Bureau of Municipal Finance Law
A taxpayer sued a town and a nonprofit conservation organization over a right of first refusal involving classified forest land. The decision is Kunelius v. Town of Stow; the Trust for Public Land et al, 588 F.3d 1 (2009).
Marilyn Kunelius owned a horse farm on Red Acre Road in the Town of Stow. Her farm contained 50.67 acres of which 42.1 acres were classified forest land. By having the land classified under M.G.L. Ch. 61, Kunelius received tax breaks but the town also received certain rights if the forest land was later to be developed. Desiring to sell the property, Kunelius entered into negotiations with Cohousing Resources LLC (Cohousing). An agreement was reached in October 2002. Under the purchase and sale agreement, Cohousing agreed to pay $1.1 million for the farm. It was Cohousing's intent to develop a portion of the land for affordable housing under M.G.L. Ch. 40B. The purchase and sale agreement contained a liquidated damages provision, which meant that if the Buyer defaulted, then the Seller as her remedy could retain the $10,000 deposit plus $1,500 per month up to the time of closing to compensate Seller for lost income from her horse farm business. There was one stumbling block. Since most of the land was classified under M.G.L. Ch. 61, the Town of Stow had a right of first refusal concerning the 42.1 acres of classified forest land.
In accordance with M.G.L. Ch. 61, Marylyn Kunelius notified the town in a letter dated October 16, 2002 of her plan to sell the forest land. Alarmed by the news that the land would be developed, neighbors on Red Acre Road urged town officials to match the offer and protect the land that abutted two conservation areas and was located over the Town's largest aquifer. By statute, the Stow board of selectmen had 120 days after receipt of a notice of intent to exercise the right of first refusal. The selectmen explored using Community Preservation Act (CPA) funds and issuing debt to finance the purchase. The Stow voters, however, rejected a debt exclusion for the purchase, which would have allowed additional local taxes to be raised by exempting any principal and interest payments from the limits of Proposition 2½ .
Under M.G.L. Ch. 61 Sec. 8, the Town had the right to assign its right of first refusal to a nonprofit conservation organization. On February 11, 2003 the Stow selectmen by majority vote assigned the right of first refusal to the Trust for Public Land (Trust), which is a nonprofit conservation corporation. On February 12, 2003 the selectmen sent notice of the assignment and acceptance by the Trust to Marilyn Kunelius. Affidavits to this effect were duly recorded at the Registry of Deeds.
The Trust received guarantees from Stow officials and town meeting that $400,000 in CPA money would be forthcoming to assist in the acquisition. Nevertheless, the Trust was unsuccessful in securing financing for the balance. The Trust was equally unsuccessful in obtaining price concessions from Kunelius who declined to reduce the purchase price. On the deadline date for the closing, which was September 26, 2003, the Trust defaulted and there was no closing. The officers of the Trust, however, believed the Trust would be liable under the terms of the purchase and sale agreement for $19,000 in liquidated damages that would consist of the $10,000 deposit plus $1,500 per month for the six months to the final date of closing.
When Kunelius, after the Trust's default, informed Cohousing that her property was still for sale Cohousing informed her of its decision to develop another site. Upset that she had no buyer, Kunelius filed a lawsuit against the Town of Stow and the Trust in federal district court. Her claim could be brought in federal court since Kunelius had moved to Maine and there was now diversity of citizenship, which meant the federal court had jurisdiction. In her complaint Kunelius alleged she was entitled to specific performance or full benefit of the bargain damages and that the liquidated damages clause in the purchase and sale agreement should be invalidated. Kunelius also brought a consumer protection claim under M.G.L. Ch. 93A. The federal district court entered summary judgment in favor of the Town and the Trust. Kunelius then appealed to the First Circuit Court of Appeals.
The U.S. Court of Appeals also ruled against Kunelius. The Court of Appeals held that, under Massachusetts law, which applied to this action, Kunelius was only entitled to the liquidated damages provided in her purchase and sale agreement with the original Buyer, which was Cohousing. Marilyn Kunelius argued that the liquidated damages provision had been inserted in the agreement because she had established a special relationship with Cohousing and it would be unfair to grant the same concessions to the town and the Trust. The Court of Appeals, however, was not sympathetic since Kunelius essentially had control of the drafting of the purchase and sale agreement and she had simply neglected to include any contractual language to limit her risk in the event the right of first refusal was ever invoked. Furthermore, the Court noted that under common law a right of first refusal ripens into an option to purchase under the terms provided in the offer. The Court observed that prior court decisions on rights of first refusal also have held that the holder of a right of first refusal must meet all the terms of the offer, including provisions such as a clause for liquidated damages. Although the Massachusetts Supreme Judicial Court had never ruled on a liquidated damages clause in a M.G.L. Ch. 61 right of first refusal context, the Court of Appeals believed that the Supreme Judicial Court would likely adopt the same rule in effect in other jurisdictions and thereby make the liquidated damages provision in the agreement applicable to the Town and the Trust.
Having rejected Kunelius' claim for specific performance, the Court of Appeals then turned to her consumer protection claim. Specifically, Kunelius sought damages under the business-to-business provision of the consumer protection law. M.G.L. Ch. 93A Sec. 11 requires a plaintiff alleging unfair or deceptive practices to demonstrate that the transaction was commercial in nature, and that both the plaintiff and the defendant were engaged in trade or commerce. In the case at hand, it could be argued that that the commercial transaction was the sale of the horse farm, which was a business operated by Kunelius. In the Court's view, however, the Trust was not engaged in a trade of business since it was a nonprofit corporation acting in furtherance of its mission of preserving and conserving land. For this reason, the Court of Appeals held that Kunelius could not receive damages under a consumer protection theory.
Although Kunelius was unsuccessful in federal court, she was entitled to the liquidated damages and could seek to sell her land to another willing buyer.