Private Status Remains Alive and Well
December 29, 2017When Does Unaccompanied Nonmember use of Private Club Facilities Risk Loss of Private Status?[1]
January 11, 2019When may I stop paying club dues?1
The answer to this question may likely depend upon what you agreed to when you joined the club.
Some club governing documents provide for the cessation of dues liability upon death or the effective date of resignation. Other clubs purport to continue the dues obligation for the remainder of the year of death or resignation. Yet other clubs insist on dues liability continuing until you are replaced by a newly joined member. The continuing dues liability may be in the form of set-off against any resigning member redemption or refund rights. Or it may be in the form of unconditional personal liability not limited to set-off.
The devil is in the details. Club articles, bylaws, rules, membership plans (where applicable) and enrollment agreements or applications all must be consulted. Often these documents cross reference each other. Sometimes they even conflict with one another especially when amendments are undertaken and not reconciled with the earlier iterations or no consideration is given to vestiges of the “vested rights” doctrine still extant in some states.
Unfortunately, many members join social and recreational clubs without carefully reading the fine print or consulting a knowledgeable lawyer versed in corporate governance. They assume without knowing they can rid themselves of dues and other liabilities, e.g., assessments, capital and minimum charges upon simply resigning. This is not necessarily the case.
A recent decision of the South Carolina Supreme Court illustrates the complexity of this question. The Callawassie Island Members Club, Inc. v. Dennis2decided in 2018 is instructive.
The Dennises purchased property on Callawassie Island, S.C., in 1999. Simultaneously, the Dennises joined a private club known as The Callawassie Island Club, and paid $31,000 to become “equity members.” The Club’s bylaws stated “Any equity member may resign from the Club by giving written notice to the Secretary. Dues, fees, and charges shall accrue against a resigned equity membership until the resigned equity membership is reissued by the Club.
In 2010, the Dennises decided they no longer wanted to be members of the Members Club, submitted a letter of resignation and stopped making all payments. The Club filed a breach of contract action against the Dennises, alleging the (allegedly) unambiguous terms of the membership documents required the Dennises to continue to pay their membership dues, fees, and other charges until their membership was reissued.
The Dennises denied any liability, alleging they were told by a Club manager their maximum liability would be only four months of dues, because after four months of not paying, they would be expelled. The Dennises also alleged the membership arrangement violated the South Carolina Nonprofit Corporation Act (“NPC Act”)3.
Finding no ambiguity in the Club bylaws, a majority of the South Carolina Supreme Court reversed the court of appeals below which had held there was “some ambiguity in the governing documents as to whether club members are liable for dues accruing after resignation.”4In addition, the court of appeals found the provisions of the documents that require the Dennises to continue to pay their membership dues after resignation violate section 33-31-620 of the Nonprofit Corporation Act5. However, the S.C. Supreme Court reinstated the trial court’s summary judgment for all unpaid dues, fees and other charges holding the requirement that members continue to pay dues, fees, and other charges after resignation until their membership is reissued is not prohibited by section 33-31-620 of the NPC Act.
The cited NPC Act section 33-31-620 recites: “(a) A member may resign at any time. (b)
The resignation of a member does not relieve the member from any obligations the member may have to the corporation as a result of obligations incurred or commitments made before resignation.” The section is substantially similar to the model Nonprofit Corporation Act6provision and as found in many state nonprofit corporate statutes.7
The S.C. Court of Appeals held section 33-31-620 obligates resigned members to pay any dues incurred before resignation,” but “does not require resigned members to continue to pay any dues that accrue after resignation.”8The Court of Appeals explained requiring a member to continue to pay dues that accrue after resignation “would create an unreasonable situation in which clubs could refuse to allow a member to ever terminate their membership obligations.” Thus, in effect, a member may not resign at any time. We note further that a resigned member is not entitled to use privileges of the club’s facilities. So how does the club justify an indefinite continuation of dues for resigned members which are payment for the use of club facilities?
A dissenting opinion in the S.C. Supreme Court decision recites: “I agree with the court of appeals that the documents are ambiguous on their face. To begin, under Rule 14.2.1 of the 2001 Rules, the rules upon which the Club premised its motion for summary judgment,
Any member may terminate membership in the Club by delivering to the Membership Director written notice of termination in accordance with the Plan for the Offering of Club Memberships. Notwithstanding termination, the members shall remain liable for any unpaid club account, membership dues and charges (including any food and beverage minimums).”
“According to the Club, this provision is subordinate to the bylaws and membership plan, so even if the term “unpaid” only referred to unpaid dues at the time of resignation, the Dennises are still required to pay future dues. However, conspicuously absent from this provision is any language indicating the dues and charges continue to accrue after resignation “until the membership is reissued.” The dissent further observed: “the clause is ambiguous because it is unclear whether a resigned member is liable for unpaid dues outstanding at the time of resignation or for dues accruing before and after resignation.” “Rule 14.2.1 states that upon termination, the member ‘shall remain liable” for unpaid club accounts and dues. The use of the words ‘remain’ and ‘unpaid’ support the Dennises’ interpretation that the provision refers to charges and dues which have already been accrued—not future charges—for a member cannot remain liable for dues and charges which have not yet come into existence.”
Even making the majority opinion in the Supreme Court decision more astonishing is language contained in the 1994 Membership Plan and Bylaws, in place when the Dennises joined the Club. These documents provide: the dues “will accrue against and be deducted from the amount to be paid to the resigned member upon the reissuance” of his membership. . . . [t]he 1994 Bylaws state, “Any equity member may resign from the Club by giving written notice to the Secretary. Dues, fees and charges shall accrue against a resigned equity membershipuntil the resigned equity membership is reissued by the Club.”
Thus, pursuant to the 1994 bylaws, the obligation to continue dues is an in rem obligation, i.e., limited to set-off against the equity membership (redemption right) of the resigned member not a personal obligation. What is not expressed in the minority opinion is whether the 1994 bylaws necessarily survive a subsequent amendment deleting the in rem nature of the liability and substituting a personal liability for future dues. To put another way, did the Dennises have a “vested right” in the bylaw provision respecting their future liability for dues payment beyond resignation?
The case points to the difficulty of reconciling various governing documents with one another especially as in Callawassie, where they have been amended several times over the years. We have been called upon to determine what rights and duties exist in other club scenarios and the likely effect of amendments made subsequent to a resigning member’s joining the club. The exercise requires careful comparison with the various governing documents which typically include a membership plan, articles of incorporation, bylaws, club rules, enrollment agreements and membership applications. Also, it is necessary to examine the relevant state corporation law and state court decisions regarding the issues and objectives presented.
We recall one case where a resigned member was being hounded by an out-of-state club to pay post resignation accrued but unpaid dues. The language was not as ambiguous as in Callawassie but the club failed to pursue its claim likely because of the cost of bringing a suit in a foreign state court and then only for the unpaid and accrued dues through the date of the filing of the claim.
We have also assisted clubs in amending their governing documents to provide for modifications in redemption or refund rights of resigned members. The problem sometimes arises in this context of resigned members contending amendments made after they joined the club and before they resigned are “unfair” despite precedental state court decisions to the contrary.
The propensity of some trial courts to impose a “fairness” standard might be thought to arise in those states which recognize the doctrine that every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. Club bylaws are commonly recognized as contracts between the members and the club. The question may arise whether a club requiring a resigned member to be personally liable to continue to pay dues when the now former member is no longer entitled to use the facilities violates the “fair dealing” doctrine. Does a club as in Callawassie which amended its bylaws to change the liability for future dues from an in rem liability to a personal liability violate the duty of good faith and fair dealing?
Private clubs which inherited membership plans and other governing documents from a commercial developer should be meticulous in reviewing the various governing documents for inconsistencies and potential conflict with state statutes and case law. Preferably, this review should be undertaken by an attorney familiar with club governance law. Often a club does not need the continuation of dues payment by resigned members beyond the fiscal year of resignation until they are replaced to remain economically sound. Eliminating such ostensibly overreaching provisions may enhance the marketability of the club in attracting new members.
In summary, as we have cautioned previously, when considering joining a private club, especially one started or being or formerly operated by a commercial developer, it is wise to read the fine print. If a substantial equity or initiation fee is involved or ambiguities are found, it is wise to consult a knowledgeable lawyer versed in corporate documentation. Do not rely on what a membership coordinator or director tells you verbally. This reliance in the Callawassie case was given short shrift as excluded under the applicable rules of evidence.
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.
2Appellate Case No. 2016-002187, Opinion No. 27835.
3SeeS.C. Code Ann. §§ 33-31-101 to -1708 (2006 & Supp. 2017).
4417 S.C. at 616, 790 S.E.2d at 438.
5417 S.C. at 618-19, 790 S.E.2d at 439.
6See https://www.americanbar.org/products/inv/book/268712961/
7See, e.g., O.C.G.A. § 14-3-620. (a) Unless otherwise provided by law, a member may resign from membership at any time by delivering notice in writing or by electronic transmission to the corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date, although the articles or bylaws may require reasonable notice before the resignation is effective. (b) This Code section shall not relieve the resigning member from any obligation for charges incurred, services or benefits actually rendered, dues, assessments, or fees, or arising from contract, a condition to ownership of land, an obligation arising out of ownership of land, or otherwise, and this Code section shall not diminish any right of the corporation to enforce any such obligation or obtain damages for its breach.
8417 S.C. at 618, 790 S.E.2d at 439.
