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Concerned Citizens of The Estates of Fairway Village v. Fairway Cap, LLC

Court of Chancery of Delaware

March 6, 2019

CONCERNED CITIZENS OF THE ESTATES OF FAIRWAY VILLAGE, JULIUS H. SOLOMON, PEGGY A. SOLOMON, EDWARD D. LEARY, LISA P. TORRINI LEARY, KENNETH P. SMITH, DENISE M. SMITH, TERRY L. THORNES AND CARMELA M. THORNESand36 BUILDERS, INC., d/b/a INSIGHT HOMES, Plaintiffs,
v.
FAIRWAY CAP, LLC and FAIRWAY VILLAGE CONSTRUCTION INC., Defendants.

          Date Submitted: January 3, 2019

          Richard E. Berl, Jr., Esquire of Hudson, Jones, Jaywork & Fisher, LLC, Lewes, Delaware, Attorney for Plaintiffs Concerned Citizens of the Estates of Fairway Village, Julius H. Solomon, Peggy A. Solomon, Edward D. Leary, Lisa P. Torrini Leary, Kenneth P. Smith, Denise M. Smith, Terry L. Thornes and Carmella M. Thornes.

          Jeffrey M. Weiner, Esquire of Law Offices of Jeffrey M. Weiner, P.A., Wilmington, Delaware and Timothy Jay Houseal, Esquire and William E. Gamgort, Esquire of Young, Conaway, Stargatt & Taylor LLP, Wilmington, Delaware, Attorneys for Defendants Fairway Cap, LLC and Fairway Village Construction Inc.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         Homeowners within a Residential Planned Community in Ocean View, Delaware, known as Fairway Village, initiated this action to obtain permanent injunctive relief against the current developer that would: (a) prevent the developer from constructing townhouses in the community for use as rental apartments; and (b) require the developer to build townhouses for sale that conform to townhouses already constructed in the community. According to the homeowners, the developer's plan to create an apartment regime at Fairway Village threatens the value of their properties and undermines the internal governance scheme for the community as designed by the original developer. In response, the developer maintains that the harm identified by the homeowners is illusory and, even if it exists, there is no legal basis to prevent the developer from putting its property to the property's best use.

         At first glance, the homeowners make a compelling case. They bought into a Residential Planned Community believing the community would be comprised of like-minded residential homeowners who were invested, both financially and emotionally, in the community they were creating. The developer's plan to place a rental complex within this community will place transient residents with different incentives alongside homeowners who presumably take pride in home ownership and in sustaining a residential neighborhood. Their frustration at this prospect is understandable.

         But the developer has the better legal position. The documents governing the development of this Residential Planned Community neither expressly nor implicitly prohibit the developer from doing precisely what it plans to do. Nor will the planned rental regime violate any State statute or local ordinance. While the homeowners resist this reality with tortured readings of the governing community documents, their principal argument is that the Court should either imply restrictive covenants in these documents or invoke its equitable powers to prevent an injustice.[1] The implied covenant does not work here, however, both because it has not been pled and because the community's governing documents address the matter directly. And, while equity "will not suffer a wrong without a remedy," the homeowners stretch this maxim beyond its limits by assuming that equity may be invoked to prevent a party from lawfully exercising its contractual rights or a property owner from putting its property to a lawful use, even when such conduct may be harmful to others in the community. The homeowners were given an opportunity to prove a wrong that might be redressed by equity during a one-day trial. As explained below, they failed to do so. Consequently, judgment must be entered for the Defendants.

         I. FACTUAL BACKGROUND

         I have drawn the facts from the parties' pre-trial stipulation, evidence admitted at trial and those matters of which the Court may take judicial notice.[2] The trial record consists of 114 joint trial exhibits, 296 pages of trial testimony and 14 lodged depositions. The following facts were proven by a preponderance of the competent evidence.

         A. Parties and Relevant Non-Parties

         Plaintiff, Concerned Citizens of The Estates of Fairway Village ("Concerned Citizens"), is an unincorporated association of individuals with varying ownership interests in real property within Fairway Village, a Residential Planned Community located in Ocean View, Sussex County, Delaware.[3] In addition to Concerned Citizens, several members of the association who own property in Fairway Village have joined as named plaintiffs in this action. Julius H. Solomon and Peggy A. Solomon own a single-family dwelling at 59 Golden Eagle Drive.[4] Edward D. Leary and Lisa P. Torrini Leary, who reside in Florida, own a single-family dwelling at 3 Golden Eagle Drive, which they maintain as a second home.[5] Kenneth P. Smith and Denise M. Smith own a townhouse condominium (Unit 47) at 123 Oakmont Drive.[6] And Terry L. Thornes and Carmela M. Thornes own the townhouse condominium (Unit 4) at 107 Oakmont Drive.[7]

         Defendant, Fairway Cap, LLC, is a Delaware limited liability company located at 105 Foulk Road, Wilmington, Delaware 19803.[8] Fairway Cap owns several lots in Fairway Village where it proposes to develop a townhouse rental regime. Indeed, it has already caused several townhouses to be constructed and rented.[9] Defendant, Fairway Village Construction, Inc., a Delaware corporation located at 105 Foulk Road, 2nd Floor, Wilmington, Delaware 19803, constructs townhome condominiums in Fairway Village on lots owned by Fairway Cap.[10]

         B. The Development of Fairway Village

         In 2006, Caldera Properties, the first developer of Fairway Village, recorded a Record Plan for a Residential Planned Community for the Estates of Fairway Village, a community comprising over 121 acres and upon which 166 single-family home lots and 166 townhouse condominium units would be developed.[11] The Town of Ocean View, Delaware (the "Town" or "Ocean View") approved the plan and it was recorded at the Sussex County Office of the Recorder of Deeds in Plot Book 110, Page 107.[12]

         Dan McGreevy is Caldera's principal. He acquired the property that would become Fairway Village from the Skiba and Chandler families.[13] After marshaling Fairway Village's plans through recordation, McGreevy assigned his contractual rights to the Estates of Fairway Village, LLC ("Estates") and its principals--Mario Capano, Frank Capano and Tony DiEgilio--represented by attorney Samuel J. Frabizzio, Esquire.[14]

         NVR, Inc., trading as Ryan Homes ("NVR" or "Ryan"), agreed to acquire several lots and build homes and townhouses at Fairway Village.[15] Estates asked NVR to take the lead in drafting the governing documents for the community. NVR agreed. Its attorney, Edward Tarlov, Esquire, prepared the documents with input from Frabizzio.[16]

         Fairway Cap first sought to be involved at Fairway Village as a developer of certain designated lots.[17] When Estates defaulted on its loan to TD Bank, however, Fairway Cap acquired the delinquent loan and thereby acquired all remaining building lots by deed in lieu of foreclosure without having to pay transfer tax.[18]Fairway Cap thus bound itself as successor in interest to all of the community's governing documents of record.[19]

         C. Troubled Sales

         NVR built and sold six townhouse condominium units in Fairway Village over two years.[20] In 2010, however, after determining it could not sell additional condominium units in Fairway Village at a profit, NVR decided to cut its losses, pay contractual penalties and terminate its agreements with Estates.[21]

         NVR was not alone in experiencing difficulty selling townhouse condominiums in Fairway Village. In June 2015, 36 Builders, Inc., trading as Insight Homes ("Insight"), bought twenty condominium sites in Fairway Village for $1.45 million.[22] Of its twenty townhouse condominium lots, Insight built and sold twelve units before sales stalled.[23] Frabizzio twice sent Notices of Default to Insight because it did not meet the take down schedule for additional units as agreed upon with Fairway Cap.[24] Insight responded by assuring Fairway Cap that it was doing its best to make sales; the market was just not there.[25]

         For its part, to stoke sales activity, Fairway Cap constructed a model and a number of spec townhouse units.[26] It also hired a sales team, including an on-site Fairway Village representative, [27] and advertised the townhouse units in multiple outlets.[28] Even so, it took almost two years before Fairway Cap sold its first four units. Over the following year, sales continued at a remarkably slow pace.[29]TD Bank was demanding repayment of its loan.[30] Something had to give.

         In the winter of 2016, with no sign of improving sales, Fairway Cap hired the Real Property Research Group ("RPRG") to conduct a "Preliminary Market Assessment."[31] The study concluded the most economically sustainable option for Fairway Cap's townhouse condominium lots was to build townhouse condominiums on the lots, maintain ownership and rent out the units to long-term residential occupants.[32] After considering its options, Fairway Cap determined that RPRG had presented the best course and decided to pursue the rental regime at Fairway Village.[33]

         In November 2017, M&T Bank loaned $18.2 million to Fairway Cap to fund construction of the rental units. Fairway Cap's mortgage characterized the project as a commercial enterprise.[34] The "term sheet" described the rental units as "apartments."[35] And Section 1.5 of the Construction Loan Agreement refers to the construction of thirty-four "apartment buildings."[36] A Management Agreement, dated June of 2017, provided that Capano Management, a company that manages commercial assets for Louis Capano, III and his father, Louis Capano, Jr., would manage 127 rental units at Fairway Village.[37]

         D. Concerned Citizens Object

         Plaintiffs discovered Fairway Cap's plan to build townhouses for rent after seeing an online advertisement for apartments to be known as "The Reserve at Fairway Village."[38] Several homeowners appeared at a September 2017 Ocean View Town Council meeting to voice their objections.[39] The Town Council heard the objections and took the matter under advisement. After performing some research, the Town Council advised the homeowners that it could not provide relief since the planned rentals appeared to comply with Fairway Cap's recorded plans and with the Town's Code.[40] In response to this notification, on September 18, 2017, Plaintiff, Harold Solomon, wrote a letter to the Mayor of Ocean View in which he restated the homeowners' objection to Fairway Cap's rental plans.[41] On October 3, 2017, the Mayor responded by restating the Town's position:

The fact that the developer has chosen to remain the owner of multiple townhouses, rather than sell them, doesn't change the law, the Code or the rights of individual homeowners. It simply makes the developer an owner of multiple housing units, subject to the same rules and regulations as anyone else under the Town Codes . . .[42]

         On October 4, 2017, Plaintiff, Lisa Leary, apprised the Town by email that the "rental units being constructed are substantially smaller than the smallest townhome units in [Fairway Village], which seems to indicate that there has been a significant footprint change in the Subdivision Plans."[43] The Town's Director of Public Works replied, "[t]he changing of a model does not constitute a change in the Site. . . . The developer is limited to the number of units that can be constructed. . . . [T]he permits issued for the [townhouses] in Fairway Village all exceed the minimum livable floor area of 1250 square feet required by Code."[44]

         On October 5, 2017, Ms. Leary emailed the Town to advise that "the building footprint [for the to-be-rented townhouses had] overlapped the lot lines."[45] The Director of Public Works responded, "[w]ith the exception of [townhouse] Units 160 through 166, which have been constructed on their own individual lot, the area where the remaining 159 [townhouses] are being constructed is also one individual lot but larger. There are no individual lot lines for the Townhouses."[46]

         On October 20, 2017, Ms. Leary emailed the Town again, this time to inquire whether copies of Fairway Village townhouse leases were required to be filed with the Town.[47] On October 27, 2017, the Director of Public Works emailed back, explaining that rental leases are not filed nor required to be filed with the Town.[48]

         Ms. Leary's final written correspondence with the Town occurred on November 1, 2017, when she reiterated her concern that Fairway Cap's construction of the rental townhouses did not comply with the Town Code. The Town Manager responded by letter dated November 6, 2017, in which he confirmed that the Town did not see any violations of the Town Code in connection with Fairway Cap's construction activities, nor did the Town see any need for Fairway Cap to file a "re-subdivision" plan with the Town.[49]

         E. The Rental Scheme's Impact on Existing and Potential Homeowners

         Fairway Cap's current plan is to retain ownership of more than 76% of the condominium units to be built in Fairway Village. This high concentration of ownership renders Fairway Village a "non-conforming" community for purposes of securing mortgage financing that can be insured by the Federal National Mortgage Association ("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac").[50] According to Plaintiffs' mortgage financing expert, Joseph Della Torre, the lack of access to Fannie Mae or Freddie Mac-backed mortgages makes condominiums in Fairway Village "unwarrantable, "[51] meaning prospective purchasers or unit owners seeking to refinance will pay higher interest rates and higher points with lenders who offer products not insured by Fannie Mae or Freddie Mac.[52]

         Leland Trice, Plaintiff's real estate valuation expert, opined that property values throughout Fairway Village (both for single-family homes and townhouse condominiums) would suffer if Fairway Cap were permitted to introduce its townhouse rental regime into the community.[53] His rationale is simple. A community comprised largely of transient residents is less attractive, and therefore less valuable, than a community comprised of homeowners. For his part, Della Torre opined that the higher mortgage payments (caused by the lack of access to Fannie Mae and Freddie Mac mortgages) would shrink the pool of potential buyers, also lowering property values.[54]

         Fairway Cap's rental scheme will also affect Fairway Village's governance and management structure. Under Section 5.7 of the Constitution, the Developer is exempt from assessments.[55] Consequently, Fairway Cap will not be subject to current or future assessments for the approximately 127 condominiums it plans to build, own and rent. Section 5.9 of the Constitution, as amended, requires a $900 contribution from the initial purchaser of each living unit in Fairway Village.[56]Fairway Cap's rental units will not yield these up-front payments. Additionally, Section 5.10 requires the community association to create certain reserve funds for the repair and replacement of community areas and community property.[57] This requirement has not been satisfied by the Fairway Cap-controlled association.[58]All told, Fairway Cap's retention of 127 units deprives the community association of approximately $114, 000 in operating revenues that would be generated if these units were sold to the public.

         Although it incorporated in 2008, the Condominium Association did not hold its first annual meeting until the fall of 2017.[59] And contrary to the requirements of the enabling documents, two owner representatives have never been elected to the Condominium Council.[60] Moreover, according to Section 4.3 of the Community Constitution, [61] as long as Fairway Cap owns units in Fairway Village, its "Class B" membership gives it the right to additional votes until 2023.[62] With this provision in hand, Fairway Cap controls approximately 1, 100 votes (compared to about 200 homeowner votes).[63] Plaintiffs maintain Fairway Cap has thus "entrenched itself at Fairway Village" by establishing "control over the condominium, and any conflict between its own business plan and the best interests of the condominium will be decided by Fairway Cap."[64]

         F. Relevant Provisions of the Community's Governing Documents

         The definition section within the Fairway Village Declaration Establishing a Plan for Condominium Ownership (the "Declaration") applies both to the Declaration itself and to the "Code of Regulations recorded immediately hereafter and all amendments to said documents."[65] The Declaration defines "Unit Owner" as "any natural person, corporation, partnership, association, trust or other legal entity . . . which owns title to a Unit."[66] "Buildings" are defined as the "buildings used or intended to be used for residential purposes (including leasing of Units for residential purposes) or for any other lawful purpose more specifically set forth in the Declaration . . . and shall expressly include the Initial Buildings and, when and if constructed and submitted to the Act, any Expansion Building(s)."[67]

         The Declaration further states that each Unit and the Common Elements "shall be occupied and used as follows":

No part of the Property shall be used for other than residential housing and the related common purposes for which the Property was designated. Each Unit shall be used only for residential purposes and shall be occupied only by as many persons as do not burden the Unit or Common Elements; provided, however, that Developer shall be entitled to use a Unit or Units as 'models' or 'samples' for the purpose of selling or renting Units in the Condominium;
Except for residential use permitted by paragraph (a) of this Section, no industry, business, trade, occupation or otherwise designed for profit, altruism, exploration or otherwise shall be conducted, maintained or permitted on any part of the Property, nor shall be conducted, maintained or permitted on any part of the Property. Except for the Developer, its successors and assigns, and the agents thereof, no 'For Sale' or 'For Rent' signs or other window displays or advertising shall be maintained or permitted on any part of the Property or in any Unit therein without the prior written consent of the Council. The right is reserved by the Developer or its agents to place 'For Sale' or 'For Rent' signs on any unsold or unoccupied Units or at suitable places in the Common Elements.[68]

         The Community Constitution provides that "[a]ny owner who leases his/her Living Unit shall be deemed to have assigned his/her right to utilize the Community Property to the lessee of the Living Unit."[69] Anticipating that individuals other than owners may reside in the condominium units, the Community Constitution also provides:

Every provision of the Governing Documents, including the Community Codes, shall apply to all Owners, tenants, occupants, guests and invitees of any Living Unit. All owners who lease their Living Units shall include a notice provision in the lease informing the tenant and all occupants that the Living Unit and Community Property are subject to the Governing Documents, including the Community Codes. However, the failure to include such provision in the Lease shall not relieve any person of responsibility for complying with the Governing Documents.[70]

         The Community Constitution makes clear that "no Community Code shall prohibit outright the leasing or transfer of any Living Unit, or require consent of the Association for transfer of any Living Unit."[71]

         The Code of Regulations for Estates of Fairway Village Condominiums (the "Code") states, in relevant part:

The Developer or the Association may from time to time adopt rules and regulations pertaining to the rental of Units. Owners of rented Units shall be personally liable for the failure of a tenant or any invitee of a tenant to abide by rules and regulations pertaining to the use or occupancy of the Development. The Owners of any units shall obtain the approval of the Developer or the Association for any lease forms for the leasing of units within [Estates of Fairway Village Condominium].[72]

         In a section devoted entirely to "Sales, Leases, and Alienation of Units," the Code states:

No Owner shall execute any deed, lease, mortgage or other instrument conveying or mortgaging the title to his Unit without including therein the undivided interest of such Unit in the Common Elements, it being the intention hereof to prevent any severance of such combined Ownership and Interest. Any such lease, mortgage, or other instrument purporting to affect one or more of such interests, without including all such interests, shall be deemed and taken to include the interest or interest so omitted, even though the latter shall not be expressly mentioned or described therein. No part of the interests in the Common Elements of any Unit may be sold, leased, transferred, given, devised, or otherwise disposed of, except as part of a sale, lease, transfer, gift, devise, or other disposition of the Unit to which such interest are appurtenant, or as part of a sale, lease, transfer, gift, devise or other disposition of such part of the interest in the Common Elements of all Units.[73]

         The only express restriction on an owner's right to rent his condominium unit appears in Section 9.2 of the Code, which states, "no Owner shall be permitted to convey, mortgage, hypothecate, sell, lease, give or devise his Unit unless and until he . . . shall have paid in full to the Council all unpaid Common Expenses . . . against his Unit and payable prior to the date of conveyance, except permitted mortgagees."[74] The Code also emphasizes that no amendment to the Code may "interfere with or affect . . . the lease, sale, other disposition or use of any Unit(s) owned by Developer."[75]

         The Code contemplates that copies of lease agreements will be supplied to the Condominium Council:

"[e]very Unit Owner, within ten (10) days of entering into a lease or any other agreement for the occupancy or use of his Unit (including, but not limited to, any rental agreement that may be excluded under the Delaware Landlord Tenant Code under 25 Del. C. § 5102), shall supply a copy of any such lease or other agreement to the Council together the payment of a reasonable administrative fee to process such registration of each lease or other agreement as may be determined by the Council. Any such rental agreement shall also expressly provide that such rental agreement is subject to the provisions of the Act, the Declaration, this Code of Regulations and the Rules and Regulations and that any failure of the lessee to comply with such provisions shall constitute a default under the rental agreement.[76]

         Finally, the terms and conditions of Fairway Cap's form Agreement of Sale and Purchase for Fairway Village townhome condominiums clearly alerts buyers that Fairway Cap reserves the right to rent unsold units: "Buyer further understands and agrees that Seller shall own, may vote in connection with, may further improve, and may rent any unsold unit, and in connection therewith shall have no lesser rights, privileges and powers than any other unit owner."[77]

         G. Procedural History

         Plaintiffs filed their three-count Verified Complaint on December 28, 2017.[78]Count I alleges breach of contract[79]; Count II alleges breach of fiduciary duties; and Count III alleges fraud.[80] On January 25, 2018, Plaintiffs sought an order enjoining Defendants from constructing units with dimensions that deviate either from recorded plans or from units already constructed, particularly regarding square footage. The proposed order included a mandatory component that would compel Defendants to rebuild or reconfigure noncompliant units.[81] Plaintiffs also sought an order enjoining Defendants from maintaining a residential apartment complex in Fairway Village, requiring Defendants to place all constructed townhouse condominium units up for sale to the public and requiring the immediate transfer of control of the governance at Fairway Village to the owners of existing homes and condominiums.[82]

         The Court granted Plaintiffs' Motion for Preliminary Injunction in part on March 20, 2018, by enjoining Defendants from renting townhouse condominium units at Fairway Village pending trial. Thereafter, on April 19, 2018, the Court granted Defendants' motion to dismiss Plaintiffs' breach of fiduciary duty and fraud claims, leaving only the breach of contract claim for trial.[83] On May 23, 2018, the Court granted an order consolidating this case with 36 Builders, Inc., d/b/a Insight Homes v. Fairway Cap, LLC and Fairway Village Construction, Inc.[84] The 36 Builders complaint was then dismissed by Stipulation of Dismissal on August 15, 2018.

         Near the eve of trial, Plaintiffs moved for summary judgment and moved to exclude the expert report and related testimony of Leland Trice. Plaintiffs also moved to exclude the opinion evidence of Defendants' expert, Michael Morton, Esquire. Given the compressed time before trial, the Court deferred ruling on these motions until its post-trial decision. The one-day trial occurred on August 28, 2018. On October 10, 2018, Defendants made a post-trial motion to exclude supplemental and undisclosed expert opinion testimony from Joseph Della Torre. The parties presented post-trial oral argument on January 3, 2019. This is the Court's post-trial decision.

         II. ANALYSIS

         As noted, the only claim tried to the Court was Plaintiffs' breach of contract claim. To succeed on that claim, Plaintiffs were obliged to prove: (1) the existence of a contract; (2) the breach of an obligation imposed by the contract; and (3) harm suffered as a result of the breach.[85] The parties agree that the community's governing documents constitute contracts between the developer and the homeowners. When considering a breach of contract claim in the real property context, the Court must remain mindful that the law will facilitate the free use of land when not otherwise validly restricted.[86] Thus, Plaintiffs bore the burden at trial to identify where Fairway Cap was restricted in the use of its property, by positive law, contract or otherwise, and how those restrictions had been breached.[87]

         A. Plaintiffs Cannot Prevail on Their Breach of Contract Claim by Proving Defendants Breached the ...


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