The ultra-luxury Ritz-Carlton Club and Residences at Kapalua Bay - touted as "destined to become Maui's most cherished luxury homes" when it opened in 2009 - is embroiled in a lawsuit filed by homeowners who allege the developer and management company have "allowed the project to fall into disarray."
The lawsuit was filed in June in 2nd Circuit Court by owners of 10 of the multimillion-dollar condominiums, about a month before The Ritz-Carlton announced it would no longer manage the property after next Monday "as a result of insufficient funding of ongoing operating costs."
As of Friday, that deadline has been extended to Oct. 29, according to Honolulu attorney Terry O'Toole, who is representing the plaintiffs in the lawsuit.
Article Photos
The Ritz-Carlton Club and Residences at Kapalua Bay, shown in this photo taken Saturday afternoon, is caught up in a lawsuit by homeowners in the development. The legal action in 2nd Circuit Court filed by 10 owners of multimillion-dollar condos in the project alleges that the developer and management company have allowed the property to fall into disarray.
The Maui News / MATTHEW THAYER photo
"That would have resulted in the termination of 100 employees working at the property," said O'Toole, a director with the law firm of Starn O'Toole Marcus & Fisher.
"Our primary concern at the moment was keeping the property operating. As a result of some negotiations, all parties have worked out an extension that will hopefully give the lenders and developer an opportunity to put everything back together again and get things back on an even keel," he said.
A spokeswoman for The Ritz-Carlton Destination Club said that the company had no comment on the lawsuit or its future involvement with the property.
The $355 million Ritz-Carlton Club and Residences at Kapalua Bay opened in mid-2009 on the site of the former Kapalua Bay Hotel as a joint venture between affiliates of Maui Land & Pineapple Co., Marriott International and Exclusive Resorts, with Maui Land & Pineapple holding a majority interest.
The entities formed Kapalua Bay LLC, a limited liability company, to develop the project, with Maui Land & Pineapple owning a 51 percent stake, the Marriott affiliate 34 percent, and Exclusive Resorts - formed by Maui Land & Pineapple's majority shareholder and AOL co-founder Steve Case - the remaining 15 percent.
The suit names Kapalua Bay LLC and the three partner companies as defendants, as well as The Ritz-Carlton Development Co., The Ritz-Carlton Management Co., the property's association of apartment owners, and six members of the association's board, including Maui Land & Pineapple President Ryan Churchill.
The plaintiffs in the lawsuit are owners in the residences portion of the property, which is made up of 84 wholly-owned condominiums that were initially priced between $3.9 million and $9.8 million. (The club portion of the property is made up of another 62 fractional ownership or time-share units.)
Only one-third of the 84 residences had been sold as of June 30, leaving the developer responsible for the common area maintenance fees for the 56 unsold units, according to the lawsuit.
The lawsuit alleges that the developer stopped paying its share of the maintenance fees earlier this year, "thereby rendering the (apartment owners' association) and the project woefully underfunded."
The association's board of directors, according to the lawsuit, has "indicated that . . . all maintenance costs and responsibilities will fall on the few independent owners, including plaintiffs, to the tune of millions of dollars per year."
The situation "places the project in grave danger and without funds to pay for even basic safety, health and general maintenance items," the lawsuit says.
The lack of operating funds for the homeowners association triggered The Ritz-Carlton's termination notice, according to documents Maui Land & Pineapple filed on Aug. 3 with the U.S. Securities and Exchange Commission.
"On July 10, 2012, the Ritz-Carlton Management Co. issued a notice of default and termination to the Association of Apartment Owners effective Sept. 10, 2012 as a result of insufficient funding of the ongoing operating costs of the AOAO," the filing said. "(Maui Land & Pineapple) is presently unable to reasonably determine the impact, if any, of these matters."
Maui Land & Pineapple said it has invested $53.2 million in cash contributions and $25 million worth of land for the project.
The company said Kapalua Bay LLC, the joint venture for the project, has a construction loan agreement with Lehman Brothers Holdings Inc. and other lenders that matured last August, under which $282.3 million was outstanding as of June 30. The loan is collateralized by the project assets, including the land beneath the property, the company said.
As a result, the lenders in March notified the developer that the loan was in default, and in June filed for foreclosure against Kapalua Bay and other entities related to the project.
The lawsuit alleges that the defendants acted in bad faith and "breached their fiduciary duties through their disloyalty" about the project's financial troubles.
"Until just recently, plaintiffs were never given any information that defendants were in a financial crisis or that the project itself was in dire financial straits," the lawsuit said.
The plaintiffs also claim losing The Ritz-Carlton brand would cause the property and their investments to "lose considerable value."
Honolulu attorney Louise Ing, representing Marriott International and The Ritz-Carlton Hotel Corp., said she was not authorized to comment on the case due to ongoing litigation. She said her clients dispute the lawsuit's allegations and have filed motions to dismiss the suit.
Attorneys for Maui Land & Pineapple and Exclusive Resorts did not immediately respond to requests for comment.
O'Toole declined to comment on the claims in the lawsuit, but said he believes it was important in helping postpone The Ritz-Carlton's deadline to abandon the property.
"The lawsuit more or less forced everybody to start talking," he said. "We think the lawsuit provided, in part, a vehicle for moving forward. The rest we'll sort out in court if we have to."
The case is before Judge Joseph Cardoza, who will resume a preliminary hearing Wednesday morning in Wailuku.
* Nanea Kalani can be reached at nkalani@mauinews.com.
