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Acevedo v. Musterfield Place, LLC

Supreme Judicial Court of Massachusetts, Middlesex

June 8, 2018


          Heard: February 8, 2018.

         Civil action commenced in the Superior Court Department on January 26, 2015. A motion for partial summary judgment was heard by Maynard M. Kirpalani, J., and the case was reported by him to the Appeals Court.

         The Supreme Judicial Court granted an application for direct appellate review.

          John Egan (Laura M. Kelly also present) for Musterfield Place, LLC, & another.

          Chester L. Tennyson, Jr., for the plaintiff.

          Present: Gants, C.J., Gaziano, Budd, Cypher, & Kafker, JJ.

          GANTS, C.J.

         On February 22, 2013, the plaintiff, Julio Acevedo, allegedly slipped and fell while descending stairs at his apartment in a public housing development in Framingham known as Musterfield at Concord Place (property), and suffered serious injuries. He filed a complaint in the Superior Court alleging various claims for damages against three defendants: the Framingham Housing Authority (authority); Musterfield Place, LLC, a "controlled affiliate" of the authority, which owns the property (owner);[2] and FHA Musterfield Manager, LLC, the managing agent for the owner (manager). The owner and manager moved for partial summary judgment, seeking a ruling that they should be deemed public employers under the Tort Claims Act (act), G. L. c. 258, § 2, and therefore may not be liable for damages in excess of $100, 000. The judge denied the motion, concluding that the act "clearly defines the scope of a public employer, " and did not include controlled affiliates within that definition. Recognizing that the issue whether controlled affiliates are deemed public employers under the act is a matter with "potentially broad impact throughout the Commonwealth" and that it has not been addressed by any other Massachusetts court, the judge reported his decision to the Appeals Court pursuant to Mass. R. Civ. P. 64 (a), as amended, 423 Mass. 1410 (1996), and stayed the action until the appeal is decided. We conclude that neither a controlled affiliate nor the manager of a controlled affiliate is a "public employer" as defined in the act, and therefore, we affirm the denial of the defendants' motion for partial summary judgment.


         In 2009, the authority determined that the property, a 110-unit public housing development in Framingham then owned by the authority (and previously known as the Pearl Harbor Development), was in need of substantial rehabilitation. Because the estimated costs to rehabilitate the property exceeded the funding available to the authority from the Department of Housing and Community Development (department), the authority sought financing through five sources, one of which was an equity investment by investors seeking to take advantage of low income housing tax credits made available through the Federal Low Income Housing Tax Credit (LIHTC) program.

         The LIHTC program, created by the Tax Reform Act of 1986 and incorporated in the Internal Revenue Code, see 26 U.S.C. § 42 (2012), is a Federal tax subsidy program designed to promote the construction and rehabilitation of rental housing that is affordable to low and moderate income households. Under the LIHTC program as administered in Massachusetts, the Internal Revenue Service allocates Federal tax credits to the department. The department, in turn, allocates those tax credits to "qualified low-income housing projects" -- that is, residential rental properties that are rent-restricted and have a certain minimum share of rental units set aside for low and moderate income households. See 26 U.S.C. § 42(g), (h)(3). See also 760 Code Mass. Regs. § 54.05(1) ("Any person or entity [of whatever type] with an ownership interest in a qualified Massachusetts project is eligible to receive an allocation of Massachusetts standard [tax credits under the LIHTC program] with respect to such project"). Private developers of these projects typically use the tax credits allocated to them through the LIHTC program as an incentive to attract capital from private investors to help pay for the construction, acquisition, and rehabilitation of affordable housing. These developers "sell" the tax credits to private investors, usually through a syndicator, in exchange for an equity investment in the housing project. See J. Khadduri, C. Climaco, & K. Burnett, United States Department of Housing and Urban Development, What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond?, at 2 (2012) .

         Local housing authorities seeking to rehabilitate public housing cannot make direct use of these Federal tax credits because they are exempt from Federal tax liability and, therefore, have no Federal tax liability that they can diminish by receiving Federal tax credits under the LIHTC program. To enable local housing authorities to make use of Federal funding that would otherwise be unavailable to them, the department promulgated regulations permitting them to transfer ownership of a housing project in need of substantial rehabilitation to a "controlled affiliate" of the local housing authority, defined as "[a]n entity with the power to own and manage residential real property of which and over which actual and legal control shall be in [a local housing authority]." See 760 Code Mass. Regs. §§ 4.01, 4.15 (2017). The controlled affiliate that owns the property may claim these tax credits annually over a period of ten years, thereby offsetting the Federal tax liability of its investors, see 26 U.S.C. § 42(a), (f)(1), but must continue to comply with affordability requirements for the low and moderate income renters of the property units for a period of fifteen years to preserve those tax credits. See 26 U.S.C. § 42(c)(2), (i)(1), (j). For any LIHTC project allocated tax credits after 1989, the owner must also agree to comply with the affordability restrictions for an additional fifteen years, known as the extended use period. See 26 U.S.C. § 42(h)(6).

         Here, in order to obtain Federal tax credits pursuant to the LIHTC program, the authority submitted an application to the department to transfer ownership of the property to a controlled affiliate. In the fall of 2009, after the department approved the authority's application, the authority sold the property, pursuant to 760 Code Mass. Regs. § 4.15, to its controlled affiliate, the owner, for $6.5 million. The owner has three members: RSEP Holding, LLC, the "investor, " with a 99.99 per cent ownership interest; the manager, the "managing member, " with a 0.009 per cent ownership interest; and Red Stone Equity Manager, LLC, the "special member, " with a 0.001 per cent ownership interest.[3] The manager is comprised of only one member -- the authority. Therefore, although the authority no longer owns the property, the authority (through the manager) continues to manage it.

         D ...

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