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Showdown in Spokane: The Spokane Country Club Bankruptcy Case

The bankruptcy case of the Spokane Country Club (“SCC” the “Club” or the “Debtor”) is a very interesting study of how the bankruptcy process has not only been used to disrupt the collection efforts of plaintiff creditors who have already been awarded a judgment, but also to essentially negate significant policy changes for a club that had been stipulated to 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 located on over 187 acres set against the Little Spokane River. The Club is a non-profit and as such pays no Federal taxes. At the time of its bankruptcy filing in May 2013 it had 340 regular members (who are shareholders), 104 other types of members and 60 employees.

In the summer of 2009 four female members (the “Plaintiffs”) filed suit against SCC, alleging gender discrimination. They claim that despite paying equal fees they did not enjoy equal access to the club’s facilities. For example, they alleged they were denied equal access to: (i) facilities including the golf course; (ii) prestige golf events; (iii) tee times; (iv) membership honors and awards; and (v) club functions. They also alleged that there was a restricted, men’s only area (though not marked as such) known as the “Men’s Grill.” Although the male only designation of that area was expressly renounced in public, in practice male board members and staff continued to make comments and behave as though this area remained 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 the 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 2 member applicants had been rejected over the previous 9 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, for its part, 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 afterwards, the parties entered mediation and came up with a framework to pay the judgment, as well as 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 which would force the Club to cease its discriminatory practices, it filed for bankruptcy protection in the Eastern District of Washington.

The bankruptcy filing drastically changed the situation. One of the primary effects was that it significantly eroded the 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 — assaults that would likely introduce entirely new court battles to be fought. By filing, the Club was making good on a threat it had previously made during the State court litigation that if the matter went to trial and the Plaintiffs prevailed in any meaningful way 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 oversupply of courses and a contraction in the total 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 proposed counsel. Less than a month later, Davidson Backman, Debtor’s counsel, objected to the formation of the UCC on the grounds that the four 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. (Although it should be noted that SCC, or another interested party, could have challenged that secured status at a later time in the case.) This secured status was owing 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, above and beyond its physical assets) and liabilities of $2.9 million.

The Debtors made a number of points in their objection to the formation of the committee, including questioning why a Unsecured Creditors Committee was even necessary in the first place. While not explicitly stating that they believed the Plaintiffs’ claims were secured and that their status as secured creditors was sufficient reason to remove them from the UCC, the Debtor did make note of the fact that the judgment liens became attached against SCC real property as a matter of law, and also that 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 instead focused on conflicts of interest the Plaintiffs would create and the 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 not necessary. (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 in August 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 – all the while continuing to work on contingency.

The bankruptcy filing also stayed the injunction. This is important because the Club had not yet stopped its discriminatory practices and the injunction would have placed it under the watchful eye of the state court. Starting from the petition date, as a result of almost 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 continues to delay payment of the judgment.

Once the Debtor entered bankruptcy, the old agreement that had been worked out prepetition 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: (i) Plaintiff’s claims would be allowed at $1.6 million to be paid through a special assessment to the members of $740k, disbursement of the supersedeas bond and insurance; and (ii) SCC would cease gender-based discrimination and provide equal access to facilities, tee times, etc. Since the terms of the settlement had not been pre-approved by a vote of the members, the only thing remaining to be done was have them put it to a vote. If this was a film that last sentence would have been accompanied by foreboding piano music.

Following two lengthy “Town Hall” meetings in the winter of 2013, the members rejected the settlement agreement by a vote of 257 to 13. Whether the sticking point was the cessation of gender discrimination or the monetary impact of an assessment on each member is not clear. 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, distinctly private clubs charge initiation fees ranging from six figures to a million or more, SCC offered a decidedly lower price of entry.

It is perhaps no surprise that the members voted down anything having to do with personal cash outlays as the Club was reportedly still paying 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. The members essentially voted for the Club’s destruction rather than submit to a compromise.

The Club then went to the drawing board on a plan of reorganization which did not incorporate any type of settlement. The Debtor’s first iteration, released in November 2013, 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 private”[9] 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, then approved, by the New Club. The chosen ones would have their memberships transferred, while those abandoned would have their memberships converted to equity claims against the estate. As for the Plaintiff’s claims: the Debtor vowed to “defend against the allowance of Plaintiffs’ claims, and will 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 persistent actions of the Plaintiffs changed the complexion of the plan in many respects. The Fourth Amended Plan, which was approved in the Spring of 2014, simply says that the Club will re-emerge as a private club and pay future obligations out of cash flow, financing transactions and assessments. They also 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 does concede 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 highlights 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 of this year the Plaintiffs filed a competing plan calling for auction of the Club with a minimum bid of $2.5m. A sale at this price would presumably be enough to pay sales commissions, administrative fees and most, if not all, 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 has been quite a sordid ordeal. Beyond the gender discrimination at the core of the dispute at SCC, we find the bankruptcy case worthy of note for several reasons. First, it illustrates the protections and advantages provided to Debtors by the bankruptcy code. 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 with essentially one hand tied behind its back. Whereas normally you’d have a firm experienced in bankruptcy law representing the major creditors and being kept current with payments on its invoices, by contrast in this case an attorney inexperienced in the bankruptcy code who had already been working on contingency since 2009 had to continue on that basis for two additional years and running. And adding more insult to injury, not only is Mary Schultz defending her clients’ claims, she’s defending her fee claims as well. 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 so as to discourage companies from filing for Chapter 11 and causing everyone to “wait in line”? And if a bankruptcy case, such as this one, is clearly being used solely as a means 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, canes, and staffs made available to the debtor by the bankruptcy code.

Of course, the case also 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, as SCC ignored the growing demographic shift to more female golfers to its own detriment. In any case, the State and Federal court system, age old issues around gender rights and the all-important dollar collided in Spokane – and it’s not clear who, if anyone, won.

[1]  Findings of Fact, Conclusions of Law and Order for Injunctive Relief and Attorney Fees, Superior Court State of Washington, No. 09-2-03168-6. July 23, 2014.

[2] Plaintiff attorney Mary Schultz.

[3]  Motion For Order Directing United States Trustee To Change Membership Of Creditors’ Committee, US Bankruptcy Court, No. 13-01959. Docket 94, July 9, 2013.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Fourth Amended Disclosure Statement, US Bankruptcy Court, No. 13-01959.  Docket 443, March 24, 2014.

[8] Plaintiff Creditors’ First Amended Objection to SCC’s First Amended Disclosure Statement, US Bankruptcy Court, No. 13-01959, Docket 279, December 22nd, 2013.

[9] Disclosure Statement, US Bankruptcy Court, No. 13-01959, Docket 236, November 1, 2013.

[10] Ibid.

About Adam D. Stein-Sapir

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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Adam D. Stein-Sapir