Lake San Marcos Bankruptcy Update

As a resident of Lake San Marcos and an avid bass fisherman on the lake, I often have a first hand view of the progress going on around the lake.  I must say that I am constantly impressed with the improvements like the new dock above where I keep my boat.  I believe that Lake San Marcos and the surrounding real estate are in for some very positive growth.  Please read the bankruptcy update by Wayne Widener as published in the Lake San Marcos Community Association Newsletter, Quail Call, December 2013 edition.

By Wayne Widener
Near the end of this recap, I have some good news to share with you.

Lake San Marcos is emerging from a dark chapter in its history. About nine years ago Matt Dinofia bought the assets of CDC, which owned the recreational facilities and the lake. Matt was a real estate speculator who liked to buy prop-erties, and either flip them quickly, or operate them at minimal expense.

Dinofia found he was unable to flip the properties here at Lake San Marcos, and a long period of physical deterioration began. Requests to fix the sinking docks, the rotting Pavilion, the cracked tennis courts and the scuzzy pools brought little action. Numerous meetings and discus-sions brought few positive results. The facilities and the lake continued to get worse and worse.
John Andrew, the Community Associa-tion President at that time, said, “If he won’t work with us, let’s go after him. It’s our job to try and protect the commu-nity.” With the support of the board, the LSMCA hired a noted local attorney, Ken Lounsbery, to file a lawsuit in state court alleging CDC was in breach of con-tract for its failure to maintain the proper-ty included in the Lake and Lodge Leases.

Knowing that he could not win such a lawsuit, and facing many other problems, Dinofia filed for bankruptcy, using the federal bankruptcy laws to shield him from the Community Association law-suit. At that point the Community Asso-ciation hired another attorney, a specialist in Federal Bankruptcy law, Judy De-scalso, who began representing us in ap-pearances before the federal bankruptcy court judge in San Diego.

CDC filed bankruptcy on August 26, 2010. So we are now entering our fourth year of attending hearings, and filing mo-tions on behalf of the community as the bankruptcy process slowly winds its way through the system. There have been many hearings and many trips to San Di-ego. But our attorneys didn’t go alone. We have always had lake residents in attendance at every hearing involving CDC. Eli Whitney, John Andrew, Jim Murphy, Bob Kreis, Warren Lydecker, Rich La Farge, Lee Herzog, Jim Broach, Harry Bubnack, Don and Carol Alexan-der, and many others have insured that when the judge looked out over the heads of the lawyers…there were always con-cerned citizens in attendance for her to see.

What was revealed by the CDC bank-ruptcy filings was a record of complete incompetence in the management of the CDC assets. CDC has gotten itself into a position, under Dinofia’s ownership, where at one court hearing CDC reported it had less than $1,000 remaining in its bank account. I won’t speculate how, with $800,000 a year in payments from the residents, and few of the incoming bills being paid, why there was less than $1,000 left in the till. Where all the mon-ey went has never been determined, but it is clear it wasn’t being spent to clean the lake or to maintain the recreational facilities.

As an example of why it is difficult to determine where the money went, I earli-er attended a deposition in Los Angeles where Dinofia was required to testify under oath to questioning from lawyers. When asked where a $2 million dollar payment he had received was used, he responded, under oath, he “couldn’t re-member what he had done with that two million.”
To try and get the judge to order Dinofia to perform maintenance on the properties while the bankruptcy proceedings were going on, the Community Association hired a Consulting Engineer to produce a series of reports giving expert testimony to the court that the properties were dete-riorating due to lack of maintenance. To counter these reports, Dinofia would wait until a few days before the next court hearing, and would then nail a few boards on a dock, or putty over and paint rotting wood, and then present “evidence” in court the maintenance problems were being taken care of.

As you can imagine, all this sparring in Federal Court was expensive. At one point the Community Association legal bills were getting to the point where they appeared unsustainable. The President at that time (and currently) was Eli Whit-ney. In an act of bold leadership he said to “continue on the fight….we’ll pay for it somehow.”

When it appeared the Dinofia lawyers were going to be able to stall the court proceedings indefinitely, the Commu-nity Association sought other allies to find a way to bring Dinofia to task. At the same time Dinofia had been thumbing his nose at the residents and many of his creditors, he had also been thumbing his nose at the Re-gional Water Board over requests to do testing and begin cleanup of Lake San Marcos.

There was a chink in his armor of us-ing the bankruptcy as a shield against all claims. That flaw was that the Re-gional Water Board has police powers and, under law, he could not use bankruptcy to avoid paying for ac-tions that they officially ordered.

At a public hearing, supported by a busload of residents from Lake San Mar-cos who testified in support of forcing action on the lake, the Water Board is-sued an “Investigative Order” to force Dinofia to pay for an estimated $400,000 in lake testing. He couldn’t dodge this financial bullet, and it struck him be-tween the eyes. The Water Board’s order was a key factor in Dinofia deciding to “leave town” and sell his stock in CDC to a new owner.

So, after years of effort and expenses that ran into six figures (some of which we still owe), we were instrumental in get-ting CDC out of the hands of Matt Dino-fia, and into the hands of new management.

This was an epic battle that the commu-nity had to win. The condition of the facilities, the docks, and the lakes had deteriorated to the point many were con-sidering stopping payments on their Lake and Lodge leases, the financial support for our community facilities and the lake. The “Lake and Lodge Financial Model” of paying for our recreation facilities and lake was getting shaky after 40 years. Many residents were simply not paying, and others were failing to renew their leases when they expired.

If this “non-payment movement” had become more widespread it could have led to a death spiral for the community, with CDC being dissolved, and its assets sold off on the courthouse steps. In that event, it is likely that the community fa-cilities would have ceased to exist. You would probably find condos being built here on the site of the Pavilion, and the lake owned by the state and open for dai-ly use by the public. The judge referred to this scenario as “mutually assured de-struction” for both CDC and the community.

At this point new ownership took over CDC. Pino Vitti, the new owner, is the opposite of Matt Dinofia. He is con-cerned about the residents, sees them as his customers, and wants to see the lake cleaned up and the facilities remodeled. However, he inherited a rat’s nest of problems. Overdue tax liens, missing records, unhappy customers, environmental problems, legal problems, financial prob-lems, and regulatory problems. I did not believe this many problems could be overcome before time ran out. He had enormous courage to buy into this mess. He has been working on multiple problems during this last year, slowly solving them one by one. However, as recently as a month ago I was still concerned he might not be able to solve them quickly enough, and CDC might still fail under the weight of its problems.

But, I am happy to report tonight that the last of those who were blocking CDC from getting a reorganization plan approved have compromised and agreed to not block him any further. This was a big big win for CDC and also for Lake San Marcos. It will pave the way for CDC moving out of bankruptcy next year.

The Community Association has been working closely with the new ownership of CDC to achieve this win. We have filed motions of support in federal bankruptcy court, had meetings with the Water Board, the City of San Marcos, and Vallecitos Water District, written letters to the Telesis Credit Union, filed freedom of information act requests, challenged obstructionism by 3rd parties in letters to the Water Board, and appeared on behalf of CDC at mediation meetings. We were a friend to the new owners of CDC when they didn’t have many friends. We think they appreciate the support we gave them as they strug-gled through a list of challenging problems in their first year of ownership.

I believe in the next 90 days CDC will have a plan approved by the court and the creditors, and Pino Vitti will be able to take full control of the finances and direction of his company. Up until now he has been handcuffed by the court proceedings, and could not do many of the things he wanted to do. We believe that will mean CDC will be able to speed up the process of re-placing the decaying docks, finish testing and begin remediation efforts to clean up the lake, and begin the process of remodel-ing and/or replacing our very old recreational facilities. By the end of 2014 we should see significant improvements and changes to the facilities.

CDC has uncovered old insurance policies from the 1960s and 1970s that covered lake pollution, and once the fix for the lake is agreed upon, much if not all, of CDC’s share of the cost of cleanup may be paid by the insurance carriers.

So, the bankruptcy phase may be at an end, and the revitalization phase of Lake San Marcos may soon begin. Our community and our facilities will be changing. Some of the changes we will like, and some we won’t like, but com-pared to the possible loss the lake and all of our community facilities, any changes we undergo will be better than the alternatives we faced only a year ago.

The community still has problems to face. As I mentioned before, the “Lake Lodge Lease Financial Concept” is now almost 40 years old, but it is working less well as time goes on. Fewer and fewer people are paying to keep up the facilities and the lake. Eventually we must find a way to have more people share in the expenses of maintaining our com-munity, or the expenses for those who do pay will have to go up to compensate for those who do not pay.

One solution to the problem may be to create a Community Facilities District (CFD) by a vote of the residents. The Facilities District would receive income from the property taxes paid by ALL RESIDENTS in Lake San Marcos, and in return they could use the revenue to contract with CDC for the use of the lake and the facilities. All Lake and Lodge leases would then be can-celled. For those who pay a lease now, you would be trading a lease payment for an increase in your property tax bill. It could be the same or even less money than what you are paying now, and it could be tax deductible. A CFD might be a way to restructure the financing method which supports our community facilities and the lake. The Community Association will be looking at the idea in the coming year.

So, in conclusion: Over the last four years the Community Association helped force out the old owner, and helped support the new owner in their first turbulent year of ownership. Because of those actions by the Community Association, and the good luck of getting Pino Vitti for an investor, we think the future for the Lake San Marcos community looks much brighter for 2014.”

Find out more about the “Quail Call” or get involved in the “Lake San Marcos Community Association.”

Want to look at property in Lake San Marcos, just contact me, Gary Harmon.