Golf is a multibillion dollar industry. It broadly encompasses recreational activities, amateur and professional tournaments, golf course operations, equipment manufacturers and products, intellectual property issues, insurance questions, tax matters, environmental law, real property disputes, and numerous other areas familiar to lawyers. Given the many substantive legal connections to the sport, it should not be surprising that one authority ranked golf as the second most litigated sport, with baseball ranking first. Broadly understood, cases involving golf extend far beyond the typical case of a broken window or a player being hit by a golf ball. In fact, some have called golf a litigator’s dream.
A new chapter in golf litigation recently opened when the state of California sued ClubCorp and numerous affiliated country club owners in June 2019 (People of the State of California v. ClubCorp Holdings, Inc., CGC-19-576620). Defendant ClubCorp is a Delaware LLC with a principal place of business in Texas, and it is the largest owner and operator of private golf and country clubs in the country. It conducts business in California through more than 20 affiliated golf clubs, which are also named defendants.
The specific wording of the membership agreements drafted by the defendants, which is at the center of the litigation, varies somewhat in detail, but they all provide that 100 percent of a member’s initial deposit “will be unconditionally refunded” after 30 years. Depending on the club and the year of the membership, deposits can be from $300 to $7,500 or more. ClubCorp’s records show that it has retained initiation deposits due for refund to Californians totaling more than $10 million. Nationally, the membership deposit figure is closer to $200 million.
New member prospects are specifically targeted around the age of 40. Thus, when the 30-year contract repayment obligation occurs, members are typically in their seventies. At that point, many members will forget they are due a refund, or if they die before the refund is due, their executors or heirs are unlikely to be aware of the refund. Who gets the money? The complaint cites ClubCorp Founder’s philosophy: “A dollar borrowed is a dollar earned. A dollar refinanced is a dollar saved. And a dollar paid back is a dollar lost forever.”
The complaint filed by the California Attorney General asks for triple damages, civil penalties, restitution, and injunctive relief for violating California’s Unfair Competition Law (UCL; Business and Professions Code § 17200, et seq.) and False Claims Act (FCA; Government Code § 12651, subd. (a)(7)). Any monies not properly returned to the depositing member, according to the complaint, would be subject to the Unclaimed Property Law (UPL) and thereafter escheat to the state. The monetary and penalties will be calculated according to the proof but are apt to be in the millions of dollars.
Under California’s UPL, businesses are required to make efforts to return property to rightful owners. It also requires businesses to annually report and deliver unclaimed property to the State Controller’s Office (SCO). After there has been no activity or contact with the owner for a period of time, generally three years, the property escheats to the SCO.
Defendants filed annual unclaimed property reports, called “holder reports,” with the SCO, but the reports did not list the initiation fees as deposits due to return. The complaint alleges that the falsification of the “holder reports” fraudulently reduced the amounts owed California and effectively provided ClubCorp millions of dollars in “noninterest bearing” loans, or what one might describe as “forgivable loans.”
In mid-July, the defendants filed a notice of removal from San Francisco Superior Court to the U.S. District Court for the Northern District of California on the theory that the plaintiff’s claims arise under federal question jurisdiction (Case 4-19-cv-03972-KAW, filed 07/10/19). In every case, a court is confronted with a threshold question: What is the source of the applicable law. In most cases, state law applies unless preempted by federal statutes or the U.S. Constitution. But federal courts have also found it appropriate to disregard state law in some cases in favor of federal common law, which is a body of law based on federal judicial lawmaking. Its application raises serious constitutional questions of federalism and the need for legal guardrails.
The theory that the defendants advance is straightforward. If California is not entitled to the escheat, no violation of state law under the UCL or FCA exists. Defendants maintain that before a state can escheat unclaimed intangible property, it has the burden of establishing the right to escheat under the federal common law, which they argue it has failed and cannot do. In addition to other claims, the defendants assert that the right to escheat of intangible personal property necessitates determining whether a debtor-creditor relationship exists and, if so, who is the debtor. One difficulty with the Supreme Court cases cited by the defendants to support their position is that they involve escheat cases between various states. In those cases, a strong federal interest is involved, which is not the situation in the present case.
The defendants’ argument brushes aside the broad California definition in the UPL of a “holder.” Under section 1501(e), a “holder” is “any person in possession of property subject to this chapter belonging to another . . . [or] indebted to another on an obligation subject to this chapter.” Establishing a debtor-creditor relationship is not essential under California law.
First principles are important. The sole purpose of the UPL law is to reunite the owner of the unclaimed property, in this case the deposit, and when this is not possible, to allow the property to pass to the state. ClubCorp’s legal gymnastics would allow it to pocket the membership deposits that properly belong to California. The defendants are not likely to fare any better in federal court than they would in state court.
NOTE: The author will be a panelist at the CLE session “Golf and the Law: Fun and Legal Issues” during the GPSolo Division’s upcoming 2019 Solo & Small Firm Summit, to be held October 16 to 19 in Carlsbad, California. Click here to learn more.