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The Bankruptcy Code's Inherent Limitations for Struggling Golf Courses
As addressed in the first of this two-part article last month, addressing the problems confronting golf course owners seeking financial restructuring under Chapter 11, the ability of a debtor to reject a restrictive covenant under Section 365 or to sell free and clear of a covenant under Section 363(f) is limited and the obstacles are difficult to surmount. A possible solution, however, may surface if a debtor can demonstrate a change of circumstances under state law.
In order to dispose of a burdensome covenant, a debtor typically will need to demonstrate that: 1) a change of circumstances has occurred which has severely impacted the original intent of the restriction; or 2) the covenant is an improper restraint on alienation. In California, for example, “[restrictive] covenants will be construed strictly against persons seeking to enforce them, and in favor of the unencumbered use of the property.” Biagini v. Hyde, 3 Cal. App. 3d 877, 880, 83 Cal. Rptr. 875 (1970); see also, Ezer v. Fuchsloch, 99 Cal. App. 3d 849, 861, 160 Cal. Rptr. 486 (1979).
Change of Circumstances
Nevertheless, to demonstrate a change of circumstances, the general rule is that the change must be of such a dimension “that it is no longer possible to accomplish the original purpose intended by the restriction,” or the enforcement of the restrictive covenant “would be inequitable, or unreasonable, or oppressive.” County of Butte v. Bach, 172 Cal. App. 3d 848, 867, 218 Cal. Rptr. 613 (1985). See also, Gladstone v. Gregory, 95 Nev. 474, 498, 596 P.2d 491, 494 (1979) (“[c]hanged conditions sufficient to justify nonenforcement of an otherwise valid restrictive covenant must be so fundamental as to thwart the original purpose of the restriction. … [R]espondents had the burden to show the changed conditions have so thwarted the purpose [so that] it would be inequitable or oppressive to enforce the restriction.”).
In addition, “whether there has been such a change of conditions as to warrant a refusal to enforce, or a cancellation of, restrictions, the courts give greater weight to the changes occurring within the restricted area than to those occurring without the area.” 20 Am. Jur. 2d, Covenants, Conditions, etc., §284, p. 849. Thus, changes within a contiguous tract are more likely to render the original purposes of the restriction obsolete and may add the additional equity of waiver to the calculus. Yet, changes wholly outside the tract can suffice. Where the changes render the restricted property valueless, equity may side with the party who seeks to lift the restriction despite evidence that enforcement would benefit the other properties in the tract. See, Downs v. Kroeger, 200 Cal. 743, 254 P. 1101 (1927).
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