WAYSTATIONS INC v. EDMONDS

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Court of Appeal, Second District, Division 4, California.

WAYSTATIONS, INC., Petitioner and Appellant, v. James A. EDMONDS, Jr., as Real Estate Commissioner, etc., Defendant and Respondent.

No. B031523.*

Decided: November 02, 1988

Richard E. Hodge, Inc., Gary W. Nevers, and David M. Title, Los Angeles, for petitioner and appellant. John K. Van de Kamp, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., and Lawrence P. Scherb II, Deputy Atty. Gen., for respondent.

Petitioner/appellant Waystations, Inc. (appellant) appeals from the judgment denying its petition for writ of mandate.   Appellant's petition, pursuant to Code of Civil Procedure section 1094.5, had sought an order compelling defendant/respondent the Commissioner of Real Estate to withdraw his decision to issue a Desist and Refrain Order, ordering Waystations to stop selling time-shares in the Tahoe Beach and Ski Club.

FACTS

To better understand the underlying facts, a brief description of how time-shares are developed and function is helpful.   As defined in Business and Professions Code section 11003.5, subdivision (a), a time-share project “․ is one in which a purchaser receives the right in perpetuity, for life, or for a term of years, to the recurrent, exclusive use or occupancy of a lot, parcel, unit, or segment of real property, annually or on some other periodic basis, for a period of time that has been or will be allotted from the use or occupancy periods into which the project has been divided.”   A time-share is considered a common-interest subdivision.  (Bus. & Prof. Code, § 11000, 11004.5.)   As such, the developer or sponsor is required to file a subdivision public report with the Department of Real Estate (DRE) before time-share interests can be sold.   The public report includes a Time–Share Declaration, which sets forth restrictions, conditions and covenants to be recorded against the subdivision, enumerating the duties and obligations of the Homeowners Association and the developer.   The developer must also submit a budget which establishes a method of funding the maintenance and operation of the project by the Homeowners' Association.   The necessary funds are raised through assessment of all owners, including the developer.   In lieu of payment of these assessments, pursuant to Title 10, California Administrative Code, section 2812.4, subdivision (a)(1), a developer may enter into a Subsidy Agreement with the Homeowners Association.   This Code, among other things, states that:  “The [DRE] will ordinarily not approve a subsidization program unless provisions are made for the accumulation of reserves for replacement and major maintenance of the property comprising the project in accordance with accepted property management practices and for the transfer of the reserve fund to the Association on termination of the program.”

Appellant is the owner of a 165–unit time-share subdivision, known as Tahoe Beach and Ski Club and located in South Lake Tahoe, California.   As of April 10, 1987, 84 units have been dedicated for time-share use and ultimately all units will be so dedicated.   As of December 31, 1986, approximately 2355 vacation interests had been sold to the public.

On June 6, 1983, a Final Subdivision Public Report for Tahoe Beach and Ski Club was issued by the DRE, authorizing sales to the public of time-share interests in the property.   The public report was issued based upon a Declaration of Vacation Plan (the Declaration), the budget, and other related documents, all of which were submitted to and approved by the DRE, as required by applicable statutes and regulations.

Paragraphs 5.1 and 5.3, subdivision (b) of the Declaration provide that assessments shall be collected to cover basic expenses.  “Basic expenses” are defined as “the estimated aggregate amount of expenses, as set forth in the Budget, to be incurred by the Association during the applicable Fiscal Year․”   Among other things, the basic expenses are to provide for establishment of a Reserve Fund “to ensure payment when due of the cost of capital expenditures relating to the repair or restoration of Common Furnishings, and for such other purposes as are required by good business practice (the ‘Reserve Expenses')”;  and maintenance of the “General Account at the level determined by the Association as provided in Paragraph 5.10.”   Paragraph 5.10 of the Declaration required each owner, other than the developer, to pay $75 to the General Fund.1

A Subsidy Agreement was entered into between appellant and the Homeowners' Association.   Under its terms, the appellant promised to cover any deficit if monies payable by owners were insufficient to meet “reserve expenses” of any given year and if the basic assessments collected were insufficient to cover operating expenses.   As required by this agreement, appellant posted a surety bond in the amount of $475,000.   Particular provisions of the Subsidy Agreement will be discussed in depth below.

On January 28, 1987, the DRE issued an Order to Desist and Refrain, ordering appellant to stop “selling, exchanging or leasing, offering for sale, exchange, or lease, soliciting purchasers or lessees, or negotiating for sale, exchange or lease, of lots or parcels” in Tahoe Beach and Ski Club.   The Order alleged that appellant had failed to make payments to the Reserve Account and to maintain certain funds in the General Fund, as required by the Declaration.

At appellant's request, an administrative hearing was held on February 17, 1987.   Upon consideration of the hearing testimony and additional briefs submitted by the parties, the administrative law judge issued his decision and findings of fact.2  This decision, later adopted by the Commissioner of Real Estate, refused to grant relief from the Desist and Refrain Order.   Among other things, the decision found that as of December 31, 1985, appellant was in arrears $143,810.01 in its payments to the Reserve Account;  and had failed to make any payments necessary to maintain the General Fund balance at an amount equal to the number of owners, other than the appellant, multiplied by $75, which as of December 31, 1985, should have amounted to $122,000.3

On April 24, 1987, appellant filed a petition for writ of mandamus.   The court upheld the findings of the Real Estate Commissioner and denied appellants' petition.4  Because it provided the DRE with a letter of credit for the amount in dispute ($265,000), appellant continues to sell time-share interests in this project.

DISCUSSION

Appellant's assertion of error is based on one contention:  that the trial court erred because it misinterpreted the provisions of the Declaration and Subsidy Agreement just as the administrative law judge and Commissioner of Real Estate previously had done.   Accordingly, appellant contends that the appropriate standard of review calls for us to exercise our independent judgment and treat this appeal as a renewed petition for writ of mandate.   The DRE responds with an 18–page brief, the majority of which speaks to the applicability of the “substantial evidence” standard of review;  and fails adequately to address the substantive issues.

 For the most part, we are in accord with appellant's representation that any substantive factual disputes are grounded in the parties' differing interpretations of the relevant portions of these documents.   We deal, primarily, with a question of law, “treat this appeal as a renewed petition for writ of mandate[,] and draw our own legal conclusions from the undisputed facts in the cause.”  (Swaby v. Unemployment Ins. Appeals Bd. (1978) 85 Cal.App.3d 264, 269, 149 Cal.Rptr. 336;  disapproved on other grounds by Pacific Legal Foundation v. Unemployment Ins. Appeal Bd. (1981) 29 Cal.3d 101, 115–116, 172 Cal.Rptr. 194, 624 P.2d 244.)   However, when appellant argues that its witness' testimony at the administrative hearing is more believable than the testimony of the DRE's witnesses, we are governed by the long-established rules on appeal which require us to defer to the administrative law judge's determination that the DRE witnesses were more credible.  (Campbell v. Board of Dental Examiners (1971) 17 Cal.App.3d 872, 875–876, 95 Cal.Rptr. 351.)

Resolution of this appeal hinges on an understanding of the interrelationship between and among the Budget;  the relevant Declaration provisions, defining basic expenses and establishing the Reserve Account and the General Fund;  and the requirements of the Subsidy Agreement.

The Budget is prepared for each fiscal year and includes:  “(a) estimated revenue and expenses on an accrual basis, (b) the amount of the total cash reserves of the Association currently available for replacement or major repair of common facilities and for contingencies, (c) an itemized estimate of the remaining life of, and the methods of funding to defray the costs of repair, replacement or additions to, major components of the Common Areas and Facilities for which the Association is responsible, and (d) a general statement setting forth the procedures used by the governing body in the calculation and establishment of reserves to defray the costs of repair, replacement or additions to major components of the Common Areas and facilities for which the Association is responsible.”

The basic expenses are the aggregate amount of expenses set forth in the Budget, including costs of operating and maintenance, and provide for the maintenance of the Reserve Fund and the General Fund.   These basic expenses are funded by basic assessments, collected from each owner each fiscal year, pursuant to a formula.   The bonded Subsidy Agreement exempts the appellant from having to pay the basic assessment;  however, the Declaration requires that this Subsidy Agreement be “in a form acceptable to the California Department of Real Estate and shall be secured as required pursuant to Section 2812.4 of the Regulations of the California Department of Real Estate.”

The Reserve Fund is set aside to ensure payment of the cost of capital expenditures.  “The Reserve Expenses portion of the Budget shall consist of specific items and amounts for which such Reserve Expenses are being collected.”  (¶ 5.3, subd. (b).)

The General Fund, described in paragraph 5.10 of the Declaration (see footnote 1, ante), is comprised of the sum of $75 collected from each owner, other than the appellant, at the time of purchase.   Its purpose is to pay any expenses, not capital expenditures, which may arise in operation of the project, for which basic or special assessments are inadequate.   The Subsidy Agreement exempts the appellant from having to pay $75 for each of the vacation plans which remain unsold.   Appellant, however, must pay the difference between costs of operation and “the assessments collected” from the other owners and cannot use General Fund monies to reduce its obligation under the Subsidy Agreement unless it contributes $75 for each of its vacation plans.   Upon termination of the Subsidy Agreement, the appellant must pay into the General Fund an amount equal to $75 for each of the vacation plans it currently owns.

Conforming to the language setting forth what must be included in the Budget (¶ 4.2, subd. (h)) as well as the language defining “basic expenses” (¶ 5.3, subd. (b)), paragraph 5.10 provides that the Basic Assessment against all owners, except appellant as long as the Subsidy Agreement is in effect, shall include an amount “sufficient to maintain the balance in said General Fund Account at an amount equal to $75.00 ․ multiplied by the number of Vacation Plans” owned by the other owners.   Upon termination of the Subsidy Agreement, the basic assessment against all owners, including appellant, “shall include an amount sufficient to maintain the balance in the General Fund Account at an amount equal to $75.00 ․ multiplied by 7956 [the total amount of vacation interests].”  In seemingly contradictory language, paragraph 5.10 goes on to state that:  “The amount paid shall be retained ․ in the General Fund and may be used by the Association (a) to pay any expenses which may arise in connection with the ․ project ․” and to pay delinquent assessments.

Appellant and the Homeowners Association entered into a Subsidy Agreement.   Under its terms, the appellant agreed to pay “the deficiencies of the Association relating to maintenance and operating expenses of all Dedicated Units (‘Vacation Units') and Common Areas of the Project․”  (Subsidy Agreement, Terms and Conditions, ¶ 2.)  “Deficiencies” is defined as “the difference between (i) the cumulative total amount of maintenance and operating expenses related to the Subject Property which are incurred by the Association [which money is collected through Basic Assessments], together with the amount of any installment of real property taxes currently due and payable with respect to the Subject Property, ․ and (ii) the cumulative total amount of Basic Assessments (less amounts therefrom allocated to Reserve Expenses) and Tax Assessments attributable to the Subject Property and payable 5 to the Association pursuant to Paragraphs 5.5 [basic assessment] and 5.6 [tax assessment] of the Declaration by Time–Share Owners other than [appellant]․”

The Subsidy Agreement also discusses the Reserve Fund.   It provides that:  “to the extent that the amounts payable by Owners through Assessments are insufficient to fund the total amount of Reserve Expenses incurred in any given year, [appellant] agrees to pay to the Association ․ an amount equal to the difference between (i) ‘Actual Reserve Expenses' (as the quoted term is hereinafter defined) for such Fiscal Year and (ii) the amount of monies payable to the Association in such Fiscal Year by Owners other than [appellant] and allocated to Reserve Expenses pursuant to the Declaration.   For purposes of this Agreement, the term ‘Actual Reserve Expenses' shall mean that portion of the Reserve Expenses set forth in the Association's Budget for the applicable Fiscal Year attributable to those portions of the Property actually used by Owners in connection with the Vacation Plan program․’'  (Subsidy Agreement, Terms and Conditions, ¶ 4.)

The DRE interpreted the foregoing Declaration provisions and Subsidy Agreement to mean that:  (1) the appellant would pay, on an annual basis, the difference between the actual amounts budgeted for reserves for replacements and the amounts paid for said reserves by owners other than appellant, less an amount equal to the actual reserve expenses expended during the applicable year;  and (2) the appellant would maintain a sum of $75 collected from each owner other than appellant in a General Fund.   Appellant interpreted the same provisions to mean that:  (1) it had to pay only the actual reserve expenses for which inadequate funds were received;  and (2) the General Fund was supposed to be used to pay any expenses which might arise in connection with the project, and the Association would replenish the Fund through the basic assessment process.

Our consideration of the disputed documentary language leads us to conclude that the DRE's interpretation is correct as to the Reserve Fund and partially correct as to the General Fund.

 The Reserve Account

 The DRE contends the following equation governs the amount appellant is required to pay the Reserve Fund:  budgeted reserve expenses minus amounts received from other owners (less actual reserve expenses spent) equal amount due from appellant.   The language of the Subsidy Agreement clearly supports this equation when it provides that appellant is to pay “an amount equal to the difference between (i) the ‘Actual Reserve Expenses' [defined subsequently as the budgeted reserve expenses] ․ and (ii) the amount of monies payable to the Association ․ by Owners other than [appellant] and allocated to Reserve Expenses․”   This interpretation allows for a build-up of the reserves as envisioned by Title 10, California Administrative Code, section 2812.4.   To accept appellant's interpretation would defeat the goal of building a reserve account to cover future anticipated expenses.   Moreover, unless reserve expenses were less than the amounts collected from other owners during the time that the Subsidy Agreement was in effect, there would be no reserve account funds to “transfer” to the Association upon termination of the Subsidy Agreement.

It does appear, however, that both the administrative law judge and the trial court erred when they substituted the word “paid” for “payable.”   The Declaration does not discuss appellant's obligation to make payments to the Reserve Account which is a subject discussed only in the Subsidy Agreement.   Since the Subsidy Agreement affects accounting, its precise language should be honored.

 The General Fund

The DRE and the administrative law judge approached appellant's obligations to pay into the General Fund from different directions.   The judge's decision, with which the trial court agreed, states that the appellant spent $122,000 of General Fund monies, collected from other owners, “to defray operating expenses that would otherwise have been paid by [appellant] [because of its obligations under the Subsidy Agreement]” without paying General Fund the required $75 per vacation plan owned;  and consequently breached the Declaration.  (See Proposed Decision, Determination of Issues, II, p. 6.)   However, the DRE's Desist and Refrain Order, paragraph III states:  “In connection with your application for the final subdivision public report, you represented to the [DRE] that you would collect from each owner of an interest in the Subdivision the sum of $75.   You further represented to the Department that you would maintain any such funds collected as a general fund.”   Appellant's brief solely addresses the DRE's position.

 In its brief, appellant has argued that the parties are in agreement as to the facts, and that the issue on appeal concerns a question of law.   In stating the facts are not at issue, appellant has admitted expending General Funds monies for operating expenses.   Consequently, we accept as correct the administrative law judge's conclusion in this regard.   The determinative question remains whether such use was allowed by paragraph 5.10 of the Declaration.   We conclude that it was not.

The DRE's position is that the various documents require that the General Fund at all times contain a balance equal to the product of $75 times the number of vacation plan owners, other than appellant.   Without repeating the language of paragraph 5.10 of the Declaration, found in footnote 1, we note that it begins with language allowing the monies of the General Fund to be used by the Association to pay the expenses which may arise in connection with the project, other than capital expenditures, for which the Basic Assessment and any Special Assessment prove to be inadequate.6  Later in the paragraph, the Declaration provides:  “The amount paid shall be retained ․ and may be used by the Association (a) to pay any expenses which may arise in connection with the ․ project, including, without limitation those goods, services and other items referred to in Paragraph 5.2, above, ․” Paragraph 5.2 provides:  “Assessments shall be used exclusively to promote the recreation, health, safety and welfare of the Owners, to operate, maintain and improve the Property, to pay for the administration of the Vacation Plan operation and reimbursement of expenses incurred by the Association and to provide funds for other expenditures incurred in the performance of the duties of the Association as set forth in this Declaration.” 7  Appellant argues that the language of the Declaration is so broad that the General Fund can be used for operating expenses.   It does appear that the later reference to paragraph 5.2 allows appellant to expend General Fund monies for operating expenses and contradicts the earlier language in paragraph 5.10, limiting the use of General Fund monies to those costs not covered by the Basic Assessment.   If appellant is correct in its interpretation, the terms of the Subsidy Agreement require it to pay $75 per unit it owns into the Fund, before appellant can use these funds to cover operating expenses, which is the conclusion arrived at by the administrative law judge.

We conclude that a reconciliation of these seemingly contradictory phrases leads to the moot logical result.   The later reference to paragraph 5.2 does not negate the earlier limitation on General Fund expenditures to costs not covered by basic or special assessments.   It appears that at this juncture, the Declaration sought to create a fund which would pay for costs which might otherwise have fallen through the cracks.   Paragraph 5.2 contains a broad summary of items for which assessments might be collected.   It is the other items listed in paragraph 5.2 and not met by basic and special assessments which may be funded by General Fund monies.

Paragraph 5.10 also requires the Basic Assessment to include an amount sufficient to maintain the balance in the General Fund at an amount equal to $75 multiplied by the number of owners.   When considered together, the various provisions of paragraph 5.10 allow for some expenditure of General Fund monies, but not to the extent claimed by appellant.   Thus read, whenever the General Fund balance drops below the $75 per owner amount, the basic assessments are to be used to replenish the Fund.

Since appellant admits it used these funds to pay operating expenses, it indeed should have paid $75 per unit it owns into the Fund.   On the other hand, given the contradiction in paragraph 5.10, the fairer approach, is to require the DRE to allow:  (1) appellant to reimburse the General Fund the funds expended to pay operating expenses;  (2) the Association to use General Fund monies for costs not covered by basic or special assessments;  and (3) the Association to replenish the account through increase of basic assessments as allowed by the Declaration.

The judgment is affirmed, in part, and reversed, in part.   We remand with directions to the trial court to order the DRE to take actions consistent with the conclusions expressed in this opinion.   Each party to bear its own costs.

APPENDIX

BEFORE THEDEPARTMENT OF REAL ESTATESTATE OF CALIFORNIAIn the Matter of the Order to Desist and Refrain Issued Against:WAYSTATIONS, INC. TAHOE BEACH AND SKI CLUB Respondent.No. H–2220 SACOAH No. N–28594PROPOSED DECISION

Karl S. Engeman, Administrative Law Judge, Office of Administrative Hearings, heard this matter on February 17, 1987, in Sacramento, California.

Larry Alamao, Counsel, Department of Real Estate, represented the complainant.

Respondent Waystations, Inc. was represented by James M. Orendorff and Gary G. Kuist, Attorneys at Law.

Evidence was received, the hearing was closed and the record was left open for the receipt of written argument on or before February 24, 1987.   On February 24, 1987, written argument was received from complainant, marked Exhibit 12 for identification, and made a part of the record.   On February 24, 1987, written argument was received from respondent, marked Exhibit E for identification, and made a part of the record.   The matter was thereupon submitted.

The Administrative Law Judge certifies this decision and recommends its adoption.

FINDINGS OF FACT

I

On or about January 28, 1987, James A. Edmonds, Jr., Real Estate Commissioner, Department of Real Estate, State of California, issued an Order to Desist and Refrain (Business and Professions Code section 11019) ordering respondent Waystations, Inc., doing business as Tahoe Beach and Ski club (hereinafter “the subdivider”) to desist and refrain from selling, exchanging or leasing, offering for sale, exchange, or lease, soliciting purchasers or lessees, or negotiating for sale, exchange or lease, of lots or parcels in the subdivision.   On or about February 2, 1987 the subdivider submitted a written demand for hearing.

II

Respondent is an owner or an agent or employee of an owner of a subdivision as defined in Sections 11000 and 11004.5 of the Business and Professions Code of the State of California known as Tahoe Beach and Ski Club located in El Dorado County, State of California, and identified in the records of the Department as File No. 010038HF–FOO (hereinafter referred to as “the subdivision”).   A final subdivision public report in this file was issued on or about June 6, 1983.

III

In connection with the subdivider's application for the final subdivision public report, subdivider represented to the Department that subdivider would pay on an annual basis the difference between the actual amounts required for reserves for replacements and the amount paid for said reserves by owners of interest in the subdivision other than the subdivider.

IV

In connection with subdivider's application for the final subdivision public report, subdivider represented to the Department that subdivider would collect from each owner of an interest in the subdivision the sum of $75.   Subdivider further represented to the Department that subdivider would maintain any such funds collected as a general fund (also known as a contingency fund).

V

The obligation to pay assessments for reserves as described in paragraph III and to collect and maintain the general fund as described in paragraph IV commenced on the first day of the month following the first sale of an interest in the subdivision.

VI

On or about November 15, 1984, subdivider sold the first interest within the subdivision.   Subdivider's obligation to pay assessments for reserves described in paragraph III commenced on December 1, 1984.

VII

The representations and assurances given by subdivider as described in paragraph III have not been fulfilled by subdivider while subdivider owned lots or interest in the subdivision in that subdivider has failed to pay or cause to be paid assessments as described in paragraph III and as of December 31, 1985, subdivider was in arrears in the payment of said assessment in the amount of $143,810.01.

VIII

The representations and assurances given by subdivider as described in paragraph IV above have not been fulfilled by subdivider while subdivider owned lots in or interest in the subdivision in that subdivider has failed to maintain sums collected for the general fund in the total amount of $122,000 as of December 31, 1985.

IX

The subdivision is located at 3601 Highway 50, South Lake Tahoe, in El Dorado County, California.   It is a 156 unit time share project to be developed through the conversion of a 234 unit present motel (or hotel) called The Waystation.   As of December 31, 1986, the first and second phases of the conversion had been completed and 68 units dedicated for time share use.   In time, subdivider intends to add the remaining 88 units for time share use.   As of May 31, 1986, approximately 1,838 annual and 345 biannual vacation interests had been sold.   As of approximately May 31, 1986, the Homeowners Association operating account contained approximately $32.12.   An account designated “Special Account” into which monies were deposited which were received to fund the general or contingency account contained approximately $344.06.

X

Without detailing the disputes between the Department's auditor and the consulting appraiser who testified for the subdivider, the amounts referred to hereinabove as amounts owed by the subdivider are based on the testimony of the Department's auditor.   His testimony was found more persuasive than that of the consulting appraiser retained by the subdivider.

DETERMINATION OF ISSUES

I

The first of two related legal issues raised by respondent subdivider was whether subdivider had any responsibility to make payments into the reserve account because of the existence of a subsidy agreement between subdivider and The Tahoe Beach and Ski Club Owners Association (hereinafter “the Association”).   It is determined that subdivider, pursuant to the terms of the Declaration of Vacation Plan, Subsidy Agreement, and the Public Report, was obligated to make payments into the reserve account in the manner described hereinafter.

In Article V of the Declaration, subdivider agrees to pay to the Association the basic assessment, the tax assessment, the reconstruction assessment, and all special assessments.   The basic assessment is defined to include sufficient amounts to provide for reserves to insure payment when due of the cost of capital expenditures relating to the repair or restoration of the units, the common areas, the repair or replacement of common furnishings, and for such other purposes as are required by good business practice.

The Declaration does provide that the subdivider may, in lieu of payment of the basic assessment, enter into a bonded subsidy agreement with the Association by which the developer shall agree “to pay to the Association the difference between all actual costs, including real estate taxes, incurred by the Association, and the Basic Assessments and pro rata real estate taxes paid or payable by Owner's, provided, however, that any such bonded subsidy agreement shall be in a form acceptable to the California Department of Real Estate and shall be secured as required pursuant to Section 2812.4 of the Regulations of the California Department of Real Estate.”

Subdivider and the Association did enter into such a subsidy agreement which agreement was approved by the Department.   On page 4, section 4 of the Subsidy Agreement, is the following language:

“It is the intent of Developer and the Association that sufficient monies be collected on an annual basis to fund the Reserve Expenses with respect to all items located within the Property which are or may become dedicated to use in connection with the Vacation Plan program.   Thus, to the extent that the amounts payable by Owners through Assessments are insufficient to fund the total amount of Reserve Expenses incurred in any given year, Developer agrees to pay to the Association, within ten (10) days following receipt by Developer of a statement therefor, following the end of each Fiscal Year, an amount equal to the difference between (i) ‘Actual Reserve Expenses' (as the quoted term is hereinafter defined) for such Fiscal Year and (ii) the amount of monies payable to the Association in such Fiscal Year by Owners other than Developer and allocated to Reserve Expenses pursuant to the Declaration.”

Within the same section of the Subsidy Agreement, the term “Actual Reserve Expenses” is defined to mean that portion of the reserve expenses set forth in the Association's budget for the applicable fiscal year attributable to those portions of the property actually used by Owners in connection with the Vacation Plan program.

Section 2812.4 of Title 10 of the California Administrative Code relates to subsidization by the subdivider (or sponsor) and provides that the Department will ordinarily not approve a subsidy program unless provisions are made for the accumulation of reserves for replacement and major maintenance of the property comprising the project in accordance with accepted property management practices and for the transfer of the reserve fund to the Association on termination of the program.

Page 11 of the Public Report states that the subdivider (or sponsor) has submitted a budget for the maintenance and operation of the common areas and for long-term reserves.   It also states that assessments include reserves which are not to be used for operating expenses but which are to be used for future capital expenditures relating to the repair and restoration of the project buildings and other project common areas as well as repair and restoration to the project common furnishings.   On page 12 of the Public Report in a discussion of the payment of subsidies by the subdivider, the report states that subsidy payments by the subdivider, payable monthly to the Association, are to cover the difference between the actual costs incurred by the Association in operating the project and the basic assessments, less reserve expenses, payable by other owners.

In summary, each of the provisions recited above is consistent with the Department's position that subdivider is obligated to fund, on an annual basis, the difference between amounts budgeted for the reserve account and amounts received from other owners allocable to the reserve account, less an amount equal to actual reserve expenses expended during the applicable fiscal year.   Subdivider's contention, that it need only pay actual reserve account expenditures for which inadequate funds were received from other owners, would defeat the goal of building a reserve account to cover future anticipated expenses.   And, unless reserve expenses were less than the amounts collected from other owners during the time that the subsidy agreement were in effect, there would be no reserve account funds to “transfer” to the Association upon termination of the subsidy agreement.

II

Respondent subdivider's second, related contention is that it had no obligation, because of the subsidy agreement, to make any payments into the general, or contingency, fund.   As of the date of the administrative hearing, subdivider had paid no money into the fund.

Section 5.10 of the Declaration of Vacation Plan, page 45, provides that each owner, other than the developer, shall be required to pay an amount equal to $75 which amount shall be retained by the Association in the general fund account and used to pay any expenses other than capital expenditures which may arise in connection with the operation of the project and for which the basic assessment and any special assessment proves to be inadequate.   The $75, according to the Declaration, shall be paid by each owner other than the developer upon execution of a purchase agreement.

Within the same section of the Declaration is the following language:

“For so long as the Subsidy Agreement is in effect, Developer (1) shall not be required to pay any amount as and for the General Fund, (2) is obligated to pay the difference between costs of operation and assessments collected from purchaser and (3) may use the proceeds, or any part thereof, to reduce Developer's obligation under the Subsidy Agreement only after making a contribution to said fund for each Vacation Plan it owns.   Upon termination of the term of the Subsidy Agreement, Developer shall pay to the Association an amount equal to $75.00 multiplied by the current number of Developer Vacation Plans.   The basic assessment against all Owners, excluding Developer, for so long as the Subsidy Agreement is in effect shall include an amount sufficient to maintain the balance in said General Fund Account at an amount equal to $75.00 ․ multiplied by the number of Vacation Plans conveyed to Owners other than Declarant.”  (emphasis added)

Therefore, pursuant to the terms of the Declaration, subdivider is prohibited from using the proceeds of the general fund to reduce its obligation to pay operating costs which exceed the basic assessments received from the other owners unless it has made a contribution to the general fund for each Vacation Plan it owns.   Respondent subdivider made no such contribution to the general fund but used the approximately $122,000 collected from other owners for deposit into the general fund to defray operating expenses that would otherwise have been paid by subdivider.

Subdivider points out that within the same section of the Declaration of Vacation Plan is a list of expenses which may be paid by the Association from the general fund which list includes any expenses which may arise in connection with the project and any delinquent assessments from any owner.   However, this language relates to amounts paid by subdivider and the other owners upon termination of the subsidy agreement.   And, more important, even if not so construed, the prohibition against the use of the general fund by the subdivider until subdivider has contributed to the general fund would still be applicable.

III

Respondent subdivider's failure to make payments into the reserve account and the general fund in the amounts set forth hereinabove establishes that respondent subdivider has not carried out representations and assurances given by respondent subdivider upon which the Commissioner of the Department of Real Estate relied in issuing respondent subdivider a Public Report.   Such assurances were contained in the Declaration of Vacation Plan and Subsidy Agreement submitted by respondent subdivider to the Commissioner which formed the basis of assurances to respective purchasers relating to the maintenance of the reserve and general funds contained in the Public Report.   Cause has therefore been established, pursuant to Business and Professions Code section 11019, for the Commissioner to order the respondent subdivider to desist and refrain from such violations and to order the cessation of the sale or lease of interest in the subdivision.

ORDER

The Order to Desist and Refrain is affirmed.   Respondent subdivider is ordered to desist and refrain from selling, exchanging or leasing, offering for sale, exchange, or lease, soliciting purchasers or lessees, or negotiating for sale, exchange or lease, of lots or parcels in the Subdivision, until such time as subdivider has paid the Association in full the amounts owed by subdivider to the reserve account and has replaced funds received from the owners allocable to the general fund.   As the evidence in this proceeding only established the amounts payable by respondent's subdivider as of December 31, 1985, the Department shall determine the amounts presently due from respondent subdivider and payable before the Order to Desist and Refrain is vacated.

Dated:  March 13, 1987

/s/ Karl S. Engeman

KARL S. ENGEMAN

Administrative Law Judge

Office of Administrative Hearings

FOOTNOTES

1.   In pertinent part, paragraph 5.10 provides that these funds:  “․ shall be retained by the Association in the General Fund Account and used to pay any expenses (other than capital expenditures) which may arise in connection with the operation of the Vacation Plan project and for which the Basic Assessment and any Special Assessment prove to be inadequate.   Said sum of $75.00 shall be paid by each Owner other than Developer upon execution of the Purchase Agreement.   For so long as the Subsidy Agreement is in effect, Developer (1) shall not be required to pay any amount as and for the General Fund, (2) is obligated to pay the difference between costs of operation and assessments collected from purchaser and (3) may use the proceeds, or any part thereof, to reduce Developer's obligation under the Subsidy Agreement only after making a contribution to said fund for each Vacation Plan it owns.   Upon termination of the term of the Subsidy Agreement, Developer shall pay to the Association an amount equal to $75.00 multiplied by the current number of Developer Vacation Plans.   The Basic Assessment against all Owners, excluding Developer, for so long as the Subsidy Agreement is in effect shall include an amount sufficient to maintain the balance in said General Fund Account at an amount equal to $75.00 (or such greater sum which the Association shall from time to time determine) multiplied by the number of Vacation Plans conveyed to Owners other than Declarant.   Upon the termination of the Subsidy Agreement, the Basic Assessment against all Owners, including Developer shall include an amount sufficient to maintain the balance in the General Fund Account at an amount equal to $75.00 ․ multiplied by 7956.   The amount paid shall be retained by the Association in the General Fund and may be used by the Association (a) to pay any expenses which may arise in connection with the Vacation Plan project ․ (b) to pay the sum of any Assessment(s) or other amount(s) due from any Owner and which is then delinquent and apply the same in payment of any other sum(s) due and payable by the Association hereunder.”

2.   The administrative law judge's decision and findings of fact are attached as an Appendix to this opinion.

3.   At the administrative hearing, the DRE's accountant testified that the Reserve Account contained $32.12 and, as of May 27, 1986, the General Fund contained $344.06.

4.   The court's minute order, dated October 8, 1987, explained its ruling as follows:  “The administrative record is received into evidence by reference as petitioner's exhibit 1.  [¶] Exercising its independent judgment in considering the evidence, the court determines that the weight of the evidence supports the findings of the California Real Estate Commissioner.  [¶] Reserve Account—The court agrees with the interpretations of the various provisions discussed in the Administrative Law Judge's report which finds that the subdivider is obligated to fund on an annual basis, the difference between amounts budgeted for the reserve account and amounts received from other owners allocable to the reserve account;  less an amount equal to actual reserve expenses expended during the applicable fiscal year.  [¶] General or Contingency Fund—Pursuant to the terms of the Declaration, subdivider is prohibited from using the proceeds of the general fund to reduce its obligations to pay operating costs which exceed the basic assessments received from other owners unless it has made a contribution to the general fund for each vacation plan it owns as pointed out by the Administrative Law Judge.”

5.   We note that the Subsidy Agreement uses the phrase “payable to the Association ․ by Time–Share Owners other than [appellant].”  (Emphasis added.)   The Declaration uses slightly different terminology.   In paragraph 5.10, it requires appellant to pay the difference between costs of operation and “assessments collected from purchaser․”  (Emphasis added.)   To the extent that this inconsistency can affect a particular outcome, the ambiguity should work against appellant as it drafted these documents.  (Civ. Code, § 1654.)

6.   To reiterate, the basic assessment is determined by, among other things, the amount of “basic expenses” required “to operate, maintain, improve and repair all Units on the Property, the Common Areas, and the Common Furnishings” and for administration of the vacation plan project.

7.   While the language of the Declaration speaks of the authority of the Association to expend certain funds, in the early stages of time-share projects, the developer (here, appellant) is the Association and retains control of its Board of Directors.

GOERTZEN, Associate Justice.

McCLOSKY, Acting P.J., and GEORGE, J., concur.

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