Kauai Beach Villas: 2020 Flood Reveals $70M in Hidden Construction Defects

A March 2020 flood at a beachfront Kauai timeshare resort triggered the discovery of construction defects that have now led approximately 6,900 interval owners and 45 whole unit owners into chapter 11 bankruptcy. The Association of Apartment Owners of Kauai Beach Villas filed for Subchapter V bankruptcy protection on December 5, 2025, disclosing that two of its eight buildings are already unoccupied due to compromised post-tension steel cables, and the remaining buildings require comprehensive remediation that the association cannot finance. With estimated repair costs exceeding $70 million and a 16% default rate on existing special assessments, the Association determined that attempting to levy the full assessment would leave at least $14 million uncollected, leading it to pursue a Section 363(h) sale to a single buyer for nearly 7,000 fractional owners.

The case uses Section 363(h)—typically used for forced sales of co-owned property—to sell an entire resort free and clear of thousands of individual ownership interests. This strategy parallels similar Subchapter V filings at PTVO-affiliated timeshare properties across the country, where aging infrastructure, rising maintenance fees, and owner delinquency are cited in support of the restructuring approach.

Resort Background and History

Property and Development.

The Kauai Beach Villas resort sits at 4330 Kauai Beach Drive in Lihue, on the eastern shore of Kauai. The property was constructed in the early 1980s pursuant to a Declaration of Horizontal Property Regime dated June 5, 1981, establishing the condominium regime that governs the resort's ownership structure. The development comprises eight three-story buildings designated A through H, containing 150 total apartments ranging from 803 to 1,401 square feet. Club Wyndham maintains the timeshare marketing relationship, though the property is known historically as PAHIO at Kauai Beach Villas. The resort underwent renovations between 1996 and 2004, and includes amenities such as an outdoor pool, sports courts, Jacuzzi, and private lagoon.

Unit Configuration:

Ownership Structure.

The Association's membership reflects the split between timeshare and whole ownership interests that complicates the current restructuring. Of the 150 apartments, 105 are utilized as timeshare properties with approximately 6,893 individual interval owners holding deeded interests representing fractional ownership. The remaining 45 units are owned by whole owners who hold full apartment ownership rather than timeshare intervals. Each apartment owner—whether interval or whole—is a member of the Association of Apartment Owners.

Owner Distribution:

The management structure has been overseen by PAHIO Resorts, Inc. under a Management Agreement, though that agreement terminates December 31, 2025—creating an operational transition concurrent with the bankruptcy proceedings. Larry D. Warner has served as President of the Board of Directors since 2021.

Path to Bankruptcy: The Flood That Revealed Hidden Defects

March 2020 Flood Discovery.

On March 20, 2020, ground floor units in Buildings A through E were flooded. What initially appeared to be a localized water damage event triggered remedial work that exposed systemic construction deficiencies dating to the original 1980s development. The remedial work expanded to a property-wide assessment affecting all eight buildings.

Wiss, Janney, Elstner Associates, Inc. (WJE), a national structural engineering firm specializing in building investigation and failure analysis, conducted comprehensive assessments of the property. On October 7, 2024, WJE provided the AOAO and IOA Boards an update that revealed "potentially unsafe conditions resulting from building deterioration." The findings indicated that the defects were not isolated incidents but affected the structural integrity of every building on the property.

Catalog of Construction Defects.

The structural assessment identified multiple categories of defects requiring comprehensive remediation:

Primary Deficiencies:

• Waterproofing failures throughout all buildings
• Mass corrosion of support columns (structural load-bearing elements)
• Compromised post-tension steel cables in Buildings G and H
• Structural concerns with second and third floor lanais/balconies
• Systemic issues requiring building-wide rather than targeted repairs

The severity of the defects varies by building, with the two structures closest to the ocean showing the most damage:

Building Status:

Buildings G and H, the beachfront structures with the most direct exposure to the corrosive oceanfront environment, have been closed to occupancy due to the compromised condition of their post-tension steel cables. All guests are now prohibited from accessing second and third floor lanais and balconies across the property due to structural safety concerns.

Post-Tension Cable Condition.

The compromised post-tension cables in Buildings G and H are a central structural issue. Post-tension cables are high-tensioned steel strands running through concrete floor slabs, typically tensioned to approximately 33,000 pounds each. This construction technique, common in coastal condominium buildings since the early 1990s, provides structural integrity but requires ongoing protection from the corrosive coastal environment.

Hawaii's climate accelerates corrosion in such systems. Coastal areas face constant exposure to salty ocean air that accelerates corrosion. High humidity compounds the effect, while temperature fluctuations cause metal components to expand and contract, increasing stress on corroding elements. Volcanic activity adds sulfur dioxide and other corrosive gases to the atmospheric mix.

The Post-Tensioning Institute released official guidelines for repairs in 2019, acknowledging the widespread nature of deterioration in coastal post-tension construction. For Buildings G and H at Kauai Beach Villas, the cable compromise led to their closure. The Board concluded that a sale, rather than remediation, would be pursued.

Repair Cost Constraints.

The Association's assessment of repair costs evolved over multiple analyses, each confirming the scale of the financial challenge:

Repair Cost Estimates:

To fund repairs through special assessments, the Association would need to levy amounts per unit that exceed the value of many interval interests:

Special Assessment per Unit (Project Remediate):

The Association had already tested owner willingness to fund major repairs through the "Project Reoccupy" assessment—a $4.1 million special assessment to repair Buildings G and H. The results demonstrated the futility of the assessment approach:

Project Reoccupy Assessment Results:

With a 16% default rate on a $4.1 million assessment, the Board projected that attempting to levy the full $70+ million needed for Project Remediate would leave at least $14 million uncollected—assuming the default rate did not increase substantially when owners faced assessments of $300,000 to $500,000 per unit.

Owner Delinquency.

The special assessment default rate reflects a broader pattern of delinquencies. According to owner discussions, approximately 45% of timeshare owners are not current on yearly maintenance fees, and 65% have not paid special assessments. The Association suspended its Deed Back program, through which owners could surrender their interests.

This delinquency pattern reflects industry-wide trends. Hawaii timeshares regularly see annual maintenance fees exceeding $2,000, with some properties imposing combined maintenance and special assessment burdens of $5,344 annually. Across the industry, 66% of owners seeking to exit their timeshares cite high fees as the primary reason, while 30% report they simply cannot afford ongoing costs. Timeshare maintenance fees have risen approximately 42% over the past decade, outpacing inflation and many owners' ability to pay.

Subchapter V Restructuring Strategy

Filing and First Day Relief.

On September 19, 2025, 81.829% of members present at a special meeting voted to authorize the chapter 11 filing. The Association filed its Subchapter V petition on December 5, 2025, with Wayne K.T. Mau appointed as Subchapter V Trustee to oversee the case.

Subchapter V provides a streamlined bankruptcy process for small businesses with several advantages for a case like this: the debtor remains in possession while the trustee oversees operations; no creditors' committee is required; no lengthy disclosure statement is needed; and there is a 90-day deadline for filing a plan. These features allow a quicker sale process and can limit case costs that would otherwise reduce potential recoveries for owners.

First Day Motions:

Financial Position at Filing.

The Association entered bankruptcy with the following liquid assets:

Assets:

Secured Debt:

Bank of Hawaii holds the sole secured claim, with a current balance of approximately $446,341 against the original $1.9 million loan.

Section 363(h) Sale Strategy.

The Association's restructuring strategy centers on Section 363(h) of the Bankruptcy Code, which permits the sale of the estate's interest along with co-owners' interests in property. The statute requires that: (1) partition in kind must be impracticable; (2) sale of an undivided interest would realize significantly less than sale of the whole; and (3) the benefit to the estate must outweigh the detriment to co-owners.

For Kauai Beach Villas, the Section 363(h) approach is used to sell property with nearly 7,000 separate ownership interests. The Association seeks to sell the entire project free and clear of all member interests, with those interests attaching to sale proceeds.

Key Strategic Elements:

1. Member Consent Process: The Association is seeking consent from interval owners to expedite the sale and avoid the need for adversary proceedings against non-consenting parties.

2. Consent Form: The Court approved the form of notice at the First Day hearing, but deferred final approval of the consent form to a January 2026 hearing.

3. Timing Considerations: As counsel emphasized at the First Day hearing, "The maintenance fees are dwindling, the burden on the owners is substantial, the cost of the case and pushing it out and pushing the sale back are going to become more burdensome and less beneficial to those equity security holders as the costs of the case start to erode the recoveries."

4. Whole Unit Treatment: The treatment of 45 whole unit owners remains undetermined. Their interests may either be included in the sale or the property may be sold subject to their ownership—a question the Court and parties have yet to resolve.

Interval Owners as Equity Holders.

The classification of interval owners is addressed in the case. At the First Day hearing, the Court asked counsel to clarify whether interval owners are creditors or equity security holders. Counsel confirmed that interval owners hold deeded interests and are "more akin to equity owners than creditors."

This classification has implications for case administration. As equity holders rather than creditors, interval owners would receive proceeds from the sale only after all creditors are satisfied. They may have different voting rights and procedural standing than creditors. The proceeds would be distributed based on ownership percentages after creditor satisfaction.

Whole Unit Owner Considerations.

The presence of 45 whole unit owners—who own full apartments rather than fractional timeshare intervals—adds complexity to the sale process. In July 2024, whole owners filed a lawsuit including a motion to halt a vote on remediation, reflecting their different economic interests.

As community discussions have noted, "The interests of interval owners and whole owners are not aligned. Interval owners risk losing vacation access; whole owners risk losing high-six figures." Whole owners face greater financial exposure than interval owners, whose individual interests are smaller given the property's condition. The sale process has not resolved whether whole owner interests will be included in the sale or remain outside it.

Industry Context

Hawaii's Timeshare Market.

The broader Hawaii timeshare market includes new development alongside older properties with maintenance challenges.

Market Statistics:

According to the Honolulu Star-Advertiser, the industry added new supply in 2024 with Marriott Vacations Worldwide opening a new Waikiki resort and Maui Bay Villas by Hilton Grand Vacation launching operations. Younger buyers—Millennials and Gen Z—are showing increased interest in Hawaii timeshares. The sources also note regulatory changes, with the Transient Accommodations Tax increasing to 11% starting January 1, 2026, and counties able to charge up to 3% more in local TAT.

Hawaii's Construction Defect Litigation.

Kauai Beach Villas is not an isolated case. UHERO research has documented construction defect litigation affecting Hawaii housing:

Construction Defect Litigation (2001-2024):

According to the Star-Advertiser, settlements in these cases have reached tens to hundreds of millions of dollars. The litigation environment has driven builder's insurance premiums up by as much as 500%, while units in litigation are often excluded from FHA and VA loan programs. Hawaii's Contractor Repair Law provides a process for resolving defect disputes through repairs and mediation. The Kauai Beach Villas filings describe repair costs that exceed available funding through assessments.

The PTVO-Affiliated Timeshare Bankruptcy Pattern.

Kauai Beach Villas is part of PTVO-affiliated timeshare bankruptcies using similar legal strategies:

Similar Section 363(h) Cases:

All four cases are active:

All four cases share common characteristics: aging properties with deferred maintenance costs, Section 363(h) sale strategies to enable unified disposition, and K&L Gates serving as special counsel.

The Flagship Resort Development bankruptcy in New Jersey—a separate timeshare liquidation involving a 32-story resort with over 440 units—reported timeshare default rates approaching 40%.

Kauai Resort Market Context

The local Kauai resort market has seen recent investment activity. Outrigger acquired the adjacent Kauai Beach Resort & Spa—a 350-room beachfront property on 25 acres—in August 2023, planning a $25 million enhancement. SilverWest is developing a new 210-room Hilton Curio Collection hotel at Kauai Lagoons with $150 million in financing.

The residential market provides price context. According to Hawaii Life, Kauai's median home price surged 20.33% in 2024 to $1,368,750, with only 23 of 148 residential homes priced under $1 million. Total sales volume reached $914.9 million.

Professional Retentions

The debtor retained special litigation counsel (Wakuzawa).

Key Timeline

Frequently Asked Questions

What is the Association of Apartment Owners of Kauai Beach Villas?

The Association is a registered not-for-profit corporation that manages the Kauai Beach Villas resort on the island of Kauai, Hawaii. It oversees 150 apartments in eight buildings, with approximately 6,893 interval (timeshare) owners and 45 whole unit owners who are all members of the Association. The resort was originally constructed in the early 1980s pursuant to a Declaration of Horizontal Property Regime.

Why did the Association file for bankruptcy?

A March 2020 flood revealed construction defects from the 1980s original construction, including waterproofing failures, corroded support columns, and compromised post-tension cables. The estimated repair cost exceeds $70 million, which the Association cannot finance through special assessments given a 16% default rate that would leave $14+ million uncollected. The Association determined that a Section 363(h) sale would be pursued.

What is happening to the timeshare units?

The IOA Board voted to discontinue all timeshare occupancy as of January 1, 2026. Two buildings (G and H) are already unoccupied due to safety concerns from compromised post-tension steel cables. All reservations on or after January 1, 2026 have been cancelled. The Association seeks to sell the entire property to a single buyer through the bankruptcy process. Under Hawaii Revised Statutes Section 514B-47, upon sale the property would cease to be a condominium property regime, with net proceeds divided among unit owners in proportion to their respective common interests.

What is a Section 363(h) sale?

Section 363(h) of the Bankruptcy Code allows a trustee or debtor to sell the estate's interest along with co-owners' interests in property, if partition is impracticable and the benefit to the estate outweighs detriment to co-owners. The Association is using this provision to sell the entire resort free and clear of all approximately 7,000 individual ownership interests, with those interests attaching to sale proceeds.

Will timeshare owners receive any recovery?

Interval owners are being treated as equity holders rather than creditors, meaning they would receive proceeds from the sale only after creditors (including Bank of Hawaii's secured claim and administrative expenses) are paid. The amount of any recovery depends on the sale price achieved and the costs of the bankruptcy case. Counsel noted at the First Day hearing that case costs are "eroding the recoveries" available to equity holders.

What is happening with the 45 whole unit owners?

The treatment of whole unit owners—who own full apartments rather than timeshare intervals—is "yet to be determined" according to court discussion. Their interests may either be included in the sale or the property may be sold subject to their ownership. Whole owners have different economic interests and filed litigation in July 2024, as they face potential losses in the "high-six figures" rather than the smaller sums at stake for interval owners.

What are the construction defects?

The defects include waterproofing failures throughout all buildings, mass corrosion of structural support columns, and compromised post-tension steel cables (high-tension strands running through floor slabs). Hawaii's coastal environment—constant salt air exposure, high humidity, temperature fluctuations, and volcanic gases—accelerates corrosion of building materials, particularly affecting the 1980s-era construction at Kauai Beach Villas.

Is this situation unique to Kauai Beach Villas?

No. Similar Section 363(h) sale strategies are being used at Skyline Tower Resort (New Jersey), Fairfield Williamsburg (Virginia), and Star Island Vacation (Florida), all PTVO-affiliated properties with deferred maintenance costs and Section 363(h) sale strategies. The Flagship Resort Development bankruptcy in New Jersey similarly reflected timeshare default rates approaching 40%.

What is Subchapter V and why was it used?

Subchapter V is a streamlined bankruptcy process for small businesses that allows the debtor to remain in possession while a standing trustee oversees operations. It requires no creditors' committee, no lengthy disclosure statement, and has a 90-day plan deadline.

What happens to timeshare reservations and maintenance fees?

All timeshare reservations for January 1, 2026 onward have been cancelled. The PAHIO management agreement terminates December 31, 2025. Owners who have paid maintenance fees and assessments are treated as equity holders in the bankruptcy, with any recovery depending on sale proceeds minus secured claims and case costs. The Court will establish a claims bar date at the January 2026 hearing.

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