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A person in the state of Washington purchases a gym membership that entitles them (and them alone) to visit the gym for the rest of their lifetime, in exchange for a single lump sum payment. A few years later said person fails to pay down their debts and declares bankruptcy. Would the court be able to order the gym to transfer said membership to a creditor? Or perhaps pay out a pro rate lump sum to the creditors in exchange for canceling said membership?

Would it matter if the lifetime purchase is for something more substantial than a gym membership? I.e. do the rules change if you've contracted Hilton to provide you a free room in any hotel for the rest of your life?

JonathanReez
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    This assumes the membership is negotiable and transferable, which is a big assumption. – tbrookside Sep 01 '22 at 13:05
  • What about bankruptcy prevents the member from working out? – Michael Hall Sep 01 '22 at 14:04
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    @MichaelHall Nothing but it’s technically an asset that they own and might in theory be seizable but creditors – JonathanReez Sep 01 '22 at 17:56
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    Does the distinction between physical asset and service contract matter? Either way, if I'm the gym owner I tell the creditor that they can come workout for life if they seize the membership as an asset, but the money has been paid, and I've kept my end of the bargain. Compare to a car: Sure the court could seize the car and auction it off, but the dealer has no obligation to take it back at the sales price. – Michael Hall Sep 01 '22 at 18:14
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    @MichaelHall what if the original purchaser was 70 years old but the creditor is 20 years old? – JonathanReez Sep 01 '22 at 18:49
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    I guess when the original purchaser passes away the young creditor needs to find a new gym... – Michael Hall Sep 01 '22 at 19:04
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    I thought you were going to ask what happens when the gym goes bankrupt - a rather likely event if they make a habit of selling lifetime memberships. – Michael Kay Sep 01 '22 at 20:00
  • @MichaelKay Also a subject upon which there is law on point that very clearly addresses this situation which was contemplated by the drafted of Title 11 of the United States Code. – ohwilleke Sep 01 '22 at 21:38
  • Option for appraisal: each month/time the debtor goes to the gym, he must pay the creditor the market value of that service. Another option: if the debtor expected lifespan is 100 years, bought the subscription when he was 50 yo for $5000 and he is now 60 yo, he can but if back for $4000. Nos of the options are perfect for obvious reasons, though. – SJuan76 Sep 01 '22 at 23:22
  • @SJuan76 would be interesting to see if a clause like that was previously required by a court. – JonathanReez Sep 01 '22 at 23:22
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    @MichaelKay - Lots of gyms sell long-term and lifetime memberships. Like all gyms, they rely on their customers not turning up at the same time. Anyone stupid enough to pay for ten-year membership is simply a customer that's ten times dumber than one that paid for a 1-year membership – Richard Sep 03 '22 at 13:37
  • @Richard if they paid 10x as much I'd agree, put a big enough of a discount into the 10 year membership and the savings could be worth the combined risk from getting lazy, the gym closing, etc. – Dan Is Fiddling By Firelight Sep 03 '22 at 16:48
  • @DanIsFiddlingByFirelight - Given that most people don't even make it to their first anniversary attending regularly, booking a ten year pass even at a vast discount is still a terrible idea. The whole premise of gym membership is that if everyone who was a member actually turned up, it would be standing-room only with fifty people waiting for every machine. – Richard Sep 03 '22 at 16:59
  • @Richard I wonder how accountants value the liability that a gym has when it has sold lifetime memberships up-front? (I run a software business that has an obligation to provide support for some time after customers make a purchase, and the accountants are pretty conservative in assessing that as a liability.) – Michael Kay Sep 03 '22 at 17:03
  • @MichaelKay - https://doi.org/10.1016/S0748-5751(97)00019-5 is a perfect case study of this. Creating 'lifetime memberships' theoretically creates a liability that you'll need to account for annually (e.g. for the lifetime of the business). If you sell the business, this liability will detract from the valuation of the business, although the smart money will be on monetising each member so that a lifetime member just becomes another revenue stream (e.g. offer consumables and services that their membership doesn't cover) – Richard Sep 03 '22 at 17:13
  • Yes, for a new gym goer a long term membership would be a bad idea. But someone who's been going regularly for 20 years has a high probability of continuing to work out until they're physically incapable. – Dan Is Fiddling By Firelight Sep 03 '22 at 17:39
  • @DanIsFiddlingByFirelight - But then you also need to take into account that the average person (at least in the UK) moves house every 10 years or so, so that lifetime gym membership may end up being somewhere inconvenient. – Richard Sep 03 '22 at 19:07
  • @Dan Is Fiddling By Firelight If you've been going to the same gym for years, then the risk of just stopping quite soon afterwards would be quite low. Additionally, if you're the type of person who hates feeling like they've wasted money, a long term gym membership could be a great motivator to keep going. – blademan9999 Sep 04 '22 at 08:07

4 Answers4

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Would the court be able to order the gym to transfer said membership to a creditor? Or perhaps pay out a pro rate lump sum to the creditors in exchange for canceling said membership?

Would it matter if the lifetime purchase is for something more substantial than a gym membership? I.e. do the rules change if you've contracted Hilton to provide you a free room in any hotel for the rest of your life?

What happens varies a bit depending upon the kind of bankruptcy. In a Chapter 7, all property and contract rights of the bankrupt debtor vest in the bankruptcy trustee when the bankruptcy petition is filed, by operation of law, with certain exceptions. (Chapters 11, 12 and 13 which are reorganizations are conceptually more complicated and I won't address them at length. But, in a reorganization, the title to the debtor's property doesn't necessary vest in a distinct bankruptcy estate at a single moment in time and instead can continue to be owned by the debtor subject to various bankruptcy related obligations.)

Certainly, a right to use a hotel for life, which is very close but not identical to a legal life estate in a time share, would be a bankruptcy estate asset and would be vested in the bankruptcy trustee.

The bankruptcy court is fairly limited in how it can adjust the rights of third-parties who are not creditors of the bankrupt, although it is not entirely without any authority to do so. It can invalidate "ipso facto" clauses in contracts that are triggered only upon bankruptcy, it can unwind preferential payments and fraudulent transfers made prior to filing for bankruptcy, the trustee can invalidate contracts that a third-party lien creditor could invalidate, they can declare restraints on the transferability of contract and property rights that are invalid under state law invalid, and so on. But, generally speaking, the property rights of a party are what they are defined to be unless a specific exception applies.

In some cases, if an asset is not exempt from creditors claims, but is also not transferrable, the bankruptcy court could probably compel the bankrupt debtor to buy that asset back from the bankruptcy estate at fair market value, on some sort of financing terms that made it possible to do so, so that the creditors of the estate are not harmed by the lack of transferability.

A fact pattern involving a membership in a Surf Club worth several hundred thousand dollars is explored in 2014 ruling in Feaster v. Surf Club, an adversary proceeding in a debtor-member's Chapter 13 bankruptcy, although it doesn't address all of the issues in this question.

ohwilleke
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Yes

But since it has (on the terms stated) no liquidation value and cannot be assigned to one or more of the creditors, the liquidator can’t do anything with it except return it to the owner.

Dale M
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Let’s say my wife would like a life long gym membership. I pay for it. I own it. I own (what exactly?) saying that my wife can go to one particular gym for free for the rest of her life. Even though I own it, i cannot go to the gym, only my wife can.

The right exists. The gym got their money, they have to hold up their end of the bargain. Say we add to the contract that it is irrevocable, even if both parties (gym and me) agree. So if we fall out, there’s nothing to do to stop her from going to the gym.

I would think that if the contract is done right, there is no way to stop that bankrupt person from visiting the gym. Who owns what would then be irrelevant.

gnasher729
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    Wow. I think I just found a loophole the size of a barn. Get a large line of credit, use this credit to pay for non-transferable, irrevocable memberships in enough stuff that all my needs are guaranteed for the rest of my life, then try to pay back the loan. If that works out, great. If not, still great. – Andy Sep 01 '22 at 16:57
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    @Andy yeah that’s the line of thinking that got me to ask the question – JonathanReez Sep 01 '22 at 17:55
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    @Andy Are there that many services in the world that even offer irrevocable lifetime memberships? I feel like that's kind of rare, possibly for exactly this reason... – Darrel Hoffman Sep 01 '22 at 18:04
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    @DarrelHoffman it used to be offered for airline tickets. It's still offered for golf clubs. – JonathanReez Sep 01 '22 at 19:01
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    @JonathanReez buy lifetime timeshares. Once you have 355 days/year worth of timeshares, you'll never be homeless again. Also, check on irrevocable dynasty trusts (available in some states), and Charitable Remainder Trusts. I think the latter is exaclty what you want. – Mindwin Remember Monica Sep 01 '22 at 19:43
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    @Mindwin timeshares can be sold so I assume they can be a part of bankruptcy proceedings – JonathanReez Sep 01 '22 at 19:54
  • @JonathanReez irrevocable, untransferable timeshares. – Mindwin Remember Monica Sep 02 '22 at 18:46
  • @Mindwin you'll need a lot more than 3[b]6[/b]5 days worth to live in them full time. Without a large excess you'll run into one of the gotchas that gets people who buy a time share normally. Everyone wants to go on vacation in the summer and around a few other major holidays; making getting a slot then much easier said than done. – Dan Is Fiddling By Firelight Sep 03 '22 at 16:38
  • @Mindwin Last time somebody tried to sell me a timeshare, they wanted more for the "cleaning fee" than I was used to paying for the room. I asked if we could have that waived if we cleaned it ourselves and they said no.... so I turned down their offer. – Andy Sep 09 '22 at 00:03
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Such a contract (lifetime gym membership) is illegal in Washington state (RCW 19.142.040) so either you are confused over what state this in, or you are confused over how soon thereafter the bankruptcy happened (the law was passed in 1987). I assume this is chapter 7 bankruptcy, under current law. We would need to know what exemptions you are taking (state vs. federal), and to simplify things I assume you are taking the Washington exemptions. Under §1(b)(ii) you may exempt

Other personal property, except personal earnings as provided under RCW 6.15.050(1), not to exceed three thousand dollars in value...

where

For purposes of this section, "value" means the reasonable market value of the debtor's interest in an article or item at the time it is selected for exemption, exclusive of all liens and encumbrances thereon.

By OP stipulation, the contract is not transferable: therefore it has zero market value, and may be freely added to the exemption list. Maybe you didn't know about exemption (e.g. you're doing a DIY proceeding). The next question is whether you volunteered for this, or were you forced into liquidation? If you voluntarily "give up" the gym membership, the court isn't ordering anything (except in the sense that there will be a court order that says what your plan is: so you can self-inflict a loss). So I assume this is involuntary bankruptcy, again, without the aid of a lawyer. Then we come to the interesting question of whether the court would grant a spiteful request to seize legally-valueless property, if you don't proffer a legal basis for denying the request. I really don't if a judge will deny such a request, but to the extent that a judge is supposed to be neutral in these proceedings, the judge should not act as your attorney. In other words, hire an attorney.

user6726
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  • "the contract is not transferable: therefore it has zero market value," I don't think this is a valid assumption. It can still be valued based upon the economic value to the debtor and there are gym memberships that have a value of $300-$2000 a month with all sorts of perks in big cities and resort towns. Even more in the case of a hotel room for life. Also not all restrictions on alienability are legally valid, many are void as contrary to public policy even if not discriminatory based upon a prohibited class. Giving it up for free may be a fraudulent transfer. – ohwilleke Sep 01 '22 at 21:44
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    Since by assumption (I didn't write the question) the contract can't be sold to someone else, and the law is framed in terms of market value not personal value, I think this is valid. The fact that a lifetime gym contract is illegal in Washington is also not irrelevant. – user6726 Sep 01 '22 at 22:02
  • "The fact that a lifetime gym contract is illegal in Washington is also not irrelevant." I fully agree with that part of your answer but the question also asks about comparable assets that aren't subject to that rule. – ohwilleke Sep 01 '22 at 22:09
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    Such a contract (lifetime gym membership) is illegal in Washington state => my reading is that you could grant a 50 year membership in exchange for a lump sum, you just can't say the contract is "for life". – JonathanReez Sep 01 '22 at 22:43