Opinion ID: 771909
Heading Depth: 2
Heading Rank: 2

Heading: NEI's Liability for the Developer's Obligations

Text: 30 Because the plaintiffs seek a partial equitable rescission of their original purchase contracts, a critical threshold question is whether NEI can be held liable for the initial developer's alleged breaches of contract and/or misrepresentations. The plaintiffs assert that 18-14-601 of the Time-Share Act provides that NEI is liable for all obligations of the initial developer. Alternatively, the plaintiffs contend that NEI either expressly or impliedly assumed the developer's obligations under common law principles of corporate successor liability. 31 The district court determined that NEI succeeded only to the property interests conveyed in the May 1994 foreclosure sale, and that those property interests did not include the initial developer's obligations to provide utilities, and access to Hotel amenities and parking. The district court further determined that 18-14-601 of the Time-Share Act refers only to the transfer of the developer's obligation to perform certain record-keeping functions, not to a transfer of all obligations of the initial developer. 32 We disagree. We conclude that 18-14-601 means what it says. Any transfer of the developer's interest in the time-share program to any third person shall be subject to the obligations of the developer. The statute does not limit the obligations transferred to certain record-keeping functions. Instead, the statute refers to all of the developer's obligations vis a vis the individual time-share owners. 33 Our interpretation of 18-14-601 is hardly novel. In a separate state court proceeding brought against NEI by Lakeshore time-share owners Charles and Mickie Rea (presided over by the same Garland County Chancery Court that decided the license agreement dispute), the court held that NEI was liable for the misrepresentations of the original developer pursuant to the provisions of the Time- Share Act. That decision was affirmed by the Arkansas Supreme Court on procedural grounds, without addressing the merits. See Nat'l Enters., Inc. v. Rea, 947 S.W.2d 378, 380 (Ark. 1997). 34 Though the Arkansas Supreme Court has not had occasion to address the meaning of 18-14-601, that provision is derived from a model act adopted verbatim by several other states. See Iowa Code Ann. 557A.18; Neb. Rev. Stat. 76-1739; Tenn. Code Ann. 66-32-127; see also Guam Code Ann. 47501. 35 One state, Tennessee, has addressed precisely the question at stake here: Do the initial developer's obligations transfer to a third party (by operation of the Time-Share Act) as the result of a foreclosure sale. State v. Heath, 806 S.W.2d 535 (Tenn. Ct. App. 1990). In Heath, the Tennessee Attorney General sued to prevent the foreclosure of certain unsold units in a time-share program, unless at the time of the foreclosure sale the rights of all non-defaulting time-share purchasers were specifically recognized and preserved. See Heath, 806 S.W.2d at 536-37. The court held that 36 [t]hese provisions of the Act [referring to a transfer of the developer's interest] are to protect a consumer from what actually transpired in this case, i.e., foreclosure by lender that extinguishes the rights of the non- defaulting purchaser. While the statute does not forbid foreclosure, it requires any foreclosure to take into account the purchasers of the time- shares' interest. 37 Id. at 538. 38 The court noted that the legislature intended to give time-share purchasers a remedy against both the developer's lender and the third party to whom the developer's interest is sold, because a foreclosure-in-process is a good sign that any remedy against the developer itself would be meaningless: 39 Section 127 states that any third party to whom the developer's interest is transferred shall be subject to the developer's obligation even if, arguendo, the bank was not required to comply with section 128 6 when the agreement was made, the bank as transferee would assume the obligations of compliance once the developer defaulted. 40 The overriding purpose of the Time-Share Act is to protect consumers. Regulatory, civil and criminal remedies are provided. To hold that a civil remedy against a lender [or other third-party transferee] is inapplicable would defeat the legislative intent. Ordinarily, a developer defaults on a note because it has no money to pay its obligation. To conclude that the legislature intended to limit the consumer's civil remedies to an action for damages against the developer under Section 128 would be a meaningless gesture. 41 Id. 42 The instant case is indistinguishable from Heath for all material purposes. In both cases, the original developer defaulted, the lender foreclosed, and a third party purchased (or intended to purchase) the developer's interest at the foreclosure sale. Under the reasoning in Heath, 18-14-601 mandates that NEI shall be subject to the obligations of the developer. 7 43 Florida has also enacted a provision in its Time-Share Act that serves the same purpose as 18-14-601 of the Arkansas Time-Share Act, though the statutory language is not identical. See Fla. Stat. Ann. 721.17. In Bell v. RDI Resort Servs. Corp., 637 So. 2d 960 (Fla. Dist. Ct. App. 1994), the court held that the Florida legislature intended that subsequent third-party participants in the operation of a time-share project could be held liable for alleged misrepresentations made by the original developer. See Bell, 637 So. 2d at 962; see also Smith v. Dept. of Bus. Regs., 504 So.2d 1285 (Fla. Dist. Ct. App. 1987) (financier who accepted assignment of unsold time-share units as collateral for balance of loan to time-share developer was subject to statute requiring developer to honor rights of purchasers). 44 Our interpretation of 18-14-601 is thus consistent with the nature of time-share projects, and the unique obligations that arise from the development and creation of such projects. The developer sells not only an interest in real property, but an interest in time. The time-share regime is meaningless unless the time-share purchasers' continued interests in the project are protected. Thus, when a developer's interests in the project are transferred to a third party, the transferee must acquire not only the interest in the property, but also all the other obligations of the developer with respect to the time-share regime. 8