SR-701-005
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City Council Meeting 9-8-87
Santa Monica, California
STAFF REPORT
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SEP - 8 1987
TO:
Mayor and city Council
FROM:
City Attorney
SUBJECT:
Ordinance Adding Section 4814 and Amending sections
6120 and 6122 of the Municipal Code To Require a
Police Permit and Bond For Health Clubs.
The city council directed the city Attorney to draft an
ordinance requiring health clubs in Santa Monica to obtain a
police permit and a bond as a condition of operation.
After
soliciting input from health clubs operating in Santa Monica and
monitoring the progress of state and federal efforts to regulate
this field, the accompanying ordinance has been prepared and is
presented to the City Council for its consideration.
BACKGROUND
The difficulties consumers face when their health clubs go
out of business is a problem experienced throughout the country
but one that has been especially troublesome in Santa Monica.
During the past several years the Consumer Affairs section of
this office has received complaints from over 1500 consumers
after a series of health club closures.
In the majority of these cases, under-financed health clubs
offered unrealistic bargain rates and eventually went out of
business without warning and without providing refunds.
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Consumers were left with useless contracts and no alternative
health club facilities which would honor their contracts.
In the case of the most recent health club shutdown, the
Beverly Hills Workout, of the 954 requests for claim forms
distributed by this office 612 were requested by Santa Monica
residents. Refunds due consumers who have contacted this office
amount to nearly $70,000.00.
Although state law does regulate health club contracts to a
certain degree, Civil Code sections 1812.80 et seq., meaningful
legislation has been virtually nonexistent to offer protections
once a health club actually closes its doors.
The California
Legislature has pending and for several years has had before it
bills which would effectively deal with the problems associated
with health club closures.
To date, no such legislation to
protect consumers from health club closures has been enacted.
Inaction on the federal level has also hampered efforts for
a consistent and effective enforcement program. After a decade
of hearings and investigation, the Federal Trade Commission
decided that the problem of health club fraud was not of
sufficient significance to warrant regulation on the national
level. The problem of health club fraud is best left to local
regulation, the Federal Trade Commission concluded.
The absence of industry wide regulation has left Small
Claims Court as the primary enforcement tool for injured
consumers. Attempts at recovery through Small Claims Court has
proved a frustra ting and ineffective remedy for consumers who
have the difficult task of tracking down former operators and
then, if they prevail at trial, attempting to identify assets in
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order to execute the judgment. Additionally, since the fees at
issue are relatively small, most consumers opt not to pursue this
remedy.
Although this office has taken an aggressive stance against
unscrupulous operators by filing what has been reported to be the
first in a series of consumer protection lawsuits to obtain
restitution for consumers, such actions utilize a tremendous
amount of resources and recovering refunds against defunct or
bankrupt operations is a cumbersome and difficult task.
Despite this office's initial success in its lawsuit action
against Shirle I s Fitness Center, the subsequent closure of the
Beverly Hills Workout, whose owners have filed for bankruptcy,
and the resulting procedural morass faced by this office in its
attempt to procure refunds, dramatically demonstrates the need
for local effective regulation to address this problem.
The regulatory approach established by the proposed
ordinance requires non-exempt health clubs to post a bond or
provide an alternative source for refunds which would then be
utilized if the health club closes and the operator fails to
provide refunds within 30 days of the closure.
This method
provides an alternative to protracted litigation by establishing
an available fund from which to provide refunds.
In preparing the proposed ordinance, this office solicited
input from existing health clubs in Santa Monica.
One such
operation did provide input resulting in the proposed exemption
to the bond requirement found at Section 4814(e) (5).
This
exemption is provided for applicants with demonstrated consistent
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operation, secure assets and an assurance that contracts will be
honored upon a sale or transfer of ownership.
SECTION BY SECTION ANALYSIS
A section-by-section analysis of the proposed ordinance
follows:
section 4814(a). Purpose. This section states that it is
the purpose of this ordinance to provide an effective and
expedient method for consumers to obtain refunds when their
health club closes.
Section 4814(b) (1).
Definition of "Health Club."
This
section contains a broad definition of health clubs to include
businesses which provide on a membership basis instruction or
facilities for a variety of fitness related activities including
body building, aerobics, exercising, weight reduction and
physical culture.
Included in this definition are businesses
soliciting memberships for clubs which have yet to open. This
provision protects against a common health club fraud where
membership monies are collected in advance and the club never
opens.
Section 4814(b) (2). Definition of "Health Club Contract."
This section defines a health club contract as an agreement in a
form and manner prescribed by California civil Code Sections
1812.80 et seq. between a health club and consumer to provide
health club services.
Section 4814 (b) (3) . Definition of "Health Club Closure."
This section defines a health club closure as the permanent
cessation of operations in the manner and location provided for
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in the health cl ub contract.
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This definition does not not
include temporary closures of two (2) weeks or less or for
closures of a longer duration in order to make repairs or
alterations to existing facilities.
section 4814(b) (4). Definition of lIRefund." This section
defines refund to mean the prorated remaining value of a health
club contract at the time of the health club closure.
Initiation and processing fees are included in the term. "refund"
if the health club closes within two (2) years of the date such
fees were paid.
section 4814 (b) (5) .
Definition of "Bond. II This section
defines the required bond as one being obtained through a company
approved by the City Attorney and in the amount of seventy Five
Thousand Dollars ($75,000.00) or five percent (5%) of the
business' gross revenues from the prior fiscal year, whichever is
greater. The bond shall be in the name of the city and in favor
of health club consumers.
section 4814 (c) .
Police Permit Required.
This section
contains the requirement that all health clubs operating or
proposing to operate in Santa Monica apply for and receive a
police permit prior to such operation or solicitation of
memberships.
section 4814(d). Bond Requirements. Prior to the issuance
of a police permitr the health clubr unless exempted by paragraph
(e), must present to the city Attorney proof of the existence of
a bond policy with the following requirements:
1. The bond is issued by a company approved by the
city Attorney.
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2. The bond is payable to the City in favor of
health club consumers.
3. The bond is in the amount of Seventy Five
Thousand Dollars ($75,000.00) or five percent (5%) of the
applicant's gross for the prior fiscal year, whichever is
greater.
4. The bond is enforceable upon the failure of the
applicant to provide refunds to consumers within 30 days of a
health club closure.
5. The bond provides for payment of administrative
costs to the City of Santa Monica in an amount equal to Ten
Percent (10%) of the total monies refunded to consumers.
Section 4814 (e) .
Bond Exemption.
This section provides
for an exemption from the bond requirement under anyone of the
following circumstances:
1. The applicant is a tax-exempt organization
within the meaning of Section 23701d of the California Revenue
and Taxation Code.
2. The applicant agrees to charge consumers on a
monthly fee basis and will not charge as an initiation fee an
amount greater than the monthly fee.
3 . The appl icant has posted the bond required by
this section for five (5) consecutive years without causing the
forfeiture of the bond.
4. The applicant has been in continuous operation
under the same name and management for a period of five (5) years
prior to the effective date of this ordinance during which time
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it has not operated a health club that has closed without
providing refunds or alternative comparable health club services.
5. The applicant has provided health club services
continuously for a period of three years immediately prior to the
date of the permit application; has assets in excess of One
Million Dollars ($1,000,000.00) and; warrants to the city that as
a condition of any subsequent sale or transfer of ownership of
the health club, the applicant either will provide refunds or
require the successor in interest to honor the terms and
conditions of the applicant's existing health club contracts.
Applicants granted an exemption pursuant to this subsection shall
file for four (4) years thereafter an annual statement certifying
that they continue to maintain assets in excess of One Million
Dollars ($1,000,000.00).
This provision was included at the suggestion of American
Golf Corporation--owner of Santa Monica Athletic Club, which
expressed concern at extending its bond commitments to the extent
it would adversely impact its ability to secure bonds for other
operations.
American Golf Corporation's position is that a
health club operator with significant assets and demonstrated
continuity of operations should be allowed an opportunity to
provide comparable consumer protection without the necessity of a
bond.
6. The applicant establishes a trust account in the
amount of Seventy Five Thousand Dollars ($75,000.00) or five
percent (5%) of its prior year's gross, whichever is greater,
naming the city as trustee and to be used exclusively for the
payment of refunds in the event of a health club closure.
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Bond Enforcement Stayed.
This section
section 4814 (f) .
affords health club opera tors a thirty ( 30) day period once a
health club has closed to provide consumers with refunds prior to
the City enforcing the bond or other secured interest.
section 4814(g). Administration of Refunds. This section
provides for the administration of health club bond monies by the
City Attorney's Office.
The City Attorney is directed to
establish a Health Club Refund Account for receipt of bond or
secured interest funds and to review and determine the
appropriate amount of each refund request. Ten percent (10%) of
the total amount of refunds provided shall be claimed by the City
from such bond or secured interest funds as reimbursement for
reasonable administrative expenses.
section 4814(h). Deadline for Claims. This section sets a
six (6) month deadline for acceptance by the City of claims for
refunds.
Nothing in this section prejudices the right of
consumers to seek alternative civil remedies which may otherwise
be available.
Section 4814(i).
Term of Health Club contract.
This
section limits the term of a health club contract to that period
of time for which the health club has an ownership or leasehold
interest in the physical facility in which health club services
are provided.
Section 48l4(j).
Disclosure Statement.
This section
requires that all health club contracts entered into in the city
of Santa contain the following disclosures statement:
NOTICE TO CONSUMERS:
In the event of a
health club
closure,
you
may
have
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addi tional protections afforded by local
law beyond those prov ided to you under
state law. For more information, contact
the Santa Monica city Attorney I s office,
Consumer Affairs, 1685 Main Street, Santa
Monica, California 90401.
Section 6120. Permits Required. This section is amended
to add health clubs to the list of businesses required to obtain
police permits.
Section 6122. Permit Fees. This Section is amended to add
health clubs to the fee schedule for police permits. The initial
permit fee is set at One Hundred Dollars($100.aO) with the
renewal fee set at Twenty Five Dollars ($25.00).
RECOMMENDATION
It is respectfully recommended that the accompanying
ordinance be introduced for first reading.
PREPARED BY: Robert M. Myers, City Attorney
Jeffrey W. Holtzman, Consumer Affairs Attorney
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