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.”
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.