By: Rob Harris
A federal appeals court issued a decision last week that provides a cautionary reminder to banks and other golf course financers who believe acres of beautiful land provide sufficient collateral even if the golf course venture proves unprofitable.
United States Steel developed an Alabama subdivision, called Heatherwood, in the 1970s. The court described the project as follows:
“The centerpiece of the subdivision was an eighteen-hole golf course. The plat maps for the subdivision=s first three sectors showed a golf course at the heart of the subdivision and indicated that all the subdivision=s roads would have golf-themed names, such as ‘Masters Lane’ or ‘Oakmont Road.’ The first set of general covenants, restrictions and easements for the subdivision also referenced a golf course, requiring each residential lot to have a ‘golf cart storage area’ and barring fences ‘adjacent to the golf course fairways, tees or greens.’”
In 1999, certain subdivision homeowners and others grouped together to buy Heatherwood Golf Club from U.S. Steel. After a period of time, these individuals sold the Club, as a result of which an entity called Heatherwood Holdings, LLC took title. Needing funds to pay for renovations, Heatherwood secured a $4 million loan from First Commercial Bank, for which it provided the bank a mortgage on the golf course property.
Unfortunately, the golf club did not fare well under Heatherwood, and it eventually filed for bankruptcy. Heatherwood, together with the Bank, seeking to recoup its loan, found themselves confronting an obstacle to liquidating the collateral. The Bank made its $4 million loan with the expectation that the land could be turned into a residential development. After all, there was no formal deed restriction that limited the use of the property to a golf course.
The residents of the Heatherwood subdivision, however, objected, seeking to preserve the land for use as a golf course.
In its recent decision, the appellate court affirmed the bankruptcy court’s finding that the property was subject to an “implied restrictive covenant,” precluding its development. As the court noted,
“USX recorded numerous plat maps which identified the property as a golf course and listed the names of the roads in these maps, all of which were derived from the names of golf courses and tournaments. Moreover, the deeds to each residential lot in the subdivision makes reference to the various covenants and easements which note that the Heatherwood subdivision is a planned residential and golf community. The deeds required owners of residential lots to construct a golf cart storage area and prohibit the construction of a fence on those lots adjacent to a fairway, tee or green on the golf course property. Prospective lot purchasers were told that every homeowner must be a member of the Heatherwood Golf Club. USX created various marketing materials highlighting the benefits of living in a golf course community and erected a sign at the entrance of the development noting that the Heatherwood subdivision is a ‘golf course community.’ Notably, the community was used exclusively as a golf course community since it began operating in 1986. Lastly, based on testimony from witnesses, the bankruptcy court determined that most, if not all, Heatherwood homeowners were induced to buy based on the inclusion of a golf course in the subdivision and that USX always intended for the Heatherwood subdivision to be a golf course community.”
Accordingly, the bank found itself with rights to golf course collateral at a value that fell short of the amount of its debt.
Message to lenders: be darn sure about the uses to which you can put your collateral, just in case the borrower can’t meet its obligations.