DC4MS

Bankruptcy Trouble in Paradise

By MICHAEL CORKERY and AVERY JOHNSON
July 29, 2006

Bankruptcy Trouble in Paradise - WSJ.com

A bankruptcy-law filing by companies started by the pioneer of luxury "destination clubs," which sell members an array of annual vacation choices at exclusive hideaways, is sending shudders through the largely unregulated business.

The troubles at Tanner & Haley Resorts, based in Westport, Conn., reveal potential pitfalls for consumers of these high-end hybrids between time-shares and country clubs that have proliferated in recent years.

The companies filed for Chapter 11 protection from creditors early in the past week, leaving the refundable membership deposits of its 874 members in doubt. Tanner & Haley founder Rob McGrath, a former Wall Street securities trader and onetime professional skier, launched the high-end resort niche in 1998. Now Tanner & Haley says parts of its business model are problematic.

It remains in operation and says it intends "to continue to meet substantially all travel commitments previously made." But it has stopped returning members' deposits, at least until its bankruptcy proceeding is resolved. Each member paid deposits totaling hundreds of thousands of dollars, annual fees that can total tens of thousands of dollars and daily usage fees that top $100.

The companies' basic problem: It promised that members could stay at any of its destinations at any time. But if the houses and apartments it owned at certain locales were already booked, Tanner & Haley had to pay dearly to lease nearby homes. The companies started selling members the use of jets and high-end cars and also bought undeveloped land on which to build houses.

Destination clubs are different from time-shares and more akin to country-club memberships. Time-share businesses essentially sell chunks of vacation time each year in a particular resort or set of resorts. A related type of business sells fractional interests in properties. Members of destination clubs in most cases don't get an ownership stake and have a wider and ever-changing variety of upscale homes in popular destinations like Cabo San Lucas, Mexico; Aspen, Colo., and the Caribbean.

According to a document in its bankruptcy-law filling, "On a typical vacation or retreat, a member and his or her extended family might take a private jet to an island in the Caribbean, get picked up in a limousine at the airport and driven to a four-bedroom, $4.75 million beach house with a fully stocked refrigerator, three bottles of fine wine and fresh-cut flowers served by a butler and a chef, and given access to a 40-foot yacht."

Tanner & Haley's Web site touts the pedigree of its members in order to attract new ones. It says its members include "a large number of CEOs and presidents of Fortune 500 companies as well as the managing directors of numerous real-estate opportunity funds, venture-capital firms, and money-management institutions. As a result, new members can rest assured that our clubs have been scrutinized time and again for their financial stability and experience delivery."

The bankruptcy-law filing says "the debtors' books and records reflect aggregate member deposit and other liabilities of $308 million."

Growth in the business has been brisk, prompting talk of consolidation and confusing prospective buyers with a proliferation of plans at widely differing prices. The industry leader is now Denver-based Exclusive Resorts LLC, which is majority-owned by America Online co-founder Steve Case's Revolution LLC and boasts more than 2,000 members. The industry's next-biggest company is Tanner & Haley, which has battled in and out of court with Exclusive Resorts, with each accusing the other of being a copycat. Other major players include Private Escapes LLC, with about 268 members; Quintess LLC, with 117 members; Dream Catcher Retreats, with 105 members, and Ultimate Resort LLC, with 80 members. The Helium Report, a Web site that reviews luxury services, estimates that 24 clubs now exist, with about 600 homes valued at an average of $3 million each.

Tanner & Haley's problems underline the industry's lack of regulation. After problems arose over aggressive marketing by time-share operators several years ago, states took steps to regulate them. Destination clubs are relatively new and haven't attracted much scrutiny. As a result, their business practices aren't always transparent.

"We expect one outcome of this reorganization process to be enhanced financial transparency and corporate governance, not just at Tanner & Haley but industrywide," said Holly Etlin, Tanner's recently named chief restructuring officer, after fielding questions from angry members during a conference call Thursday.

Legal experts disagree whether destination clubs should be regulated like a time-share, which would allow members to see more information about the companies' finances. The time-share industry argues that they should be. "The nature of these clubs allows them to buy and sell properties without [members'] consent," said lawyer Robert Webb, treasurer of the American Resort Development Association, which, he says, predominantly represents the time-share industry. "They are engaging in luxury-home arbitrage with other people's money."

The destination-club industry is in overdrive trying to convince potential investors that it is a safe bet. Earlier this summer, 12 founding members created the Destination Club Association to come up with a list of "best practices" for the industry. Private Escapes Chief Executive Rich Keith fired off a message to its members in anticipation of the Tanner & Haley filing, contending that "we have shaped Private Escapes to be radically different from them."

Tanner & Haley members are nervous as August vacation time approaches. Jill Fisher Cope, a 45-year-old lawyer from Florida, is scheduled to leave for one of the Tanner & Haley properties on Monday. "We thought the club owned all its properties, but now it comes out that it's leasing a lot of them," Ms. Cope said. "If I were leasing a home out to a company in bankruptcy, I'm not sure if I would want their members staying there."

Tanner & Haley companies own 67 homes around the world, in addition to eight undeveloped lots. The companies had an operating loss of $64 million last year, according to a bankruptcy-law filing.

--Ron Lieber contributed to this article.