Posted on Mar 8, 2019 by B.Bryan |
“To be a good entrepreneur you have to know how to intelligently use…other people’s money.” – ClubCorp founder Robert H. Dedman
This statement and the facts in this case call to recollection one of America’s most infamous entrepreneurs—Billy McFarland, another entrepreneur whose intent was to scheme innocent patrons of his brand for his own gain. Was ClubCorp the FYRE Festival dressed up in country club duds? Instead of taking money from millennials eager to increase their social media standing, the company chose to methodically bilk its membership of “loans” it promised to ultimately pay back. Maybe that comparison is a stretch, but the case certainly makes for interesting reading.
Texas based company ClubCorp Holdings, Inc. and its other related entities were sued by the state of Texas on January 7, 2019 for noncompliance with the state’s unclaimed property laws. States suing holders is somewhat of a surprise, but what is truly shocking in this case is Texas seeking more than $53,000,000 of past due property, plus penalties and interest which at the time the action was filed totaled an additional $30,000,000. Could all of this have been avoided? Perhaps, but that’s where the case gets interesting – and it all began as a multi-state unclaimed property audit in 2008.
ClubCorp is a group of membership-based golf courses located all over the U.S., a group since its inception in 1957 required members to pay “initiation deposits” or “membership deposits”. These deposits were considered “interest free loans” or “forgivable loans” under the ClubCorp contract; wherein the company used these funds to cover basic operations and expansion of the brand. In each membership contract, however, it was explicitly stated that the membership deposit would be 100% refundable to the member at the loan’s maturity date, 30 years from the date the contract was signed. Unclaimed property problems were seemingly inevitable for the company, as it almost never made good on the promise to refund deposits to its members at the time of maturity. ClubCorp acknowledged this in its public financial filings, as it repeatedly reported the burgeoning deposits issue as a risk factor.
According to the Complaint, ClubCorp refused to comply with several requests during the audit, including a seemingly reasonable request by the state to send “election forms” to members to determine ownership of the funds, and myriad other document and information requests aimed at obtaining a quantifiable estimate of the unclaimed property the company could be holding. The state even went so far as to permit these election forms to serve as a basis for ClubCorp to retain the member deposits (assuming the member waived his/her right to the funds in a response), and offered to waive penalties and interest in 2018, even after ClubCorp’s consistent recalcitrance. However, ClubCorp continued to assert that it had no intention of repaying these membership loans unless forced to do so.
In an interesting twist to the plot here, ClubCorp’s CEO seemingly made an attempt to circumvent the pending bad outcome of the Texas audit by creating 27 Oklahoma entities – even after receiving a demand for payment from Texas – by merging Texas-chartered ClubCorp entities into these newly created entities. This frenzied attempt to remove the unclaimed property liability from the companies under audit proved fruitless, because although the mergers were legal, the transactions did nothing to extinguish the underlying liabilities ClubCorp owed to the state of Texas. This appeared to be an inflammatory misstep and one of several mistakes made by the company during the course of the audit.
Details could emerge as the case continues that may indicate other issues and concerns. Was the company overly reliant on a tenuous legal position that caused it to flout decades of established federal common law and state-specific rights under escheat statutes? ClubCorp clearly relied upon these deposits as core elements of its operating capital – so, who’s to blame? Internal management? An entrepreneurial spirit rooted in the use of “other people’s money”? Consultants or external counsel? This litigation seeks to probe these queries, and most importantly, to assert Texas’ right to custody of these funds under its unclaimed property laws.
Stay tuned—we will be watching this case closely and share updates on developments as they become available. If you would like to know more about the Complaint filed by the state of Texas or if you have questions regarding your company’s current business practices in relation to unclaimed property, contact us today.