Opinion ID: 1840531
Heading Depth: 1
Heading Rank: 3

Heading: argument of active members

Text: The trial court heldapparently as a matter of lawthat the certificates of membership gave the inactive club members a vested contract right or property right to receive a pro rata share of the assets on dissolution and that these certificates overrode any other corporate documents limiting this right. The trial court also found as fact that the Club representatives gave the impression to purchasers that the certificates represented an entitlement to share in the assets of the Club upon its dissolution and further that subsequent actions by the Club ratified this impression. The active members dispute both the factual and legal conclusions. First, the active members argue that the 1958 articles of incorporation, the certificates, and every version of the corporate by-laws by their terms all preclude the inactive members from sharing in the distribution of assets. On this view no conflict exists between the certificates and subsequent by-laws, with the result that no deprivation of vested rights could have occurred. The active members' contention seems to be two-fold: (1) that since the certificates were expressly made subject to later amendments in the corporate charter and by-laws, no vested right could have accrued, and (2) that the inactive members cannot be considered to come within the meaning of the certificate provision referring to  members of the corporation holding certificates of membership. (Emphasis added.) This second point is supported by the fact that both the 1973 and 1980 versions of the corporate by-laws provide that any member failing to pay dues or bills within 60 days after they become due shall be automatically dropped from membership. The inactive members had not paid dues and thus were arguably not members. We cannot accept these contentions. First, the certificates purport to certify membership; no indication is given that this primary aspect of the certificates could be later voided by amendments to other corporate documents. In addition, the 1973 and 1980 by-laws do not specifically purport to nullify the certificates as proof of membership in some form. Thus, the term members in the certificate must be equated with certificate holders. The question then becomes whether the certificate provision giving members of the corporation holding certificates of membership a claim to distribution on a pro rata basis is affected by the earlier provision making the certificate subject to the corporate charter and by-laws as amended. Corporate documents such as by-laws and membership certificates are equivalent to contracts among the members of the organization. H. Oleck, supra, at 985. Accordingly, normal rules of construction for contracts apply. The initial question is to determine, as a matter of law, whether the contract is ambiguous. Extrinsic evidence may be considered to resolve a latent ambiguity arising from some collateral matter outside the writing. If the contract is not ambiguous, then its interpretation is a matter of law for the court to determine without reference to extrinsic evidence. If the court instead finds the contract to be ambiguous, then its interpretation is a question of fact, and extrinsic evidence may be considered. Brown Mechanical Contractors, Inc. v. Centennial Ins. Co., 431 So.2d 932 (Ala.1983). If extrinsic evidence of surrounding circumstances does not clarify the ambiguities, then the contract must be construed against the party who drafted it. Molton, Allen & Williams, Inc. v. St. Paul Fire & Marine Ins. Co., 347 So.2d 95, 99 (Ala.1977). In the present case that party is the Club. In our view the terms of the certificate and by-laws are ambiguous when read together. As noted by the trial court, the provision regarding distribution of assets is more specific than the general provision making the certificate subject to later amendments. It seems illogical to allow a later by-law amendment to nullify the one aspect of Club membership that was specifically stated in the certificates. The first piece of extrinsic evidence that should be consulted in such a case is the 1958 articles of incorporation, to which the certificates and by-laws must conform. In relevant part, these provide: ARTICLE IVMEMBERSHIP The classes of members in the Corporation and the qualification and method of selecting of which shall be set out in the By-Laws of the Corporation. ARTICLE VGOVERNMENT . . . . (b) By-Laws. The members of the Corporation may adopt such By-Laws as they shall deem desirable and may amend the same from time to time as provided in said By-Laws, provided that said By-Laws are not inconsistent with these Articles of Re-incorporation or with the laws of the State of Alabama. . . . . ARTICLE IXDISSOLUTION Upon any dissolution or final liquidation of the Corporation, distribution of the net assets of the Corporation remaining after payment of all the debts and obligations of the Corporation shall be made to the members of the Corporation then in good standing per capita, provided that no part of the net earnings thereof shall enure to any individual member. (Emphasis added.) The articles of incorporation do not answer the question posed above, since in good standing is not defined and it is left to the by-laws to set out the qualifications for members. Also relevant is the 1960 corporate resolution authorizing the certificates. This resolution provides in part: Be it further resolved that this corporation issue to members of this club who may purchase the same non-interest bearing debentures or preferred certificates upon payment for each certificate of the sum of $250.00 payment therefor to be made at such time and such manner as the Board may direct. Such certificate may be negotiated. All proceeds of each such debenture or partial payments therefor shall constitute a trust fund when received to be applied to a reduction of the principal and interest on the $30,000.00 loan referred to above. Holders of such debentures shall not by virtue thereof have any lien or mortgage on the properties of the corporation but shall, in event of liquidation of the properties, be preferred in payment from such proceeds in the liquidation to the end that such holders shall be paid the amount of debentures owned by them before there is any distribution among share holders or members of the assets in liquidation. Be it further resolved that to carry out the spirit and interest of this resolution the Board is empowered to provide all forms and terms to be incorporated into the debenture or preferred certificates and that the amount of such debenture offered or sold shall be unlimited. Any excess received above the amounts necessary to discharge the $30,000.00 loan may be used at any time for further capital improvements of the club properties. The last sentence of the first paragraph quoted appears to support the active members' view in that a distinction is made between certificate holders who are paid the amount of debentures owned by them and share holders or members receiving the assets in liquidation. However, this resolution appears to have been loosely drafted. Its reference to shareholders is inconsistent with Code of 1975, § 10-3-125, which provides that a nonprofit corporation shall not have nor issue shares of stock. In addition, the resolution authorizes the board of directors to provide specific forms and terms for carrying out the spirit and interest of this resolution. In view of these facts, we do not see the resolution as a useful indicator of the meaning of the certificates. It is next appropriate to consider the successive by-laws for indications of what parts of the certificate were meant to be subject to change. The by-laws of 1958, 1961, 1965 and 1973 all require distribution to active members in good standing at the time of dissolution. All versions of the by-laws prior to the arrangement with the Elks in 1970 defined active members as those who are approved for membership by the board of directors and pay the initiation fee. [1] After the Club entered into its arrangement with the Elks in 1970, the by-laws were amended in 1973 to provide for membership as follows: 2.1 CLASSES. Membership in the Club shall consist of and include the following classes: active and inactive. All members shall be holders of Certificates of Membership. 2.2 ACTIVE MEMBERS. Active members are ones who are in `good standing' and who have purchased or are purchasing a Certificate of Membership (Debentures) as of September 18, 1970). 2.3 INACTIVE MEMBERS. Inactive members are ones who have a paid-up Certificate of Membership but are no longer active in the Club as of September 18, 1970. 2.4 TERMINATION OF MEMBERSHIP. The membership of any person may be terminated in either of the following ways: (a) Non-payment of dues and bills. Any member who fails to pay his indebtedness to the Club within sixty (60) days after the same becomes due shall be automatically dropped from membership. (b) For Cause.... (c) Discontinuation of Membership. Any member of the Club wishing to discontinue his membership will submit a letter of resignation to the Board. The 1973 by-laws make clear that, notwithstanding the provision for automatic termination of membership for nonpayment of dues, membership in the Club, active or otherwise, could be continued without payment of dues (as the trial court recognized). These by-laws for the first time refer to certificate holders, which are equated with members. Since none of the earlier by-laws had been amended to refer to the certificates and none had made a distinction between active and inactive members, it is arguable that the 1973 by-laws were simply intended to state the Club members' understanding of their status ever since the certificates were issued. It is also possible that the 1973 by-laws were intended to redefine their status to reflect the fact that some could not be active members of the Elks Club. It is not clear from the trial court's decree whether it viewed the 1973 by-laws as reflecting such an intent. In either case, these by-laws contain an internal contradiction when read with the certificates. Article 2.1 (defining membership) of the 1973 by-laws taken together with the certificate (giving distribution rights to all members) is inconsistent with Article 5.4 of those by-laws which limits distribution of the assets to the active members of the Club in good standing at the time of dissolution. If the latter provision is to control, then the active members are correct in arguing that the 1980 by-laws did not alter in any manner the distribution rights of the members by eliminating the inactive classification. Article 2.1 of the 1980 by-laws states: Membership in the Club shall consist of those active members paying dues as prescribed, in `good standing' and who have purchased, or are purchasing a Certificate of Membership (Debenture) as of September 18, 1970. Article 5.4 of the 1980 by-laws provides that the assets of the Club shall be equally divided among the members of the Club at the time of dissolution. The trial court, in finding that the 1973 by-laws equated active and inactive members, protecting the distribution rights of both, made no mention of the provision in those by-laws specifically allowing distribution only to active members. As a result, the trial court saw the 1980 by-laws as departing from the terms of the 1973 by-laws. If, however, the active members are correct in arguing that both the 1973 and 1980 by-laws restricted distribution to the active members, then the validity of those by-laws depends on how we resolve the ambiguity noted above: whether the certificate provision regarding distribution is to be independent of amendments to the by-laws. Because none of the language discussed above resolves this ambiguity it is necessary to consider the trial court's factual findings. The trial court found that representations were made to the certificate holders, leading them to believe that their claim to the assets on dissolution was indefeasible. The active members argue that the only testimony upon which such a conclusion could be based should have been excluded under the Dead Man's Statute, Code of 1975, § 12-21-163. We find it unnecessary to consider the effect of this statute, because, assuming the testimony in question should have been excluded, the trial court had sufficient evidence upon which it could have based its conclusion. Specifically, the fact that Club members received certificates after retiring from active membership and then completing payment for their certificates, reveals a shared understanding that inactive members were to receive something more than reimbursement for the purchase price of certificates. This evidence is sufficient to resolve the ambiguity discussed above and show that the certificates were intended to create a right in all of the members to receive a pro rata share of the assets. Since such a right existed, the amendments to the by-laws were subject to scrutiny to determine whether they improperly divested the inactive members of their claims. The traditional approach to this problem in the law of corporations is to determine whether such claims are vested rights, in which case they may not be altered. In the context of business corporations, it has been said: The `vested rights' terminology has been attacked as being confusing and meaningless.... The Model [Business Corporation] Act swept away the vested rights doctrine by providing in detail what amendments a corporation can make to its articles.... However, even with the decline of the `vested rights' approach, the courts have not held that a member of a corporation can be deprived, by amendment, of all rights created in the articles or by-laws. No definitive terminology has been developed. The courts and the writers have turned to the more indefinite tests of `fairness', `good faith,' `reasonableness,' and lack of `constructive fraud.' ... . . . For example, in Topkis, Ex'r. v. Delaware Hardware Co., 23 Del.Ch. 125, 2 A.2d 114, 119 (1938), [involving the elimination of voting rights by amending the articles of incorporation] the Court of Chancery upheld the amendment: `   The question in such cases is whether the supposed advantage which the exercise of the power is said to intend to secure, is one that a court of equity would pronounce to be unfair to others who are affected thereby. Where as here the exercise of the power is one that is designed to change voting rights as allowed by the statute and the change is not aimed to accomplish an ulterior purpose beyond itself that can be denominated as inequitable, no ground exists for interference.   ' 23 Del.Ch. at 135, 2 A.2d at 119. Dentel v. Fidelity Savings & Loan Assn., 273 Or. 31, 539 P.2d 649 (1975). It is clear that the trial court did find as a fact that the active members had an ulterior purpose that can be denominated as inequitable. Under the standard applied in the Dentel case, such a finding provides a basis for invalidating the amendments to the by-laws that affect the rights of the certificate holders to receive a pro rata distribution of assets. We recognize that members or shareholders of a corporation are deemed to have constructive notice of the corporate by-laws and amendments to them, especially in a case such as this one where membership certificates specifically referred to by-laws as amended. See Supreme Commandery of the Knights of the Golden Rule v. Ainsworth, 71 Ala. 436 (1882); H. Oleck, supra, at 408; Mobile Press Register, Inc. v. McGowin, 271 Ala. 414, 124 So.2d 812 (1960). It is especially true, however, as noted above, that by-laws are traditionally subject to scrutiny under a standard of protecting vested rights or preventing unfairness. In modern corporation law such scrutiny is quite limited, because courts are reluctant to create doctrines that could interfere with the flexibility needed by commercial corporations to adjust to changing business conditions and needs. However, this reason for limited judicial scrutiny is inapplicable here, because cutting off the claims of the inactive members in no way serves the needs of a non-profit corporation that is going out of existence. Moreover, a distinction can be made between by-laws that are mere regulations governing the conduct of the internal affairs of the corporation, and those in the nature of a contract which are evidently designed to vest property rights inter se among all stockholders. Bechtold v. Coleman Realty Co., 367 Pa. 208, 79 A.2d 661, 663 (1951). A general reservation of the power to amend is more naturally applied to the former class of by-laws and should be narrowly construed to avoid making the contract subject to change in any essential particular at the election of one in whose favor the reservation is made. Ayers v. Grand Lodge A.O.U.W. State of New York, 188 N.Y. 280, 80 N.E. 1020, 1021 (1907). See generally 8 W. Fletcher, Cyclopedia of the Law of Private Corporations, § 4177 at 622-23 (rev. perm. ed. 1982). This reasoning is applicable in the present context.