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The State of California - State and Consumer Services Agency
LEGAL AFFAIRS
400 R Street, Suite 3090
Sacramento, CA 95814-6200
Legal Guide W-9
WHEN YOUR HEALTH CLUB CLOSES
March 1994
This fact sheet explains the legal remedies which
are available to you if your health club closes or changes
ownership before the end of your health club services contract.
"My Health Club Closed ... What Can I Do Now?"
If your health club closes, first consider the possibility that
the owner may be attempting in good faith to find a buyer for the
club who will honor the owner's contracts with the club's
patrons. Try to contact the owner of the health club or the owner
of the building to determine the current status of the health
club.
The owner of your health club may also own another facility
nearby, and may invite you to transfer your membership to the
other facility. If the location of the alternative facility is
convenient to you and it offers equipment and services that are
comparable to those provided at the facility that has closed, it
may be in your best interest to accept the alternative. In fact,
if the two facilities are comparable, you may have a legal
obligation to accept the alternative. #1
Sometimes, a competitor of a closed health club will allow the
patrons of the closed club to transfer their memberships to a
competitor's club, which may want the new patrons and the future
income that will be received when the transferred patrons renew
their contracts. If the alternative is reasonably comparable in
location and offers adequate equipment and services, it may be in
your best interest to accept the alternative. However, you
ordinarily will be under no legal obligation to do so. If you
accept, you probably will lose your right to recover money
damages from the club that closed (since you will have suffered
no economic loss).
If your health club closes and does not offer comparable services
at a location that is of about equal convenience to you, this
ordinarily will amount to a breach of the health club's contract
with you. This means that you ordinarily will have the right to
terminate the contract, to stop making payments, and to recover
money damages for the services for which you made payment but
which you did not receive.
How to Stop Payment Properly.
In this situation, you should decide if you wish
to terminate, and then communicate your decision
to the health club. A simple letter will suffice, but be sure to
keep a copy of the letter. It always is best to send the letter
by certified mail and request a return receipt.
In your letter to the health club, in which you announce your
decision to terminate your contract, you should state that you
are terminating the contract, and you should state why you are
doing so. If the contract requires you to make monthly payments,
your letter also should state your decision to stop making
payments.
If you have been making your payments to a financing agency, you
probably have the same right to stop making payments to the
financing agency. Therefore, if your contract with the health
club was assigned to a bank or other financing agency, your
letter expressing your decision to terminate your contract should
be sent to both the health club and the financing agency. Be sure
that your letter also informs both of them that you are
withholding future payments because the health club has closed.
If your monthly payments are made to the health club or financing
agency by a preauthorized electronic funds transfer from your
bank, you should also notify your bank that you want the payments
stopped. You have the right to stop payment of a preauthorized
electronic funds transfer by notifying your bank orally or in
writing at least three days before the scheduled date of the
funds transfer. #2 If your notification to the bank to stop the
funds transfer is oral, the bank may require you to provide
written confirmation of your request within fourteen days of the
date of your oral request but it must inform you of that
requirement and where to send your notice at the time of your
oral notice. If the bank informs you that it requires written
conformation of your oral notice, your oral notice becomes
ineffective 14 days after it was given, and the financial
institution could resume making the electronic funds transfers
from your account.
If you have paid anything in advance--either the full amount for
an agreed period or a downpayment or membership fee--your letter
to the health club also should include any request for a refund.
For instance:
- If you have paid $300 for three years of
services and the club closes after the first year, you
can claim as your refund 2/3 of $300, or $200 for the
services that you didn't receive.
- If you paid $100 as a downpayment fee on
a three-year contract, and you also promised to pay the
health club an additional $20 per month, the total cost
of your three-year contract will be the $100 downpayment
plus $480 in monthly payments for a total of $580 If the
club closes at the end of the second year, you can claim
as your refund 1/3 of $580 or $193.
- If your contract just called for
installment payments of $25 per month during the entire
three-year period, or if your payments were on a
month-to-month basis and your contract was cancelable by
you at your choosing without cause, you could stop
payments, but you probably wouldn't be entitled to any
refund.
- If you also paid a membership or
initiation fee, your right to receive a refund of the
membership fee may depend upon your agreement with the
health club. Some health clubs declare that the
membership fee is refundable if the consumer terminates
the relationship, while other clubs declare that the
membership fee is forfeited if the consumer terminates
the relationship. If your agreement entitles you to a
refund of the membership fee when you terminate your
relationship with the health club, you certainly should
have the right to recover the membership fee if the club
should close. In other situations, your right to recover
the membership fee is legally unclear. However,
particularly where the health club opened only recently,
or where the health club services contract was for a term
of several months or years rather than month-to-month,
the courts probably would award you a refund because of
the health club's breach of the contract.
"What If the Health Club Is Sold to
a New Owner?"
If your health club does not close but is sold to
new owner, and the new owner refuses to honor your contract, you
also have a claim against the original owner for breach of
contract. You can enforce this claim, if necessary, by suing in
small claims court. If you sue the original owner, be sure to sue
the owner by using the owner's current legal name. If these are
multiple owners, include all of the owners by their current legal
names.
Often, however, you may not be able to locate the previous owner,
or he or she may be insolvent (may have no money or assets to
repay you). You probably can file a suit in small claims court
(if the amount involved is $5,000 or less), but if you cannot
locate the previous owner, you will not be able to effect service
of the summons and complaint on that person (that is, notify that
person of your suit). And, even if you succeed in serving the
owner with your complaint, if the previous owner is insolvent,
then, even if you get a judgment against him or her, it may be
difficult or impossible for you to collect.
If the owner of your health club files bankruptcy, you can file a
claim with the bankruptcy court. If assets are available to pay
general creditors, you may receive a partial refund of the
payments you made for services not rendered. You may obtain a
proof of claim form from the bankruptcy court clerk's office.
However, most bankruptcies do not result in payments to unsecured
creditors like you.
If your health club closes and the new club that opens on the
same premises refuses to honor the terms of your contract with
the previous health club owner, you may need to obtain more
information about the business transfer to determine your rights.
If the new owner did not purchase the health club from the
previous owner, but merely made arrangements to assume the leases
of the premises and equipment, the new owner is not required to
honor the contract you had with the previous owner. Your only
recourse in this case would be to try to persuade the previous
owner to reimburse you, or sue him or her for breach of contract.
If the new owner has purchased the club from the
previous owner, it is possible that the new owner may be legally
required to honor your contract with the previous owner. Since
there is no law directly governing this situation, you probably
will need an attorney to advise you. You also may need an
attorney to gather the evidence that is needed to prove your
claim, and to present the evidence and your arguments at trial.
- Legal Theories -
There are two legal theories under which you could claim that the
new owner must honor your contract with the previous owner. The
first is called the "fraudulent conveyance" theory. The
second theory, called the "mere continuation" theory,
is discussed later in this fact sheet.
- Fraudulent Conveyance Theory -
A possible legal argument for imposing liability for performance
and breach of the contract on the purchaser of a health club is
the "fraudulent conveyance" theory. A fraudulent
conveyance may be proved by showing either of two sets of
requirements.
The first type of fraudulent conveyance requires proof that the
previous owner sold the business with actual intent to hinder,
delay or defraud his or her creditors, and that the new owner was
aware of this fraudulent intent. #3 The previous
owner's creditors would include patrons who had signed long-term
contracts and paid money in advance for services they never
received. #4 The intent to defraud may be proved
by circumstantial evidence, but the circumstances must be very
convincing. Where the circumstances could prove either fraud or a
good faith purchase, the court will not find fraud. However,
insolvency of the previous owner is strong evidence of fraud.
An example of this type of fraudulent conveyance would be a
situation in which the previous owner is insolvent and the buyer
of the club is aware of this insolvency. The contract of sale
specifies that the buyer is purchasing the club's assets but does
not assume any of its liabilities. The buyer of the club knows
that the seller intends to take the money he or she receives from
the sale and to move out of state without paying any of his or
her creditors. Under these circumstances, a court may find that
there was a fraudulent conveyance.
The second type of fraudulent conveyance requires proof that the
previous owner either was insolvent when he or she sold the
business or was rendered insolvent by the sale, and
the buyer of the club did not pay "fair consideration"
for the business. #5 Generally, a person is
insolvent when the fair value of his or her salable assets is
less than the amount needed to pay the liabilities as they become
due. #6 Fair consideration generally is measured
by the fair market value of the assets. #7
An example of this type of fraudulent conveyance would be a
situation in which the previous owner was very nearly insolvent.
One of his or her creditors agrees to take over ownership of the
club in payment of the debt owed to that creditor, the amount of
which is far less than the fair market value of the club. In this
situation, a court may find that there was a fraudulent
conveyance.
If you are able to prove a fraudulent conveyance, the remedies
include:
- Restraining the new owner from disposing
of the assets of the business;
- Appointing a receiver to take charge of
the assets;
- Setting aside the conveyance to the
extent necessary to pay your claim; and
- Levying execution on the property. #8
As you can see, even if you were to win on a
fraudulent conveyance theory, it might be difficult actually to
get your money back. Also, the complexity of either of the legal
theories discussed in this fact sheet may make it difficult for
you to bring a suit against the buyer of the health club in small
claims court. Even though the amount of your claim might be
within the jurisdictional limit of small claims court ($5,000 or
less), you will need help from an attorney. If you decide to file
an action in small claims court, you may want to give this fact
sheet, and the accompanying list of legal sources to the judge.
An alternative to filing an individual suit would be to form a
coalition with other health club patrons and file a joint claim.
The group of health club patrons could pool their resources to
hire an attorney who would represent the entire group. This would
make the cost of any suit more affordable for the individual
health club patrons.
- Mere Continuation Theory -
The "mere continuation" theory, to date, has been
applied only in cases involving strict products liability (that
is, cases where a new owner-manufacturer is held liable for
injuries caused by an inherently defective product that was
manufactured by the previous owner-manufacturer). These cases
hold that the new owner of a business is strictly liable for
injuries caused by a product that was manufactured by the
previous owner when the new business was a "mere
continuation" of the old business.
Application of this reasoning in the health club contract would
require the new owner of a health club to honor membership
contracts into which the previous owner entered.
While it seems to be a valid extension of the mere continuation
theory to suggest its application in a suit against the buyer of
a health club seeking to require the club's new owner to honor
the previous owner's membership contracts, there is no reported
case indicating that it has been applied successfully in this
context. #9
To establish the new health club owner's liability to honor the
previous owner's membership contracts under the "mere
continuation" theory, you would have to prove the following:
- The virtual loss of a remedy against the
previous owner resulting from the new owner's purchase of
the business;
- The new owner's ability to assess the
risk and spread the cost among all customers; and
- The fairness of requiring the new owner
to assume the responsibility as a burden attached to the
purchase of the good will of the business. #10
Factors that a court may consider in determining
if these requirements are met include the new owner's acquisition
of the previous owner's trade name, good will and customer list,
and the new owner's continuing the same type of business and
holding itself out as being the same enterprise.
The following example may help explain the mere continuation
theory. The owner of a health club contracts with a buyer to
purchase the entire club. The buyer of the club is aware that the
seller has outstanding contracts for services with the club's
patrons, and realizes that either the buyer will be required to
honor the contracts or the previous owner will be required to
reimburse the patrons for their investment. The buyer purchases
all of the assets of the health club including the trade name,
good will and health club membership list. The buyer pays a fair
consideration for the health club. The buyer continues the
business as a health club in the same location, using the same
business name, logo, etc. In this situation, a court might
determine that it is fair to make the buyer of the health club
liable for the contracts between the previous owner and the
club's patrons, reasoning that the new health club was a mere
continuation of the previous health club.
For your information, the Department of Consumer Affairs has the
following publication on health clubs and spas.
- Overview of California's Health Services Contract Law.
NOTICE: We attempt to make our
legal guides accurate as of the date listed. However, because the
law and procedures are constantly changing and are subject to
differing interpretations, these papers are only guidelines.
Questions on how the law applies to a specific case should be
directed to a lawyer.
Prepared by:
Richard A. Elbrecht
Supervising Attorney
John C. Lamb
Senior Staff Counsel
Virginia J. Taylor
Staff Counsel
Endnotes
1. Civil Code section 1812.89(b)
2. 12 Code of Federal Regulation section 205.10(c)
3. Civil Code, sec. 3439.04(a)
4. Civil Code, sec. 3439.01
5. Civil Code, sec. 3439.04(b)
6. Civil Code, sections 3439.02(a) and 3439.04(b).
7. Civil Code, sections 3439.03, 3439.04(b), and 3439.08(a).
8. Civil Code, sections 3439.07 and 3739.08
9. See e.g., Oliver Machinery Co. v. U.S.
Fidelity Guaranty Co. (1986) 187 Cal.App.3d 1510,
1517-1518 [232 Cal.Rptr. 691, 695].
10. Ray v. Alad (1977) 19
Cal.3d 22 [136 Cal.Rptr. 547]
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