In re Sea Oaks Country Club, LLC

In re: SEA OAKS COUNTRY CLUB, LLC, Debtor.

In re: SEA OAKS GOLF CLUB, LLC, Debtor.

Case No. 20-17229 (CMG)

Case No. 20-17228 (CMG)

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

November 10, 2020

NOT FOR PUBLICATION

Chapter 11

OPINION

APPEARANCES:

Timothy P. Neumann, Esq.

Broege, Neumann, Fischer & Shaver

Attorney for Debtor

Robert N Braverman, Esq.

McDowell Law, PC

Attorneys for Certain Lifetime Members

Sommer L. Ross, Esq.

Duane Morris LLP

Attorneys for Atlantic Homes, Inc.

CHRISTINE M. GRAVELLE, U.S.B.J.

Introduction

Debtors, Sea Oaks Country Club, LLC ("Country Club") and Sea Oaks Golf Club, LLC ("Golf Club") (collectively, "Debtors") move before the Court for an order: (I) approving the sale of Debtors' assets free and clear of liens, claims and encumbrances; (II) authorizing the assumption and assignment of certain executory agreements and leases; and (III) rejecting other executory agreements and leases and all membership agreements (the "Motion").

As is apparent by Debtors' names, they own and operate a golf course, which is located at 99 Golfview Drive, Little Egg Harbor, New Jersey (the "Real Property"). Golf Club owns the Real Property, which is improved by an 18-hole golf course, a clubhouse, halfway house, banquet hall, inn and business office. Golf Club also owns a motor vehicle, golf-related equipment, computer equipment, and certain furniture, fixtures, and other personal property located on the Real Property (the "Golf Club Assets"). Country Club owns a plenary consumption retail liquor license, golf-related inventory, account receivables, and a modest amount of food, beverage and liquor inventory (the "Country Club Assets") (collectively with Golf Club Assets, the "Sale Assets"). Country Club operates the golf course, restaurant, inn and dining and catering facility. Golf Club's source of revenue is through rents paid by Country Club to utilize the Golf Club Assets. The Debtors seek to sell both the Golf Club Assets and the Country Club Assets together under the theory that such a sale would realize a higher price than attempting to separately sell those assets.

The proposed purchaser of the Sale Assets is Atlantic Homes, Inc. ("Atlantic Homes"). Atlantic Homes is the 49% owner of both Country Club and Golf Club. It also holds a note and first mortgage as to the Real Property, which obligation is guaranteed by Country Club. Atlantic Homes' claim against Debtors exceeds $10,000,000.00. The purchase price for the Sale Assets is $3,000,000.00, well below the amount claimed. The proposed payment for the transaction contemplates a cash payment in the amount of $200,000.00 to be paid to Country Club for theCountry Club Assets, and a credit in the amount of $2,800,000.00 against the amount owed to Atlantic Homes under its note.

Objecting to the motion are certain parties who paid a lump sum to enter into lifetime golf memberships (the "Lifetime Members"¹ and the "Lifetime Memberships") with a predecessor of the Debtors, Sea Oaks Country Club, L.L.P. (the "L.L.P."). They enjoy benefits including no greens fees for life, preferential tee times, and discounts on merchandise. Certain Lifetime Memberships are transferrable,² and state that their rights and privileges shall be irrevocable and continue in perpetuity.

The Lifetime Members object to any sale of assets which seeks to reject the Lifetime Memberships. The objection is premised upon three main points: (i) as the Lifetime Members have fully performed their obligations with regards to the Lifetime Memberships, and because the Lifetime Memberships are irrevocable, they are not executory contracts and may not be rejected under 11 U.S.C. § 365(a); (ii) to the extent the Lifetime Memberships constitute an interest in the property being sold, Debtors are unable to satisfy any of the requirements of 11 U.S.C. § 363(f); and (iii) the sale cannot satisfy the "good faith" or "business purpose" requirements for a § 363 sale under In re Abbotts Dairies of Pa., Inc. because Atlantic Homes is an insider of the Debtors which had knowledge of the Lifetime Memberships and the sale provides the estate with an amount insufficient for any significant distributions to creditors. See In re Abbotts Dairies of Pa., Inc., 788 F.2d 143, 150 (3d Cir. 1986).

Debtors have responded to the Lifetime Members' objections, positing: (i) the Lifetime Memberships executory contracts subject to rejection under § 365 because the Lifetime Members have continuing obligations; (ii) the Third Circuit's expansive definition of "interest" in property under § 363(f) encompasses the Lifetime Memberships, and because that interest is avoidable under 11 U.S.C. § 544(a) it is in "bona fide dispute," thereby satisfying § 363(f)(4); and (iii) despite the sale of the assets to a part-owner of Debtors, the sale nonetheless is in good faith and for a sound business purpose, as it is the result of considerable marketing.

The Motion raises the difficult question of how to characterize the Lifetime Memberships vis-à-vis the property being sold. The documents create a contractual relationship between the parties - defining the responsibilities and obligations of each side. The first step in the analysis is a determination of whether that contract is executory. If so, Debtors may reject the Lifetime Memberships before transferring the Sale Assets. Alternatively, regardless of the nature of the contract, Debtors may also be able to sell free and clear of those interests pursuant to § 363(f)(4).

The Court will address each of the points made and will grant the Motion for the reasons that follow.

Jurisdiction

The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 23, 1984, as amended September 18, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (N), and (O). Venue is proper in this Court pursuant to 28 U.S.C. § 1408 and 1409. Pursuant to Fed. R. Bankr. P. 7052, the Court issues the following findings of fact and conclusions of law.

Facts

The L.L.P. that preceded the Debtors was formed in 1997 to construct and operate a golf club. Atlantic Homes owned 91% of the L.L.P. Soon after its formation, the L.L.P. began advertising the Lifetime Memberships whereby the prospective members would pay a lump sum of $50,000 or $60,000 in exchange for the benefits of membership as a means to fund the construction and development of the project. The Lifetime Members were provided a "Q & A" brochure from an information session that occurred in 1997. They note that the brochure asks "[w]hat happens to our membership if Sea Oaks declares bankruptcy two years down the line?" The response to the questions focuses on the economic reasons that the project would not need to declare bankruptcy, while not addressing what would happen to the Lifetime Memberships in the event of a bankruptcy.³

The record indicates that approximately sixty Lifetime Memberships were sold during that time period, with an additional seven Lifetime Memberships sold at a later time period. The Lifetime Membership certificates at issue here were transferrable. They identified the "Management" as the L.L.P., "its officers, employees, agents, servants, successors, and assigns." In addition to outlining the membership rights and privileges regarding unlimited golf course play, complimentary use of golf carts, discounts on merchandise, and other amenities, the certificates contained the following provisions:

Duration of Membership

The rights and privileges hereby granted to the Member and his or her transferees shall be irrevocable and shall continue in perpetuity. Any sale or transfer of the golf course, club house and/or related facilities shall be made subject to the rights granted by this certificate of membership.

Rules and Regulations

Any person exercising the rights and privileges granted by this membership certificate shall be subject to and shall abide by all general rules and regulations promulgated by Management pertaining to such matters as golf course and club house operations and rules of conduct applicable to Members and guests.

The Golf Club and Country Club were formed in 2003. Atlantic Homes held a 49% ownership interest in each entity. In January 2015, Atlantic Homes loaned Golf Club the principal amount of $9,600,000.00, which is evidenced by a promissory note and secured by a recorded first priority mortgage on the Real Property. The obligations are guaranteed by Country Club. Atlantic has filed a proof of claim in the amount of $10,440,342.50.

Debtors each filed bankruptcy on June 3, 2020. An order granting joint administration was entered on July 1, 2020. On July 27, 2020 Debtors filed a Motion for Approval of Bidding Procedures, which was granted by order dated August 20, 2020. That same date, Debtors filed the Motion. The Lifetime Members filed opposition and oral argument was held on September 9, 2020, at which point additional briefing was requested and provided.

Legal Analysis

I. The Lifetime Memberships Are Executory Contracts and Can Be Rejected

The initial inquiry for this Court is whether the Lifetime Memberships are executory contracts, which may be rejected pursuant to the plain language of § 365(a).⁴ If the Lifetime Memberships can be rejected, Debtors obligations to the Lifetime Members are terminated, and no further analysis is necessary as to how those obligations affect the Sale Assets. But the fact that the Lifetime Memberships are "irrevocable and shall continue in perpetuity" complicates theanalysis and compels this Court to agree with Judge Bernstein, recently retired from the bankruptcy bench of the Southern District of New York, that "the time expended searching for executoriness can be spent more fruitfully doing almost anything else." See In re Hawker Beechcraft, Inc., 486 B.R. 264, 276 (Bankr. S.D.N.Y. 2013), citation omitted. Ne...