Court dismisses majority of Mystic Lands claims

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Court dismisses majority of Mystic Lands claims

This story was updated Jan. 22, 2020.

Mystic Lands property owners may have prevailed in court over one issue — a paving contractual dispute — but the majority of the other claims made against developer Ami Shinitzky for fraud and financial wrongdoing were previously dismissed.

A Swain County jury sat patiently listening for seven weeks as a room full of lawyers introduced over 400 exhibits, examined and cross examined numerous witnesses and pored over thousands of emails trying to get to the bottom of a dispute between a developer and property owners.

It was anyone’s guess how the jury would rule. Would they sympathize more with Shinitzky — an elderly, wealthy developer trying to keep control over his multi-million dollar investment property after struggling to get through the recession — or would they side with a group of “outsiders” who spent big money to own pristine land right on the Nantahala River?

After deliberating for about three days, the jury ruled in the plaintiffs’ favor on every issue — and the issues they were presented with weren’t simple.

“The jury got it right,” said Adam Peoples, an Asheville lawyer who represented Mystic Lands homeowner Fred Yates. “This is a victory across the board for the homeowners.”

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Shinitzky’s attorney Craig Justus said he appreciated the jury’s civic commitment to this issue, but added that a motion to appeal could be filed.

“Although we are disappointed with the verdict, we believe that there were legal issues surrounding the jury instructions and what questions that they were asked to answer,” he said in an emailed statement. “Ultimately, as to my client’s belief that the Mystic Lands developer had been harmed by the actions of the plaintiffs, the jury did not agree. Appealing these legal issues is one option that my client is considering; all options are being weighed.”

While the issues between Shinitzky and the property owners are complex and have a lot of moving parts at the moment, plaintiffs were seeking to force the developer to meet his contractual obligations with this particular lawsuit. The individual plaintiffs also had to defend themselves against Shinitzky’s countersuit for defamation. His defamation suit stems from the property owners accusing Shinitzky of misappropriating Mystic Lands Property Owners’ Association funds.

The verdict

The plaintiffs believe Shinitzky misappropriated the POA funds for his own personal development business and made statements to that effect in the last several years, but that’s not the allegation the jury was specifically tasked with deciding.

Since Shinitzky was countersuing for defamation, his legal team had the burden of proving the plaintiffs defamed him by making unfair or deceptive statements that were false and that financially harmed his business.

The jury found that the plaintiffs did not defame Shinitzky, but because of how the question was posed and the multi-part test to prove defamation, it’s unknown whether the jury found the statements to be true or if the jury determined the statements were false but that it didn’t rise to the level of harming his business.

“The jury told us that we didn’t defame Shinitzky by accusing him of misappropriation, but they were not specifically asked whether the allegations of misappropriation were true,” Peoples said.

Shinitzky also accused the plaintiffs of unfair and deceptive trade practices and sought $1.2 million in damages claiming the defamatory statements against him kept him from selling Mystic Lands lots. The jury did not award him any damages either.

The jury also found that Shinitzky breached his contract with plaintiff and homeowner Tom Schreiber by not paving the road up the ridge to his home. Schreiber and other plaintiffs didn’t seek any damages in this case but instead asked for “specific performance,” meaning the court can order Shinitzky to complete the road projects. Those details have yet to be laid out by the judge.

“The next step is going to be the enforcement of the judgment and working out the details for paving of the road — hopefully that goes smoothly,” Peoples said.

On the stand

The trial began in a Bryson City courtroom Nov. 6, took a long recess for the Christmas holiday, resumed Jan. 3 and finally wrapped up Jan. 9. It had been a grueling process for the jurors — you could see their patience wearing thin.

“The length of this trial was highly unusual for Bryson City,” Peoples said.

It would have dragged on for another week or two had the plaintiffs’ lawyers not changed their minds about introducing more evidence or witnesses. The 400 exhibits belonged solely to Shinitzky’s defense attorneys who began laying out their case Nov. 4 and didn’t rest until Jan. 4.

“We talked about it and decided this jury has had enough,” Peoples said. “Craig Justus (Shinitzky’s lawyer) told the judge he thought it would take two to three weeks to present his case, but six weeks later he was still putting up more evidence. Every week they went over, we cut another witness from our case. We (the homeowners’ attorneys) felt like the jury had seen enough evidence and we didn’t need to go any further.”

During his time on the stand, Shinitzky made it pretty clear he believes Greg Diehl was the main source of contention at Mystic Lands. Diehl was hired in 2012 to be the director of the POA, but he was also working for Shinitzky’s development at the same time and received commissions for helping sell lots at Mystic Lands.

While plaintiffs painted Diehl as the “whistleblower” for alerting property owners that Shinitzky was using POA funds for development purposes, Shinitzky and his defense painted Diehl as the instigator of the entire mess.

Shinitzky testified that Diehl was the one either making financial mistakes or misallocating POA funds. He said he wasn’t aware of the misappropriation until 2014 at which time the board was planning not to renew Diehl’s contract as director.

Shinitzky said Diehl was not a whistleblower — he was only trying to save his job by telling property owners Shinitzky was misappropriating funds from the POA.

However, the jury never got to hear from Diehl personally as the defense did not call him as a witness during the trial. Shinitzky’s lawyers did work to discredit Diehl by showing the jurors emails between him and property owners plotting against Shinitzky, including an email Diehl sent to The Smoky Mountain News under the fake name Stan Roberts. Roberts claimed to be a Mystic Lands property owner upset about Shinitzky clear cutting trees along the river.

Much of the last few days of the trial were spent discussing Mystic Lands finances and the events leading up to Yates and other plaintiffs having cause to be concerned with how money was being spent.

Alex Cury, an attorney for one of the plaintiffs, questioned Shinitzky about many of his financial practices when managing the POA account. During one of his depositions, he said it was common for him to take the QuickBooks file home for a few days and make changes in the system before payroll was due.

Cury also pointed out that several employees had access to the QuickBooks files and none of them used a specific password to get into the file, which means it’s impossible to know who made what changes.

As Cury tried to show that Shinitzky used POA funds to clear his lots for a sale event in 2013, Shinitzky placed the blame on Diehl for hiring a company to spread gravel on the driveways and paying the bill from the POA account.

When Cury asked what account that bill was paid out of — the POA or developer account — Shinitzky said he had a large credit in the POA account at the time.

The conflict between property owners and Shinitzky came to a head in the summer of 2014 when Shinitzky told the property owners they owed him $280,000. In addition to the suspicions of misappropriations, property owners were already unhappy about their POA dues increasing every year. Property owner dues went from $700 a year in 2005 to $2,200 a year by 2015 — and they still didn’t have all the amenities they were promised. With all that money going into the POA account, property owners couldn’t understand how they owed the developer $280,000.

At this point, Diehl’s claims about Shinitzky misusing their annual dues for development purposes seemed to be the only answer.

Yates sent multiple emails to Shinitzky asking for an explanation to the financial questions, and though Shinitzky at first offered to go over the books with him and other property owners in detail, he wouldn’t hand over the books to them for review.

Shinitzky said during his testimony that he felt Diehl and the group of property owners were conspiring against him and building a case to get him removed as declarant, which is why he wouldn’t hand over the books to anyone other than financial experts.

“Why would I let him look at the developer’s books if he’s trying to undo me?” he said on the stand. “He (Yates) doesn’t know the difference between a balance sheet and a profit and loss statement — he’s not an expert.”

Shinitzky did agree to an independent audit of the books by a professional CPA and her report showed no proof of misappropriation. The plaintiffs’ lawyers claimed the investigation done was not independent and that the auditor did her report based solely on Shinitzky’s “curated” records.

Again, many allegations were thrown around during the trial, but the jury was reminded that they were to focus on the issue at hand — did Shinitzky breach a contract with the plaintiffs and did the plaintiffs defame Shinitzky with their claims of misappropriations?

Far from over

While this verdict was a victory for the group of property owners in Mystic Lands, it’s definitely not the last time they will be in a courtroom facing Shinitzky.

There is still an appeal pending in regard to Shinitzky’s current powers as declarant of Mystic Lands, which are clearly laid out in the covenant that he wrote for the POA.

“Shinitzky has control over everything — he’s president of the POA, he holds enough votes to overcome the votes of the homeowners, and he can appoint and remove members of the board,” People said. “There’s no checks and balances to ensure he’s looking out for the property owners’ best interest.”

The property owners want to strip him of the stronghold he has over the POA so they can have board elections and prevent Shinitzky from simply appointing the people he likes and removing the people who disagree with him. In order to do that, the plaintiffs will have to go to court again.

In the Mystic Lands covenants, the declarant doesn’t have to give up control to the Mystic Lands POA until he sells 95 percent of the lots, which plaintiffs claim has been a moving target. They allege that 95 percent of the original lots have been sold, but Shinitzky keeps dividing lots to keep himself below the 95 percent threshold.

“The big deal for the plaintiffs is whether his control has ended. The court of appeals has to decide whether the period of declarant control has expired. If declarant control has expired, and we believe it has, the property owners will finally get a democratic governance for their POA, which is all they’ve ever wanted,” Peoples said.

This was actually the first lawsuit the property owners filed against Shinitzky. Under the state’s preclusion law, plaintiffs were able to file a derivative action — meaning the group of property owners filed the complaint against him and his development businesses on behalf of the entire POA.

But because Shinitzky has the power to appoint and remove anyone he chooses from the board, Peoples said he removed two of the plaintiffs from the board — Fred Yates and Tom Schreiber — and appointed property owners who supported him. Then the board took a vote to dismiss the complaint against Shinitzky and his development businesses on the POA’s behalf. Even if the POA board was independent of Shinitzky, Yates testified in court that Shinitzky’s vote could override everyone else’s because his vote carries more weight and he owns multiple lots.

“They want to have a say in how their neighborhood is run and he has complete control over everything,” Peoples said.

The issue of whether Shinitzky has reached the 95 percent in sold lots is currently being appealed. If the plaintiffs’ and their legal team can show that Shinitzky’s powers have expired, the POA can take over control of Mystic Lands.

Other claims dismissed

While Mystic Lands property owners won the claim over the contractual agreement, the other nine claims they made against Shinitzky were already dismissed.

In February 2015, a group of seven (along with three of their spouses) property and homeowners of Mystic Lands — a gated community development along the Nantahala River, Mystic River, and two neighborhoods up by Queens Lake, Mystic Forest and Mystic Ridge — filed a lawsuit on behalf of the Property Owners Association against Shinitzky and his development company. The plaintiffs made 10 claims against the developer, but nine out of 10 have been dismissed and only one of the claims was appealed. The plaintiffs also initiated another lawsuit — called the Taylor lawsuit — making additional allegations, but that was also dismissed.

“We held court several hearings where they (plaintiffs) brought up all the arguments about maintaining their multiple claims of financial wrongdoing,” Justus said. “The court wasn’t convinced — the court entered an order allowing the Property Owners Association to dismiss these claims due to there being an absence of proof of financial malfeasance.”

The plaintiffs have only appealed one claim out of the nine dismissed related to the developer rights as declarant to appoint directors to the Property Owners Association, while the remaining tenth claim, the developer’s alleged failure to build an astronomical observatory and lay asphalt on the Mystic Ridge roads was heard in the recent Swain County trial.

The nine dismissed claims and various allegations fell into four categories:

The first, financial misappropriations such as the developer using POA funds for a water system for his use, cashing a check belonging to the POA, withdrawing POA funds for his personal use, and otherwise interfering with the proper management of the POA’s financial affairs.

Secondly, Justus said the plaintiffs were unable to prove that Shinitzky used POA funds for his own benefit. He said the only thing they could point to was a $1,600 bookkeeping error where the time for developer work was mistakenly allocated on the time sheets and not accounted for on POA records. It was later discovered and corrected.

“That’s not misappropriation — that’s just a bookkeeping error,” Justus said.

Plaintiffs’ claim that the POA board did not approve advances Shinitzky made to the POA, in accordance with the provisions of Mystic Lands’ Covenants and Restrictions, in an amount exceeding $260,000 to make up shortfalls mostly during the recession years, and therefore was not valid and refundable.

In the third claim, the plaintiffs claimed that Shinitzky’s right as the declarant of the development had expired. These rights, laid out in the N.C. Planned Community Act, grants the developer — who takes a substantial risk in his development investment — the right for a certain number of years, or until 95 percent of his inventory has been conveyed to buyers, to appoint the members of the POA board and to not be liable for the payment of assessments.

Justus said it’s common for developers to have this type of declarant control outlined in a POA covenants. However, he denies the plaintiffs’ claims that Shinitzky abused his power by appointing and dismissing specific members to the board that would vote the way he wanted them to vote.

“The POA has always operated the community and the appointees don’t owe Ami (Shinitzky) a dime. Everyone has large investments in this community,” he said. “And Ami appointed only property owners to the Board of Directors even though the bylaws do not require it.”

None of these allegations survived prior courts’ hearing. In spite of the objections by the plaintiffs, they are all dismissed, and Justus said Shinitzky and his development company were exonerated.

As to the voluntary advances the developer made to the POA in the difficult times when many lots remained unsold and many others were in distress and not paying their assessments, Justus said Shinitzky never confronted the property owners regarding the $260,000 liability on the POA books or demanded prompt repayment.

The plaintiffs claimed that this matter first came to their attention in an October 2014 annual meeting after Greg Diehl, the POA director at the time, had spread the word around the neighborhood. In fact, Justus said the debt had accumulated over several years and was always recorded in the POA accounting records. There were also multiple written communications to the POA membership that developer advances to cover shortfalls had accumulated over $200,000. In other words, Justus says it was never hidden.

“My client even acknowledged he didn’t know whether it would get paid back,” Justus said, not an unlikely possibility in case the development was to fail as so many others did during that time.

Lastly, lots purchased at Mystic River were supposed to include a septic system, but the system envisioned turned out to be impractical and far pricier to owners in the long run. By 2009, Justus said property owners were aware of the situation, were presented with another option and agreed to it.

In July 2016, Superior Court Judge Marvin Pope Jr. ruled that the claims on behalf of the POA could be dismissed with prejudice, and that the POA did owe Shinitzky — $256,244 — with a resolution but did not address how the debt would be repaid. Judge Pope separately dismissed the claims related to the expiration of declarant rights as well as the Taylor lawsuit.

The recent trial

Two matters were before the jury in January: the remaining un-dismissed tenth claim for the paved roads and observatory and Shinitzky’s counterclaim for damages he suffered as result of the plaintiffs’ alleged defamatory statements and actions.

According to plaintiffs, to entice people to purchase lots in Mystic Lands, the developer agreed in writing that he would complete and pave all roadways. Once Mystic Ridge came into being a year or so after Mystic River, he would build a rotating dome astronomical observatory there.

Plaintiffs claimed that they fulfilled their part of the contract but Shinitzky did not complete the amenities within a reasonable time. They asked the judge to order Shinitzky to pave the roads and build the rotating dome observatory at Mystic Ridge.

While it’s true that the roads at Mystic Ridge lots have not yet been paved, as it became apparent to Shinitzky that paved roads in the mountains are a hazard in winter conditions and a liability not an asset. Justus said the $1 million clubhouse — at a far higher cost than was required — was completed in 2011 despite being in the middle of the recession, no lots selling and no revenue generated.

This happened long before the plaintiffs filed suit against his client. The boathouse at Mystic Ridge, which was envisioned as only a simple wooden shed, was built at 10 times the cost as a second clubhouse. Justus said that his client’s decision to not pave some of the roads was not a financial decision to try to save money.

Pointing to a wonderful sense of community at Mystic Lands, now lost because of these lawsuits and the public allegations made, Justus said, “Banks had shut down and you couldn’t get a loan, so a number of folks (Mystic Lands property owners) worked together to get it done [the completion of the clubhouse].”

The property owners worked cooperatively to lend their own money to the developer in the amount of $550,000 to help fund the capital project knowing it could attract more people to invest in Mystic Lands and support property values. They were repaid over the ensuing years. Two of the plaintiffs were part of this group too, and were paid back at above market interest rates.

“And those property owners got paid back 8 and 10 percent or better — they got almost double what the market rate was,” Justus said. “My client put in much more money to finish it, and if you take a look at the drawing compared to what’s there it’s better than what that drawing showed.”

As for the observatory, Justus said many of the plaintiffs had already purchased their lots before having any concept of what the observatory would look like or even that one would be built. The artist rendering, which was just an early idea, was done in 2009 while most property owners purchased land before 2007. Justus said that the observatory was built to be able to accommodate more people at once, and built with blueprints provided by the dome maker — a national expert in astronomical observatories.

Justus added that during the recession the current property owners understood it wasn’t a good time to build the observatory — hardly any homes built for owners to be there to enjoy it, but yet another expense for the POA to maintain.

“Everyone in the community knew it was not a good time to build — the board of directors, which later also included (plaintiffs) Fred Yates and Tom Anderson, made the decision not to have the developer construct the observatory yet because there weren’t enough homes to use it.” However, now with the observatory complete prior to the end of the trial, it has become a moot point.

As for Shinitzky’s counterclaims, he did not prevail. The jury found that he did not meet the level of proof required by the jury instructions.

There are still legal issues to be addressed after the verdict, which will come before the court in the coming days.

History of Mystic Lands

The Mystic Lands development along the Nantahala River has been controversial since Shinitzky purchased the 35-acre tract for $4.8 million back in 2005.

Once a public campground, Shinitzky purchased the pristine river property with plans to develop a private, gated community with a total of 32 small lots.

The Nantahala River is surrounded by national forest, making the Mystic River development a rare opportunity to own a piece of land in the gorge. Despite pushback from the outdoor recreation community who felt the development would destroy the natural setting of the Nantahala Gorge, the lots sold in a matter of weeks following an aggressive marketing campaign. People paid between $225,000 and $375,000 for lots that on average were only one-third of an acre.

The economy and the housing market were in a much different state in 2006, but with the recession hitting everyone hard in 2007, developers all over the country were in way over their heads. Many developers building large up-scale subdivisions in Western North Carolina cut their losses during the height of the recession, leaving property owners in the lurch on their investments.

Shinitzky also made many promises to the people buying up lots — Mystic Lands was going to be a nirvana with topnotch amenities including a clubhouse and observatory on top of the ridge. Shinitzky was proud to say on the stand that he was one of the few developers determined to stick it out after the real estate bubble burst — after all he was also a property owner in the Mystic Lands community.

“I have built this place and loved this place and sacrificed for 12 years and spent millions only to try to steal a few thousand dollars? Are you kidding me?” Shinitzky said while testifying.

Even though the lots sold at record speed, home construction was slow moving as property owners waited for a better economic climate to construct their dream second homes.

By 2012, construction was rebounding and nearly a dozen property owners began designing and building their Mystic River homes. Things were looking up and all the property owners were working hand in hand with Shinitzky to see the completion of more homes and the amenities promised to them.

But patience wore thin by 2015 when homeowners weren’t seeing any progress being made — the specialized septic systems needed for the river property weren’t provided, roads up to the Mystic Ridge properties weren’t being paved and construction of the clubhouse and observatory wasn’t being done.

Property owners finally made contributions in the form of a $550,000 loan to get the clubhouse completed. Shinitzky did eventually pay back that loan to the POA members, but that was just the beginning of the financial struggles between property owners and the developer.

Construction of the observatory, a facility where homeowners could view the nighttime sky from the top of the ridge, didn’t get underway until the plaintiffs were already in court with Shinitzky. While property owners are happy it got done, the facility is definitely not what they were told it would be. An artist rendering shared with property owners displays a much nicer dome-shaped observatory while what was actually built looks like a small modular building with an observatory dome on top of it.

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