Heatherwood Holdings, LLC v. HGC, Inc. (In re Heatherwood Holdings, LLC)

• Citation: 746 F.3d 1206
• Decision Date: 27 March 2014
• Docket Number: 12–16021.,Nos. 12–16020,s. 12–16020
• Parties: In re HEATHERWOOD HOLDINGS, LLC, Debtor. Heatherwood Holdings, LLC, Plaintiff–Appellant, v. HGC, Inc., Defendant–Appellee. Heatherwood Holdings, LLC, Debtor. Crimson Portfolio, LLC, Plaintiff–Appellant, v. HGC, Inc., Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

746 F.3d 1206

In re HEATHERWOOD HOLDINGS, LLC, Debtor.

Heatherwood Holdings, LLC, Plaintiff–Appellant,

v.HGC, Inc., Defendant–Appellee.

Heatherwood Holdings, LLC, Debtor.

Crimson Portfolio, LLC, Plaintiff–Appellant,

v.HGC, Inc., Defendant–Appellee.

Nos. 12–16020, 12–16021.

United States Court of Appeals,Eleventh Circuit.

March 27, 2014.

Steven David Altmann, Charles L. Denaburg, Marvin E. Franklin, Najjar Denaburg, PC, Birmingham, AL, for Plaintiff–Appellant.

Lee Rimes Benton, Douglas J. Centeno, Amy M. Hazelton, Brenton Kirk Morris, Benton & Centeno, LLP, Birmingham, AL, for Defendant–Appellee.

Appeals from the United States District Court for the Northern District of Alabama. D.C. Docket Nos. 2:11–cv–02902–CLS, 2:09–bk–00076–TOM, 2:11–cv–02903–CLS, 2:09–bk–00076–TOM.

Before CARNES, Chief Judge, TJOFLAT, Circuit Judge, and MARRA, ^* District Judge.

MARRA, District Judge:

I. INTRODUCTION

This is an appeal by Heatherwood Holdings, LLC (“Heatherwood”) and First Commercial Bank (“FCB”) (hereinafter, “Appellants”) of the affirmance by the United States District Court for the Northern District of Alabama of a final amended judgment entered by the United States Bankruptcy Court for the Northern District of Alabama in favor of Appellee HGC, Inc. (“HGC”) (hereinafter, “Appellee”). Appellants challenge the bankruptcy court's determination that there was an implied restrictive covenant limiting the use of real property at issue to a golf course.

II. BACKGROUNDA. Facts

United States Steel (“USX”) began developing the Heatherwood subdivision in the 1970s in Shelby County, Alabama. 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.”

USX began selling residential lots in the subdivision in 1984. The initial purchasers of the subdivision homes had to become members of the Heatherwood Golf Club which USX ran through a subsidiary company,Heatherwood Golf Club, Inc.¹ USX's advertisements emphasized the benefits of membership, inviting prospective purchasers to “[i]magine returning home every day to play Heatherwood's 18–hole golf course,” or imagine living in a “beautiful home” with a “gorgeous golf course included.”

USX provided more details about the golf course's role within the subdivision in the promotional materials it provided to prospective buyers. USX tried to provide these materials—the “Heatherwood Documents”—to all prospective buyers. The documents included descriptions of: the Club's amenities; the covenants, restrictions, and easements for the lots surrounding the course; and the requirement that any successive purchaser of a home in the subdivision must become a member of the Club. They also announced USX's intention to eventually sell the Club, outlining three ways the sale could occur. Those three ways centered around an option USX granted the Club's membership and an escrow agreement it set up to facilitate the members exercising that option. The option gave the members the right to buy the Club for $1.5 million by October 1, 1999, after which the option would expire. To help make that purchase possible, the documents explained, the subdivision's homebuyers and other select members of the Club would enter into an escrow agreement, whereby they paid certain amounts into an escrow account held by USX. Put another way, the Club's members would exercise the option to buy the club, or if the members did not exercise the option, USX could “sell the facilities to others,” or USX could exercise its option to sell the facilities to the Club members in as-is condition for the amount in the escrow account, including accumulated interest.

USX completed the Club in 1986. During that time, USX recorded a second set of general covenants, restrictions, and easements for the subdivision's fourth sector. Like the first set of filings, the fourth sector's filings required each lot to have a “golf cart storage area,” and barred fences, walls, or hedges “adjacent to the golf course, fairways, tees, or greens.” The fourth sector's filings also included easements on the lots next to the golf course that would “permit the doing of every act necessary and proper to the playing of golf on the golf course adjacent to the lots.” USX proceeded to install ten more sectors in the Heatherwood subdivision, filing the same or similar sets of general covenants, restrictions, and easements with each new sector. Some of the lots in these sectors included easements for golf carts to cross homeowner's property to reach the golf course. The golf-cart easements specified that they were “granted [to] benefit the Grantee's land and shall be perpetual and shall run with the land.”

USX continued to own and operate the Club until 1999. That May, the Heatherwood Homeowners Association Steering Committee offered to purchase the Club for the amount in the members' escrow account.² Mike Wesler testified that purchasing the Club was to ensure control over upgrades to the course and thereby prevent membership losses. In contrast, William Thompson testified that the purchase was to prevent a third party from converting the golf course into housing. In June, equity members of the Club, which included some individuals who did not live in the subdivision, formed HGC in order to purchase, operate, and maintain the Club. On October 8, 1999, a special warranty deed transferred the Club to HGC.

While the special warranty deed included numerous exceptions, none of them restricted HGC or any subsequent owner's use, maintenance, or development of the golf course. By contrast, when USX transferred golf course properties in other subdivisions it was developing, it included covenants limiting the real property to use as a golf course. The deed did, however, restrict USX's right to utility easements. It specified that any new easements should be “selected and located” to avoid “unreasonably interfer[ing] with the operation of the golf course” and required USX to “minimize any disruption of the golf course” when constructing and installing the utilities.

HGC's ownership of the Club would not last long. The club needed at least $2 million in capital improvements to attract new members and continue operating the Club, but HGC's members were not willing to contribute their own money. As a result, HGC began soliciting proposals from various golf club management companies for assuming operation and management of the Club. HGC ultimately decided to transfer the Club to Pine Cone Capital, Inc., run by Jonathan Kimerling and William Ochsenhirt. HGC chose Pine Cone Capital because of its reputation for running golf courses, its commitment to making capital improvements, and its willingness to agree to commit to operating the property as a golf course for at least twenty-five years. Over the next few weeks, HGC and Pine Cone Capital would negotiate the terms of the asset purchase agreement. Numerous drafts of the agreement were exchanged. The final version of the agreement committed Pine Cone Capital to spending at least $2.5 million on capital improvements to the Club and operating the property as a golf course for the next twenty-five years.

Though Pine Cone Capital was purchasing the Club, it assigned its rights to Heatherwood. Kimerling and Ochsenhirt formed Heatherwood for the purpose of owning, operating, and managing the Club. On July 5, 2000, HGC and Heatherwood entered into a side agreement that committed Heatherwood to operating the Club for the next twenty-five years. That same day HGC conveyed the real property to Heatherwood. Like the 1999 deed transferring the Club to HGC, the 2000 deed lacked any express restriction limiting the real property to use as a golf course. The parties recorded both the side agreement and the deed in the Shelby County Probate Court on July 10, 2000.

Heatherwood promptly closed the Club and began renovations. To secure additional money for its renovations, Heatherwood obtained a $4 million loan from FCB. Heatherwood secured the loan with, among other things, a first mortgage on the golf course property and Kimerling's personal guarantee of $1 million of the loan. At trial FCB's representative, Thomas Genetti, testified that FCB agreed to these terms on the assumption that if Heatherwood could not rehabilitate the Club, then FCB could redevelop the land as residential property. FCB made that assumption despite the fact that Genetti visited the property and saw the subdivision built around the golf club, as well as the signs indicating that the subdivision was a golf community. Genetti testified he was unaware of the asset purchase agreement and the side agreement's 25–year operation guarantee, and that FCB would have required more collateral if it had known that the property was limited to use as a golf course. On May 4, 2001, Heatherwoodexecuted: (1) a promissory note for $4 million; (2) a mortgage and security agreement securing the note; and (3) an assignment of rents and leases. The mortgage was recorded on May 7, 2001. Heatherwood completed the renovations several months later and reopened the Club in October 2001.

Despite the renovations, the Club did not fare well. It lost money every year from 2002 to 2008, with six-figure losses in six of those years, and losses exceeding $400,000 in four of them. Heatherwood's management testified that these losses came from the Club's inability to retain and expand its membership, and that the Club's struggles with membership came from “playability issues,” which included the narrowness of the...