# Opinion

> United States Bankruptcy Court, D. Puerto Rico · December 29, 2010

URL: https://www.frixlaw.com/law-library/cases/11355597

## Case

- **Full name:** In re: Palmas del Mar Country Club, Inc.
- **Court:** United States Bankruptcy Court, D. Puerto Rico
- **Decided:** December 29, 2010
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

1 IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
2
3
4 IN RE: :
:
5
PALMAS DEL MAR COUNTRY CLUB, INC. : Case No. 10-07072 (ESL)
6 : Chapter 11
Debtor. :
7 __________________________________________:
8
OPINION AND ORDER
9
This case is before the court on the objection filed by Palmas del Mar Country Club, Inc.
10
(the “Debtor”) to the priority status of Proofs of Claim filed by Mr. Jose Sanchez, Mr. Luis
11
Marin, Mr. Miguel Nazario Franco, Mr. Blair C. Fensterstock and Ms. Janitzia Schurch
12
13 (collectively the “Claimants”), (the “Objection”)(Docket No. 89). The Claimants allege that the
14 membership deposits they paid the Debtor have priority status pursuant to 11 U.S.C. § 507(a)(7).
15
The Debtor alleges that they are general unsecured claims. In addition, the Debtor claims that the
16
Claimants have failed to overcome the strong presumption against treating general unsecured
17
claims as priority claims and that the members got what they paid for the moment it was paid,
18
19 that is, membership in the club, therefore they do not qualify as the types of parties, nor have the
20 types of claims that Congress intended to protect with Section 507(a)(7). The Claimants filed
21
oppositions to the objection (Docket Nos. 104, 116, 120 and 121). For the reasons stated herein
22
the Objection is hereby granted.
23
The Debtor, prior to the bankruptcy petition, operated golf, tennis and beach club
24
25 facilities and amenities (the “Facilities”) at Palmas del Mar, Humacao, PR. In order to join the
26 clubs, a member entered into a membership agreement with the Debtor. The membership
27 agreement was set forth in a March 1991, a September 2000, and a March 2002 membership plan
28
1 member was required to make an up-front payment called a membership deposit (the
2
“Membership Deposit”) and to pay monthly or yearly dues. According to the Membership
3
Agreements the Membership Deposits were refundable to members under certain circumstances,
4
to wit, (i) after the member formally resigned, the membership was placed on a waiting list for
5
6 reissuance and when similar memberships were subsequently sold, the resigned membership was
7 reissued in accordance with the formula provided for in the Membership Agreement; or (ii) upon
8 the lapse of 30 years from the issuance of the membership1. As of the date of the petition there
9
were 417 members on the resignation list, with some being on the list since as far back as
10
January 2003. Payment of the Membership Deposit only entitled the Claimants to become a
11
member of the clubs but did not entitle members access to club benefits which were only
12
13 afforded to members upon payment of their monthly or yearly dues. Members are required to
14 pay separately for all services and goods at the Facilities.
15
The Membership Agreements provide that the Debtor can, in its sole discretion, terminate
16
and discontinue operation of the Facilities, terminate or modify the Membership Agreements
17
and/or sell the Facilities. The Membership Agreements further provide that the Membership
18
19 Deposits received will initially be deposited in an interest bearing escrow account at a local
20 financial institution until completion of the new golf facilities, and that two-thirds of the
21
22
1 The Membership Agreements read as follows:
23
24 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
25 be obligated to refund the membership deposit upon the earlier of the following:
26
(a) within sixty (60) days after the resignation and reissuance of the Signature Member’s
27 membership in the Club; or
(b) thirty (30) years from the date the member acquired their Signature Membership in the
28 Club.
1 membership proceeds be held in the escrow account, plus the accrued interest, shall be released
2
to the club upon the completion of the eighteen holes of the new golf course; and the remaining
3
one-third, plus interest, shall be released to the club upon the issuance of a use permit for the new
4
golf clubhouse.
5
6 The legislative history of 11 U.S.C. § 507(a)(7) shows that the purpose in creating this
7 priority was to protect consumers who leave a deposit or lay merchandise away and do not
8
receive the merchandise from the retailer when the retailer files bankruptcy. The Debtor
9
concludes that these Claimants are not the type of consumers this provision intends to protect.
10
In turn, the Claimants argue that their claims arise from a refundable membership deposit
11
and the legislative intent behind Section 507(a)(7) was to protect consumers that paid money for
12
13 lay away plans, deposits on merchandise or gym memberships, among others. The Claimants
14 sustain that the Membership Deposits are comparable to gym memberships and thus
15
contemplated within the meaning of “deposits” pursuant to Section 507(a)(7). They further
16
contend that the Membership Deposits were given in connection with the acquisition of services
17
that were not provided, and which were for personal, family or household use. The Claimants
18
19 argue that if a Club Member did not pay his dues, the Membership would be terminated and
20 refunded in accordance with the same terms and conditions as a Member who resigned his
21
Membership. The Membership Deposits were in fact guaranteed refundable by the Membership
22
Plan. Furthermore, upon payment of the Membership Deposit a Member was not required to pay
23
golf green fees or court fees for the tennis facilities, and these are indeed services. Finally, the
24
25 Claimants argue that the refundable deposits had to be segregated from the Debtor’s other cash
26 holdings.
27
28
1 Discussion
The Bankruptcy Code provides in section 507(a)(7) as follows:
(a) The following expenses and claims have priority in the following order:

6 (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
7 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
8 delivered or provided.
11 U.S.C. § 507(a)(7). The purpose of this priority is to protect consumers who make deposits
10
for goods or services that at the time of the bankruptcy filing were not provided to such

12 || consumer. 4 Alan N. Resnick and Henry J. Sommer, Collier on Bankruptcy, 9507.09 (16" Ed.
13 || Rev’d 07/2010). The operative word in this provision is “deposit” which has been defined as
14 “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
16
and Missionary Fellowship, Inc., 137 B.R. 888 (Bankr. D.S.C. 1991). Also “to place for
17
18 safekeeping or in trust”, “to give as security or in part-payment”, “anything laid away or
19 || entrusted to another for safekeeping”, “anything given as security or in part payment.” The
20 || Random House College Dictionary (Rev’d Ed. 1980), and “the act of giving money or property
71 to another who promises to preserve it or to use it and return it in kind.” Black’s Law Dictionary
22
(8th Ed. 2004).
23
The legislative history indicates that this priority should be broadly interpreted. Therefore,
25 || there is some confusion in cases considering this priority, and some courts have granted the
26 || priority to consumer claims although they seem to be out of the scope of the statutory language.
27 |! 4 Collier on Bankruptcy at 507.09.
28
-4-

1 The legislative history of this priority provides as follows:
2
The purpose of this priority is to protect consumers who leave a deposit or lay
3 merchandise away, and who do not receive the merchandise from the retailer who files a
petition.
4
A consumer that pays money on a layaway plan or as a deposit on merchandise, or that
5
buys a service contract or a contract for lessons or a gym membership, is a general
6 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
7 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
8
debtor, because the assets available provide little return to unsecured creditors. Because
9 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.
10
In order to remedy this situation this bill provides a priority for these consumer creditors of a
11
business in bankruptcy. Id. at ¶ 507.09[1].
12
13 There are situations that are clearly within the scope of the statute, such as, consumer
14 purchases on layaway, and the seller files bankruptcy before the consumer finishes paying for the
15
good; or a consumer makes a 50% deposit on a piece of furniture, the balance of which is due at
16
the time of the delivery, but the seller files bankruptcy before delivery. Id. at ¶ 507.09[2]. In
17
fact, some courts have held that the language of the statute is unambiguous and thus the
18
19 legislative history is irrelevant to its interpretation. In re Heritage Village Church and Missionary
20 Fellowship, Inc., 137 B.R. at 895. The Heritage court determined that the priority afforded by
21
this Section is specifically conditioned upon the making, by a consumer, of a “deposit” prior to
22
the commencement of the bankruptcy proceeding and that the plain meaning of the word
23
“deposit” is that it is a partial payment establishing the depositor’s right to receive good or
24
25 services upon the completion of the payments. In determining that the claim in question was not
26 entitled to priority status pursuant to 11 U.S.C. § 507(a)(7) the Heritage court reasoned as
27 follows:
28
1 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
2
completely satisfied the partner’s obligations to the Debtor with respect to the Lifetime
3 Partnership. The relationship did not require further payments by Lifetime Partners and
as such, did not constitute a deposit relationship...
4 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
5
made by Lifetime Partners, were not, in any sense of the word, deposits. The word deposit
6 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
7 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.
8
In essence, the rights and responsibilities of individual Lifetime Partners and the Debtor
9 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
10 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).
11
Id. at 896.
12
13 Conversely, there have been courts that have broadly interpreted the statute. For example
14 it was determined that tenant’s security deposits are within the scope of this provision, although
15
the unreturned security deposit itself does not constitute goods or services and the leased
16
premises will normally have been “provided” prior to any obligation to return the deposit.
17
Collier on Bankruptcy, ¶507.09[2][a] citing Guarracino v. Hoffman, 246 B.R. 130 (D. Mass.
18
19 2000). However, the Guarracino court based its decision mainly on the fact that an individual
20 tenant is not a business creditor, the deposit is a pre-requisite to housing and thus not negotiated
21
at arm’s length between equals, and, most importantly, it is a consumer’s money held in trust and
22
the legislative history evidences Congress’ intent to protect the same. 264 B.R. at 134. See also,
23
In re River Village Associates, 161 B.R. 127 (Bankr. E.D.Pa., 1993).
24
25 In the case of In re WW Warehouse, Inc., 313 B.R. 588 (Bankr. D. Del 2004) the court
26 held that claims based on gift certificates to purchase merchandise from retailer that had not been
27 redeemed when the bankruptcy petition was filed were entitled to 507(a)(7) priority status despite
28
1 the fact that they were not based on down payments or partial payments. In order to reach its
2
decision the WW Warehouse court examined the legislative history of the statute and concluded
3
that the same was passed to give priority to consumers who found themselves in the same
4
position as gift certificate purchasers, that is, those who paid money on lay away plans or made
5
6 deposits on merchandise assuming their deposit was tantamount to a trust fund and because of
7 their ignorance and inability to bargain with a retail merchant, are unable to do a credit
8
investigation or obtain special terms from the merchant, as a true creditor may do. 313 B.R. at
9
594. The court explained as follows:
10
The W.T. Grant problem which section 507(a)([7]) was designed to correct arose when
11 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
12
arrangement, scrip holders were treated as unsecured creditors. This led to a large public
13 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
14 were outraged to find that their money had been commingled and dissipated.
15
The drafters of the Code believed that it was appropriate to provide some protection to
16 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
17 typically realize that they are extending credit when they make an advance payment for
goods or services.
18
19 Id.
20 Similarly, in the case of In re Salazar, 430 F.3d 992 (9th Cir. 2005) the Ninth Circuit held
21
that “deposit” as provided in 507(a)(7) may include the advance of full payment for consumer
22
goods or services because despite the literal definition of the word, the “[m]erchants’ violation of
23
consumers’ expectations and trust is precisely what Congress responded to when it passed the
24
25 statute in question.” 430 F.3d at 996. Courts have held that other examples of a “deposit”
26 include money paid for the purchase of an extended warranty contract, In re Tart’s T.V.,
27 Furniture and Appliance Co., Inc., 165 B.R. 171 (Bankr. E.D.N.C. 1994) and tuition payments In
28
1 re Longo, 144 B.R. 305 (Bankr. D.Md. 1992).
2
In the case before us the Claimants made an up-front payment in order to become club
3
members of the Debtor. Although the term Membership Deposit was used in the Membership
4
Agreements, these up-front payments are not “deposits” within the purview of Section 507(a)(7).
5
6 The Membership Agreements clearly provide the conditions precedent to the reimbursement of
7 the Membership Deposit, which are: (i) after the member formally resigned, the membership was
8
placed on a waiting list for reissuance and when similar memberships were subsequently
9
sold, the resigned membership was reissued in accordance with the formula provided for in the
10
Membership Agreement; or (ii) upon the lapse of 30 years from the issuance of the membership.
11
12 Furthermore, the Membership Agreements provide that the Membership Deposits would be used
13 to fund the building of the golf course. “Deposit” has been defined as “money given as a pledge
14 or down payment”, “anything laid away or entrusted to another for safekeeping”, “anything given
15
as security or in part payment”, and “the act of giving money or property to another who
16
promises to preserve it or to use it and return it in kind. In this case the Claimants had no
17
expectation that the Membership Deposits would be placed on escrow to be reimbursed to the
18
19 member upon his or her resignation and thus no trust relationship was created with respect to the
20 Claimants’ monies. The legislative history cited in the caselaw clearly indicates that Section
21
507(a)(7) was passed to protect those consumers who made payments, whether partial or full,
22
thinking that the recipient of the monies would hold them until the services they were purchasing
23
were provided, and that the monies remained their property until the services purchased were
24
25 provided. The Membership Agreements unambiguously state that the Debtor was not holding
26 their money in trust. The Membership Agreements provided that the Membership Deposits
27
would be used for improvements.
28
1 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,
5 which was what the Membership Deposit made them entitled to. The up-front payments
6 || provided by the club members were for an immediate service which was provided, and not for a
7 || future right to buy, lease, or rent any property. The rights and responsibilities of the Debtor were
g y: YP
8 Ht both fully operative and were being delivered and provided prior to the filing of the bankruptcy
9
petition.
10
The payment of the “deposit” was a prerequisite for the membership, subject to being
12 refunded pursuant to the conditions set forth in the Membership Agreements. The Debtor is
13 || contractually liable to the Claimants pursuant to the terms of the Membership Agreements.
14 | However, the liability is not entitled to Section 507(a)(7) priority.
15
Conclusion
16
In view of the foregoing the objection filed by Palmas del Mar Country Club, Inc. to the
17
riority status of Proofs of Claim filed by Mr. Jose Sanchez, Mr. Luis Marin, Mr. Miguel Nazario
ig |? y
19 || Franco, Mr. Blair C. Fensterstock and Ms. Janitzia Schurch (Docket No. 89) is hereby granted.
20 || The claims are allowed as general unsecured claims for the amounts filed.
21
SO ORDERED.
22
In San Juan, Puerto Rico, this 29"" day of December 2010.
23
24

26 ique S. Lamoutte
United States Bankruptcy Court
27
28
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/11355597. Public record. Not legal advice.