“Income” and “Profit” Under the Nonprofit Corporation Act

Breitman v. Atlantis Yacht Club, ___ N.J. Super. ___ (App. Div. 2023). This opinion by Judge Sabatino today involved the redemption of a membership interest in the defendant yacht club (“the Club”). Plaintiff paid $7,500 for that membership interest. The Club’s by-laws provided that if a member withdrew, the member would receive a payment from the Club to redeem his/her interest at such time that a new member joined the club. The amount to be paid, according to the by-laws, was the new member’s fee, less a $5,000 capital assessment.

It took five years for a new member to join so as to trigger plaintiff’s right to his redemption amount. By that time, the membership fee had increased to $25,000. Plaintiff thus claimed the right to $20,000 from the Club. The Club said it would pay that amount in installments over three years. The Club made the first payment, but thereafter the Club underwent a “compliance review” by a law firm. As Judge Sabatino described it, the law firm “reportedly advised the Club that making such a redemption payment to withdrawing members at a higher amount than their original membership fee would risk the Club’s nonprofit status. As described in a June 14, 2021 letter to members from the Club’s board of governors, such a gain would not be ‘in compliance with [unspecified] NJ law and [unspecified] IRS regulations.'” As a result, the Club refused to make the second and third payments to plaintiff.

Plaintiff sued. The Law Division ruled in his favor, rejecting the Club’s argument that plaintiff was claiming under “‘an illegal contract’ because it would entail the ‘distribution’ to a member of ‘income or profit’ disallowed for nonprofit corporations under N.J.S.A. 15A:2-1.” The Club appealed, but today the Appellate Division affirmed the Law Division’s decision, applying de novo review

Judge Sabatino focused directly on the key language of the statute, which stated that “no dividend shall be paid and no part of the income or profit of a corporation organized under this act shall be distributed to its members ….” Looking to dictionary and caselaw definitions of “income” and “profit,” Judge Sabatino found that the plain meaning of those terms meant that the distribution to plaintiff would be neither. “Therefore, a plain and sensible reading of the statute supports the trial court’s oral ruling that ‘enforcing the contract between the parties does not violate N.J.S.A. 15A:2-1(d).’ The Club’s agreement to pay plaintiff the additional two scheduled installments for his [interest] is not void, as it is not technically defective, contrary to public policy, or illegal. And, as the trial court rightly found, there was an enforceable agreement created here that the Club breached ….” The Club was thus required to pay plaintiff the full amount promised.