Steines v Westgate: Military Lending Act Oral Arguments

Oral arguments in Steines v Westgate were heard in United States District Court Middle District, Orlando Division on October 11, 2022. The hearing was called to resolve Defendant’s Westgate Resorts Motion to Compel Arbitration.

The lawsuit, filed on February 2, 2022, on behalf of active duty service members, claims that Westgate Resorts’ timeshare agreement is void because it has an arbitration clause. The Military Lending Act (MLA) prohibits arbitration. A “Covered Borrower” is an active duty service member covered under the MLA.

Arguments swirled around whether a timeshare is a residential “dwelling” or a transient stay, like a hotel. Residential mortgages are exempt from the MLA.

Questions I would have liked to ask of those who argue a timeshare loan is the same as a residential home loan:

1. What house in America can’t be sold because of an outstanding loan? 

Timeshares are next to impossible to get rid of if there is a loan outstanding. Service members can be deployed at a moment’s notice. Even without a loan, there is no guaranteed release.

2. Why is a residential foreclosure different from a timeshare foreclosure? If I default on a $50,000 timeshare loan, the developer can take back my points, resell them for $50,000, then turn around and sue me on the $50,000 promissory note. However, if I have a $300,000 home, default on a $150,000 loan, and if the home is sold for $300,000 after foreclosure, I would be given $150,000.

This last question I asked of attorney Mike Finn of Finn Law Group, as he was quoted in Kiplinger on October 4, 2022, concerning this remarkable fact: “And then I (the developer) may sue your pants off, even though I am going to sell it to someone else and get my purchase price back.’ There is no other product in the world that can do this to you. None!”    

https://www.kiplinger.com/real-estate/best-way-to-exit-your-timeshare-never-buy-one-in-the-first-place

The popularity of Arbitration among the industry

Developers vehemently argue in favour of arbitration, arguably biased against the consumer. There must be a reason why Congress decided arbitration should be prohibited under the Military Lending Act, which was created to protect service members from a threat to our nation’s military readiness, morale, and retention.

An arbitration clause was added to Westgate’s benefits page on February 1, 2022. The MLA lawsuit was filed on February 2, 2022. Now owners cannot access their World of Westgate (WOW) benefits without agreeing to arbitration. The courts ruled against BB&T for adding an after-the-fact arbitration clause.

An older Westgate contract did not contain an arbitration clause:

https://www.westgateresorts.com/loyalty/terms-conditions/#arbitration

PUBLIC CITIZEN lists, in the article linked below, reasons why arbitration is unfair to consumers and discriminatory:   

In addition to the denial of consumers’ and employees’ rights to seek remedies in court, arbitration between two parties with unequal bargaining power is too often a discriminatory and one-sided process, benefiting the corporations mandating it. https://www.citizen.org/article/mandatory-arbitration-clauses-are-discriminatory-and-unfair/

Westgate was ordered to produce any efforts they took to target veterans. Jared Saft, Westgate’s Chief Business Officer, stated that Westgate gives away annually 1,500 two-night stays with no strings attached, meaning no required timeshare tours. He mentioned a few executives at Westgate who were themselves veterans. He said the stays were given to veterans, “to show appreciation for their service.”

A question I would have liked to ask:

3. If Westgate is so appreciative of veterans, why the callous attitude toward a veteran who served 24 years overseas, in Military Intelligence, with deployments to Iraq and Afghanistan? He needs his remaining earned income working at the Pentagon. His lung condition is fatal without a lung transplant. He must be on a ventilator to be moved up on the wait list. Because of his Westgate loan, his security clearance is in jeopardy. Westgate denied the family a hardship release.  Like many others, he reported that he was told he could rent to cover the cost of the timeshare.
   

https://afterinsidetimeshare.com/?p=1295

Westgate Arbitration and the Military Lending Act, June 17, 2022, https://afterinsidetimeshare.com/?p=982

ADAM U. STEINES; MIRANDA L. STEINES; and ANDREW M ORMESHER, Plaintiffs, v. WESTGATE PALACE, LLC; WESTGATE RESORTS, INC.; WESTGATE RESORTS, LTD., LP; CENTRAL FLORIDA INVESTMENTS, INC.; WESTGATE VACATION VILLAS, LLC; and CFI RESORTS MANAGEMENT, INC.: WESTGATE LAKES, LLC, Case 6:22-cv-00629-RBD-DAB

From the order issued by presiding United States District Judge Roy B, Dalton Jr:

On the one hand, Defendants’ Arbitration Addendum contains an express delegation provision that commits to an arbitrator the threshold determination of whether the agreement to arbitrate is enforceable. This delegation provision divests the court of jurisdiction to review any challenge other than to that provision. 

On the other hand, if the MLA applies it would render the delegation provision in Defendants’ Arbitration Addendum void ab initio and unenforceable. 

The central issue here is whether Plaintiffs’ timeshare loans constitute “a residential mortgage” exempt from the MLA’s coverage. The Department of Defense (“DOD”) defines a residential mortgage as “any credit transaction secured by an interest in a dwelling[.]”2 See 32 C.F.R. § 232.3(f)(2)(i). 

Oral Arguments over Semantics – To be or not to be – a residential dwelling?

Opposing parties were directed to produce any evidence relevant to Schwarz factors. This was a lawsuit from 2006 concerning Plaintiff Schwarz suing the City of Treasure Island, Florida, over zoning issues. Mr. Schwarz was leasing his homes to recovering substance abuse patients. The courts determined that if there were more than six stays in a year, the stay is transient (like a hotel), and not a residential stay.

While a different policy and statutory scheme may animate the analysis of the MLA, the Schwarz factors may be relevant for classifying a property as a “residential structure” for purposes of the MLA. 

Attorney Richard Epstein, of Greenspoon Marder, representing Westgate, contrasted amenities available at his AC Marriott hotel he had stayed at the night before the hearing, compared to amenities that a timeshare has, like a kitchen.

Question I would have liked to ask:

4. What about Marriott’s Residence Inn? They have kitchens. 

Judge Dalton brought up Airbnb and VBRO, that can be booked with any amenity desired (even a boat), and  commented that he could not leave his underwear and toothbrush at a timeshare, but he could if a residence.

Attorney Janet Varnell, with Varnell and Warwick, representing Plaintiffs, commented that Westgate Palace was closed during the Covid pandemic. Ms Varnell said homes were not closed during Covid, adding “You were sent to your home.”

Co-counsel for Plaintiffs, Craig E. Rothburd, pointed to Westgate’s documents that stated “for transient use only.” Mr. Epstein countered that that paragraph was only a small part of the document that stated this.

A Department of Defense Predatory Lending Report Relevant to this lawsuit

Another MLA lawsuit complaint, filed against Wyndham on 1/7/2020, in the UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF FLORIDA, contained a report issued by the Department of Defense that listed factors relevant to this lawsuit. The lawsuit was dismissed because borrowers were not active duty at the time of purchase.

 BRIAN CARROLL and ASHLEY CARROLL, Plaintiffs, v. WYNDHAM VACATION RESORTS, INC. and COMENITY LLC, Defendants. Case 6:20-cv-00028-PGB-LRH

Excerpts from the Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents,

In 2006, the United States Department of Defense (“DOD”) issued the Report, focusing on “predatory lending” to military members. 

The Report highlighted the “steady and significant increase in the rate of revoked or denied security clearances for military personnel due to financial problems; ‘At a time when we are at war, this is an unacceptable loss of valuable talent and resources.’” 

According to the Report:

Predatory lending in the small loan market is generally considered to include one or more of the following characteristics: 

High interest rates and fees; little or no responsible underwriting; 

My comments in parenthesis:

(Timeshares are financed at 12% to 19.99%.  Credit cards, often opened at purchase, financing the down payment or purchase, have interest rates as high as 24%. There is no underwriting) 

loan flipping or repeat renewals that ensure profit without significantly paying down principal; 

(Up-sell, up-sell, up-sell is the mantra. The Navy veteran in the YouTube linked below had to seek bankruptcy protection after being switched back and forth between programs. He ended up with $2,700 a month in timeshare loan payments that he charged to credit cards.) https://www.youtube.com/watch?v=j_nca6lMA4U

loan packing with high cost ancillary products whose cost is not included in computing interest rates;

(There have been many reports of buyers being offered an inflated price for their existing timeshare, when in fact there is little to no resale for a timeshare. An example: $111,835 Purchase price less additional equity $82,395 for my Orange Lake and Westgate timeshares, Adjusted purchase price $29,440.)

a loan structure or terms that transform these loans into the equivalent of highly secured transactions; 

fraud or deception; 

(There have been Attorneys General settlements and lawsuits too numerous to mention. The most recent (October 6, 2022), a jury awarded over $1 million to FantaSea victims. 

 https://www.prnewswire.com/news-releases/jury-awards-over-1m-to-consumers-in-timeshare-deception-lawsuit-against-fantasea-resorts-301643195.html

waiver of meaningful legal redress; or 

(Arbitrators are retained at $400 to $800 an hour, paid by the developer, as opposed to a judge paid for by taxpayer dollars. One active duty service member lost in arbitration disputing a $12,000 purchase. The judgment issued against the family of six, while dad was deployed, was $66,000. Over $50,000 was the resort’s attorneys’ fees.) 

operation outside of state usury or small loan protection law or regulation. 

Concluding Westgate Oral Arguments

At the conclusion of two hours of oral arguments, Judge Dalton said he disagreed with Mr Epstein. Mr Epstein stated he would appeal to the 11th Circuit. Judge Dalton appeared unfazed.

Related articles – Active Duty Service Members harmed by timeshare sales and lending

Report 1 of 6: Active Duty Navy, Chief Petty Officer, 14 years served

https://afterinsidetimeshare.com/?p=1098

Report 2: Marine Veteran, 26 years served, security clearance

https://afterinsidetimeshare.com/?p=1115

Report 3: Active Duty Navy, 12 years served

https://afterinsidetimeshare.com/?p=1151

Report 4: Active Duty Navy, 18 years served 

https://afterinsidetimeshare.com/?p=1191

Report 5: Husband & Wife,  both Active Duty Air Force 10, 9 years

https://afterinsidetimeshare.com/?p=1243

Report 6: Active Duty Air Force, 8 ½ years served

https://afterinsidetimeshare.com/?p=1291

Irene will be following this case and will no doubt write an update in the future, cases such as this are just the beginning for consumer rights, military or civilian. Europe began to unify regulations on timeshare in the 1990s, covering how it operates and more importantly how it is sold, with the first directive known as Directive 94/47/EC. This came into force in 1994, with all EU members placing it into their own laws. Over the years these were adapted as timeshare changed, the first being in 1998 with Directive 98/27/EC, this was the basis for Spanish Timeshare Law 42/1998.

Spain’s timeshare laws were further strengthened with Law 4/2012, and then in 2015 legal history was made with the first Supreme Court ruling on the timeshare laws, further rulings followed, cementing them to the benefit of consumers. It took years for change to happen, the industry believed it was above the law and used every trick it could muster, including hints that genuine law firms were “scammers” only out to get your money. As time moved on the giants were falling like flies at every appeal, the consumer who purchased in Spain which had the largest timeshare market was protected. Sales fell dramatically, even before Covid, Sales Decks closed down and many sales companies have gone into liquidation. It is a stark warning to the industry, you can only “Screw the Consumer so far”.