For some people, it is unsettling to read the Pentagon is funding research into a program, Space-based Machine Automated Recognition Technique, looking to use AI to monitor all human activity around the globe in real-time.2

If it is as billed, the program resembles a back-to-the-future look exemplified by the dystopian novels of George Orwell’s “1984”3 or Aldous Huxley’s “Brave New World.”4

However, we submit the unsettling nature of government surveillance is not as threatening to personal privacy and freedom as is the current wave of private enterprise’s foray into visual and audio surveillance. The presumed 4th amendment to the U.S. Constitution protections respecting electronic surveillance (deemed a search under the Fourth Amendment), does not apply to private activity if the government is not involved.

However, various states have enacted laws to circumscribe the private use of surveillance devices. For example, Georgia law states it is unlawful for “Any person, through the use of any device, without the consent of all persons observed, to observe, photograph, or record the activities of another which occur in any private place and out of public view;…”5

Georgia does make an exception “For an owner or occupier of real property to use for security purposes, crime prevention, or crime detection any device to observe, photograph, or record the activities of persons who are on the property or an approach thereto in areas where there is no reasonable expectation of privacy;…” 6

Similarly, an exception is made for residential homeowners and renters “To use for security purposes, crime prevention, or crime detection any device to observe, photograph, or record the activities of persons who are within the curtilage of the residence of the person using such device. A photograph, videotape, or record made in accordance with this subparagraph, or a copy thereof, may be disclosed by such resident to the district attorney or a law enforcement officer and shall be admissible in a judicial proceeding, without the consent of any person observed, photographed, or recorded; . . . ”7

What is mildly troublesome with the underlined passage in the preceding paragraph is that the same language is not provided in another section relating to the similar rights of an owner or occupier of [nonresidential?] real property.8 Does this mean if a nonresidential property owner turns over recorded evidence of an intruder to a law enforcement officer without the consent of the intruder, the intruder may have a claim of invasion of privacy?

The likely answer to a putative claim of an intruder or other person for invasion of privacy is if the cameras are not installed in an area where a person has a reasonable expectation of privacy, the installation of a camera will not be an invasion of privacy. This leads to the question of what are the areas where a person has a reasonable expectation of privacy?

Typical off-limit areas are bathroom stalls or areas where people change clothes (locker rooms). Areas such as swimming pools, tennis courts, or entrances and exits to the clubhouse are not areas where a person would have a reasonable expectation of privacy.

Under current law, to establish a reasonable expectation of privacy, a person must establish two things: that the individual had a subjective expectation of privacy; and that that subjective expectation of privacy is one that society is prepared to recognize as reasonable. If either element is missing, no protected interest is established.

Still to be resolved, however, is how do private citizens and entities protect themselves from undesired, intrusion into their private property or activities? We are now in an age of largely unregulated drone surveillance. Recently, squadrons of drones have been observed over the skies of Eastern Colorado without local law enforcement having a clue as who is responsible for the drone activity.9

If these types of drone activities are not governmental, it may be our concerns over the anxiety of government surveillance are not of as immediate a concern as are surveillance originating with private industry or persons.

Homeowner associations, other associations, and clubs who own or occupy and operate property are buying into privately funded and furnished surveillance cameras and software to spy on anyone entering their curtain of influence.10 The association purchases or leases the surveillance equipment from a private vendor. The vendor may offer to provide cloud or network backup and storage of photographic data captured by the equipment. Often, data is shared through networks with the local police department if found to be indicative of criminal activity. A vehicle license plate may reflect a stolen vehicle or one involved in a traffic violation.11

Suppose a private club management employee is conducting evening video security surveillance and picks up a video of two unmarried persons in flagranto delicto 12 in the outdoor adult-only area adjacent to the club’s swimming facilities. What course of action, if any, is the club manager legally justified in pursuing? Is the engaged couple comprised of club employees, members, or a mixture of the two classifications? Does the club have a policy concerning how to address video results? Is the area where the event occurred one in which at nighttime the participants should reasonably expect privacy? Does the club prohibit access to the pool complex after dark?

We suspect most private clubs are not particularly forthcoming respecting the publication of the reasons for video and audio surveillance. We have reviewed many club rules and have not found much if anything pertaining to the use of cameras and other surveillance tools and their purpose or on whom they may be used. When seeing security cameras adjacent to the club entrance, most likely assume they are present to identify trespassers. Are we then surprised when we discover the cameras are also there to spy on members and employees?

Certainly, it is prudent if the club is to employ surveillance equipment, it should include in its policy pronouncements the purpose of the equipment, how it is to be employed, and whether members and employees may be subject to the surveillance. Also, the club rules should specify that members on behalf of themselves, family, and guests, agree the presence and use of the surveillance equipment is not an infringement of their privacy rights; and there are no places in the club where a reasonable expectation of privacy is valid [except for named locations].

Video cameras generally should not be placed in areas where there is a reasonable expectation of privacy, e.g., bathroom stalls, dressing rooms, or locker rooms. However, even if your state forbids the use of surveillance cameras in dressing rooms, most states enforce informed consent laws. This means that dressing room cameras are allowed, but it may be legally required to inform those entering the area of the presence of monitoring equipment, usually by way of conspicuous signage.13

The question whether the club should erect signs disclosing the presence of security cameras is a matter of practical debate. Some believe the sign itself may be a deterrent to criminal activity. Generally, except in those states mandating disclosure, there is no legal requirement to post signs indicating the presence of surveillance equipment. However, state laws differ and the club should check with counsel to ascertain if there exists a signage requirement.14

In a prior blog,15 we addressed the use of drones on club property. However, in that blog, we did not address the potential privacy aspects of drone use by the property owner. If the club employs drones for security purposes, it might be useful to reference the use in the club’s rules so that members, their families, and guests are aware of and acquiesce in drone surveillance.

In summary, a club using surveillance equipment is cautioned to consider all the aspects attendant upon its use and to document these aspects in either the club’s policy manual or rules. The policies and rules should be formally adopted by the club’s governing board and publicized on the member-access side of the club’s website.

Copyright 2023
Fred L. Somers, Jr., P.C.
Atlanta, GA. 30338

1. By Fred L. Somers, Jr., Esq. This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.
2.https://www.nextgov.com/emerging-tech/2019/12/crazy-government-research-projects-you-mightve-missed-2019/161977
3.Secker & Warburg (1949)
4.Chatto & Windus, London (1932)
5. O.C.G.A. §16-11-62(2)
6. O.C.G.A. §16-11-62(2)(B)
7. O.C.G.A. §16-11-62(2(C)
8. O.C.G.A. §16-11-62(6)
9. https://www.thedrive.com/the-war-zone/31631/there-is-a-big-and-bizarre-drone-mystery-unfolding-in-rural-colorado
See The Risks and Rewards of Installing Security Cameras by Joseph C. Larkin, Esq. NewsLetter_LLH_Spring2019.pdf (luederlaw.com)

Community Matters – Spring 2019


10.I.e., sexual intercourse.
11. If I Put Up Surveillance Cameras, Do I Need to Post a Sign? States That Allow Cameras in the Dressing Rooms (legalbeagle.com) https://legalbeagle.com/7464756
Id.
12. Should a Country Club allow Model Aircraft Drones? By Fred L. Somers, Jr., P.C. (November 26, 2017)

 

Best Practices for Trade Association and Private Club Governance[1] 

Much gratuitous advice has been bandied about in recent times concerning “best practices” in different industries. Most of it is subjective opinion, albeit some of it useful in an appropriate context.

The dictionary informs us “best practices” consist of a procedure that has been shown by research and experience to produce optimal results and that is established or proposed as a standard suitable for widespread adoption.[1] However, “best practices” are unlike voluntary standards. The latter are usually formed by a consensus of unrelated persons vocationally involved with the subject being considered as a standard and sanctioned by a certifying standards organization. “Best practices” don’t necessarily achieve the level of a consensus standard unless there is a compelling safety, cultural, or utilitarian reason to run the gauntlet of standards certification and the discipline required to be certified as a standard.

One observer[2] notes “Standards are something necessary and need to be defined, monitored and controlled while Best Practices can be taught but may vary by individual [entity] . . . Because there are many different ways of doing things, we can teach “Best Practices” and encourage them to be used, but in the end we require  ‘Standards’.”

In September 2021, ISO (International Standards Organization) published ISO 37000. Its abstract proclaims:

This document gives guidance on the governance of organizations. It provides principles and key aspects of practices to guide governing bodies and governing groups on how to meet their responsibilities so that the organizations they govern can fulfill their purpose. It is also intended for stakeholders involved in or impacted by, the organization and its governance. It is applicable to all organizations regardless of type, size, location, structure, or purpose. [3]

In attempting to use ISO 37000 in a practical way, it is necessary to translate its principles into useful and practical methods to abide by the principles.

The Organization for  Economic Cooperation  and  Development,  (OECD), issued  OECD  Principles of  Corporate Governance in 1999  and later revised them. Originally the Principles were designed with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance,  and providing guidance for regulators and,  more broadly, participants in financial markets. They now purport to also provide guidance to private organizations.[4] “Principles” as used by the OECD we interpret to equate with “standards”.

Corporate governance standards relating to the board of directors have been established by the NYSE, Nasdaq, and the SEC, where applicable.[5] However, these standards are of limited relevance for use by nonprofit, nonpublic private organizations. Notwithstanding, some elements of them have migrated into the nonprofit realm, e.g., conflict of interest, and executive compensation review and scrutiny.

Following this lead, the IRS has stuck its nose under the tent of private nonprofit, tax-exempt entity governance with its form 990 Return of Organization Exempt From Income Tax. [6] Under 990 Part VI Governance, Management, and Disclosure, Section B. Policies (This Section B requests information about policies not required by the Internal Revenue Code) [Italics supplied for emphasis], the entity is required to respond to questions about Governing Members, Officers, and Key Employees.

One might ask if the information requested under Section B is not required by the IRC why should the organization furnish it? Presumably, the answer is by not furnishing the information, the organization brings undesirable scrutiny upon itself. More significantly, however, for purposes of this discussion, the information requested demonstrates what IRS believes are necessary governance “best practices” for tax-exempt entities. We conclude the prudent tax-exempt entity, e.g., 501(c)(7) private clubs, or a 501(c)(6) trade association should adopt the policies asked about in Section B. That is, they become “best practices” to avoid later unwanted scrutiny by the IRS.

Form 990 asks the following questions, among others: (1) Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form? (2) Did the organization have a written conflict of interest policy? (3)  Did the organization have a written whistleblower policy? (4) Did the organization have a written document retention and destruction policy? (5) Did the process for determining compensation of the [CEO, Executive Director, or top management official and other officers or key employees of the organization] include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?

The foregoing 990 questions undoubtedly grew out of the OECD recommendations, notably as relates to conflicts of interest, whistle-blower protection, and oversight of internal control and financial reporting systems.

What is available from a basic Google search of numerous consultant websites and relevant industry sources is a variety of what we believe is important to consider. Some of these “best practices” help to promote the economic, social, and cultural stability and viability of the entity and even the industry group to which the entity belongs.

Having served on various governing and advisory boards and in leadership positions of private clubs, other voluntary organizations, including homeowner associations and trade associations, and local and state government commissions or advisory panels, we are persuaded there is no “best practices” formula that works for all private clubs, trade associations, or nonprofit governing bodies. Each entity’s culture, constituency, physical plant, demographics, and financial status is unique. Further, these factors may and do change over time for a specific entity.  If these factors differ in any material respect from entity to entity then their governance styles, methods, and organic documentation shall or ought to materially differ.

Indeed, a recent article[7] expressed the observation best boards focus on solutions and structures tailored to their companies, ignoring cookie-cutter “gold standards.”

A generation ago, the norm in corporate governance was to recognize differences among companies — the need to tailor governance to fit needs, to shun cookie-cutter approaches. In recent years, however, the norm has veered to a universal expectation that all boards should follow identical guidelines, usually anointed as “best practices” or “gold standards.”[8]

But are there “standards” or “policies” as opposed to “best practices” we might look to for some guidance as to what characteristics might make for a coherent, useful and successful nonprofit entity governance structure that is universally valid?

Given the premise there is no necessarily common approach to much of what is considered “best practices”, we proceed to undertake a limited catalog of what some of these “best practices” might include if only to provide a buffet sample from which to select the ones desirable for a particular organization.

One principle espoused by ISO 37000 is transparency, i.e., suitably disclosing board activities and making them understandable to the entity’s members. Specifically, the board should be transparent in its decision-making process, key operating indicators, and consistency in terminology and application through the adoption of reporting frameworks.

Transparency has now crept into the window of private organizations. See, e.g., The Corporate Transparency Act which applies to corporations, limited liability companies, limited liability partnerships, and any other entity which is required to file with a secretary of state (for domestic entities) or is required to register to do business in the US (for foreign entities).[9]

Our experience is that boards typically are not suitably transparent about their activities. We recall a member meeting where the members were asked to vote for an assessment but had not been furnished in advance with the club’s annual audited financial statement for the fiscal year only recently ended. Rather, the members were presented with a verbal summary presentation of the prior fiscal year’s financial results before the assessment vote was taken. Query: as a matter of transparency, whether the members should have been first furnished with the audited statement before being asked to vote on the assessment?

Admittedly, “confidentiality” is often required for specific board actions or matters. Thus, member disciplinary hearings, pending but yet undecided matters, and employee decisions or disputes, must be handled in a confidential manner for legal reasons. But we find boards prone to overemphasize confidentiality over the need for transparency when confidentiality is not legally required.

As observed by Cunningham, generalities in corporate governance are suspect.[10] The issue should always be what is best for a particular organization and its members, not what generalists and self-anointed industry advisors or policy entrepreneurs declare is best.

Governing boards need to balance legal needs for confidentiality with the growing awareness and demand for transparency. Certainly, e.g., employee and member disciplinary proceedings must be held in confidence. However, boards might consider posting their minutes (excluding executive session minutes) after they have been approved, Also, the president’s or general manager’s newsletters discussing non-confidential board activity of member interest are useful tools for satisfying transparency. While there is a paucity of law respecting transparency duties, we predict it is the wave of the very near future.

To conclude. Private clubs and trade associations should be wary of simply adopting “best practices” published by self-appointed industry advisors. Rather, they should ask whether each and every one of the proffered “best practices” is suitable and appropriate for their particular organization. Additionally, they should ask and resolve whether other practices may be appropriate that are important to them in their governance and administration.

[1]

Copyright 2022

Fred L. Somers, Jr., P.C.

Atlanta, GA 30338

This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

 

[1] Best practice Definition & Meaning – Merriam-Webster https://www.merriam-webster.com/dictionary /best%20practiceh

[2] http://www.functionsense.com/2012/10/standards-and-best-practices/

[3] https://www.iso.org/standard/65036.html

[4] Improving corporate governance standards: the work … – OECD https://www.oecd.org › daf › corporategovernanc…

[5] https://uk.practicallaw.thomsonreuters.com/0-381-5330?originationContext=knowHow&transitionType=KnowHowItem&contextData=(sc.Default)&comp=pluk

[6] See About Form 990, Return of Organization Exempt from Income Tax | Internal Revenue Service (irs.gov) also see https://scholar.google.com/scholar_url?url=http://digitalcommons.pace.edu/cgi/viewcontent.cgi%3Farticle%3D1592%26context%3Dlawfaculty&hl=en&sa=X&ei=c3SuYbi_PLGUy9YPieuc-As&scisig=AAGBfm1o3R67kGuYtIWkCD4AQrBaWl3C4w&oi=scholarr

[7] See “The Illusion of Corporate Governance “Best Practices” by Lawrence A. Cunningham (2022) at https://www.directorsandboards.com/articles/singleillusion-corporate-governance-best-practices

[8] Id.

[9] . The Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for the Fiscal Year 2021 (“NDAA”) and includes the Corporate Transparency Act, became law effective with Congress’ override on January 1, 2021, of former President Trump’s veto of the NDAA. The Corporate Transparency Act consists of §§ 6401-6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’ findings and objectives in passing the Corporate Transparency Act, and § 6403 contains its substantive provisions, primarily adding § 5336 to Title 31 of the United States Code. See https://www.americanbar.org/groups/business_law/publications/blt/2021/05/corporate-transparency-act/#:~:text=The%20Corporate%20Transparency%20Act%20Included%20in%20The%20NDAA Also see 59498  Federal  Register / Vol.  87,  No.  189 / Friday, September 30,  2022 / Rules and Regulations.

[10] See f.n.7 supra.

Separation of Powers in the Context of Private Clubs and Trade Associations

By Fred L. Somers, Jr., Esq. The author is an Atlanta, Ga. attorney concentrating on legal matters pertaining to private clubs and trade associations. This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

It strikes me as both odd and contrary to the norms of a democratic society that the judicial and legislative roles are combined in the governing board of nonprofit entities. This combination of powers we believe may often result in biased judicial decisions. Biased because in a dispute between a member and the organization, the board is most likely to take the side of the organization, as its duty of loyalty is first to the organization and not to individual members.

It gets particularly sticky when the dispute is between an individual member and one or more of the board members themselves or their close friends or family. We have witnessed occasions when the board acted improperly when adjudicating a hearing in these instances in a biased, unreasonable, and unfair manner towards individual members in favor of a director(s). For instance, in one case when a member persistently and correctly complained about a board’s decisions, the board called for a disciplinary hearing to show cause why the member shouldn’t be expelled or otherwise sanctioned for conduct detrimental to the best interests of the organization.

Right or wrong in the moral sense, (assuming that moral judgments are appropriate in such instances), the manifest conflict of interest in the cited case by allowing the board to decide who should prevail in the dispute is most apparent. It is not like we are living in the swashbuckling days of pirates and privateers when the ship’s captain was the judge and jury regarding seamen perceived as mutinous. Or, in the realm of absolute monarchies or imperial regimes where the king or dictator decides what laws shall apply to a constituent when these laws have been violated, whether the citizen has violated them, and what punishment should be administered if any.

The governing board using what it perceives as the applicable societal moral standards of behavior to apply to member conduct being weighed is presumably guided and influenced by what the organization’s bylaws, rules, and policies recite. However, in the member disciplinary proceedings, we have been privy to rely more on the subjective views of the directors comprising the judges. Little compassion or empathy occurs when the miscreant member was acting under the influence of alcohol and crossed the “zero tolerance” policy regarding employee sexual harassment. No additional consideration is even forthcoming should the member be a long-term member. The judgment pronounced is the result of adherence to black-and-white standards with no consideration for “grey” causes of behavior or conditions attendant to the behavior. As demonstrated by Bruno Latour, there are a myriad of causes leading to events about which we pay little heed in attempting to evaluate and judge these events on a presumptive but perhaps falsely “objective” basis.

Combining legislative and adjudicative functions in a nonprofit governing board may be efficient, but is contrary to democratic republican principles, inherent in the private governance of organizations situated within a democratic republic. Why not favorably consider a separate and independent (of the governing board) judiciary committee? We say independent of the governing board because as recently expressed in a recent complaint filed against FINRA, hearing officers are subject to the inherent pressure, bias, and conflict of interest flowing from being employed or appointed by one of the two litigants. See Case 8:22-cv-02347 Document 1 Filed 10/12/22 Page 1 of 30 Page ID 1, Scottsdale Capital Advisors. Thus, it seems appropriate the judiciary function should be exercised by someone not appointed by the governing board.

This judiciary committee would be charged with hearing and deciding all disputes between the organization and an individual member(s), and the action to be taken, if any, following the hearing.

But you might ask, how do we select the members of the judiciary committee? Is it overly burdensome for the membership to have to elect both judiciary committee and governing board members at their annual meeting? Or, preferably, should not the tenure of judiciary board members be longer than governing board tenures so the elections for vacancies on the respective bodies occur on different occasions? Should judiciary committee decisions be final or subject to appeal to an independent arbitrator?

Suppose the individual member contends the board acting in an ultra vires manner, i.e., beyond its authority under the organization’s articles or certificate of organization, operating agreement, or bylaws. Obviously, in such a case, the constituency of the judiciary committee may need to include one or more lawyers or others who have an understanding of fair and reasonable legal processes and other legal principles to decide the issue at hand. In a large organization, there should not be a problem identifying such candidates. Smaller organizations or those with membership admission requirements effectively barring lawyers from membership may have to reach outside their membership for judiciary committee members. But this creates the potential for expenses not contemplated or thought to be reasonable to impose on the organization’s members.

Moreover, we have found if the details of how disputes between members and the organization or governing board are set forth as a matter of policy or law, members conducting the dispute hearing can easily do so if provided with guidance with sufficient, written clarity, the procedures to follow and applicable legal principles. For example, private organizations not tainted with public governmental powers are not bound by constitutional precepts of due process. Thus, unless an applicable state statute mandates minimum fair process standards for nonprofit entities, the entity is free to prescribe its own rules and procedures for dispute hearings. These procedures normally do not include a right to counsel, adverse witness confrontation, or the right to a transcript or to record the proceedings.

The answer may be to exclude disputes not specifically allocated to the jurisdiction of the judiciary committee, e.g., an ultra vires complaint, shall be referred to an independent arbitrator or mediator for a final, non-appealable decision and the expenses therefor shall be awarded to the prevailing party. Thus, the organization will only bear the dispute resolution expense if the governing board is not the prevailing party.
Concern then needs to be focused on the scope of authority given to the judiciary committee, the credentials required for participation, the tenure of individual members, and the finality or not of the judiciary committee’s decisions. If not final and binding, then to what agency should the appeal be permitted? Appeal to the ultimate internal authority, i.e., the membership itself, is sometimes used. However, in a dispute which needs to be kept confidential, e.g. a sexual harassment case, it is most dangerous from a liability viewpoint to expose the dispute to the general membership.
Rather, if the judiciary committee’s decision is appealable to a third-party, independent arbiter, then we are back into extraneous costs and the fair method of allocation of these costs. Further, if an independent arbiter is to ultimately decide the dispute, then why not start with the independent arbiter?

It is beyond the scope of this writing to spell out the needed governing document adjustments required to accomplish the creation of a judiciary committee. If the idea is of interest, we may follow up in a later article with suggestions of how this may be accomplished.

In summary, non-profit private organizations should consider separating the judicial function from the executive (management) and legislative (governing board) functions.

Spoiling Golf at a Private Club1
“Life as depicted in George Orwell’s 1984 “could come to pass in 2024” if lawmakers don’t protect the public against artificial intelligence, Microsoft’s president has warned.2
However, some of us believe AI’s real threat to personal privacy already exists in the non-governmental, private sector.
Nothing illustrates this concern more vividly than the GPS software now being used by some managers or golf committees of member-owned private clubs to monitor and control the use of their golf courses by the very owners of these courses, i.e., the members themselves. The idea seems to be “if it works at public facilities to speed up play and control course behavior it will work for us.”
In contrast with public golf courses, private club courses have a lot of repeat play because you have to be a member, immediate family, or infrequent guest of a member.3 “Many of these Clubs have a profound respect for the tradition of the game and don’t believe screens in golf carts support tradition. Unlike resorts and destination golf courses, members at private Clubs know the golf course well and have their own distance devices.”4
Golf traditionally was a “gentlemen’s game”, i.e., most everyone, men and women, played by the rules, including obeying the golf etiquette rules. But, in recent times as golf has become “everyone’s game”, the perceived need of management or golf committees to control the pace of play, ensure players obey local rules, and even attempting to prevent injury mishaps brought on by blind spots, has resulted in imposing “big brother” control. This control is exercised by the use of large screens posted on the front of the golf car facing its occupants. Having played the same golf courses for many years I do know where the blind spots are, but the onboard GPS screen doesn’t know that.
Admittedly, at least one manufacturer gives a nod to privacy concerns. “Cart locations are only tracked in areas that you geofence to allow tracking. This provides your community members the privacy they need!”5
This sop is ostensibly offered to owners of personally owned golf cars when off the club property. For those who are not familiar with “geofencing” in the context of a golf course operation, it is a GPS-enabled electronic barrier that allows the golf course operator to send location-specific messages or instructions to a golf car once the golf car enters into a defined geographically turf sensitive area. Thus, if you drive into an area the course manager doesn’t desire you to enter, the golf car will either slow to a crawl or simply stop until you back out of the area. However, it is not always obvious where these forbidden areas may be.
It is faintly amusing to watch golfers ahead of you coming to a stop on a fairway protected by geofencing and then having to back off the fairway in reverse to get back in play. It pays to be attentive to the starter who hopefully is available to tell you which holes are “cart path” only. However, we have experienced the ignominious travails of geofencing even when attempting entry into fairways not designated as “golf cart” paths only. We have also experienced being halted when on a paved golf cart path!
An extreme case is presented by one GPS software manufacturer.
“In an extreme case, a no cart zone violation can typically result in a golf cart automatically shutting down with no movement until the marshall [sic.] arrives. This action can create a potentially negative experience at your golf club. With the iPar7 GPS, the screen flashes a red written warning indicating the no cart zone violation and provides a loud audio warning with an acknowledgment screen and continuous audio warning while in [a]restricted area. Violation time limits can be set to auto-notify Pro Shop for additional action and a message is sent to the golf course marshall [sic.] indicating which golf cart has violated the no cart zone and the location of that cart.6 [Italics supplied for emphasis].
In the old days, that is, before GPS systems replaced or supplemented the golf staff or golf committee responsible for course control, the golf staff would monitor and evaluate the pace of play and observance of golf car etiquette on the spot. The golf staff ordinarily use tact and diplomacy when urging members to “pick up play” and refrain from urging a change of behavior. For example, when the staff perceives the spacing between different groups is sufficient to not be causing a delay. Of course, one reason the golf staff is typically most courteous is they don’t want to irritate the members who pay their salaries and purchase lessons and merchandise from the golf shop or the professionals.
GPS systems, however, don’t concern themselves with tact, diplomacy, or facts. AI software doesn’t scan the course ahead of and behind the presumably unduly slow foursome but merely and rudely instructs them to pick up the pace. Notices appear on the screen such as “you are 12 minutes behind pace” despite the fact the next hole is completely vacant in front of you and there is no one waiting to hit behind you or that you have been waiting on every shot because of the slow group in front of you. The desired pace programmed into the system likely doesn’t account for weather conditions, the fact an outing consists of a crowded shot-gun tournament or play day, or whether the course is restricted to golf car paths only.
Admittedly, the prominent screens which show distance to the hole are a boon to both the player and the club. Instead of having to use my expensive range finder or fumble around looking for distance markers and walking off the difference between the marker and my ball, I pull up next to my ball, look at the screen for the distance to the hole and its location on the green, hopefully, pull the correct club and hit it in the sweet spot.
The downside to this software is some screens also purport to show the distance from the tee to where your ball hit from the tee is situated. We use the word “purport” as we have found the screen doesn’t invariably give the correct distance. Most likely, it is a programming error.
A significant benefit to the use of GPS screens is the safety component. In playing on a rainy day when lightning is detected by the club’s lightning software, the screen may display a message to get to the nearest shelter. After the danger has passed, the screen may ask which hole you wish to return to from the shelter you have sought. However, a delay in re-activating the hole details may occur until the AI system catches up with its timing. We experienced this delay recently when after hearing the “all clear” horn signal we returned to the hole we had abandoned due to an oncoming storm.
One might ask whether this redundancy in lightning warnings is useful. But we are reminded that repetition often gains attention when a single warning, e.g., a fifteen-second horn7 or siren blast, may not suffice. The optimum we surmise would be to have the GPS integrate with the lightning detection system warning employed by the club.8 Both systems should be consistent with the club’s written Emergency Action Plan (EAP), as set forth by OHSA.9 Also, attention should be focused on OSHA’s fact sheet, “Lightning Safety When Working Outdoors”.10 We recommend what is required to alert club employees of lightning danger is relevant to what is required to alert club members and their guests.
Some manufacturers even offer devices to provide GPS attachments for golf bags or golf bag trolleys for walking golfers. This would be helpful if the manufacturer’s product screen includes the location of walking golfers ahead of you when situated in a forward-looking blind location. Otherwise, showing only other golf cars in front of you as indicated by the product we are familiar with, doesn’t disclose walking golfers who may be within range of your next shot.
If playing a course frequented by both riding and walking golfers, lacking knowledge of walking players ahead of you poses false security in relying on a screen only showing other golf cars ahead. Conversely, recently we were “hit into” by some walking golfers behind us who couldn’t see us because they were hitting from a forward-looking blind tee. Without a bag tag or smart screen software program offering information about forward conditions, they would have had to climb a long hill and then return to their tee before hitting.
Also, golf cars may be parked forward of where the golfer is positioned. Thus, while the screen shows the location of the golf cars ahead, it doesn’t necessarily correlate with the location of the golfers. Often I or players with me will park the golf car next to the green and then walk back to hit their approach shot well short of the green. Thus, a player relying solely on the GPS screen and gauging the golf cars beyond reach may hit into us.
Understandably, at proprietary public courses, these GPS systems and information screens are useful tools to maximize course profit by maintaining maximum play within daylight hours and reducing the need for marshals or golf staff labor costs. However, we question their wholesale adaptation at private, member-owned golf clubs. Having a screen image appear at every location where blind shots come into play is an irritant to members who play the course often and know where the blind spots exist. Having the availability of screens showing the location of golf cars ahead may not alleviate the duty of care inherent in visually checking for safe conditions yourself. Indeed, relying on the screen to tell you it is safe to hit when you know the screen doesn’t disclose walking golfers may not protect you from personal injury liability.
If you are positioned where a blind spot exists for the hole in front of you and you know or should have known there were golfers on the same hole in front of you but didn’t bother to look for yourself, your conduct may be seen as reckless and the usual defense of assumption of risk won’t apply.11 Query: whether hitting a ball from a blind spot without visually checking to see if golfers are ahead of you in the expected area of intended flight is reckless. That is, is reliance on a GPS screen that doesn’t disclose golfers as opposed to golf cars likely may not be sufficient due diligence to avoid liability for injury to another golfer.
In conclusion, we submit careful discretion should be exercised by private club management and golf committees in the adoption and selection of a GPS, and the components necessary to accomplish the desired pace of play and turf protection. There is simply no need and presumptuous to protect members against themselves when the members are already familiar with the terrain. I didn’t join a private country club to be constantly warned after several or many years of membership to “Be careful, a blind spot obscures players in front of you.”
At least one manufacturer suggests golf car-mounted screens may be replaced with the GPS and other content sent to your smart-phone. If this technique is deployed, the obtrusiveness of a large screen constantly in front of you is eliminated.12 The same vendor’s website describes eight reasons why the club doesn’t need screens mounted on golf cars. Among the reasons are “younger and more diverse consumers will expect experiences that are enhanced by mobile phone technology (everyone has a screen in their pocket); . . . .”13
Perhaps after introducing GPS screens to the members riding in golf cars, a survey should be taken of the members inquiring what they like and dislike about the system components. If the survey discloses certain aspects of the GPS components are irritating or objectionable to a substantial number of respondents, management should consider removing them.

Alternatively, if the club has not yet deployed GPS screens on its golf cars, it could provisionally install them on a limited number of vehicles and after a month or so, send the survey to the members to obtain their reactions before installing or refrain from installing GPS screens on the remainder of the club’s golf car fleet.

[1] By Fred L. Somers, Jr., P.C. This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

Copyright 2021

               Fred L. Somers, Jr., P.C.

              Atlanta, GA 30338

[2] https://www.bbc.com/news/technology-57122120

[3] https://www.fairwayiq.com/8-reasons-you-dont-need-a-gps-screen-for-your-cart-fleet/

[4] Id.

[5] GPS Cart Tracking (fairwayiq.com)

[6] https://tothegreen.com/

[7] We are unaware of or have not discovered any standards prescribing the duration or type of sound recommended or mandated for lightning warnings. The club should ensure its published lightning policy states the type and duration of warning, e.g., a single 15 second horn sound for golfers to take shelter, and two shorter sounds for “all clear”.

[8] See, e.g., http://thorguard.com/#

[9] 29 CFR 1910.38 (includes 29 CFR § 1910.165 Employee alarm systems) or 29 CFR 1926.35.

[10] https://www.osha.gov/sites/default/files/publications/OSHA3863.pdf; and Lightning Safety When Working Outdoors (osha.gov)

[11] Cf. https://www.overlawyered.com/2009/05/new-york-court-says-golfers-arent-required-to-yell-fore/comment-page-1/#comment-47831 citing, inter alia, Anand v. Kapoor, 2009 NY Slip Op 03110 [61 AD3d 787] Appellate Division, Second Department.

[12] See https://www.fairwayiq.com/  op. cit. supra

Equality, Diversity, Inclusion, and Private Clubs1

>

Much media and rhetoric have been bandied about respecting the terms or concepts “equality”, “diversity”, “inclusion” and their benefits. It may be useful to raise several questions concerning respecting the origin and utility of this media and rhetorical discussion. What, if anything, do these concepts contribute to the well-being and mission of the private social and recreational club? What is meant by diversity in the context of a private club? Is “diversity” a meaningful end unto itself or merely a current passion of contemporary, progressive social doctrine? The same questions present themselves as to “equality” and “inclusion”.

We address herein these three concepts as relating to member-owned private clubs. The so-called proprietary or corporate-owned clubs are not addressed herein.

Equality.

“Equality” in the context of a private club may be the most comprehensive notion of the three concepts to address. In a private, member-owned club, all members at first blush are presumably entitled to be treated equally by the club and its officers, directors, and staff. That is, assuming the members are of the same classification, e.g., golf privileged, they should have equal access to tee reservations. However, at numerous clubs with historical customs, e.g., respecting group golf course tee time reservation systems, “equal” access may be an illusion. That is, preferred tee times may be set aside for the same members year after year. As golf course access became tighter during the 2020 pandemic, complaints about equal access understandably arose. The clubs that confronted these complaints used different responses.

Other areas of the private club present similar equality issues. If all members are entitled to use the dining facilities on a first-come (or reservation) basis, then should a member who violates a “no-tipping” policy receive better service and seating preference than a member who observes the policy? Should a club officer be able to get an event reservation if the reservation list is closed with a waiting list that does not include the officer?

Of course, the foregoing illustrations are not what is now being bandied about when a discussion centers on “equality” as illustrated by the Equality Act2 adopted in the U.S. House of Representatives and pending before the U.S. Senate. The Act’s purported purpose is “To prohibit discrimination on the basis of sex, gender identity, and sexual orientation, and for other purposes.”

In its present form, the Act amends the Civil Rights Act of 1964, Titles II, III, IV, VI, VII, and IX. Title II (public accommodations), and VII (employment) are of particular relevance to our discussion. If the club is a truly or distinctly private club, it may escape the mandates of Titles II, and VII or a state or local ordinance emulating Title II.3 Numerous private clubs have already accepted new members reputed to have or espousing sexual orientation or identity different from the norm, (collectively, “LBGTQs”). Some clubs have not only accepted LBGTQs persons as members but in at least one case elected one of them as a club president. Another club was tentative about admitting an LBGTQ fearing it didn’t want to become the “go-to” club for LBGTQs in the area.

These examples illustrate that it doesn’t take legislation to get private organizations to become more heterogeneous. If the membership is primarily comprised of liberal thinking millennials whose formative years exposed and indoctrinated them into tolerance and acceptance of a heterogeneous society, then it may be admitting LBGTQs to club membership is a non-issue.

However, if as is most likely, the club is controlled and mostly populated by older Gen X members the tolerance for admitting LBGTQs may be much less. This absence of tolerance may emanate from a desire to preserve the homogeneity of its constituency. If the club desires to remain so, then it will be incumbent upon it to establish, and maintain truly private status to invoke exclusion from a legislative mandate for including LBGTQs in its member roster.

Regardless, a member-owned private club is wise to establish and maintain distinctly private status if only because if it desires to preserve the power to exclude a person from membership or access to its facilities, an excluded person may claim a violation of the Equal Rights Act, if and when adopted, or a similar state law whether or not the LBGTQ status was evident or known to the Club.

Many putative private clubs unwittingly or otherwise violate the requirements for Constitutional private status. They indiscriminately allow for unaccompanied by a member, non-member use of their facilities; they advertise the availability of their facilities through public media in connection with fundraisers and other events; they lack a formal mechanism to propose, process, investigate, and evaluate prospective members;4 and omit or transgress other indicia of distinctly private status.

It is beyond the scope of this article to expound upon what it takes to establish a truly or distinctly private status for purposes of avoidance of the application of Titles II, and VII of the Civil Rights Act of 1964, (whether or not amended by the Equal Rights Act), or a similar state or local law. Some examples are illustrated by the material listed in footnote 5.5 A private status legal audit may be helpful to support a club’s contention it is a truly private club and entitled to the Constitutional freedom of association and expression inherent in the 14th Amendment.

Likewise, a review of the relevant case law6 is useful if the Club is unfamiliar with the privacy principles and facts needed to support distinctly or truly private status. While Constitutional freedom of association should theoretically always trump statutory freedom from perceived discrimination, (statutes being of a lower order of legislation than the Constitution), courts differ on the importance of and priority of the various criteria necessary to establish freedom of association. Some courts also entertain a balancing of rights to reach a decision.

“Equality” is a much-misunderstood concept. Thomas Jefferson in the Declaration of Independence announced “All men are created equal”. This quotation has been said to have meant “all free, property-owning males are created equal”.7 But as Brundage explains further,

Equality is hard to define because its meaning keeps changing. Jefferson’s restrictive definition, that “people are of equal moral worth, and as such deserve equal treatment under the law”, made distinctions for free men vs. slaves, men vs. women, property owners vs. debtors, et cetera [citation omitted]. On the one hand, most Americans’ notion of legal equality makes no such distinctions.8

Equality is not something that a government can grant or deny a person or a group of citizens. The objective, scientific, and irrefutable fact is we are all more or less differently endowed physically, mentally, emotionally, and genetically. I cannot hope or could not have expected to compete with a Leonardo DaVinci, Amadeus Mozart, Immanuel Kant, Michael Jordan, Tiger Woods, or any of the historical or contemporary polymaths and genetically superb athletes.

However, equality of economic and educational opportunity, access to health care, and similar society ambitions for its citizens are all to some degree achievable societal objectives. But even these objectives face practical and objective limitations. It is not realistic or advantageous for a person with an IQ of less than 100 to matriculate at a university with an average admissions standard of over a 700 SAT score.

The relevance of these observations to private club governance is to be found in the expectations of the club’s members and its mission. Is the constituency of the club comprised of largely higher educated, economically advantaged, and socially compatible members? Are they members because they sought inclusion in an institution of persons of similar tastes, interests, and societal outlook?

Or is the constituency of a different genre, e.g., of social reform-minded, eager proponents of equal opportunity for everyone regardless of social standing, indifference towards intermingling with members who are different from each other respecting their social and political values or expectations? We recall one member candidate who responded to the question “what interests you in joining our club”, by pointing out the window to the golf course. The proposal to admit the candidate was declined. It was apparent the candidate wasn’t interested in comingling with other members or in the club’s social activity and lacked social skills in responding to the question in a verbal, friendly manner.

Numerous private clubs are most active in promoting local charities and allowing local high school golf teams to use their golf course for practice and matches. However, these same clubs are most circumspect concerning the scrutiny given member candidates for admission. Reputation for good character, perceived compatibility with the existing membership, and congeniality, are prominent and necessary considerations. Clubs are known to avoid the admission of candidates with criminal convictions especially those involving moral turpitude. Clubs do not need to be social reformers, a goal outside of their mission.

Diversity.

Of the many private clubs, some have knowingly accepted the occasional LGBTQ membership candidate. Other clubs, believing that LGBTQ persons don’t “fit” their membership profile have demurred. In the simplest, generic definition, “diversity” means a range of different things.

“In the social science use of the word, ‘diversity’ refers to both an obvious fact of human life—namely, that there are many different kinds of people—and the idea that this diversity drives cultural, economic, and social vitality and innovation.”9

This source of the foregoing quotation continues to state, “. . . decades of research suggest that intolerance hurts our well-being—and that individuals thrive when they are able to tolerate and embrace the diversity of the world.”10 That is, “diversity” is allegedly inconsistent with tolerance. It promotes intolerance. We question the objectivity of this “research” and its conclusion. That is, are there not societies, associations, and clubs that are not diverse but yet tolerant and empathic of other people who do not fit their profile? We know of several from our own experience.

A further quote from the same source is most useful.

“In North America, the word ‘diversity’ is strongly associated with racial diversity. However, that is just one dimension of the human reality. We also differ in gender, language, manners and culture, social roles, sexual orientation, education, skills, income, and countless other domains. In recent years, some advocates have even argued for recognition of “neurodiversity,” which refers to the range of differences in brain function.”11

Our philosophical training informs us social norms and tenets are posited concepts not necessarily logical, empirical, or objective ones. There can be no conclusive proof homogenous societies and their members, e.g., social and recreational private clubs, are intolerant of persons whose profile is different than theirs. To maintain to the contrary is but sophistry.
The hallmark, indeed requirement of a truly private club, is that its member qualifications specifically include congeniality and compatibility with existing members. It must exist solely for the social and recreational enjoyment of its members, chosen for their congeniality and compatibility. Its very purpose is to produce an exclusive membership.12 It is required to have a plan or purpose of exclusiveness.13 Its antithesis is to produce an “inclusive” membership based upon diversity.14

Likewise, truly private social and recreational club members possess common social, educational, and cultural backgrounds. That is, they are homogeneous, not diverse.
The foregoing recitation of truly private club characteristics does not preclude the admittance and assimilation of prospective members who may be of a different color, creed, national origin, sex, or sexual preference, than most existing members. It does mean they must evidence likely congeniality and compatibility with the existing membership. It also means they should share a common social, educational, and cultural background of most existing members.

We know of very prestigious private clubs that have admitted members with some or all of the categories listed in the preceding paragraph, i.e., color, creed, national origin, sex, or sexual preference . The issue presented for the admissions committee and governing board is not how to show diversity but to determine a candidate’s likely compatibility and congeniality. The purpose of vetting is to preserve the purpose of exclusiveness.

If demonstrated compatibility and congeniality is evident in a prospective member candidate, we believe the candidate is most likely to be accepted as a new member at most all private clubs today regardless of other profile characteristics which differ in the main with the existing membership. Some years ago it was our observation being of a different race or national origin than the predominant existing membership constituency might have been or was a barrier to acceptance. However, today we observe there is generally no barrier. At our own social and recreational club, we now have members of differing races, religious identity, and national origins and long have had the latter.
We submit having members of differing races, religious identity, national origin or other profile differentials is not a measurable good in absolute or objective moral terms. For a private club, the membership profile is what the members desire it to be. Constitutionally, if the club is truly private, that principle is legally justified.15 Whatever a non-member of that club believes is right or wrong, is irrelevant.

If there is any validity to the notion private clubs as a general rule lack diversity, it is likely in the economic sense. That is, at numerous clubs disposable wealth and social standing remain a constant test of acceptability, the former usually evidenced by the size of the initiation fee and dues. Some clubs when new had modest joining fees and dues now tout initiation fees approaching or even exceeding $100K and annual dues and mandatory fees ranging upwards of or exceeding $20K. In the sense that such a club continues to have older members of lesser wealth than the newer, majority of members, however, the club may be said to be at least, economically diverse.

Inclusion.

Private clubs by nature are “exclusive” not “inclusive”. But these two terms are not necessarily contradictions. A tax-exempt recreational and social club under I.R.C. 501(c)(7) is required to maintain “exclusivity” in the sense its facilities are reserved for the exclusive use of its members, their families, and their (presumably and preferably “accompanied”) guests. This does not mean within the club, there is not an objective to make members feel inclusive among the various programming and activities offered to all members of the same classification. Once admitted, usually, efforts are made to make the newly admitted member comfortable by being introduced to and given the opportunity to join group activities.

Conclusion.

It is not usually the mission of a private club to be a leader in general societal change or improvement. The goal of a truly private club is to provide its members, not the outside world, with a compatible, congenial, and friendly environment for social and recreational intercourse. It serves as a retreat from the helter-skelter of everyday life. While this goal may seem selfish or antithetical to persons who do not belong to the club, it is built into our legal and social framework as a free society.

1.This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

2.The act encompasses “SEC. 3. Public accommodations.(a) Prohibition on discrimination or segregation in public accommodations.—Section 201 of the Civil Rights Act of 1964 (42 U.S.C. 2000a) is amended— (1) in subsection (a), by inserting “sex (including sexual orientation and gender identity),” before “or national origin”; and(2) in subsection (b)— (A) in paragraph (3), by striking “stadium” and all that follows and inserting “stadium or other place of or establishment that provides exhibition, entertainment, recreation, exercise, amusement, public gathering, or public display;”; . . . ”(b) Prohibition on discrimination or segregation under law.—Section 202 of such Act (42 U.S.C. 2000a–1) is amended by inserting “sex (including sexual orientation and gender identity),” before “or national origin”. H.R.5 — 117th Congress (2021-2022) See https://www.congress.gov/bill/117th-congress/house-bill/5/text

3. EEOC v. Chicago Club, 86 F. 3rd 1423 (7th Circuit 1996)

4. See, Gillespie v. Lake Shore Golf Club, Inc., 56 Ohio L.Abs. 222, 91 N.E.2d 290 (Ohio Ct.App. 1950); United States by Katzenbach v. Jack Sabin’s Private Club, 265 F. Supp. 90 (E.D. La. 1967); and Wright v. Cork Club, 315 F. Supp. 1143 (S.D. Tex. 1970).

5. See, e.g., https://somerslawfirm.org/blogs/When Does Unaccompanied Nonmember use of Private Club Facilities Risk Loss of Private Status?; Private Status Remains Alive and Well; and The Private Club and the Supreme Court Decision in Obergefell v. Hodges.

6. See Louisiana Debating and Literary Association v. City of New Orleans Stratford Club, 42 F.3d 1483 (5th Cir. 1995) cert. denied 515 U.S. 1145, 115 S.Ct. 2583, 132 L.Ed.2d 832 (1995) holding a New Orleans ordinance as applied to the clubs is unconstitutional where the Clubs are private entities protected by the First Amendment; and the ordinance’s procedures interfere impermissibly with that protection. “While the right to intimate association is not absolutely protected from state regulation, state [or local] regulation of intimate association is subject to strict scrutiny, the [government] must show that: (1) the action serves a compelling state interest which (2) cannot be achieved through “means significantly less restrictive of one’s associational freedom.” Behm v. Luzerne Cty Children & Youth Policy Makers, 172 F.Supp.2d 575 (M.D. Pa. 2001) citing Louisiana Debating.

7. https://www.mattbrundage.com/publications/jefferson-equality The meaning of Thomas Jefferson’s “all men are created equal” – Matt Brundage
8. Id.
9. https://www.greatergood.Diversity Definition | What Is Diversity (berkeley.edu)
10.Id.
11. Id.
12. See Sullivan v. Little Hunting Park, 396 U.S. 229 (1969); Board of Directors of Rotary International v. Rotary Club of Duarte, 481 U.S. 537 (1987)
13. United States v. Landsdowne Swim Club, 713 F. Supp. 785 (E.D. Pa. 1989), aff’d, 894 F.2d 83 (3rd Cir. 1990)
14. Board of Directors of Rotary International v. Rotary Club of Duarte, 481 U.S. 537 (1987)
15. New York State Club Association, Inc. v. City of New York, 487 U.S. 1 (1988); Louisiana Debating & Literary Ass’n v. City of New Orleans, 42 F.3rd 1483 (5th Cir. 1995) cert. denied, 1995 WL 26853 (U.S. 6/19/95); EEOC v. Chicago Club, 86 F. 3rd 1423 (7th Circuit 1996); and Lobel v. Woodland Golf Club of Auburndale, Civil Action No. 15-13803-FDS (D. Mass 2017)

The Importance of the Nominating Committee: How to Avoid Unnecessary Management Crises.[1]

By: Fred L. Somers, Jr., Esq.[2]

In reading Harry T. Williams’s splendid biography of Huie Long[3], we are struck with the tension evinced between Long’s perception of his powers as a governor and the understanding of the Louisiana legislature of the constitutional limitations on those powers. When Huie Long was perceived to have over-reached his constitutional power, it led to impeachment proceedings.

Over the years we have witnessed instances of elected officers of nonprofit, voluntary organizations exceeding their authority under the organization’s governing documents. Sometimes this takes the form of micromanagement of the organization’s day-to-day operations specifically relegated to professional management.  Other times, it takes the form of usurpation of the paid COO’s duties. We shall use private clubs as our example of a nonprofit, voluntary organization that allows this malady of micromanagement or usurpation of professional management duties. The phenomenon also occurs in other types of nonprofits.

We recall one private club officer taking away the key to the thermostat controls from a wellness director because the officer didn’t like the temperature being set by the director.

Or, take the golf committee chair who canceled a golf staff meeting called by the director of golf. Or, consider the house committee chair’s spouse taking it upon herself to conduct table setting classes for the wait staff.

To avoid these unfortunate incidents of micromanagement and usurpation of compensated management functions, it would seem useful to provide a process for stopping their occurrence or for the removal of the offending elected officer. However, after reviewing dozens of private organization governing documents we never find any reference to impeachment per se. This is likely because corporate law substitutes removal rather than impeachment.

While a provision for recall of elected officers is something we routinely recommend when drafting or revising governance documents, the process is rarely employed. It seems the typical members and elected officers merely close their eyes to the misconduct, or they are not concerned enough about the misconduct to initiate open conflict. Possibly, this is because of the normal short term tenure of elected officers in private nonprofit organizations and the lack of willingness to undertake a touchy task.

Notwithstanding, we once witnessed a wholesale recall of an entire board of directors by a disaffected member constituency who marshaled their votes to oust the incumbent board and elect their favored candidates. Unfortunately, the result was less than efficacious; the general manager quit, and the organization fell into difficult times from which it never recovered.

State nonprofit statutes usually provide some assistance in officer or director removal. For example, the Georgia nonprofit corporate code[4] provides: “Removal of directors – Unless the corporation’s articles or bylaws provide otherwise: (1) The members may remove, with or without cause, one or more directors elected by them.” Also, another Georgia code section[5] provides:  “Resignation and removal of officers . . . (b) A board may remove any officer at any time with or without cause.” These code sections have their counterpart in the Model Nonprofit Corporation Act.[6]

However, it is unlikely without some procedure or process set forth in the organization’s governing documents, the members or directors may find it difficult to mount a removal effort.

A better path to follow is to reduce the likelihood of officers exceeding their authority by careful pre-screening of board candidates by a nominating committee. The selection of the nominating committee members themselves is of critical importance. They must be familiar with the appropriate function of the governing board and the duties of and legal constraints imposed upon individual governors or directors.[7] This principle usually translates into having former directors, particularly recently retired ones, comprise at least the majority of the nominating committee.

Excepting perhaps only the smallest nonprofits, it is a hallmark of successful nonprofit entities to have operations controlled by professional management staff consistent with policies formulated by the governing board. Because of this tenet, candidates for club and other nonprofits governance office must be cognizant of the differences between setting policy and operations procedures. The distinction requires an understanding by governing board members. Policies reflect the ultimate mission of the club while operations procedures are devised and supervised by management staff in applying the policies. Governing boards are also responsible for oversight in seeing the procedures authored by and implemented by management are consistent with legal requirements.  However, it is beyond the scope of this article to delineate the distinction further. Useful discussions of the distinction are available online.[8]

On occasion, the distinction blurs. For example, a general manager decides to significantly increase the pricing on the club dining menu. The new pricing is consistent, in the manager’s judgment, with the board’s policy to operate food and beverage at the Club on a “break-even” basis. However, the new menu prices cause an uproar among the membership and are found to be generally higher than some of the comparable clubs and restaurants in the area. In this instance, the board may be justified in requiring the manager to roll back his new prices to more acceptable ones.

Requiring board prospects to have been active voting members in good standing in the Club for a minimum of three (3) years is a start. Such a requirement provides some assurance the prospective candidate is familiar with the Club’s social culture.

Recent involvement in the Club through standing or ad hoc committee assignments is a must. This participation assures some semblance of familiarity with the Club’s governance structure. Sounding out and obtaining the candidate’s commitment and availability to attend and participate in scheduled board and committee meetings is essential. We recall one extremely qualified board member who rarely attended meetings because he was constantly traveling on his regular job. His effective contribution to the Club’s governance was zero.

Candidates should be vetted to discover if they possess a desire to preserve or formulate new policies to make the Club an ever-improving experience for the membership. Sometimes a candidate will have a personal agenda that unduly disturbs the board’s attempt at consensus. Or worse, the personal agenda will result in other board members taking a back seat to the new director who appears to or believes he “knows it all”.

For example, years back I was appointed chairman of a newly created public housing commission. However, after several meetings, I found the other members rarely contributed any ideas. I asked the county commission chair who appointed me to attend a meeting to see what the problem was that was keeping other members quiescent. After the meeting, he informed me because I seemed to know what I wanted the group to achieve, was very specific and insistent about the methods to be employed to achieve our goal, what was the point of the other members submitting other proposals?

The lesson I learned? It is that the mission of volunteer boards, commissions, and committees is to obtain collaboration and consensus of the members not only one person. When I was later privileged to chair other volunteer groups, I constantly reminded myself to continuously request ideas from the other board members first and not preempt their contributions with my personal views.

One take-a-way from my own experience is that candidates for deliberative groups should be sounded out for their willingness and ability to collaborate with other group members. How opinionated does the candidate appear to be? There is nothing wrong with persons with strong opinions if they also give the impression of desiring to hear the opinions of others.  However, QAnon adherents and Antifa believers might not make useful fellow committee members.

Board experience in the governance of other volunteer organizations is a useful attribute for board nominees. While, e.g.,  501(c)(7) organizations differ in numerous respects from 501(c)(3), and other nonprofit groups, the restrictions, and fundamentals are closely aligned. Awareness and avoidance of conflicts of interest, loyalty to the organization, maintenance of confidential information, and transparency, are principles common to all nonprofits and indeed for business, and public governance.

Allowing former board members after a hiatus of one or more years from prior service is sometimes most useful. Former board members are already familiar with how the Club functions. They don’t require a lengthy orientation and education to become effective governors.

Before being nominated, candidates should be required to state what their ideas are for fulfilling the performance of the office sought. Candidates with a predisposition to set their agenda rather than to acquiesce in the mission established by the organization should not be elected to office.

Efforts should be made by the nominating committee to identify and encourage desirable members with the attributes described, to seek the nomination. We all know persons in whom others express admiration for and have confidence, who would likely make excellent organization leaders. Yet, many outstanding members are reluctant to volunteer without being asked. Sometimes this reluctance is derived from the organization’s custom of proposing more candidates than there are vacancies to fill. The reluctant member candidate doesn’t desire to enter into what he or she perceives as a “beauty contest” only to run the chance of losing. Efforts should be undertaken to eliminate contests for office vacancies where there is no viable reason for them.

I recall the COO of a very successful nonprofit corporation and popular club member being urged to submit his candidacy for office after several of us assuring him there was no prospect of his failure to be elected. To our chagrin, the nominating committee passed him over. His supporters had to work like hell to get him to offer his services again. Gratefully, the newly appointed nominating committee approved him for nomination and subsequent election. He turned out to be an outstanding President.

Most importantly, the nominating committee should begin its deliberations and interviews as early as possible. Preferably, they might start a year ahead of the member meeting at which office candidates are elected. We have seen situations where a club couldn’t even muster enough candidates to fill vacancies because the committee began its deliberations too late to enable sufficient time to arouse interest among the members.

In summary, if a club or any private association desires to have a strong and effective governing board it must focus on its nominating committee procedures. These procedures should be reviewed annually to ensure they are meeting the organization’s aspirations for growth, or stability, and excellence.

[1] This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

[2] The author is an Atlanta Ga. area attorney with a concentration in private clubs and trade associations. See https://www.somerslawfirm.org.

[3]  Huey Long by T. Harry Williams,  (1969  Alfred A. Knopf NY)

[4] Ga. Code § 14-3-808

[5] Ga. Code § 14-3-843b

[6] Model Nonprofit Corporation Act §§ 808 (American Bar Association 3rd ed. 2008). Its successor is presently available online for comment in a 4th ed. exposure draft. See https://www.americanbar.org/groups/business_law/committees/nonprofit/mnca/ Eight states adopted the MNPCA. The other states more or less follow the state for profit or business corporation act.

[7] These duties consist of the duties of care, i.e., discharging their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances; , loyalty, i.e., in a manner the director reasonably believes to be in the best interests of the Club; and good faith.

 

[8] See, e.g., https://Keydifferences.com/Difference- Between- Policies- and- Procedures.html; and

https://Powerdms.com/blog/What is a Policy vs. a Procedure? (powerdms.com). Notwithstanding, directors need to exercise oversight of procedures adopted by management staff to validate they are consistent with board policy and to avoid liability exposure for the club, its directors, and officers for vicarious tort claims and regulatory violations. For example, this oversight may take the form of requiring club counsel or a legal committee to review and update employment manual content; confirming OSHA guidelines compliance; requiring the independent accountants to opine as to the conformity of the club’s financial statements to the AICPA best practices and accounting standards; and to have either the club counsel or independent auditors verify operations conformity to IRC 501(c)(7) requirements, if applicable.

 

 

Cooperative vs. Corporation – A different choice for new organizations[1]

By Fred L. Somers, Jr., P.C.[2]

 When starting a new or reorganizing an existing business, owners are usually confronted with the choices of a corporation, limited liability company, sole proprietorship, or one of the various forms of partnership.[3] The traditional text and online sources for educating lawyers and entrepreneurs typically omit the option of forming a cooperative.

Yet, cooperatives have been around for a long time. In practice, they are largely concentrated in agricultural, utility, and specialized industry endeavors. However, many and successful cooperatives exist in the broader commercial context. Ace Hardware is but one of many examples. Retailer cooperatives have been particularly successful among groceries, pharmacies, and hardware stores.[4] Also, cooperatives are popular within the health care industry.

There exist producer, consumer, worker, and other cooperative classifications. Producer cooperatives operate for the benefit of the members in their capacity as producers. Their function may be either the marketing or processing of goods produced individually (as in fishermen’s or farmers’ marketing associations, or associations which make butter or cheese from farm products received from farmer members), or the marketing of goods processed or produced collectively (as in the so-called workers’ cooperative). Consumer cooperative organizations operate for the benefit of the members in their capacity as individual consumers [5]

Recently, there has been revitalization internationally of cooperatives. We submit a case may be made why cooperatives if they continue to strengthen and multiply may reduce the tension between capital and labor, and that between lesser economically privileged citizens and those enjoying a high economic living under capitalism. 

Distinguishing Cooperative Features. So how do cooperatives differ from the run of the mill organizations? The distinguishing feature of cooperatives as opposed to other organizational forms, is they are user-owned, user-controlled entities that distribute benefits based on use.[6] These features may be considered the three bedrock principles of cooperatives.

. . . [A] cooperative principle is an underlying doctrine or tenet that defines or identifies a distinctive characteristic. It clearly sets the cooperative apart from other businesses. (And as [John] Milton said, “A good principle, not rightly understood, may prove as harmful as a bad principle.”)[7]

For example, the principle of “user-controlled” is often cited as “one member, one vote”. That is, member-owners of a cooperative corporation should have one vote no matter how much money they have invested in stock or how much they patronize the organization. The “one member one vote” principle may be characterized as “democratic control”.  However, a more enlightened interpretation of “user-controlled” may be “member control”. We submit it more accurately describes today’s cooperatives than “democratic control.” Member control recognizes that members can control a cooperative either through one vote per member or through a voting system that relates to the size of the patronage each member does with the cooperative.[8]  “Member control” more accurately is expositive of a principle inherent in cooperatives than “democratic control”.

Other organizations and resources cite additional “cooperative principles”. One is the “seven principles” consisting of: voluntary and open membership, democratic member control, member economic participation, autonomy and independence, education, training, and information, and cooperation among cooperatives.[9] Important is the principle of education and training. Our experience tells us when promoted to leadership positions in cooperatives, the new leaders are sometimes not sufficiently prepared in the nuances and groundings of cooperative operations. This unpreparedness leads to unnecessary mistakes in governance and the risk of losing tax and other benefits of the cooperative over other types of organizations.

Yet another resource espouses fourteen principles, including unity, cooperation, honesty, and neutrality, i.e., membership is open to all, irrespective of religion, caste, political affiliation, and beliefs.[10] Depending upon the laws of the jurisdiction within which the cooperative is operating, and the applicable tax law there may be other requirements (as distinguished from principles) that dictate conformity. However, in the absence of a state law mandating the cooperative be open to all, we find limitation of eligibility for membership to a particular ethnic or other attributes can be a strengthening and cohesion of member interrelationships and economic benefit.

There is a difference in the basic objectives of cooperatives from capitalistic companies. The basic objective of a cooperative organization is to provide essential services for the benefit of its mem­bers. A capitalistic company is a business organization with the objective of earning profit for its shareholders or members.[11] This difference does not mean e.g., a cooperative may not be a corporation in form. Some states require cooperatives to exist as corporations.[12] However, in these instances, return on invested capital is subordinated to distributions to participating member patrons.

Various choices exist depending partially upon the state in which the business is to be organized or operate.  Traditional cooperative members are often in the same industry and have common economic interests that may involve joint marketing, purchasing of supplies, or the providing of services or all three functions.[13] The traditional cooperative is authorized by state statute in a substantial majority of the states.[14] In states not providing for business cooperatives outside of specified industries, other forms of entity structure are available to include cooperative features. For example, a limited liability company (LLC) may be structured to provide cooperative tax treatment and distribution rights.

Limited Cooperative Associations. More recently, “hybrid”, “new generation” and limited cooperatives have been authorized by several states to enable businesses to escape the relatively rigid configurations and requirements of some of the traditional cooperative statutes. Especially we find attractive the limited cooperative, (“LCA”), enacted by at least 10 states plus the District of Columbia. These limited cooperatives in general are patterned after the Uniform Limited Cooperative Association Act.[15]

bLCAs differ from traditional cooperatives in that a member of an LCA does not need to be a patron. In a traditional cooperative, to be a member you are required to participate as a patron of the enterprise.  By allowing non-patron investors to become members, LCAs have more flexibility and capacity to generate financing than the traditional cooperative.[16] LCAs can entice investors with voting rights. Investor-members also receive revenue allocations proportionate to the ratio of their investments to those of other investors.[17]

Unlike traditional cooperatives, in which start-up expenses are minimal and growth is financed through members’ retained earnings, permanent equity to fund LCA start-up and growth is financed through the sale of either delivery or purchase rights or obligations. LCAs may use, multi-stakeholder revenue-based financing[18] mechanisms to raise capital, offering investors a return of up to a multiple of 1-5x the original investment, or a fixed percentage of profit for a fixed duration of time.  Once the cap is reached, the shares are treated as automatically repurchased. These instruments are sometimes called demand dividends.[19]

These flexible LCA financial tools are to be contrasted with traditional and mature cooperatives which tend to finance operations and growth using a preferred share that earns a target, non-cumulative, non-guaranteed dividend over a minimum holding period of between five to ten years.

Alternatively, LCAs with a mature financial history may offer an equity buyback, also known as equity redemption. Instead of taking money out of the business through revenue-share distributions, investors buy shares and hold them until the company is profitable enough.

Taxation. There are several income tax regimes available for cooperatives. IRC 501(c)(12) provides federal income tax exemption for benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, electric companies, or “like organizations”.[20] The purpose of an I.R.C. 501(c)(12) organization is to provide certain services to its members at the lowest possible cost. To qualify for and maintain exemption under I.R.C. 501(c)(12), a cooperative must receive 85 percent or more of its income each year from members. The income must be collected solely to meet the cooperative’s losses and expenses.

Congress also provided special tax rules for three other kinds of cooperatives.  These are “Subchapter T” cooperatives and farmers’ cooperatives. Subchapter T cooperatives are governed by I.R.C. sections 1381-1388. These cooperatives may conduct any kind of business. Their members or patrons can include individuals or organizations. Subchapter T cooperatives are not exempt from federal income tax. Rather, their earnings are taxed at either the cooperative level or member-patron level, or both. A subchapter T cooperative must usually pay tax on patronage source earnings it retains. It can deduct patronage-source earnings it distributes to its member-patrons from its gross income. Only patronage-source earnings are eligible for deduction by the cooperative, and they constitute taxable income to member-patrons who receive them. The cooperative is subject to tax on its net non-patronage source earnings, and patrons are subject to tax on distributions of non-patronage income.[21]

Farmer cooperatives are governed by I.R.C. § 521. Farmers’ cooperative organizations are exempt from taxation to the extent provided in subsection 521. Farmers’, fruit growers’, or like associations are organized and operated on a cooperative basis (A) to market the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, based on either the quantity or the value of the products furnished by them, or (B) to purchase supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses.[22]

Finally, there is I.R.C § 216 Cooperative Housing Corporations. However, it has been held a taxpayer was a cooperative under subchapter T because it was a section 216 cooperative housing corporation.[23]

Each of these tax regimes has both similar and unique requirements. We shall focus here on Subchapter T cooperatives as I.R.C. 501(c)(12) is of limited application and most strict in its requirements. Other extensive resources address farmers’ cooperatives’ requirements.[24] We do not address cooperative housing corporations separately as noted they are governed also by Subchapter T.[25] Further, the cooperatives we have personally dealt with are addressed under Subchapter T.

For-profit cooperative corporations and limited liability companies electing to be taxed as associations are given special treatment respecting federal taxation. They may reduce their tax exposure by issuing what are known as “patronage dividends” to patrons of the cooperative. The term “patronage dividend” means an amount paid to a patron by an organization (1) based on the quantity or value of business done with or for such patron, (2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and (3) which is determined by reference to the net earnings (a/k/a “net margins”) of the organization from business done with or for its patrons.[26]

Patronage dividends do not include an amount paid to a patron by a cooperative to the extent that such amount is paid out of earnings not derived from business done with or for patrons.[27] Thus, e.g., if the cooperative pays out earnings derived from business with other organizations or non-patrons, the earnings are usually excluded from being included as patronage dividends. However, there are exceptions to this rule. Also, amounts paid to a patron by a cooperative are not eligible to be classified as patronage dividends to the extent that such amounts are fixed without reference to the net earnings of the cooperative organization from business done with or for its patrons.[28] For example, if the cooperative pays an 8% return to patrons on capital stock, the 8% return does not qualify as a patronage dividend.

The term “net earnings” include the excess of amounts retained (or assessed) by the organization to cover expenses or other items over the amount of such expenses or other items but shall not be reduced by any taxes imposed by subtitle A of the Code, but shall be reduced by dividends paid on capital stock or other proprietary capital interests.[29]

A cooperative may deduct the amount of the patronage dividends that it issues in a particular tax year from its gross income in that year.[30] As a result, this income is not taxed at the entity level.

Each patron shall include in gross income—(1) the amount of any patronage dividend which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by the patron during the taxable year from the cooperative.

So what are “qualified” and “non-qualified” allocations? A “qualified” allocation occurs when at least 20% of the total patronage refund is being delivered to the patron in cash or by a check drawn on a bank and the patron has been notified in writing and agreed in advance to the retention of a portion of the otherwise distributable allocation of net margin. The notice of retention shall be provided at any time within a period beginning on the date such written notice of allocation is paid and ending not earlier than 90 days from such date, but only if the patron receives written notice of the right of redemption at the time the patron receives such written notice of allocation. To be effective, the written notice of the right of redemption referred to in the preceding sentence shall be given separately to each patron.[31]

Note the patron is required to consent to a qualified allocation. The consent may be evidenced by the patron signing and furnishing a written consent to the cooperative revocable by the patron at any time.

A “nonqualified” allocation occurs when the cooperative isn’t required to pay any portion of the patronage refund in cash or by a check drawn on a bank to the patron.

If the net margin is fully allocated and distributed in cash or by a check drawn on a bank to the patrons, the patrons incur income tax recognition for the amount they received. If a portion of the net margin is retained as a qualified allocation then the retained portion is added to the patron’s capital account and taxed to the patron.

bIf the portion of the net margin is retained as a nonqualified allocation, then the cooperative recognizes income for tax purposes for the allocation for the year in which retained. The patron does not recognize income in the year retained. However, in a later year when the retainage is distributed in cash, the patron will recognize income and the cooperative will receive a tax deduction. If a nonqualified allocation is made, the cooperative is not required to make any cash distribution in the year of allocation.

Summary. Business consultants or professional advisors are not usually oriented towards cooperatives as they are towards the more conventional organizations. Admittedly, conforming to the strictures of cooperative organization to achieve favorable tax and other results is an educational process. However, if the objectives of the new organization and its constituencies are more consonant with the cooperative form of entity than they are with a “C” or “S” corporation or a limited liability company without electing association status, then the organizer should favorably consider the cooperative or LCA structure.

[1] This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

[2] The author is an Atlanta Ga. area attorney with a concentration on trade association, private club, cooperative, limited liability, and small business formation, organization and governance. . See www.somerslawfirm.org.

[3] There are several different types of partnerships. Also, the option of sole proprietorship exists but doesn’t afford the immunity from personal liability for actions taken by owners, shareholders, members, directors and officers on behalf of or for the benefit of the entity afforded by the other choices.

[4] Autry and Hall, “The Law of Cooperatives”©, page 19 (American Bar Association Business Law Section 2009) [Hereafter “Autry”]

[5] Puget Sound Plywood, Inc v. Commissioner, 44 T.C. 305 at 307 (1965). This case is considered by many as the

seminal case respecting cooperative taxation.

[6] Autry at page 8 paraphrasing Puget Sound Plywood, Inc v. Commissioner, 44 .T.C. 305 (1965); See also  https://www.rd.usda.gov/files/CIR45_2.pdf#:~:text=They%20are%20the%20principles%20that%20continue%20to%20distinguish,u%20Financial%20obligation%20and%20benefits%20propor-tional%20to%20use%3B

[7]https://www.rd.usda.gov/files/CIR45_2.pdf#:~:text=They%20are%20the%20principles%20that%20continue%20to%20distinguish,u%20Financial%20obligation%20and%20benefits%20propor-tional%20to%20use%3B

[8] Id.

[9] For example see https://www.fci.coop/about-us/seven-cooperative-principles/; and https://www.iwdc.coop/why-a-coop/basic-principles-of-a-cooperative

[10] http://bankofinfo.com/principles-of-co-operative-society/

[11] https://www.yourarticlelibrary.com/company/difference-company/difference-between-cooperatives-and-companies/75892

[12] See, e.g., Texas and Arkansas.

[13] McKee and Frederick,Traditional Cooperative Businesses” (2019) https://cooperatives.extension.org/traditional-cooperative-businesses/

[14] See National Cooperative Business Association Clusa International State Cooperative Statute Library https://ncbaclusa.coop/resources/state-cooperative-statute-library/. The library is a useful reference for individuals who want to quickly access specific provisions in different states’ cooperative laws and also have the ability to compare the provisions with similar provisions in other jurisdictions. the library provides a provision-by-provision description of state laws, with different spreadsheet pages on subjects such as cooperative purpose, powers, formation, articles of incorporation, bylaws, membership, control, directors, officers, patronage, finance, merger, consolidation and dissolution. The library also includes answers to questions on how cooperatives are treated under specific states’ securities, antitrust, escheat and unclaimed property laws. Further, states’ cooperative tax regimes are described, including state law provisions regarding cooperative income tax, franchise taxes, sales taxes, the domestic production credit, and other taxes and exemptions. Id.

 

[15]  Uniform Limited Cooperative Association Act ©2011, 2013

[16] e.g.,https://jrwiener.com/limited-cooperative-associations-and-early-stage-financing/

 

[17] https://www.dorsey.com/newsresources/publications/client-alerts/2019/07/washington-state-limited-cooperative-association

[18] A company agrees to pay out a % of its top-line sales, usually until its investors achieve some pre-determined return. As an example, company ABC raises $500,000, and in return pays out 3% of its sales until investors have received a total of $1,000,000 in distributions (a 2x return on their $500,000 investment). Tweaks can be made to this basic model, such as (1) including a grace period (e.g. payments only start after a number months/years, or once the company hits a certain revenue threshold), (2) using some profit line instead of revenues (e.g. % of free cashflow, EBITDA etc.), or (3) instead of a revenue-based loan, the same % of revenues can be used to buy shares back from investors at a pre-determined price. See https://transformfinance.org/blog/2018/2/26/dont-go-chasing-unicorns-or-how-to-support-a-more-inclusive-startup-ecosystem

 

[19] Revenue-based financing is more typically used in the context of later stage businesses.  It turns out that adapting this as a tool for early stage investing often just doesn’t work. [Also,] Simple math tells us is that a revenue share deal would rarely work if a company is trying to raise more than, say, $750,000. Of course, the picture gets even worse (more red cells) if the business was starting from a lower base (e.g. $500,000 in annual sales instead of $750,000) and/or if it were growing at a slower pace (e.g. 50% year over year instead of 80%). In general, for early stage businesses, revenue-based finance really only works if you need a relatively small amount of capital, say $500k or less. https://transformfinance.org/blog/2018/2/26/dont-go-chasing-unicorns-or-how-to-support-a-more-inclusive-startup-ecosystem.

 

[20] General Survey of I.R.C. 501(c)(12) Seto and Chasin, Cooperatives and Examination of Current Issues,  2002 EO CPE Text –  https://www.irs.gov/pub/irs-tege/eotopice02.pdf

[21] Id.

[22] See https://www.law.cornell.edu/uscode/text/26/521

[23] Park Place, Inc. v. Commissioner, 57 T.C. 767 (1972) cited in Thwaites Terrace House Owners Corp. v. Commissioner, 72 T.C.M. 578 (T.C. 1996)

[24] See, e.g., http://ncfc.org/ and https://farmersmarketlegaltoolkit.org/business-structures/cooperatives/

[25] See end note 25.

[26] 26 U.S.C. § 1388(a)

[27] REG § 1.1388-1(a)(2)

[28] Id.

[29] REG § 1.1388-1(a)(1)(iii)

[30] 26 U.S.C. § 1382(b).

[31] REG § 1.1388-1(c)(3)(i)

By: Fred L. Somers, Jr., P.C.[1]

Like numerous older addicted golfers, I have sometimes fantasized over having my cremated ashes spread on one of my favorite golf venues. Many of us know of an avid deceased golfer whose family fulfilled this perhaps macabre desire.

Recently we were asked whether spreading cremated ashes on a privately owned golf course is legal. The answer depends upon in what jurisdiction or state the golf course is located. It also depends upon the property owner’s permission assuming it is otherwise legal.

Unlike disposal of cremated ashes on public property or at sea which are regulated, disposal of these ashes on private property is a non-event if environmental concerns are not presented. Cremated ashes are sterile and will do no damage to turf or other organic growth. The primary concern may only be to not encourage the practice by publicizing a policy respecting the practice.

According to the Neptune Society, “Scattering has become an increasingly popular and meaningful way to remember a loved one and provides each family a unique way to celebrate their loved one in a place that was special to them during their life . . . .”[2]

In Georgia, provided the person obtains the consent of the golf course owner, scattering of cremated ashes on private property is not regulated by state authority. If consent is not obtained from the owner, presumably an action for trespass lies for the activity. It is not apparent, however, that any damages other than nominal for the trespass could be assessed. However, under certain circumstances an action for criminal trespass may be brought.[3] A person who commits the offense of criminal trespass shall be guilty of a misdemeanor. In Georgia a misdemeanor may be punished by a fine and a sentence of imprisonment of no more than 12 months.[4] Best procedure is to obtain written consent of the club owner.   On state owned property, the scattering of human ashes from cremation is prohibited, except under conditions established by the site manager.[5] So if the deceased’s favorite golf course is in a state park, it is prudent to check with the site manager.

In Texas, a person may scatter cremated remains over uninhabited public land, over a public waterway or sea, or on the private property of a consenting owner.  Texas law also states that unless the container is biodegradable, the cremated remains must be removed from the container before being scattered.[6]

California’s laws about dealing with ashes are the strictest in the nation[7]. California allows you to dispose of cremated remains only in specified areas where there is no local prohibition.[8]

If you want to be stealthy about scattering the deceased ashes over a private golf course you could lease an airplane and do the deed from high above. The U.S. government does not consider cremains to be hazardous material if you remove the ashes from their container before scattering.

Our recommendation is club governing boards or owners consider adopting a policy respecting requests for the spreading of ashes on Club property.

The policy content considerations might include the following: (1) Requests for spreading of cremated ashes on Club grounds are not favored.  (2) If, however, a relative or a friend of a deceased Club member who died or resigned in good standing requests it, the conditions for approving the request might include: (a) the spreading occurs at night or on a day the Club is closed for member or patron activity; (b) a member of the Club staff is present; and (c) the specific location and date for the spreading is approved by the General Manager or his delegated manager. (3) This policy is not to be publicized but only disclosed to the relative or friend who makes the request.

Our reason for recommending such a policy is that as a practical matter there is no practical way to stop family or friends of a deceased member from spreading ashes if they are intent on doing it.

From the point of good will it may do more harm than good to simply deny all such requests or to threaten trespass complaints.  It is common for avid golfers to think about having their ashes spread on their favorite golf course. It is an emotional aspiration that is harmless but likely meaningful to their family and friends to see fulfilled. In the case of a widow or widower of a deceased member, honoring the request may be an inducement for the widow or widower to retain the Club membership.

We use the word “may” accede to the request in the recommended policy content. This is because a future governing board or owner may take a more cynical approach or be faced with numerous requests that become an administrative burden if acceded to.

We once visited a private club in Tucson and saw a plaque honoring deceased members by name.  Upon our return home, we mentioned the plaque to a club general manager and asked what he thought of a memorial plaque honoring deceased members whose family or Will left a legacy to the club.  His response was “this is a club for the living not the dead.”  However, the response and the plaque concept gave us an idea that another condition for allowing ashes to be spread on the club property would be a minimum honorarium contribution for the privilege. Whether a plaque would be also in order is a subjective matter left to the discretion of the club. However, it might be an inducement to consider if the club is willing to allow cremains distribution.


[1]  The author is an Atlanta Ga. area attorney with a concentration in private clubs and trade associations. See www.somerslawfirm.org. “Bury me not on the lone prairie” – Song and lyrics by Johnny Cash 1965; derived from “Bury me not in the deep, deep  sea” written by Edwin Hubbell Chapin, published in 1839, and put to music by George N. Allen See https://www.lyrics.com/lyric/3379633/Bury+Me+Not+on+the+Lone+Prairie

This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

[2]  https://www.neptunesociety.com/cremation-information-articles/what-are-the-laws-on-scattering-ashes

[3] See Ga. Code 16-7-21.

[4] Ga. Code § 16-8-12.

[5] GA Reg. 391-5-1-.04 Resource Protection (Georgia Rules and Regulations. . . . (4) Memorials. (a).

[6] https://www.neptunesociety.com/cremation-information-articles/what-are-the-laws-on-scattering-ashes

[7] https://www.nolo.com/legal-encyclopedia/burial-cremation-laws-california.html#7

[8] Id.

By Fred L. Somers, Jr., P.C.[2]


[1]  This blog is designed for general information only. The information presented at this site should not be construed to be formal legal advice or the formation of a lawyer/client relationship. The author of this blog is not certified by any state agencies or boards of legal specialization. This blog may constitute attorney advertising in some jurisdictions.

[2] The author is an Atlanta area attorney with a concentration in private clubs and trade associations. See www.somerslawfirm.org. The author is indebted to Peter A. Somers, Esq. for valuable comments included herein.

The defense of force majeure is based on a contractual provision. Force majeure has been defined as unforeseeable circumstances that prevent someone from fulfilling a contract duty.[1] Bylaws are considered a contract between a club and its members.[2] Under its bylaws, a club undertakes the duty to furnish its members with goods and services in exchange for dues and charges.

Because of the cessation of business (whether full or partial) caused by governmental mandates arising out of a pandemic, if the club desires to continue to have members pay dues and charges during the mandate’s term, the club should check its bylaws for a force majeure clause.[3] Without such a clause, the club may find it legally difficult to insist members continue to pay dues and charges if the club is closed.

That is, the flip side of a club’s unjustifiable inability to perform a duty may give rise to the members, the persons to whom the duty is owed, having a justifiable excuse for nonperformance of their duty to pay for the services owed them under the club’s duty to perform the services. Under this doctrine, (the mutuality doctrine), both parties must be bound to perform their obligations or the law will treat the agreement as if neither party is bound to perform.[4] Provided the right to avoid performance is dependent on some condition or event outside the control of the party seeking to cancel the contract, courts will find that mutuality of obligation exists.[5]

The clauses generally take two forms. The most general form excuses performance under the contract when it is due to any circumstance outside the party’s control, which presumably would include performances prevented by a corona virus or its derivative, a governmental closure mandate. The second type of force majeure clause lists specific events that trigger the clause. We surmise most clubs, if they have a force majeure clause in their bylaws, have one of the latter variety.

In most commercial contracts, force majeure events are contemplated to cover acts of God, extreme weather events, riot, war or invasion, governmental or regulatory action including strikes, terrorism, or the imposition of an embargo. It is less common to see force majeure clauses that expressly contemplate a global health emergency, pandemic, or epidemic as a force majeure event.[6] However, if the pandemic results in a governmental or regulatory action causing the club to cease operations, it is possible if not likely a court may afford relief under the mutuality doctrine for nonpayment of dues or other charges based on a claim for failure of the club’s performance.

Clubs that desire to enforce ongoing dues and other charges during an epidemic or pandemic occurrence which legally requires them to close all or a significant portion of their facilities to members need to examine their bylaws and rules to see if they have adequate grounds to continue to insist on payment.

For, example, consider a provision stating: “Facilities Unavailable. If any of the Club facilities are unavailable for Membership use due to renovations, repair, fire, casualty or other similar occurrence beyond the Club’s control, the Membership will continue to be liable for the timely payment of all Dues and other duly-authorized charges to Member’s receivable accounts including but not limited to assessments.”  

Or consider the provision contained in NCA’s model bylaws: “Even though certain Club Facilities are unavailable for Membership use due to repairs, maintenance, or renovation, or fire, casualty or other similar occurrence beyond the Club’s control, the Membership will continue to be liable for the timely payment of all dues.”[7]

Is the imposition of a municipal, county, state, or federal closure mandate arising from a pandemic ordering the closing of “non-essential” businesses under the mandate a “similar occurrence” to “renovations, repair, fire or casualty”?

Perhaps the word “similar” should be stricken in the quoted provisions if the governing board has the authority to amend the bylaws without member concurrence. Or, if not, the club’s governing board might consider issuing an interpretation (assuming it has interpretation authority) that the state, county or municipal order for the facility closing due to the pandemic is an event beyond the club’s control and within the intent of the bylaw prescribing the obligation to continue paying dues and charges.

What is included in the term “casualty”? One legal definition has it as “A disastrous occurrence due to sudden, unexpected, or unusual cause.”[8] However, it is manifest COVID-19 wasn’t the proximate cause of Club shutdowns. It was and in some venues still is a governmental mandate arising from concern over the further spread of contagion. You can argue over whether the government is justified under our Constitution or whether it is economically efficient to mandate these shutdowns. The point being is that it is not necessary for the government to assume control over the exercise of free commerce merely because it believed it justified. Thus it is not the virus pandemic that reasonably might be thought of as a casualty. Rather it is/was the government’s unilateral decision to implement curtailment of business by exercising its presumed power of interference with commerce that caused the cessation of furnishing goods and services by Clubs to its members.

 Or Is the Club considered a “non-essential business” under the mandate? Or is part of the club considered “essential” as an outdoor recreational facility? If “essential” the club is vulnerable. That is, if the club chooses to close the use of its facilities voluntarily, it is doing so without the excuse of force majeure. In this latter situation, the club may be faced with a stronger mutuality contention the members don’t have to pay dues and charges during the closure.

The question of whether a pandemic caused governmental closing mandate is a “similar occurrence” to a list of specific casualties is a question of interpretation. Do the Bylaws provide the governing board decides all matters of interpretation? Is its decision declared to be final or conclusive? Does the interpretation have to be “reasonable” or can it be arbitrary? For example, a member could contend the interpretation a closing caused by a governmental mandate arising out of a pandemic is not reasonably similar to a closing due to “renovations, repair, fire, or casualty”.  Hopefully, the club has a mandatory alternative dispute clause in its bylaws that avoids litigating the question.

Does the Club’s business interruption insurance include a provision allowing for recovery of lost revenue due to a governmental mandate closing the Club’s operations? If “yes” what components of the revenue are covered?

Should the Club consider suspending certain charges during the pandemic that might be considered prudent and appropriate if its facilities are closed to member use? For example, if the Club cannot serve food and beverages, wouldn’t it be appropriate to suspend “minimum” and “service charges”?

The continuation of dues is deemed economically justified if the Club continues to incur maintenance, taxes, utility and labor expenses during a closure. Other than dues and capital assessments, (if, e.g., the latter are being used to discharge mortgage debt and interest), the question of whether other charges should be abated or suspended is relevant. Is maintaining the usual complement of a labor force necessary if the Club is not open? The club argument for doing so is to retain valuable employees and avoid the need for recruitment and training of new employees for when the club reopens. But for how long is this retention justified if there is no reason to believe reopening will occur in the near term?

 If the club is proprietary, i.e., not owned by its members, a weaker case is presented for the continuation of dues if the rules, membership plan, or agreements don’t require their continuation if the club is closed for whatever reason. That is, we find proprietary clubs likely don’t require their members to sign contracts including force majeure clauses.  Hopefully, the membership contracts at least require agreement to the club’s rules or membership plan.

In the case of semi-private clubs, we find they may not even require a signed contract or enrollment agreement for memberships. Obviously, for non-member use, there is no need for protection against claims for the non-availability of the facilities.

  If the club is owned by the members, a stronger economic case may be made for not only the continuation of dues but also capital assessments. After all, the club board is charged with the protection of the members’ collective assets. This duty of asset preservation if ignored can come back to bite individual governing board directors via derivative or class action lawsuits for dereliction of duty.

The incentive for having a force majeure clause in the bylaws is to reduce the possibility or even likelihood many members may question whether it is desirable to continue their membership if the Club is not going to be available for their use for the indefinite future. Having a substantial initiation fee which is forfeited upon resignation protects against the wholesale loss of members who paid the nonrefundable fee.

If the Club provides for an inactive status with reduced or suspended dues and charges during the inactive status period, a suspension of some or all of these non-dues and assessments may forestall a “run on the bank”. That is, the club may be confronted with an abnormally high request for inactive status if the club is not perceived to be available for member use for the indefinite future. Charging less than full dues and charges during the “inactive” status may abate the potential for resignations if the resigning member stands little to lose by resigning.

If the club has outdoor recreational facilities, e.g., one or more golf courses and the governmental pandemic mandate allows for outdoor recreation as an “essential activity”, then the club may be obligated to mitigate the loss of use damages to its members if it can accommodate golf course use within legal guidelines prescribed by the governmental authority. Not only is it prudent to mitigate as a legal matter, but it is also prudent as a psychological means to allow the members some facilities use, albeit restricted. Thus, as we have seen, numerous golf clubs have opened their courses for play without golf cars, bunker rakes, restrooms, or use of practice facilities and subject to other restrictions or conditions. Tennis, croquet, and other outdoor activities are more problematic as they usually require participants to violate the “social distance” separation rule.

Learning to live with governmental intrusion upon the constitutional freedom to use or deal with one’s property as one desires is a difficult and sometimes legally questionable necessity. Its origins lie in Supreme Court cases dating back at least to 1917.[9]  It is presumably the result of the concern for the safety and well being of all citizens trumping this freedom. As individuals, we are called upon to sacrifice individual freedoms for the health and safety of all of us. It is the social contract we made by becoming citizens in an organized society. Provided the regulation is constitutional, we have no complaint or redress for perceived interference with our freedoms, whichever they may be.


[1] https://www.bing.com/search?q=force+majeure+definition&qs=SS&pq=force+majeure&sk=HS1LS1&sc=8-13&cvid=F5B27D31AFA74014A6E7465705A1BD1E&FORM=QBRE&sp=3

[2] https://legal-dictionary.thefreedictionary.com/Club

[3] Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God, prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.  https://www.bing.com/search?q=force+majeure+clause&form=WNSGPH&qs=LS&cvid=ce7a62a169f24c64baf9b670e871ecca&pq=force+majeure&cc=US&setlang=en-US&PC=LCTS&nclid=8F4E2041C49DA6D983A581C3A47AE5FD&ts=1588784809424&wsso=Off

[4] https://contracts.uslegal.com/elements-of-a-contract/mutuality-of-obligation/

[5] Id.

[6] See “Push the Pause Button? Contracts and COVID-19”  By Mark P. Henriques March 25, 2020

[7] National Club Association Club Director Series “Model Club Bylaws”© page 30 (2012)

[8] https://legal-dictionary.thefreedictionary.com/casualty

[9] E.g.,  Buchanan v. Warley, 245 U.S. 60 (1917),b

Copyright 2020

 Fred L. Somers, Jr., P.C.          

Atlanta, GA 30338