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Lewes Investment Co., LLC v. Estate of Graves

Court of Chancery of Delaware

September 24, 2012

Lewes Investment Company, LLC, a Delaware limited liability company, Plaintiff,
v.
The Estate of Frances B. Graves, The Frances B Graves Revocable Trust dated June 14, 2002 William D. Graves, an individual, Ann Bar Stubbs, an individual, Mahlon H. Graves, Jr., an individual, and Dean M. Graves, an individual, Defendants.

Submitted: December 1, 2011

Draft Report; March 22, 2012

MASTER'S REPORT

Pending before me is a complaint for recission of a real estate contract based on allegations of false representation, breach of contract, and breach of the covenants of good faith and fair dealing. A two-day trial was held in August 2011, during which an oral motion to dismiss the complaint for lack of subject matter jurisdiction was made.[1] A draft report was issued following post-trial briefing, in which I recommended that the motion to dismiss be denied, and judgment on the merits be found in favor of Plaintiff Lewes Investment Company, L.L.C. ("Lewes Investment"). Exceptions were taken to my draft report. Defendant's arguments are the same as have been posed to this Court in several previous rounds of briefing. I believe that I have adequately addressed these arguments in my draft report and, therefore, 1 am adopting my draft report as my final report without further modification.

I. FACTUAL BACKGROUND

Lewes Investment is the successor in interest to Ivy Partners III, L.L.C. ('ivy Partners"), a Delaware limited liability company that entered into an agreement to purchase two parcels of land from the Estate of Frances B. Graves, the Frances B. Graves Revocable Trust dated June 14, 2002, William D. Graves, Ann Barr Stubbs, Mahlon H. Graves, Jr. and Dean M. Graves (collectively, the "Defendants" or the "Graves Family"). Tax parcel number 3-34 5.00 176.00 ("Parcel 176") and tax parcel number 3-34 5.00 177.00 ("Parcel 177") contain a total of approximately 88.4 acres of land located in Sussex County, Delaware, and are known as the Graves Farm. The Graves Farm is located west of the Five Points intersection at U.S. Route I and State Route 9 in Lewes, Delaware. The panics entered in an agreement of sale of the Graves Farm on or about July 26, 2004.[2]

The agreement of sale ("Agreement") was drafted by Defendants' attorney, George B. Smith, who also solicited interested parties to bid on the Graves Farm. Defendants accepted Ivy Partners' offer to purchase the Graves Farm for $13 million and. upon execution of the Agreement, Ivy Partners furnished an initial deposit of $10, 000. Pursuant to the Agreement, Ivy Partners had five days after the effective date of the Agreement to order a title insurance commitment. Ivy Partners then had five days following its receipt of the commitment to send Defendants a list of all title objections and exceptions disclosed in the commitment that interfered with the proposed development and were not acceptable, i.e., title defects. Defendants thereafter had ten days to notify Ivy Partners of their unwillingness or inability to deliver good and marketable title, at which point Ivy Partners had the option to terminate the Agreement and have its deposit returned with interest. Defendants' failure to notify Ivy Partners of their inability or unwillingness to deliver good and marketable title within the ten-day period constituted Defendants' agreement to deliver good and marketable title at the closing "subject only to the Permitted Encumbrances."[3]

The Agreement also called for an additional deposit to be paid after the expiration of a 90-day feasibility period which, together with the initial deposit, equaled five percent of the purchase price.[4] Closing was to occur within 18 months of the effective date of the Agreement; however. Ivy Partners had the option to extend the closing date for up to an additional six months by paying Defendants a nonrefundable fee of $25, 000 for each month during the extension period, which fees were in addition to the purchase price of $13 million.

On August 23, 2004, Ivy Partners' attorney, James Fuqua, timely notified Smith that a title search had revealed the Graves Family only owned a 7/8th tenancy-in-common interest in Parcel 176, which contained approximately 3.32 acres of land along Route 9, and that the remaining 1/8th tenancy-in-common interest was owned by third parties.[5] Defendants did not respond to Ivy Partners within the ten-day period or at any time thereafter that they were unwilling or unable to deliver good and marketable title at closing. On October 22, 2004, Ivy Partners assigned a!! of its rights, title and interest in the Agreement to Lewes Investment.[6] On October 24, 2004. Lewes Investment made the required additional deposit of $640, 0007.[7] On October 21, 2005, Lewes Investment exercised its right to a six-month extension of the closing pursuant to paragraph 3(a) of the Agreement, and paid at total of $150, 000 to secure a six-month extension of the closing to July 26, 2006.[8] On June 29, 2006, Richard Stout, one of the three members of Lewes Investment, held a meeting with Smith and the Graves Family to request an extension of the July 26 closing date.[9] Stout needed more time to obtain preliminary approval of the development project, and preferred closing on the deal after he had worked out several issues with Sussex County and various State agencies. The Graves Family offered Lewes Investment a 12-month extension contingent upon payment of additional monthly fees.[10] At the end of this meeting. Stout learned that the attorney for the Graves Family had yet to lake any steps to cure the title defect.[11]

By letter dated July 25, 2006, Lewes Investment's Virginia-based attorney, Wayne G. Tatusko, notified Smith of his client's concern that the Graves Family would be unable to close on July 26, 2006:

Closing of the purchase and sale of the Property under the Agreement was to have been held no later than July 26, 2006. Purchaser could not in good faith continue with its closing preparations as Purchaser became aware that Seller still did not have good and marketable title to the Property. It is Purchaser's assumption that, because time is not of the essence for the closing of the purchase and sale of the Property, Seller may be entitled to a reasonable adjournment of the closing date in order to cure this title defect. It is our understanding that no steps have been taken up until this time to begin to effect any cure. If Seller is entitled to such an adjournment of the closing date, such adjournment would in no event exceed thirty (30) days.
Purchaser continues to desire to purchase the Property on an acceptable basis. Purchaser cannot, however, continue to expend the significant money, time and energy necessary to perfect its plans for the development of the Property and to prepare for the closing of the purchase of the Property while Purchaser is aware that a significant title defect exists that may not be cured or curable. Seller has had almost two years to cure this title defect. Seller's failure to cure the title defect in that extended period of time makes it reasonable for the Purchaser to assume that Seller will not have cured the title within the next thirty (30) days.
Section 2 of the Agreement provides that Purchaser will be entitled to the return of its deposit if Seller is unable to deliver good title. In addition. Section 14 of the Agreement provides that if Seller fails to perform the terms and conditions of the Agreement Seller will reimburse Purchaser for all Purchaser's out-of-pocket expenses. That Section further provides that Purchaser shall have any and all remedies available to it in equity and in law. Accordingly, Purchaser would be entitled to the return of all monies paid to Seller by Purchaser as deposits and extension fees, together with the substantial costs and expenses incurred by Purchaser in good faith over the past two years. These amounts would exceed $1, 000, 000.
In lieu of exercising its remedies under the Agreement, Purchaser would prefer to negotiate a mutually acceptable extension of the Agreement. We trust that Seller can appreciate that Purchaser cannot prudently incur additional expenses in its development efforts in the absence of complete assurance that the defect in title has been cured. In the absence of a mutually acceptable extension, Purchaser is left with no alternative but to exercise the remedies under Section 14 of the Agreement.[12]
Rather than respond directly to Tatusko, Smith sent Fuqua a letter dated July 31, 2006, in which Smith stated:
I must remark that you and I spoke prior to July 26, and you agreed to prepare an agreement that would "toll" the closing date and address open issues. I never received anything from you. I subsequently called Karen to discuss the title issue on the 3/8 of the 3.32 acres, left a message and never received a call back. When I called her today, she said she gave that message to you because you had the file. I had finished my review of our searches and was ready to attempt to resolve the open title issue..... To move this along, can we meet sometime this week in person to match what you have with what I have and, hopefully, agree on how to resolve the title issue. Although there are lots of reasons why your client cannot or will not proceed to closing at this time, it appears that the only "seller problem" is the Carpenter title issue. Assuming it can be resolved quickly, my clients will expect either a speedy closing or an extension along the lines of what was offered to Rick Stout on June 29, 2006.[13]

Tatusko subsequently sent a second letter to Smith, which was dated August 28, 2006, and slated in part:

As noted in our previous letter to you, Seller may have been entitled to a reasonable adjournment of the closing date. If Sellers were entitled to such an adjournment, that time has now expired. Accordingly, Purchaser is entitled to a full restitution under the Agreement..... In light of Seller's failure to meet the requirements of the Agreement, Purchaser must put on hold its efforts to obtain the entitlements necessary for the development of the Property. Purchaser cannot continue its negotiations with the relevant governmental agencies nor resume any expenditure of additional sums of money unless it can agree with Sellers on a mutually acceptable course of action for the purchase and development of the property.[14]

Stout and Neal Teague, another member of Lewes Investment, met with Smith and the Graves Family on September 19, 2006, to get a progress report on their efforts to cure the title defect and to discuss a possible extension of the Agreement.[15] On September 26, 2006, Smith sent a memorandum to Stout by e-mail attachment, in which he outlined a proposed extension agreement starting September 19, 2006, for three years or 30 days after final site plan approval, whichever was earlier.[16] The e-mail stated: "Rick - Here is a very simple memo that hits the high points. If you and Neal agree, you will then need to flesh it out in an agreement. At that time, I have more extensive language but it can wait for your acquiescence to these major points."[17] There is no evidence in the record that Lewes Investment ever responded to the terms outlined in Smith's memorandum. In a letter dated February 12, 2007, Smith informed Fuqua that the 1/8th interest in the 3.32 acres formerly owned by the Carpenter family had been deeded over to the Graves Family.[18] In a letter to Stout dated April 2, 2007, the Graves Family through new counsel asserted that Lewes Investment had breached the contract by failing to settle and purchase the property in July 2006. The Graves Family offered Lewes Investment a 30-day extension to bring the contract to settlement or else they would declare the contract in default and retain the deposits.[19] This litigation followed.

II. Procedural Background

Plaintiff filed its complaint against Defendants on April 12, 2007. Defendants filed an answer and counterclaim on May 25, 2007, and Plaintiff replied to the counterclaim on June 14, 2007.[20] After some discovery was conducted, on December 1, 2008, Defendants filed a Motion to Dismiss pursuant to Chancery Court Rule 41(e) for lack of prosecution.[21] I issued an oral bench draft report denying the motion on January 21, 2009. No exceptions were taken, and a final order was issued by the Court on February 23, 2009.[22]

After further discovery, Plaintiff filed a Motion for Summary Judgment on November 11, 2009.[23] Following briefing and oral argument, on March 4, 2010, I issued an oral bench report concluding that Defendants had materially breached the Agreement by failing to have good and marketable title to Parcel 176.[24] 1 therefore recommended that summary judgment be granted in favor the Plaintiff. Defendants took exception to my draft report. Following briefing on the exceptions, I withdrew my draft report in order that a trial might be held on the issues of materiality of the breach and whether lime was of the essence as to the closing date.[25] A two-day trial took place in August 2011. After Plaintiff rested its case, Defendants moved to dismiss the complaint for lack of subject matter jurisdiction. Plaintiff then moved for leave to amend its complaint to conform to the proof and seek specific performance. Both parties objected to each other's motion. I reserved decision on the merits and motions, and ordered post-trial briefing.

III. Motion to Dismiss

Defendants have moved to dismiss the complaint for lack of subject matter jurisdiction under Chancery Court Rule 12(b)(1). According to Defendants, Plaintiff has abandoned its rescission claim and is only seeking monetary damages. Since Plaintiff has an adequate remedy at law, their argument goes, this Court does not have jurisdiction to hear this matter. Plaintiff argues that it properly plead an equitable claim for rescission based upon Defendants' misrepresentation that they owned all of the land that they had agreed to sell. According to Plaintiff, testimony supporting its breach of contract claim is no different from what is necessary to prove its rescission claim. Furthermore, Plaintiff argues that the clean-up doctrine set forth in Wilmont Homes v. Waiter, 202 A.2d 576, 580 (Del. 1964), allows the Court to adjudicate all related claims, including those based in law, especially when judicial efficiency and economy are considered.

This case has been in litigation for nearly five years. In spite of having filed a motion to dismiss for lack of prosecution and having responded to a motion for summary judgment, Defendants never addressed the issue of lack of subject-matter jurisdiction until the pretrial conference in August 2011, and then not even in the form of a formal motion. A two-day trial has now taken place, and under the clean-up doctrine this Court has the discretion to grant the relief necessary to a party even if it involves providing a legal remedy such as monetary damages. Getty Refining and Marketing Co. v. Park Oil, Inc., 385 A.2d 147, 150 (Del. 1978). To transfer this action to a court of law at this stage of the proceedings would be contrary to judicial efficiency and economy, and would further delay the resolution of this case. Therefore, the motion to dismiss for lack of subject matter jurisdiction should be denied.

IV. The Issues at Trial

A. The Parties' Contentions:

Lewes Investment argues that the Graves Family was unable to convey good and marketable title to Parcel 176 because they did not own the entire parcel in fee simple. The Graves Family only owned an undivided seven-eighths interest in Parcel 176, and third parties owned the other undivided one-eighth interest. The missing one-eighth interest rendered title to Parcel 176 unmarketable, and this constituted a material breach of the Agreement by Defendants. Lewes Investment argues that even though Parcel 176 contained only 3.32 acres, it was material to the Agreement because all of the Graves Farm was important, and Parcel 176 was an integral part of the proposed development. Furthermore, non-resolution of the title defect would have had adverse consequences for financing the purchase of the Graves Farm. Lewes Investment also argues that the Graves Family failed to cure the title defect despite having been given a reasonable amount of time to do so. Whether or not the Agreement specified that lime was of the essence as to the closing, Lewes Investment now argues that timely performance became essential once Tatusko notified Smith by letter dated July 25, 2006, that the Graves Family had 30 days to cure the title defect. The Graves Family's own expert, Robert Gibbs, Esquire, testified that he could have resolved the title defect problem within a month's time if Smith had asked him for advice. According to Lewes Investment the Graves Family's conduct was unreasonable because they did nothing and said nothing after being given 30 days to solve their title defect problem.

The Graves Family denies that they breached the Agreement. They argue that time was not of the essence as to settlement, and that they were permitted to cure the title defect within a reasonable time as long as they held good and marketable title at the closing. According to the Graves Family, the resolution of the title defect in February 2007 was reasonable in light of the following circumstances: (I) Lewes Investment's admission that time was not of the essence in its July 25, 2006 letter; (2) Stout's repeated requests to extend settlement and threat to pull out of the Agreement if the July 26th closing dale was not extended; (3) the fact that Lewes Investment was only in the preliminary stages of developing the Properly; (4) Lewes Investment was not financially prepared to settle on July 26; (5) Lewes Investment did not make any formal arrangements for settlement on July 26; (6) Lewes Investment completely ignored the title issue for one and a half years; (7) Lewes Investment continued to seek a settlement extension in September 2006; (8) Stout spoke of the title issue being "resolved at some point" in September 2006; and (9) Lewes Investment had its design engineer continue working on the project through March 2007.

The Graves Family also argues that the title defect was not material because Stout told them during the meeting on June 29, 2006, that Lewes Investment "might be able to find a way to work around [the title defect] if it gets to be [j a real problem."[26] The Graves Family now argues that excluding one-eighth of 3.32 acres in the sale would have minimally deprived Lewes Investment of the benefit of its bargain. Furthermore, they argue that Stout's statement shows that the defect was not material to Lewes Investment, that the State could have exercised its eminent domain power to create an access road across Parcel 176, [27] and that Lewes Investment could have been compensated fully at settlement for the missing one-eighth interest. The Graves Family calculates that interest was worth less than $60, 000, a nominal amount when compared to the $13 million contract price. Finally, the Graves Family argues that they were in a position to substantially perform their obligations under the Agreement; i.e., they could have conveyed 99 per cent of the Graves Farm, or 87 out of 88 acres, if the parties had been required to settle on July 26, 2006. Lewes Investment would have been entitled to compensation for the defect, but not, as sought here, for rescission of the contract.

B. Analysis:

To understand the issues surrounding the title defect, it is necessary to describe in some detail the land that was the subject of the Agreement. The boundaries of the Graves Farm extend from Route 9 southeast to encompass land on the other side of Beaver Dam Road.[28] The southeast corner of the Graves Farm abuts an unimproved 19.5-acre parcel owned by the Delaware State Housing Authority ("DSHA"), which in turn abuts two residential subdivisions on its southern and eastern sides. Parcel 176 is a triangular-shaped sliver of land that, starting at the northwest corner of the Graves Farm, extends in a northeasterly direction along Route 9 for about 1000 feet.[29] Opposite the Graves Farm on the northern side of Route 9 is the Vineyards development project, a small subdivision, and other small private properties. Further east along Route 9 and closer to the Five Points intersection is a historic district called Belltown.

After the Agreement was executed and Ivy Partners' interest was assigned to Lewes Investment, Stout and the other members of Lewes Investment determined that the highest value for the Graves Farm would be achieved through a mixed-use zone, i.e., a zone that allows both commercial and high-density residential development. Since the Graves Farm is zoned agricultural and lies outside the sewer district, it would have to be rezoned to permit such development. Stout attended a preliminary state land use planning ("PLUS") meeting to discuss Lewes Investment's proposed development with Stale and Sussex County officials. Based on the discussions at this meeting, Stout understood that DSHA was having difficulties in building low-and moderate-income housing on its 19.5 acre parcel because of objections from neighbors. Lewes Investment subsequently approached DSHA with a proposal to acquire the 19.5 acres, and to integrate a moderate-income housing project with its private development. In February 2005, DSHA granted Lewes Investment the right to acquire the State's parcel, and Lewes Investment's design engineers created a plan that allocated 20 percent of the density to low- and moderate- priced housing that would be identical in physical structure to the market-rate housing, and would be distributed throughout the combined 108 acres of the two properties.[30]

At the first PLUS meeting, Stout also learned that the State wanted to improve the alignment of the Five Points intersection on Route 1 to ease traffic congestion. In order to avoid harming the historic district of Beiltown, DelDOT was proposing to move Route 9 to where Beaver Dam Road is presently located. The proposed relocation of Route 9 would result in the creation of a cul-de-sac at Beiltown. In order to provide the residents of Beiltown and other nearby properties access to the "new" Route 9, DelDOT proposed building a spur road through the Graves Farm. After negotiations with Lewes Investment and its engineers, DelDOT ultimately approved the design of a spur road through Parcel 176.[31]

On October 21, 2005, Lewes Investment exercised its right to extend the closing date of January 26, 2006, for six months.[32] The development project was going to be more complicated than anticipated because the State had asked Lewes Investment to assist Sussex County in drafting a moderate-income housing ordinance.[33] As the extended July 26 closing date approached, Lewes Investment continued to meet with various State and County agencies to resolve outstanding issues. The real estate market was entering a slow period, and Lewes Investment was aware that major homebuilders were expressing some concerns about the market. Lewes Investment was in the process of negotiating with Discover Bank to obtain financing for the project, and the bank required an appraisal of the properties being developed.[34]An appraisal valued the Graves Farm and the DSHA parcel together at $14.1 million.[35] On behalf of Lewes Investment, Fuqua's office was preparing for settlement, and a first ...


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