Assertions when developers have too much control over the association | Husch Blackwell LLP

The Montana developer of three condominium hotels at Big Sky Ski Resort sold units subject to declarations that “obligated all unit owners to use [Developer]or a designated representative [Developer], as their “exclusive rental agents” when renting out their condos. The statements also provided that “unit owners may opt out of renewal of the lease management agreement [Developer] after three years, but only if 75% of homeowners vote to end the contract [Developer]Of course, the developer also owned all of the commercial units, which accounted for 22% of the voting units, and several residential units, making it virtually impossible for 75% of the unit owners to do anything the developer didn’t want.

The developer also drafted the Rental Management Agreements (“RMAs”). “The RMAs require unit owners to deal [Developer] as your exclusive agent for the purposes of renting, managing and operating the unit. The RMAs require payment from the unit owners [Developer] 50% of the gross rental income “after assumption of costs”. [Developer] charges unit owners for several services under RMAs, including resort fees, credit card processing fees, wholesale and travel agency commissions. [Developer] also controls the central reservation center through which guests of the condominiums make their reservations. [Developer] can use this system to control the prices for each of the units and the order in which the units are booked.”

The plaintiffs, the condominium owners at the three condominium hotels, sued the developer for:

  1. breach of fiduciary duty;
  2. Constructive Fraud;
  3. breach of contract;
  4. breaching any implied promise of good faith and fairness;
  5. Unjustified enrichment;
  6. antitrust claims;
  7. Accounting; and
  8. declaratory claims.

The developer immediately sought to have the claims dismissed.

District Court decision

The district court reviewed each of the claims and ultimately dismissed the accounting claim only because the plaintiffs failed to provide one of the required elements: proof that they had previously requested accounting and that request had been denied. With respect to the seven other lawsuits, the court determined that the facts presented were sufficient to proceed with the lawsuits. Notable was the court’s ruling on the antitrust lawsuits, in which the court found:

“A tying agreement is an agreement by one party to sell a product, but only on condition that the buyer also buys another (or tied) product, or at least agrees that it will not buy that product from another supplier. Binding agreements violate both the Sherman Antitrust Act and Montana law and constitute an unlawful restriction on trade. See 15 USC §§ 1, 2, 14 … A plaintiff must establish three elements in order to prevail in a claim of illegal tying: (1) that there are two distinct products or services in different markets whose sales are related; (2) the seller has significant economic power in the market for tied products sufficient to compel purchase of the tied product; and (3) that the tying agreement affects a “not insignificant volume of trade” in the tied product market. That’s what the plaintiffs claim [Developer] uses ownership of the “tie-in product,” in this case the condominiums, to compel plaintiffs to use it [Developer’s] Rental Management Services – the “Tied Product”. … The essential feature of a void tying agreement is that the seller uses its control over the tying product to force the buyer to purchase a tied product that the buyer either did not want or might have preferred to buy elsewhere in other terms…. The declarations must not compel apartment owners to enter into an RMA if the owner did not wish to do so [to rent] at all,” but they are forcing condo owners who may have been trying to “buy.” [rental management services] elsewhere under different conditions” to reach an agreement [Developer] instead of this. ID. Grant the explanations [Developer] Market power in ‘reduc[ing] Competition in the market for the tied product, in this case rental management services…. The plaintiffs have contended that the 50% of the gross rental income is payable [Developer] under the RMA exceeds the fair market rate for rental companies. Plaintiffs allege that other rental management companies in the Big Sky area provide similar services for a comparable 25% to 30% of gross rental income. The plaintiffs’ allegations allow the court to reach the reasonable conclusion that the plaintiffs could have retained rental management services for half of [Developer’s] Cost if not limited by the explanations. These allegations are proving sufficient to sustain the plaintiffs’ antitrust claims [Developer’s] request for dismissal.”

Additionally, the court did NOT dismiss the plaintiffs’ class action claims, noting that such a decision should be made if class certification is sought.

INSIGHTS GAINED:

  1. If developers really believe that their product is so good that it competes fairly in the marketplace, why would they write provisions in condominium records that prevent open competition? The answer seems to be to gain a competitive advantage.
  2. If you charge more than your competition’s fees (in this case 50% of gross rents after certain expenses have been deducted versus 25-30% charged by competitors) people are generally encouraged to take a close second look and may file a lawsuit.
  3. If you are a member of the board of directors or owner of an apartment in an association where you have little choice over your rental management agent, you should read this decision carefully, possibly reviewing the briefs from this case and determining whether it is worth pursuing with a professional Attorney to talk about the available options.
  4. It should not be overlooked that although the plaintiffs won essentially every aspect of the motions, they would undoubtedly have spent a significant amount of money to achieve the outcome, which may have been one of the defendants’ goals (to free the plaintiffs of their resources to rob). Because the only thing the plaintiffs won was the right to continue their case.

Anderson v. Boyne USA, Inc., Montana District Court Opinion, 2022 WL 2528242, (7/7/2022)

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