Would a lifetime gym membership be subject to bankruptcy proceedings?

Question

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?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.