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Marina View Condominium Association of Unit Owners v. Rehoboth Marina Ventures, LLC

Court of Chancery of Delaware

March 6, 2018

Marina View Condominium Association of Unit Owners
v.
Rehoboth Marina Ventures, LLC

          Draft Report: August 22, 2017

          Date Submitted: July 18, 2017

          Peter K. Schaeffer, Esquire

          Robert G. Gibbs, Esquire R. Eric Hacker, Esquire Morris James Wilson Halbrook & Bayard, LLP

         Dear Counsel:

         Plaintiff, Marina View Condominium Association of Unit Owners ("the Association"), filed this action on March 22, 2017. Count I of the complaint seeks a permanent injunction against Defendant, Rehoboth Marina Ventures, LLC ("the Marina") because of the Marina's alleged violations of the parties' lease agreement. Counts II and III of the complaint seek rescission of the lease based upon failure of consideration, unconscionability, fraud and collusion. The Marina filed a motion to dismiss the complaint under Court of Chancery Rule 12(b)(7), and to dismiss Counts II and III under Court of Chancery Rule 12(b)(6) and Rule 9(b). It detailed the grounds for dismissal in its opening brief, which included the Association's failure to join necessary parties and state a claim, failure to plead the necessary elements for rescission, fraud or unconscionability, and that the relief sought has legal remedies abrogating the Court of Chancery's subject matter jurisdiction. Count I of the complaint - seeking injunctive relief for a breach of contract - is not subject to the motion to dismiss.

         The Association then filed a motion for judgment on the pleadings. Vice Chancellor Glasscock stayed consideration of the motion for judgment on the pleadings pending a decision on the motion to dismiss. The case was reassigned to me and this is my decision on the motion to dismiss.

         I recommend that the Court deny Marina's motion to dismiss the complaint for failure to join all indispensable parties, and grant the motion to dismiss as to Counts II and III of the complaint. This is a final report.

         BACKGROUND

         In July of 2006, Marina Motel Ventures, LLC ("Motel Ventures"), entered into a marina lease ("lease") with Rehoboth Marina Ventures, LLC, which was recorded in the Sussex County Recorder of Deeds on July 26, 2006. The lease concerns a marina business used in conjunction with a subaqueous lease that the Marina operates on property owned by Motel Ventures. The lease provides that the property used by the Marina is considered "common elements" of the Association, and includes the marina building, adjacent parking and other designated "marina areas." The initial term of the lease is 99 years, followed by another term of 99 years, unless the Marina provides notice of non-renewal. The Marina is obligated to maintain the subaqueous lease with DNREC, reserve marina slips for use by Association unit owners ("unit owners") at a discounted rate (20% off of the market rate), and to pay its share for maintenance, repair and replacement of parking areas. The lease provides that the leased property shall be used for the purpose of conducting a marina, "and no part of the Leased Property shall be used for any other purposes without the prior written consent of Lessor."[1]The Marina is responsible for paying for its trash removal, utilities, and other operating expenses. Acts of default and remedies for default are specified in the lease.

         There are two amendments to the lease - both executed by the original parties to the lease - the first dated August 14, 2006 and the second dated April 14, 2008. The first amendment provides that the Council of the Association will be notified and must consent prior to making any changes to the lease that will affect the substantive rights of the unit owners. The second amendment provides that the Marina shall have the right to assign, mortgage, sublease or otherwise encumber the lease without the consent of Motel Ventures. All such actions are deemed "subject to and subordinate to" the lease. Copies of mortgages must be provided to Motel Ventures.[2]

         The complaint states that ownership of the leased premises passed from Motel Ventures to the Association "some hours later the same day" when the lease was recorded, and that the Declaration of Condominium ("Declaration") for the Association was recorded subject to the lease.[3] The complaint also alleges that "[o]n information and belief, the members of the limited liability companies party to the Marina Lease on July 26, 2006 were identical."[4]

         The complaint also alleges that issues arose in December 2016 when the Association noticed that the Marina was building "vacation apartment buildings on leased property."[5] The Association requested that the Marina cease and desist such activity as not marina-related, and the Marina refused to do so.

         The Association also filed an action for summary possession of the leased property in the Justice of the Peace Court ("J.P. Court") on June 14, 2017. The Marina filed a motion to dismiss or stay the proceedings in the J.P. Court pending resolution of the previously-filed litigation in the Court of Chancery, and, on July 19, 2017, the J.P. Court stayed the summary possession action pending determination of this case.

         The Association and the Marina have taken exceptions to the draft version of this report. I have either modified the body of this report to address the exceptions taken, or consider them adequately addressed in this report.

         ANALYSIS

         A. Who are indispensable parties under Rule 19?

         This Court may dismiss this action under Court of Chancery Rule 12(b)(7) for failure to join an indispensable party under Rule 19. Rule 19 provides for the joinder of persons needed for just adjudication. Under Rule 19(a), the Court determines whether an absent person should be party to the litigation because they have an interest in the subject of the action which, if they are not included, will mean that disposition in the case will injure their rights or subject them to substantial risk of multiple or inconsistent obligations related to that interest. If their joinder is necessary, the Court orders them to be joined. If joinder is not feasible, the Court determines whether "in equity and good conscience" the action should proceed or be dismissed because the person is a necessary party under Rule 19(b) factors. Rule 19(b) factors include: to what extent a judgment might be prejudicial to the absent person or parties; the extent to which provisions in the judgment can lessen or avoid prejudice; whether the person's absence will render the judgment inadequate; and whether the plaintiff will have an adequate remedy if the action is dismissed for non-joinder. The factors are interdependent and must be considered in relation to each other and the facts of the case.[6]

         The Marina argues that the Association has failed to include all necessary parties under Rule 19, such as the individual unit owners, and other holders of interests in the property subject to, or affected by, the leasehold, including any mortgagees or lien holders of any units, any Association property or the Marina leasehold, or marina tenants. It argues that the Association was required to indicate whether these persons existed and whether their rights were represented. It also claims that the Association failed to plead its representative capacity and its failure to do so leaves the complaint subject to dismissal because there is no averment in the complaint as to how unit owners are adequately represented in the litigation.[7]

         I will first address the argument that unit owners must be included as necessary parties to this litigation. This argument is similar to the argument made by the defendants in Council of Unit Owners of Sea Colony E. v. Carl M. Freeman Assocs., Inc.[8] In that case, the council of the unit owners was suing in a representative capacity on behalf of the owners for defects in common elements.[9]Defendants asserted in support of their motion to dismiss that the council failed to join the unit owners who are needed for just adjudication, leaving defendants subject to the risk of multiple obligations. The Court found that the individual unit owner participation is not necessary because the council represents the unit owners' complete interest as to the common elements.[10] Similarly, here, the issue pertains to a common element of the Association - the marina property - and the Association is defined as "all of the Unit Owners acting as a group in accordance with the Code of Regulations."[11] Unlike the homeowners in the cases cited by the Marina, individual property rights are not at issue here and the Association can adequately represent the unit owners' interests in common elements. The cases asserted by the Marina to show that individual unit owners are necessary parties are distinguishable because those cases dealt with different circumstances, holding that landowners are necessary parties to an appeal from a decision of the board of adjustment that directly affects their property.[12] Because this case pertains only to common elements, I recommend that the Court deny the Marina's motion to dismiss for failure to include unit owners as necessary parties.

         Next, the Marina argues that the Association lost its ability to claim representative status for unit owners when it did not assert in the complaint that it represents the interests of the unit owners. The Association's standing to sue is not an issue, because it is undisputed that the Association is the successor-in-interest to the original lessor, Motel Ventures, and the lawsuit alleges a breach of the lease terms. The Marina asserts that, since the Association did not specifically allege its representative capacity in the complaint, it does not represent the unit owners' interests.

         On a motion to dismiss, the Court can consider documents extrinsic to the complaint but that are integral to, or incorporated by reference into, the complaint.[13] In determining what documents are integral to the complaint, there is no bright-line rule for the Court to follow and the Court must make a "facts-and-circumstances" inquiry.[14] Although extraneous to the complaint, both the lease and the Declaration are referenced in the complaint and the Marina's alleged violation of the lease serves as the basis for this litigation.[15] I find that, for the limited purposes of the motion to dismiss, the lease and the Declaration are incorporated into the complaint.[16]

         For a motion to dismiss, the Court accepts all well-pled allegations of the complaint as true and draws all reasonable inferences from those allegations in the non-moving party's favor.[17] Considering the lease and the Declaration as incorporated by reference into the complaint and drawing reasonable inferences in the Association's favor, I find there are sufficient factual allegations to show the Association's capacity to represent the unit owners' interests.[18] Accordingly, for purposes of denying the motion to dismiss for failure to include necessary parties, I recommend the Court conclude that the Association has the authority to represent the interests of the unit owners and that individual unit owners are not indispensable parties for purposes of this action.

         The Marina further argues that the complaint should be dismissed because all holders of interests in the property subject to, or affected by, the leasehold, including any mortgagees or lienholders of any units, any Association property or the Marina leasehold, and marina tenants, are indispensable parties to this action. The cases cited by the Marina in support of its claim that all mortgagees and lienholders are necessary parties, Hendry v. Hendry[19] and Makitka v. New Castle Cty. Council[20], are distinguishable. In Hendry, the issue before the Court was not whether the person with the leasehold interest was a necessary party. I agree with the Marina that the Hendry case held that a lease of land is an interest in land.[21]But it doesn't necessarily flow from that holding that all persons with an interest in land are indispensable parties in a legal action. In Makitka, the Court concluded that a record owner of property is a necessary party to litigation challenging that land's development, after analyzing the property owner's situation under Rule 19.[22]

         Here, the case is not challenging land development but related to the marina property, which is a common element of the condominium. To determine whether mortgagees and lienholders are indispensable parties to this litigation, the analysis focuses on whether their interests in the subject of the action are "of such a nature" that disposition of the matter may impair or impede their ability to protect their interest or that, without them, complete relief cannot be attained by the parties before the Court.[23] The central issue in this case is the operation of the marina, and the use of the marina is a common element of the condominium units. The interests of the unit owners' mortgagees and unit owners are similar in ensuring that the benefit and value from the marina as a common element to the condominium units is protected. And, the parties can achieve resolution in the case without joining the unit owners' mortgagees as parties.[24] Consistent with the conclusion that individual unit owners are not indispensable parties and the Association can represent their interests, I find that unit owners' mortgagees are not necessary parties to this action.

         Looking at the allegations most favorably for the Association, there is also no basis to conclude that mortgagees or lienholders for Association property are necessary parties to the suit. As to mortgagees and lienholders of the Marina lease, the second amendment to the lease states that they take subject and subordinate to the lease, and there is no allegation that their interests are unique from those of the Marina. I recommend that the Court deny the motion because none of those mortgagees or lienholders are indispensable parties to this action.

         Finally, the Marina asserts that "marina tenants" are also indispensable parties.[25] I do not find that the marina tenants - which I presume means boat-slip renters - have interests that meet the standards for indispensable parties under Rule 19. Under the lease, unit owners are offered the opportunity to enter into a seasonal lease for a boat slip each year at a discounted rate.[26] Boat slips not leased by unit owners may be rented to others. Under the terms of the lease, boat-slip renters would continue to have possessory rights even if the lease is terminated, so that the boat-slip renters' limited interest in their seasonal lease is protected.[27]

         B. Standard of review for failure to state a claim under Rule 12(b)(6)

         The Court may dismiss parties' claims for failure to state a claim under Court of Chancery Rule 12(b)(6). The facts for purposes of the motion to dismiss under Rule 12(b)(6) are drawn from the complaint and the documents incorporated by reference and integral to the complaint. In ruling on a motion to dismiss for failure to state a claim, the well-pled allegations of a complaint are assumed to be true and the plaintiff receives the benefit of all reasonable inferences.[28]Conclusions in the complaint are not accepted as true without allegations of facts to support them.[29] But vagueness or lack of detail are not sufficient grounds alone to dismiss for failure to state a claim so long as the complaint provides the defendant with notice of the claim.[30] "Failure to plead an element of a claim precludes entitlement to relief and, therefore, is grounds to dismiss that claim."[31]A broad brush must be used in determining sufficiency of claims - whether a plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof.[32] If recovery on a particular claim is not reasonably conceivable, then the Court grants the motion and dismisses that claim under Rule 12(b)(6). If recovery is reasonably conceivable, the motion to dismiss is denied.[33]

         C. Does Count II of the complaint state a claim for equitable rescission?

         Count II of the complaint seeks rescission of the Marina lease for failure of consideration, specifically that the Marina failed to supply "the required consideration of discounted boat-slip rentals to the Condominium unit owners per the terms of the Marina Lease."[34] The Marina argues that this claim should be dismissed because it fails to plead the necessary elements of a claim of equitable rescission and it alleges failure of consideration, for which there are multiple legal remedies.[35] The Association responds that legal remedies could be sought for failure of consideration and other claims but that, since it is seeking injunctive relief under Count I of the complaint, the other claims can be addressed under the Court of Chancery's clean-up doctrine.[36]

         Rescission is recognized at law where one party informs the other of their intent not to be bound by the contract.[37] Equitable rescission is appropriate when the relief needed is more than a judicial declaration that a contract is invalid and an award returning the money or property to the plaintiff to restore them to their original condition.[38] It remedies situations "when damages are not available, the amount of damages not ascertainable, or when damages are inadequate to do justice."[39] It is the "unmaking" of an agreement and the attempt to return the parties to the status quo.[40]

         If there is a full and adequate remedy at law, ordinarily, equity will not step in to rescind a contract.[41] Typically, a claim for equitable rescission is based upon grounds of fraud, misrepresentation or mistake.[42] However, there have been limited cases in which courts have found that a breach of contract could support the use of equitable rescission.[43] In those cases, courts have looked to whether there was "an ...


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