Frandzel Robins Bloom & Csato Blog

The Rule’s of Golf… They Are A Changin’

On January 1, 2019, the most significant and game-altering changes in decades to the Official Rules of Golf will take effect.

Implemented after a multi-year vetting and commenting process jointly overseen by both of golf’s supreme governing authorities–the United States Golf Association and the Royal & Ancient Golf Club of St. Andrews–golf’s worldwide unified “New Rules” are intended to streamline and speed up play for the recreational golfer, while making rulings in formal competitions more intuitive, more user-friendly, and less “gotcha,” than were prior versions of the Rules.

Resources:

(A)The USGA Rules 2019 APP:  Every golfer with a an Android or iOS smartphone should immediately go to their App Store and download the USGA RULES OF GOLF – 2019 APP.  It is FREE.  The App has three separate segments: (i) the “Players Edition,” which provides a laypersons detail (with very helpful illustrations) of the new rules that should prove sufficient in virtually all casual golf rounds and most competitive ones, (ii) the “Full Rules,” which provides the actual text of the new rules as jointly drafted and agreed upon by the USGA and the R&A, and (iii) the “Official Guide,” which is designed for use in tournament conditions by Tournament Rules Officials/Committees, and includes, among other things, recommended Committee Procedures, and the formal Rules Interpretations (i.e. what was known previously as the “Rules Decisions”).

(B) www.USGA.org: Every golfer should bookmark the USGA’s website on their home computer. A click on the “Playing,” and “Rules” dropdown menus will direct you to a 2019 Rules Education menu that gives direct access to the formal text of the New Rules, the Rules Interpretations, and very helpful series of short videos providing visual guidance to golfers as how to proceed under the New Rules in a variety of common situations golfers face on the course in a typical round.  Twenty-five minutes spent online watching this series of videos is time well-spent for any golfer who wants to make sure he or she is playing our great game as it is intended to be played.

(C) www.SCGA.org: Golfers in Southern California will be able find additional helpful information about the New Rules by visiting the website of the Southern California Golf Association at www.scga.org.  Rumor has it that beginning in late 2019, the SCGA’s Rules personnel will be rolling out an entire new series of its popular (and humorous) “Rules Crew” videos dedicated to providing practical interpretations of the New Rules as they impact Southern California golfers.

Highlights

A full discussion of all the 2019 changes to the Rules of Golf would turn this blog-post into a decent sized book. A few highlighted 2019 changes include:

(A) Knee Height Drops:  Any time a ball is to be dropped by a player under the New Rules, the player no longer extends his or her arm at shoulder height to drop the ball. Under the new rules, all drops are from approximately the height of the player’s knee.

(B) Dropping Areas Simplified: When under the Rules a ball is to be dropped, either within one club length (relief from immovable obstruction, abnormal ground condition, or when taking stroke and distance relief) or two club lengths (unplayable lie, relief from lateral hazard) of a fixed point, the “Dropping Area” is now the appropriate “wedge of pie” measured from the fixed point in which the Ball must be BOTH dropped (from knee height) AND come to rest.  The prior rule that a dropped ball was permitted to roll two club-lengths from where the ball first hit the ground has been eliminated.

(C) Penalty Areas Simplified:  Water Hazards (marked yellow) and Lateral Water Hazards (marked red) have been redefined as “Penalty Areas” (marked either yellow or red), and a player’s options have been simplified.  First, a ball found in a Penalty Area may be played as it lies in the Penalty Area.  Unlike before, the Player is now permitted to remove loose impediments from around a ball found in a Penalty Area as long as the ball does not move in the process, and the player is permitted (i) toground his or her club in the Penalty Area, and/or (ii) take practice swings insidee the Penalty Area, as long as the player’s lie and intended line are not improved. Second, with a penalty of one stroke, a player may still take either “stroke and distance” or “line of sight” relief from the Penalty Area by dropping a ball within one club-length from the appropriate relief spot. Third, in a Red Penalty Area, the player has an additional option, with a one stroke penalty, of dropping a ball within two club lengths no closer to the hole of the last point the player’s ball crossed the margin of the Red Penalty Area. A fourth option previously available for lateral hazard relief under the prior rules permitting a drop on the “opposite margin of the hazard equidistant from the point of entry” has been eliminated.

(D) Ball Deemed Lost if not Found Within 3 Minutes: Under the New Rules, a player’s ball is deemed lost if not found within 3 minutes of when the player or the player’s caddie first begins to search for it.  The prior rules gave the player a 5 minute search time to find his or her ball.  To speed up play, players are encouraged to play a Provisional Ball before going to start the search for their original ball.

(E) No Penalty If Ball Accidentally Moved: If a player, a player’s caddie, or anyone else accidentally moves a ball in play while searching for it, there is no longer any penalty associated with the accidental movement.  The Player must replace the Ball and restore its lie before playing the next shot.  Further, if a player’s ball is accidentally moved for any reason on the putting green, it is to be replaced with no penalty.  If a ball on a putting green moves after it has been marked and lifted (even if it has been replaced and the mark removed and/or if the movement was caused by the wind or other natural causes), the ball is to be replaced where it had been marked and played from the spot where previously marked with no penalty.  If a ball on a putting green moves due to wind or other natural causes before it has first been marked or lifted, the ball is to be played from the new spot without penalty as if the ball had come to rest on that new spot originally.

(F) Additional Option for Ball Unplayable in Bunker.  The one stroke penalty options of stroke and distance, and line of sight within in the bunker, provided under the former rules for taking relief from an unplayable ball coming to rest in a Bunker have been retained. The New Rules, have added an additional relief option which permits the player to extend the line of sight relief option beyond and behind the margin of the Bunker, except that the penalty associated with this new method of relief is two strokes, instead of one.

(G) Flagsticks: Players may, at any time, have the flagstick attended, removed, or left in the hole—even if their stroke is taken with the ball on the putting green. This will likely speed up play significantly as players—particularly on long putts (and on very short ones)–will not have to wait to have the flagstick attended before taking their first putt.  *Note, PGA Tour Player Bryson DeChambeau was recently quoted as saying it is his intention in 2019 to never have the flagstick removed for any full shot or putt, because he believes the flagstick will never “hurt” a good shot or putt, and hitting the flagstick can only help shorten shots or putts that are hit with too much pace and would not go in anyway.

(H)  Miscellaneous additional changes. Unless the conditions of competition expressly prohibit them, standard distance measuring devices are permitted. The embedded ball rule now covers the entire golf course, except Penalty Areas and Bunkers.  An unintentional “double-hit” of any shot (putt or swing) no longer triggers a one-shot penalty. If a ball in play accidentally strikes or is interfered with by a player, a player’s caddie, an opponent, any of their equipment or any other person or person’s equipment, there is no penalty, it is considered a “rub of the green,” and the ball is played wherever it comes to rest.

As noted at the outset, there are many significant changes to the Rules of Golf that automatically go into effect on January 1, 2019.  Due to space limitations, a number of these changes could not be discussed here. I strongly recommend that any casual golfer interested insuring their golf rounds are scored correctly, and every competitive golfer, both (i) download the free USGA Rules App to their smartphone (and read it), and (ii) spend about twenty-five minutes at the www.USGA.org website watching the series of videos designed by the USGA to provide players with an overview of the New Rules.  I’m certain most players will find it a useful and productive use of their time, and should make their rounds of golf in 2019 (and beyond) that much more enjoyable.

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[Photo by Court Prather on Unsplash]

Banker Beware: The Ninth Circuit Says It’s Your Fault If You Don’t Know Who Pays You

1. Facts

Freddie Fraudster[1] wholly owns and operates Loser LLC, an operating business with significant cash flow. Unbeknownst to anyone, over the span of several years Freddie diverts more than $8 million in funds from Loser LLC’s business operations into a “secret” bank account he maintains at a separate Bank in the name of Loser LLC, but over which Freddie at all times holds exclusive discretion and control.  Freddie uses the secret account as his personal piggy-bank, paying on going personal expenses such as:  regular monthly mortgage payments to his Bank on his personal residence, utility and homeowner association payments regarding that same residence, funding a personal horseracing hobby, and hiring Sally Trueblood, a salt of the earth interior designer to whom Freddie paid approximately $230,000 over time—using checks from the “secret” Loser LLC account–as payment for legitimate interior design services provided by Sally in remodeling a building owned by Freddie personally. It was stipulated that Sally was referred to Freddie by another of her clients and did not know Freddie previously, that she had provided her design services to Freddie based a truly arms’ length transaction, that the value of the services she provided were consistent with the amounts paid, and that she had otherwise acted at all times in good faith with respect to Freddie and the services she provided to him without knowing anything about Freddie’s unrelated fraudulent activities.

As one might expect, Loser LLC suffered significant losses and filed for Chapter 7 Bankruptcy protection. Freddie went into hiding somewhere outside the country.  A Chapter 7 Trustee was appointed to recover and liquidate Loser LLC’s assets for the benefit of its creditors, and Freddie’s scheme of diverting Loser LLC’s funds into the secret bank account for Freddie’s personal benefit, was uncovered.  The Trustee then “sued the checkbook” for the secret account, filing more than 100 fraudulent transfer suits against virtually every recipient of any payment out of the “secret” account under Bankruptcy Code section 548(a)(1)(B), alleging that each recipient was strictly liable for the return of all payments from the secret account because they were the  initial recipient of a constructive voidable transfer for which Loser LLC received no benefit or consideration.

Because Ms. Trueblood was obviously an “innocent” recipient of payments made via checks written on Freddie’s “secret” Loser LLC checking account, the parties chose to use the Trustee’s lawsuit against Ms. Trueblood as a “test case” to obtain a ruling on an affirmative defense that would be asserted by virtually each of the 100 “checkbook” defendants sued by the Trustee.  Section 550(b) of the Bankruptcy Code provides that an otherwise avoidable fraudulent transfer may only be recovered from an “initial” transferee or the recipient of the benefits of the transfer, and cannot be recovered from a “mediate or subsequent” transferee if the subsequent transferee “takes for value, . . . in good faith, and without knowledge of the avoidability of the transfer avoided.

The Bankruptcy Court initially ruled in Ms. Trueblood’ s favor, holding that Freddie’s diversion of Loser LLC funds into the “secret” bank account over which he held “exclusive control,” was sufficient to render Freddie as the “initial” transferee of the diverted funds referenced in Section 550(b), thereby rendering Ms. Trueblood an innocent “subsequent” transferee entitled to avail herself of Section 550(b)’s good faith defense.  On appeal, the US District Court initially, and the US Ninth Circuit Court of Appeals ultimately, disagreed, and ruled that the appropriate inquiry was to focus on who, at the time of the challenged transfer, had “dominion” over the funds being transferred, and defined such “dominion” as (essentially), “whether the recipient of funds has legal title to them.”

Following this logic, the Ninth Circuit reasoned that notwithstanding that Freddie’s “diversion” of Loser LLC’s operating revenues into a secret account over which he exercised exclusive control, because the “secret” account was at all times maintained in the name of Loser LLC (and not Freddie or another unrelated entity), Loser LLC all times retained “dominion” over the funds at issue, and Loser LLC could not, under any circumstances, be considered the “initial transferee” of its own funds for the purposes of Section 550(b).  This led the Court to the inevitable conclusion that Ms. Trueblood (and virtually all of the other100+ “checkbook” defendants), was therefore (i) ineligible to assert the Section 550(b) good faith defense, and (ii) was strictly liable to the Chapter 7 Trustee for the return of all the payments she received from the secret account because the services she provided did not benefit Loser LLC.

The bottom-line lesson from this case is that form over substance matters in the Ninth Circuit.   Because Freddie diverted Loser LLC’s operating funds into a “secret account” that remained in the name of Loser LLC, everyone who received a check written on the secret account for Freddie’s personal expenses was strictly liable for, and had no defense to, an avoidable transfer claim by Loser LLC’s Chapter 7 Trustee.  Had Ms. Trueblood (or any of the other recipients) insisted on having Freddie pay her with a personal check or in cash—even if the initial origins of the funds used to cover any such payment was the very same “secret” Loser LLC account–Ms. Trueblood and those in her position would then have been deemed a “subsequent transferee” of the diverted funds entitled to the good faith defense of Section 550(b).

After issuing its ruling, the Ninth Circuit remanded the Trueblood case back to the Bankruptcy Court after striking Ms. Trueblood’s Section 550(b) good faith defense.  The Bankruptcy Court then applied the Ninth Circuit’s logic in each of the other 100(+) avoidable transfer actions filed against every recipient of a payment from the secret account.  Recoveries on this theory included recovery of payments made out of the secret account to, among other things, Las Vegas Casinos for Freddie’s personal gambling debts, monthly mortgage payments made on Freddie’s home loan, monthly utility payments and homeowner association dues paid regarding Freddie’s residence, payments made to the seller of real property to Freddie through an escrow agent, and other similar payments made by Freddie directly from the “secret” Loser LLC account for personal expenses.  In each instance, had the recipient of any such payment insisted that  Freddie  make the payment with a personal check or cash, they would have been entitled to assert the Section 550(b) good faith defense, resulting in a limitation on the Chapter 7 Trustee’s recourse on those transactions solely to Freddie or to those who were involved in (or at least aware of) his diversion of funds.

Practical Suggestions:

1. If a Borrower or customer is permitted to set up automatic monthly mortgage (or other) payments electronically, the Banker/Creditor should verify and make sure that the automatic payments are actually being made by the Borrower or Customer who owes the payment.
2. To the extent possible, particularly when working with a small business owner, real estate developer or other entrepreneur who regularly conducts business through the use multiple entities and/or multiple bank accounts, make an effort to “match” the source of payments received, or to be received, to bank accounts or other funding sources to a party obligated for the loan. It should particularly be viewed as a red flag if checks are received from an unknown or seemingly unrelated small business entity who is not an obligor or guarantor of the obligation being repaid.
3. Whenever a loan pay off, or property purchase resulting in a loan payoff, is taking place through a third-party escrow, endeavor to include instructions to escrow in the payoff demand that escrow is to determine, verify and advise you prior to closing as to the source of the funds being used to pay off the loan and/or purchase the property through said escrow.  To the extent that the source of funding cannot be sufficiently tied to the beneficiary of the transaction, consult with legal counsel to determine whether there are unnecessary “form over substance” avoidable transfer risks in the transaction that can be minimized prior to escrow’s close.

[1] This article is drawn from the US Ninth Circuit Court of Appeals decision rendered on October 2, 2017 in: Henry v. Official Comm. Of Unsecured Creditors of Walldesign, Inc. (In re Walldesign, Inc.), 872 F.3d 954 (9th Cir. 2017).  The names have been changed to protect the (not so) innocent.