Private Club Membership Redemption Rights Revisited

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Private Club Membership Redemption Rights Revisited

Some private clubs formed in the last three decades of the 20th Century were formed by developers using redeemable or refundable deposits or initiation fees to assist in the clubs’ working capital funding or to recapture the developers’ investment. Regrettably, this technique has resulted in punishing the clubs’ members who succeeded the developer in owning, operating, maintaining and managing their club.

To remain competitive in today’s private club market place, a private club needs to continuously plan for and make capital improvements as well as maintain and embellish the existing infrastructure. Without continuing enhancement of the club’s facilities to meet ever changing cultural and recreational values and remain physically appealing, the club may find itself unable to attract the preferred member candidates.

Funds to do these improvements and embellishments traditionally come from initiation fees, the loans and capital dues. However, when a club’s initiation fees are absorbed by a refund obligation to terminated members, the result is obvious. The club becomes either totally reliant on the incurrence of new debt and assessment of capital dues upon the remaining members to fund improvements or enter a death spiral by indefinitely postponing the improvements.

As reported in our previous blog[1], our experience shows [i]some of these redemption plans are legally capable of modification or elimination. A careful due diligence exercise is required by a attorney, preferably experienced in both crafting redemption plans and in their modification or elimination, to determine whether they may be eliminated or modified.

Two very recent (2016) Florida cases address resigned member redemption rights. Verandah Development, LLC, v. Gualtieri,[2] and Hirsch v. Jupiter Golf Club LLC.[3] At this writing, the latter case is still pending trial.

In Verandah, the Florida District Court of Appeal Court affirmed the trial court’s finding Verandah was not entitled to amend the refund policy under its agreement with the resigned members. However, the appeals court reversed the final judgment  in favor of the resigned members because the plaintiff members did not establish that they were entitled to an immediate refund. The focus was on the membership agreement signed by the members. It recited in pertinent part:

My membership privileges will be subject to the terms and conditions of the Club Membership Plan and Rules and Regulations, which I acknowledge, receipt of (the “Membership Plan”). . . Membership in the Club does not confer upon me a vested or prescriptive right or easement to use the Club Facilities. [Verandah] and the Club reserve [sic.]the right, in their [sic.]sole and absolute discretion, to restrict or to otherwise reserve the Club Facilities for maintenance, tournament play and other special events from time to time. [Emphasis added].

I hereby acknowledge receipt of Verandah Club Membership Plan and the Rules and Regulations and agree to be bound by the terms and conditions thereof as the same may be amended from time to time by the Club or [Verandah] and irrevocably agree to fully substitute the membership privileges acquired pursuant to the Club Membership Plan and Rules and Regulations for any present or prior rights in or to use of the Club Facilities. [Emphasis Added].

Members who join the club after 180 days of the date of their real estate contract and later resign their membership will be refunded their initiation deposit previously paid subject to a “one in, one out” refund policy. Under the refund policy, the resigned membership will be placed on a resigned waiting list for that membership category. The Club will pay a refund of the initiation deposit to the first person on the resigned list upon every sale of a membership category.

Three years after the plaintiff resigned members joined the Club, the Club amended the Membership Plan to provide that the Club would issue refunds to one resigned member for every three new memberships issued in a given category. Five years later the member plaintiffs resigned their membership. After the Club informed them they would be refunded under the amended “three in, one out” policy they filed suit, seeking a refund of their initiation fee deposit.

The resigned members argued that the amended refund policy constituted a breach of Agreement. The Club argued that under the membership agreement, it was authorized to unilaterally amend the refund policy.

The court followed a prior federal court decision, Feldkamp[4], observing the club in Feldkamp, like Verandah, argued that it was entitled to amend the refund policy under a similar provision. The Feldkamp court rejected this argument, reasoning that the amendment rights of the club only pertained to “membership privileges (‘rights in or to use of the Club Facilities’) not the substantive right to a refund.

“[t]he only reasonable interpretation of [these] provision[s] is that [the Club] had the unilateral right to make changes which would affect the prior rights in or use of the Club Facilities (e.g., changes related to membership dues, Club operations and services, guest and family privileges, sale of the Club, etc.). Thus, the refund obligation remained a vested contractual right, not subject to amendment by the Club.

A footnote to the above quotation in Feldkamp observes: “Further, the weight of the authority supports the courts reading that a general reservation of the power to amend is more naturally applied to the class of bylaws that are mere regulations governing the conduct of the internal affairs of the organization.” We note, however, the “authority” cited by the Feldkamp court is limited to a secondary source and two out-of-state cases.[5] The Feldkamp footnote further recites (in quotation marks):

An amendment of by-laws which form part of a contract is an amendment of the contract itself and when such a power is reserved in general terms, the parties do not mean, as the courts hold, that the contract is subject to change in any essential particular at the election of the one in whose favor the reservation is made.

We submit that Black v. Glass cited by Verandah is not representative of the “weight of authority” respecting when a bylaw amendment may affect member rights. “Vested Rights” is an subordinate and minority position when coupled with an admission by the member that the member agree to abide and be bound by bylaws (or in Verandah, by the Membership Plan)
as they presently exist or are hereafter amended.[6]

The Verandah court went further in rejecting the Club’s reliance on Hamlet Country Club, Inc. v. Allen.[7]

In Hamlet, the redemption rights were contained in the bylaws that were subject to amendment. The Hamlet court relied on Orchard Ridge Country Club, Inc. v. Schrey[8], where the court found the rights at stake were “qualified from the outset.” The Hamlet court also distinguished First Florida Bank, N.A. v. Financial Transaction Systems, Inc.[9], where this court reaffirmed the well-established principle that “a corporation is prohibited from amending its bylaws so as to impair a member’s contractual right.” The Hamlet court reasoned: “We find [First Florida Bank] distinguishable because the corporation was attempting to change contractual rights emanating from its charter by altering the bylaws. In the present case the alleged vested rights are all contained in the bylaws which were subject to amendment.Hamlet, 622 So. 2d at 1083.  [Emphasis Added].

We observe Verandah is quite a different case than is Hamlet. The refund rights in Verandah arose from the membership agreement or contract, independent of any bylaws [or in Verandah, of the Membership Plan] . Amending the bylaws it is submitted may not abrogate a right created in a separate contract between the member and the club. It is only when the separate membership agreement expressly acknowledges the power of the club to amend [all] member rights in present or future bylaws that a bylaws amendment may abrogate or modify refund rights.[10],[11]

The Verandah court then inexplicably follows with a non-sequitor, “Accordingly, we find that the [Club’s] amendment to the refund policy was impermissible under the Agreement.” But, what the Verandah court fails to observe is that the  Club likely didn’t have any bylaws, i.e., a contract between the members and their club. In Verandah, the Club was undoubtedly owned by an entity other than the members.[12] The refund rights were not contained in any bylaws as in Hamlet. If the refund contract right is contained in the bylaws and the bylaws are amendable upon a vote of the members who are the owners of the club, the members may vote to abrogate or change current and resigned member refund rights under amendable bylaws. We submit Verandah’s holding has no relevancy to a member owned private club which amends its bylaws to change refund rights when those refund rights emanate from the bylaws and the members when joining the club agree to be bound by these bylaws as now exist or hereafter amended.[13]

A different case is presented if the refund rights emanate solely from the membership agreement dehors the bylaws or a membership plan. In Verandah, the refund right was referenced in both the membership plan and the membership agreement. However, the membership agreement controlled as its reference to the membership plan only dealt with use privileges. We submit all Verandah stands for is if the membership agreement merely refers to the membership plan as respects the member’s use privileges and specifically states what the refund right entails, then the refund rights shall emanate solely from the membership agreement regardless of what the membership plan has to say about refund rights. Under the facts as presented, the Verandah decision is correct and clearly distinguishable from Hamlet.

Trump National is of interest given the nature of the present political scene. Refundable membership deposits were once quite common in the commercial golf resort business. If structured properly, the “deposit” was not deemed taxable income to the club resort developer. As in Trump National, the deposit didn’t require refunding until a definite date in the future, 30 years in the case of Trump National.

As noted in a recent article in the New York Times, refundable deposits fell out of favor after the 2008 financial crisis.[14] Subsequent to 2008, the number of golf courses including private clubs has been reduced by closures and the annual creation of new courses similarly reduced. A significant percentage of the closures is due to the inability of golf clubs to attract and hold members due to their fiscal inability to continue to operate in an attractive condition.

After purchasing the Ritz Carlton Golf Club & Spa Jupiter, Trump decided he didn’t want to live with a refundable deposit liability. He terminated the membership plan’s provisions for the refunds and offered a different scheme to the members. Disgruntled resigned members who up until the purchase by Trump had been entitled to continued use of the resort’s facilities, filed a class action complaint in federal court in the Southern District of Florida on May 4, 2013. The case is presently pending trial scheduled for mid-2016.

The complaint states the plaintiffs have been denied a refund of their respective Membership Deposits by Defendants RBF, LLC and Donald Trump’s affiliated business, Defendant Jupiter Golf Club LLC (“JGC”). It alleges Plaintiffs and Class Members paid substantial Membership Deposits to Defendant RBF, LLC ranging from approximately $35,000 to $210,000, as well as annual dues. The Membership Deposits are recited as refundable based upon the terms of the applicable Membership Agreements which Plaintiffs and Class Members entered into with RBF.

At stake is an estimated $30 million in refundable deposits now thought to approximate $18 million following settlement of member claims who elected to continue their memberships with the new club owner or otherwise accepted less than 100 cents on the dollar.[15]

According to the original class action complaint filed by resigned members of Trump National Jupiter in 2012, Donald Trump, through Jupiter Golf Club LLC, (“JGC”), purchased The Ritz-Carlton Golf Club & Spa Jupiter (the “Club”) from RBF, LLC. Immediately after acquiring the Club, Trump, through JGC, unilaterally and systematically changed the terms of membership, terminated the categories of membership enjoyed by Plaintiffs and Class Members who were members-in-good-standing on the resignation waiting list and has refused to refund Membership Deposits to Plaintiffs or Class Members.

Trump’s answer to the (later amended) complaint states:

Plaintiffs’ claims against Trump Golf are barred under the estoppel and waiver doctrines because Plaintiffs’ Membership Agreements expressly provide . . . (i) Plaintiffs agreed that their Membership Plan or the Rules and Regulations may be amended at any time and that the Club reserves the right, in its discretion, to … modify the Membership Plan and the Rules and Regulations” or “to add, issue, modify … any type or category or class of membership.”

Pointedly, the membership agreement we examined recites its terms shall be controlling over any language in the membership plan regarding the club’s obligation to pay a refund to the member.

The membership plan recites, in pertinent part,-

The Club reserves the right to terminate, restate, amend, waive any provision of or otherwise modify any of this Membership Plan or the Rules from time to time without notice to any member and all members shall be bound by such amendments. The Club Owner shall (i) have the sole right to interpret the Membership Documents, and (ii) any decision, determination, interpretation, waiver, consent, action, amendment, promulgation, charge, collection, enforcement, or other matter that may, will, must or shall be made, taken or done by Club Owner under any of the Membership Documents may be made, taken or done in Club Owner’s sole and absolute discretion.

Noteworthy, the membership plan contains an in terrorem clause;

Should any party bound by the Membership Documents bring suit against the Club Owner or any of the Released Parties for any matter and fail to obtain judgment therein against the Club Owner or applicable Release Party, said party shall be liable to the Club Owner and such Released Parties for all costs and expenses incurred by it in the defense of such suit (including court costs and attorneys’ fees and disbursements through all proceedings, including appeals).

It is difficult to come to any conclusion regarding the likely outcome of this litigation between Trump and the resigned members. Much of the court records are under seal and the filings not under seal are voluminous. The case is presently scheduled for trial in mid-2016.

While commercial resort facilities are different in many respects from member owned private clubs, there are similarities in the manner in which they are originally organized. The lessons to be learned from Verandah and upon its conclusion from Trump National Jupiter, may have relevance to attempts by private member owned clubs to modify or eliminate refundable initiation fees or certificates. The emphasis should be on careful and rigorous parsing and analysis of the governing documents  and pertinent state case law to ascertain what options the private club may have in modifying refundable rights of members and former members.

 

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] http://somerslawfirm.org/private-clubs-ability-to-modify-or-curtail-members-and-former-members-refund-rights/

[2] Verandah Dev., LLC v. Gualtieri , case No. 2D15-2250  (Fla. 2nd DCA 2016)

[3] Hirsch v. Jupiter Golf Club LLC, case 9:13-cv-80456 ( District Court, S.D. FL Palm Beach Division) (hereafter “Trump National”)
[4] Feldkamp v. Long Bay Partners, LLC, 773 F. Supp. 2d 1273, 1282 (M.D. Fla. 2011).

[5] Black v. Glass, 438 So. 2d 1359, 1371 (Ala. 1983) and Ayers v. Grand Lodge A.O.U.W., 80 N.E. 1020, 1021 (N.Y. 1907). The reliance on Black v. Glass is suspect. The club in Black v. Glass was going out of business. “By-laws are traditionally subject to scrutiny under a standard of protecting vested rights or preventing unfairness. In modern corporation law such scrutiny is quite limited, because courts are reluctant to create doctrines that could interfere with the flexibility needed by commercial corporations to adjust to changing business conditions and needs. However, this reason for limited judicial scrutiny is inapplicable here, because cutting off the claims of the inactive members in no way serves the needs of a non-profit corporation that is going out of existence.”

[6] See footnote 9 below.

[7] Hamlet Country Club, Inc. v. Allen, 622 So. 2d 1081 (Fla. 4th DCA 1993)

[8] Orchard Ridge Country Club, Inc. v. Schrey, 470 N.E.2d 780, 783 (Ind. Ct. App. 1984)

[9] First Florida Bank, N.A. v. Financial Transaction Systems, Inc., 522 So. 2d 891, 892 (Fla. 2d DCA 1988)

[10] See, e.g., Fullenwider v. Supreme Council of Royal League, 180 Ill. 621, 54 N.E. 485 (1899); and Fichter v. Milk Wagon Drivers’ Union, Local 753, 382 Ill. 91, 46 N.E.2d 921(1943)

[11] We also suspect some differences of opinion between the two Florida circuit appeals courts, Hamlet having been decided by the 4th District Court of Appeals and Verandah and First Florida Bank, N.A. having been decided by the 2nd District Court of Appeals.

[12] We surmise the absence of bylaws by the Verandah references to the “Club’s Membership Plan, rules and regulations”. Membership Plans are typically used by commercial developers of private recreational clubs; rarely, if ever, by nonprofit, tax exempt clubs organized by its members.

[13] Korn v. Mutual Assurance Society, 6 Cranch 192, 3 L.Ed. 195 (1810).  See also, Mutual Assurance Society v. Korn, 7 Cranch 396, 3 L.Ed. 383 (1813); Kensington National Bank v. Cedarbrook Country Club,161 Pa.Super. 407, 54 A.2d 838 (1947); McCaffrey v. Pittsburgh Athletic Association,293 A.2d 51

448 Pa. 151 (1972 ); and  Reynolds v. The Surf Club, 473 So.2d 1327, 10 Fla. L. Weekly 1635 (Fla. App. 3 Dist., 1985) .

[14] http://www.nytimes.com/2016/02/27/sports/golf/at-trump-club-in-florida-some-members-want-their-money-back.html?_r=0

[15] Id.



Copyright 2016

Fred l. Somers, Jr., P.C

Atlanta, GA 30338