A lifetime membership in a golf club can be cut short in bankruptcy, for reasons explained by Bankruptcy Judge Christine M. Gravelle of Trenton, N.J.
Although it is theoretically possible for members to have rights that will survive bankruptcy, a club’s lender might not permit interests coming ahead of a mortgage. Golfers should consider investing only what they are willing to lose on a membership, unless the club has a strong financial track record.
The ‘Lifetime’ Club Memberships
Sixty-seven individuals paid $50,000 to $60,000 for what they thought were lifetime memberships in a golf club. In return for lump sum payments, they were exempted from paying green fees, would be given preferred tee times, and would receive discounts on buying merchandise.
Sadly, the golf club ended up in chapter 11. The 49% owner of the club also held a $10 million mortgage. The 49% owner offered to purchase the assets for $200,000 cash and a $2.8 million credit bid. There was an auction but no other bidders.
Holders of lifetime memberships objected to the sale free and clear of their interests. In her November 10 opinion, Judge Gravelle ruled that the membership interests were executory contracts that the club could reject. Even if the lifetime memberships might be implied restrictive covenants, she found a bona fide dispute allowing the sale free and clear.
Paid-Up Memberships Were Executory Contracts
First, Judge Gravelle analyzed whether the memberships were executory contracts under the so-called Countryman definition.
The members argued, unsuccessfully, that their agreements were not executory contracts because they had fully performed by paying up front, in full.
Judge Gravelle disagreed. She concluded that the members had unperformed obligations because the agreements required them to abide by the club’s rules and pay for purchases. To qualify for rejection, the remaining obligations must be material.
Judge Gravelle examined whether the members’ remaining obligations were “material” under New Jersey law.
Judge Gravelle interpreted the New Jersey Supreme Court as holding that a material obligation is one allowing the nonbreaching party to terminate its obligations to perform. A material breach in New Jersey need not rise to the level of allowing the nonbreaching party to terminate the contract.
Deciding that the club could terminate its obligations to perform if members did not pay their accounts, Judge Gravelle found material, unperformed obligations on the part of the members, thus turning the membership agreements into executory contracts subject to rejection under Section 365.
Implied Restrictive Covenants
The members contended that they held implied restrictive covenants running with the land that cannot be rejected as executory contracts.
Judge Gravelle analyzed whether the club could nevertheless sell the assets free and clear of the members’ interests under Section 363(f)(4). That section allows the sale of an interest in property that is “in bona fide dispute.”
Judge Gravelle found a bona fide dispute about the members’ interests arising under Section 544(a)(3), which allows a trustee to avoid an obligation that is voidable by “a bona fide purchaser of real property.”
Regarding Section 544(a)(3), the club contended that the alleged restrictive covenants running in favor of the members were voidable in New Jersey because they had not been recorded and thus could be voided by a hypothetical bona fide purchaser with no knowledge of the unrecorded interests.
Judge Gravelle observed that the club and the members disagreed about the avoidance of the members’ implied restrictive covenants. Those interests were therefore subject to bona fide dispute. Thus, the club could sell the assets free and clear of those interests under Section 363(f)(4).
Judge Gravelle approved the sale of the assets free and clear of the members’ interests, even though the members likely would receive no distributions on their claims.
Observations
Golfers who lay down five to seven figures for a club membership should read the documents carefully, otherwise their investments could be lost for the reasons described by Judge Gravelle.
As the judge explained, purchasers of memberships could protect their investments by having recorded interests under state law. Whether the developer of a club could give recorded interests is another question. A lender might not permit members to have rights coming ahead of a mortgage.
A lifetime membership in a golf club can be cut short in bankruptcy, for reasons explained by Bankruptcy Judge Christine M. Gravelle of Trenton, N.J.
Although it is theoretically possible for members to have rights that will survive bankruptcy, a club’s lender might not permit interests coming ahead of a mortgage. Golfers should consider investing only what they are willing to lose on a membership, unless the club has a strong financial track record.
The ‘Lifetime’ Club Memberships
Sixty-seven individuals paid $50,000 to $60,000 for what they thought were lifetime memberships in a golf club. In return for lump sum payments, they were exempted from paying green fees, would be given preferred tee times, and would receive discounts on buying merchandise.
Sadly, the golf club ended up in chapter 11. The 49% owner of the club also held a $10 million mortgage. The 49% owner offered to purchase the assets for $200,000 cash and a $2.8 million credit bid. There was an auction but no other bidders.
Holders of lifetime memberships objected to the sale free and clear of their interests. In her November 10 opinion, Judge Gravelle ruled that the membership interests were executory contracts that the club could reject. Even if the lifetime memberships might be implied restrictive covenants, she found a bona fide dispute allowing the sale free and clear.