Honua Kai customers allege documents filled with defects

Maui News

Besides the alleged defects in the legal language of the sales documents, customers at Honua Kai Resort & Spa have alleged a wide range of omissions of pertinent information or of physical features that didn’t appear when the project was built out. Among them:

* That, initially, the sales documents did not inform buyers that a sewage treatment plant is across the highway from the resort, or of nearby rock-crushing operations.

Would-be buyer Frank Iachelli was shocked to learn about the wastewater plant, because the unit he was buying is on the back, closest to the county plant, “right on the corner.”

* That the original offering promised a 9,000-square-foot Duke’s restaurant, even though the Maui Planning Commission’s special management area approval allowed one only half as big. Attorney Richard Rost says the developer never even applied for the big restaurant, although its distributed press releases announced it.

Iachelli says it might seem like “a minor thing,” but the Duke’s restaurant “was huge for us.” He and his wife have been coming to Hawaii for more than 10 years, and “Duke’s (in Waikiki) is one of our favorite places. We like to have brunch there. We knew it would be a good draw for renting out” their unit on Maui.

* That it was not disclosed that owners renting out their units, but not using the developer’s rental management service, would have their customers excluded from common areas.

* That units were not built as described. According to Iachelli, when the first phase, Hokulani, was opened “the reviews were horrible,” and there were complaints about the quality and finish of the construction.

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Attorney will argue buyers have right to change mind
Honua Kai clients seeking partial summary judgment

March 6, 2011 – By HARRY EAGAR, Staff Writer Maui News

On Tuesday, Wailuku attorney Richard Rost will be in 1st Circuit Court in Honolulu asking for partial summary judgment in a lawsuit by a buyer at the Honua Kai Resort & Spa who is trying to back out of his purchase.

It is one of 37 suits Rost has filed on behalf of buyers of 105 units at the North Beach resort. They claim the developer, Maui Beach Resort LP (a venture of Canadian developer Intrawest), has “confiscated” nearly $20 million in cash deposits they paid.

Rost argues that the federal Interstate Land Sales Act requires sellers of projects like Honua Kai to allow buyers to rescind their decision, for any reason or none, during the two years after signing. According to testimony and evidence, the sales contracts did not contain that required language on the signature page.

Instead, the document said buyers had seven days. (Other documents said 15 days or 30 days.)

Frank Iachelli, one of Rost’s clients, says not only did the document state seven days, “I was told we only had seven days to cancel.”

Circuit Judge Virginia Crandall denied Rost’s first motion for partial summary judgment in December, but in a February order (written by Honua Kai lawyer William McCorriston), the court said, “A genuine issue of material fact exists as to whether the defendants’ failure to include the rescission language . . . is an omission of a material fact.”

Rost, who has been working full time for two years on these claims, throws up his hands on that one. If the buyer can walk away, how is that not material, he asks.

Neither McCorriston nor Maui Beach Resort executives replied to inquiries from The Maui News.

Barbara Duhamel, a longtime resident of West Maui, and her husband signed for a unit when Honua Kai first went on sale in 2006. Their intention was to make an investment for their retirement.

“It seemed like a good idea,” she said last week, to “secure a little better retirement.”

But “as time went by, the economy changed.” She would “absolutely” have rescinded the purchase within the two-year window (which carried into 2008, when the changes in the real estate market were apparent) if she had known she had that right.

Iachelli says he and his wife, Theresa, bought in the second phase, Konea, also with a view toward providing for their retirement. When the first section, Hokulani, opened, the reviews were “horrible,” and he thought the effect on his retirement income “would be devastating.” But, he added, “I didn’t think I could do anything.”

The Duhamels had put down a total of $320,000, in two equal installments, 20 percent of a selling price of $1.6 million.

Not having that money available the last few years has hurt her financially, Barbara Duhamel said, because the value of their house dropped. That made it difficult to refinance to take advantage of lower interest rates, but she says that if that $320,000 had been available, she could have built up the equity in her home, which would have made lenders view her application more favorably.

To add insult to injury, she says, she was threatened that if she did not go through with the transaction, “my credit would be dinged.”

“I drive by that project twice every day,” she says, and each trip reminds her of how “disrespectful” the developers were to her.

She says when her credit rating was threatened, she “walked out.”

“It was just a very greedy, deceitful developer,” she says. She felt as if the sales agent was “just saying, ‘Ha, ha, ha, we got your money. You have no rights as a buyer.’ ”

“It’s been extremely stressful.”

The Iachellis put down a little more than $250,000, the bulk of their retirement money from a printing and design business in California.

Rost says there have been settlements in about 10 of the 37 suits (some of which had more than one plaintiff), but the terms are confidential. In the remainder, the buyers are seeking at least a return of all their money.

If he can prove civil fraud or misrepresentation – and he says he can – then there could be recoveries of attorney fees, treble damages or punitive damages.

Tuesday’s hearing is before Crandall, but the suits were assigned to eight different judges.

Since early this year, Rost has submitted written complaints to the Office of Interstate Land Sales Registration of the U.S. Department of Housing and Urban Development, asking for an investigation of possible criminal conduct.

So far, he has not heard back.

He also asked for the Real Estate Commission and the Department of the Attorney General to investigate for violations of state law – also without reply.

The state and federal regulations differ, but either, Rost says, requires both more disclosure to the buyers and a longer period in which to exercise “buyer’s remorse.”

The law has been on the books since 1968 and originally was intended to protect buyers from sellers “of swampland in Florida,” Rost says.

As long as real estate markets are robust, the law seldom comes into play, because buyers don’t want to back out. Duhamel, for example, did not intend to live in her unit but to put it into a rental pool and, she hoped, eventually sell for a profit.

But, Rost says, “every 10 or 15 years” there is a real estate meltdown somewhere, and then buyers do want to back out of deals that promise losses instead of gains.

Seldom in Hawaii, though. There is no state case law on the issue, and only one federal case covering a Hawaii sale, in 1986, Rost says.

Initially, the complaints focused on allegations of failure to disclose or failure to deliver on promises. (See related story.) But as time went on and depositions revealed more about the project, Rost says, the focus of the legal argument came to the rescission provisions.

Now he is arguing not that Intrawest violated the contract, but that there never was a contract. The legal theory is that there has to be a meeting of the minds and a material exchange to make a contract.

He argues that since the buyers had an absolute right to walk away, the seller neither had a meeting of the minds, nor was entitled to latch on to the money for the material exchange.

Rost argues that the developer was not entitled to use the deposit money for construction expenses until the two-year backdown period was passed, but that it did.

It is ironic, he says, that Intrawest did not follow the HUD requirements – which say the rescission language must be on the signature page so the buyer can’t miss it – because if it had, it still would have had to allow the sales to be canceled, but it could have withheld 15 percent as liquidated damages.

Since there never was a contract, he argues, all the money must be returned.

Besides the claims under the federal law, the suits claim that the state condominium law requires that all information provided to buyers in writing be truthful and accurate and not omit material facts.

Since it was not, the remedy is, Rost says, the buyers get their money back.

Willful violation of the Interstate Land Sales act carries a potential penalty of up to five years in jail and a $10,000 fine.

When Honua Kai was announced in 2004, it had been more than 20 years since a “whole-ownership” oceanfront condominium development had been proposed at Kaanapali, and Intrawest was so confident that it limited reservations for the first, 242-unit phase to three per real estate agent.

There was what one plaintiff described as a “feeding frenzy” at a lottery to determine which units went to whom.

Prices tentatively were pegged at from “low $500,000s” for studios to $3.5 million for three-bedroom units, but by the time sales opened two years later, the real estate boom worldwide was nearing its peak, and prices were considerably higher. Intrawest bragged at the time that it had moved all its offering in a single day, with the highest sales total in its history.

The initial estimate for 625 condos, 75 townhouses, restaurant and other facilities was $280 million, although Steve Sewall, director of development for Intrawest Placemaking, said then that Maui construction prices “are some of the highest we have seen anywhere.”

He hadn’t seen anything yet. Although sales prices rose, construction prices also came in far beyond 2004 estimates, and the as-built cost of the 40-acre resort was more than double Intrawest’s early projections.