Zwicky v. Diamond Resorts Inc.
| Decision Date | 30 June 2021 |
| Docket Number | No. CV-20-02322-PHX-DJH,CV-20-02322-PHX-DJH |
| Parties | Norman Zwicky, Plaintiff, v. Diamond Resorts Incorporated, et al., Defendants. |
| Court | U.S. District Court — District of Arizona |
Pending before the Court are seven Motions to Dismiss Plaintiff's Second Amended Complaint ("SAC") filed by every remaining Defendant. (Docs. 39; 40; 45; 46; 47; 77; 92). Almost every Motion is fully briefed, except for Defendant Linda Riddle's Motion (Doc. 45) because Plaintiff voluntarily dismissed her with prejudice (Doc. 57).1 The Court now issues its decision.2
The core claim of Plaintiff Norman Zwicky's SAC is that Defendants intentionally misrepresented how much he, and other similarly situated, would have to pay for a timeshare. The history of this class action claim begins before August of 2010, when Mr. Zwicky had a "traditional timeshare interest" in a ranch in Payson, Arizona (the "Ranch"). (Doc. 61 at ¶ 8). The Ranch itself was also an asset held by the now dissolved and defunctcorporation, ILX Resorts Incorporated. (Id. at ¶ 39). When ILX Resorts filed for bankruptcy, a subsidiary of Defendant Diamond Resorts Incorporated ("DRI") bought its interest in the Ranch. (Id. at ¶ 40).
DRI continued to support the timeshare program, except not in the "traditional" way. (Id. at ¶ 18). Those who bought a timeshare in one of DRI's properties did not hold a "deed, leasehold assignment, or any other legal or equitable interest in real property." (Id. at ¶ 18). Instead, DRI sold Mr. Zwicky and others a "Points Certificate," which served as the basis for calculating the strength of their "Reservation Privileges." (Id. at ¶ 21). Mr. Zwicky bought about 13,000 Points for "$26,395 including the stipulated trade-in value" of his old timeshare interest in the Ranch. (Id. at ¶¶ 42-43).
In addition to paying for the Points, Mr. Zwicky agreed to enter into a "lifetime obligation to pay for annual Member Obligations [fees]. . . ." (Id. at ¶ 44). These fees are alleged to be about $2,500 per year. (Id. at ¶ 47) ($2,337.59 in 2014 and $2,535.01 in 2016). For Mr. Zwicky, these fees eventually far exceeded their benefits. When totaled up over seven years, a reservation at the Ranch cost Mr. Zwicky about $600.00 per day. (Id. at ¶ 48). Mr. Zwicky alleges it would have been far cheaper to simply book a reservation at another DRI property as a member of the public. (Id. at ¶ 50).
As noted at the outset, the point of Mr. Zwicky's legal claims is that DRI, its various subsidiaries, and its employees, intentionally underestimated what Mr. Zwicky would have to pay in fees. Mr. Zwicky alleges that the fees for each year were forecasted in an annual budget that "purported to be a reasonable and good faith estimate . . . ." (Id. at ¶ 120). But year after year, the actual costs were materially greater than had been predicted. (Id. at ¶¶ 122, 124). Mr. Zwicky alleges Defendants intentionally hid these costs despite knowing they would result in increased fees at the end of the year. (Id. at ¶ 128).
The details of how this timeshare worked, which organizations were involved, and how the budgets came to be are somewhat convoluted. The Court will start with the Premiere Vacation Collection Owners Association ("PVCOA"), which is an Arizona non-profit corporation. (Id. at ¶ 15). Mr. Zwicky became a member of PVCOA when he tradedin his old timeshare interest in the Ranch and acquired his Points. (Id. at ¶¶ 14-21). PVCOA's Board "manages and maintains" the timeshare property, and it levies and collects annual fees form its members, like Mr. Zwicky. (Id. at ¶¶ 70, 71). Several of the Board's officers were also DRI employees. (Id. at ¶¶ 111-16).
One of PVCOA's other members is a wholly-owned DRI subsidiary, Defendant ILX Acquisition, Inc. ("ILXA"), which was formed at the time of ILX Resorts, Inc.'s bankruptcy to acquire and hold properties, such as the Ranch, as a "developer." (Id. at ¶¶ 59-60). Because ILXA holds the unsold timeshare inventory, it has a "bulk membership" that grants "massive voting power" in PVCOA matters. (Id. at 63-65).
Through the voting process, PVCOA delegates many of its duties to a management agent, to whom PVCOA pays a yearly management fee. (Id. at ¶¶ 74, 76, 88). This management agent is Defendant Diamond Resorts Management, Inc. ("DRMI"), another wholly-owned DRI subsidiary. (Id. at ¶¶ 4, 76).
The budgeting process at the heart of this case is alleged to work as follows. At the beginning of each year, PVCOA's Board, "in collaboration with DRMI," delivered a budget to its members that "purported to be a reasonable and good faith estimate" of what the PVCOA members' fees would be. (Id. at ¶ 120). When the end of the year came, Mr. Zwicky alleges that the actual fees were "materially" higher than was estimated. (Id. at ¶¶ 126-28). This material difference consistently appeared, starting in 2011 up to at least 2015. (Id. at ¶¶ 120-34).
Mr. Zwicky alleges that the reason for this difference is because DRI slipped a "substantial portion" of its own corporate overhead charges into DRMI's management fee, which was then charged to PVCOA and subsequently passed on to PVCOA members. (Id. at ¶ 88). Mr. Zwicky alleges that none of PVCOA's budgets ever "meaningfully disclosed" this practice. (Id. at ¶ 122). He alleges the PVCOA's Board knew that its estimated budgets were "materially less than the amount DRI and its subsidiaries intended to charge . . . ." (Id. at ¶ 128). Furthermore, he alleges DRI deliberately hid its practice of putting overhead charges into DRMI's management from PVCOA's members, but not to DRI shareholders.(Id. at ¶ 138).
Mr. Zwicky tried to get PVCOA's Board to voluntarily disclose its financial records in April 2015, but he eventually resorted to filing suit in Maricopa County Superior Court "to enforce his statutory and common law inspection rights . . . ." (Id. at ¶ 208). On May 6, 2016, the Superior Court ordered PVCOA to disclose certain records to Mr. Zwicky. (Id. at ¶ 211). He received the documents on June 6, 2016, which he alleges contain evidence of Defendants' wrongdoing. (Id. at ¶ 212-13). On August 19, 2016, the Superior Court then granted his motion to permit him to refer to the documents in filing a complaint, but PVCOA quickly appealed the Superior Court's order. (Id. at ¶ 214-15).
On March 22, 2017, the Arizona Court of Appeals enjoined Mr. Zwicky from disclosing any documents that PVCOA had deemed confidential. (Id. at ¶ 216). On January 23, 2018, the Court of Appeals affirmed Mr. Zwicky's right to inspection, but it reversed the Superior Court's August 19 order which had allowed the disclosure of information for the purpose of bringing a lawsuit. (Id. at ¶ 217); see also Zwicky v. Premiere Vacation Collection Owners Ass'n, 418 P.3d 1001, 1003 (Ariz. Ct. App. 2018). Finally, on August 23, 2018, the Superior Court entered a stipulated order whereby Mr. Zwicky could use certain information to formulate a complaint, but he was prohibited from quoting or attaching confidential documents to a complaint. (Id. at ¶ 218-19).
Mr. Zwicky originally filed this action in Arizona Superior Court on August 21, 2020. (Doc. 1-3 at 9). It was subsequently removed to this Court on December 1, 2020. (Doc. 1). The SAC brings three Claims against Defendants, who are DRI, DRMI, ILXA (the "Corporate Defendants"), and six DRI employees. (Id. at ¶¶ 2-5). Of the six individual DRI employees, three were officers on PVCOA's Board, Defendants Troy Magdos, Kathy Wheeler, and Linda Riddle. (Id. at ¶¶ 111-16). The Court notes that PVCOA itself is not a named defendant in this action. The SAC's First Claim is for violation of the Racketeer Influenced and Corrupt Organizations Act of 1970 ("Federal RICO"). (Id. at ¶¶ 145-84). The Second Claim is a civil racketeering claim brought under A.R.S. § 13-3212(B) ("Arizona RICO"). (Id. at ¶¶ 185-97). The Third Claim is for breachof fiduciary duty under the Arizona Timeshare Owners Association and Management Act. (Id. at ¶¶ 198-221).
Defendants' Motions to Dismiss seek to dismiss the SAC and some Defendants from this action under Federal Rules of Civil Procedure 12(b)(6) for failure to state a claim and 12(b)(2) for lack of personal jurisdiction. The Court will begin with an evaluation of whether the SAC adequately states a claim.
Complaints must make a short and plain statement showing the pleader is entitled to relief for its claims. Fed. R. Civ. P. 8(a)(2). There must be factual allegations from which a court may reasonably infer a defendant acted unlawfully. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Simply presenting "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements," does not suffice to state a claim. Id. When a party alleges fraud, that party "must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). This must be accompanied with the "who, what, when, where, and how" of the alleged fraud. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir.1997)).
A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of a claim. Cook v. Brewer, 637 F.3d 1002, 1004 (9th Cir. 2011). Dismissal of a complaint for failure to state a claim can be based on either the "lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).
In reviewing a motion to dismiss, "all factual allegations set forth in the complaint 'are taken as true and construed in the light most favorable to the plaintiffs.'" Lee, 250 F.3d at 679 (quoting Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996)). But courts are not required "to accept as true a legal conclusion couched as a factual allegation." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) ...
To continue reading
Request your trial