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

• Court: Court of Chancery of Delaware
• Decided: March 26, 2019
• Docket: 2017-0571-MTZ
• Status: Published

Opinion

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., C.A. No. 2017-0571-MTZ March 26, 2019 Page 2 of 14

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 James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 3 of 14

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. James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 4 of 14

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. James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 5 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 6 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 7 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 8 of 14

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. James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 9 of 14

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”). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 10 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 11 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 12 of 14

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). James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 13 of 14

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. James W. Owen, Jr., et al. v. Tavistock Civic Association, Inc., C.A. No. 2017-0571-MTZ March 26, 2019 Page 14 of 14

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