Lifetime Memberships May Not Be For Life if Bankruptcy Intervenes
With the proliferation of bankruptcy proceedings for country clubs, golf clubs, health clubs (see DBR Nov. 12, 2020, on You Fit Health Clubs), many “members” who were enticed into what appeared to be attractive packages for so-called lifetime memberships may be sorely dismayed when they learn that an intervening bankruptcy proceeding may wipe out their so-called lifetime membership benefits.
In the recent bankruptcy case in Trenton, New Jersey (In re Sea Oaks Country Club, 20-17229 (Bankr. D.N.J. Nov. 10, 2020), Bankruptcy Judge Christine Gravelle set forth a detailed analysis of lifetime memberships in a country club, which should be a wake-up call for anyone thinking of investing large sums in such a membership during these financially difficult times for any type of membership organization. Since it is virtually impossible to obtain detailed financial information concerning golf, health and other types of membership clubs, the ruling in the Sea Oaks case cautions that one should be very careful with respect to investing in a lifetime membership unless one is willing to lose it all in the event of a bankruptcy proceeding.
In the Sea Oats case, individuals paid between $50,000-$60,000 for what were called lifetime memberships in the country club which then entitled them to be exempt from greens fees, to preferred tee times as well as receiving discounts on merchandise. When the country club filed for Chapter 11 protection, the 49% owner of the club also held a $10 million mortgage on the club and its facilities. When no other purchasers could be found, the 49% owner purchased the assets for $200,000 cash and a $2.8 million credit bid in a bankruptcy court sale under Section 363 of the Bankruptcy Code, with the sale proposed to be free and clear of the lifetime membership interests.
When the lifetime membership holders objected to the sale being free and clear of their interests, Gravelle ruled that the membership interests were executory contracts that could be rejected by the golf club in the Chapter 11 proceeding. While the membership holders claimed that the lifetime memberships may be implied restrictive covenants, the Judge in a detailed opinion found a bona fide dispute, which under Section 363 of the Bankruptcy Code, allowed the sale of the golf club’s assets and business free and clear of the lifetime membership interests.
Utilizing what has become to be known as the “Countryman” definition of what is an executory contract, the bankruptcy judge found that the members had unperformed obligations because the lifetime membership agreements required them to comply with the club’s rules and pay for purchases. The judge found that under New Jersey law, these were material obligations which, if breached, would give the country club the right to terminate the so-called lifetime memberships. Thus, the bankruptcy judge found that the lifetime membership agreements were executory contracts subject to rejection under Section 365 of the Bankruptcy Code.
The members also argued that they held implied restrictive covenants running with the land that could not be rejected as executory contracts. Section 363(f)(4) of the Bankruptcy Code allows the sale of an interest in property that is “in bona fide dispute.” The court found a bona fide dispute about the members’ interests under Section 544(a)(3) of the Bankruptcy Code that allows a trustee to avoid an obligation that is voidable by “a bona fide purchaser of real property.” Over the objection of the lifetime membership holders, Gravelle ordered the sale of the country club assets free and clear of the so-called lifetime membership interests.
With respect to golf and country club memberships where there is real property involved, one may think that by recording a document evidencing the lifetime memberships would be sufficient to protect the interests. However, if there is a prior existing mortgage, without the mortgage holder’s subordination, the recordation of the lifetime membership interest may be useless.
As noted above, this decision has far-reaching implications as it can extend to health club memberships, airline club memberships and any other membership opportunity where individuals advance (sometimes substantial) funds in order to obtain what is hoped to be lifetime benefits. In these economic uncertain times, the concept of caveat emptor is certainly applicable and should be carefully considered before purchasing a lifetime membership.