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Farinella v. North Hudson Yacht Club

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


June 28, 2007

CHARLES THEODORE FARINELLA, GEORGE AHTO, JR., STANLEY BERKOWITZ, BARNEY L. KRIEG, NICHOLAS PAPPAGALLO, JOSEPH P. MARTIN, RAYMOND ORSI, EDWARD CZECZUGA, DAVID C. KESICK, ANDREW NUNZIATO AND ROD STORMS, PLAINTIFFS-APPELLANTS,
v.
NORTH HUDSON YACHT CLUB, A NEW JERSEY NOT FOR PROFIT CORPORATION, DEFENDANT-RESPONDENT.
SALVATORE VASSALLO, ANTHONY J. NEGLIA, GERHARD W. TAPKEN, KRIS A. TAPKEN, MICHAEL VERGHITSIS AND ROBERT C. BOWAN, PLAINTIFFS-APPELLANTS,
v.
NORTH HUDSON YACHT CLUB, INC., NORTH HUDSON YACHT CLUB BOARD OF DIRECTORS CONSISTING OF COMMODORE ROBERT KENYON, VICE COMMODORE SANDY MARKS, REAR COMMODORE ANTHONY D'AGOSTA, FLEET CAPTAIN RICHARD ROBINSON, RECORDING SECRETARY FRANK SARKISIAN, FINANCIAL SECRETARY JOHN SABATINI, TREASURER GLENN KENYON, DIRECTOR THOMAS OLSZEWSKI AND DIRECTOR CARMINE TETA, DEFENDANTS-RESPONDENTS.

On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket Nos. BER-C-0203-04 and BER-C-67-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued April 18, 2007

Before Judges Parker, C.S. Fisher and Messano.

In this dispute between former members of a yacht club and the club's current members, plaintiffs*fn1 appeal from two orders entered on January 17, 2006 granting summary judgment in favor of defendants and two orders entered on February 24, 2006 denying plaintiffs' motions for reconsideration. We affirm.

Defendant North Hudson Yacht Club (Club) is a recreational and social not-for-profit corporation in Edgewater. Its purpose is to promote social recreation and proficiency in boating.

Plaintiffs in Docket No. A-3300-05T5, Charles T. Farinella, George Ahto, Jr., Stanley Berkowitz, Barney L. Krieg, Nicholas Pappagallo, Joseph P. Martin, Raymond Orsi, Edward Czeczuga, David C. Kesick, Andrew Nunziato and Rod Storms, all former members of the Club, filed their complaint in the Bergen County Chancery Division on June 4, 2004. Plaintiffs in Docket No. A-3322-05T5, Salvatore Vassallo, Anthony J. Neglia, Gerhard W. Tapken, Kris A. Tapken, Michael Verghitsis and Robert C. Bowman, are also former members of the Club who filed a separate complaint on June 17, 2004 in the Bergen County Law Division.

The Law Division case was transferred to the Chancery Division on a sua sponte motion by the court and the cases proceeded back-to-back.

Each of the plaintiffs voluntarily resigned his membership in the Club between 1981 and 2001. In addition to naming the Club as defendant, the Vassallo group named the current Board of Directors as defendants.

The Club was incorporated on January 12, 1912. In June 1968, the Club purchased property in Edgewood fronting on the Hudson River for $125,000. The property was intended to be used for Club purposes. Some time in 2004, various former members learned that the current membership had voted to potentially disband the Club and sell the property.

In their complaints, plaintiffs claim that the Club cannot disband but must continue in perpetuity; that the property cannot be sold, but if the property is sold, the proceeds must be given to charity or to the State. Alternatively, plaintiffs maintain that if the property is sold, they are entitled to share in the proceeds of the sale.

The Club's bylaws contain a provision for potential dissolution and sale of the Club's assets. Article XVIII provides as follows:

The funds of this Club shall not be used for any purpose other than that for which the Club was organized. No member or members shall have the power to disband the Club or dispense with the funds or property belonging to the Club, as long as a total of fifteen (15) Regular Life[] or Inactive Members remain in good standing and wish to retain the charter and "operate the Club for the purpose for which it was founded."

At a meeting on February 28, 2003, the Club's current membership voted eighteen to eleven to sell the property and divide the money among the current thirty members. In August 2003, the Club entered into a contract for sale of the property for $7.5 million.

The Farinella group of plaintiffs sought in their complaint to have (1) the proceeds of the sale held in escrow pending a determination of rights and liabilities of the parties and an accounting made of all assets of the Club; (2) plaintiffs' memberships reinstated; and (3) the Club amend its corporate resolution and file the appropriate tax forms to pay all tax liability on the proceeds and then distribute the proceeds to plaintiffs, as well as the current members.

In their complaint, the Vassallo group sought (1) an accounting and constructive lien against all of the Club's assets; (2) appointment of a receiver to take control of the Club's assets; (3) an order directing that proceeds of the sale be held in escrow; (4) an order prohibiting dissolution of the Club and expelling current members who have violated their fiduciary duty; and (5) reinstatement of plaintiffs as members of the Club entitled to distribution of the sale proceeds.

Two of the former members, Salvatore Vassallo and Anthony J. Neglia, were granted honorary life membership in 1991. As life members, they were not required to pay dues until an amendment to the bylaws in 1997. When the Club adopted the amendment requiring them to pay dues, they resigned permanently.

These two plaintiffs contend that the amendment to the bylaws was intentionally adopted in 1997 to force them to leave the club, thereby depleting the membership for purposes of distributing future profits in 2002.

After discovery was completed, defendants moved for summary judgment. On January 17, 2006, the trial court granted defendants' motion for summary judgment in both cases. The trial judge rendered a written decision in which he set forth the undisputed facts and found that "[t]he constitution and bylaws are not specific regarding the distribution of proceeds on the sale of property or on winding up the organization" except for

Article XVIII. In its opinion, the trial court found:

Although the constitution and bylaws do not make specific provision for distribution of assets to the members on the dissolution of the [C]lub, plaintiffs cite to no authority that requires otherwise. There is no statute or case that addresses that issue. Plaintiffs would have the court read into the not-for-profit a requirement that its assets cannot be distributed to members such as would be the case for a stock corporation having stockholders. This court cannot make that quantum leap in the absence of some precedent or law. There simply is none.

The meeting at which the membership by an 8-11 vote approved the sale and the subsequent ratification of the contract that is presently in effect appear[ed] to reflect the majority of the membership and to be over the negative vote of less than [fifteen] members'[s] votes, the number required to continue the [C]lub in existence.

The fact that these [thirty] members are the only members left and that they stand to gain a substantial amount of money from the sale of the property in the windup of the [C]lub is in and of itself not inequitable. Impressive. Maybe outrageous. But no[t] inequitable in the sense that others ought by law be allowed to participate. And what guidance does the court have as to what an "equitable distribution" ought to be. All the members that ever were, including their estates? The current members and the plaintiffs? Half to charity and half to? Some percentage to the State, some to charity (what charity), some to the members (which members)? and so on.

. . . . In accordance with the Brill standard, the plaintiffs must put in play enough material to set up a dispute as to material facts, according to them appropriate inferences in conjunction with such motions. They have provided only innuendoes and generalities, not facts. In absence of disputed facts and any clear direction by law, the court has no choice but to grant summary judgment to defendants and to dismiss plaintiffs' actions.

In this appeal, the Farinella plaintiffs argue:

POINT ONE

THE COURT ERRED IN COMING TO ITS DECISION OF SUMMARY JUDGMENT IN THAT IT BASED ITS RATIONALE PARTIALLY ON FACTS THAT WERE NOT OF RECORD AND, IN FACT, DO NOT EXIST

POINT TWO

COURT ERRED IN THE APPLICATION OF THE LAW THAT WAS APPLIED TO THE FACTS

POINT THREE

THERE IS NO PROVISION IN THE CONSTITUTION AND BY-LAWS OF THE CLUB THAT WOULD PERMIT DISTRIBUTION OF THE PROCEEDS OF SALE TO MEMBERS

POINT FOUR

THE FAILURE OF THE MEMBERS TO MAKE KNOW [SIC] TO FORMER MEMBERS THAT THE PROPERTY COULD BE SOLD AND THAT THE PROFITS COULD BE DISTRIBUTED AMONGST THE MEMBERS WOULD CONSTITUTE A FRAUD

POINT FIVE

SUMMARY JUDGMENT SHOULD NOT BE GRANTED AS THERE ARE MATERIAL ISSUES OF FACT THAT MUST BE RESOLVED BY THE FINDER OF THE FACT WHICH PRECLUDES THE GRANTING OF SUMMARY JUDGMENT

The Vassallo plaintiffs argue:

POINT ONE

THERE IS NO LAW FROM THE STATE OF NEW JERSEY TO SUPPORT A DISTRIBUTION OF ASSETS BELONGING TO A NON-PROFIT CORPORATION TO ITS MEMBERS FOR THEIR PERSONAL ENRICHMENT WHEN THE BY-LAWS EXPLICITLY STATE THAT THE ASSETS MAY ONLY BE USED TO FURTHER THE CLUB'S INTENDED PURPOSE

POINT TWO

THERE IS NO LAW IN THE STATE OF NEW JERSEY TO SUPPORT THE PROPOSITION THAT THE PLAINTIFFS ARE NOT ENTITLED TO PARTICIPATE IN THE DISTRIBUTION OF ASSETS OR THAT THEY DO NOT HAVE STANDING TO SUE UNDER THE CIRCUMSTANCES

POINT THREE

FACTUAL DISPUTES AND ISSUES OF CREDIBILITY WARRANTED A DENIAL OF DEFENDANTS' [SIC] SUMMARY JUDGMENT MOTION

POINT FOUR

EQUITY DICTATES THAT ANY DISTRIBUTION OF CLUB ASSETS TO THE CLUB'S THIRTY (30) MEMBERS SHOULD INCLUDE SIMILAR DISTRIBUTION TO THE PLAINTIFFS

In essence, both sets of plaintiffs argue that the trial court erred in granting summary judgment because there are genuine issues of material fact and because the trial court incorrectly applied the law.

Non-profit organizations are given substantial deference because they "must have considerable latitude in rulemaking in order to accomplish their objectives and generally, their private law is binding on those who wish to remain members."

Loigman v. Trombadore, 228 N.J. Super. 437, 449 (App. Div. 1988) (citing Higgins v. Am. Soc'y of Clinical Pathologists, 51 N.J. 191, 202 (1968)); see also Danese v. Ginese, 280 N.J. Super. 17, 23 (App. Div. 1995). Deference is afforded to non-profit organizations because "courts recognize an association's right to adopt, administer and interpret its own rules without judicial intervention." Danese, supra, 280 N.J. Super. at 23.

"'[A] voluntary association may, without direction or interference by the courts, draw up for its government and adopt rules, regulations and by-laws which will be controlling as to all questions of . . . internal policy.'" Loigman, supra, 228 N.J. Super. at 450 (quoting 6 Am. Jur. 2d Assocs. & Clubs, § 5 at 433).

Courts will only intervene "into the affairs of a non-profit association" when the objecting party suffers "'an invasion of their civil rights, of [their] person or of [their] property.'" Ibid. (quoting 6 Am. Jur. 2d, supra, § 27 at 453-54). In Danese, we stated that

[C]courts will not, as a rule, take jurisdiction of a matter involving the internal affairs of an association, even in cases where judicial interference is otherwise warranted, unless the complaining member has exhausted such remedies as may be provided by the laws of the association itself.

[280 N.J. Super. at 24 (quoting 7 C.J.S. Assocs. § 8 (1980)).]

Here, plaintiffs are no longer members of the Club and have no recourse to internal remedies to resolve their dispute. Their resort to the courts is their only remedy. The principle of non-interference by the courts, however, remains strong. In other words, plaintiffs must have a sustainable legal interest to warrant judicial intervention. See Loigman, supra, 228 N.J. Super. at 449.

"A non-profit corporation "may sell, convey, mortgage, create a security interest in, lease, exchange, transfer and otherwise dispose of its property and assets." N.J.S.A. 15A:3-1(5). Although plaintiffs claim that they were "under the impression" that the property owned by the Club could not be sold, the statute under which the Club was organized clearly permits it to acquire and sell property.*fn2 Irrespective of plaintiffs' "impression" that the Club could not dispose of the property, both the governing statute and the Club's bylaws allow the Club to alienate the property.

Plaintiffs further claim that defendants' failure to inform them that the Club could be sold constitutes a fraud on them. Plaintiffs, however, have presented no evidence, beyond rumor and innuendo, to support such a claim. Rule 4:5-8(a) requires that allegations of fraud be pled with "particulars of the wrong, with dates and items if necessary . . . insofar as practicable. Malice, intent, knowledge and other condition[s] of mind of a person may be alleged generally." Proof of legal fraud must be made by clear and convincing evidence. See, e.g., Stochastic Decisions, Inc. v. DiDomenico, 236 N.J. Super. 388, 395-96 (App. Div. 1989), certif. denied, 121 N.J. 607 (1990).

We agree with the trial court's finding that plaintiffs "offer nothing in support of [their] positions other than their own general statements, citing to no source or person [and] no specific conversation." We have been provided with brief excerpts of the deposition testimony of fifteen plaintiffs. Each plaintiff indicated in his deposition that he resigned voluntarily. One plaintiff, Gary Tapken, also indicated that his $1,000 bond was refunded when he resigned. Tapken testified that as early as 1998 -- four years before the Club voted to sell the property -- defendant John Sabatini told him, "we're going to get this membership down to [thirty] people and we're going to sell the place." Other than that bare allegation, plaintiffs offer no evidence of fraud or misrepresentation. Indeed, plaintiffs concede that they cannot prove that anyone knowingly misrepresented facts to them regarding the sale of Club property or the distribution of proceeds from such sale if the Club were to be dissolved. Moreover, plaintiffs offer no evidence whatsoever that any members were forced out or pressured to resign "to get [the] membership down to thirty people." Plaintiffs rely on Smith v. Hunterdon County Mut. Fire Ins. Co., 41 N.J. Eq. 473 (Ch. 1886), to support their position.

There, the defendant mutual insurance company decided to distribute a large surplus to its current members. Id. at 473-74. The court found that the surplus accrued from payments made by former and current policyholders and that distribution to current policyholders alone would serve as a windfall to them and a penalty to those who contributed to the surplus by paying premiums over the years. Id. at 474-75. The court concluded, therefore, that former policyholders should be included in the distribution. Id. at 477-78.

Smith is distinguishable from this case. Here, the former Club members stopped paying their dues and contributing to the Club upon their resignations, as did the policy holders in Smith, but the increased value of the property was the result of the extraordinary inflation in the real estate market since the property was purchased in 1968.

N.J.S.A. 15A:12-8(a) provides that dissolving corporations "shall adopt a plan of dissolution for the satisfaction of its liabilities and the distribution of its assets. The plan shall implement all provisions in the certificate of incorporation or bylaws prescribing the disposition of assets." The statute further provides that the dissolution plan shall include, where appropriate, provisions to implement the following in the priority set forth below:

(1) Payment and discharge of all liabilities and obligations of the corporation;

(2) Compliance with all conditions of any tax exemption applicable to the corporation;

(3) Return, transfer or conveyance of all assets received and held by the corporation upon condition that the assets be returned, transferred or conveyed upon dissolution of the corporation;

(4) Transfer or conveyance of all assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, eleemosynary, benevolent, educational or similar purposes, but not held upon condition[s] set forth in paragraph (3) of subsection b. of this section, to one or more domestic or foreign corporations engaged in activities substantially similar to those of the dissolving corporation or, if applicable, to a receiver to be held for the benefit of the public and for use in accordance with the limitations, or pursuant to a court order;

(5) Distribution of all assets required by the corporation's certificate of incorporation or bylaws to be distributed to the members in the manner so specified;

(6) Disposition of all other assets.

[N.J.S.A. 15A:12-8(b).]

Where neither the certificate of incorporation, the constitution of the organization or the bylaws specify otherwise, the funds should be divided pro rata among the members at the time the non-profit organization dissolves. Pierson v. Gardner, 81 N.J. Eq., 505, 509 (E.&A.1913).

In short, there is no legal basis upon which these plaintiffs can claim an entitlement to distribution of the proceeds of the sale of the Club property. The corollary to the question of whether former club members have a right to share in a distribution of the Club's assets is whether the former members can be held liable for the debts of the dissolving organization. Clearly, under the circumstances presented, the answer is no. See, e.g., Clearwater Citrus Growers' Ass'n v. Andrews, 87 So. 903, 905 (Fla. 1921); Raulston v. Everett, 561 S.W. 2d 635, 638 (Tex. App. 1978).

We have carefully considered the record in light of plaintiffs' arguments and the applicable law, and we are satisfied that the arguments lack sufficient merit to warrant further discussion in a written opinion, R. 2:11-3(e)(1)(E). We affirm substantially for the reasons stated by Judge Gerald C. Escala, now retired, in his written decision dated January 17, 2006. R. 2:11-3(e)(1)(A).

Affirmed.


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