A recurring question comes up on these investment club forums as to what to do about members who have not made regular monthly payments. One factor which adds to the confusion is that the standard partnership agreement for investment clubs does not address the issue of delinquent payments. Most clubs ignore the problem, but some make revisions to their agreement to resolve the issue.

 

One solution has been to assess fines to members whose payments are not 'on time', as described in the agreement. Others go so far as to require members to make up delinquent payments, as well as pay a fine. Other problems arise when a member who is delinquent resigns.

 

The purpose of this document is not to come up with a one, solve-all solution, but to point out the factors involved. Failing to understand these factors has led to many unusual, even bizarre, and unfair amendments to the club agreement.

 

First of all, the failure of a member to make a monthly payment does NOT directly impact the value of the remaining members' positions. When a member makes a payment, his/her value is increased by the amount of that payment, and the other members' positions are unchanged. It is true that the club is much better able to plan if contributions are constant, and larger member contributions allow more or better lot size purchases, but, again, the failure of a member to contribute does not DIRECTLY impact the values of any other member.

 

Clubs that assess fines for delinquent payments do so, by requiring the offending member to pay a 'fee'. This fee increases the value of each member by his/her pro-rata portion of the total assessment. Whether the imposition of this 'fee' promotes prompt payment by the members is a question that each club has to decide. Other clubs will have the treasurer request payment from the member. This requires more work for the treasurer. Other clubs view non-payment of monthly dues as an indication of non-interest in the club, and call for the resignation of a member who misses a certain number of payments (usually three).

 

As stated previously, there is no one, right or wrong way to handle this, but it is very important in coming up with a solution that the members understand exactly what is involved as to the effect of a missed or delinquent payment.

 

Even more problems arise when a member with delinquent payments resigns. Some clubs have amended their agreement to require that member to 'make good' on these payments before receiving compensation for his/her position. This is clearly a case of not understanding the factors involved. Suppose a member announces that he/she wishes to retire. The standard agreement sets the date for determining the value of the withdrawal payment. If the club were to require that the member 'pay up' any delinquent payments as of that date, the member's value would be increased by the amount of the delinquent payment received, so it would be a wash as far as the rest of the club is concerned. Some clubs, again without understanding what is involved, seek to streamline the procedure by deducting the delinquent payments as a withdrawal fee. This is really unfair to the retiring member. If he/she were to pay the delinquent amounts, the resulting pay-out would be increased by that amount. If the delinquent amount is considered a withdrawal fee, the remaining members reap a reward where they were never directly hurt, and the withdrawing member is considerably worse off than if he/she had been allowed to make up the payments. This particular problem of paying withdrawing members who are delinquent has come up many times over the years, and the advice given has always been 'do not charge the delinquent payments as a withdrawal fee'. It just isn't fair.

 

A slightly related problem is when should a retiring member cease making monthly contributions to the club. As I hope is clear from the foregoing, the payments should cease with the retirement announcement.

 

 

 

Rip West
Saint Paul, MN