Country Club Membership

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By: Rob Harris

You have to love the cash management strategy followed by Harris Golf Co., which owns or manages ten golf courses in Maine.

Claiming that it is protesting abusively high tax assessments on its courses, Harris Golf has adopted a corporate policy of permitting tax liens to be filed on its courses, and paying the overdue taxes before the expiration of the 18 month period the government must wait before it can foreclose.

According to Harris Golf’s president, “We believe that we’re being overcharged. If you look back at the history since we bought it, it’s a pattern. We always pay the taxes before the liens mature. For us, it’s the normal course of action. It’s how we run our business.”

Choosing to vote with its wallet, president Jeff Harris proclaims: “That is the only way we can get a vote — by dollars — holding them back. It is what it is, and the only thing you can do [to object] is withhold the money. It’s a very sore subject for me because we feel like we’re being abused.”

 

‘When you dish out illegal stock tips at the golf course, there are no mulligans.”

So begins the interesting and informative article by Patrick Temple-West in Politico discussing two insider trading cases recently brought by the Securities and Exchange Commission “that center on the relationships between golfing buddies and how their chitchat in the tee box or at the 19th hole turned into lucrative and illegal trading bonanzas.”

According to a former official in the SEC’s enforcement division, quoted by Temple-Best, “[g]olf is becoming a recurring theme in insider trading cases.”

Golf Dispute Resolution’s posts about the two cases discussed by Temple-West can be found here and here.

By: Rob Harris

Although sometimes attributed to Abraham Lincoln, others question the origin of the proverb: “He who is his own lawyer has a fool for a client.” My vote for likely candidate is an attorney marketing trade group.

Whatever its origins, the Appellate Division of the New Jersey Superior Court recently provided at least temporary relief to a member of The Ridge at Back Brook who initially undertook to represent himself in court proceedings challenging his obligation to pay dues and associated country club costs totaling approximately $87,000, which liability, with finance charges, had by the time of judgment grown to more than $250,000.

The member’s substantive defense apparently was that his dues “were improperly utilized for capital and debt service, contrary to the terms of the membership agreement, which provided it was to be utilized, if at all, exclusively for operational expenses” As the court explained, “Defendant asserted that plaintiff took this course because ;the project was millions of dollars over budget’ even though plaintiff ‘affirmatively advised’ at the contract’s formation that ‘there was no debt and construction was within budget.’”

The trial court, however, refused to entertain the member’s arguments, finding that he failed to present them timely and in accordance with the court’s rules and procedures.

The appellate court, however, showed some empathy. As its opinion states:

We … hold that a pro se litigant is entitled to nothing less than that to which a litigant is entitled when represented by a negligent attorney. That is, … pro se litigants are not entitled to greater rights than litigants who are represented by counsel. But we also [have] recognized…– in concluding that a self-represented litigant was deprived of a meaningful opportunity to be heard due to a lack of understanding of motion practice – that it is ”fundamental that the court system . . . protect the procedural rights of all litigants and to accord procedural due process to all litigants.”

Consequently, the appellate court sent the case back “for further consideration of defendant’s motion to be relieved of the consequences of his failure to adequately represent himself.”

 

 

By: Rob Harris

As if changing demographics and an economic downturn weren’t obstacles enough. Now, country clubs are facing targeting by the Securities and Exchange Commission.

Last month, we noted that the SEC had charged seven golf buddies with insider trading.

Now, the federal government has announced that civil and criminal charges have been brought against the senior vice president of a bank for tipping off a “fellow golfer with whom he socialized at a local country club” about his employer’s plans to acquire another banking institution. The tippee–charged civilly by the SEC, but not criminally–allegedly parlayed the inside information into a $300,000 profit.

For those who view the government’s golf-related actions as aberrations, wrong. The official press release issued by the SEC provides as follows:

“Country clubs or similar venues may give people a false sense of security that leads them to think they can get away with trading on unlawful stock tips,” said Paul G. Levenson, director of the SEC’s Boston Regional Office. “But as in any social setting, people who trade securities based on confidential information they receive are taking a huge risk that their illegal tipping and trading will be identified by the SEC.”

Those who always had an urge to read an SEC insider trading complaint now have their opportunity to do so.

Thanks to Bob Carlson, lawschool friend and author of the Retirement Watch financial newsletter, for alerting me to this hot-off-the-press item.

By: Rob Harris

A Texas court recently issued a decision that may be of interest to those holding memberships in financially shaky clubs.

As the court explained, the owner of Golf Club at Castle Hills “entered into contracts with appellants that granted appellants lifetime memberships at the golf club, which included free greens fees and other golf-related benefits.”

After several years of financial difficulties, an entity known as Castle Hills Golf Course Company obtained through foreclosure the right to operate the golf course. The new operator refused to honor the lifetime golf contracts.

The members, upset, seized upon language in the membership agreements that provided as follows: “In the event of a transfer of ownership of the [Golf Club at Castle Hills], the membership may continue under the new ownership or may be terminated with a prorated refund to the Applicant as follows: up to ten (10) years 100% and after ten (10) years, 50% of the Lifetime Fee will be refunded.”

With eight years having passed since the golfers had been granted their lifetime membership agreements, they sued for refunds in accordance with their agreements.

The court, however, rejected the members’ claims. According to the court, absent evidence of ratification of the agreements, the foreclosure proceeding served to provide the new operator with the ability to proceed, unencumbered by contractual obligations provided to the lifetime members by the predecessor entity.

 


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.


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