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Appeals Court Concludes That Condominium Board Does Not Have the Ability to Dismiss Lawsuit Where Majority of Board Had Conflict of Interest

Condominium developers have long employed creative measures for avoiding liability for deficient construction – whether it’s baking self-serving anti-litigation provisions into the condominium documents or using single-purpose asset-less entities to develop the condominium. One practice that developers have commonly employed – after they have been sued by the association – is to “pack” the condominium board with pro-developer shills. A 2016 Appeals Court decision indicates, however, that courts may not look favorably on a developer’s board-packing scheme.

In Washington West, the condominium association – seeking to recover unpaid condominium fees – advanced claims against the record owners of four separate condominium units. Trustees of the Washington West Condominium Trust v. Ashkouri, 89 Mass. App. Ct. 1102 (2016) (Rule 1:28). One individual – Hisham Ashkouri – essentially owned all four of these units through various realty trusts. After the lawsuit was filed, two additional trustees were appointed to the board of the condominium association. These newly appointed board members were trustees of realty trusts that owned “Ashkouri units.” At a special meeting – after Ashkouri had essentially “packed” the board – the majority of the Board voted to dismiss the lawsuit and thereafter filed a stipulation of dismissal with the Court on behalf of the condominium association. The defendants also filed a motion to dismiss – styled as a “motion in limine to dismiss plaintiff’s claims for lack of standing” – and an “emergency motion for declaratory judgment.”

One practice that developers have commonly employed – after they have been sued by the association – is to “pack” the condominium board with pro-developer shills.

Although a hearing was held on the motion to dismiss, the decision on these motions was not issued until trial. The defendants contended that – because G.L. c. 183A § 10(b)(4) confers standing on the condominium association to conduct litigation – the association lost standing to prosecute the board’s claims once a majority of the trustees voted to dismiss the lawsuit. The trial court judge, rejecting the defendants’ lack-of-standing argument, concluded that “[g]iven their obvious conflict of interest, it is evident that the three trustees cannot satisfy their burden of proving the ‘intrinsic fairness of the vote and the vote did not harm the Trust.” The Appeals Court affirmed the trial court’s ruling – noting that “[i]f the trustees did, in fact, represent units that were in arrears, the trustees were then interested parties, and the court was permitted to strictly enforce the fiduciary rule against self-dealing and hold invalid the vote of the interested trustees.”

It is undoubtedly surprising that a court could rule that a condominium board – despite a majority vote in favor of dismissing a lawsuit – could essentially be compelled to maintain a civil action. While this lawsuit did not involve claims against the developer, the Appeals Court’s decision (although unpublished) provides some authority for challenging the practice of a developer’s board-packing tactics.

Courts have commonly looked unfavorably on developer’s self-serving efforts to shield themselves from liability, or otherwise rely upon legal defenses that would bar recovery in the condominium context. A Superior Court decision – issued by Chief Justice Ralph D. Gants – determined that a provision in the condominium documents, which shielded trustees from liability, did not apply to the declarant-appointed trustee, ruling that it “cannot survive careful judicial scrutiny when the provision is enacted by the developer to protect the officers it selects to manage the Trust from liability.” Harris v. McIntyre, 2000 WL 942559, *10 - *11 (Mass. Super.). The Court found, therefore, that the provision was void as violative of public policy because it so decidedly favored the developer-appointed trustee. The Court also concluded that a developer could not maintain a statute of limitations defense against a condominium trust, which was controlled by the unit owners, when the developer-appointed trustees failed to timely sue the developer. Harris, 2000 WL 942559, *15 (Mass. Super.); see also Beaconsfield Townhouse Condominium Trust v. Zussman, 49 Mass.App.Ct. 757, 761 (2000)(using the date that the condominium trust acquired independent trustees as the starting point for a statute of limitations analysis in a case involving roof problems); Libman v. Zuckerman, 33 Mass.App.Ct. 341, 345 (1992)(accepting master’s finding that the defendants, condominium developers, were estopped from raising the statute of limitations defense, as they had been managers of the condominium unit owners’ association). Superior Court decisions have also ruled that the statute of repose does not bar a condominium board’s breach of fiduciary duty claim against declarant-appointed trustees for the failure to address construction deficiencies. Pederzani v. Guerriere, 1995 WL 1146832, *3 (Mass. Super.). Harris v. McIntyre, 2000 WL 942559, *12 (Mass. Super.). The Supreme Judicial Court ruled that the economic loss rule does not apply to damage caused by negligent design and construction of the common areas of a condominium building – in a case involving a board’s construction defects claims against the developer. Wyman v. Ayer Properties, LLC, 469 Mass. 64 (2014).

Protracted litigation can be trying for any condominium association. Volunteer board members have the unenviable task of having to maintain the morale of the association while expensive litigation seemingly drags on indefinitely. Many unit owners want to give developers, who can be charismatic and charming business people, the benefit of the doubt. Unit owners – successful and sophisticated in their own right – often find it difficult to accept that they have been hoodwinked by an unscrupulous developer. These unit owners need to be reminded that such lawsuits serve to protect their real property investments. Board members have a duty to maintain the common areas of the building, and by seeking to make the responsible parties pay for the deficiencies (i.e., the developer who performed the shoddy construction) – as opposed to the unit owners – the Board is serving its fiduciary obligation to the association.

Pro-developer factions can form during the course of litigation. In many instances, these unit owners are not directly impacted by the subject construction deficiencies, and they do not want to be responsible for funding the lawsuit. These factions are often manipulated by the developer, who contends that the board is being led astray with poor engineering and greedy lawyers. In reality, the volunteer board does not take any pleasure in prosecuting lawsuits, but is simply trying to hold the developer responsible for its deficient construction – rather than saddling the unit owners with a hefty assessment to deliver the well-constructed homes that they believed they were purchasing. Fortunately, the Washington West decision provides an indication that a court will not be inclined to allow a developer to torpedo a meritorious lawsuit with a board-packing scheme.

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Should you have any questions regarding this article, please do not hesitate to contact David Rogers at 781-817-4900 or email drogers@lawmtm.com.

David Rogers