REDUS Peninsula Millsboro, LLC v. Mayer

EFiled: Aug 29 2014 12:01PM EDT
Transaction ID 55959055
Case No. 8835-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE

JOHN W. NOBLE 417 SOUTH STATE STREET
VICE CHANCELLOR DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179

August 29, 2014

Katharine L. Mayer, Esquire Robert J. Valihura, Jr., Esquire
McCarter & English LLP The Law Office of Robert J. Valihura, Jr.
405 North King Street, 8th Floor 1203 North Orange Street
Wilmington, DE 19801 Wilmington, DE 19801

Chad J. Toms, Esquire Brian L. Kasprzak, Esquire
Whiteford Taylor & Preston LLC Marks, O’Neill, O’Brien,
405 North King Street, Suite 500 Doherty & Kelly, P.C.
Wilmington, DE 19801 300 Delaware Avenue, Suite 900
Wilmington, DE 19801

Re: REDUS Peninsula Millsboro, LLC v. Mayer
C.A. No. 8835-VCN
Date Submitted: March 4, 2014

Dear Counsel:

Defendants/Counterclaim Plaintiffs, Neal M. Mayer, John Gee, Don

Dieringer, David Harrod, John Shanaphy, Marc Stanley, Chuck Burrall, and Deb

Putt (the “Homeowners”), own homes in The Peninsula, a Sussex County
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residential development.1 In their counterclaims, they challenge the mandatory

bundled internet and basic cable services supply agreement that binds their lots

with its $90 monthly fee and which may last for many decades, as well as the

conduct of the entities benefiting from this contract. The Homeowners became

obligated, through the acquisition of their real estate in the development, to

purchase these telecommunications services from the Peninsula Community

Association, Inc. (“PCA”), a neighborhood group in which they are required to be

members. PCA purchases those services through Peninsula Infrastructure

Management, LLC (“PIM”), which was formed by The Peninsula’s original

developers to manage the telecommunications services.

The developers of The Peninsula formed PCA before the sale of any lots in

the development. PCA, which was always controlled by the developers, entered

into an Agreement to Obtain Communications Services (the “PCA-PIM

Agreement”) with PIM in 2004. The PCA-PIM Agreement provided that PIM

would manage telecommunications services for PCA for twenty-five years, and

that the agreement would automatically renew for four additional ten-year periods,

1
The facts are drawn from the Homeowners’ Answer and Counterclaim.
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unless PIM decided not to extend the arrangement. In 2005, Verizon Services

Corporation (“Verizon”) agreed with PIM to provide services to the 1,404 units to

be constructed at The Peninsula at a monthly price of $58.95 per unit. Thus,

through this arrangement the original developer was able to capture the monthly

difference of $31.05 per unit; this payment stream could conceivably be extended

to a total term of sixty-five years. The Homeowners assert that employees and

directors of the original developer and PCA, at annual PCA meetings, told them on

numerous occasions that the $90 fee they were obligated to pay was a “pass

through” arrangement.

The original developer encountered financial problems. In 2009, LandTech

Receiver Services, LLC and LandTech, Inc. (collectively, “LandTech”) were

appointed the Receiver to assume control of The Peninsula, at the request of

Plaintiff/Counterclaim Defendant Wells Fargo Bank, N.A. (“Wells Fargo”), the

principal lienholder of The Peninsula at Longneck LLC. Thereafter, through a

foreclosure sale, Wells Fargo obtained certain property and contractual rights at

The Peninsula. Plaintiff/Counterclaim Defendant REDUS Peninsula Millsboro

LLC (“REDUS”), a wholly owned subsidiary of Wells Fargo, assumed control of
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PIM. The Homeowners assert that Verizon also paid PIM, and now pays REDUS,

$425 for each residence in The Peninsula which is wired for telecommunications

services.

The Homeowners recently learned that the monthly $90 they pay to PIM is

not a pass through and sought to adjust the terms of their payments. After the

Homeowners wrote to the PCA Board, then directed by LandTech, a Senior Vice

President of Wells Fargo responded, on behalf of REDUS and Wells Fargo, that

alterations to the PCA-PIM Agreement were unlikely to occur. The Homeowners

sought arbitration, which is permitted by the PCA-PIM Agreement, but the

arbitration has been stayed in favor of their counterclaims in this proceeding.

The Homeowners, through their counterclaims, seek to invalidate the PCA-

PIM Agreement as an unlawful contract, an unconscionable contract, and void

against public policy. They also allege that breaches of fiduciary duty committed

by the original developers should be imputed to REDUS and Wells Fargo, which

have been unjustly enriched as a result of those breaches of fiduciary duty.

REDUS and Wells Fargo have moved to dismiss the counterclaims by arguing that
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the Homeowners lack standing to challenge the PCA-PIM Agreement and that all

of their claims fail on the merits.

***

REDUS and Wells Fargo have moved to dismiss under the familiar standard

of Court of Chancery Rule 12(b)(6), which requires that the Court accept all well-

pleaded facts as true and draw all reasonable inferences in favor of the

Homeowners.2 Even vague allegations in the counterclaim will be accepted as

well-pleaded if REDUS and Wells Fargo were provided notice of the claim.3 The

motion to dismiss will be denied if the Homeowners’ well-pleaded factual

allegations would entitle them to relief under a reasonably conceivable set of

circumstances.4 The reasonable conceivability standard asks whether a possibility

of recovery exists. Finally, the Court may reject conclusory allegations that are not

2
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
536 (Del. 2011).
3
Id.
4
Id. at 537 & n.13.
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supported by specific facts, and unreasonable inferences may not be drawn in favor

of the Homeowners.5

A. Standing

REDUS and Wells Fargo contend that the Homeowners lack standing to

challenge the PCA-PIM Agreement because they are not parties to the contract and

are not creditor or donee beneficiaries of it. They argue that the Homeowners are

not donee beneficiaries because they did not have “someone else’s performance

donated to [them] as a gift secured by the promisee’s consideration.”6 They also

assert that the Homeowners are not creditor beneficiaries because REDUS and

Wells Fargo are not promisees who “owe[] a duty or liability to the beneficiary and

[who] secure[d] a contract with another party whose performance satisfies the

obligation to the beneficiary.”7

5
Price v. E.I. duPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enterprise Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
6
Browne v. Robb, 583 A.2d 949, 954 (Del. 1990).
7
Id.
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However, REDUS and Wells Fargo overlook the principle that “Delaware

courts recognize third party standing to sue in contract under the creditor

beneficiary theory standard when the promisee owes some legal duty to the third

party[.]”8 Although the Browne Court acknowledged that placing third parties into

the various categories of beneficiaries can be tricky, here, the Court concludes that

the Homeowners’ allegation that the prospective lot owners in The Peninsula were

the intended beneficiaries of the PCA-PIM Agreement is sufficient for this stage of

8
Id. The definition of “duty” is not as limited as REDUS and Wells Fargo suggest.
As a guiding principle, “the key to third-party standing in contract law is the intent
to benefit the third party.” Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2008
WL 4182998, at *4 (Del. Ch. Sept. 11, 2008). For example, this Court has found
third-party standing for membership unit holders where a merger agreement
“manifests an unambiguous intent to benefit” the members, such as by paying
consideration to them. Id.; cf. Hadley v. Shaffer, 2003 WL 21960406, at *5 (D.
Del. Aug. 12, 2003)). The Delaware Supreme Court has also found that a property
owner can be a third-party beneficiary of a contract between a contractor and a
subcontractor where the contract defined the term “owner” and created rights in
that owner. See, e.g., Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc., 336 A.2d
211, 215-16 (Del. 1975) (analogizing Sears Roebuck & Co. v. Jardel Co., 421 F.2d
1048 (3d Cir. 1970)). It is appropriate to note that the intricate contractual
arrangement here has as its ultimate effect the delivery of internet and cable
services to the Homeowners.
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the proceedings.9 In particular, REDUS and Wells Fargo acknowledge that the

PCA-PIM Agreement provides for arbitration of certain claims and thus appears to

provide rights to the Homeowners.10

REDUS and Wells Fargo also argue that the Homeowners have failed to

articulate an injury to a legally protected right or failed to connect this injury to

them. The Homeowners have identified an injury through their allegations of the

monetary damages they are suffering. They have connected this harm to Wells

Fargo and REDUS through the acquisition of PIM and through the letter from

Wells Fargo’s Senior Vice President explaining that the PCA-PIM Agreement

9
Answer and Countercl. ¶ 8. The “Homeowners” make their entrance early in the
script, indeed at the outset of the contract: “The Services provided by the
Infrastructure are . . . a customized suite of Services provided at a reasonable cost
to Homeowners, and the provision of such Services is in the best interest of the
Parties and the Homeowners . . . .” Aff. of William Emil Honaker in Supp. of Mot.
for Prelim. Inj. Ex. B at 1.
10
Pl.’s Opening Br. in Supp. of Mot. to Dismiss at 8-9 & n.3. The PCA-PIM
Agreement states, “Any Homeowner may challenge the pricing as violating this
Section [5.7]. Such Homeowner shall bring an action . . . in accordance with the
dispute resolution process described in Section 8.1 below. If such action is
successful, Homeowners shall be entitled to a rebate or credit . . . .” Aff. of
William Emil Honaker in Supp. of Mot. for Prelim. Inj. Ex. B at 9. Although
REDUS and Wells Fargo assert that the Homeowners are beneficiaries only of the
arbitration provision, they do not explain why the Court should limit the
Homeowners’ involvement with the PCA-PIM Agreement so strictly.
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would not be modified.11 The Homeowners’ claims will not be dismissed for lack

of standing.

B. Breach of Fiduciary Duty

REDUS and Wells Fargo argue that fiduciary duties may only be “imputed

to a separate entity formed and controlled by fiduciaries for the purpose of

engaging in a transaction with an entity to whom those duties are owed.”12 They

first contend that the original developers owed the Homeowners no fiduciary

duties. Second, they assert that REDUS and Wells Fargo were not formed and

controlled by the original developers and therefore fiduciary duties may not be

imputed to them.

The Homeowners argue that the breach of fiduciary duty occurred when The

Peninsula’s developer, which controlled both the homeowner’s association and

PIM, agreed to the terms of the PCA-PIM Agreement. They claim that this

11
The letter notes that “the Communications Contracts will continue to be
administered by REDUS in accordance with their terms.” Letter to the Court from
Robert J. Valihura, Jr., Esquire Opposing Mot. to Expedite Proceedings, Sept. 5,
2013, Ex. B.
12
Barbieri v. Swing-N-Slide Corp., 1997 WL 55956, at *1 (Del. Ch. Jan. 29,
1997).
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transaction, allegedly permitting PIM to capture an additional $31.05 per month

from the lot owners in The Peninsula, permits the fiduciary duties owed by PCA to

the lot owners to be imputed to PIM. The Court agrees. As alleged, the developer

was the controller of the association which would owe duties to its members, the

lot owners, including the Homeowners. The developer caused the incorporation of

PIM, and PIM, as an affiliate of the controller, entered the PCA-PIM Agreement

with PCA, an entity to whom the developers owed fiduciary duties. Thus,

fiduciary duties may be imputed to PIM.

However, the question remains whether REDUS, or Wells Fargo, could be

held responsible under some theory of successor liability. They argue that Barbieri

precludes such a result. However, the case does not appear to answer the question

of whether another entity can “step into the shoes” of an entity which may have

breached its fiduciary duties, continue profiting from the breach, and yet avoid

liability for that earlier breach.

Thus, various questions important to the Homeowners’ theory of the case

have not been addressed. These questions might include the effect of the

foreclosure sale on whether the imputed fiduciary duty claim may be brought
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against REDUS or Wells Fargo, whether some theory of successor liability might

cause REDUS or Wells Fargo to be responsible for PIM’s alleged breach, and

whether the fact that the Homeowners were not members of the homeowner’s

association at the time the PCA-PIM Agreement was signed has any impact on the

scope of the original fiduciary duties owed to them. REDUS and Wells Fargo have

not made arguments based upon any of these grounds to which the Homeowners

would be entitled to respond. Thus, although the fiduciary duty claim may fail for

other reasons, REDUS and Wells Fargo have not moved the Court on those

grounds and the claim survives.

C. Unlawful Contract and Void Against Public Policy Arguments

REDUS and Wells Fargo contend that the Homeowners have failed to

identify how the PIM-PCA Agreement is unlawful or void against public policy.

Delaware courts are averse to invalidating agreements on these grounds:

When parties have ordered their affairs voluntarily through a binding
contract, Delaware law is strongly inclined to respect their agreement,
and will only interfere upon a strong showing that dishonoring the
contract is required to vindicate a public policy interest even stronger
than freedom of contract.
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Such public policy interests are not to be lightly found, as the wealth-
creating and peace-inducing effects of civil contracts are undercut if
citizens cannot rely on the law to enforce their voluntarily-undertaken
mutual obligations.13

REDUS and Wells Fargo argue that the Federal Communication

Commission (“FCC”) has authority over such bulk billing arrangements and point

to a report stating that such bulk billing arrangements are permissible.14 And,

although the Homeowners correctly assert that the FCC was somewhat troubled by

bulk billing arrangements which were “sweetheart deals,” the risk of such deals did

not cause the FCC to determine that such billing arrangements were

impermissible.15 The Homeowners note that the FCC explained that remedies at

state law may allow for rescission of such problematic arrangements. The FCC

specifically referred to a collection of state statutes addressing these concerns;

however, this list did not identify any Delaware law providing a remedy.16 The

Homeowners fail to identify independently such a policy pronouncement. “The

13
Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del. Ch. 2005), aff’d in part, rev’d in
part, 892 A.2d 1068 (Del. 2006).
14
Exclusive Servs. Contracts for Provision of Video Servs. in Multiple Dwelling
Units & Other Real Estate Devs., 25 F.C.C. Rcd. 2460 (2010).
15
Id. ¶¶ 25, 27.
16
Id. ¶ 27 n.60.
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Court will not condemn a contract as a violation of public policy unless the

contract clearly contradicts public policy as declared by the legislature,”17 and thus

valid grounds for invalidating the agreement have not been asserted.

The Homeowners also allege that Delaware’s policy in favor of the free

alienability of property constitutes grounds upon which the PCA-PIM Agreement

may be invalidated.18 However, they fail to identify how this supply agreement

unduly burdens their ability to sell their property. Thus, their claims based on

public policy will be dismissed.

D. Unconscionability

REDUS and Wells Fargo argue that the Homeowners have failed to allege

that the PCA-PIM Agreement, an integral part of a complex set of obligation-

creating documents that directly and materially affect the Homeowners, is

unconscionable as between the parties to the agreement. “[A] contract is

unconscionable if it is such as no man in his senses and not under delusion would

17
Bank of Baltimore v. Auto’s Plus, 1994 WL 19937, at *2 (Del. Super. Jan. 4,
1994) (citation omitted).
18
Answer and Countercl. ¶ 65.
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make on the one hand, and as no honest or fair man would accept, on the other.”19

REDUS and Wells Fargo contend that the Homeowners have not alleged that PCA

was subjected to an unconscionable agreement. However, the Homeowners have

alleged that the payments due under the agreement, borne by the individual

homeowners, are unconscionable.20

The allegations of several problematic actions concerning the formation of

the PCA-PIM Agreement permit an inference that it is unconscionable. The

Homeowners allege that they were told that their payments to the homeowner’s

association were “pass-through” payments and thus the additional $31.05 (monthly

per lot) retained by PIM was not disclosed to them. Additionally, the fact that the

extra $31.05 is an approximately fifty percent markup of the actual cost of

acquiring the communication services creates a question as to whether a reasonable

19
Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978) (internal
quotations omitted).
20
A party remote from the contracting parties is not necessarily precluded from
asserting unconscionability. See, e.g., Fritz v. Nationwide Mut. Ins. Co., 1990
WL 186448, at *5-6 (Del. Ch. Nov. 26, 1990) (granting summary judgment against
an insurance contract’s enforcement to a third-party beneficiary after finding a
compulsory arbitration clause unconscionable), reargument denied, 1991
WL 23585 (Del. Ch. Feb. 19, 1991).
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person would submit to such an arrangement. Finally, the possibility that the

agreement might last for as many as sixty-five years may further inform the

analysis of whether the agreement is unconscionable. In short, the combination of

the alleged misinformation concerning the creation of the contractual arrangement,

the large proportional markup retained by PIM (and now REDUS), and the lengthy

term of the agreement create a question as to whether a reasonable person might

enter into such an arrangement.

However, the agreement does, under certain circumstances, offer the

Homeowners arbitration concerning the price term. To some extent, whether the

agreement is reasonable may depend upon whether the price charged to the

Homeowners is reasonable, which may be affected by the results of the arbitration

which the Homeowners have commenced. The arbitration has been curtailed in

favor of these proceedings. However, because the Court’s analysis of whether the

agreement is reasonable may in part be informed by the payment terms of the

agreement, perhaps the arbitration process for resolving payment issues should
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move forward.21 The Court, accordingly, will convene a conference with counsel

to reconsider the advisability of proceeding with the arbitration.

E. Unjust Enrichment

REDUS and Wells Fargo argue the unjust enrichment claim must be

dismissed because a valid contract governs the behavior of which the Homeowners

complain. “When the complaint alleges an express, enforceable contract that

controls the parties’ relationship . . . a claim for unjust enrichment will be

dismissed.”22 REDUS and Wells Fargo correctly cite Delaware law, but ignore

that “claims of unjust enrichment may survive a motion to dismiss when the

validity of the contract is in doubt or uncertain.”23 Here, because some uncertainty

concerning the validity of the contract exists, the unjust enrichment claim survives.

F. The Counterclaims against Wells Fargo

Finally, Wells Fargo argues that the counterclaims against it should be

dismissed because the Homeowners’ claims are, in law and in fact, against

21
An understanding of how arbitration views the pricing at least touches upon the
alleged unconscionability.
22
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del.
Ch. Oct. 10, 2006).
23
Id.
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REDUS. Wells Fargo may turn out to be correct, but the Homeowners’ allegations

describe Wells Fargo’s deep involvement with much of the conduct at issue,

including its role in transferring to REDUS the rights to PIM and the PCA-PIM

Agreement.24 Thus, dismissal is not warranted under the reasonably conceivable

standard.

***

For the above reasons, REDUS and Wells Fargo’s motion to dismiss the

counterclaims is granted as to the Homeowners’ counterclaims that the PCA-PIM

Agreement is unlawful and void as against public policy. Otherwise, the motion to

dismiss is denied.

IT IS SO ORDERED.

Very truly yours,

/s/ John W. Noble

JWN/cap
cc: Register in Chancery-K

24
Answer and Countercl. Ex. A.