Double Bogie: Bank's Security Interest in Green Fees Cut Off by Club's Bankruptcy

A recent court decision points to a critical difference between the way revenue generated by golf courses and revenue generated by hotels is viewed in a bankruptcy scenario. My partner, Ben Young, reports how one lender found out that the cash flow generated from the green fees of a bankrupt golf course was not part of the lender's collateral. Veteran workout specialists will be reminded of the old "rents versus accounts" issue on hotel revenues that was finally resolved by an amendment to the Bankruptcy Code.

Are golf course revenues "rents"?

A golf course may look like a solid piece of collateral. After all, golfers will pay good money to play and the green fees and driving range fees golfers pay to play the course will generate a revenue stream. This revenue stream can be pledged to a lender and used to support loans to the owner of the course. Lenders love to finance a business that generates a steady revenue stream, making a golf course look like an attractive form of collateral.
But what happens if the owner of the course files a bankruptcy case? In that event, the lender will want to control the borrower's cash flow. Does the lender's lien extend to the green fees and driving range fees paid by golfers after the course's owner files a bankruptcy case?

Premier Golf Properties -- new appellate panel decision on security interest in golf course revenues

A recent decision of the Bankruptcy Appellate Panel for the Ninth Circuit holds that the lender's lien does not encumber post-petition green fees and driving range fees. The result of the case (Premier Golf Properties LP) is that the lender immediately lost its security interest in the most important revenue stream generated by its borrower. In Premier Golf, the debtor owned two 18-hole golf courses and a driving range and its revenues were generated by the green fees and driving range fees. The lender made a loan to the debtor secured by a blanket security interest in all of the debtor's real property and personal property. The lender's loan documents granted it a security interest in all accounts and contract rights. The loan documents specifically included in the lender's collateral all green fees and driving range fees and all rents, issues, revenues and profits arising from any rental, license, concession or other grant of a right of possession, use or occupancy of the real property or from any agreement affecting the use, enjoyment or occupancy of the real property.

Bankruptcy cuts off security interest in post-petition revenues from the golf course

The debtor filed a chapter 11 case and immediately argued that the lender's security interest did not extend to any post-petition green fees and driving range fees. Under Bankruptcy Code § 552, whether the post-petition green fees and driving range fees were subject to the lender's pre-petition security interest turned upon whether these fees were the proceeds of the lender's collateral or were rents for the collateral. The debtor argued that the post-petition green fees and driving range fees were not proceeds of the lender's collateral, were not rents for the use of the lender's collateral and therefore were no longer the lender's collateral.

The Bankruptcy Appellate Panel agreed. The court determined that the green fees and driving range fees were not rents because those fees derived primarily from the services performed by the golf course owner, not from the real property. These services included repositioning holes, planting, seeding, mowing, watering, fertilizing and maintaining the course. The court concluded that "Unlike hotel cases where the revenue from room rental derives primarily from the usage of real property as shelter or occupancy, a golf course derives its revenue primarily from the usage of real property as entertainment." Similarly, because the fees were generated by the services performed by the course's owner, the fees were not proceeds of the lender's collateral.

What does this all mean?

The Bankruptcy Appellate Panel's decision appears to be correct. In legal terms, rent is an amount paid for the possession and occupancy of real property. A golfer is not in possession of the course and the fees paid to play the course therefore can in no way be considered "rent". Similarly, the fee is primarily for the services provided by the course and thus is not "proceeds" of the lender's collateral either.

The obvious consequence is that a lender cannot rely on holding a security interest in green fees and driving range fees to protect it in a bankruptcy case. Because these fees are a primary source of a golf course's revenues and cash flow, a lender's inability to obtain a bankruptcy-proof security interest will make it much more difficult for course owners to obtain financing.
The decision may have broader implications as well. Premier Golf held that cash collected on the lender's collateral was not subject to the lender's security interest because that cash was generated from the debtor's performance of services and was not merely the passive conversion of the lender's collateral into cash. As a result, a lender to any business that incorporates a strong services component in its revenue generation will want to consider the potential impact of Bankruptcy Code section 552 in the event of the borrower's bankruptcy filing. 

For more information on workouts, bankruptcies and receiverships of hospitailty properties

For more articles about dealing with distressed hospitality assets, go to www.HotelLawyer.com and scroll down the right hand side. Then click on red link to the topic that says, "Workouts, Bankruptcies & Receiverships."

There is a rich library of materials there, including free access to The Lenders Handbook for Troubled Hotels. JMBM's Global Hospitality Group® has deep experience in all aspects of golf course, resort and hospitality finance -- as well as in workouts, bankruptcy and receiverships. We would be pleased to discuss the implications of this case with you and help you to evaluate your options for protecting your interests.

Bennett Young is a partner in JMBM's Bankruptcy, Insolvency and Restructurings Group and a senior member of the Global Hospitality Group®. His clients include lenders, financial institutions, secured and unsecured creditors, distressed investment funds, businesses, receivers, special servicers and creditors' committees. Ben recently represented the owner of a partially completed multi-billion dollar resort property in the restructuring of its finances and has represented lenders to hotels and casinos. For more information, contact Ben Young at 415.984.9626 or [email protected].

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?

About the JMBM Global Hospitality Group®

The hospitality attorneys in the Global Hospitality Group® of Jeffer Mangels Butler & Mitchell LLP comprise the premier hospitality practice in a full-service law firm, and the most experienced legal and advisory team in the industry. Our team of seasoned hotel lawyers has helped clients with more than 4,600 hospitality properties located around the globe valued at more than $123 billion, and have worked on more than 2,700 management and franchise agreements. Our experience provides one of the most extensive virtual data bases of market terms for deals and financings. The hospitality lawyers of our team are not just great hotel lawyers—we are also hospitality consultants and business advisors, dealmakers and facilitators of the flow of capital. We help our clients find the right operator, joint venture partner or capital provider. We know who to call and how to reach them.

Jim Butler
+1 310 201 3526
JMBM