Donovan Smith HOA v. Donovan Smith MHP, LLC

• Court: Supreme Court of Delaware
• Decided: July 10, 2018
• Docket: 24, 2018
• Status: Published

Opinion

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