilmer’s staff incorrectly coded an expense item as an income item. Robin Pedlar thought Kilmer’s firm was “overpaid.” According to Martel, the distribution of work between the LHCC office and Kilmer’s firm has created problems. His view:

It’s hard to sort out who’s doing what to whom.

Kilmer’s firm is paid $4250 per month (an annual rate of over $50,000), and the board was reviewing other cutbacks to balance the budget at the May 15th budget meeting. Despite that, Pat Shields didn’t think that meeting was the appropriate time to address the value of Kilmer’s services.

In the video of overpaying for too many tote bags, Robin Pedlar worried:

If this is indicative of how phony all the numbers could be, it scares me.

She was not alone in her concern about sloppy accounting. Wayne Poyer asked somewhat rhetorically:

How bad is our accounting?

Let’s look at one area, the relationship between delinquencies and receivables. In our videos 2008 1Q Delinquencies and How Bad Is Our Accounting, Treasurer John Martel gave the numbers on delinquencies: 114 homes (including trash assessments), 70 water/sewer lots, and 242 membership lots. Based on LHCC’s published assessment rates, this is a monthly delinquency of $30,748.08. Yet the difference between LHCC’s reported accounts receivable in March and April of 2008 is only $9,299.73. If the delinquency rate is actually that high, why didn’t accounts receivable go up by a larger amount? If it’s not that high, why is the board over-stating the delinquency rate and budgeting based on this over-statement? As Poyer himself remarked, the delinquency report “just doesn’t pass the nonsense test.”

Budget-related videos from this meeting also include a discussion of getting foreclosing banks to pay their dues and a brief review of Kilmer’s role (which includes a little spat between a frustrated Martel and Suzy Marcus). A few unrelated topics were addressed after the budget review: creating the nominating committee; handling road violations, in which directors acknowledged that the roving patrol is not authorized to stop alleged violators; and relisting lots for sale with Oakcrest.

If you find it odd that in all this budget talk, the name of Steve Locke doesn’t come up much, we do as well. Steve’s resume says he’s a certified financial planner and a former member of the Financial Management Task Force. He had little to say about changes to the budget, a topic that is very relevant to his background and experience. What is the point of serving on the board if you don’t have much to say on the topic most directly related to your background or work experience? Congratulations, Steve. You’re our Silent Sitter for the May budget meeting.

With all of the excitement about accounting and budgets (a subject that caused Robin Pedlar to comment a little past the half-way point of the budget meeting that “we’ve got to move faster or I’m going home”), we realized that we neglected to announce our Silent Sitter winner for the April 28th meeting. The most important topic covered at the April 28th meeting was a proposal to refinance the clubhouse balloon note. In a meeting where directors openly acknowledged they breached their fiduciary responsibility, Suzy Marcus sat in almost total silence. She neither objected to the characterization expressed by several board members that the board (of which she was a member) had in fact breached its fiduciary responsibility or raised any concern about the cost to fix that mistake. Important issues require the input of all board members. Congratulations, Suzy. You’re our Silent Sitter for the April meeting.

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Quick Takes on the April 28th Board Meeting

The April 28th was long – over 3 1/2 hours, not counting an executive session. We’ve included all but about 15 minutes of that meeting, spread over 26 video clips.

Review of a new front gate contract took about 5 1/2 minutes, but review of a $1500 reimbursement for additional lifeguard open water rescue training took over 30 minutes. The latter issue apparently stemmed from roving patrol/lifeguard supervisor Zeb Brevard, rather than the board, authorizing an expenditure made by the parent of one of the lifeguards.

Just because review of the front gate contract took 5 1/2 minutes doesn’t mean there was serious review. The board rubber-stamped GM Ray Sohl’s recommendation of keeping the contract with Haines at a cost of $15 per hour rather than accept a much lower cost proposal from Spartan at a cost of $13.33 per hour. The potential savings from Spartan’s proposal? About $15,000. The board couldn’t spend a lot of time on this $130,000 contract because it had to have enough time to discuss a contract with the lifeguards requiring them to reimburse the $100 training cost if they failed to work the entire season. At one point, presumably just to shorten a ridiculously long (or was it just ridiculous?) discussion, an audience member volunteered that he would reimburse the $100 training cost if that event occurred.

For the monthly staples, Martel gave the Treasurer’s Report and GM Ray Sohl gave the Management Report. Martel also put forward a motion to fully expense rather than capitalize all of LHCC’s depreciable assets. No director asked whether that was GAAP-compliant. For that matter, no director asked what GAAP is.

Dave Buermeyer gathered up some projections from Miller & Smith and some boxes of old documents. He rolled them into his Vision 10, a plan for the next 10 years at Lake Holiday. It drew applause from the board, which is the only group that will pay any attention whatsoever. Buermeyer also brought back more modifications to a policy to fill board vacancies. Secretary Ken Murphy secured approval for a new Rules Tracking System. At least they’ll look pretty. Early topic of the video: picking the right font. We’ll state the obvious: when a simple community association has to have a rules tracking system, it has too many rules. The board also approved a motion to hire a new collection agency, Debt Recovery Bureau, to try to collect old LHEUC debts on a contingency basis. According to Ray Sohl, these debts are outside the 3 year statute of limitations, and 1 firm has already tried a similar approach and given up after about 2 months.

On a positive note, director Steve Locke brought up negative communications relating to architectural compliance during the Committee & Task Force Reports. He was critical of his own experience and said the board needed to find a “much more neighborly way of going about things.” He thought “a little conversation would have gone a long way.” Perhaps his wife Deborah is working with him to try to develop a “kindler, gentler” side rather than the pseudo-tough guy tactics he displayed in our Keep It Over Here Punk video. Imagine: one LHCC director thinks “a little conversation” with an adversary could go “a long way.” Believable? Enduring? Let’s wait and see.

In earlier meetings, the board concluded that LHCC lacked the money to install guard rails, a safety issue, but evidently the money is there for the GM to solicit proposals to improve the acoustics at the clubhouse. Safety, no. Better acoustics for board members to hear themselves talk, yes.

The biggest topic of the night: re-financing the clubhouse loan. GM Ray Sohl started the discussion by stating that the “Board of directors has expressed an interest in re-collateralizing the existing clubhouse loan.” Oddly, there’s no expression of such interest during open meetings. Since the board voted on a motion to direct the GM to get bids on changes to the clubhouse acoustics, why is there no approved motion to direct the GM to investigate refinancing the clubhouse? This is just more evidence of the backroom discussions that Wayne Poyer denied the existence of when questioned by Bill Masters at the February Round Table.

In a sometimes heated debate, the board decided what to do about the fact that it pledged common assets without first obtaining 67% approval of the membership. To those who say the board never violates LHCC’s governing documents, this is just 1 example. The board acknowledged it didn’t follow LHCC’s governing documents on one of the largest transactions in Lake Holiday’s history. Jo-anne Barnard expressed the view that had she been given a chance to vote to incur a big mortgage to remodel the clubhouse, she would have chosen not to do so.

According to some board members, to fix things would require:

  • pledging over 90 LHCC-owned lots
  • paying $18,000 in closing costs
  • paying an extra $1400 per month for 5 years
  • putting a bank hold on $150,000-$200,000 of LHCC deposits for 5 years

The hold would prevent LHCC from using the money. The board’s fix relies on an artificial distinction between “common area” and “common property.” Mortgaging the clubhouse without member approval was wrong because the clubhouse is “common area,” but mortgaging 91 lots without member approval is acceptable because these lots, according to the board, are something entirely different – “common property.” The extended debate is covered in a total of 9 parts, the first 8 of which include the discussion and the last of which includes the final vote.

Several directors expressed the view that the fix was expensive at a time when money is tight and the damage from violating LHCC’s governing documents can’t be undone. The decision: put the issue to retroactively approve pledging common assets to a member vote (which will almost certainly fail, as Poyer himself acknowledged), and if it fails, to enter into the refinancing, probably in early 2009. Martel asked that the record reflect that this decision to refinance is a breach of directors’ fiduciary responsibility, and when Poyer objected to the minutes reflecting Martel’s comments, he withdrew them. Not to worry, John Martel. The record of your inability or unwillingness to stick to your position is amply reflected on YouTube.

We extend our continued thanks to Bill Masters for his unflinching efforts to let property owners monitor the conduct of LHCC’s board. Despite the board’s talk of openness, they blocked Masters’ videographer from the boardroom on the grounds that he wasn’t an LHCC member. Property owners should be deeply troubled by a board that blocks openness and at the same time denies it is doing such blocking.

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Bye, Bye, Bleckster

Rick Bleck, who did not meet the 1 year ownership requirement for nomination set forth in LHCC’s bylaws and was invisible on the campaign trail but was elected anyway, resigned from LHCC’s board on January 30th. Bleck, aka the “Bleckster” (see his own email address), sent a resignation email to Wayne Poyer. He resigned essentially the day after attending the January board meeting which included an Executive Session focused on LHCC’s litigation issues. He wished the remaining board members “Good Luck to all with this one” and with that, he was gone. He may not have left a lasting impression, since GM Ray Sohl mistakenly identified him as “Bill Bleck” when forwarding his resignation email. Maybe the community that allegedly elected Bleck to the board didn’t leave a lasting impression on him either. In 2 instances he referred to Lake Holiday simply as “Holiday.”

We suspect Bleck was duped to keep his name on the 2007 ballot even though he didn’t meet the nomination requirement to block the election of Bill Masters. Masters has been critical of the board, and the board is intolerant of criticism, however justified. Caught in a place where he would not be able to make a meaningful contribution or independently become familiar with the challenges facing Lake Holiday, Bleck would have little more than a marginalized role on LHCC’s board. However, Bleck himself opted to take on this marginalized role by allowing his name to remain on the 2007 ballot after he learned of a legitimate challenge to his nomination. Although he put himself in a difficult position, he should have stuck it out.

At the March 27th board meeting, LHCC’s board decided to appoint Bleck’s successor. The deadline for expressing an interest to serve was March 18th, and only 2 prospective candidates responded by that date: Bill Masters and Mike Sweeney. Just as with Bleck’s nomination, there’s a big problem here. Mike Sweeney is the husband of Robin Pedlar, one of LHCC’s current directors. LHCC’s Articles of Incorporation contain this simple sentence:

A Lot shall not have more than one membership, but the single membership shall be shared by all owners of the lot.

Since Robin Pedlar and Mike Sweeney jointly own only 1 property at Lake Holiday, there’s only 1 possible membership in LHCC to go around. But to serve on LHCC’s board, one must be a member. Robin Pedlar is already serving on the board, so she must be a member. That leaves no membership for Mike Sweeney. Case closed. Not so fast. Wayne Poyer said he reviewed this issue “quite thoroughly” and that usually translates to getting a legal opinion to trick trusting owners that this is somehow, someway legitimate. Here’s that legal opinion from Juan Cardenas of Rees Broome as read by Wayne Poyer:

Assuming Mr. Sweeney is a member of LHCC and in good standing, he is eligible to serve on the board of directors per the Bylaws. The fact that he is a co-owner of a lot with Ms. Pedlar does not invalidate his eligibility to serve, nor would it affect his right to vote on matters as a member of the board on matters before the board of directors as the Bylaws do not regulate, much less prohibit, the possibility of two or more co-owners of one lot serving on the board at the same time. The Bylaws make clear that Mr. Sweeney and Ms. Pedlar share voting rights with respect to their lot as members of LHCC on matters before the membership, as only one vote is assigned to each lot regardless of the number of co-owners. But again, this point does not affect the issue of eligibility to serve on the board. I hope this further explanation is helpful. (emphasis added)

Bill Masters challenged whether Mike Sweeney is a member of LHCC, and he specifically referred to that statement under LHCC’s Articles of Incorporation. Cardenas avoided all mention of the Articles and instead tried to focus attention on LHCC’s Bylaws because there’s no way around the unambiguous statement in the Articles. His opinion has a more fundamental flaw. He assumed the very result he should have been asked to evaluate, whether Mike Sweeney is a member of LHCC. Given that Robin Pedlar is an existing director and thus a member, LHCC’s Articles make clear that Mike Sweeney is not a member of LHCC. Therefore, as long as Robin Pedlar is using that membership by holding office, Mike Sweeney is ineligible to serve on the board. We suspect that Mike Sweeney himself knows that this arrangement doesn’t pass the laugh test. That’s why he put the onus back on the board and expressed the hope that the board “reviewed all the documents” and would act in “good conscience.”

We also wonder why Cardenas filled his opinion with arguably true statements that are totally irrelevant to the real issue of whether Mike Sweeney is a member of LHCC. Did he do this as a slight-of-hand trick to draw attention away from his circular logic? Did Wayne Poyer accurately frame the question to Cardenas or read Cardenas’ entire response to the board? We may never know. What we do know is that the LHCC board will blatantly violate its own governing documents without blinking an eye.

During the vote to appoint Bleck’s successor (the first part of which is covered in the above video and the second part here in Breaking the Rules Pt 2, Robin Pedlar abstained and gave no reason for her abstention. We doubt that she needed to explain to other directors that Mike Sweeney was her husband. However, given that Robin Pedlar and Mike Sweeney have different surnames, that fact may not be obvious to the rest of the community. She had a tough choice: be silent or make it crystal clear that she is Mike Sweeney’s wife and explain her abstention, which would have only drawn attention to the illegitimacy of Sweeney’s appointment – attention that clearly LHCC’s directors did not want. Given a tough choice, a Silent Sitter will usually choose to keep silent. Congratulations, Robin Pedlar! You’re our Silent Sitter award winner for the March 27th board meeting.

Robin Pedlar is our 6th Silent Sitter award winner, and the 2007 board is about half-way through its tenure. We thought it was time to create a Silent Sitter page honoring all the winners, with a little background on the award itself.

If your own wife can’t openly vote in favor of whatever you’re trying to do, there’s a problem with it. And she knows it.

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Is There Any Hope?

At the February 23rd Round Table, a Membership Lot owner expressed concern about his prospects for being able to build on his lot in the future. The future that he had in mind: the year 2020. He had a question that is probably on the minds of many Membership Lot owners: “Is there any hope for me?”

LHCC President Wayne Poyer didn’t offer any promises and didn’t offer a lot of hope, but what he did offer came down to Rule 20, Aqua Virginia’s line extension policy. If, as Wayne Poyer described, Rule 20 is the source of salvation for Membership Lot owners, we thought it would be enlightening to review some of the history of LHCC’s treatment of Membership Lot owners and how this rule took shape.

There are a few facts that are important to understand utilities at Lake Holiday: the role of the SCC and the relationship between LHCC and LHEUC. Utilities in Virginia are regulated by the SCC, and utilities have tariffs approved by that Commission. These tariffs include both rates and rules, such as line extension policies. The SCC issues a certificate of public convenience and necessity to a utility. This certificate covers a specified area (often called the certificated area) and carries with it the obligation to serve all potential customers in that service area, subject to the line extension policy in the tariff. For LHEUC (and now for Aqua Virginia), that is the entire Lake Holiday community. LHCC owned 100% of the stock of the utility LHEUC. Under its Articles of Incorporation, LHCC was formed “to promote the…welfare of the members….” Logically, LHCC would be required to operate LHEUC to promote the welfare of members, which includes Membership Lot owners.

Some Lake Holiday critics of a utility’s contribution to a line extension make 2 false claims: that line extension credits (e. g., the old Rule 16 and now Rule 20 credits) would result in a “run on the bank,” and that the cost of the line extension work would raise utility rates. These critics exploit a lack of understanding of accounting and utility regulation to create fear of draining capital out of the Utility and higher rates. The truth is exactly the opposite of what line extension critics claim.

Line extensions provide utilities with new capital and they serve to help lower utility rates for existing homeowners. The Rule 16 credit was capped at an amount less than $3,000 per lot, and it is provided as a credit against the tap fee paid by the owner making the extension. Taps fees typically far exceed the amount of a line extension credit because the tap fee is intended to return capital to the utility for the investment required to build the system to which a new owner connects. In 2006, the tap fee was $8,868 and the Rule 16 credit was $2,861. Thus, every new line extension in 2006 would provide the utility with over $6,000 of fresh capital, less its cost to install the meter and finalize the connection.

In accounting terms, tap fee payments that come with line extensions are accounted for as a return of capital. For LHEUC, the return of capital would have boosted its interest income or helped lower its borrowing costs. With lower net expenses, LHEUC would have needed lower rates to operate. For Aqua Virginia, whose rates are set on a rate of return basis, the return of capital from a tap fee accompanying a line extension serves to lower Aqua Virginia’s investment. With a lower investment, the maximum profit that Aqua Virginia can earn is lower, and it is spread over 1 more rate-paying customer. These forces combine to lower homeowner utility rates, all other things being equal.

Up until the end of 2006, LHEUC’s line extension policy was embodied in Rule 16 of its tariff. Despite the fact that Rule 16 had been in effect for many years, it had been largely hidden from Membership Lot owners. Dave Ingegneri, the former GM of Lake Holiday, testified in a deposition that Chris Allison:

felt it was in the community’s best interest to not publicly announce Rule 16, but certainly, if somebody would request the information we would release it and certainly, Rule 16 is a public document, so if anybody really wanted to find the information they could.

In other words, the burden was on Membership Lot owners to discover Rule 16 completely on their own. But Chris Allison wanted to make that burden even harder. According to Dave Ingegneri, Chris Allison authored a document entitled Membership Lots and Water and Sewer Lots that was included in a number of disclosure packages to prospective buyers. The document falsely claimed that “LHEUC, the utility company, is not empowered by the SCC (VA State Utility Regulating Agency) to expand the current water and sewer infrastructure.” The truth is the exact opposite. LHEUC (and now Aqua VA) was obligated to extend the utility infrastructure in its certificated area, subject to its tariff.

Chris Allison is not the only LHCC leader that has acted against the interests of Membership Lot owners. Frank Heisey made false promises to Membership Lot owners and repeatedly failed to mention LHEUC’s Rule 16 obligations. In the February 2004 President’s Report, Frank Heisey wrote:

LHCC is responsible for expansion of the water and sewer system.

In January 2002, Frank Heisey replied to an email from a concerned Membership Lot owner. He wrote:

The issue with the future of membership lots is an issue of when and where we should extend water and sewer lines. We do not have the capital reserve to do this now based on all of the other issues facing us with the infrastructure….

Note that Frank Heisey was writing as the President of LHCC, and that he wrote “…when and where we should extend…” rather than “…if we should extend….” He wrote that LHCC didn’t have the money “now” rather than “we will never do that.” Tellingly, he didn’t breathe a word about LHEUC’s obligations under Rule 16, something that would have benefited this particular Membership Lot owner. Membership Lot owners were not seeking out Rule 16 precisely because the President of LHCC was telling them that LHCC was responsible for expansion and that LHCC would resolve the “when and where [it] should extend” once its finances improved.

As we previously discussed, in the 3 year period from 2004-2006, Membership Lot owners contributed about $1.4 million to LHCC. Much of this money was contributed because of representations from leaders like Frank Heisey.

But in a 2006 deposition, Frank Heisey discussed extending utilities to Membership Lots: “We had no plans for doing that.” Would Membership Lot owners have paid $1.4 million to LHCC if he had said “we have no plan and no obligation?” Did Frank Heisey make those representations because the money paid by Membership Lot owners was almost exclusively used for pay for benefits to homeowners like himself? To the best of our knowledge, not a single Membership Lot owner has ever made and completed a Rule 16 line extension request over more than 30 years. At least 1 of these owners so desperate for utility service would have pulled this off if LHCC had not concealed Rule 16 from them.

Former LHCC President Chris Allison described just what Rule 16 could mean to a Membership Lot owner in 2006. For a Membership Lot owner just 1 lot away from the end of the utility line, Rule 16 would mean that the Membership Lot owner was “probably not going to have to pay very much….” But to benefit from Rule 16, Membership Lot owners needed honest information about LHCC’s plans and LHEUC’s obligations. They never got it.

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Our references to representations from LHCC about its obligation to extend utilities are not isolated. In 2003, Frank Heisey wrote LHEUC President Jack Fastnaught and the entire LHEUC board that he had legal advice that “LHCC is responsible for new lines….” In 2004 LHCC President Heisey and LHEUC President Chuck Brewer jointly wrote to every property owner that “We must expand the water and sewer system to meet the on-going growth and development in our community.” Discussions in public meetings often went far beyond broad-brush, general statements. At a May 2005 joint LHCC Board and Master Planning Task Force meeting, engineers from Patton Harris Rust Associates (PHRA) presented a project to extend utilities to 70 lots in Section 8A near Dogwood Drive and Mill Court. The project had a specific per lot cost estimate of $13,000, and the LHCC Board approved a motion to “facilitate the Dogwood Project.” Today, those lots sit just as they did in 2005 – without utilities.

By the end of that same year, prospects for Membership Lot owners would take a bad turn. In September 2005, we filed a lawsuit against both LHCC and LHEUC that focused attention on the line extension issue. A little more than a month later, LHCC signed contracts to sell LHEUC’s assets to Aqua Virginia. The deal was never put to a member vote. When Lake Holiday was under a court-ordered building moratorium and the Circuit Court was overseeing LHEUC’s affairs, then LHCC President Frank Heisey wrote to members that “selling of the utility company would require a 2/3 majority vote of the eligible membership. This in itself would not be a quick or easy process, nor should it.” The sales contract with Aqua Virginia was hurriedly signed on the eve of LHCC’s 2005 annual election of directors, after which Heisey would no longer be on the board. One representation to members while the Circuit Court was involved; an opposite action when that oversight was gone.

Despite the fact that LHCC already had a deal in place to get out of the utility business, about 2 weeks after signing that deal, its subsidiary LHEUC filed a rate and rule change request in which it attempted to remove any obligation to extend utilities to Membership Lots. Why was LHCC rushing to eliminate the Rule 16 obligation when it would soon be out of the utility business? Were its directors concerned that line extension issues were now part of a lawsuit, and LHEUC’s Rule 16 line extension obligation would now come to light?

Had LHCC bothered to make one, a quick check with the SCC would have revealed that a utility is obligated to serve new customers in the service area covered by its certificate. When asked in a deposition about the SCC’s response to LHEUC’s effort to eliminate Rule 16, Dave Ingegneri testified that “it [the SCC] would in no way approve that, those tariff sheets without Rule 16.” Whose idea was it to eliminate Rule 16? According to Ingegneri: “Chris Allison’s.” Ingegneri went on to describe where LHEUC’s own board had problems with the proposed tariff changes, but Chris Allison went to a Utility board meeting to offer a dictate:

the outcome or the, the [sic] dictate was, if you guys [the LHEUC board] don’t approve it the Association board will.

We collected and filed with the SCC over 450 complaints to fight LHEUC’s effort to increase rates and eliminate its line extension obligations. In just 3 weeks, the SCC ruled that LHEUC’s changes were “defective and should be given no effect.” LHCC had concealed the existence of Rule 16 from Membership Lot owners for years. When it attempted to eliminate any obligation to extend utility lines, it didn’t even bother to provide notice of its plan to these same owners. Instead, LHEUC apparently hid behind the notion that no notice of utility rule changes needed to be sent to Membership Lot owners since they were not Utility customers at the time. All of this is old news to our regular blog readers. We’ve written about LHCC’s shabby treatment of Membership Lot owners during the tariff change effort, and the SCC’s initial rejection of LHEUC’s rate and rule change. LHCC made 2 efforts to undo the SCC’s initial ruling, but the Commission let its ruling stand.

In February 2006, at the same time that the SCC was reviewing LHEUC’s rate and rule change request, LHCC, LHEUC, and Aqua filed a Joint Petition with the SCC to sell LHEUC’s assets to Aqua. It took the parties about 3 1/2 months from signing the contract to file their petition with the SCC. That petition contained a new line extension policy, or the proposed Rule 20. This new proposal was materially different from the previous tariff. Under Rule 16, LHEUC contributed 3 1/2 times the estimated annual utility revenue per Membership Lot, or about $2861. Under the proposed Rule 20, that contribution would drop all the way to $0.

In March of that year, we joined the utility transfer case (PUE-2006-00013) as a Respondent in that proceeding. We were the only Respondent to join the proceeding. Many Membership Lot owners purchased their lots 30 years ago, expecting to have a second home at Lake Holiday. Most own 1 lot that is of little value. With the passage of time and the high cost involved to understand the facts and participate in a utility transfer case against one of the largest water utilities in the entire country, most have given up. Some twist the fact that we were the sole respondent into a characterization of us as trying to block the utility sale. The truth is that we urged the SCC to not approve the transfer as it was proposed, which is lawyer-speak for saying we wanted certain provisions of the original deal changed. That is exactly what happened. After our testimony, the original line extension deal was changed dramatically.

In June, we filed testimony, largely complaining about the line extension policy that LHCC and Aqua proposed. We encouraged adoption of a line extension policy where Aqua Virginia would contribute 3 1/2 times estimated annual utility revenue to the cost of line extensions. We argued simply for continuing the in-force Rule 16, a requirement for the utility to make an investment in line extensions that had been in place for more than 30 years. In July LHCC and LHEUC responded. Chis Allison on behalf of LHCC and Mark Kropilak on behalf of Aqua filed 30 pages of testimony to argue against our proposal. To the question of Aqua’s willingness to contribute 3 1/2 times revenue, Kropilak had an answer: “No.” Chris Allison was spending legal dollars to reduce Aqua Virginia’s contribution to line extensions. Why? Since Aqua Virginia is unrelated to Chris Allison, why was he spending LHCC’s money in this manner?

By August, the SCC staff had reviewed our testimony and LHCC’s rebuttal, and SCC staff members filed their own testimony on the line extension issue that we raised.

Here’s what the SCC had to say:

The proposed main extension rule also forms the main argument, or at least one that squarely falls within the jurisdiction of this Commission, by the Respondent [Ogunquit] in this proceeding.

All water and wastewater utilities currently contribute three and half times the annual revenue per customer to the cost of a main extension.

Staff is concerned that Aqua’s rule differs radically from all other water and wastewater utilities regulated by the Commission.

LHCC, its subsidiary LHEUC, and Aqua Virginia proposed a line extension policy that “differs radically” from the policy for “all other” water utilities regulated by the SCC. The policy proposed was different from just about every other water/wastewater utility in the entire state of Virginia. That’s the policy that LHCC put forward to the SCC to serve Membership Lot owners, whose interests LHCC was allegedly serving. We, quite reasonably, opposed that policy.

Less than a month later, Aqua Virginia filed new testimony, adopting the position that both we and the SCC recommended. Aqua wrote:

We have now moved to a position, consistent with the Staff testimony, for Aqua Lake Holiday (under the general provisions of its main extension rule) to invest in the applicant’s main extension in the amount of 3 1/2 times the estimated annual revenues anticipated to be generated by the home to be constructed on the applicant’s lot. In addition, regarding the payments for intervening lot connections, the payment of these refunds will be extended to ten years from the original five years that was proposed. These changes will cause an increase in the investment needed from Aqua.

We appreciated the opportunity to present our ideas in a public forum and play a role in persuading Aqua Virginia to improve its line extension policy. The changes for which we argued applied not just to us, but to all Membership Lot owners equally. The SCC and its staff played a central role in making Aqua Virginia’s line extension policy more typical of the policies in place for other utilities. What’s clear is that, despite its obligation to promote the welfare of Membership Lot owners, LHCC played no role in improving the line extension policy. Instead, LHCC spent Membership Lot owners’ own money to come up with a bad plan and then paid lawyers to block our efforts to improve it.

Even with all of our references to testimony, the resolution of the line extension issue was very swift. Most testimony in the case was filed in electronic form with follow-up paper copies. Once Aqua Virginia agreed to make its line extension policy more like every other water/wastewater utility in Virginia, we supported these changes, and our further participation was limited to expressing this support. We did not contest any element of the SCC staff testimony, and we did not even appear at the hearing in Richmond. If we were seeking to block the utility sale, we would have done both things.

It took just a couple of days to reach an agreement to stipulate into the record our pre-filed testimony, and we were “excused from participation…,” all of which is discussed in the SCC’s November 2006 order granting the transfer. LHCC’s directors have managed to spin our successful but limited involvement in the transfer case into the false notion that we fought hard to block the transfer itself and lost. Wayne Poyer repeats this worn-out lie in the April 2008 President’s Report, where he describes our involvement in the transfer case as “legal obstacles thrown up (unsuccessfully) by a Member of the Association.” The sale of LHEUC’s assets was not approved by the SCC on the terms proposed by LHCC; it was approved on terms very similar to the terms that we recommended. Wayne Poyer needs to recheck his definition of “unsuccessful.”

In the fall of 2006, the Utility sale was moving toward closing by the end of the year. But Chris Allison remained as unsympathetic to the plight of Membership Lot owners as ever. After working to conceal the Rule 16 obligation, Chris Allison responded via certified mail to a Rule 16 extension request from an owner in Section 6A. A summary of his response: LHEUC will contribute its required $2,861.46. You just need to send in your check for $1,499,713.59. The property owner in Section 6A had been waiting years for utilities, perhaps over 30 years, and probably only recently learned of LHEUC’s obligations under Rule 16. For Chris Allison, who worked to conceal and remove those Rule 16 obligations, to waste the postage to send a letter requesting a deposit check for nearly $1.5 million is far beyond mean-spirited. It’s petty and callous.

Under Chris Allison’s leadership, LHCC wasted thousands of dollars fighting our recommendations before the SCC. Chris Allison discussed just how much money LHCC spent at a board meeting in March 2007. In our video Allison Attacks Masters, Chris Allison said that LHCC spent $200,000 on the SCC proceeding, and that one half of that – or $100,000 – was to fight our recommendations. He claimed that our recommendations amounted to “only 2 lines” in the final SCC ruling. In a final stab at Membership Lot owners, Chris Allison wasted $100,000 fighting to make Aqua Virginia’s line extension policy unlike every other water/wastewater utility in the state. Unsurprisingly, he lost. Instead of recognizing his error of fighting black letter law, he tried to make us the scapegoat by suggesting that our actions triggered legal spending.

The following table summarizes LHEUC’s old Rule 16, the proposed Rule 20, and the Rule 20 actually adopted by the SCC:

Proposed & Adopted Rule 20 vs Old Rule 16
# Feature Old Rule 16 Proposed Rule 20 Adopted Rule 20
#1 Credit to original applicant 3.5 X avg annual utility revenue $0 3.5 X avg annual utility revenue
#2 Future credit for intervening lots that connect later 3.5 X avg annual utility revenue $1,000 $2,000
#3 Expiration of credit for intervening lots 10 years 5 years 10 years

In the summer of 2007, LHCC made a hasty, ill-conceived effort to amend the deeds of dedication in 4 sections where most Membership Lots are located. That effort, called the Utility Extension Program (UEP) was a big flop. At the February 2008 Round Table Wayne Poyer told the concerned Membership Lot owner that:

the best minds in this community contributed to that and in fact authored it.

Really? We’re one of the largest owners of Membership Lots, and we were never contacted about helping to develop a utility extension plan. We’ve spoken to hundreds of other Membership Lot owners, and none of them were contacted either. It’s not credible that “the best minds in this community contributed” when most Membership Lot owners were never even contacted. In fact, the plan was crafted by LHCC’s Development Executive Committee (or DEC, discussed in our video Only 3 For The DEC, which at the time (and still, as of this writing) included no Membership Lot owners. It did, however, include Chris Allison.

During the debate over the UEP kickoff, Wayne Poyer said Membership Lots had “virtually no value” (predictably in our video clip Virtually No Value). LHCC concealed the existence of LHEUC’s Rule 16 from Membership Lot owners for years; it went so far as to deny its obligations. It tried to eliminate those obligations under that rule without sending any notice to these owners. When it came time to sell the Utility’s assets, LHCC jointly proposed a new line extension policy that required Aqua to make no contribution to the cost of line extensions, and then blocked our efforts to secure a larger contribution from Aqua. Five of LHCC’s current directors (Wayne Poyer, Dave Buermeyer, John Martel, Noel O’Brien, and Pat Shields) were on the board in 2006 that fought to block what became Rule 20. In fact, for all the importance Wayne Poyer now attaches to Rule 20, there’s no link to it anywhere on LHCC’s official website.

On February 23rd, Wayne Poyer described the plight of Membership Lot owners as a “sorry situation” and for the Section 6A owner on the video, he had a harsher outlook: “tough.” It’s time for LHCC to own up to its deplorable behavior of thoroughly obstructing Membership Lot owners’ efforts to get utilities.

LHCC’s directors have spent a lot of time and money to insure Membership Lots have “virtually no value.” They have drained hundreds of thousands of dollars from LHCC. Yet the hope for Membership Lot owners, according to Wayne Poyer, is in the Rule 20 protections that LHCC obstructed at every turn.

It’s time for Membership Lot owners to ask themselves a hard question: have LHCC’s directors lived up to their responsibilities to serve the interests of those property owners? The answer can be found in another question with a simple, objective answer: Does my lot, after more than 30 years, have utilities yet?

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