Minnesota Session Laws - 1987, Regular Session

  

                         Laws of Minnesota 1987 

                        CHAPTER 367-H.F.No. 949 
           An act relating to consumer protection; requiring 
          registration for health, buying, and social referral 
          clubs; providing bonding and alternative security 
          requirements; regulating bond claims; appropriating 
          money; amending Minnesota Statutes 1986, sections 
          325G.23, subdivisions 4, 8, and by adding a 
          subdivision; and 325G.27. 
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
    Section 1.  Minnesota Statutes 1986, section 325G.23, 
subdivision 4, is amended to read:  
    Subd. 4.  "Health club" means any corporation, partnership, 
unincorporated association or other business 
enterprise organized for profit having the primary purpose of 
engaging in offering one or more facilities for instruction, 
training, encouragement or assistance in physical fitness, body 
building, exercising, reducing, figure development or any other 
such activities, or furnishing the use of facilities for such 
activities in return for the payment of a fee entitling the 
member to the use of the facilities.  The term does not include 
any nonprofit organizations, any private club owned and operated 
by its members, or any facility operated by the state or any of 
its political subdivisions. 
    Sec. 2.  Minnesota Statutes 1986, section 325G.23, 
subdivision 8, is amended to read:  
    Subd. 8.  "Prepayment" means any payment over $25 $50 for 
service or merchandise made before the service is rendered or 
the merchandise is received.  It is not a prepayment if a 
payment for service is made on the same day the service is 
rendered.  The term "prepayment" includes, but is not limited 
to, the payment of any service fee, initiation fee, application 
fee, administrative fee, deposit fee, processing fee, enrollment 
fee, maintenance fee, or similar fee no matter how the fee is 
denominated.  It is not a prepayment if a payment for service is 
made on the same day the service is rendered.  Money received by 
a club from a financial institution upon assignment of a 
contract shall be considered prepayment when and to the extent 
the member is required to make prepayments to the financial 
institution pursuant to the contract.  
    Sec. 3.  Minnesota Statutes 1986, section 325G.23, is 
amended by adding a subdivision to read: 
    Subd. 10.  "Outstanding liabilities" means the amount of 
prepayment actually received from club members less the amount 
of the prepayment as prorated over the duration of any contract 
for services rendered by the club. 
    Sec. 4.  Minnesota Statutes 1986, section 325G.27, is 
amended to read:  
    325G.27 [REGISTRATION REQUIREMENTS, SURETY BOND 
REQUIREMENT, ALTERNATIVE SECURITY.] 
    Subdivision 1.  [REGISTRATION REQUIREMENT.] Every buying 
club shall maintain a bond issued by a surety company admitted 
to do business in this state the principal sum of which shall at 
all times be at least as great as the sum of (a) the total 
amount of prepayment received for all contracts of membership 
entered into after May 31, 1974, and (b) the total of all 
deposits being held on merchandise ordered or purchased through 
the club, pursuant to contracts entered into after May 31, 
1974.  (a) Every buying, health, or social referral club doing 
business in this state shall register with the attorney general 
and provide all information requested on forms the attorney 
general provides. The person shall furnish the full name and 
address of each business location where the club's memberships 
are sold as well as any other registration information the 
attorney general considers appropriate. 
    (b) Each registrant under this section shall pay a 
registration fee of $250 at the time of registration.  
    On September 1 of each year following the initial 
registration, each registrant shall pay a renewal fee of $150 to 
the attorney general. 
    (c) The attorney general may bring an action for mandamus 
against a club to require the club to register or to have and 
maintain the surety required by this section. 
    Subd. 2.  [SURETY BOND REQUIREMENT; ALTERNATIVE SECURITY.] 
(a) Every health club or social referral club shall maintain 
a surety bond issued by a surety company admitted to do business 
in this state the principal sum of which shall be at all times 
at least as great as the total amount of prepayment received for 
all contracts of membership entered into after May 31, 1974 in 
an amount not less than the aggregate value of outstanding 
liabilities to members as defined in section 3.  In the case of 
a renewed lifetime contract, the outstanding liabilities shall 
be calculated on a prorated basis for not more than 36 months.  
A copy of the bond shall be filed with the attorney general. 
    Subd. 3. In no event shall any bond required by this 
section be less than $25,000.  
    Subd. 4.  The bond required by this section shall be in 
favor of the state for the benefit of any member who suffers 
loss of prepayment made pursuant to a contract entered into 
after May 31, 1974, due to insolvency of the club or the 
cessation of business by the club.  A copy of the bond shall be 
filed with the attorney general.  Any person claiming against 
the bond may maintain an action at law against the club and the 
surety.  
    Subd. 5.  The aggregate liability of the surety to all 
persons for all breaches of the conditions of the bonds provided 
herein shall in no event exceed the amount of the bond.  
    Subd. 6.  This section does not apply to any club which 
files a declaration, executed under penalty of perjury by the 
owner or manager of such club, with the attorney general stating 
that the club does not require or in the ordinary course of 
business receive prepayment for services or merchandise.  
     (b) No club shall be required to file with the attorney 
general a bond, letter of credit, or cash in excess of $200,000, 
regardless of the number of facilities. 
     (c) The amount of the bond shall be based upon a financial 
statement covering the immediately preceding 12-month period of 
the club, and shall be executed under the penalty of perjury by 
any two duly constituted officers of the corporation, describing 
the club's outstanding liabilities to the members using 
generally accepted accounting principles. 
    The financial statement shall be submitted at the time of 
initial registration and updated at each renewal under 
subdivision 1. 
    (d) If a club's outstanding liabilities to the members 
exceed the amount of the bond, and the club has failed to 
increase the bond, then the club shall immediately stop selling 
club memberships and shall refrain from selling club memberships 
until the requirements of this subdivision have been satisfied. 
    (e) An irrevocable letter of credit in a form acceptable to 
the attorney general, or a cash deposit, may be filed with the 
attorney general instead of a surety bond where evidence is 
presented that a surety bond cannot be obtained. 
     (f) This subdivision does not apply to any club which files 
a declaration with the attorney general, executed under penalty 
of perjury by the owner or manager of such club, stating that 
the club does not require or in the ordinary course of business 
does not receive prepayment for services or merchandise. 
    Subd. 3.  [CLAIMS.] (a) A member of a club who suffers or 
sustains any loss of prepayments of membership fee by reason of 
the closing of a facility or bankruptcy by the seller of the 
club membership agreement shall file a claim with the surety 
and, if the claim is not paid, may bring an action based on the 
bond and recover against the surety.  In the case of a letter of 
credit or cash deposit that has been filed with the attorney 
general, the member may file a claim with the attorney general. 
    (b) Any claim under paragraph (a) shall be filed no later 
than one year from the date on which the facility closed or 
bankruptcy was filed. 
    (c) The attorney general may file a claim with the surety 
on behalf of any member.  The surety shall pay the amount of the 
claims to the attorney general for distribution to claimants 
entitled to restitution and shall be relieved of liability to 
that extent. 
    (d) The liability of the surety under any bond may not 
exceed the aggregate amount of the bond, regardless of the 
number or amount of claims filed. 
    (e) If the claims filed exceeds the amount of the surety 
bond, the surety shall pay the amount of the bond to the 
attorney general for distribution to claimants entitled to 
restitution and shall be relieved of all liability under the 
bond. 
    Subd. 4.  [REGISTRATION AND SURETY BOND FOR PLANNED 
FACILITY OR FACILITY UNDER CONSTRUCTION.] (a) Each club that 
sells club memberships to be offered at a planned facility or a 
facility under construction shall: 
    (1) register under subdivision 1 before conducting sales 
activities; and 
    (2) maintain a surety bond, irrevocable letter of credit, 
or cash deposit filed with the attorney general, in an amount 
not less than $25,000 until the value of obligations to 
consumers exceeds that amount.  
    (b) Until the time a person opens a club facility, the 
amount of the surety shall be increased as necessary to take 
into account increases in the person's outstanding liabilities 
to the members with a final adjustment to be made at the time of 
opening. 
    (c) Upon opening the facility, the person is subject to 
subdivisions 1 to 3. 
    Sec. 5.  [APPROPRIATION.] 
    $36,000 is appropriated from the general fund to the 
attorney general for the purposes of sections 1 to 4.  $18,500 
is for fiscal year 1988 and $17,500 is for fiscal year 1989.  
The approved complement of the attorney general is increased by 
one position. 
    Approved June 2, 1987