Refundable Membership Issues

February 10, 2104

Federal Court Holds That Country Club’s Failure To Return Membership Deposits Is “Unsettling” And Actionable

By: Rob Harris

There was a time when New Jersey’s Hamilton Farm Golf Clubcommanded membership deposits ranging from $160, 000, for an Individual Golf Membership, to $212,000 for an upgraded Family Golf Membership. Those days are gone, at least for now.

Those members who coughed up the sizeable membership deposits signed a Membership Agreement that provided for a “Refund of Membership Deposit,” stating as follows:

“[i]f the member resigns before the end of the 30-year period, the membership deposit paid by the member or the amount of the membership then charged for membership, whichever is the less, will be refunded, [...] after the issuance of the membership by the Club to a new member.”

Under the Membership Agreement, the “Club also reserve[d] the right to modify this Membership Plan [...] and to add, issue or modify any type or category of membership.”

With the turn in the economy, a number of members sought the refund of their membership deposits. Alas, the club–availing itself of its contractual right “to add, issue or modify any type or category of membership”–did just that. As one court explained in 2011, Hamilton Farm issued a new class of memberships which “require lower membership deposits—namely, $50,000 up front and $50,000 eight years later.” However, these reduced priced memberships “allegedly include member privileges identical to those offered” at the substantially higher price.

For obvious reasons, demand for the higher priced memberships offered by Hamilton Farm vanished, enabling the club to disavow its contractual obligation to refund deposits, since the refund obligation was triggered only upon “issuance of the membership by the Club to a new member.”

The ability of members to challenge the club’s action as a breach of contract has been thwarted by the contract provision referenced above which, as noted, expressly permitted the club to issue the new, lower priced membership. However, courts nonetheless have come to the defense of members, holding that the club’s actions, if proved as alleged, could constitute a breach of the duty of good faith and fair dealing that is implicit in a contract.

As a New Jersey federal court held last week, “under New Jersey law, ‘[e]very party to a contract… is bound by a duty of good faith and fair dealing in both the performance and enforcement of the contract.’…  A party ‘breaches the duty of good faith and fair dealing if that party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract.’

Turning to Hamilton Farms, the court explained as follows:

“Here, Plaintiffs allege that Defendants created new memberships with substantially the same rights and privileges for the sole purpose of avoiding the continuing obligation to refund Plaintiffs’ original deposits. While the Club was contractually authorized to add new membership categories, the creation of new memberships that are nearly identical to the original memberships in all respects is ‘unsettling, particularly in light of the various inducements in the Plan suggesting that resigned memberships would be reissued as new members joined.’”

Accordingly, the court held that the resigning members of Hamilton Farms have the right to pursue their claims for refunds.

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