Golf Course Development: A Long and Winding Road – Caveat Emptor

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The path to a financially successful golf course starts with financing.  Nothing begins until capital is committed.   With equity invested as seed capital, debt instruments are often required.

The complexity and the amount of funds required is increased if the golf course is to be located within a real estate development where lots are created, roads are to be built, sewer installed, water provided, and lights mounted.

Add to this puzzle the idiosyncrasies of humans working in partnership, the odds of success become daunting.

Attending a two-week jury trial provided lessons of a lifetime.  It was a sincere thought that I should have paid the court for the insights and perspective learned from which you can hopefully benefit.


The development started in 1998 with $8.7 million in equity funding and $71.5 million in debt that went through two bankruptcies. The developer orally represented that he had personally invested $7 million in the project from 1998 until the bankruptcy was filed in 2012.  The company emerged from bankruptcy in May 2014.  The eight original equity investors had their investment flushed in the bankruptcy.

Five years after emerging from bankruptcy, the original developer and those who provided debtor in possession (DIP) financing found themselves in a heated battle in court.  It was believed that the project had the potential to generate $16 million in profits from the sale of 243 lots and the operation of an exclusive private country club.

Note that after the golf course development emerged from bankruptcy with $10 million in debt financing, the individual who provided DIP financing received 80.1% of a newly formed parent corporation with the developer receiving 19.9%.  That allocation is stipulated by the bankruptcy rules.

The DIP financier was designated as the principal manager of the parent company that owned 100% of the subsidiary real estate and golf course operating company.

The original developer remained as managing member of the subsidiary from May 2013 until September 2014 when he was terminated for non-performance as he dissipated $8.5 million without achieving many additional lot sales or the construction of a clubhouse with restaurants, pools, wine cellar, fitness center, and spa.  The developer received a monthly salary of $30,000 and was paid $400,000 upon their departure.

In 2017, the DIP financier sued for fraudulent misrepresentation that the developer had not invested $7 million in the project based on new information learned.  The developer counter-sued for malfeasance in management, tortious interference, contested additional loans made, questioned the need for the construction of the clubhouse, and the failure to distribute profits that didn’t exist.

The cost of the litigation exceeded $2 million, including each side spending over $100,000 for a two-week trial.  Both will continue to be equity participants.  What a waste of precious capital.  Go figure.

There is one overriding lesson in this story. It should be recognized, that in the absence of the will of the parties to cooperate, there is no agreement that can or will provide the clarity and direction necessary to ensure any conflicts can be successfully settled without litigation.


Hence, there are valuable lessons for every golf course operator.

1.  The emotion and passion of the original developer and the individual who provided DIP financing (a homeowner in the development) clouded their financial judgment. An individual’s distaste for another human being colors sound and reasonable thoughts concerning compliance with the terms of the agreement.

2.  Never create a windfall provision for distribution of profits that differs from the equity structure of the company that emerges from bankruptcy. The parties agreed, that the developer, after the debt was repaid, would first recover his $7 million before the distribution of profits, ultimately 55% to the developer and 45% to the DIP financier.  Don’t ask why that was agreed to.  It makes no sense.

3,  Never sue an original developer for fraud based on the oral representations they may have made regarding their original investment.  While oral representations are affirmative statements that can be interpreted as fraud, there are seven thresholds that must be achieved for a claim of fraud to be enforceable:

The representation has to be (1) false, (2) material, (3) knowingly made to be false; (4) made with the intent to deceive, (5) was relied on by the aggrieved (6) the reliance was justifiable, and (7) damages occurred.

4. Never sue based on an oral representation of the developer and then use the fact as a DIP financier you didn’t sign the loan collateral guarantee agreements in which both parties pledged additional assets for a subsequent loan

It was necessary to secure $10 million in financing upon emerging from bankruptcy.  The original developer, the DIP financier, and eight others posted personal collateral to guarantee the loan.  They were to receive 5% of their pledged collateral annually with a deferred payment provision of 12%.

After several years of paying the 5% interest to all those who guaranteed the loan, when the representation that the developer invested $7 million was learned to be false in 2016 on which the windfall was created, payments to the original developer on the loan guarantee were suspended in 2017.

Making payments for three years (2014 to 2017) then asserting the agreement is not enforceable is a strategy built on a thin thread.

5.  Never sue to contest a windfall clause for-profits distribution if such would occur only if the development were successful, which at this time, is debatable as the clubhouse has yet to be constructed.

6.  Guarantee payment agreements for collateral provided for loans should be based on a single, not a tiered interest rate that is not dependent upon some future event.

7.  The legal boilerplate of representations and warranties in an operating agreement are never read and certainly never fully understood. This is a huge mistake. These provisions, which are often very broad in scope, have to be closely examined, narrowed in scope, and fully understood.

The lawyers will attack and place great significance in these clauses one often takes foregranted.

8.  Upon termination of the developer in September 2014, an amended operating agreement was created with the windfall provisions inserted, and a separate mutual release was executed.

A mutual release, when drafted, should be narrow in scope and specifically state that which it does not include, i.e., fraud, malfeasance, etc.

The mutual release, in this case, did not contain limitations in scope though it was the intent of the drafting party.

9.  Know that the process of introducing evidence into a case, even if its reliance is intuitively obvious, can be tedious.  Note that opening statements are not admissible.

Before an exhibit can be offered into evidence in court, a foundation must be laid for its admission. The first foundation that must be laid is that the article is authentic. The “hearsay” rules come into play as to the admissibility of evidence.  You can’t state what somebody else told you.  Materials facts can be precluded from entered into court if the foundation is not properly set by the lawyer.

A final document of a contract may be insufficient to be admitted as evidence unless the underlying red-lined iterations of the draft are also included as to show the intent of the parties.

10.  Understand that lawyers are not accountants or salesman and will get so immersed in presenting the details to a jury that they may fail to present the strategic points to the case.

Lawyers, in this case, were largely inept in presenting financial information in a simple matter than can easily be understood by the jury.  Their focus on the minutiae masks the broader picture of revenues, expenses, net operating income, and key balance sheet items, i.e., loans.

We observed five hours of testimony focusing on individual transactions contesting advances and loans made by the managing member of the newly formed parent to keep the struggling enterprise afloat. The lawyer could have merely shown the net operating loss for two years was $2.8  million and the managing member of the parent personally was required to fund to ensure continued operations.   The point could have been presented in five minutes.

While cases often turn on small points and consistency in the evidence presented, creating a simplified highlight of the underlying issues of the case is essential for the jury to comprehend.

11.  Note that when such advances and loans are made, they should be fully described on the balance sheet as loans with the stipulated interest and maturity date specified.

The managing member of the parent company labeled such as accrued liabilities, consistent with historical practices.  This categorization led to the representation that the developer was being intentionally deceived as to the activities of the project for which they had a continuing carried interest.

12.  It is a bad idea that if loans are advanced by an individual to an operating company, and such debt is satisfied through the transfer of lots, reduction of member dues, etc. A check for the loan payment should be written and a separate check tendered for the purchase of the lot or the payment of club dues.  Offsetting liabilities by the transfer of assets creates the impression of impropriety.

13.  Cash flow forecast should be prepared at four levels: worst-case presuming the project’s failure, realistic, possible, optimistic.  Never publish an optimistic forecast.  Present the range of forecasts that the entity may achieve – not a single projection for that will be used as what your intent was.  By the way, using bulk sales vs. individual lot pricing will understate the possible financial potential from real estate sales.  While you want to obtain the financing, the risk of future litigation outweighs the short-term benefit of inflated projections.

If something is marked personal and confidential, i.e., an offering memorandum, this is meaningless if litigation ensures.

14.  What you do, say, write or forecast, presume that it will be reviewed by an attorney who will twist, contort, discredit and misrepresent the intent of that expressed.

15.  Many people rely on client-attorney privilege. If you and your attorney have a conversation that includes a third independent person, i.e., a broker to raise capital for the project, that conversation is not protected under the client-attorney privilege.

16.  Where the client-attorney privilege is in enforce, the client can unilaterally waive such privilege. The attorney can not.

17.  Lawyers may take a case and represent a client to argue one’s assertions even if the probability of success is unlikely. Their priority is to their fees.  This is a case that should never seen the daylight of court.

18.  Lawyers in calling a witness, in my opinion, should state the fact that they are trying to demonstrate, present the evidence, ask the appropriate questions to confirm the findings and then summarize the point be made to the jury. Lawyers let the jury form their conclusions rather than asking the Socratic question.

19.  All lawyers should be required to go to school for public speaking. The idiomatic expressions that use become highly distracting as these expressions, it seemed, were used over 1,000 times:

  • I would like to put up quickly…
  • Not going to too spend too much time on this…
  • Let’s go through this…
  • Let’s step ahead…
  • Let’s talk about…
  • Let’s change gears…
  • Let me shift topics…
  • Very quickly your honor…
  • I going to switch around the chronological sequence…
  • Switching around…
  • All right…
  • I am not going through all the detail…
  • My understanding…

20.  It should be noted that cross-examination is not limited to direct testimony.

21.  If an agreement specifies the process for negotiating disputes via alternative dispute resolution procedures, i.e., mediation and/or arbitration, don’t skip a step and sue out of frustration to resolve the issue. It will be held against you if you don’t comply with the resolution procedures precisely.

22.  The more complicated the case, the less you want a jury trial. Juries pick up astutely on the inconsistencies in witness’ statements almost to the exclusion of looking at the principal substance and equity of the issues being presented.

23.  Juries are advised to look for consistency, motives, manner, and demeanor to consider all or part or none of a witnesses testimony.  They should not approach their responsibilities with sympathy, bias, and prejudice.

24.  Jury instructions are so detailed and framed within a legal context that it is impossible for a citizen to understand unless they have taken several law classes in college.  The instructions, how crafted by opposing counsels with the guidance of the judge, can influence the vote of the jury. 

Concepts like a fraud in the inducement, affirmative defense, ultra vires, and the theory of laches are bantered about.

25.  Direct or circumstantial evidence can be considered each given each the appropriate weight.  The preponderance of evidence means it is more true than not.  Probabilities can be considered, possibilities not. The standard is declining order are fraudulent, malicious and willful and wanton.  In a civil case, the “preponderance of evidence” is the standard. In a criminal case, the standard is higher and becomes “beyond a reasonable doubt.”

26.  Statements make in court, even when objections are raised and the judge tells the jury to ignore the question, have an impact on the jury.

27.  As a spectator, whoever is presenting, you form the impression that they are likely to win the case.


Somehow the jury got it right.  I learned that I could not be a lawyer.  I would take victory or defeat too personally regarding the other attorney.

The jury denied that fraud occurred based on the oral representation.  It found that the developer’s claims were incorrect that they have been harmed by the DIP financier subsequently investing millions to keep the project afloat and the actions taken by the DIP financier were proper.  They also found the DIP financier suspending payment on the guarantees was improper, though they did give the developer a haircut of $400,000 of what was alleged due.

The conclusion I drew was if one had the option of investing $8 million in golf course and $20 million in a clubhouse vs. investing in a certificate of deposit that pays 4%, take the CD.

Note:  This blog is not intended in any way, shape, or form to communicate any legal advice or to be relied on.  It is solely based on the opinions formed by the author, a layperson, from the evidence seen and the statements made in a court proceeding.  Please consult with an attorney before proceeding on any matter.  On second thought, do all that you can to avoid litigation – no one wins but the attorneys. 


That is my thought, what is your opinion?  Please comment below.

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