In October 2014, the United States Bankruptcy Court for the District of New Jersey handed down an opinion that involved a Chapter 11 reorganization of an individual who was a resigned member of a country club. Companies in bankruptcy may liquidate or reorganize, but individuals in bankruptcy generally liquidate, using their remaining assets to pay off most of their debts at a significant discount. An individual may also reorganize and propose a “plan” to modify his obligations. This is not common, and it is particularly unusual for the debtor to pay for significant legal work to obtain a detailed court opinion such as the one issued in this case. The court issued a 34-page opinion that addressed a number of legal issues related to club memberships.
In this case, In re: Liza Price Rappaport, the Debtor was a member of The Ridge at Back Brook, a country club in New Jersey (the “Club”). The Club is a “company-owned” club rather than a “member-owned” club. The members have “licenses” to use the Club facilities and the members have certain financial obligations to the Club.
In this case, the Debtor signed a membership agreement with the Club and paid a $65,000 deposit that was refundable after 30 years. She was also obligated to pay monthly dues until her membership was reissued to a new member.
The Debtor stopped paying her dues three years before filing bankruptcy. The Club obtained a judgment against the Debtor representing three years of unpaid dues, but did not perfect its lien for the judgment, either by recording the judgment in a county where the debtor owned real estate or garnishing a bank account or having a sheriff take possession of assets. The Debtor filed bankruptcy approximately ten years after she joined the Club, in part due to this judgment and because she had lost significant money in other investments. During the bankruptcy case, the Club filed a claim to be paid for its judgment and for unpaid future dues through 2030 for about $1.1 million (for the remaining 20 years until her 30 year refund kicked in). The Debtor objected to the claim on various grounds, and the court ended up allowing the claim in the amount of about $284,000.
The Importance of Clear Membership Documents and Communications 
The Club in this case benefited from clear documents. Although the Debtor only signed a one-page Membership Agreement, the court found that the Membership Agreement incorporated by reference various club documents that made the contract clear and evidenced the parties’ agreement. This court sided with the Club, even enforcing its right to change its club documents after the Debtor joined. There are governing principles about the effectiveness of bylaw amendments and other changes to club documents, and any changes should be reviewed by competent counsel to be sure they are enforceable. This holds true for member voting documents, where the exact language approved by the members may obligate the club for years to come, and it is important that the language be clear to future readers.
The Importance of a Pre-Bankruptcy Judgment
In this case, the Club sued the debtor and obtained a judgment before she filed bankruptcy. However, the Club failed to “perfect” the lien of that judgment before the debtor filed bankruptcy, so the judgment did not improve the Club’s claim in the debtor’s bankruptcy case. Had the Club sued and perfected its judgment, its claim for unpaid dues would have been in a secured position, which would have greatly improved its recovery. There are two lessons here: If the club has a judgment it should immediately take steps to perfect a lien for that judgment so that the club would be better protected in a bankruptcy. More importantly, however, is to keep any claim small by acting promptly. When a member is delinquent, cut off use and charging privileges as early as practical under the circumstances, and consider assessing late fees and interest. There are a number of effective ways to handle this issue, depending on the club’s specific situation. A surprising number of club documents tie the club’s hands while a member runs up financial obligations for months and months. If a member becomes significantly indebted to the club, take prompt action including filing suit, if necessary. Once you have a judgment, take steps to perfect your lien.
Dues-Relief Provisions and Liquidated Damages
Consider reviewing your club’s governing documents for provisions that might better serve the club as policies rather than bylaws. Provisions in your club documents might reduce your claim. In this case, the Club’s documents provided dues relief for widows, people who move more than 200 miles from the Club, and individuals who become disabled. The court used these provisions, although the debtor did not meet any of these qualifications, to determine that there was a possibility that the debtor’s obligations to the club would be reduced over time. This factor was used against the Club when calculating the amount of the Club’s claim that should be paid, as the court did not award the full 20 years of dues requested. If your club provides dues relief, such as for disabled members, consider making that a policy in the club’s discretion rather than a matter of right in the bylaws or other governing documents.
Financed Memberships and Club Offsets
The court provided an extended discussion about the Club’s Membership Agreement being an “executory contract.” An executory contract is one in which both parties continue to have performance obligations, such as a lease where the landlord must make the space available every month and the tenant must pay rent every month. This is in contrast to an “executed” contract in which one party (the creditor) has fully performed, such as delivering goods or services and the other party (the debtor) has not performed (by paying the money due). The court decided the Membership Agreement was an executory contract, meaning the debtor could assume the contract and both parties would continue to perform, or reject the contract and owe damages for failure to perform the remainder of the contract. The debtor here rejected the contract and the court allowed the Club its damages claim. There are several takeaways for clubs. For a company-owned club, the “get out” provisions for widows and those who move discussed above might leave an out for a smart debtor, who could affirm the contract and owe only past damages but then move away (or some other “get out” option the club offers). That is another reason to evaluate these provisions, as discussed above. For the member-owned club, this gives a reminder to review any joining fee financing program documents to be sure the language protects the club from a claim it is an executory contract, which could negatively impact the club’s potential recovery. This issue could arise inside a bankruptcy or with any member who walks away before paying in full. Other issues not addressed in this case that should still be considered by member-owned clubs are whether the club’s documents include appropriate language to accrue unpaid dues against any potential refund from the Club upon resale of the membership and granting the club a lien on the membership.
Conclusion As always, clubs should review their club documents annually to be sure they are up to date with best practices. In the meantime, the club must follow their existing documents until they are property modified.
Robyn Nordin Stowell is a partner in the law firm Stinson Leonard Street in Phoenix, Arizona, and heads its Golf Resort and Private Club practice. Paul Hoffman is a bankruptcy partner in the firm. Robyn can be reached at 602-212-8682 or 602-300-5326 or by e-mail at robyn.stowell@ stinsonleonard.com. Paul can be reached at 816-691-2746 or by e-mail at paul.hoffman@ stinsonleonard.com. This article is for informational purposes and is not legal advice.