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Sartin v. Chula Vista Inc.

United States District Court, E.D. Wisconsin

March 22, 2019

JOSEPH SARTIN, et al., Plaintiffs,
v.
CHULA VISTA, INC., et al., Defendants.

          ORDER DENYING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

          WILLIAM E. DUFFIN U.S. MAGISTRATE JUDGE

         1. Background

         Chula Vista, Inc. operates the Chula Vista Resort and Waterpark in the Wisconsin Dells. The plaintiffs own condominium units at the resort, which they purchased with the expectation that they could earn income by renting the condominiums to resort visitors. The plaintiffs entered into a rental management agreement with CVR Management, LLC, an affiliate of Chula Vista, Inc., whereby CVR would manage the units in exchange for 40 percent of the rental income.

         Subsequent to the plaintiffs' purchasing their condominiums, in 2009 Chula Vista created a program called “The Club” whereby members of the public, in exchange for a $10, 000 initiation fee and annual dues, would receive a variety of benefits, including up to 80 percent off condominium rentals. The plaintiffs allege they were injured by this program because Chula Vista alone retained the fees from The Club. As a result, when the plaintiffs rented their unit to a club member, they received 60 percent of a deeply discounted rate. This not only diminished their income from the rental of their condominium units but decreased the resale value of their units, which is tied to the unit's income potential.

         The plaintiffs retained counsel, who began communicating with Chula Vista in anticipation of litigation. In a June 11, 2018 certified letter to the defendants, plaintiffs' counsel alleged that

through its use of The Club at Chula Vista Resorts, CVR Management and its members unlawfully converted the Chula Vista Condominium units for their own financial gain, by renting out condominium units at discounted rates without sharing Club fees with the owners. In doing so, CVR Management and its members acted in bad faith and did not use best efforts to maximize the owners' rental income, in violation of the Rental Management Agreement.

(ECF No. 4-3 at 1.)

         A few months later, in October of 2018, Chula Vista sent all condominium owners a new rental management agreement that would take effect in November of 2018. The new agreement, which is single-spaced and stretches into 20 pages, included the following new provision:

(r) Club. Owner is aware that the manner in which guests are procured for nightly stays has changed dramatically from the time the Unit was created, with travel agents charging straight commissions, conference planners and sports promoters are filling rooms with different systems, online travel agencies are charging pre-deducts, online travel agencies, affiliated and unaffiliated home rental booking sites have all expanded rapidly, and new programs with differing commission rates and methods are constantly being introduced. Owner is aware that Operator has formed a private loyalty club, ("Club") intended to operate similarly to a branded hotel loyalty club, in order to drive repeat business to the Resort and to the rental management program, which has been operating for years, and Owner has received Net Room Revenue for years, from stays by Club members. The purpose of the Club is to produce more nightly stays, including more nightly stays in the Unit. To the extent that the Owner was a party to a prior Rental Management Agreement, Owner acknowledges that Owner has been aware of, and consented to, the rental of the Unit through the Club program, at Club rates, since the creation of the Club, and that any charges paid by Club members to join the Club were in the nature of commissions, and not included in Net Room Revenue, or for discounts at other Hotels, Resorts, Resort amenities, including restaurants, waterparks, golf, shopping, impulse purchases, etc. Owner acknowledges that this statement is intended to clarify the intent of prior Rental Management Agreements, as it relates to the Club program, to classify these membership fees as commissions and discounts for other Hotels, Resorts, Resort facilities, and not Net Room Revenue.

(ECF No. 4-4 at 9.) In effect, as a condition of having CVR continue to manage their units, the defendants required all condominium owners to acknowledge that they had consented to The Club, the resulting diminished rental income, and to Chula Vista keeping all of the revenue from The Club.

         The plaintiffs refused to sign the new management agreement and filed this action as a proposed class action on behalf of all Chula Vista condominium owners. They seek a preliminary injunction enjoining the implementation of the 2018 management agreement. The plaintiffs further “request an order rescinding all 2018 RMAs that have already been signed by condominium owners.” (ECF No. 4 at 11.) Alternatively, the plaintiffs ask the court to strike or void the waivers quoted above. (ECF No. 4 at 11.)

         The defendants responded to the plaintiffs' motion for a preliminary injunction (ECF No. 9) and the plaintiffs replied (ECF No. 28). The defendants seek to file a sur-reply. (ECF No. 34.) The court grants that motion. The court received oral argument from the parties at a telephonic hearing on March 14, 2019. (ECF No. 35.)

         Subsequent to the plaintiffs filing this action the defendants sent an amended 2018 rental management agreement to all condominium owners except the five plaintiffs. (ECF No. 28 at 3.) This amended rental management agreement deletes the following provision, which is included in the language quoted above:

To the extent that the Owner was a party to a prior Rental Management Agreement, Owner acknowledges that Owner has been aware of, and consented to, the rental of the Unit through the Club program, at Club rates, since the creation of the Club, and that any charges paid by Club members to join the Club were in the nature of commissions, and not included in Net Room Revenue, or for discounts at other Hotels, ...

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