Country Club Membership

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By: Rob Harris

Massachusetts’ Indian Ridge Country Club is seeking new members. According to its website, there’s a “special one time membership offer for 2014,” and you can “join today with no initiation fee!”

Still might not be a good investment.

The club is owned by the Market Basket supermarket company, a 71 store food powerhouse in Massachusetts and New Hampshire. The company’s success is a triumph of business, given that its owners remain engaged in a decades long family feud that has spawned a boatload of litigation.

Earlier this week, the family dispute transcended the dairy aisle, reaching Indian Ridge.  Here’s an informational, and entertaining, story describing how family disagreements, unleashed, can impact the harmony of a golf club experience.

 

By: Rob Harris

This week, a New Jersey appellate court issued an interesting decision on an issue that has become increasingly litigated as private clubs lose members: how and when can a departing member obtain refund of an initiation fee when he is in the back of a long line of exiting members?

Robert Passero resigned from North Jersey Country Club in December 2011. Eight months later, 44 former members were ahead of him in line, waiting for payment, and 21 had joined the line behind him.

While the club did not dispute its obligation to pay Mr. Passero for his $14,900 debenture bond, the club argued–successfully–that the contractual documents and bylaws did not specify when payment need be made.

The appellate court decided that the issue was one of “reasonableness”, and that a court would need to entertain all the relevant evidence to determine what constituted a “reasonable” time for payment.

The court’s decision advanced observations that may be of interest to those involved with club governance issues:

  • The court acknowledged that, in a pure contractual scenario, the law requires that, unless the contract provides otherwise, money owed be paid immediately. However, the court found that “those narrow principles of contract law are not controlling” in the context of a club-member relationship. According to the court, “this is not a straight commercial contract between strangers, … but a condition of membership in a private club which granted plaintiff all of the rights and privileges of a Class A member, which he enjoyed for the next twenty years. The rights and obligations of the parties in these circumstances requires a deeper analysis [than contract law].”
  • Instead, the court determined that the payment issue would be governed by “the business judgment rule.” As the court explained, “the business judgment rule has its roots in corporate law as a means of shielding internal business decisions from second-guessing guessing by the courts.”  According to the court, “we are dealing here with a country club, a private association, and neither the nature of the association, nor the dispute involved in this case, implicate any public interest or concern. Under these circumstances, courts should be extremely reluctant to interfere with internal disputes.”
  • At the same time, the court was unwilling to give the Board a blank check not to issue a check: “ The discretion that accompanies the Board’s authority cannot be exercised in a manner that is unfair to a former member, who is now a bona fide creditor.”

The test, therefore, becomes one of reasonableness. In teeing up the issue for a subsequent evidentiary proceeding, the court raised the following questions:

“Is it reasonably sufficient for the Club to take a laissez faire, take-it-as-it-comes approach, seeing how much money is available from annual net operating profits to pay off these loans? Should the rule of reasonableness require the Club to take a more proactive approach by, for example, setting an outer limit of perhaps one or two years for payment once a member resigns?”

According to the court, “there must be a balance struck between the right of a retiring member to obtain repayment of his or her interest-free loan and the legitimate needs of the Club to maintain viability and sustainability in its operation.”

Takeaways?

Is it appropriate that one who contracts with a club should not be able to enforce her rights in the same manner as if contracting with another person or entity? Stay tuned as to this issue. I suspect that other courts may have something to contribute to this discussion.

Whatever legal standard ultimately emerges, clubs should review their governance documents with an eye toward ensuring clarity as to redemption times and procedures.

By: Rob Harris

Those advocating a strong, centralized club governance structure often point to Augusta National. And perhaps the defining moment for the “if you don’t like the way we do it–tough” model was the “mano-a-mano” “discussion” between (Club) President Clifford Roberts and (United States) President Dwight D. Eisenhower.

The U.S. Prez was a critic of the large pine tree that graced the left side of the 17th fairway. In 1956, during an Augusta National governors’ meeting, he proposed that the club be cut down. The Club Prez, of a different mind, overruled DDE and adjourned the meeting.

Now comes news reaffirming that, whatever the pecking order between the leader of the free world and the president of Augusta National, there is, indeed, a higher power. Mother Nature, by way of the ice storm she recently delivered to Georgia, weighed in, with damage to the tree being so great that the club was forced to remove it.

By: Rob Harris

Those who have called a customer service line and heard the voice mail telling them they are 14th in line may feel empathy for five former members of The Classics at Lely Resort, a golf club located in Naples, Florida. A federal court, however, did not.

Like many clubs, The Classics at Lely Resort permitted resigning members to recapture a sizeable portion of their deposit, but only as new members joined. At the time they resigned, the five plaintiffs were, respectively, 162nd, 199th,  214th, 216th and 454th on the waiting list. To make matters more challenging, except for a  period of time, the club’s bylaws provided that only one transfer occurs for every four or five new memberships. Four of the five plaintiffs have been on the list since 2004. That’s a long time to wait.

Nonetheless, the United States Court of Appeals held this week that the members failed to assert a viable claim against the club. As the court explained, “the Club’s Bylaws clearly provide that resigning members are placed on the transfer list in their order of resignation and that refunds will be issued as those memberships are transferred to new members.”

Moreover, the court rejected the plaintiffs’ assertion that the club had made certain oral promises to them. According to the court, “to the extent the members complain these apparently oral promises were somehow incorporated into the owners’ contractual obligations, they provide no basis for circumventing the Bylaws’ ‘Entire Agreement’ clause, which states in no uncertain terms that none of the ‘rights and obligations’ in the Bylaws and Purchase contract ‘may be modified, amended, enlarged, or revised’ in any way other than by written agreement.”


By: Rob Harris

There was a time when New Jersey’s Hamilton Farm Golf Club commanded membership deposits ranging from $160, 000, for an Individual Golf Membership, to $212,000 for an upgraded Family Golf Membership. Those days are gone, at least for now.

Those members who coughed up the sizeable membership deposits signed a Membership Agreement that provided for a “Refund of Membership Deposit,” stating as follows:

“[i]f the member resigns before the end of the 30-year period, the membership deposit paid by the member or the amount of the membership then charged for membership, whichever is the less, will be refunded, [...] after the issuance of the membership by the Club to a new member.”

Under the Membership Agreement, the “Club also reserve[d] the right to modify this Membership Plan [...] and to add, issue or modify any type or category of membership.”

With the turn in the economy, a number of members sought the refund of their membership deposits. Alas, the club–availing itself of its contractual right “to add, issue or modify any type or category of membership”–did just that. As one court explained in 2011, Hamilton Farm issued a new class of memberships which “require lower membership deposits—namely, $50,000 up front and $50,000 eight years later.” However, these reduced priced memberships “allegedly include member privileges identical to those offered” at the substantially higher price.

For obvious reasons, demand for the higher priced memberships offered by Hamilton Farm vanished, enabling the club to disavow its contractual obligation to refund deposits, since the refund obligation was triggered only upon “issuance of the membership by the Club to a new member.”

The ability of members to challenge the club’s action as a breach of contract has been thwarted by the contract provision referenced above which, as noted, expressly permitted the club to issue the new, lower priced membership. However, courts nonetheless have come to the defense of members, holding that the club’s actions, if proved as alleged, could constitute a breach of the duty of good faith and fair dealing that is implicit in a contract.

As a New Jersey federal court held last week, “under New Jersey law, ‘[e]very party to a contract… is bound by a duty of good faith and fair dealing in both the performance and enforcement of the contract.’…  A party ‘breaches the duty of good faith and fair dealing if that party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract.’

Turning to Hamilton Farms, the court explained as follows:

“Here, Plaintiffs allege that Defendants created new memberships with substantially the same rights and privileges for the sole purpose of avoiding the continuing obligation to refund Plaintiffs’ original deposits. While the Club was contractually authorized to add new membership categories, the creation of new memberships that are nearly identical to the original memberships in all respects is ‘unsettling, particularly in light of the various inducements in the Plan suggesting that resigned memberships would be reissued as new members joined.’”

Accordingly, the court held that the resigning members of Hamilton Farms have the right to pursue their claims for refunds.


By: Rob Harris

Attorneys’ fees and litigation costs are important factors that should be taken into account before a party rushes headstrong into litigation. Sure, you may want to lash out–whether considering to file a lawsuit or whether to vigorously defend claims that you feel are without merit–but lashing out comes with a price tag that adds up quickly when attorneys charge anywhere from $300-$700 per hour.

Almost two years ago, we reported on a novel theory brought by a member of the Hermitage Golf Club near Dublin, Ireland. Member Terry Talbot sued the club, claiming that it defamed him and damaged his reputation by lowering his handicap by more than seven shots over five years. Mr. Talbot claimed the club effectively was branding him a cheat, entitling him to 10 million pounds in damages.

Mr. Talbot lost his lawsuit–no surprise. Under the legal system in Britain and Ireland, loser pays, meaning that Mr. Talbot was legally responsible to pay the club the 500,000 pounds in fees it incurred in defending the lawsuit.

Guess what? Mr. Talbot has yet to make good. Any the club leaders presumably are not preparing their annual budget with the expectation that the money is coming any time soon. Indeed, Mr. Talbot claims that the club has not even requested payment: “I’m still wondering about the legal bills, and of course it is a real concern. The other side got costs alright, and it was an awful lot of money, but they haven’t applied for them for some reason.”

Well, I think Ican supply a reason: Mr. Talbot is a 77 year old pensioner who represented himself in the lawsuit. As he himself acknowledged, ”I certainly haven’t a tuppence to rub together.”

At the time the case was brought, Irish attorney Larry Fenelon suggested that golf clubs would benefit from the inclusion of arbitration and mediation provisions in their governing documents. He noted that club leaders “should check themselves if they are thinking ‘this could never happen to us’. It can, it does and it may. The key ingredients are (i) an aggrieved principled person and (ii) a haphazard dispute resolution process. The prevention is so simple, so quick and so utterly cost effective. It’s a no brainer.”

Such provisions, together with prudent thinking about the benefits of a modest settlement, remain important considerations for golf clubs and any golf-related business.

 

By: Rob Harris

Property tax wonks (surely, there must be one of you out there?) will be thrilled to know that the Colorado Court of Appeals has decided the question that has kept you on the edge of your seats: “Should the value of sold memberships be used in the calculation of the actual value of the club’s property for property tax purposes?”

Huh? Once again, in English, this time:

  1. Tax collector wants money.
  2. To collect more money, tax collector wants property appraised values to be as high as possible.
  3. Golf club wants to limit the amount of taxes it pays, therefore, wants property valuation to be as low as possible.

OK, that’s better. So what happened?

The Pitkin County (Colorado) tax assessor needed to determine the value of the property owned by the Roaring Fork Club. As the court explained, “the club has many amenities. Its property consists of an 18-hole golf course, a driving range, designated golf practice areas, a 28,337-square-foot members’ lodge that contains a pro shop, a swimming pool, two tennis courts, fitness facilities, a restaurant, and a bar, another restaurant near the tenth tee, and a 1,381-square-foot members’ fishing lodge.”

The assessor calculated the value of the club’s property at about $19,000,000.  Gulp.

The club, effectively seeking a mulligan, obtained a hearing before the Pitkin County Board of Equalization, at which the club asserted the value of its property was about $7,000,000. The club lost. Bigger Gulp.

The reason for the different figures? A difference of opinion as to whether the value of memberships sold by the club should be included in the calculation of the property valuation. The court summarized the parties’ positions as follows:

“The club contended, as is pertinent to our analysis, that the value of the sold memberships should not be considered in determining the actual value of the club’s property for property tax purposes because the memberships are not interests in the real property.

“The BOE replied that the value of these memberships was properly considered as part of the actual value of the club’s property… The memberships, the BOE’s argument continued, were part of the club’s full fee simple interest in the club’s property because they were effectively leasehold interests, and the membership deposits were akin to prepaid rent. According to the BOE, the memberships would improperly escape taxation if they were not included in the actual value of the club’s property.”

So, for the court, “the issue we must resolve is whether, as the BOE contends, these memberships are an ‘interest in land,’” or, alternatively, whether “the sold memberships are merely licenses, and, therefore, they do not constitute an interest in land.”

The winner? The club.

According to the court,

  • The membership agreement is not a lease. The agreement expressly states that memberships are not ownership interests or easements. It does not give members “the right of possession of the property leased, and exclusive use or occupation of it for all purposes not prohibited by its terms.”
  • Memberships are not life estates. A holder of a life estate is entitled to rents and profits from the property…  The membership agreement makes clear that members do not receive any rents or profits from the club’s property. A holder of a life estate is entitled to exclusive possession and use of the property… Members are not entitled to exclusive possession or use of the club’s property.
  • The agreement does not give members any other taxable interest in the club’s property. The agreement does not transfer any interest in the club’s property to the members.
  • The language of the agreement establishes that memberships are “revocable licenses.” … Members have a personal privilege to perform any of a series of acts on the club’s property, including playing golf, fishing, dining, or working out at the fitness facility. But the memberships can be revoked for reasons including nonpayment of dues or violation of the club’s rules and regulations.

So, there you have it:

Victor: Taxpayer

Vanquished: Tax Man

Until next time.

By: Rob Harris

Golf clubs often include in their bylaws and other governing documents provisions that require membership disputes to be resolved through arbitration. Arbitration, for the uninitiated, provides for a more informal adjudicatory proceeding that litigation, and–important for many clubs–is intended to be confidential. It also has the benefit of avoiding the uncertainties (some would say, randomness) of a jury trial.

Sometimes, club documents will require members to submit their claims to the privacy of arbitration, while the club reserves its rights, in the event that it has claims against a member, to proceed to court. Such was the case with Diamantea private club in Arkansas whose by-laws stated that “any controversy, other than nonpayment of dues, charges, and accounts by a member, arising out of, or relating to the by-laws or the rules and regulations, or any member’s membership, or a breach, which is not within the jurisdiction of the small-claims court, shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its rules.”

Gary and Linda Dye were residents of the club’s adjacent housing development. Unhappy with provisions in the governing documents that required residents to be dues paying members of the golf club, they commenced litigation seeking a court order declaring those provisions unlawful. The club permitted the litigation to continue for a number of months.

At some point, however, the club determined that it desired to invoke the arbitration procedures in the bylaws. Whether the club had deliberately opted to proceed with litigation or had inadvertently not paid attention to its arbitration rights is not clear. What is clear, however, is that the courts–both the lower court and the Arkansas Court of Appeals–were not persuaded.  While a party may have the contractual right to arbitrate, it will be deemed to waive that right if it does not promptly pursue it. As the Arkansas Court of Appeals stated in its recent decision,

“In the present case, the Club made use of the circuit court to decide motions, raise various defenses and arguments, and participate in a hearing.  [The Dyes] indicate that they were forced to spend a great deal of attorney time and expense in the preparation of pleadings and responses, as well as being present at the hearing. .. The extent of the proceedings in circuit court, as well as the expense of time and/or money incurred in that venue, supports the circuit court’s denial of the Club’s motion to compel arbitration in the instant case. Under our standard of review, we hold that the circuit court did not err in its determination that the Club waived its right to raise the arbitration defense due to unnecessary delay, prejudice to appellees, and failure to raise the arbitration issue earlier…”

The takeaway: be sure to read the contract documents carefully when a dispute erupts. Otherwise, contractual advantages previously obtained through negotiation may be lost.

By: Rob Harris

Private clubs ordinarily are free to impose membership policies free of the racial, sex and religious anti-discrimination laws that apply to public establishments. Hence, Augusta National acted within its lawful rights by telling the public to pound sand in response to outcries about its discriminatory membership policies.

New Jersey’s Plainfield Country Club, ostensibly private, may face problems, however, with respect to its recent suspension of a female member and the ouster of her husband from the club’s board of trustees. Liza and Joseph Garrubbo have sued the club, which hosted the 2011 Barclays Tournament, alleging the club punished them in retribution for their attempts to obtain enhanced rights for women members.

The complaint alleges that the club, despite its private, not-for-profit status, is a place of public accommodation, because it permits the public to access an additional nine hole course and hosts weddings and other social events.

This case bears watching. Reports about the complaint and background can be found here and here.

By: Rob Harris

Yesterday’s post discussed a recent decision by the Ohio Court of Appeals involving the effort by two families to recoup their ostensibly refundable $30,000 membership initiation fees. Add a zero, and you still don’t have the amount of the refundable initiation fee that Nunzio Innucci Jr. claimed was wrongfully withheld from him by New Jersey’s Due Process Stable golf course.

A recent story describes how Innucci in 2004 joined the uniquely named course founded by celebrated businessman and convicted money launderer, Robert Brennan, paying a $350,000 initiation fee that he was told would be refundable on three days notice. According to Innucci, after Brennan’s release from prison, he became the general manager at the club which allegedly destroyed for Innucci the benefits of the club, including his ability to host guests.  Innucci opted to resign his membership, however, the club failed to promptly return his initiation.

According to the story, the litigation has settled, with the terms being subject to confidentiality. The story, nonetheless, makes for good reading.

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