Heatherwood Holdings, LLC. v. HGC, Inc., 746 F.3d 1206

Background

USX developed the Heatherwood subdivision with an 18-hole golf course at its center, using plat maps, recorded covenants, marketing materials, and lot deeds referencing golf-course amenities and membership requirements.
USX conveyed the golf-course property (1999) without an express covenant restricting future use to a golf course; a side agreement (2000) recorded with the deed committed the buyer to operate the course for 25 years.
HGC (an equity-members’ entity) bought the club in 1999 and later conveyed the real property to Heatherwood, which borrowed $4M from First Commercial Bank (FCB), secured by a mortgage on the golf-course land.
Heatherwood operated the course but suffered sustained losses and ceased operations in 2008; Heatherwood then filed bankruptcy and sought to sell the real property free and clear of liens and restrictions.
HGC and homeowners asserted an implied restrictive covenant running with the land (relying on Shalimar), the bankruptcy court found such an implied covenant and notice to purchasers, the Alabama Supreme Court answered a certified question affirming that Alabama law may recognize an implied golf-course restriction under similar facts, and the district court affirmed; this appeal followed.

Issues

Issue	Plaintiff's Argument (Heatherwood/FCB)	Defendant's Argument (HGC/homeowners)	Held
Whether Alabama law recognizes an implied restrictive covenant limiting use of the golf-course property	No implied covenant without an express deed restriction; USX did not intend a perpetual restriction	Yes: plats, covenants, marketing, and actual conditions show a common-scheme intent to include the golf course	Alabama law can recognize an implied restrictive covenant in these circumstances (Alabama Supreme Court answered certified question affirmatively; appellate court affirmed)
Whether purchasers (Heatherwood/FCB) had notice such that they are not bona fide purchasers	Purchasers lacked actual notice and should be able to redevelop if they purchased without restrictive deed language	Purchasers had actual, constructive and inquiry notice from public records, plats, marketing, and on-site conditions	Court held purchasers had notice (not bona fide purchasers); bankruptcy court’s factual finding not clearly erroneous
Whether doctrines (estoppel by deed; integration) or merger prevent enforcement of the implied covenant	Estoppel by deed, integration, or merger of side agreement into deed defeats the implied covenant	HGC/homeowners argue no concealment or representation to invoke estoppel; integration does not bind all lot owners or erase implied scheme	Court rejected estoppel by deed and integration defenses on the record; findings supported by evidence
Whether changed economic circumstances or lack of standing defeat enforcement	Changed economics and inability to operate render covenant unenforceable; HGC lacks standing because it owned no land	Economic frustration may be argued, but covenant’s benefit to homeowners outweighs burden; HGC has members who own lots and homeowners are indispensable parties	Court rejected changed-circumstances defense on the facts and found HGC/homeowners had standing to enforce the covenant

Key Cases Cited

Heatherwood Holdings, LLC v. First Commercial Bank, 61 So.3d 1012 (Ala. 2010) (Alabama Supreme Court answered certified question: implied restrictive covenant consistent with Alabama law under similar facts)
Shalimar Ass'n v. D.O.C. Enters., Ltd., 688 P.2d 682 (Ariz. Ct. App. 1984) (recognizing implied restrictive covenant for golf-course subdivision; relied upon by HGC)
Hun Es Tu Malade? #16, LLC v. Tucker, 963 So.2d 55 (Ala. 2006) (enumerating methods to prove a common scheme of development)
Ex parte Frazer, 587 So.2d 330 (Ala. 1991) (notice at time of purchase is required to enforce implied restrictive covenants)
In re Westwood Cmty. Two Ass'n, Inc., 293 F.3d 1332 (11th Cir. 2002) (person-aggrieved doctrine limits who may appeal bankruptcy orders)