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Gilmartin v. Whaley Royce, LLC

Court of Chancery of Delaware

March 28, 2017

Thomas J. Gilmartin and Jill Singer, Plaintiffs,
v.
Whaley Royce, LLC, Defendant.

          Date Submitted: July 6, 2016

          Draft Report: October 7, 2016

          MASTER'S REPORT

          Kim E. Ayvazian Master in Chancery

         This case involves a real estate contract that required disputes between the parties to be resolved by arbitration. Buyer requested arbitration after seller refused to return buyer's deposit when he sought to cancel the contract. Following a hearing, the arbitrator found in favor of seller, awarding seller the deposit as liquidated damages, plus attorney fees and costs. Dissatisfied with the outcome of the arbitration, buyer filed a complaint in this Court, alleging fraud and seeking to vacate the arbitrator's award. Seller now has moved to dismiss the complaint as an impermissible collateral attack on the merits of the arbitrator's decision, among other grounds. For the reasons that follow, I recommend that the Court dismiss buyer's complaint in its entirety.

         Factual and Procedural Background[1]

         On October 31, 2013, Plaintiff Thomas J. Gilmartin and Defendant Whaley Royce, LLC ("Whaley Royce" or "Seller") entered into a contract for the purchase of Lot 27 in a single family home community under development in Dagsboro, Delaware.[2] The contract called for a deposit of ten percent of the purchase price upon execution, but provided a two-day due diligence period.[3] If Gilmartin notified Seller within this time period that he no longer wanted to proceed with the contract, it would be declared null and void and Seller would refund Gilmartin's deposit. Otherwise, the deposit and all other monies paid to Seller would be nonrefundable in the event of Gilmartin's default.[4]

         On the same day he signed the contract, Gilmartin also executed several addenda to the contract. The first addendum provided that "this contract is subject to buyer receiving his Final 9/11 First responder settlement on or before 12/2/2013. If buyer does not receive his final settlement agreement by 12/2/2013 all deposit monies, at the buyers request, will be returned" ("Zadroga Funds Addendum").[5] Another addendum acknowledged that the buyer did not have the full deposit and required a deposit of $1, 000 upon the execution of the contract, and the balance of deposit in the amount of $63, 670 by December 2, 2013 ("Deposit Schedule Contingency Addendum").[6] A third addendum executed by Gilmartin, which was also executed by Plaintiff Jill Singer, purported to include Singer as an additional buyer under the terms of the contract ("Add Buyer Addendum").[7] The Add Buyer Addendum was not executed by Seller. On October 31st, Singer wrote a check to Seller in the amount of $1, 000 as an initial deposit on Lot 27.[8]

         On November 30, 2013, Gilmartin and Singer executed another addendum releasing "[a]ny or all contingencies for the purchase of" Lot 27 ("Revocation of Contingencies Addendum").[9] In September 2014, a dispute arose between the parties concerning the contract and Gilmartin sought the return of his deposit and termination of the contract, citing the Zadroga Funds Addendum.[10] Whaley Royce refused to return Gilmartin's deposit and claimed the contingency had been valid only until December 2, 2013, after which it was waived.[11] Gilmartin then sought arbitration through the American Arbitration Association ("AAA") in accordance with Paragraph 37 of the contract.[12]

         During the arbitration process, Gilmartin was represented by counsel and Whaley Royce was represented by a non-lawyer.[13] The parties selected Christopher I. McCabe, Esquire as their arbitrator ("Arbitrator") from a list of five neutral arbitrators provided by the AAA.[14] Singer was not given notice of the arbitration hearing and, although she traveled with Gilmartin to the hearing, Singer was excluded from the proceedings by Arbitrator. On May 4, 2015, Arbitrator issued his written award, declaring that Whaley Royce was entitled to retain all deposit monies as liquidated damages, and be reimbursed by Gilmartin for all costs and expenses, including reasonable attorneys' fees incurred by Whaley Royce in the arbitration action.[15] Gilmartin was also required to pay the AAA's administrative fees and Arbitrator's compensation.[16]

         On July 31, 2015, Gilmartin and Singer filed a pro se complaint to vacate the arbitration award.[17] On October 2nd, Whaley Royce filed a motion to dismiss the complaint.[18] An attorney subsequently filed an amended complaint on March 18, 2016, [19] and the parties thereafter briefed the motion to dismiss. Oral argument took place on July 6, 2016.[20]

         The Complaint

         Five causes of action are alleged in the amended complaint. The first count is based on fraud. Plaintiffs allege that Whaley Royce knew they could not afford to purchase the property unless Gilmartin received his September 11th settlement funds. Plaintiffs further claim that Whaley Royce never intended to refund their deposit money, as evidenced by the fact that Whaley Royce induced them to execute the Revocation of Contingencies Addendum purporting to nullify the Zadroga Funds Addendum. In addition, Plaintiffs allege that the arbitration award was procured by Whaley Royce's "improper, fraudulent and bad faith dealings with these unsophisticated Plaintiffs and by manipulation of the Arbitration proceeding to hold plaintiffs to standards designed for Commercial and/or Construction Industry Professionals."[21]

         In their second count, Plaintiffs allege that Arbitrator was unduly and impermissibly biased in favor of Whaley Royce because of his history of representing construction industry professionals and entities. Although Plaintiffs had received Arbitrator's biography from the AAA, [22] they allege that it did not accurately portray Arbitrator's employment experience or the nature of his professional practice. According to Plaintiffs, his law firm's website revealed that Arbitrator primarily represented construction professionals and was likely concerned with drafting the sort of "one-sided contract" used by Whaley Royce.[23]

         In their third count, Plaintiffs allege that Arbitrator exceeded or imperfectly executed his powers by: (a) using the AAA Commercial Arbitration Rules rather than the AAA Construction Industry Arbitration Rules that were required by the parties' contract or, what would have been preferable to Plaintiffs, the AAA Consumer Arbitration Rules that are more suited to unsophisticated consumers like themselves; (b) excluding Singer from the arbitration proceedings when she was a material and necessary party to the contract and the arbitration; (c) allowing the arbitration to proceed when Whaley Royce, a limited liability company, appeared without counsel in violation of Delaware law; (d) failing to provide any reason or explanation for his failure to credit the Zadroga Funds Addendum as an integral part of the contract that could not be waived or revoked by any subsequent document; (e) failing to allow Singer to take part in the arbitration even though she was present and desired to take part in the proceedings; and (f) failing to enter a default against Whaley Royce when it appeared without legal counsel.

         In their fourth count, Plaintiffs allege that the contract impermissibly required arbitration under the AAA Construction Industry Arbitration Rules rather than the AAA Consumer Arbitration Rules. Finally, Plaintiffs allege in their fifth count that, by virtue of the internally incompatible operation of the Zadroga Funds Addendum and the Revocation of Contingencies Addendum, there could not have been a valid arbitration agreement between the parties.

         The Issues Whaley Royce argues that Plaintiffs waived their right to challenge the contract and arbitration clause because Gilmartin initiated and participated in the AAA arbitration proceedings. Even if Plaintiffs' claims have not been waived, Whaley Royce contends that the arbitration clause is valid and enforceable because the contract was not a standard form contract, and could have been cancelled during the due diligence period if Gilmartin had objected to the arbitration clause. Furthermore, the arbitration clause was not unfairly structured and the type of contract between the parties did not meet the criteria for application of the AAA Consumer Arbitration Rules. Whaley Royce also argues that: (a) Plaintiffs' claim of fraud does not meet the heightened pleading standard of Court of Chancery Rule 9(b) because the allegations lack specificity; (b) Plaintiffs fail to state a claim under 10 Del. C. § 5714(a)(2) because there is no allegation that Arbitrator had a substantial personal or financial relationship with any party or its agent; and (c) Plaintiffs fail to state a claim under Section 5714(a)(3) that Arbitrator exceeded his powers or imperfectly executed them because (i) there is no allegation that the use of the AAA Commercial Rules prejudiced Plaintiffs, (ii) Singer was not a party to the contract, was not entitled to notice, and was properly excluded from the proceedings, and (iii) arbitration is not a court proceeding and, therefore, Whaley Royce was not required to be represented by counsel. Finally, Whaley Royce argues that AAA rules only require an award to be in writing and to provide a financial breakdown of any monetary reward; there is no requirement that an arbitrator provide an explanation or detailed opinion related to his decision.

         Plaintiffs oppose the motion to dismiss, arguing that they have sufficiently pleaded a claim of fraud in the inducement by Whaley Royce. First, Plaintiffs contend that when Whaley Royce accepted Plaintiffs' offer to purchase Lot 27, knowing that Plaintiffs could not afford the property without the full payment of Gilmartin's benefits from the September 11th fund, Whaley Royce breached its duty to negotiate and enter into contracts in good faith. Whaley Royce's subsequent mischaracterization of the intent of the Zadroga Funds Addendum to avoid its consequences compounded this breach, according to Plaintiffs, because there is no provision or language in the Zadroga Funds Addendum that rendered it contingent or nullified if not exercised prior to December 2, 2013. Plaintiffs contend that Whaley Royce never intended to refund their deposit because Whaley Royce proffered the Revocation of Contingencies Addendum to Plaintiffs without clearly stating and warning that it would rely on this document to assert the nullification of the Zadroga Funds Addendum. Accordingly, Plaintiffs claim they relied on the promises of Whaley Royce to their detriment, and Whaley Royce induced them to enter a contract that it had every reason to know they could not afford. Plaintiffs also argue that the arbitration award was procured by Whaley Royce's "improper, fraudulent and bad faith dealings" with them, and Whaley Royce "manipulated the Arbitration proceeding" to deprive Singer of an opportunity to be heard and Plaintiffs of their deposit funds.[24]

         Plaintiffs also argue that they have sufficiently pleaded a cause of action for arbitrator partiality because the AAA biography differed in material aspects from the curriculum vitae obtained from the website of Arbitrator's law firm. As a result, Plaintiffs claim they were denied the benefit of their bargain because they were unable to make an informed selection of an unbiased arbitrator. Instead, they selected one who, by virtue of his employment and practice primarily representing construction industry professionals and entities, was unduly and impermissibly biased in favor of Whaley Royce and against them.

         In addition, Plaintiffs argue that they have pleaded a cognizable cause of action of overreaching by Arbitrator, who used AAA Commercial Arbitration Rules rather than AAA Construction Industry Arbitration Rules as required by the parties' contract, thereby depriving the parties the benefit of their bargain. Also, Arbitrator was not authorized to overlook the law requiring a limited liability company to have legal representation in a quasi-judicial proceeding or to exclude Singer from the proceedings.

         Plaintiffs argue that Arbitrator was provided a complete contract that included, among other documents, the Zadroga Funds Addendum and the Add Buyer Addendum, yet he so imperfectly exercised his powers as to render no final and definite award on the subject matter. This was demonstrated by the fact that Whaley Royce's interpretation of the Revocation of Contingencies Addendum requires a construction of the contract that is internally incompatible, rendering the Zadroga Funds Addendum meaningless. According to Plaintiffs, Arbitrator had sufficient proof to support their contentions that Singer was a party to the contract and that the Zadroga Funds Addendum demonstrated the parties understood the contract would be nullified and deposit monies would be refunded at Gilmartin's request if the

          September 11th settlement funds were not received by December 2, 2013. Nevertheless, Arbitrator ignored these documents, impermissibly excluded Singer from the hearing despite her protests, and failed to enter an award in accord with the language and clear intent of the Zadroga Funds Addendum. Finally, Plaintiffs argue that they have adequately pleaded and demonstrated that the AAA rules expressly required by the contract were not followed.

         Standard of Review When considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), the court must assume the truthfulness of all well-pleaded allegations and give the plaintiff the benefit of all reasonable inferences that can be drawn from its pleadings.[25] Nevertheless, "the court need not accept inferences or factual conclusions unsupported by specific allegations of fact, " [26] nor must it draw unreasonable inferences in favor of the non-moving party.[27]

         Analysis

         In their complaint, Plaintiffs have attacked the arbitration award on several fronts. First, they challenge the validity of the entire contract, claiming that it had been fraudulently induced by Whaley Royce. Second, they challenge the validity of the contract's arbitration clause and, more narrowly, the clause's requirement of arbitration under the AAA Construction Industry Arbitration Rules. Finally, Plaintiffs directly attack Arbitrator's award on the following grounds: (a) manipulation, bad faith, and fraud in its procurement; (b) partiality of the arbitrator; (c) Arbitrator's overreaching and exceeding his powers by: (i) excluding Singer from the hearing, (ii) using the AAA Commercial Arbitration Rules rather than the AAA Construction Industry Arbitration Rules as required by the parties' contract, (iii) allowing Whaley Royce to appear without counsel, and (iv) failing to provide any explanation for Arbitrator's failure to credit the Zadroga Funds Addendum.

         Paragraph 37 of the contract, which is captioned "Dispute Resolution/Arbitration, " provides:

If any dispute, claim or controversy arises related to this Agreement, the Limited Builders Warranty (as defined in the attached Addendum), or other agreements, communications, or dealings involving Buyer, or the construction or condition of the Property including, but not limited to, disputes concerning breach of contract, express and implied warranties, personal injuries and/or illness, mold related claims, representations and/or omissions by Seller or its representatives or agents, on-site and off-site conditions and all other torts and statutory causes of actions ("Claims"), the Seller and Buyer agree to attempt to settle the dispute first through direct discussions. In the event the dispute cannot be resolved through direct discussions, the parties agree to settle their differences by binding arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, applying the substantive laws of the State of Delaware, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The location of the arbitration shall be the location of the Community or any other location mutually agreed to by the Seller and Builder. Once a party files a request for arbitration with the other party and with the American Arbitration Association, the parties agree to commence such arbitration within sixty (60) days of filing of the request.
The parties agree that the award or order rendered by the arbitrator or arbitrators shall be final and binding and enforceable in a court of law or equity. The prevailing party in any dispute arising out of or relating to this Agreement or its breach shall be captioned to recover from the other party reasonable attorney's fees, costs and expenses incurred by the prevailing party in connection with such dispute resolution process. Notwithstanding any other provision of this Agreement to the contrary, all rights, remedies, claims or actions arising out of or connected with this Agreement, including any claims of default, breach or conduct giving rise to suspension of payment or services, shall be solely and conclusively resolved by the Dispute Resolution provisions of this Dispute Resolution Section. Any attempt to circumvent or disregard the dispute resolution procedure as delineated in this Agreement by either party shall constitute default of this Agreement. Buyer hereby waives the right to a proceeding in a court of law (including without limitation a trial by jury) for any claims or counterclaims brought pursuant to this Agreement. The provisions of this section shall survive the expiration or earlier termination of this Agreement or the settlement under this Agreement, as applicable, and shall not be merged or extinguished by any settlement, closing, payment of the Purchase Price or by execution and delivery of any deed.[28]

         The broad language of this arbitration clause precludes any challenge by Gilmartin and Singer to the merits of the arbitration award.[29] In his award, Arbitrator declared that Whaley Royce was entitled to retain Gilmartin's deposit monies as liquidated damages.[30] The only reasonable inference to be drawn from this award is that Arbitrator found Gilmartin to have breached the contract. Plaintiffs' current attempt to invalidate the contract by claiming fraud in the inducement is a "dispute arising out of or relating to this agreement or its breach" which must be submitted to Arbitration.[31] Plaintiffs' fraud claim in Count I, therefore, is an "impermissible collateral attack on the award itself, "[32] and should be dismissed as waived.

         Count I also includes an allegation that Whaley Royce procured the arbitration award by "improper, fraudulent and bad faith dealings" with Plaintiffs and "manipulation of the Arbitration proceeding."[33] Under Delaware law, the Court shall vacate an arbitration award that "was procured by corruption, fraud or other undue means[.]"[34] However, Rule 9(b) provides that: "[i]n all averments of fraud or mistake, the circumstances constituting fraud of mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally."[35] To satisfy Rule 9(b), a complainant must allege: "(1) the time, place, and contents of the false representation; (2) the identity of the person making the representation; and (3) what the person intended to gain by making the misrepresentations."[36]

         In their complaint, Plaintiffs allege that Whaley Royce was aware Plaintiffs were unable to purchase the home unless Gilmartin received his full September 11th settlement award by December 2, 2013, and was advised that Gilmartin was only going to receive ten percent of his award by December 2, 2013. Whaley Royce also was aware that Plaintiffs would put down approximately ten percent on the purchase price of the home. Plaintiffs relied on Whaley Royce's "assurances" and the language of the contract and the Zadroga Funds Addendum, [37] and believed that upon advising Whaley Royce that Gilmartin's full award had not been paid by December 2, 2013, and by demanding the return of the deposit funds, the full deposit would be returned to them. Finally, the complaint alleges that Whaley Royce never intended to refund Plaintiffs' deposit money because it subsequently induced Plaintiffs to execute the Revocation of Contingencies Addendum purporting to nullify the Zadroga Funds Addendum, and that Whaley Royce entered the contract with two unsophisticated layperson buyers "knowing they would not refund Plaintiffs' deposit money even upon their demand for such refund and notwithstanding the language of the Zadroga Funds Addendum."[38]

         The complaint does not identify the time, place or contents of the false representation. Nor does it identify the representative of the limited liability company who gave the alleged "assurances" to Plaintiffs. Plaintiffs cite the Revocation of Contingencies Addendum, executed on November 30, 2013, as proof that Whaley Royce never intended to refund their deposit money. However, a plaintiff "cannot 'bootstrap' a claim of breach of contract into a claim of fraud by alleging that a contracting party never intended to perform its obligations."[39] Such a claim requires a misrepresentation of present fact. Nowhere does the complaint allege specific facts that would lead to the reasonable inference that Whaley Royce never intended to return Plaintiffs' deposit at the time the parties executed the contract on October 31, 2013.

         Plaintiffs also accuse Whaley Royce of manipulating the arbitration proceedings to hold them to standards designed for professionals in the commercial or construction industry. Nowhere in the amended complaint do Plaintiffs allege specific facts from which the Court could draw a reasonable inference that Whaley Royce manipulated the arbitration proceedings in this or any manner. To the contrary, the contract signed by the parties called for the use of AAA Construction Industry Arbitration Rules.[40]

         The allegations contained in Paragraph 81 of the amended complaint are wholly conclusory and fail to state a claim for relief. They are also an impermissible collateral attack on the merits of the arbitration award. ...


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