Edward and Nancy Kablaoui v. Gerar Place Condominium Assn.

• Court: Court of Chancery of Delaware
• Decided: December 21, 2022
• Docket: CA No. 2021-0700-PWG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

EDWARD and ) NANCY KABLAOUI, ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0700-PWG ) GERAR PLACE CONDOMINIUM ) ASSOCIATION, ) ) ) and ) ) ) ROGER BINNER, DEBRA SALIM, ) BRIAN COMROE, KAREN STUCK ) and DANNY WATKINS in Their ) Individual Capacity and Collectively as ) Members of the Council, ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: December 15, 2022 Date Decided: December 21, 2022

Christopher J. Isaac, Anthony Delcollo, and Thomas H. Kramer of OFFIT KURMAN, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.

Brian T. McNelis of YOUNG & McNELIS, Dover, Delaware, Attorney for Defendants.

GLASSCOCK, Vice Chancellor This matter is before me on exceptions to both a Master’s final report (the

“Final Report”) and a Master’s order staying consideration of a motion to

supplement the complaint. The underlying action involves a dispute between

Plaintiff condominium owners and the Defendants: the condominium association

and its directors. Plaintiffs challenge a special assessment resulting from the

association’s decision to replace unit windows in the condominium. The

Defendants moved to dismiss the amended complaint. The Plaintiffs’ claims are

purported to be both direct and derivative on behalf of the association. Upon

review, the Master issued a thoughtful, thorough 30-page report finding that the

amended complaint failed to state a claim and should be dismissed under Rules

12(b)(6) and 23.1. The Plaintiffs excepted to the Final Report.

Before the exception could be reviewed, the Plaintiffs moved to supplement

the amended complaint, and the Master stayed consideration of that motion

pending the outcome of the motion to dismiss. On exceptions, the Plaintiffs

challenge both the stay and the recommendation of dismissal.

This Court could not maintain its current case load absent the service of the

Masters in Chancery; they are essential to the proper functioning and reputation of

the Court. Accordingly, although review of Masters’ reports is undertaken de

novo, the procedural functioning of the Master’s docket is entitled to the same

1 respect as that before the other judicial officers of this Court, else the utility and

efficiency of our process be diminished.

The main question posed by these exceptions is procedural. Should a

plaintiff be allowed to supplement an insufficient complaint after answering a

motion to dismiss, attempting thereby to include facts and allegations known to

that plaintiff before he filed the answer to the motion, and tailored to defeat the

motion? And should such a Plaintiff be able to avoid review of a finding of failure

to state a claim in a Final Report by pointing to the supplementation? Obviously,

this would have the same implications for efficiency as would a motion to amend

in similar circumstances; a pernicious procedure prohibited by Rule 15(aaa) unless

justice requires otherwise. Informed by that policy, I find that the Master properly

stayed consideration of the motion to supplement and properly found that the

amended complaint failed to state a claim. Accordingly, the exceptions must be

denied.

I explain below.

2 I. BACKGROUND

A. Factual Background

Because this decision is largely procedural, I provide only the briefest sketch

of the underlying facts. For a more comprehensive explanation of the factual

background, I direct readers to the Master’s Final Report of May 20, 2022.1

Plaintiffs Edward and Nancy Kablaoui are owners of a condominium located

in a complex administered by the Gerar Place Condominium Association, here a

Defendant.2 The remaining Defendants make up the council that oversees that

association. 3 In the summer of 2021, following a water leak, the council ordered a

replacement of the complex’s exterior windows, to be paid for by a special

assessment levied on homeowners. 4 Plaintiffs took issue with this and other council

decisions, spawning this lawsuit.

B. Procedural History

This action was initially filed in August of 2021.5 Shortly thereafter, Plaintiffs

exercised their right to amend their complaint under Rule 15(a). 6 A motion to

dismiss followed.7 Before it was briefed, Plaintiffs filed motions for a temporary

1 Kablaoui v. Gerar Place Condo. Ass'n, 2022 WL 1617729, at **1-2 (Del. Ch. May 20, 2022) [the “Final Report”]. 2 Pls.’ Third Am. Compl. ¶¶ 1-2, Dkt. No. 48. 3 Id. ¶ 3. 4 Id. ¶¶ 38-46. 5 Verified Compl., Dkt. No. 1. 6 Letter to Court re Amendment, Dkt. No. 8; see Verified First Am. Compl., Dkt. No. 8. 7 Defs.’ Mot. to Dismiss, Dkt. No. 12.

3 restraining order8 and expedited discovery. 9 The latter motion was granted and

limited expedited discovery eventually took place between January and March.10

With Defendants’ permission, Plaintiffs’ second motion to amend their complaint

was granted and the motion to dismiss subsequently renewed. 11 Following briefing,

the Master issued her Final Report recommending dismissal on May 20, 2022.12

Plaintiffs filed timely exceptions pursuant to Rule 144, 13 which were fully briefed

on July 14. 14

A month later, with exceptions to the Final Report pending, the Plaintiffs filed

a motion to supplement the complaint, citing Rule 15(d).15 Consideration of that

motion was stayed by the Master in a September 7 letter,16 to which Plaintiffs filed

exceptions.17 The following week, the case was reassigned to me by the Chancellor

for the limited purpose of resolving the exceptions.18 I heard oral arguments on the

exceptions to the final report at the end of October. At the conclusion of that hearing,

8 Pls.’ Mot. for TRO, Dkt. No. 14. 9 Mot. for Expedited Proceedings, Dkt. No. 14. 10 Tr. of 12-20-2021 Ruling of the Court 14:18-15:12, Dkt. No. 45; see generally Pls.’ Mot. to Supplement, Ex. E, Dkt. No. 64 (summarizing inspections of Plaintiffs’ expert) [the “Expert’s Report”]. 11 Minute Order, Jan 13. 2022, Dkt. No. 42-43; Defs.’ Mot. to Dismiss Pls.’ Third Am. Compl., Dkt. No. 51. 12 Final Report at *10. 13 Pls.’ Exception to Master’s Final Report, Dkt. No. 57. 14 Pls.’ Reply in Supp. of Exceptions, Dkt. No. 62. 15 Pls.’ Mot. to Supplement, Dkt. No. 64. 16 Letter to Counsel, Dkt. No. 67. 17 Pls.’ Notice of Exceptions to Master’s Order issued on Sept. 7, 2022, Dkt. No. 68. 18 Reassignment Letter, Dkt. No. 69.

4 I asked the parties for additional briefing on the Plaintiffs’ motion to supplement.19

Briefing was completed on December 15, and I took the matter under advisement.

II. ANALYSIS

This Court reviews a Master’s factual and legal findings de novo. 20 I find

the record here sufficient to support a de novo review without additional

hearings,21 particularly given that Plaintiffs’ exceptions are primarily legal, rather

than factual. 22 Plaintiffs’ motion to supplement the complaint under Rule 15(d)

raises issues of both procedure and substance, which I address in turn, below.

A. Plaintiffs’ Motion to Supplement during the Pendency of Exceptions was Improper

Whether the timing of Plaintiffs’ motion to supplement under Rule 15(d) was

proper is fundamentally a question of procedure. “Although the review of a Master’s

report is de novo, it is still a review. As such, it requires a review of the record created

before the Master. Admitting new evidence would turn the review into a new

proceeding, rather than a review.”23

19 Oral Argument on Exceptions to Master’s Report dated 10-31-22, Dkt. No. 73. 20 DiGiacobbe v. Sestak, 743 A.2d 180, 184 (Del. 1999). 21 Id. (holding a new trial or further evidentiary hearings are not necessary where the Court can read the relevant portion of the factual record and draw its own conclusions). 22 See Pls.’ Exceptions to Master’s Final Report 8-15, Dkt. No. 60 (arguing the Master’s conclusions about contractual interpretation and demand futility were incorrect). 23 In re Baran, 2017 WL 4355638, at *1 (Del. Ch. Sep. 29, 2017) (citing Lynch v. Thompson, 2009 WL 1900464, at *2 (Del. Ch. June 29, 2009)).

5 Plaintiffs acknowledge that their attempt to rewrite the factual record upon

which the Master based her ruling creates “an awkward tension in the present

procedural posture.”24 Nonetheless, they argue that this is necessary because, facing

a case dispositive motion, they would be unfairly prejudiced if their case was decided

on a record that is “indisputably stale.”25 These arguments, to my mind, reflect a

fundamental misunderstanding of the procedure in question.

Parties may not introduce new evidence or make new assertions in an attempt

to overturn a Master’s Final Report on exceptions.26 Instead, the general rule is that

the parties are deemed to have consented to the factual findings to which no

exception is taken.27 While it is true that this Court’s review of exceptions can,

where necessary, involve a new trial or additional evidentiary hearings, the purpose

of such hearings is to clarify the existing record, not to augment or alter the record

on which the Master reached a decision. 28 Otherwise, the work of the Masters would

lose its utility. Plaintiffs here have had a full and complete opportunity to make their

arguments on the record currently before the Court. And it is upon that record that

I base my review. Accordingly, I find that the Master did not err in staying Plaintiffs’

motion to supplement, pending review of her Final Report by the Court.

24 Opening Br. on Exceptions to September 7 Letter at 8, Dkt. No. 71. 25 Id. 26 Lynch v. Thompson, 2009 WL 1900464, at *2. 27 DiGiacobbe, 743 A.2d at 184. 28 Id.

6 Putting aside consideration of the exception to the Final Report for a moment,

I feel that it would be useful to clarify the correct procedure when critical new

evidence becomes available during the pendency of exceptions. As established

above, this Court’s review of exceptions is not the time for interjections of new

evidence. However, a permanent exclusion of potentially dispositive evidence

would conflict with the fundamental principles of equity. Therefore, once this Court

has ruled on exceptions, a party seeking to introduce new evidence can follow one

of two courses of action. If the case continues, it can file a motion to supplement

under Rule 15(d). 29 If the Court issues an unfavorable dispositive decision, the party

can instead file a motion for relief from the judgment under Rule 60(b), citing newly

discovered evidence.30 However, as explained below, neither of these rules

constitutes an open invitation to relitigate.

B. Granting Plaintiffs’ Motion to Supplement under Rule 15(d) Would Be Inequitable

Having found that Plaintiffs’ motion fails on procedural grounds, I need not

assess the merits of the motion. For the sake of clarity, however, I discuss briefly

here the nature of the motion to supplement. Plaintiffs seek to substantially rewrite

their third amended complaint through a motion to supplement under Rule 15(d), in

29 Ct. Ch. R. 15(d). 30 Ct. Ch. R. 60(b).

7 a way that seeks to address the allegations of the motion to dismiss.31 Defendant

opposes on the grounds that Plaintiffs’ motion is best understood as an attempt to

amend the complaint that should be barred by Rule 15(aaa). 32 “The defining

difference between [motions to amend and to supplement] is that supplemental

pleadings deal with events that occurred after the pleading to be revised was filed,

whereas amendments deal with matters that arose before the filing.”33 It is

undisputed that the facts in question post-date the most recent amended complaint,

filed January 21, 2022. 34 Therefore, I assess the motion as an attempt to supplement

under Rule 15(d), and not, per Defendants, a mislabeled motion to amend.

This Court has broad discretion to allow supplementation where equitable.35

“Rule 15(d) is a highly permissive standard” except where (1) a plaintiff’s request

to supplement was inexcusably delayed and (2) the defendant is prejudiced as a

result. 36 Because I find that Plaintiffs’ motion falls into this narrow exception, I

must deny supplementation as inequitable.

The Master issued a Final Report granting the motion to dismiss in May 2022.

The Plaintiffs seek to introduce facts discovered between January and March 2022

31 Pls.’ Mot. to Supplement, Dkt. No. 64; see Third Am. Compl. Red/Black Version, Dkt. No. 64 [the “Redline”]. 32 See Defs.’ Answer to Pls.’ Mot. to Supplement, Dkt. No. 76. 33 Agilent Techs., Inc. v. Kirkland, 2009 WL 119865, at *4 (Del. Ch. Jan. 20, 2009) (citation omitted). 34 Pls.’ Reply Brief re Mot. to Supplement ¶ 2, Dkt. No. 77. 35 Ct. Ch. R. 15(d). 36 Agilent Techs., 2009 WL 119865, at *5.

8 via a motion filed in mid-August. 37 In an attempt to justify the delay, Plaintiffs point

to the July 18 delivery of their own expert’s five-page report. 38 Plaintiffs provide no

explanation for why this report, production of which was presumably within their

control, was not created until two months after the motion to dismiss was decided

and almost half a year after the underlying evidence was collected. Given that the

report merely summarizes facts available no later than March, I find that Plaintiffs

request to supplement was inexcusably delayed.

Allowing Plaintiffs to supplement their complaint would also unfairly

prejudice Defendants. Plaintiffs’ proposed changes to the complaint directly address

the weaknesses identified by the Master in her Final Report, which recommends the

Court grant Defendants’ motion to dismiss under Rules 23.1 and 12(b)(6). 39 It is

clear to me that Plaintiffs’ motion is responsive to the pending motion to dismiss,

given its timing and content. As a result, I find that Rule 15(aaa), which is addressed

37 Pls.’ Reply Brief re Mot. to Supplement ¶ 2, Dkt. No. 77. Plaintiffs’ expert report also includes “new” facts from December 2021. Expert’s Report at 3. 38 Pls.’ Mot. to Supplement ¶ 19, Dkt. No. 64. 39 Specifically, the new allegations against Defendant Debra Salim attempt to evade dismissal under Rule 23.1 by shoring up the previous complaint’s failure to plead “particularized facts about either Salim or [Defendant] Watkins.” Final Report at 25; see Redline at ¶ 82(f). Plaintiffs also make several attempts to dodge dismissal under Rule 12(b)(6). They begin by arguing that, based on a newly obtained expert’s report, the disputed window replacement was unnecessary and, therefore, outside the category of “proper common expenses.” Redline ¶ 64 (quoting Code of Regulations § 3(c) (emphasis added)). This argument then forms the basis for alternative theories underlying Plaintiffs’ previous claims for breach of contract and declaratory and injunctive relief. Redline ¶¶ 91(d), 97(d). The newly supplemented facts are also used to support two new causes of action. Redline ¶¶ 111-22.

9 to motions to amend and thus not dispositive here, is nonetheless instructive to my

assessment of prejudice. 40

Rule 15(aaa) requires that a party wishing to amend its complaint in response

to a motion to dismiss move to do so no later than the time at which that party’s

answering brief would be due.41 Rather than amend (or supplement) their complaint,

Plaintiffs here chose to respond to the motion to dismiss with an answering brief.42

In such circumstances, “[o]ur Rules offer plaintiffs no opportunity to move to amend

while an opposed motion to dismiss is pending.”43 The rationale behind this

restriction is “to eliminate (or at least sharply curtail) instances in which this court

is required to adjudicate multiple motions to dismiss the same action.” 44

The logic underlying this application of judicial economy extends to

Defendants’ prejudice. Plaintiffs waited to bring their motion to supplement until

the complaint’s deficiencies had been made clear, resulting in its dismissal on the

merits.45 They now seek to leverage the lessons of their defeat into a chance to re-

litigate the same action. Defendants should not be required to spend additional time

and resources fending off Plaintiffs’ attempts to patch over their complaint’s

40 See generally Ct. Ch. R. 15(aaa) (restricting a party’s ability amend its complaint following a motion to dismiss). 41 Ct. Ch. R. 15(aaa); Braddock v. Zimmerman, 906 A.2d 776, 783 (Del. 2006). 42 See Pls.’ Answering Br. in Opp’n to Renewed Mot. to Dismiss, Dkt. No. 54. 43 Wells Lory Hillblom v. Wilmington Tr. Co., 2022 WL 17428978, at *5 (Del. Ch. Dec. 6, 2022) (citing Stern v. LF Cap. P’rs, LLC, 820 A.2d 1143, 1146 (Del. Ch. 2003)). 44 Stern v. LF Cap. P’rs, LLC, 820 A.2d at 1143. 45 See Final Report at 30 (recommending dismissal).

10 shortcomings using overlooked facts. To rule otherwise would create inefficiencies

and perverse incentives. Dismissal with prejudice is therefore appropriate.

C. Plaintiff’s Exceptions to the Master’s Final Report

I have reviewed the Final Report and its factual findings and conclusions of

law, de novo. I conclude that the Master’s recommendations are correct, and that

the exceptions must be denied.

III. CONCLUSION

For the foregoing reasons, the Plaintiffs’ Exceptions to the Master’s Final

Report of May 20, 2022 are DENIED and judgment is entered in accordance with

that Report. Plaintiffs’ Motion to Supplement is also DENIED. An Order is

attached.

11 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

EDWARD and ) NANCY KABLAOUI, ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0700-PWG ) GERAR PLACE CONDOMINIUM ) ASSOCIATION, ) ) and ) ) ROGER BINNER, DEBRA SALIM, ) BRIAN COMROE, KAREN STUCK ) and DANNY WATKINS in Their ) Individual Capacity and Collectively as ) Members of the Council, ) ) Defendants. )

ORDER

For the reasons stated in the accompanying Memorandum Opinion of

December 21, 2022, the Master’s Final Report of May 20, 2022 is affirmed and

Defendants’ motion to dismiss is GRANTED. Accordingly, Plaintiffs’ motion to

supplement is mooted.

IT IS SO ORDERED.

/s/ Sam Glasscock III Vice Chancellor