APPEALS COURT CONCLUDES THAT ANTI-LITIGATION PROVISION DOES NOT OFFEND PUBLIC POLICY

Published on: November 28, 2016

The idea that all are equal before the law has been a cornerstone of democratic societies for the last 2,400 years. There are situations, however, where one side appears to have an advantage – for example, a developer whose condominium documents appear to limit the ability of a condominium association to sue.  Even then, however, courts have – perhaps unwittingly – found ways to uphold that basic principle of equality by drawing a distinction between suits between neighbors and actions taken against a developer.

The Appeals Court has found that a provision contained within a condominium’s by-laws – requiring the consent of 80% of the unit owners prior to commencing litigation – “does not offend public policy.”  Bettencourt v. Trustees of the Sassaquin Village Condominium Trust, 90 Mass. App. Ct. 1106 (2016)(Rule 1:28).  These anti-litigation provisions, which are commonly found in condominium documents, can serve as poison pills – meant to discourage condominium boards from bringing lawsuits against the developer.  At first blush, the Appeals Court’s unpublished decision in Bettencourt would appear to be contrary to the Condominium Act and otherwise a departure from case law that has developed in the Commonwealth.  Upon further review, however, the decision appears distinguishable from a prior decision where a decidedly “pro-developer” provision has been found to be void as violative of public policy.

In Bettencourt, certain unit owners filed a complaint against the trustees of the condominium trust for breach of fiduciary duty based upon the trustees’ general mismanagement of the condominium.  The trustees moved to dismiss the unit owners’ complaint on the ground that the owners lacked standing to bring derivative claims on behalf of the condominium because they did not obtain approval for the lawsuit from eighty percent of the unit owners – as the by-laws of the condominium required.  According to the Appellant’s Brief, the “consent requirement” provided, in pertinent part, as follows:

…Notwithstanding any provision of the Master Deed, or the Declaration of Trust of the Condominium Trust, or of these Bylaws or the Rules and Regulations to the contrary, neither the Trustee(s) acting in their capacity as Trustee(s) or acting as representatives of the Unit Owners, nor any class of Unit Owners shall bring any litigation whatsoever unless a copy of the proposed complaint in such litigation has been delivered to all of the Unit Owners, and not less than eighty percent (80%) of all Unit Owners consent in writing to the bringing of such litigation within sixty (60) days after a copy of such complaint has been delivered to the Unit Owners and specifying in as part of the written consent a specific monetary limitation to be paid as legal fees and costs and expenses to be incurred in connection therewith, which amount shall be separately assessed as a special assessment effective forthwith of said affirmative consent.

The unit owners did not dispute the fact that they did not obtain consent from eighty percent of the unit owners to bring their lawsuit.  They contended that they were entitled to bring the lawsuit because the consent requirement was unconscionable and void as against public policy.  The Appeals Court upheld the Superior Court judge’s conclusion that the “consent requirement” mandated dismissal of the unit owners’ derivative claims.

The “consent requirement” at issue in Bettencourt is a common provision inserted in to condominium documents by developers.  It is an anti-litigation provision, which effectively serves as a poison pill to discourage condominium boards from suing the developer.  Accordingly, any appellate decision that validates such a poison pill provision would appear to be a significant impediment to any board’s efforts to litigate against a developer for issues like construction defects.

While this unpublished decision is unfortunate, it is distinguishable from a scenario where a board advances claims against a developer.  In Bettencourt, the trustees, who each owned and resided in units at the condominium, were elected by a majority of the unit owners to serve on the condominium board.  The Appeals Court noted that “because the consent requirement applies to all unit owners, including the trustees, it is not ‘one-sided’ as the plaintiffs claim.”  In essence, it appears that the Court determined that the “consent requirement” did not “offend public policy” because the unit owners and the trustees (who were also unit owners) stood on equal footing with respect to the impact of the provision.

The Appeals Court’s reasoning jibes with that of (now Chief) Justice Ralph D. Gants in a Superior Court decision called Harris v. McIntyre, 2000 WL 942559, *10 – *11 (Mass. Super.).  In that case, a developer-appointed trustee sought to shield himself from claims advanced by the condominium’s elected trustees, in a construction defect case, based upon a provision in the declaration of trust that limited the liability of the trustees.  The Court noted that the provision at issue in that case might pass muster if it served to protect elected unit owners.  The Court found, however, that such provisions “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.”  He found, therefore, that the provision was void as violative of public policy because it so decidedly favored the developer-appointed trustee.

A compelling argument can similarly be made that a poison pill provision – insofar as it relates to claims against the developer – should be void as violative of public policy, as such provisions are enacted by the developer as a deterrent to discourage lawsuits against the developer, and to give the developer advance warning of any potential lawsuit.  Indeed, such anti-litigation provisions appear to violate both the Condominium Act and provisions that are found in most condominium documents.

Specifically, G.L. c. 183A §10(b)(4) provides that a condominium board “shall have, among its other powers, the following rights and powers . . . To conduct litigation and to be subject to suit as to any course of action involving the common areas and facilities or arising out of the enforcement of the by-laws, administrative rules or restrictions in the master deed.”  See Strauss v. Oyster River Condominium Trust, 417 Mass. 442 (1994).  Additionally, most condominium documents include terms providing that – in the event of a conflict between the condominium documents and Chapter 183A – the provisions of the Chapter 183A shall control.

Poison pill provisions, such as the one at issue in Bettencourt, directly conflict with G.L. c. 183A §10(b)(4) because they take away from a condominium board the exclusive power of conducting litigation concerning the common areas of the Condominium.  In other words, such a provision would allow 21% of the unit owners to veto any proposed litigation concerning the condominium’s common areas, and further subject any such proposed litigation to additional restrictions imposed by individual unit owners.

It can also be argued that these poison pill provisions – which require a condominium board to provide (i) a copy of its proposed complaint, and (ii) a not-to-exceed litigation budget, to its litigation adversary (i.e., the developer) – are overreaching, as a matter of law, they require and force disclosure of attorney-client communications and attorney work product.

A condominium board, which is contemplating a lawsuit against the developer and is faced with the impediment of a poison pill provision, should consider the following tactics:

  • A Declaratory Judgment Action: A claim, seeking declaratory relief under G.L. c. 231A, should be advanced in the underlying lawsuit to have the court find that the poison pill provision is null and void.  The claim should be based on the reasoning discussed above (e.g., the provision violates public policy and conflicts with both the Condominium Act and the condominium documents).
  • Amending the Condominium Documents: The board should seek to amend the condominium documents to have the poison pill provision deleted or replaced with revised language.  See Board of Trustees of the Old Stone Bridge Acres Condominium Trust v. Longview Realty Trust, 23 Mass. L. Rptr. 449 (Mass. Super. 2008).

In sum, while the unpublished Bettencourt decision certainly lends credence to the notion that anti-litigation provisions commonly found in condominium documents are enforceable – the decision remains distinguishable from cases involving a board’s claims against a developer.  Indeed, there have been no reported Appellate Court decisions in the Commonwealth of Massachusetts holding that these poison pill provisions can serve to shield developers from liability.  It stands to reason that judges – much like Chief Justice Gants in Harris – will view these anti-litigation provisions, at least insofar as they are invoked by developers, as an affront to public policy.

For a copy of the decision please [click here].