Should an Expelled Member Get a Refund?

From Terry A. Taylor

A reader of The Private Club Advisor recently asked: “When an equity club expels a member, does the club have to return the cost of the membership or do the member’s actions negate his right to the initiation fee?”

I could not answer the question, other than to respond “It depends.”

1. A Board Should Not Rely Upon “General Advice” Regarding Member Expulsion. While most club expulsion processes require notice, hearing and (perhaps) a right of appeal, member expulsion processes vary. An equity club's membership plan, bylaws, rules and regulations, or stockholder’s agreement will likely establish a club’s expulsion process. The board must determine that process and follow it to the letter (unless instructed otherwise by counsel). 

2. The Circumstances Should Determine the Terms of Expulsion. Despite my advice to strictly adhere to the process of expulsion, I advise flexibility regarding the terms of expulsion. The board should be aware of the requirements of the club's membership plan, bylaws, rules and regulations, or stockholder’s agreement (if these documents even address the issue). However, the board should make sure that these terms fit the expulsion circumstances.

3. The Club Documents May Not Address the Expulsion Issue. If your club finds that its membership plan, bylaws, rules and regulations, or stockholder’s agreement do not establish a process, the board must seek legal advice prior to pursuing a member expulsion.

If I were a board member faced with a member expulsion, here is what I would do:

1. I would make absolutely certain that I followed the procedure set-forth in the club bylaws to the letter, unless my attorney told me otherwise.

2. As a general rule, I would refund what the member paid as an initiation fee, unless the circumstances involved the matters stated in #3. Refunding the fee reduces the likelihood of a lawsuit, regardless of whether such a suit has merit. Most clubs can not afford the legal expense of being “right.”

3. I would not refund any portion of the initiation fee if the offense involved criminal conduct, sexual misconduct or derogatory statements involving race, gender, nationality or religion. You have to draw the line somewhere. If the offense involved damage to club property or injury to members or staff, I would refund the initiation fee less out-of-pocket expenses for damages or injuries.

--Terry A. Taylor, Taylor Advisors PC, Colleyville, TX

817-835-0345 – taylor4812@mailblocks.com