James W. Owen, Jr. v. Tavistock Civic Association, Inc.

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
March 26, 2019
James W. Owen, Sr., Esquire Robert J. Valihura, Jr., Esquire
James W. Owen, P.A. The Law Office of Robert J. Valihura, Jr.
Delaware Corporate Center II 3704 Kennett Pike, Suite 200
Two Righter Parkway, Suite 125 Greenville, Delaware 19807
Wilmington, Delaware 19803
RE: James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc.,
C.A. No. 2017-0571-MTZ
Dear Counsel:
Plaintiffs and Counterclaim Defendants James W. Owen, Jr. and Jana L.
Owen (the “Owens”) have petitioned for costs and legal fees incurred in connection
with this deed restriction action against Defendant and Counterclaim Plaintiff
Tavistock Civic Association (“Tavistock”). The Owens seek court costs of
$1,127.50 under Court of Chancery Rule 54(d), $5,340.40 in attorneys’ fees incurred
in connection with a motion to compel (the “Motion to Compel”) under Court of
Chancery Rule 37(a)(4)(C), and $18,906.16 in additional attorneys’ fees under the
bad faith exception to the American Rule. For the following reasons, I decline to
shift costs under Court of Chancery Rule 54(d) or award attorneys’ fees under the
bad faith exception. I do, however, exercise my discretion to apportion the Motion
to Compel expenses in the Owens’ favor.
James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc.,
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I. Background
The Owens, homeowners in the Tavistock development, filed this case under
10 Del. C. § 348 seeking a judicial declaration that Tavistock improperly enforced a
deed restriction in denying the Owens’ request to erect a privacy fence. The Owens
also sought injunctive relief prohibiting Tavistock from enforcing the deed
restriction against them on the basis that it was unenforceable.
Tavistock moved for judgment on the pleadings, arguing that its board
decisions in applying the deed restriction were insulated by the business judgment
rule and the Owens did not plead facts sufficient to overcome that presumption. On
February 21, 2018, serving as Master in Chancery, I heard argument on the motion
for judgment on the pleadings and issued an oral draft report concluding that
Tavistock’s corporate status does not trump or render inapplicable this State’s well-
settled contract law or statutory provisions under Section 348 regarding the
enforceability of deed restrictions. No party took exceptions to the report, and it
became final on March 6, 2018, and was adopted as an order of this Court on March
19, 2018.
On June 8, 2018, the Owens moved to compel additional documents and
revised discovery responses, arguing that Tavistock was improperly limiting
discovery in two ways. The first was temporal: despite Tavistock’s representations
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that it had consistently enforced the deed restriction since April 9, 1984, Tavistock
limited its interrogatory responses and document production to the three years
preceding this action. The second related to claims of privilege for documents and
communications with a board member turned in-house counsel. The Owens sought
both information as to when the board member began advising the board in a legal
capacity, and the production of any non-privileged documents and communications.
Tavistock opposed the Motion to Compel and moved for a protective order.
Tavistock argued that using April 9, 1984 as the starting point for discovery “for a
fence dispute, was ridiculous, was abusive on its face,” “outrageously excessive,”
and “abusive and outlandishly overbroad,” and accused the Owens of using that time
period “as a weapon to beat Tavistock into approving” the fence application.1
Regarding the privilege concern, Tavistock explained that the in-house counsel
began providing legal advice on May 3, 2017, and confirmed that it would withhold
communications with her in connection with the provision of legal advice as
privileged.
On August 14, 2018, I granted the Motion to Compel in part and denied it in
part, ordering that (1) the discovery period for certain categories of documents would
1
Docket Item (“D.I.”) 44 at ¶¶ 14-15.
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run from April 9, 1984 through the initiation of this action to allow discovery into
Tavistock’s assertions that “it has uniformly upheld the deed restrictions regarding
fences from April 9, 1984, to the present,” and (2) Tavistock could only assert
privilege over the in-house counsel’s documents dated after May 3, 2017, and should
log all documents withheld as privileged.2 I denied without prejudice the Owens’
request for attorneys’ fees in connection with the Motion to Compel.3
On September 11, 2018, Tavistock informed the Court that, a few days prior,
Tavistock’s board had passed two resolutions that permitted the Owens to construct
their fence. Tavistock asked that discovery be stayed and the action be dismissed as
moot. The Owens agreed that the action was mooted and that a stay of discovery
was appropriate, but requested leave to petition for fees and costs prior to dismissal
of the action. The Owens so petitioned on October 22, 2018 (the “Petition”).
Briefing on the Petition was completed on December 14, 2018, and oral argument
was held on January 7, 2019. I grant the Petition in part and deny it in part.
2
D.I. 51.
3
Id. In denying the fee request, I referenced Section 348’s fee-shifting provision,
which muddied my explanation. As I clarified during oral argument on the Petition,
that language did not foreclose a request for attorneys’ fees or expenses under Court
of Chancery Rule 37 or other exceptions to the American Rule. Hearing Tr. 44-45,
January 7, 2019.
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II. Analysis
Through the Petition, the Owens seek to shift fees and costs. While the so-
called American Rule dictates that each party is responsible for its own legal fees,
this Court recognizes several exceptions, including the bad faith conduct of a party
to the litigation4 and where fees are authorized by statute.5 Likewise, the right of a
party to recover court costs “depends on statutory authority, express or implied [and]
Court of Chancery Rule 54 provides that costs shall be allowed as of course to the
prevailing party unless the Court otherwise directs.”6
The Owens seek recovery of fees and costs via three exceptions to the
American Rule: (1) Court of Chancery Rule 54 (to shift costs as a prevailing party);
(2) Court of Chancery Rule 37 (to shift expenses, including attorneys’ fees, in
connection with the Motion to Compel); and (3) the bad faith exception to the
American Rule (to shift the remainder of the Owens’ attorneys’ fees incurred in this
action).
4
Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225, 231 (Del. Ch.
1997).
5
See, e.g., 10 Del. C. § 348(e).
6
Comrie v. Enterasys Networks, Inc., 2004 WL 936505, at *4 (Del. Ch. Apr. 27,
2004) (internal citations and quotation marks omitted).
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Tavistock argues that all three avenues are closed to the Owens because this
deed restriction case was brought under Section 348, which provides for preemptive
statutory fee shifting. I disagree. Section 348 provides in pertinent part: “The
nonprevailing party at a trial held pursuant to the provisions of this section must pay
the prevailing party’s attorney fees and court costs, unless the court finds that
enforcing this subsection would result in an unfair, unreasonable, or harsh
outcome.”7 This narrow statutory exception to the American Rule requires
prevailing “at a trial.” Because this action was mooted and did not proceed to trial,
Section 348(e) does not apply. Because Section 348(e) does not apply, it does not
foreclose other avenues of shifting fees or costs.8
7
10 Del. C. § 348(e) (emphasis added).
8
See McCaulley Court Maint. Corp. v. Davenport, 2018 WL 4030781, at *2 (Del.
Ch. Aug. 23, 2018) (awarding costs under Rule 54 to the prevailing party in a Section
348 deed restriction case that did not proceed to trial), adopted, 2018 WL 4301338
(Del. Ch. Sept. 7, 2018); see also Vill. of Fox Meadow Maint. Corp. v. Kinton, 2016
WL 6995362, at *3 (Del. Ch. Nov. 14, 2016) (finding that “a fee-shifting deed
restriction may operate independently from the fee-shifting provision of Section
348”); Marriott v. Host Marriott, 1993 WL 513230 (Del. Ch. Nov. 19, 1993)
(addressing both a statutory ground for attorneys’ fees and costs and the bad faith
exception as coexistent alternative grounds).
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A. Because The Owens Are Not The Prevailing Parties, Costs
Are Not Shifted.
The Owens argue that they should be allowed their costs as prevailing parties
because Tavistock approved their fence and mooted the main issue while this case
was pending. Tavistock argues that because there was no settlement and the mooting
occurred outside this litigation, there is no prevailing party.
Court of Chancery Rule 54(d) provides: “Except when express provision
therefor is made either in a statute or in these Rules, costs shall be allowed as of
course to the prevailing party unless the Court otherwise directs.” Section 348 does
not expressly shift costs in cases that do not proceed to trial, and no other express
statutory provision or rule applies, so Rule 54 permits costs to be shifted in favor of
the prevailing parties in a deed restriction case that is resolved short of trial.9
This Court has found that a party prevailed through resolutions short of a
judicial determination, like settlements and consents to judgment.10 A party’s
actions outside of litigation (e.g., board actions) can inform a determination of
9
See McCaulley Court Maint. Corp., 2018 WL 4030781, at *2 (awarding costs under
Rule 54 to the prevailing party in a Section 348 deed restriction case that did not
proceed to trial).
10
See, e.g., FGC Holdings Ltd. v. Teltronics, Inc., 2007 WL 241384, at *18 (Del.
Ch. Jan. 22, 2007) (finding a party prevailing in connection with a consent to
judgment); Nowak v. Nonantum Mills Maint. Corp., 2005 WL 1252401, at *2 (Del.
Ch. May 18, 2005) (finding a party prevailing in connection with a settlement).
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prevailing parties under Court of Chancery Rule 54. “Under Delaware law, a
presumption of causation arises by chronology; that is, where claims against a
defendant are mooted while litigation is pending, the actions mooting the claims are
presumed to have resulted from the litigation.”11 This presumption applies here and
is borne out by Tavistock’s board minutes, which indicate that the board meeting
was a “special meeting . . . called to ask the board, on advice of counsel, to vote on
two resolutions with regard to litigation against the board.”12
But the fact that Tavistock mooted this case because of this litigation does not
end the prevailing party inquiry: the Owens must still prevail on “the merits of the
main issue or . . . on most of [their] claims.”13 As the Owens represented during the
Motion to Compel briefing, “[the Owens] brought this action to contest [Tavistock’s]
interpretation and enforcement of the Fence Restriction.”14 The mooting board
actions amended “the policy of the Board with respect to the approval of fences,”
11
In re Riverbed Tech., Inc. Stockholders Litig., 2015 WL 5458041, at *7 (Del. Ch.
Sept. 17, 2015), judgment entered sub nom. In re Riverbed Tech., Inc. (Del. Ch.
2015).
12
D.I. 52.
13
eCommerce Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678, at *52 (Del.
Ch. Sept. 30, 2013) (internal citations omitted).
14
D.I. 47 at 3.
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then approved the Owens’ request.15 These actions do not comprise a “win” for the
Owens on the merits of Tavistock’s previous interpretation and enforcement of the
Fence Restriction. I conclude that the Owens have not “prevailed” on the issue for
which they sought a judicial determination under Court of Chancery Rule 54.
Even if I were to find the Owens were the prevailing parties, I would exercise
my discretion to withhold an award of costs.16 The Owens ultimately won approval
of their fence, and this litigation played a part. But the Owens knew about the deed
restriction, and that their application would be rejected under that restriction, before
they purchased their home. In my view, it would be inequitable to cause Tavistock
to bear the costs of litigation the Owens knew they would initiate when they chose
to purchase a home in Tavistock.
B. Reasonable Motion to Compel Expenses Are Apportioned In
the Owens’ Favor.
I turn next to the Owens’ application for attorneys’ fees incurred in connection
with the Motion to Compel. Because the Motion to Compel was granted in part and
denied in part, the Owens’ request falls under Court of Chancery Rule 37(a)(4)(C),
15
D.I. 52.
16
See Ct. Ch. R. 54 (d) (providing that “costs shall be allowed as of course to the
prevailing party unless the Court otherwise directs”).
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which provides that the Court “may, after affording an opportunity to be heard,
apportion the reasonable expenses incurred in relation to the motion among the
parties and persons in a just manner.”17 This subsection “leaves the assessment of
fees to the discretion of the court,”18 unlike Court of Chancery Rule 37(a)(4)(A),
which mandates fee shifting for motions granted in full unless the opposing party’s
conduct was “substantially justified” or shifting would be unjust under the
circumstances. I find that apportionment of reasonable fees is justified here because
the Owens succeeded in nearly all of their requests in the Motion to Compel.
The Owens’ Motion to Compel sought discovery from April 1984 to present
rather than Tavistock’s proposal of a three-year discovery period. The Owens also
sought clarity over Tavistock’s assertion of privilege related to its in-house counsel.
Over Tavistock’s objection, I concluded the longer time period was warranted in
relation to fence requests, specified the bounds of privilege for the in-house
counsel’s documents, and ordered Tavistock to supply a privilege log. While
Tavistock highlights that this was only a partial win for the Owens in that I limited
the extended time period to specific requests and permitted Tavistock to withhold
17
Ct. Ch. R. 37(a)(4)(C).
18
Pharmerica Long Term Care Inc. v. New Castle RX, LLC, 2010 WL 5130746, at
*1 (Del. Ch. Dec. 8, 2010).
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documents as privileged, the vast majority of the Owens’ requests were granted over
Tavistock’s objections.
Further, Tavistock’s opposition to the proposed date range and Motion was
not substantially justified.19 Tavistock affirmatively, voluntarily, and repeatedly
represented that it had interpreted and applied the deed restriction consistently since
April 9, 1984, and relied on that representation in defense of this action. Yet
Tavistock balked at discovery aimed to confirm its representation.20 Tavistock’s
resistance was not substantially justified under the circumstances.
Because I find that Tavistock was not substantially justified in its opposition
to the Motion to Compel and the Motion to Compel was largely granted in the
Owens’ favor, I exercise my discretion under Rule 37(a)(4)(C) to apportion the
19
See Kaye v. Pantone, Inc., 1983 WL 18012, at *2 (Del. Ch. Mar. 28, 1983) (“If a
motion to compel is granted in part and denied in part the Court may apportion the
reasonable expenses, but if the Court finds the opposition to production to be
substantially justified, the allocation of expenses may be denied.”).
20
See, e.g., D.I. 44 at ¶¶ 14-15 (arguing that, despite its own reliance on the 1984
date, using 1984 as the starting date for discovery “for a fence dispute, was
ridiculous, was abusive on its face,” and the time frame proposed was “outrageously
excessive,” “abusive and outlandishly overbroad” and “a weapon to beat Tavistock
into approving” the fence application) (emphasis in original).
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reasonable expenses incurred in bringing the Motion to Compel—the amount of
which I conclude is $5,000.00—to Tavistock.21
C. Fees Are Not Shifted Under the Bad Faith Exception.
Finally, I turn to the Owens’ request for attorneys’ fees based on alleged bad
faith litigation conduct. The bad faith exception to the American Rule is premised
on the theory that “when a litigant imposes unjustifiable costs on its adversary by
bringing baseless claims or by improperly increasing the costs of litigation through
other bad faith conduct, shifting fees helps to deter future misconduct and
compensates the victim of that misconduct.”22 But “this quite narrow exception is
applied in only the most egregious instances of fraud or overreaching.”23 “[A]nd the
party seeking to invoke that exception must demonstrate by clear evidence that the
party from whom fees are sought . . . acted in subjective bad faith.”24
21
The Owens submitted invoices showing $5,340.40 in legal fees incurred in
connection with the motion to compel. D.I. 60, Ex. B-3 (entries preceded by “*”). In
light of the factors identified in Rule 1.5(a) of the Delaware Lawyer’s Rules of
Professional Conduct and the discretion provided to me in Court of Chancery Rule
37(a)(4)(C), I cap those expenses at $5,000.00. See Bragdon v. Bayshore Prop.
Owners Assoc., Inc., C.A. No. 2017-0539-JTL (Del. Ch. Jan. 25, 2019) (ORDER).
22
Blue Hen Mech., Inc. v. Christian Bros. Risk Pooling Tr., 117 A.3d 549, 559-60
(Del. 2015).
23
Arbitrium (Cayman Is.) Handels AG, 705 A.2d at 231-32.
24
Lawson v. State, 91 A.2d 544, 552 (Del. 2014).
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The Owens have not met this high bar. In briefing, the Owens argued that bad
faith was evident in Tavistock’s pre-litigation conduct, which unnecessarily required
the filing and continuance of this litigation; misleading discovery conduct,
necessitating the Motion to Compel; and alleged misrepresentations that Tavistock
mooted the case out of financial and business concerns rather than as an inevitable
concession to the Owens’ claims.
Concerns over Tavistock’s discovery conduct are fully addressed by
apportionment of expenses in the Owens’ favor under Court of Chancery Rule
37(a)(4)(C), as explained above. As to Tavistock’s pre-litigation conduct and
representations as to the mooting of this action, the Owens admitted that there was
no clear evidence that Tavistock acted with subjective bad faith before or during this
litigation.25 Instead, the Owens suggested that if I “connect[ed] the dots,”26 I would
find bad faith. I make no such finding. I conclude that the Owens have failed to
show clear evidence of subjective bad faith conduct by Tavistock or its counsel. No
further fee shifting is warranted.
25
Hearing Tr. 11.
26
See id. at 11, 13-16.
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III. Conclusion
For the foregoing reasons, I hereby grant in part and deny in part the Owens’
Petition and award the Owens $5,000.00, representing the reasonable expenses
incurred in connection with the Motion to Compel under Court of Chancery Rule
37(a)(4)(C).
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms