COURT OF CHANCERY
OF THE
STATE OF DELAWARE
ABIGAIL M. LEGROW NEW CASTLE COUNTY COURTHOUSE
MASTER IN CHANCERY 500 NORTH KING STREET, SUITE 11400
WILMINGTON, DE 19801-3734
Final Report: June 17, 2015
Submitted: March 6, 2015
Catherine Di Lorenzo, Esquire
Legal Services Corporation of Delaware, Inc.
100 West 10th Street, Suite 203
Wilmington, DE 19801
Thomas C. Marconi, Esquire
Losco & Marconi, P.A.
1813 N. Franklin Street
Wilmington, DE 19802
Re: Joan Fehl v. Helena Paolina
C.A. No. 9047-ML
Dear Counsel:
When the petitioner’s home had been foreclosed upon and was on the brink
of sheriff’s sale, her long-time friend – the respondent – agreed to buy the home
and allow the petitioner to live there while she repaid the respondent and
repurchased the home. After she lost her job, the petitioner stopped making
payments, but contends the Court should void or rescind the sale of the property to
the respondent on the theory that the agreement between the parties was
C.A. No. 9047-ML
June 17, 2015
Page 2
unconscionable. The respondent, in turn, contends she is the rightful owner of the
property and that the Court should award damages to her for the period in which
the petitioner lived on the property and failed to make any payments. I agree that
the respondent is the rightful owner of the property, but disagree that she is entitled
to any damages. This is my final report.
FACTUAL BACKGROUND
The petitioner, Joan Fehl (“Ms. Fehl”), purchased a home at 723 Bayview
Road, Middletown, Delaware (the “Property”) in 1993 for $35,000.1 By May
2006, Ms. Fehl was delinquent on her mortgage and a foreclosure proceeding was
filed against her. Judgment was entered against Ms. Fehl and the Property for
$101,785.61. The Property was scheduled to be sold at sheriff’s sale on September
12, 2006.
Ms. Fehl discussed her financial difficulties with her close friend, the
respondent, Helena Paolino (“Mrs. Paolino”).2 Ms. Fehl and Mrs. Paolino met
when their children were infants and had been friends for decades. Over the years,
Mrs. Paolino provided relatively minor financial assistance to Ms. Fehl when she
was in need. In early September 2006, Mrs. Paolino agreed that she and her
husband, Carmen Paolino (“Mr. Paolino”) would purchase the Property to save it
1
Petition to Void and Rescind Property Transfer (hereinafter “Petition”) ¶ 6.
2
Joint Pretrial Stipulation and Order (hereinafter “Pretrial Order”) ¶ 5.
C.A. No. 9047-ML
June 17, 2015
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from sheriff’s sale and allow Ms. Fehl to continue living there while she made
payments to the Paolinos to repurchase the Property.3
The agreement between Ms. Fehl and the Paolinos was not reduced to
writing, but the parties largely followed its terms for six years. On September 11,
2006, the Paolinos purchased the Property by paying off the mortgage. To make
the purchase, the Paolinos initially drew down an existing line of credit, but in
October 2006 they obtained a mortgage on the Property.4 The taxes and insurance
on the Property were escrowed, so that the mortgage payments included payments
toward those items.5 The mortgage payments were $969.02 per month.
The parties’ course of performance indicates they agreed that Ms. Fehl
would pay $1,000 a month, continue to reside in the Property, and bear the cost of
maintaining the Property. Although she made payments between 2006 and 2012,
Ms. Fehl never paid $12,000 a year.6 In 2012, Ms. Fehl lost her job and was
unable to continue making payments. Here the parties’ relationship – already
strained by their financial dealings – completely deteriorated. After Ms. Fehl
ceased making payments in August 2012, the Paolinos bore all the costs associated
3
Ms. Fehl testified that Mrs. Paolino volunteered this solution, while Mrs. Paolino
testified Ms. Fehl suggested it. This factual dispute does not factor into my analysis.
4
Joint Exhibit (“JX”) 7, 8.
5
JX 9.
6
See JX 4. Ms. Fehl’s records indicate she made the following payments: $5,900 in
2006, $1,800 in 2007, $8,500 in 2008, $9,450 in 2009, $10,235 in 2010, $3,250 in 2011,
and $2,000 in 2012.
C.A. No. 9047-ML
June 17, 2015
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with the Property, including the mortgage, taxes, and insurance.7 Mr. Paolino died
in January 2013, at which point Mrs. Paolino became the sole owner of the
Property. In March 2013, Mrs. Paolino’s son, acting on her behalf, notified Ms.
Fehl that she was behind in her “rent” and an action would be filed against her if
the “rent” was not paid.8
A landlord-tenant action was filed against Ms. Fehl in April 2013, but that
action was dismissed because the Justice of the Peace Court determined it lacked
jurisdiction because the parties’ dispute was not a landlord-tenant matter.9 Ms.
Fehl was removed from the Property on July 23, 201310 and filed this action on
October 29, 2013, seeking an order voiding and rescinding the 2006 transfer of the
Property on several independent grounds. The petition contained 8 – at times
cryptically described – counts: (1) fraud, (2) negligent misrepresentation, (3)
undue influence, (4) lack of consideration, (5) no valid contract/no meeting of the
minds, (6) unjust enrichment, (7) unconscionability, and (8) detrimental
reliance/promissory estoppel.11 Mrs. Paolino filed a counterclaim against Ms.
7
Pretrial Order ¶ 14.
8
Id. ¶ 16.
9
Id. ¶ 17.
10
Id. ¶ 18.
11
Some of these counts might better be described as reasons why Ms. Fehl contends the
agreement to sell the property is an unenforceable contract. See e.g., counts 4, 5, 7.
C.A. No. 9047-ML
June 17, 2015
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Fehl, arguing that Ms. Fehl breached the parties’ agreement by failing to make the
payments required of her and by causing significant damage to the Property.
This case was tried on December 5, 2014. Several of Ms. Fehl’s claims
relied on her theory that the value of the Property at the time the Paolinos bought it
vastly exceeded the purchase price. For that reason, Ms. Fehl presented at trial the
expert testimony of Earl Loomis, a certified real estate appraiser, who issued a
report opining that the Property was worth $240,000 in 2006 when the Paolinos
purchased it from Ms. Fehl.12 Mr. Loomis’s estimate of value was based on his
assumption that the Property was in “average” condition in 2006. Mr. Loomis
abandoned his estimate of value on cross-examination when Mrs. Paolino’s
counsel presented evidence that on September 6, 2006, New Castle County refused
to issue a certificate of occupancy for the Property because of numerous code
violations. Mr. Loomis disclaimed his valuation in the face of that evidence:
Q. (Mr. Marconi): Is this the first time that you’ve ever heard that
New Castle County stated that as of September the 6 th of 2006 no
certificate of occupancy had been issued?
A. (Mr. Loomis): No, I had not heard that.
Q. Had you known either of those two things, would that have had
any affect on your appraisal value of the property?
A. Well, with the code violations I would say yes.
12
JX 6.
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June 17, 2015
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Q. As we sit here today do you believe that $240,000 is the accurate
appraisal of the property?
A. Knowing these kind of violations I would say no.
Q. You have no idea what the value of the property was in 2006?
A. What I would subtract from the 240 is an estimate of what it would
cost to bring the property up to code.
Q. Sitting here today you have no idea what that would be, do you?
A. I have no idea. I’m not a contractor.13
Petitioner did not ask Mr. Loomis any questions on redirect or offer any other
evidence from which the Court could determine the value of the Property at the
time Ms. Fehl sold it to the Paolinos.14
At the conclusion of trial, I issued a draft report from the bench (the “Draft
Report”). In the Draft Report, I concluded that Ms. Fehl had failed to prove the
necessary elements of her claims. I specifically concluded that the claims that
depended on Ms. Fehl’s contentions about the value of the Property in 2006 failed
because she had not provided sufficient proof of value. I also concluded that Mrs.
Paolino had failed to prove that she was entitled to any monetary damages because
she had not shown the amount of any damage to the Property and had not shown
that the parties’ agreement entitled her to payment of “rent.” I therefore
13
Pet’r’s Opening Br. in Supp. of Exceptions to Draft Report (“Pet’r Opening”), Ex. B at
11-12.
14
Id., Ex. B at 12.
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recommended that the Court enter judgment in favor of Mrs. Paolino on the eight
counts in the petition, and in favor of Ms. Fehl on the counterclaim. Both parties
took exception to that report. This is my final report.
ANALYSIS
A. Ms. Fehl has abandoned all claims except Count VII, and that count
depends on the Loomis valuation, the accuracy of which Mr. Loomis
disclaimed at trial.
In her exceptions to the Draft Report, Ms. Fehl argues that I erred in
discounting Mr. Loomis’ valuation report and that, if that valuation is accepted,
precedent in this Court and the District Court of Delaware support the conclusion
that the transfer of the Property should be rescinded. Although the second part of
that argument may have force, there is no basis on which the Court can rely on Mr.
Loomis’ valuation, and therefore there is not sufficient evidence to reach the
question of whether the agreement between Ms. Fehl and the Paolinos was
unconscionable.
As a preliminary matter, Ms. Fehl did not take exception to any factual or
legal conclusion reached in the Draft Report relating to the five counts in the
petition that did not depend on the Loomis valuation.15 In addition, although the
15
That is, the claims for fraud, negligent misrepresentation, undue influence, “no valid
contract/meeting of the minds,” and “detrimental reliance/promissory estoppel” do not
depend in any way on Ms. Fehl’s claims regarding the disparity between the value of the
property and the purchase price.
C.A. No. 9047-ML
June 17, 2015
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counts for “lack of consideration” and unjust enrichment did depend, to some
degree, on the Loomis valuation, Ms. Fehl’s brief in support of her exceptions did
not address those counts in any way. Ms. Fehl therefore has abandoned those
claims by not taking exception to the portions of the Draft Report involving those
causes of action.16
Ms. Fehl argues that, if the Property was worth $240,000 in 2006, and Ms.
Fehl sold it to the Paolinos for $100,000, the sale was unconscionable. Ms. Fehl
concedes that this Court typically will not void contracts on the basis that the
relative value of the bargain to the parties was not equal. As a general rule, “mere
inadequacy of price” will not invalidate a transfer, absent evidence of fraud,
duress, or incapacity.17 That general rule must yield on occasion, however, and the
Delaware courts will – with “extreme reluctance” – void a contract for fairness
“when all of the facts suggest a level of unfairness that is unconscionable.” 18 A
contract is unconscionable if there is “an absence of meaningful choice and
16
See Ct. Ch. R. 144(a)(1) (2014) (“the only exceptions which may be filed to the final
report are those which were filed to the draft report and disallowed, plus exceptions to
any changes from the draft report made in the final report.”). Rule 144 was revised by
the Court effective January 1, 2015, but the parties’ exceptions to the Draft Report were
dated December 12, 2014 and therefore are governed by the old version of the rule. In
substance, however, the revised rule contains the same restriction. See Ct. Ch. R. 144(c)
(2015).
17
Ryan v. Weiner, 610 A.2d 1377, 1381 (Del. Ch. 1992).
18
Id. at 1381.
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contract terms unreasonably favorable to one of the parties.”19 Ms. Fehl points to a
number of decisions in which courts have concluded that a contract was
unconscionable when real property is sold for less than half of the property’s fair
market value.20
Any conclusion that the exchange between Ms. Fehl and the Paolinos was
unconscionable under this 50% fair market value test requires the Court to accept
the Loomis appraisal, which Mr. Loomis himself abandoned on the stand. Mr.
Loomis specifically testified that his $240,000 valuation was not accurate and that
he could not provide an opinion as to the value of the Property in 2006. Ms. Fehl
offered no other evidence regarding the value of the Property at the time of sale.
Given that testimony, there was nothing on which the Court could rely to
determine that the sale price was unconscionable.
Ms. Fehl argues, however, that the Court should not have been so quick to
discount Mr. Loomis’ opinion, because Mrs. Paolino failed to provide any
evidence regarding the severity of the code violations or their affect on property
value. First, Mr. Loomis, not the Court, discounted his opinion: he explicitly
testified that the valuation he previously offered was not reliable and that he could
not offer a revised value for the Property. Ms. Fehl does not explain why the Court
19
Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978).
20
In re Emery-Watson, 412 B.R. 670, 675 (Bankr. D.Del. 2009) (citing cases).
C.A. No. 9047-ML
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should rely on an expert opinion the expert has said is unreliable. Second, it was
incumbent upon Ms. Fehl to prove the elements of her claims. Mrs. Paolino did
not need to offer evidence regarding the cost to repair the code violations or an
alternate value for the Property; when Mr. Loomis abandoned his valuation, Mrs.
Paolino had sufficiently rebutted Ms. Fehl’s evidence of the value of the Property.
Because Ms. Fehl did not prove how much the Property was worth at the
time she sold it to the Paolinos, she cannot prove the sale was unconscionable. I
therefore recommend that the Court deny Ms. Fehl the relief she seeks.
B. Mrs. Paolino is not entitled to damages for the period in which Ms.
Fehl lived in the Property without making payments.
Mrs. Paolino argues that the parties agreed that Ms. Fehl could continue to
reside in the Property as long as she paid $1,000 a month, and that Ms. Fehl
stopped making timely payments in 2012 but continued to live in the Property for
at least a year after her last payment.21 Mrs. Paolino therefore contends she is
entitled to approximately $18,000, representing the amount Ms. Fehl should have
21
The record reflects Ms. Fehl made no payments between July 2011 and June 2012,
then made no payments between August 2012 and July 2013, when she was removed
from the Property. JX 4.
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paid in that time period.22 According to Mrs. Paolino, it would be inequitable to
allow Ms. Fehl to live in the Property for 18 months at no cost.
Mrs. Paolino has established that the parties agreed Ms. Fehl would live in
the Property and make payments to the Paolinos to repurchase the Property. It is
undisputed that Ms. Fehl did not make the necessary payments to repurchase the
Property. But there is no evidence that the parties entered into a landlord-tenant
relationship that would allow Mrs. Paolino to extract payments from Ms. Fehl
other than payments toward repurchasing the Property. The Justice of the Peace
court previously determined there was no landlord-tenant relationship between the
parties, and Mrs. Paolino has not challenged or even addressed that conclusion. In
other words, the parties had, at best, an oral agreement that Ms. Fehl would
purchase the home from the Paolinos,23 but did not reach any agreement that Ms.
Fehl would make any payments not intended to reduce her debt to the Paolinos.
When Ms. Fehl ceased making payments, she effectively abandoned her
repurchase right. At that time, Mrs. Paolino could have removed Ms. Fehl from
the Property, which she eventually did. Mrs. Paolino elected not to move swiftly
to evict Ms. Fehl, and having made that choice she cannot turn to this Court
22
Mrs. Paolino inconsistently seeks $18,000 – calculated based on the parties’ agreement
of $1,000 a month, or $17,442.00 – calculated based on the mortgage payments Mrs.
Paolino made between January 2012 and July 2013.
23
Neither party raised a statute of frauds defense in this action.
C.A. No. 9047-ML
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seeking “equitable” relief from that decision. Mrs. Paolino has not suffered any
inequity: she purchased the Property from Ms. Fehl, received the benefit of Ms.
Fehl’s payments between 2006 and 2012, and remains the sole owner of the
Property. In this case, an equitable result is one that leaves both parties with the
benefit of their bargain.
CONCLUSION
For the foregoing reasons, I recommend that the Court deny both parties’
exceptions and enter judgment in favor of Mrs. Paolino on the eight counts in the
petition and against Mrs. Paolino on the counterclaim. This is my final report and
exceptions may be taken in accordance with Court of Chancery Rule 144.
Respectfully submitted,
/s/ Abigail M. LeGrow
Master in Chancery