LEGAL COMMITTEE

A Member Filed for Bankruptcy - Now What?

The coronavirus pandemic has proven to be a boom for some industries and individuals. Clubs, at least those with golf, saw the number of rounds played increase approximately 14 percent from 2019 to 2020 despite more than half of all golf courses being closed in March and April.

Individuals filed bankruptcy less as well, with cases decreasing almost 28 percent over the same period. However, individual bankruptcies are anticipated to increase, threatening the bottom line at clubs, as unprecedented government protections wane.

On Labor Day, more than seven million out-of-work Americans lost much of their economic aid as three federal programs established in the early days of the coronavirus pandemic expired. As a result, some club members may file for bankruptcy. Thus, clubs should learn about their rights to collect unpaid dues before, during, and after a member’s bankruptcy.

First, clubs should review their bylaws and policies regarding delinquent accounts before a member files for bankruptcy. Simple steps such as shortening grace periods, instituting automatic suspensions for delinquent members and requiring deposits for events can limit the club’s exposure if a member files for bankruptcy.

Second, clubs should understand a few key bankruptcy concepts. A bankruptcy case begins the moment a debtor files a petition with the Bankruptcy Court. Thereafter, that day is called the Petition Date and the individual is called a debtor.

On the Petition Date, without any further action of the debtor or the Bankruptcy Court, an automatic stay is triggered that prohibits the club from attempting to collect any debt from the debtor. Even the most innocent collection act, like mailing a statement of monthly charges to a debtor after the Petition Date, can draw the ire of the Bankruptcy Court and result in harsh penalties against the club, including actual and punitive damages.

In addition to giving rise to the automatic stay, the Petition Date is a bright line that divides the debtor’s debts into two buckets: prepetition debts (arising before the Petition Date) and post-petition debts (arising after the Petition Date).

The distinction between prepetition and post-petition directly affects a club’s right to collect dues. Generally, prepetition dues are discharged (i.e., the debtor’s personal liability is eliminated) and clubs may only collect those amounts by filing a proof of claim before a deadline set by the Bankruptcy Court. On the other hand, post-petition dues are not discharged and the debtor remains personally liable.

But that is not the end of the story. Even though bankruptcy does not discharge post-petition dues, it does, under certain circumstances, give the debtor the power to avoid post-petition dues by rejecting their membership contract.

To understand the extent that a debtor can use bankruptcy to avoid post-petition dues at your club, you must know whether the debtor’s obligation to pay dues arises under a contract or on account of an ownership interest in the club. This distinction is typically made along the same lines as between a non-equity and an equity club and is critical to analyzing a club’s right to collect post-petition dues.

The bottom line is that clubs must proceed with caution and have an accurate understanding of their legal structure and club documents when a member files for bankruptcy. Both are necessary to know how bankruptcy affects the club’s right to collect and the debtor’s obligation to pay future dues.

A member’s bankruptcy done wrong can cost the club a lot, including the member, uncollectable dues, and sanctions from the Bankruptcy Court which could include the debtor’s actual damages, costs and attorneys’ fees and, in some circumstances, punitive damages.

When in doubt, consult a club legal professional who is knowledgeable in bankruptcy matters to help avoid violating the automatic stay, navigate the proof of claim process, understand the club’s documents and, ultimately, maximize recovery. BR

Michelle Tanzer, Esq. is chair of the Global Club and Branded Residences group at the law firm of Nelson Mullins, serves on the National Club Association board of directors, arbitrates club- related disputes for the American Arbitration Association’s (AAA) National Golf Industry Panel and authored “The Club Litigation Book: Keeping Clubs out of Court.” She can be reached at (561) 866-5700 or via email: michelle. tanzer@nelsonmullins.com

Andrew Kilpinen is an associate in the Global Club and Branded Residences group at Nelson Mullins.