HOA Nut House

Trustees' action satisfies business judgment rule

By Eric T. Berkman | Lawyers Weekly

Unit owners in a condominium complex could not bar the condo's board of trustees from levying an assessment for a major renovation project, even where the project is expected to cost $75 million, a Superior Court judge has ruled.

The plaintiff owners argued that the board of trustees breached its fiduciary duty by approving the assessment, adding that promising a discount for owners who paid their assessments early was also illegal.

But Judge Judith Fabricant denied their request for a preliminary injunction, applying the business judgment rule to the defendant trustees' decision and determining that the plaintiffs had little likelihood of success on the merits.

"Under the [business judgment] rule, the trustees' decision cannot be disturbed as long as the board has acted 'within the scope of its authority and in good faith,'" wrote Fabricant, quoting Pederanzi v. Guerriere, a 1995 Superior Court decision. "The record before the [c]ourt establishes that the board has met that test."

The five-page decision is Pompei, et al. v. Fincham, et al., Lawyers Weekly No. 12-391-07.
No second-guessing

Diane R. Rubin of Boston, who represented the defendants, said the decision has broad significance because so many people are now living in condominiums. In addition, she said, there have been many questions about whether actions of a condo board will be upheld.

"The court said clearly in this case that the trustees — the elected governing body — has a fiduciary responsibility, and that as long as it acts reasonably the court will not second-guess its decisions, and that unit owners cannot substitute their judgment for the judgment of the board," Rubin noted.

Plaintiffs' counsel David G. Hanrahan of Boston warned that the ruling — should it ultimately stand — could have serious, negative implications for condominium owners.

"If Massachusetts is going to apply the business judgment rule as a standard, then, for projects with significant costs, condominium owners will be at the mercy of trustees," he said, adding that, in this case, the trustees' decision amounted to assessments equaling approximately 20 percent of the value of the condominiums. "It's a slippery slope toward trustees being able to do just about anything they want, committing people to the payment of enormous sums of money."

Hanrahan also emphasized that there is ample support for the application of the far less rigorous "reasonableness" standard for reviewing the decisions of condo boards, including the Restatement (Third) of Property.

"The Restatement says ... you can't compare a stockholder in a business with an owner of a home," he said. "The decision of a board of trustees in a condominium association is a decision that will affect people's biggest life investment."

He further stressed that the Appeals Court has already applied a reasonableness standard to the rulemaking ability of condo trustees.

"The irony is that when it comes to whether you can have a dog or smoke in a condominium project, the court will allow a lesser standard of review. But when it comes to an issue that can cause a foreclosure on your very home, the standard is apparently a tougher one," he said.
Controversial project

The board of trustees for Harbor Towers — a 600-unit, high-rise condominium complex on Boston's waterfront — determined, based on an engineering report, that the complex's heating and cooling systems needed a major overhaul.

In order to fund the costly project, the board voted to impose an assessment of approximately $75 million on unit owners.

Individual assessments, made in accordance with each unit's percentage of undivided interest, apparently ranged between $70,000 and $400,000.

Each owner was also offered a discount, determined as a percentage of the assessment, for early payment. Like the assessment itself, discounts were proportional to percentage of ownership.

A group of unit owners, who objected to the board's decision to approve the project and the assessment, filed a motion in Superior Court for a preliminary injunction seeking to prevent the board from collecting the assessments.

As a basis for their claim, the owners alleged that the board had breached its fiduciary duty by approving the project and the assessments.

They also maintained that the board breached its fiduciary duty by offering the early-payment discount, which — according to the owners — violated G.L.c. 183, Sect. 6.

The board, on the other hand, argued that it acted in good faith at all times in making its determinations.
Business judgment

Fabricant denied the preliminary injunction on her belief that the owners would be unlikely to prevail on the merits of their claims.

First, she rejected their argument that the discounts violated Chapter 183, Sect. 6.

Massachusetts courts have construed the statute as granting trustees broad discretion to choose reasonable methods of performing their management functions where the law does not expressly prohibit a particular practice, Fabricant observed.

"Nothing before the court suggests that the trustees have abused that discretion in applying the discount policy," said the judge. "To the contrary, the discount is manifestly reasonable and beneficial to the association since it saves the association the cost of borrowing funds from other sources."

Fabricant also rejected the owners' suggestion that she review the board's decision for "reasonableness."

The owners failed to identify any case where a court had applied such a test to condo trustees regarding management of trust assets, she stated, adding that "[r]eview for reasonableness ... would subject every asset management decision made by elected trustees to lengthy and expensive litigation."

Acknowledging that no appellate court in Massachusetts had addressed the issue, Fabricant found that the business judgment rule was the proper standard for reviewing decisions regarding management of condominium assets.

Applying the rule, the judge decided that the board had acted within its authority and in good faith, and, thus, its decision could not be disturbed.

"The elected trustees, all unit owners themselves subject to assessments have conducted an exhaustive process of evaluating the building's maintenance needs ... and have concluded that the project now in progress ... is the approach that will best serve the long-term interests of the trust," said Fabricant.

Meanwhile, the judge noted that the owners had offered no evidence to suggest that the board had acted in bad faith or that it had a conflict of interest.

"It is inevitable that disagreements will arise in the management of a large and aging building with multiple owners," the judge continued. "Unit owners who disagree [with a board] have their remedy in the electoral process, not in court."

Where, as here, the record establishes that the trustees "have done exactly what is required of them," Fabricant concluded, "[t]he court will not intervene."

Eric T. Berkman, formerly a reporter for Massachusetts Lawyers Weekly, is a freelance writer.

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