The Spokane Country Club bankruptcy case (SCC, the club, or the debtor) is an interesting study. The bankruptcy process was used to disrupt the collection efforts of plaintiff creditors who had been awarded a judgment and to negate the club’s significant policy changes that had been stipulated in a state court proceeding.
The club was founded in Spokane, Washington, in 1898. Spokane is located on the far eastern side of Washington State, closer to Missoula, MT, than to Seattle. The city is named after the Native American Spokane people, whose name means children of the sun. SCC operates a premier golf and social club featuring an 18-hole golf course, clubhouse, and swimming pool on more than 187 acres on the Little Spokane River. The club is non-profit and, as such, pays no Federal taxes. At the time of its bankruptcy filing in 2013, it had 340 regular members (who are shareholders), 104 other types of members, and 60 employees.
In the summer of 2009, the plaintiffs, four female members, filed suit against SCC, alleging gender discrimination. They claim that despite paying equal fees, for membership to the Spokane Country Club they did not enjoy equal access to the club’s facilities. They alleged they were denied equal access to
They also alleged that there was a restricted, men’s only area (though not labeled as such) known as the “Men’s Grill.” The male-only designation was expressly renounced in public. However, in practice, male board members and staff commented and behaved as though this area were a men’s only zone, “engaging in vulgar and oppressive behavior, resulting in potentially humiliating risks for a female member who might enter that space.”1
Furthermore, although men enjoyed the freedom to be on the golf course during women’s golf tournaments, women were not allowed on the course during men’s tournaments.
In Washington State, as in most of this country, discrimination is legal for private clubs. However, through the lawsuit, it was found that SCC did not meet that qualification. One fact in the plaintiffs’ favor: although admission did not require a formal invitation, only two applicants had been rejected over the previous nine years. In March 2013, the State court entered a judgment against SCC for roughly $580k for the plaintiffs and $760k in attorney’s fees. The club had expended approximately $1.3 million in legal defense costs, funded mostly by its insurance policy. SCC appealed the verdict and posted a $650k supersedeas bond in favor of the plaintiffs.
Shortly afterward, the parties entered mediation and came up with a framework to pay the judgment and change the operating practice of the club to comply with Washington State laws against discrimination. According to the plaintiffs, however, the club continued to operate in a discriminatory manner. On the eve of a State court hearing to liquidate the attorney fee claims and enter an injunction to force the club to cease discriminatory practices, SCC filed for bankruptcy protection in the Eastern District of Washington.
The Spokane Country Club bankruptcy filing drastically changed the situation, significantly eroding progress the plaintiffs and their counsel, Mary Schultz, had made in State court. It also magically transformed their definitive monetary judgment, which seemed to be imminently payable, into a fragile new claim subject to the assaults afforded by the bankruptcy code. These assaults would likely introduce entirely new court battles to be fought. By filing, the club was making good on a threat made during the State court litigation. They said if the matter went to trial and the plaintiffs prevailed, the club would file for bankruptcy, and the plaintiffs could “stand in line with other creditors.”2
In the filing, the debtors blamed their poor financial performance on an overabundance of golf courses and a contraction in the number of American golfers from 30 million in 2005 to only 25 million by 2011. Evidence suggests, however, that the number of women golfers is actually growing, and thus it could be argued that the sluggishness in SCC’s member growth was at least partially attributable to its practice of gender discrimination.
One of the first signs of trouble for the plaintiffs came as quite a surprise following a routine committee appointment. The US Trustee for Region 18, Gail Geiger, appointed an unsecured creditor committee (UCC) on June 10th, 2013 comprised of the four plaintiffs. Law firm Elsaesser Jarzabek was the proposed counsel. Less than a month later, Davidson Backman, the debtor’s counsel, objected to the formation of the UCC on the grounds that the plaintiffs didn’t represent “the interests of unsecured creditors as a whole.”3
It should be noted that SCC listed the plaintiffs on its Schedule D filed with the Bankruptcy Court, the portion of its Schedules of Assets and Liabilities for listing the secured claimants. SCC, or another interested party, could have challenged that secured status later in the case. This secured status was due to their liens on real property and the supersedeas bond. The only other secured claim was a US Bank mortgage for $992k.
The club separately listed Mary Schultz’s $1.1 million legal fee claim on Schedule F (unsecured claims) as a disputed claim. The remaining unsecured claims totaled only $105k. In aggregate, the petition listed assets of $6.4 million, including an estimated value of the club beyond its physical assets. It listed liabilities of $2.9 million.
The debtors made a number of points in their objection to the formation of the committee, including questioning why an Unsecured Creditors Committee was necessary in the first place. The debtor did not t explicitly say they believed the plaintiffs’ claims were secured and their status as secured creditors was sufficient reason to remove them from the UCC. But the debtor did note that the judgment liens became attached against SCC real property as a matter of law, and the supersedeas bond provided a “source of payment to each Plaintiff if SCC were not successful on appeal.”4
Their motion to dissolve the committee focused on conflicts of interest the plaintiffs would create and complications that would result in “their motivations questioned and judged against their individual interests.”5 The debtor also represented that the $105k of undisputed unsecured claims could expect to be “paid in full with no need or desire to involve themselves”6 in the UCC, which itself was unnecessary. These claims were later paid in the “course of post-petition operations”7 in contravention of the bankruptcy code, which requires that such payments only be made with prior court approval.
The debtor prevailed, all UCC members resigned, and their counsel was summarily dismissed. It would now fall on the shoulders of Mary Shultz, an experienced litigator with very little commercial bankruptcy experience, to shepherd her clients’ claims through the Chapter 11 process while continuing to work on contingency.
The Spokane Country Club bankruptcy filing also stayed the injunction. This is important because the club had not stopped discriminatory practices, and the injunction would have placed it under the watchful eye of the state court. Starting from the petition date, after a year of the plaintiff’s persistent efforts, the stay was ultimately lifted to permit the injunction and court supervision of the debtor. While it didn’t permanently stop the injunction, the Federal Chapter 11 filing delayed it for almost a year and continued to delay payment of the judgment.
Once the debtor entered bankruptcy, the old prepetition agreement regarding payment of the judgment and fees had to be redone. A mediator was hired, and in late summer, a new settlement was reached.
The salient terms were twofold:
Since the terms of the settlement had not been pre-approved by the members, the only task remaining was to put it to a vote. If this were a film, that last sentence would have been accompanied by foreboding piano music.
Following two lengthy meetings in the winter of 2013, the members rejected the settlement agreement 257 to 13. Whether the sticking point was the cessation of gender discrimination or the monetary impact of an assessment on each member is unclear. The assessment would have amounted to less than $3,000 per member. However, due to declining enrollment and the number of people on the exit list (those waiting for a new member to purchase their share), the several thousand dollar initiation fees had been waived for some time. New members could expect to pay only the monthly fees of about $500 per month. While well-known private clubs charge initiation fees from six figures to a million, SCC offered a decidedly lower entry price.
It is perhaps no surprise that the members voted down anything having to do with personal cash outlays. The club reportedly still paid down debt from its 1998 remodel, when “members were charged only $3,000 a member and given 20 years to pay.”8 As a result of the vote, the settlement was invalidated, and the debtor filed for its removal. Rather than submit to a compromise, the members essentially voted for the club’s destruction.
The club went back to the drawing board on a reorganization plan without any type of settlement. The debtor’s first iteration proposed an interesting reconstitution of the century-old club. First, the old club’s membership and articles of organization would be abandoned, and a new, distinctly private9 one that presumably would have the prerogative to discriminate in any way it desired would rise like a phoenix from its ashes. The new club. Old members would need to be nominated and approved by the new club. The chosen ones would transfer their memberships, while the rejected memberships were converted to equity claims against the estate.
As for the plaintiffs’ claims, the debtor vowed to “defend against the allowance of Plaintiffs’ claims, and…seek the entry”10 of a judgment disallowing those claims. However, if allowed, the plaintiffs’ claims would be paid from the supersedeas bond, insurance, voluntary assessments, or a sale or financing transaction. Here we go again.
The plaintiffs’ persistent actions changed the complexion of the plans. The Fourth Amended Plan, approved in the Spring of 2014, says the club will re-emerge as a private club and pay future obligations out of cash flow, financing transactions, and assessments. They retain the flexibility to sell the club free and clear of all liens. The plan is very specific about objecting to the plaintiffs and their attorney’s claims, although it concedes that the plaintiffs’ claims are secured by a bond.
A Chapter 7 liquidation analysis shows two scenarios, each with a positive recovery to its 287 members, that highlight the impact of the plaintiffs’ attorney fees. In the first, if the $1.3 million in fees were allowed, they would only recover $2,062 per member. If they were disallowed in full, the payout would be $6,454 per member.
In February 2015, the plaintiffs filed a competing plan to auction off the club with a minimum bid of $2.5M. This amount would presumably be enough to pay sales commissions, administrative fees, and most of the plaintiffs’ attorney’s claims to the extent allowed. It is unknown at this time what path the case will take.
Needless to say, the whole affair was quite a sordid ordeal. Beyond SCC’s alleged gender discrimination at the core of the dispute, we find the bankruptcy case worthy of note for several reasons.
First, it illustrates the protections and advantages the bankruptcy code provides to debtors. Not only were settlements effectively stricken down and injunctions stayed, but with the dissolution of the Unsecured Creditors Committee, a large creditor group was forced to fight essentially with one hand tied behind its back. Normally you’d have an experienced bankruptcy law firm representing the major creditors and being current with payments on its invoices. In this case, an attorney inexperienced in the bankruptcy code had already been working on contingency since 2009 and had to continue on that basis for years. Adding insult to injury, not only was Mary Schultz defending her clients’ claims, she had to defend her fee claims.
Second, it raises important questions about how and to what extent the Federal bankruptcy court system can intervene and affect State court findings about public policy matters. Should claims arising from State court judgments be afforded special status to discourage companies from filing for Chapter 11 and causing everyone to “wait in line”? And what of a bankruptcy case clearly being used to target one specific group of creditors (remember that they just went ahead and paid their trade creditors without court approval, no problem). Then there is no real “line” in which creditors are equally waiting their turn, only a select line of certain creditors to be bludgeoned by the clubs and canes handed to the debtor by the bankruptcy code.
The case provides an interesting study of an exclusive, century-old club whose members would sooner destroy that club than change their traditions. Some might argue that this process started well before the case filing. SCC, to its own detriment, ignored the growing demographic shift to more female golfers. In any case, the State and Federal court systems, age-old issues around gender rights, and the all-important dollar collided in Spokane. And it’s not clear who, if anyone, won.
Final update: According to The Seattle Times, the Spokane Country Club bankruptcy case brought about a sale to the Kalispel Indian Tribe. The tribe operates it as the semiprivate Kalispel Golf and Country Club.
“The gender-discrimination lawsuit that ultimately closed the doors of Spokane (Wash.) Country Club has prompted a behind-closed-doors review of policies at private clubs in the Northwest, in which clubs evaluate how private they are. Some facilities no longer allow outside weddings or charity events or allow their courses to be used by high school teams in an effort to maintain their private status and avoid discrimination lawsuits.” – The Seattle Times
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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on March 19, 2015. It was recently edited by Maryan Pelland.]
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Adam is the co-founder and portfolio manager of Pioneer Funding Group, a bankruptcy trade claim investment fund (http://www.pioneerfundingllc.com/). Adam started his career in the leveraged finance group of investment bank CIBC World Markets. At CIBC he advised companies and private equity sponsors on M&A, LBOs and restructurings and focused on debt and equity capital raising.…
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