This appeal concerns the interpretation and application of N.J.S.A. 15A:2.1(d), a provision within the New Jersey Nonprofit Corporation Act, N.J.S.A. 15A:1-1 to 14-26. In relevant part, Section 2.1(d) states:
No corporation organized under this act shall have or issue capital stock or shares. 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 . . . but a corporation may pay compensation in a reasonable amount to its members . . . for services rendered, may pay interest on loans or other credit advances by members . . . [and] may confer benefits on its members in conformity with its purposes . . . .
[(emphasis added).]
Plaintiff paid $7,500 to become a member of defendant Atlantis Yacht Club, a nonprofit organization formed under N.J.S.A. 15A-2.1. His payment was memorialized in a Certificate of Interest ("COI"). In 2015, plaintiff informed the Club he was withdrawing as a member. Pursuant to the Club's by-laws, upon his withdrawal plaintiff would be eligible to receive a repayment from the Club to "redeem" his COI at such time when a new member joined.
By the time plaintiff withdrew in 2015, the Club had raised its membership fee to $25,000. Under the extant by-laws, the Club was authorized to pay plaintiff (subject to adjustments for any unpaid charges) the amount of the new member's fee, minus a $5,000 capital assessment, for a net sum of $20,000. When a new member eventually joined in 2020, the Club notified plaintiff that it would pay him the $20,000 redemption amount in installments over three years. The Club accordingly paid plaintiff a first installment in 2020 of $3,333.33, informing him that his second- and third-year annual payments in 2021 and 2022 would each be $8,333.33.
Before the second-year installment to plaintiff was due in July 2021, the Club had what is described as a "compliance review" conducted by a law firm. The firm advised the Club that making such a payment to withdrawing members at a higher amount than their original membership fee would risk the Club’s nonprofit status. That advice prompted the Club to rescind its scheduled installment payments to plaintiff.
Plaintiff sued the Club to enforce its promise to pay him the additional installments. The Law Division judge ruled in plaintiff's favor. The Club now appeals.
The novel legal question presented is whether the payment arrangement was, as the Club contends, an illegal contract because it would entail the "distribution" to a member of "income or profit of the corporation" disallowed for nonprofits under N.J.S.A. 15A:2–1(d).
The court affirms the trial judge's decision. The funds a new member pays the Club for a COI is a form of collateral to secure against future sums the member may owe the Club. Any higher amount paid to the withdrawing member at the time of the COI’s redemption is not "income or profit of the corporation" within the meaning of N.J.S.A. 15A:2-1(d).