Too often, club developers whose primary motive is sales at a profit prior to turnover of the club facilities to the unsuspecting members don't plan or anticipate the likely future imbalance of supply and demand.  That is, at some point, there may be an excess of resigning members desiring to sell their memberships over the number of prospective purchasers. Further, as the redemption waiting list grows, so the attractiveness of the equity membership decreases. We have seen it severely and adversely affect new membership subscriptions.”

We have employed a number of legal tools to ameliorate the deadly dampening effect of tired and lengthy redemption waiting lists.  The remedy often depends on the specific situation and existing club documentation. However, the generalization that may be derived from all of these situations, is that the sooner the club eliminates refundability as an option, the sooner it will enhance its ability to have sufficient capital funds for capital projects.

There are also jurisdictions which follow the Model Nonprofit Corporations Code providing the club cannot insist a person continue as a club member if the person decides to resign.[1]  If the law allows a member to resign then the now former member is not entitled to continue to use the Club and therefore is not receiving any benefit from an alleged obligation to continue to pay dues.

The question then migrates to whether the now former member who signed an enrollment or subscription agreement to continue to pay dues until replaced by another member, can be required to honor his contractual commitment dehors the statutory requirement he not be prevented from resigning at any time. That is, does the contractual obligation supersede the statutory mandate that members may resign “at any time”?  If the pertinent statute reads like the one cited in footnote 1, (paragraph (b), then the language “or arising from contract” may control notwithstanding the lack of benefit conferred upon the resigned member if he is no longer entitled to any club benefit.[2]

One technique employed to prevent later claims of breach of contract for failure to redeem is to include in the individual member enrollment agreement a provision that recites the member agrees the redemption provisions are subject to change and that he will be bound by changes regardless of when they are made, either during his membership tenure or afterwards. If the foregoing provision is included in the redemption plan, the Club may change the redemption terms to accommodate changing conditions and the resigned member has no cause of action for breach of a now superseded redemption provision.[3]

Another technique is to require a minimum number of redemptions per calendar year regardless of whether a sufficient number of new members has been admitted subsequently or as a condition precedent to the redemption of resigned members. Yet another technique rewards a resigning member with immediate redemption if he sponsors or identifies a replacement member notwithstanding there may be a lengthy redemption wait list.

Some redemption plans provide only that the redemption value diminishes between the date of resignation and the redemption date by the amount of foregone or unpaid dues following the resignation.  Thus, if the interval is long enough, the former member may not receive any redemption proceeds. Other redemption plans provide for a continued dues obligation only for the remaining dues year.  Of course, if the dues obligation is an annual obligation, with a pre-existing duty to pay dues for the full year regardless of resignation, then depending upon state law, the resignation may be effective but the dues obligation continues for the balance of the remaining year.

We submit that redeemable membership plans are not consistent with the best interests of private member owned country clubs and their continuing members. If an “equity” member has enjoyed the club and its privileges for any meaningful length of time, the member’s “equity” fairly may be perceived as amortized over the period of membership tenure. When the member dies or resigns, the now former member is deemed to have received the value the member anticipated.  That is, recreation and social enjoyment; not a return on an economic investment. If the equity plan is drafted in a manner to avoid securities registration requirements, the member will have admitted the sole motive for purchasing equity in the first instance was recreational and social.

Thus, if the redemption feature is eliminated or curtailed, instead of frittering away its capital on persons who are no longer supporting the club, the club will be using its capital to support the needs and desires of those persons who continue to support the club with their dues and patronage, i.e., its ongoing members. The former members received their bargained for value; it is now the turn of the continuing members to receive their bargained for value.

Some former members may argue they paid equity fees disproportionate to the social and recreational value either because the equity fee was so high as to be incapable of “amortization over a reasonable number of years, or because of an unanticipated, employer-directed domicile move, illness or death precluding the use of the club for more than a very brief period. In the latter three cases the complaint may be cured by a limited redemption privilege when the resignation or termination is due to circumstances beyond the control of the member during the first finite number of membership years. In the former case, the complaint may be dismissed on the basis that the member received the “exclusivity” that was bargained for in addition to the social and recreational benefit.  Otherwise, how could the member justify the excess value contribution if he denies an economic incentive.”

In summary, provided the club is solvent, its primary duty is to its current, active members, not former members, much like a business corporation’s primary duty is to its shareholders, not former shareholders.  It is only when a corporation becomes insolvent that the directors’ primary duty is to the creditors, which in the case of a nonprofit corporation arguably include former members holding partially or fully redeemable membership certificates.

We also caution against member forecasts that are too optimistic. A prudent club board in exercising its statutory duty of care, will always guard against being too ambitious and plan for downturns in new member admissions and revenue shortfalls.

Footnotes:

[1] See, 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.” The foregoing code section is derived from the Model Nonprofit Corporation Act (American Bar Association, 1986).

[2] However, we are mindful that other doctrines in favor of consumers may dictate a different result. In jurisdictions allowing, e.g.,  for avoidance of contracts of adhesion, the resigned member may be able to eliminate responsibility for continuing dues.

[3] We recognize some will contend  bylaws not impair nor destroy contract or so-called "vested rights." See, e.g., Helmly v. Schultz,, 219 Ga. 201 (1963)  However, the more modern rule is that protection does not extend to rights which are not contractual or vested, such as with regard to membership rights in a nonprofit-nonstock corporation . McCaffrey v. Pittsburgh Athletic Ass’n, 448 Pa 151, 293 A.2d 51 (1972) and Black v. Glass, 438 So 2d 1359 (Ala 1983).

Fred L. Somers, Jr., Atlanta, GA
770-394-7200
somersf@somerslawfirm.org

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