The Seawall Lawsuit: A look at some settlement issues

The Club has been sued by 12 seawall lot Owners about who should bear the costs of maintaining and replacing the portion of the Colleton River seawall running from the 17th hole of the Nick to Seven Oaks--the Owners who border the seawall or all of the Club's owners? The Club has been advised by its attorneys that the cost of repair and replacement is the responsibility of the Owner adjacent to the seawall (i.e., the Club for the 17th hole and the Community Dock and the individual seawall lot Owners for the rest of the seawall). The seawall lot Owners disagree and claim that the Club has acted improperly and should bear the bulk of that cost and they seek compensatory and punitive damages that could run into the millions of dollars. Here's some background on the lawsuit.

Why should you care?

The total cost of replacing the seawall (for all three segments of the seawall (J-Lots, M-Lots (along High Ponds), and Phase II (the lots along Oak Tree))) would be millions of dollars (perhaps $10-20 million). More likely, maintenance of as much as $500,000-$1,000,000 may be required from time-to-time to extend the life of the seawall into the future ($15,000+ for each seawall lot owner or $850+ per Owner if all of the Club's 575 Owners chip in). And if the entire seawall needed to be replaced, it would probably cost each seawall lot Owner over $250,00 or each Owner over $15,000.

So where does that leave us? What's a "fair" settlement? Personally, based upon my readings of the filings to date, I believe that the Club has by far the better legal argument. But do we really need to have this issue unresolved while the Club strives to provide dining services and to complete the amenities project on its amended schedule and budget? 

Here are some issues that each Owner should consider:

• The governing documents permit the Board to settle litigation without consulting the Owners. As long as the Board can find the money, they can settle in any manner that they believe is reasonable. Sure, at some point, that money will come from assessments, but that's tomorrow's problem.
• I've been told that Wandell promised at the Town Hall meeting on June 10 that any settlement would be presented to the Owners for consideration.
• Such a promise is great--as far as it goes. But the bottom line is that the governing documents give the Board the right to settle litigation without input from the Owners. Furthermore, five Board members can overrule the Board president today and future Boards are not bound by the intentions of past Boards--absent a binding action by the Board--and the "promise" of one member of the Board is not such a binding action.
• There are many Owners who have no interest in paying one penny for the seawall. This is particularly true of Owners who have their own bulkheads for which they are solely responsible. Why should they pay 100% of the cost of their own marsh bulkhead, as well as a portion of the cost of a far more expensive seawall for 32 other Owners?
• Although only 12 of the 32 seawall lots are parties to the current lawsuit, the other 20 seawall lot owners will likely demand a deal comparable to the deal received by the 12 Owners who have sued the Club.
• The Club has significant leverage in the dispute. An insurer is paying for some of the Club's defense and possibly for some or all of any damages that may be assessed against the Club. The 12 J-Lot Owners are responsible for not only their costs, but also the Club's legal expenses if the Club prevails in the lawsuit (note that this right in the Covenants isn't mutual--the seawall lot Owners are responsible for their own legal costs even if they were to prevail in the lawsuit).
• The Board has been less than forthcoming with information about the seawall.
• the June Town Hall presentation didn't include an update on the seawall--the issue came up during discussion at the meeting;
• the Board in the past mistakenly claimed that the dispute had been resolved; and 
• the Board has claimed that "legal privilege" prevents communications to the Owners when no such privilege applies because the Board had already provided its legal analysis to the 32 adverse parties (the J-Lot, M-Lot, and Phase II Owners). 
• Why do the adverse parties have a better understanding of the Club's analysis than do the Owners who will bear the cost of the litigation and any settlement or judgment? 

Principles for a Reasonable Settlement

Lawsuits usually settle. Settlement is particularly likely when the issues are complicated and a trial would be expensive. Even if one believes that the issues are clear cut and the Club will eventually prevail, the Club should be willing to entertain a settlement. We have a lot going on at the Club and a reasonable settlement would enable the Board to focus on important issues. But settlement isn't capitulation and any settlement should reflect the relative positions of the parties (strong for the Club and weak for the seawall lot Owners). What should a settlement look like? Here's what I believe:

• The settlement process should resolve all issues--not just with the J-Lot Owners, but also with the remaining 20 seawall lot Owners (i.e., the seawall lot Owners on High Ponds and Oak Tree)
• This will require the Club and all seawall lot Owners and the Club to agree about the handling of future expenses for maintenance and replacement of the seawall.
• The settlement should expressly state the total cost of the settlement to the non-seawall lot Owners.
• One way of handling this would be for the Club to contribute to a reserve for future repair and replacement costs of the seawall.
• No future undefined costs should be borne by the Club (for example, a bad settlement would require the Club to bear any future costs in excess of the balance in the seawall reserve account--this would shift huge risk to the Club--and I'm confident that the seawall lot Owners could think of other "back door" ways to shift cost and risk to the Club).
• The settlement must be disclosed to the Owners before it is final.
• And the bylaws should be changed immediately to require Owner approval in the event that the settlement of this (or any other lawsuit) imposes direct and indirect costs on the Owners in excess of $1 million.
• Wandell apparently promised to seek such approval at the June 10 Town Hall meeting (but I can't find the video where the promise was apparently made). But as noted above, such a promise is probably unenforceable.

How much should the Club pay?

• Speaking only for myself, I would support a settlement where the Club contributed $1 million to the reserve for future repair and replacement (about $2,000 per Owner)--but your mileage may vary.
• If the settlement costs more than that, I'd litigate.
• But that's up to the Board to come up with a number and to sell it to the Owners.
• My big issue is that the Owners should know the full cost of settlement (both current payments and any contingent future obligations) before a deal is agreed to.

What can the Owners do?

• Become informed about the issues. This is a material event with some chance of an outcome that could be expensive for each Owner. Start by reading the Complaint, Answer, and Reply. Keep in mind the old adage: "when you have the facts on your side, bang the facts--when you have the law on your side, bang the law--when you have neither, bang the table." The J-Lot owner's Complaint bangs the table, while the Club's Answer bangs the facts and the law. The Reply is a piece of work--the J-Lot owners deny knowing things that they obviously know--ought to be interesting to see how that works out for them.
• Once you've become informed, let the Board know the extent to which you want to have the Board use your money to settle the lawsuit. Remember, once the Board settles the lawsuit, it will be too late.  
• Demand that the Board carry through on the Town Hall promise that any proposed settlement will be posted for approval by the Owners before the Board can enter into such a settlement. Better yet, change the governing documents to require Owner approval for any settlement that has the potential to exceed $1,000,000 of direct or indirect costs to the Owners.

Please become informed. This lawsuit poses a significant financial threat to each Owner of the Club--become informed and let the Board know what you think. If you can't figure things out, ask one of the many retired lawyers here in Colleton for help.