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When Lake Elaine was constructed in the 1970s, it was an asset to the Continental Country Club that buoyed the property value of waterfront homeowners.

But in recent years, the man-made lake has failed to hold water and plunged the club into a series of costly repairs and lawsuits. Now, the club is trying to emerge from bankruptcy with a plan that would keep Lake Elaine drained once and for all.

As a man-made lake constructed in the high-desert ponderosa pine forest of Flagstaff, Lake Elaine was artificial and unsuited to its environment. Its existence depended on plastic lining embedded throughout 37 acres of lake bed to keep water from seeping into the porous limestone landscape.

The real trouble began in the 1990s. Lake Elaine’s water level began to drop, and it was then drained completely so that repairs to the plastic lining could take place. At that time, there was a settlement agreement reached between the homeowner’s association of Continental Country Club and the 52 homeowners who had property on the perimeter of Lake Elaine. The agreement stated that in the future, the country club would be responsible for maintaining the lake at a level of 6,845 feet above sea level.

“As the years went on issues started arising in terms of being able to maintain that lake level,� said Tahlia Murray, Continental's general manager. “There were leaks in the lake, there were sinkholes discovered, and being able to maintain that 6,845-foot level became more and more difficult.�

According to Murray, the lake began losing water at a rate of 200,000 gallons a day. Continental was under contract with the City of Flagstaff to receive up to 1.6 million gallons of reclaimed water per day, but even this wasn’t enough to keep Lake Elaine from dropping. In 2016, Continental stopped pumping water into the lake, and it began holding at about 6,835 feet � just above one of the major sinkholes but low enough to expose the concrete collar around the perimeter of the lake.

“And then the lawsuit was filed right at the beginning of 2017,� Murray said.

Homeowners around Lake Elaine’s perimeter filed a class-action lawsuit against Continental claiming that the country club had failed to uphold the agreement established in the '90s. The homeowners won, and Coconino County judge Dan Slayton ruled in October of 2020 that Continental would have to pay $700 in fines each day that it did not pump water to refill the 117-million-gallon lake.

After the water began running, that fine would be reduced to $500 a day until the 6,845 level was reached.

But there was a problem: The lake was still leaking. Continental drained the lake entirely in 2019 to assess the full extent of the leaks and determined that the sinkholes had damaged the liner. Major repairs were necessary.

“At that time, we were estimating $3 to $5 million, which the association did not have,� Murray said. “So understandably the association was in a bad position. If we filled the lake back up without doing a permanent fix, it was going to continue to leak water.�

To make matters worse, Continental also had a $600,000 balloon payment for some irrigation work due in October 2020.

“The board had to make a tremendously difficult decision,� Murray said. “We filed for Chapter 11 bankruptcy.�

Chapter 11 bankruptcy, sometimes referred to as “reorganization bankruptcy,� bought Continental some time to avoid filing the more severe Chapter 7 -- which would force liquidation of Continental’s assets, including the golf course, tennis and pickleball courts, pools, Bear Paw Activity Center and the Main Clubhouse � in order to pay off the association’s creditors.

First, Continental would have to pay down their balloon payment.

“Then the rest of the monies would go to unsecured creditors, which would include the lakefront homeowners,� Murray said. “They have a damages claimed listed in our amended disclosure of $15 million.�

Hoping to avoid Chapter 7 bankruptcy, Continental has put together a plan to settle out of Chapter 11 and put the Lake Elaine controversy behind them for good.

The settlement consists of two options. The first would be to deed Lake Elaine to the 52 lakefront owners and pay them $2.5 million to repair and maintain the lake in perpetuity. It would release Continental from all current and ongoing liability, but, according to Murray, it’s unlikely the lakefront homeowners will want to take on that responsibility.

New-look approach

The second option would be to spend that $2.5 million and transform Lake Elaine into a new amenity that would be open to all homeowners.

“This would include four or five ponds, walking trails and benches,� Murray said. “No other neighborhood in northern Arizona would have a space like this available to all of its residents, and we are excited that this could be a really positive outcome at the end of a very long, challenging journey.�

In order to make either of these outcomes a reality, Continental must first secure funding from the homeowners within the Country Club neighborhood. To do so, it has distributed ballots with two items for homeowners to vote on. The first would authorize collection of a one-time, $2,000 payment from all homeowners. The second would authorize an increase in annual dues in the amount of $97 per year to offset inflation costs.

“This is a critical time and a critical vote for our homeowners,� Murray said. “If we don’t get yes votes on both ballots, the country club and its existing amenities and benefits will cease to exist, jeopardizing property values for our 2,395 diverse homeowners. The good news is that once both resolutions pass -- and we are confident they will -- we can put Lake Elaine behind us and open that space up for all residents to enjoy, providing yet another valuable amenity to homeowners and, therefore, increasing home values.�

Ballots were distributed to homeowners on June 28 and will be tallied Thursday, July 28. Currently, it’s unclear whether homeowners will authorize the payments necessary to save Continental from Chapter 7 bankruptcy.

Donna Swann, a Continental resident who lives a good distance from the lake but would still be on the hook for the fees, said she would like to see Lake Elaine transformed.

“I prefer it to be a more communal space, more natural space,� Swann said. “As long as the residents that are currently there are respectful.�

Lakefront resident Sam Sherwood also said he would be happy to see Lake Elaine permanently drained and turned into a neighborhood amenity. He’s already voted “yes� to authorize the $2,000 payment and the increased annual dues.

“I'm one of the probably few people that backup to the lake that are not in favor of restoring that lake� Sherwood said. “I just don't think that's feasible. It'll be a nightmare going forward, trying to keep that thing filled with water, even in the best of circumstances. And, gosh, in the middle of a drought, I think it's not a good idea.�

But Sherwood recognizes why other lakefront homeowners might not agree with him. He describes himself as a relative “newcomer,� having only moved to the neighborhood three years ago. He says he can understand why those around longer might want to see the lake restored.

“They say, ‘Look, I paid to live on a lake. That's what I want,’� Sherwood said. “Without it, we have declining values.�

Local real estate agent Kelly Broaddus, who frequently deals in the Continental neighborhood, does not believe that transforming Lake Elaine would negatively impact property values in the neighborhood.

“As long as it's something as beautiful as the lake would be,� Broaddus said. “Walking trails, ponds -- what they have planned sounds beautiful.�

Regardless of how beautiful the proposed amenity may be, Sherwood remains skeptical that Continental will receive the votes it needs.

He said between the Lake Elaine controversy and a previous vote that banned rentals in the neighborhood, there is ample “bad blood� between the homeowners and the association.

“I don't see any way in the world this thing's going to pass, even though I voted for it,� Sherwood said. “I think it's just going to go bankrupt.�

But Murray is optimistic. She believes there is enough support for a new amenity that the votes will pass and Lake Elaine will be transformed into an attractive space all residents can enjoy. More than that, she thinks the land will benefit from returning to a more natural state.

“Since 2019 when we drained it, you can see how much it's already started revegetating itself and healing itself,� Murray said. “If we move forward, the collar would be removed, planting would take place and there would be a big, big change out there. It’s nice to see that it’s already started.�

While Lake Elaine has struggled to hold water, it now presents the people of Continental with the opportunity to reshape the landscape as something more closely aligned with the natural environment of Flagstaff -- something Lake Elaine was never intended to be.

“It's been a really hard process for us all, but I think it's going to be a great compromise,� Murray said. “All the while being conservative and not overusing on water and being wasteful. I'm hopeful that this is going to be a good option moving forward.�