A federal judge chose to allow a lawsuit filed against the Mamaroneck, N.Y., club to move forward, denying the defendant’s summary judgment motion. The suit, filed in June 2014, alleges the club has had a decades-long deal to lease the real estate from the holding company for a fraction of its value, and the plaintiffs allege they have been misled about the true value of the shares.
A federal judge has refused to dismiss a suit against the Winged Foot Golf Club, alleging fraudulent conduct in its treatment of shareholders of a for-profit holding company that owns the 280-acre Mamaroneck, N.Y., property, the New York Law Journal reported.
The suit asserts the club, operated as a nonprofit since 1921, has not paid fair value to the holding company to lease the two 18-hole golf courses that have hosted the U.S. Open five times. Of the five named defendants, who are prominent club members and the directors of the holding company, three are attorneys, the Journal reported.
Plaintiff Eugene Busher, who inherited his single holding company share from his mother 29 years ago, alleges he and hundreds of the other shareholders were misled about the true value of the shares, in order to induce them to sell them to the club’s governing body, which has sought to gain control of the holding company, the Journal reported.
The Busher family obtained its share when the plaintiff’s father became a lifelong member in 1928. Over the years, Busher alleges, the club, organized as a New York nonprofit corporation, has “planned and executed a fraudulent scheme, in breach of their fiduciary duties, to procure holding company shares from unsuspecting shareholders at fraudulently depressed prices,” the Journal reported.
The suit, filed in June 2014, alleges the club has had a decades-long “sweetheart deal” to lease the real estate from the holding company for a fraction of its value. Since 1947, the club has paid $30,000 per year on a lease that can be extended until 2072, the Journal reported.
Southern District Judge Nelson Román, in a March 28 opinion, denied a summary judgment motion filed by the defendants in Busher v. Barry, 14-cv-4322. Román said Busher had unearthed evidence “sufficient to create a question of material fact as to whether defendants breached their fiduciary duties and were unjustly enriched by actions in 2009-10 and 2013 when the defendants renewed the allegedly wasteful lease, tightened the holding company’s share transfer restrictions, rejected lawful demands to transfer shares, and provided allegedly misleading information to shareholders to fraudulently induce the sale of their stock to the club.”
The defendants, who include Francis Barron, a retired Cravath Swaine & Moore trusts and estates partner and Desmond Barry Jr. a partner at Condon & Forsyth, argued that the holding company had been set up when the club was formed as a means of insulating the club and its members from tort liability stemming from accidents on the club’s grounds, the Journal reported.
The holding company “has never been managed for profit and was not so managed during plaintiff’s father’s decades as a shareholder and club member,” the defendants said in court papers, and in any event, they said, the claim was time-barred. They argued the club’s purpose was always to function as a nonprofit membership organization financed by dues and initiation fees, and its holding company shareholders never expected the shares would appreciate in value, the Journal reported.
“Busher seeks to convert his share into a windfall by challenging terms of the relationship between the holding company and the club that have been in place for nearly a century,” the brief asserts.
Román rejected the claims, saying Busher had presented evidence “to demonstrate a genuine dispute as to the corporation’s original purpose. Fundamentally, the legitimacy of all of plaintiff’s allegations turns on whether or not the holding company is a for-profit or a not-for-profit entity. If it is a nonprofit entity, the actions plaintiff describes—namely the lease extension and share transfer restrictions—would not constitute wrongful activity,” Román said.