C.A. No. 12771Court of Chancery of Delaware, New Castle CountySubmitted: October 14, 2003
Decided: November 17, 2003
Michael J. Isaacs, Esquire, Sheldon K. Rennie, Esquire, FOX ROTHSCHILD, LLP, Wilmington, Delaware, Attorneys for the Plaintiffs.
Richard E. Franta, Esquire, Wilmington, Delaware, Attorneys for the Defendants.
LAMB, Vice Chancellor.
The plaintiffs are a group of tenants who hold 99-year leases on lots in Lynn Lee Village (the “Village”), a small waterside mobile home community in Sussex County, Delaware. The defendants are Key Box 5 Operatives, Inc., (“Key Box 5”). Candice A. Casey, Kathaleen McCormick, William G. Lloyd, Oak Associates, LLC, Rivers Edge, LLC, and James Gabriel and Alma K. Gabriel. Key Box 5 purchased the Village from Lynn Lee Limited Partnership (“LLLP”) in September 1988, in a transaction that was largely financed by the sale of the 99-year leases. As a part of that transaction, the plaintiffs paid in advance for their leasehold interests; accordingly, the tenants pay no annual rent but are responsible for an annual maintenance fee.
Key Box 5 recently contracted to sell the Village to a third party that plans to develop the property as a single-family residential community. By letter dated May 2, 2003, purporting to act in reliance on authority found in 25 Del. C. § 7010(a)(4), Key Box 5 notified the tenants of its intention to terminate the 99-year leases on November 14, 2003, due to the change in land use associated with this proposed sale. The plaintiffs sued to enjoin the termination of the leases and for the imposition of a resulting or a constructive trust on the Village. Their complaint also claimed retaliatory eviction as grounds for avoiding the notice of termination. The defendants counterclaimed on several grounds.
In its recent memorandum opinion, the court granted the defendants’ motion for partial summary judgment, finding that the lease termination provision found in Section 7010(a)(4) is applicable to the 99-year leases, as a matter of law. The court rested that decision on several bases. First, the court found that the parties to the 99-year leases understood (and the leases themselves provide) that Chapter 70 (“Mobile Homes and Mobile Home Parks”) would, in general, govern those agreements. Second, the court concluded that, although the General Assembly made no express provision for just compensation in the event of termination, it did not intend to exclude long-term prepaid leases from the scope of Section 7010(a)(4). And, finally, the court recognized that, to fill the gap in the statute, it has the inherent power to “fashion a suitable compensation mechanic, by reference to appropriate valuation methodologies . . . .”
The court’s summary judgment decision did not address the plaintiffs’ claim for the imposition of a resulting or constructive trust. Instead, those and related matters were set down for an evidentiary hearing that was held on October 14, 2003. At that time, the parties presented testimony and documentary evidence on those issues. The court also heard evidence on the claim that the defendants’ plan to change the land use of the Village is retaliatory and, therefore, should be enjoined.
In this opinion, the court concludes that the plaintiffs have not met their burden of showing that the circumstances surrounding the 1988 transaction warrant the imposition of a resulting trust on the legal ownership of the Village. Nor have they shown an entitlement to the creation or imposition of a constructive trust. Nevertheless, the record quite clearly shows that, at the time of the 1988 transaction, all parties involved understood that persons who purchased 99-year leases would have the right occupy the premises for 99 years. They also understood that right to be both transferable (subject to a right of first refusal) and capable of being passed to ones heirs. For these reasons, when valuing the leasehold interests at issue in this case, the court will strive to compensate the tenants for the loss of the right to the use and enjoyment of the property as a mobile home park for the balance of the term of the 99-year leases. In other words, to fully and fairly compensate the tenants, the court will value the remaining leaseholds without consideration of the fact that Key Box 5 retained the legal power to terminate pursuant to Section 7010(a)(4).
The plaintiffs presented the testimony of four tenants who hold 99-year leases. Each witness testified to the process by which Key Box 5 marketed the 99-year leases as a means of acquiring the park. Lynn Lee Village was first established in 1965 and now consists of 87 mobile homes sites. In 1985, LLLP bought the park, but, by the beginning of 1988, LLLP was itself in serious financial distress. LLLP first explored the possibility of transforming the park into a cooperative, in which units or shares would be offered for sale, initially to the park tenants and then to the public. Susan Whetstone, a local real estate sales person, became involved in this effort. On May 21, 1988, acting as a representative of LLLP, she sent the tenants of the Village a letter proposing a cooperative agreement to purchase the Village and maintain the park for the current tenants. As proposed, the plan was to offer 87 shares, the first 15 at $28,500 and the remaining 72 at $29,500. If all 87 shares had sold at these prices, the total amount paid to the cooperative would have been $2,551,500. Several people, including at least one of the trial witnesses, paid the required $500 down payment to buy into this scheme.
Soon thereafter, the proposal to form a cooperative ran into serious timing obstacles associated with the likelihood that it would be considered a “conversion” subject to Chapter 71 of Title 25 of the Delaware Code, and was abandoned in favor of a plan to finance the purchase of the park by an entity to be formed by Whetstone through the offer and sale of 99-year leases. The economic terms of the proposed leases were essentially the same as had been proposed for the cooperative. Whetstone and her sisters eventually became the stockholders of that new entity — Key Box 5. This plan avoided the timing problems associated with a “conversion” by guaranteeing that any tenant who chose not to buy a long-term lease would be entitled to remain as a tenant on the property for three years.
After the 99-year leasehold concept emerged, Whetstone personally assured the tenants at an informal meeting on her father’s porch in the Village that the tenants were buying an interest that would last 99 years. The witnesses testified how the terms of the new 99-year lease arrangement were substantively the same as that of the initial cooperative agreement. Specifically, Gouge testified that his initial $500 deposit for the cooperative agreement was transferred to the purchase of the 99-year leasehold and that he was assured that the terms and conditions would be the same. Additionally, the witnesses testified that Whetstone and Casey repeatedly assured the tenants that they were getting the equivalent of a deed that would be recorded at the courthouse.
Key Box 5 (along with Whetstone and Casey), as the purchaser, was closely involved in facilitating the process of selling, financing, closing and recording these leaseholds. The witnesses testified that they took out mortgages on the leaseholds, recorded their leases and paid a transfer tax on the property. Whetstone and Casey were not mere observers to this process but, rather, prepackaged the deal for the tenants. Acting on behalf of Key Box 5, they arranged attorney representation at settlement, and secured the participation of Sussex Trust as a source of mortgage money for the deal. The tenants bought into Key Box 5’s plan thinking that they (and Key Box 5) were “saving the park.” In doing so, the tenants honestly and reasonably relied on representations made by Whetstone and Casey, on behalf of Key Box 5.
The record also shows that more or less all of the money used to purchase the park came from the sale of 99-year leases. On June 29, 1988, Whetstone and LLLP executed an “Agreement for Purchase and Sale” that expressly stated that the purchase price was premised on the sale of the leases. By the September 30, 1988 closing, $1.5 million had been raised in the sale of the 99-year leaseholds, more than was needed to clear LLLP’s mortgage liability to Wilmington Savings Fund Society. By June 1989, $2,230,000 had been raised by the sale of the 99-year leaseholds. At most, Key Box 5 had to come up with $13,787.65 from its own funds at the time of closing.
A court will impose a resulting trust “when a legal estate is purchased with surrounding facts and circumstances giving rise to the inference that the beneficial interest is separate from the legal title.” The resulting trust is used “to give effect to the presumed intention of the parties.” “[T]he court presumes, absent contrary evidence, that the person supplying the purchase money for property intends that its purchase will inure to his benefit, and the fact that title is in the name of another is for some incidental reason.”
The current case is a difficult one for the imposition of a resulting trust. While the overwhelmingly important source of funding for Key Box 5’s purchase of the Village was the sale of 99-year leaseholds, there is no evidence that the parties ever understood or intended that the purchasers of those leaseholds would individually or as a group acquire any beneficial ownership of the park as a whole. On the contrary, the evidence is clear that the parties always understood and intended that Key Box 5 would become the legal and equitable owner of the fee simple interest in the park, subject only to however many long-term leases were sold. This is to say that the record does not support an inference that legal title to the park was taken in the name of Key Box 5 for “some incidental reason.” This leads the court to conclude that no resulting trust is warranted.
The court reaches this conclusion even though there is ample reason to find that the 99-year leaseholds were sold on the basis of a mistaken understanding of the possible limitation on their duration resulting from Section 7010(a)(4). Nevertheless, neither that fact nor the fact that Key Box 5 purchased the park with the proceeds of the sale of the leaseholds is enough to support the imposition of a resulting trust. Instead, both of those facts will weigh importantly in structuring the appropriate mechanism to fully and fairly compensate the tenants for their loss of the right to occupy the land for the full 99-year term of the leases.
The court also concludes that the record does not reveal evidence of fraud or overreaching necessary to the imposition of a constructive trust, either at the time of the creation of the leaseholds or in the later troubled history of the Village. Quite simply, the tenants got what they bargained and paid for when they bought the 99-year leases. While neither they nor Key Box 5 appear to have contemplated the potential application of Section 7010(a)(4) to the 99-year leases, this is not evidence of fraud. As discussed in the recent summary judgment opinion in this case, the possible application of that section of the law to these leases was, in fact, brought to the attention of the tenants before the September 30, 1988 closing. Apparently, neither they, nor Key Box 5, nor the legal professionals involved adequately explored this question. Had they done so and reached a satisfactory resolution of the issues involved, the current dispute might have been avoided entirely. The fact that they did not is not a basis for the court to impose a constructive trust on the defendants’ legal ownership of the Village.
Although the court rejects the claims based on theories of resultant and constructive trust, it is mindful that the fair application of Section 7010(a)(4) to these 99-year leases depends upon the court’s fashioning an appropriate mechanism to compensate the tenants for the property interests that will be taken from them when the leases are terminated. The defendants have conceded that they must compensate the tenants, but their announced intention is to reimburse the “prepaid rents” in proportion to the remaining term of the leases. The problem with this suggestion is that it might not, in fact, compensate the tenants for the value of what they bought. Many reasons suggest that this is so, most importantly the trial testimony of Casey that the sale price for the park is nearly $7 million, or more than triple the 1988 purchase price. From this, the court infers that the value of an 84- or 85-year lease on a portion of the land may also substantially exceed the amounts paid to buy the 99-year leases in 1988. If this is so, merely refunding a portion of the 1988 purchase price will not provide adequate compensation.
As discussed in the summary judgment opinion, the court intends to refer this matter to the Master promptly for a determination of the value of the 99-year leases. In that reference, the court intends to advise the Master to engage the services of a court-appointed neutral expert for the purposes of preparing a detailed appraisal of the leaseholds in issue. In that connection, it is the court’s expectation that the appraiser will value those leaseholds on the basis of the current use of the premises as a mobile home trailer park. At the same time, however, the appraiser should value the property as though that park were in a good state of repair. The court solicits the parties’ views as to the proper wording of the order of reference and the charge to the appraiser. The cost of the appraiser will be borne by the defendants, since it is their decision to terminate the leaseholds that gives rise to the need for a valuation.
(a) LLLP was the seller;
(b) Susan Whetstone was the buyer;
(c) The price was $2,200,000.00 (paragraph 2) to be paid as follows:
(i) a down payment in the form of a confessed judgment note;
(ii) Susan Whetstone, as agent for LLLP, was to offer 99-year leases and that LLLP would be bound by the leases;
(iii) Susan Whetstone was to sell a sufficient number of 99-year leases to payoff LLLP’s then existing mortgage to WSFS, estimated to have been $1,400,000.00, plus the sellers settlement costs;
(iv) upon the sale of sufficient leases to satisfy $1,400,000.00 mortgage indebtedness, LLLP would give a Deed to Susan Whetstone in return for a purchase money mortgage in the amount of the total sales price minus the amount received from the sale of the 99-year leases;
(v) Susan Whetstone was to continue to sell the 99-year leases on her own behalf after the delivery of the Deed and turn over the proceeds of such sale to LLLP who would then release that particular lot from the lien.