Donovan Smith HOA v. Donovan Smith MHP, LLC

IN THE SUPREME COURT OF THE STATE OF DELAWARE
DONOVAN SMITH HOA, §
§
Appellant Below, § No. 24, 2018
Appellant, §
§ Court Below: Superior Court
v. § of the State of Delaware
§
DONOVAN SMITH MHP, LLC, § C.A. No. S17A-06-001 MJB
§
Appellee Below, §
Appellee. §
Submitted: June 13, 2018
Decided: July 10, 2018
Before STRINE, Chief Justice; VAUGHN and TRAYNOR, Justices.
ORDER
In this appeal, the principal issue raised by the appellant, Donovan Smith
HOA (the “Homeowners”), is whether Donovan Smith MHP, LLC (the
“Landowner”) satisfied its obligation under the Rent Justification Act to show that
its proposed rent increase is “directly related to operating, maintaining or improving
the manufactured home community” as a prerequisite to being able to obtain an
above-inflation rent increase.1 In Bon Ayre Land, LLC v. Bon Ayre Community
Association,2 we made clear that “the landowner must show that its original expected
return has declined, because the cost side of its ledger has grown. If a landowner
1
25 Del. C. § 7042(a)(2).
2
149 A.3d 227 (Del. 2016).
can show that its costs have gone up, that opens the door to a rent increase based on
§ 7042(c)’s factors, including market rent.”3
Before the arbitrator in this dispute, neither party was represented by counsel.
The Landowner presented evidence in support of its argument that its costs had
increased in a manner that satisfied § 7042(a)(2),4 including testimony that “in 2016
driveways were installed in every unit,” and that “the [Landowner] painted the
maintenance building . . . .”5
In their closing argument, the Homeowners argued that this evidence was not
sufficient because the Landowner “hasn’t proven that he’s had increased
expenses. . . . [or] shown any data that says that he is having trouble with his . . .
books where we’re . . . balancing his books so that he can make a profit and continue
his business in a way.”6
But before the hearing, the Homeowners had not sought information about the
Landowner’s regular costs of operations, and at the hearing, did not dispute that the
Landowner had added a driveway to each unit and repainted the maintenance
building.7 Although the Landowner did not present evidence of what these
3
Id. at 234–35.
4
25 Del. C. § 7042 (“The proposed rent increase is directly related to operating, maintaining or
improving the manufactured home community, and justified by 1 or more factors listed under
subsection (c) of this section.”).
5
App. to Opening Br. at A10 (Arbitrator’s Decision).
6
Id. at A77 (Arbitration Transcript).
7
Although the Homeowners stated during the Landowner’s direct examination of its office
manager that the improvements to the maintenance building did not occur in 2016, they did not
2
improvements cost, the arbitrator was charged with addressing the evidence in front
of him and making fair inferences from it.8 One fair inference is that adding a
driveway to each unit involved a substantial cost, and that repainting the
maintenance building also involved a cost, and that without an increase in rent, the
Landowner’s rate of return would have been reduced.
On appeal to the Superior Court, the Homeowners argued that the arbitrator
erred in deciding that the Landowner had shown that “its profits were down because
its costs were up,”9 and thus by granting a rent increase of $29.90, or 6.7%, and in
deciding that the Landowner’s rent increase was justified by the market rent factor
of § 7042(c).10 But the Homeowners acknowledged that “it is fair to assume that
[the Landowner] incurred some expenses by installing driveways,” despite their
contention that “the record lacks any evidence as to what that cost might be.”11 And
the arbitrator’s conclusion that the Landowner satisfied the market rent factor was
follow up on this inquiry during cross-examination of the office manager, as the arbitrator stated
they could. Id. at A62–65 (Arbitration Transcript).
8
1 Del. Admin. C. § 202-7.21 (“The decision of the arbitrator shall be based solely on the evidence
presented at the hearing and based on the standards set forth in 25 Del.C. § 7042.”).
9
App. to Opening Br. at A115 (Donovan Smith HOA’s Opening Br. on Appeal).
10
Id. at A117, A126; 25 Del. C. § 7042(c) (identifying as one of the factors that “may justify the
increase of rent in an amount greater than the CPI-U” market rent, defined as “that rent which
would result from market forces absent an unequal bargaining position between the community
owner and the home owners,” and determined by considerations such as “rents charged to recent
new home owners entering the subject manufactured home community and/or by comparable
manufactured home communities”).
11
Id. at A115; id. at A116 (“While it is certainly possible that [the Landowner] had an increase in
its overall expenses because incurred the expense for the driveway and had no change to any of its
other expenses, there is no evidence in the record to suggest that this was the case. As the party
with the burden of proof, it was [the Landowner]’s obligation to provide such evidence.”).
3
based on his review of the entire record and his observation that even with the $29.90
rent increase, the Homeowners’ rent “is still far below the rents of Donovan Smith’s
competitors.”12 The arbitrator’s findings were justified by the substantial record
evidence of the market rents at comparable communities.13
In the course of affirming, the Superior Court made statements that are
inconsistent with the very structure of the Rent Justification Act,14 and our decisions
interpreting it.15 To that point, the Superior Court suggested that a landowner may
seek an above-inflation rent increase without any worry that the homeowners could
examine the underlying business records necessary to test whether the proposed rent
increase is “directly related to operating, maintaining or improving the manufactured
home community”16 when it stated:
Nothing in the statute, however, requires that the private owner expose
its financial information to public scrutiny. While the intent of the
statute is to maintain the same relative return on the property that the
12
Id. at A11 (Arbitrator’s Decision).
13
Id. at A11–12 (reviewing the Landowner’s identification of the monthly rent at three comparable
communities and testimony by witnesses from both parties that identified McNichol Place as the
“best comparison to Donovan Smith” before concluding that the Landowner satisfied the market
rent factor because “even with the proposed rent increase McNichol Place remains $92.40 a month
more expensive than Donovan Smith”).
14
25 Del. C. § 7043(b) (requiring a landowner to “disclose financial and other pertinent documents
and information supporting the reasons for the rent increase”); 1 Del. Admin. C. § 202-6.0 (“At the
meeting, the community owner shall, upon request of any affected home owner or his or her
representative, disclose all of the material factors resulting in the decision to increase the rent,
including the financial and other pertinent documents and information supporting the reasons for
the rent increase.”).
15
See Bon Ayre Land, LLC, 149 A.3d at 235–36 (noting that the Rent Justification Act includes
the “modest” requirement that the landowner “produce evidence suggesting that the ‘return’ on its
‘property’ has declined”); id. at 237 (rejecting an interpretation of the evidentiary standard of the
Rent Justification Act that is “absent from the language of the Act itself and unnecessary”).
16
25 Del. C. § 7042(a)(2).
4
owner was satisfied to receive before the statute took effect, there is no
requirement that it be a penny for penny or dollar for dollar analysis, at
least in these circumstances, when the owner is seeking to justify the
increase based on market rent.17
That statement was erroneous, and based on a logic that is in general
inconsistent with the principles underlying all litigation in our courts. To the extent
that there is a legitimate basis for claiming confidentiality as to any business
record—a status that has to be proven—the Superior Court, or the arbitrator in the
first instance, may condition discovery and use of the document on appropriate
conditions.18 But it is not the case that a landowner may proceed under the Rent
Justification Act to argue that it is entitled to an above-inflation rent increase without
also being willing to produce documents to contesting homeowners that allow them
to fairly test that assertion.19
17
Donovan Smith HOA v. Donovan Smith MHP, LLC, C.A. No. S17A-06-001 MJB, 2017 WL
6507188, at *4 (Del. Super. Dec. 19, 2017).
18
E.g., Super. Ct. Civ. R. 26(c)(7) (“Upon motion by a party or by the person from whom discovery
is sought, and for good cause shown, the Court . . . may make any order which justice requires to
protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense
. . . that a trade secret or other confidential research, development, or commercial information not
be disclosed or be disclosed only in a designated way . . . .”); 1 Del. Admin. C. § 202-7.17 (“Any
party may request that the arbitrator accord confidential treatment to some or all of the information
contained in a document. If the claim of confidentiality is challenged by any party, then the party
claiming confidential treatment must demonstrate to the arbitrator that the designated information
is confidential as recognized by state law. Notwithstanding any claim of confidentiality, any party
to the proceeding shall be allowed to inspect a copy of the confidential document upon the signing
of a confidentiality agreement in a form approved by the arbitrator.”).
19
25 Del. C. § 7043(b) (requiring a landowner to “disclose financial and other pertinent documents
and information supporting the reasons for the rent increase”).
5
For present purposes, we affirm the arbitrator’s decision on the case-specific,
narrow basis that on the record before him, the arbitrator had a rational basis to reach
his finding that the Landowner’s return had declined because of its increased cost of
adding a driveway to each unit and repainting the maintenance building.20 We see
no basis in the record to conclude that the Homeowners fairly presented the arbitrator
with a request to require the Landowner to produce copies of its underlying books
and records, or that the Homeowners argued before their closing argument, when the
record was closed, that the Landowner was obligated to do so.21
Evidentiary hearings are critical to the efficient procession of justice, and
appellate courts are rightly hesitant to second-guess the initial fact finder on the basis
of arguments not fairly presented. That guides our result here, where we accord
deference to the arbitrator, while making clear that in a later case, the outcome could
be quite different, especially if the homeowners fairly demand discovery of the
landowner’s books and records relevant to the question of whether the proposed
above-inflation rent increase is “directly related to operating, maintaining or
improving the manufactured home community”22 and the arbitrator fails to require
production of those records.
20
App. to Opening Br. at A10 (Arbitrator’s Decision).
21
Id. at A77 (Arbitration Transcript).
22
25 Del. C. § 7042(a)(2).
6
We thus affirm but for different reasons than articulated by the Superior Court
in its opinion of December 19, 2017.23
BY THE COURT:
/s/ Leo E. Strine, Jr.
Chief Justice
23
Donovan Smith HOA, 2017 WL 6507188 (Del. Super. Dec. 19, 2017).
7