PALMAS COUNTRY CLUB INC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: :
:
PALMAS DEL MAR COUNTRY CLUB, INC. : Case No. 10-07072 (ESL)
: Chapter 11
Debtor. :
__________________________________________:
OPINION AND ORDER
This case is before the court on the objection filed by Palmas del Mar Country Club, Inc.
(the “Debtor”) to the priority status of Proofs of Claim filed by Mr. Jose Sanchez, Mr. Luis
Marin, Mr. Miguel Nazario Franco, Mr. Blair C. Fensterstock and Ms. Janitzia Schurch
(collectively the “Claimants”), (the “Objection”)(Docket No. 89). The Claimants allege that the
membership deposits they paid the Debtor have priority status pursuant to 11 U.S.C. § 507(a)(7).
The Debtor alleges that they are general unsecured claims. In addition, the Debtor claims that the
Claimants have failed to overcome the strong presumption against treating general unsecured
claims as priority claims and that the members got what they paid for the moment it was paid,
that is, membership in the club, therefore they do not qualify as the types of parties, nor have the
types of claims that Congress intended to protect with Section 507(a)(7). The Claimants filed
oppositions to the objection (Docket Nos. 104, 116, 120 and 121). For the reasons stated herein
the Objection is hereby granted.
The Debtor, prior to the bankruptcy petition, operated golf, tennis and beach club
facilities and amenities (the “Facilities”) at Palmas del Mar, Humacao, PR. In order to join the
clubs, a member entered into a membership agreement with the Debtor. The membership
agreement was set forth in a March 1991, a September 2000, and a March 2002 membership plan
(collectively the “Membership Agreements”). Pursuant to the Membership Agreements a
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member was required to make an up-front payment called a membership deposit (the
“Membership Deposit”) and to pay monthly or yearly dues. According to the Membership
Agreements the Membership Deposits were refundable to members under certain circumstances,
to wit, (i) after the member formally resigned, the membership was placed on a waiting list for
reissuance and when similar memberships were subsequently sold, the resigned membership was
reissued in accordance with the formula provided for in the Membership Agreement; or (ii) upon
the lapse of 30 years from the issuance of the membership . As of the date of the petition there1
were 417 members on the resignation list, with some being on the list since as far back as
January 2003. Payment of the Membership Deposit only entitled the Claimants to become a
member of the clubs but did not entitle members access to club benefits which were only
afforded to members upon payment of their monthly or yearly dues. Members are required to
pay separately for all services and goods at the Facilities.
The Membership Agreements provide that the Debtor can, in its sole discretion, terminate
and discontinue operation of the Facilities, terminate or modify the Membership Agreements
and/or sell the Facilities. The Membership Agreements further provide that the Membership
Deposits received will initially be deposited in an interest bearing escrow account at a local
financial institution until completion of the new golf facilities, and that two-thirds of the
The Membership Agreements read as follows:1
Each person who desires to acquire a Signature Membership in the Club must pay a
membership deposit to the Club, as determined by the Club from time to time. The Club will
be obligated to refund the membership deposit upon the earlier of the following:
(a) within sixty (60) days after the resignation and reissuance of the Signature Member’s
membership in the Club; or
(b) thirty (30) years from the date the member acquired their Signature Membership in the
Club.
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membership proceeds be held in the escrow account, plus the accrued interest, shall be released
to the club upon the completion of the eighteen holes of the new golf course; and the remaining
one-third, plus interest, shall be released to the club upon the issuance of a use permit for the new
golf clubhouse.
The legislative history of 11 U.S.C. § 507(a)(7) shows that the purpose in creating this
priority was to protect consumers who leave a deposit or lay merchandise away and do not
receive the merchandise from the retailer when the retailer files bankruptcy. The Debtor
concludes that these Claimants are not the type of consumers this provision intends to protect.
In turn, the Claimants argue that their claims arise from a refundable membership deposit
and the legislative intent behind Section 507(a)(7) was to protect consumers that paid money for
lay away plans, deposits on merchandise or gym memberships, among others. The Claimants
sustain that the Membership Deposits are comparable to gym memberships and thus
contemplated within the meaning of “deposits” pursuant to Section 507(a)(7). They further
contend that the Membership Deposits were given in connection with the acquisition of services
that were not provided, and which were for personal, family or household use. The Claimants
argue that if a Club Member did not pay his dues, the Membership would be terminated and
refunded in accordance with the same terms and conditions as a Member who resigned his
Membership. The Membership Deposits were in fact guaranteed refundable by the Membership
Plan. Furthermore, upon payment of the Membership Deposit a Member was not required to pay
golf green fees or court fees for the tennis facilities, and these are indeed services. Finally, the
Claimants argue that the refundable deposits had to be segregated from the Debtor’s other cash
holdings.
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Discussion
The Bankruptcy Code provides in section 507(a)(7) as follows:
(a) The following expenses and claims have priority in the following order:
...
(7) Seventh, allowed unsecured claims of individuals, to the extent of $2,600 for each
such individual, arising from the deposit, before the commencement of the case, of
money in connection with the purchase, lease, or rental of property, or the purchase of
services, for the personal, family or household use of such individuals, that were not
delivered or provided.
11 U.S.C. § 507(a)(7). The purpose of this priority is to protect consumers who make deposits
for goods or services that at the time of the bankruptcy filing were not provided to such
consumer. 4 Alan N. Resnick and Henry J. Sommer, Collier on Bankruptcy, ¶507.09 (16 Ed.th
Rev’d 07/2010). The operative word in this provision is “deposit” which has been defined as
“something placed for safekeeping: as (a) money deposited in a bank, (b) money given as a
pledge or down payment. Merriem-Webster Online Dictionary. In re Heritage Village Church
and Missionary Fellowship, Inc., 137 B.R. 888 (Bankr. D.S.C. 1991). Also “to place for
safekeeping or in trust”, “to give as security or in part-payment”, “anything laid away or
entrusted to another for safekeeping”, “anything given as security or in part payment.” The
Random House College Dictionary (Rev’d Ed. 1980), and “the act of giving money or property
to another who promises to preserve it or to use it and return it in kind.” Black’s Law Dictionary
(8th Ed. 2004).
The legislative history indicates that this priority should be broadly interpreted. Therefore,
there is some confusion in cases considering this priority, and some courts have granted the
priority to consumer claims although they seem to be out of the scope of the statutory language.
4 Collier on Bankruptcy at ¶507.09.
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The legislative history of this priority provides as follows:
The purpose of this priority is to protect consumers who leave a deposit or lay
merchandise away, and who do not receive the merchandise from the retailer who files a
petition.
A consumer that pays money on a layaway plan or as a deposit on merchandise, or that
buys a service contract or a contract for lessons or a gym membership, is a general
unsecured creditor of the business to which he had given his money. Very few consumers
are aware of their status as general unsecured creditors. If the merchant involved files
under the bankruptcy laws, the consumer is usually left holding the bag. Though he
assumed his deposit was tantamount to a trust fund, he gets nothing from the estate of the
debtor, because the assets available provide little return to unsecured creditors. Because
of his ignorance and his inability to bargain with a retail merchant, he is unable to do a
credit investigation or obtain special terms from the merchant, as a true creditor may do.
In order to remedy this situation this bill provides a priority for these consumer creditors of a
business in bankruptcy. Id. at ¶ 507.09[1].
There are situations that are clearly within the scope of the statute, such as, consumer
purchases on layaway, and the seller files bankruptcy before the consumer finishes paying for the
good; or a consumer makes a 50% deposit on a piece of furniture, the balance of which is due at
the time of the delivery, but the seller files bankruptcy before delivery. Id. at ¶ 507.09[2]. In
fact, some courts have held that the language of the statute is unambiguous and thus the
legislative history is irrelevant to its interpretation. In re Heritage Village Church and Missionary
Fellowship, Inc., 137 B.R. at 895. The Heritage court determined that the priority afforded by
this Section is specifically conditioned upon the making, by a consumer, of a “deposit” prior to
the commencement of the bankruptcy proceeding and that the plain meaning of the word
“deposit” is that it is a partial payment establishing the depositor’s right to receive good or
services upon the completion of the payments. In determining that the claim in question was not
entitled to priority status pursuant to 11 U.S.C. § 507(a)(7) the Heritage court reasoned as
follows:
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These payments, solicited as gifts or investments and made by the Plaintiffs to the
Debtor, do not fall under the definition of “deposit”... [E]ach Lifetime Partner’s payment
completely satisfied the partner’s obligations to the Debtor with respect to the Lifetime
Partnership. The relationship did not require further payments by Lifetime Partners and
as such, did not constitute a deposit relationship...
No one disputes that whatever rights Lifetime Partners may have possessed, be they
memberships paid in full or on time, those rights were fully vested pre-petition. Payments
made by Lifetime Partners, were not, in any sense of the word, deposits. The word deposit
does not appear in any of the promotional literature attached as exhibits to either the
Plaintiffs' or the Defendant's pleadings. Moreover, no trust relationship is alleged to have
been created with respect to the Lifetime Partners' monies, nor have the Plaintiffs alleged
that the Lifetime Partners' payments were, or should have been, segregated by the Debtor.
In essence, the rights and responsibilities of individual Lifetime Partners and the Debtor
were both fully operative and were being delivered and provided prior to the filing of the
bankruptcy petition. The fact that the benefits of the Lifetime Partner memberships were
being delivered and provided pre-petition is further cause to support a determination that
the Plaintiffs fall without the literal purview of § 507(a)(6).
Id. at 896.
Conversely, there have been courts that have broadly interpreted the statute. For example
it was determined that tenant’s security deposits are within the scope of this provision, although
the unreturned security deposit itself does not constitute goods or services and the leased
premises will normally have been “provided” prior to any obligation to return the deposit.
Collier on Bankruptcy, ¶507.09[2][a] citing Guarracino v. Hoffman, 246 B.R. 130 (D. Mass.
2000). However, the Guarracino court based its decision mainly on the fact that an individual
tenant is not a business creditor, the deposit is a pre-requisite to housing and thus not negotiated
at arm’s length between equals, and, most importantly, it is a consumer’s money held in trust and
the legislative history evidences Congress’ intent to protect the same. 264 B.R. at 134. See also,
In re River Village Associates, 161 B.R. 127 (Bankr. E.D.Pa., 1993).
In the case of In re WW Warehouse, Inc., 313 B.R. 588 (Bankr. D. Del 2004) the court
held that claims based on gift certificates to purchase merchandise from retailer that had not been
redeemed when the bankruptcy petition was filed were entitled to 507(a)(7) priority status despite
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the fact that they were not based on down payments or partial payments. In order to reach its
decision the WW Warehouse court examined the legislative history of the statute and concluded
that the same was passed to give priority to consumers who found themselves in the same
position as gift certificate purchasers, that is, those who paid money on lay away plans or made
deposits on merchandise assuming their deposit was tantamount to a trust fund and because of
their ignorance and inability to bargain with a retail merchant, are unable to do a credit
investigation or obtain special terms from the merchant, as a true creditor may do. 313 B.R. at
594. The court explained as follows:
The W.T. Grant problem which section 507(a)([7]) was designed to correct arose when
Grant, a retailer filed bankruptcy. Prepetition it had issued “scrip” to customers for their
use in connection with future purchasers. When Grant filed its Chapter XI petition for
arrangement, scrip holders were treated as unsecured creditors. This led to a large public
outcry. Many of the people who had purchased scrip were under the belief that they had
deposited money with W.T. Grant that remained theirs until they redeemed the scrip and
were outraged to find that their money had been commingled and dissipated.
The drafters of the Code believed that it was appropriate to provide some protection to
consumers in such situations. Unlike businesses that knowingly extend credit and run the
risk of non-payment, consumers that make advance deposits on merchandise do not
typically realize that they are extending credit when they make an advance payment for
goods or services.
Id.
Similarly, in the case of In re Salazar, 430 F.3d 992 (9th Cir. 2005) the Ninth Circuit held
that “deposit” as provided in 507(a)(7) may include the advance of full payment for consumer
goods or services because despite the literal definition of the word, the “[m]erchants’ violation of
consumers’ expectations and trust is precisely what Congress responded to when it passed the
statute in question.” 430 F.3d at 996. Courts have held that other examples of a “deposit”
include money paid for the purchase of an extended warranty contract, In re Tart’s T.V.,
Furniture and Appliance Co., Inc., 165 B.R. 171 (Bankr. E.D.N.C. 1994) and tuition payments In
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re Longo, 144 B.R. 305 (Bankr. D.Md. 1992).
In the case before us the Claimants made an up-front payment in order to become club
members of the Debtor. Although the term Membership Deposit was used in the Membership
Agreements, these up-front payments are not “deposits” within the purview of Section 507(a)(7).
The Membership Agreements clearly provide the conditions precedent to the reimbursement of
the Membership Deposit, which are: (i) after the member formally resigned, the membership was
placed on a waiting list for reissuance and when similar memberships were subsequently
sold, the resigned membership was reissued in accordance with the formula provided for in the
Membership Agreement; or (ii) upon the lapse of 30 years from the issuance of the membership.
Furthermore, the Membership Agreements provide that the Membership Deposits would be used
to fund the building of the golf course. “Deposit” has been defined as “money given as a pledge
or down payment”, “anything laid away or entrusted to another for safekeeping”, “anything given
as security or in part payment”, and “the act of giving money or property to another who
promises to preserve it or to use it and return it in kind. In this case the Claimants had no
expectation that the Membership Deposits would be placed on escrow to be reimbursed to the
member upon his or her resignation and thus no trust relationship was created with respect to the
Claimants’ monies. The legislative history cited in the caselaw clearly indicates that Section
507(a)(7) was passed to protect those consumers who made payments, whether partial or full,
thinking that the recipient of the monies would hold them until the services they were purchasing
were provided, and that the monies remained their property until the services purchased were
provided. The Membership Agreements unambiguously state that the Debtor was not holding
their money in trust. The Membership Agreements provided that the Membership Deposits
would be used for improvements.
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In addition, the Membership Deposits were never treated as security for the future
provision or delivery of services or goods. The rights of such Claimants were fully vested upon
payment of the Membership Deposit because upon such payment they became club members,
which was what the Membership Deposit made them entitled to. The up-front payments
provided by the club members were for an immediate service which was provided, and not for a
future right to buy, lease, or rent any property. The rights and responsibilities of the Debtor were
both fully operative and were being delivered and provided prior to the filing of the bankruptcy
petition.
The payment of the “deposit” was a prerequisite for the membership, subject to being
refunded pursuant to the conditions set forth in the Membership Agreements. The Debtor is
contractually liable to the Claimants pursuant to the terms of the Membership Agreements.
However, the liability is not entitled to Section 507(a)(7) priority.
Conclusion
In view of the foregoing the objection filed by Palmas del Mar Country Club, Inc. to the
priority status of Proofs of Claim filed by Mr. Jose Sanchez, Mr. Luis Marin, Mr. Miguel Nazario
Franco, Mr. Blair C. Fensterstock and Ms. Janitzia Schurch (Docket No. 89) is hereby granted.
The claims are allowed as general unsecured claims for the amounts filed.
SO ORDERED.
In San Juan, Puerto Rico, this 29 day of December 2010.th
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