Bon Ayre Land LLC v. Bon Ayre Community

IN THE SUPREME COURT OF THE STATE OF DELAWARE
BON AYRE LAND LLC, §
§
Appellant Below-Appellant, § No. 221, 2015
§
v. § Court Below: Superior Court
§ of the State of Delaware
BON AYRE COMMUNITY §
ASSOCIATION, § C.A. No. K14A-08-001
§
Appellee Below-Appellee. §
Submitted: February 24, 2016
Decided: February 25, 2016
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, Justices;
and GLASSCOCK, Vice Chancellor,* constituting the Court en banc.
ORDER
This 25th day of February 2016, having considered this matter on the briefs
filed by the parties and after oral argument, we find it evident that:
(1) This appeal is centered on a disagreement about a rent increase
between Bon Ayre Land LLC (the “Landlord”), the owner of a manufactured
homes community, and Bon Ayre Community Association (the “Homeowners‟
Association”), which represents the interests of the individual homeowners who
lease land from the Landlord. The parties dispute various issues regarding the
propriety of an arbitrator‟s resolution of their dispute under a new statute that
*
Sitting by designation under Del. Const. art. IV, § 12.
limits the ability of property owners leasing land to owners of manufacture homes
to increase rent above the applicable consumer price index.1 This appeal comes to
us from the Superior Court, which reversed the decision of the arbitrator and
denied the Landlord the right to implement any rent increase by relying on one
ground. That ground involved the Superior Court‟s de novo determination that
when the Landlord convened the meetings with the homeowners required under 25
Del. C. § 7043(b), the Landlord failed to “in good faith, disclose all of the material
factors resulting in the decision to increase the rent”2 because it did not present a
market rent study that it attempted to introduce at the later arbitration, or any other
verifiable documentation.3 The market rent study provided a detailed perspective
on rents at allegedly comparable properties in support of the Landlord‟s position
that the proposed rent increase was justified by “market rent,” which is one of the
potential grounds for a rent increase under the statute.4 The Superior Court held
that “[b]ecause [the Landlord] has failed to comply with the procedural
1
25 Del. C. §§ 7040 et seq. (prior versions).
2
Id. § 7043(b) (prior version).
3
Bon Ayre Land LLC v. Bon Ayre Cmty. Ass’n, 2015 WL 893256, at *8 (Del. Super. Feb. 26,
2015).
4
“One or more of the following factors may justify the increase of rent in an amount greater than
the [Consumer Price Index For All Urban Consumers in the Philadelphia-Wilmington-Atlantic
City area (“CPI-U”)] . . . (7) Market rent.--For purposes of this section, “market rent” means that
rent which would result from market forces absent an unequal bargaining position between the
community owner and the homeowners. In determining market rent, relevant considerations
include rents charged by comparable manufactured home communities in the applicant‟s
competitive area. To be comparable, a manufactured home community must offer similar
facilities, services, amenities and management.” 25 Del. C. § 7042 (prior version).
2
requirements of 25 Del. C. § 7043(b), any rental increase above the [applicable
consumer price index] is denied.”5
(2) In reaching the issue of whether the Landlord had met its obligation
under 25 Del. C. § 7043(b) to disclose all material factors resulting in its proposal
to raise the rent, the Superior Court necessarily made a de novo determination
because the arbitrator held that the Homeowners‟ Association had waived that
issue in the course of the proceedings, not only by virtue of a formal stipulation
stating that “[a] meeting between the parties was held pursuant to 25 Del. C.
§ 7043(b)”6 but, more importantly, by its conduct both on the way to and during
the arbitration. During that time period, the Homeowners‟ Association appears to
have agreed that the parties would focus solely on the issue of whether the
proposed rent increase was justified on the basis of comparable market rent and
that the Landlord would win if it could demonstrate that the rent increase was
justified on that basis.7 Only after two of the Landlord‟s witnesses had testified at
5
Bon Ayre Land LLC, 2015 WL 893256, at *9.
6
App. to Answering Br. at 24 (Stipulated Facts).
7
According to the arbitrator, during a May 7, 2014 teleconference between the parties, the
Homeowners‟ Association‟s attorney initially said that he planned to challenge the validity of the
meetings for failure to comply with the statutory requirements, but then agreed that the Landlord
would win if it could prove that the proposed rent increase was justified by comparable market
rent. Over the next three weeks, the parties and the arbitrator exchanged letters and emails, but
there was no mention of challenging the validity of the meetings. Then, at the hearing, the
arbitrator asked: “Do the parties agree a meeting was held in accordance and pursuant to Title
25, Delaware Code 7043(b)?” To which the Homeowners‟ Association‟s attorney replied: “Yes.
There were two meetings.” Id. at 26 (Transcript of Arbitration at 16, Bon Ayre Cmty. Ass’n v.
Bon Ayre Homes, Nos. 2-2014 & 3-2014(May 28, 2014)). Further, the Homeowners‟
Association‟s attorney gave no opening statement and did not raise the issue of the Landlord‟s
3
the hearing and one of them had been excused, the arbitrator found, did the
Homeowners‟ Association then revive its contention that the Landlord failed to
comply with the statute‟s procedural requirements. The arbitrator found that was
unfair and held that the Homeowners‟ Association had waived its right to make
that contention.
(3) On appeal, the Superior Court focused very narrowly on the formal
stipulation and gave little weight to the arbitrator‟s impression of the issues that
were to be heard and the arbitrator‟s understanding of the Homeowners‟
Association‟s position in the course of shaping the issues for hearing.
(4) Were this a typical administrative law appeal, we would likely reverse
the Superior Court‟s decision because it had substituted its own judgment in a
situation when the body entrusted with the initial responsibility to hear a dispute
had exercised its discretion reasonably. Given the arbitrator‟s close familiarity
with the record and given the record‟s support for his impression that the
Homeowners‟ Association had waived any challenge under 25 Del. C. § 7043(b),
we would be loathe to find that the arbitrator had engaged in any abuse of
discretion.
failure to comply with the requirements of 25 Del. C. § 7043(b) until four hours into the
arbitration proceedings, after two of the Landlord‟s witnesses testified without being asked about
the meetings, and one of those witnesses was dismissed.
4
(5) But, the statute under which the Superior Court was operating was
confusing at best, and incoherent at worst. For starters, the statute expressly
deemed the proceeding before the arbitrator to be “nonbinding.”8 But, it then went
on to say that the arbitrator‟s ruling will be reviewed by the Superior Court and
that the appeal will be “on the record without a trial de novo.”9 We are at a loss to
determine what standard of review the Superior Court was supposed to apply based
on that language. Although the statute calls for a decision by an arbitrator, it does
not indicate that the Superior Court should use the traditionally very narrow scope
of review available for arbitrators‟ decisions.10 And by suggesting that the
8
25 Del. C. § 7043(c) (prior version).
9
Id. § 7044 (prior version).
10
See, e.g., SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. 2014) (“„[R]eview of an
arbitration award is one of the narrowest standards of judicial review in all of American
jurisprudence.‟”) (internal citation omitted); TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel
Sec., Inc., 953 A.2d 726, 732 (Del. Ch. 2008) (quoting Kashner Davidson Sec. Corp. v. Mscisz,
531 F.3d 68, 70 (1st Cir. 2008)) (“Arbitration awards . . . are not lightly disturbed, and „Courts
must accord substantial deference to the decisions of arbitrators.‟”); Travelers Ins. Co. v.
Nationwide Mut. Ins. Co., 886 A.2d 46, 48 (Del. Ch. 2005) (“As a general rule, a decision
reached by an arbitration panel is not reviewed on the merits by Delaware courts. The grounds
for vacating an arbitration award, where they exist, are narrowly circumscribed.”); Rancone v.
Phx. Payment Sys., Inc., 2014 WL 6735210, at *4 (Del. Ch. Nov. 26, 2014) (noting that
according substantial deference to arbitrators‟ decisions is “[c]onsistent with public policy
favoring alternative dispute resolution”) (internal citation omitted); RBC Capital Mkts. Corp. v.
Thomas Weisel Partners, LLC, 2010 WL 681669, at *10 (Del. Ch. Feb 25, 2010) (noting the
“broad deference generally accorded arbitrators”); see also W.R. Grace & Co. v. Local Union
759, Int’l Union of United Rubber, Cork, Linoleum & Plastic Workers of Am., 461 U.S. 757, 764
(1983) (noting that a court “may not overrule an arbitrator‟s decision simply because the court
believes its own interpretation of the contract would be the better one”); Totes Isotoner Corp. v.
Int’l Chem. Workers Union Council/UFCW Local 664C, 532 F.3d 405, 411 (6th Cir. 2008)
(quoting Tenn. Valley Auth. v. Tenn. Valley Trades & Labor Council, 184 F.3d 510, 514 (6th Cir.
1999)) (“[I]n the context of arbitration, „courts play only a limited role when asked to review the
decision of an arbitrator.‟”); Way Bakery v. Truck Drivers Local No. 164, 363 F.3d 590, 593 (6th
Cir. 2004) (“A court‟s review of an arbitration award is one of the narrowest standards of judicial
5
arbitrator‟s decision would be nonbinding, the statute provided no guidance as to
what weight, if any, was to be given to the arbitrator‟s decision on appeal.11
(6) For that reason, we cannot conclude that the Superior Court erred by
determining that the challenge to the Landlord‟s compliance with the requirements
of 25 Del. C. § 7043(b) was not waived, as the statute in its muddled form can be
read as indicating that the Superior Court should decide the dispute de novo. That
review in all of American jurisprudence. Disagreement with an arbitrator‟s factual findings does
not constitute grounds for a court‟s rejection of those findings.”) (internal citations omitted)
(internal quotation marks omitted); Am. Arbitration Ass‟n App. R. A-10 (“A party may appeal
on the grounds that the Underlying Award is based upon: (1) an error of law that is material and
prejudicial; or (2) determinations of fact that are clearly erroneous.”).
11
The General Assembly has now removed the term “nonbinding” from the statute. That
removal and the new provision for appeal leaves the statute in a more understandable form, as
the new appeal provision provides that any review by the Superior Court will be “on the record
and the Court shall address written and/or oral arguments of the parties as to whether the record
created in the arbitration is sufficient justification under the Code for the community owner‟s
proposed rental increase in excess of the CPI-U.” 25 Del. C. § 7044. That usage, although
loose, is associated with the kind of review that is given to determinations by administrative
agencies. Under that form of review, if a factual finding of the initial tribunal is supported by
substantial evidence, that finding must be given deference. See, e.g., 29 Del. C. § 10142
(providing, similar to the old version of the statutes, that an appeal of an administrative agency‟s
decision shall be “on the record without a trial de novo” but also providing that the trial court‟s
“review, in the absence of actual fraud, shall be limited to a determination of whether the
agency‟s decision was supported by substantial evidence on the record before the agency”);
Angstadt v. Red Clay Consol. Sch. Dist., 4 A.3d 382, 387 (Del. 2010) (“On appeal of an
administrative agency‟s adjudication, this Court‟s sole function is to determine whether the
Board‟s decision is supported by substantial evidence and is free from legal error.”) (internal
citations omitted); Falconi v. Coombs & Coombs, Inc., 902 A.2d 1094, 1098 (Del. 2006) (“We
will accept the Board‟s findings of fact if there is substantial evidence to support them.
Substantial evidence is more than a mere scintilla, but less than a preponderance of the evidence.
Substantial evidence is such relevant evidence that a reasonable mind might accept as adequate
to support a conclusion. The appellate court does not weigh the evidence, determine questions of
credibility, or make its own factual findings.”). As it applies here, the statutory amendment
would suggest that any ultimate determination by the arbitrator of whether and to what extent a
rent increase is justified should be given deference if based on substantial record evidence and
not tainted by any error of law. That said, even the amended statute is less than ideally clear, and
it would be helpful if the statute would explicitly incorporate a recognized form of judicial
review.
6
said, we do conclude that the Superior Court erred by failing to give weight to the
consequences of its determination. Precisely because the Landlord reasonably
understood the Homeowners‟ Association to have waived the failure to comply
argument and so did the arbitrator, the Landlord had no reason to put on evidence
to show that it had disclosed all of the material factors resulting in its decision to
raise the rent at the meetings with the homeowners. In fairness, any reversal of the
arbitrator‟s decision on this basis, therefore, should have resulted in a remand to
the arbitrator to allow him to take additional evidence on this claim.
(7) We implement that remedy now and decline to reach any of the other
issues on this appeal. Many of the issues that have been raised can be better
addressed in the wake of a fresh arbitration based on the amended form of the
statute, which attempted to clarify some of the problematic issues with the initial
form.12 Moreover, a remand will allow the parties to more clearly argue to the
arbitrator what the statutory phrase “disclose all of the material factors resulting in
the decision to increase the rent”13 means. But, we do note that nothing about that
12
The new provision for an appeal provides:
The community owner, the home owners‟ association, or any affected home
owner may appeal the decision of the arbitrator within 30 days of the date of
issuance of the arbitrator‟s decision. The appeal shall be to the Superior Court in
the county of the affected community. The appeal shall be on the record and the
Court shall address written and/or oral arguments of the parties as to whether the
record created in the arbitration is sufficient justification under the Code for the
community owner‟s proposed rental increase in excess of CPI-U.
25 Del. C. § 7044.
13
25 Del. C. § 7043(b) (prior version).
7
statute necessarily precludes a property owner from presenting the key elements of
its reason for a rent increase in an effort to reach accommodation with the
homeowners, and then only later procuring a formal expert report if a contentious
and expensive arbitration ensues. Rather than dilate further on this issue on a
confused record,14 it is best that the arbitrator and the Superior Court, if necessary,
consider this issue afresh with new briefs from the parties.
(8) Once the arbitrator concludes whether a meeting valid under 25 Del.
C. § 7043(b) was held, his task on remand will be complete. He can enter an order,
leaving the parties to then present any disagreements with his rulings to the
Superior Court. The arbitrator need not revisit his determinations as to the
appropriate rent increase. Rather, that and other issues previously determined by
the arbitrator shall be revisited by the Superior Court as necessary (e.g., if the
14
By way of example of the confusion in the record, the Landlord faults the arbitrator for failing
to give collateral effect to a prior arbitration between the Homeowners‟ Association, on behalf of
certain homeowners who are not parties in this case, and the Landlord. In so ruling, the
arbitrator relied upon the following statement by the arbitrator in that case: “It is stipulated that
this decision only affects eight tenants and that more tenants will be addressing these problems in
the future. This decision should not be considered controlling on whether future rent increases
could be justified.” Answering Br. Attach. 2 (Arbitrator‟s Decision, Bon Ayre Cmty. Ass’n v.
Bon Ayre Land, LLC, No. 4-2013, at 6–7 (Dec. 30, 2013)). We can understand the reluctance of
the arbitrator to give the effect to this prior ruling (in which the arbitrator held that the Landlord
had justified a rent increase from $309 to $349 per month) in view of this ambiguous statement
about it being “stipulated” that his ruling would only have this effect. Although it seems
unlikely that past proceedings involving homeowners‟ associations and property owners should
have no collateral effect, parties can agree that such proceedings will not have that effect. The
record here is confusing, and it would be hazardous to second-guess the arbitrator as to this issue
without a firmer understanding of what the Landlord and the Homeowners‟ Association
understood when they engaged in a prior arbitration about eight different homeowners‟ rent, and
what they told that arbitrator.
8
arbitrator determines that the meeting was valid and his determination is upheld by
the Superior Court). In any review of that determination, the arbitrator‟s thorough
decision on the economic merits of the rent increase dispute, or any other ruling of
the arbitrator, the Superior Court shall apply the amended statute.15
(9) Furthermore, our remand will allow the parties to consider their
respective positions with cool heads and warm hearts. They can decide whether a
new 25 Del. C. § 7043(b) meeting should be held, or whether, in retrospect, they
can live with the arbitrator‟s original decision, which assessed the record evidence
carefully and came to a conclusion that the Landlord was justified in raising the
rent substantially above the applicable consumer price index, but not to the levels it
sought, even though that decision did not give either side everything it wanted. If
they cannot, then the parties can proceed before the arbitrator anew, formally brief
to him the complicated legal issues they now present, and accord him the
opportunity to consider them under the amended statute.16
15
See supra note 11.
16
Finally, we note that the arbitrator took this contentious case very seriously. Due to the burden
of the remand upon him, the parties are expected to share the costs of the arbitrator‟s fee, as if
this were an entirely new arbitration. The remand is occasioned by circumstances having
nothing to do with the arbitrator‟s own performance, because he addressed thoroughly the issues
fairly presented to him by the parties.
9
NOW, THEREFORE, IT IS ORDERED that the judgment of the Superior
Court is REVERSED and the case is REMANDED to the arbitrator for further
proceedings consistent with this Order.
BY THE COURT:
/s/ Leo E. Strine, Jr.
Chief Justice
10