Saturday, June 4, 2011

Not Necessarily a Sale

Smalley v. Stowe Mountain Club, 2011 VT 51

Does a mere inter-corporate capital transfer among affiliated entities constitute an actual sale of property, triggering a deed’s restrictive covenant that applies when land is “sold or conveyed?”  As with every legal question, it depends.    

In today’s case, the SCOV looked into the shuffling of property between Stowe Mountain Club, LLC, Mount Mansfield Company, and Spruce Peak Realty, LLC, all of which are wholly owned or controlled by their parent corporation American International Group (AIG).

Our angry neighbor Plaintiff in this case is Mr. David Smalley.  Smalley bought a house on almost two acres of land next to the Stowe Mountain Resort from Ms. Nancy Cooke in 1994.  Cooke’s original 1959 deed from the Mount Mansfield Company contained numerous restrictions and conditions, all of which ran with the land and nearly all of which were aimed at maintaining an upscale residential character for the neighborhood.  A revised deed in 1977 corrected a boundary error, but retained by reference the restrictions in the 1959 deed.  Smalley’s 1994 deed likewise continued the restrictions in the 1959 deed.    

These restrictions included a minimum cost of construction for improvements, a required sign-off by the Mount Mansfield Company’s architect before construction, and, importantly here, a requirement that “the premises and buildings . . . shall at no time be used or occupied for the purpose of any . . . place of public resort.”  Right after the laundry list of restrictions came the language that forms the crux of today’s case: “land within 200 ft. of the boundaries of the lot here conveyed to Grantee shall be sold and conveyed by the Grantor subject to the same conditions, restrictions and covenants as are contained in this deed.”

Over the years since 1959, the Mount Mansfield Company (MMC) sold other residential lots in the area around the ski resort, all subject to the conditions and restrictions set forth in the 1959 deed.  Then, in 2003, the Mount Mansfield Company conveyed land near Smalley’s lot to Spruce Peak Realty, LLC (SPR), which in turn conveyed the property to its own limited liability company, the Stowe Mountain Club, LLC (SMC), in 2004.  The deeds accompanying these conveyances recited that they were “in consideration of ten and more dollars paid to its full satisfaction” and the Vermont transfer tax returns identified the “Total Price Paid” in each case as in excess of $200,000.  But MMC characterized both transfers as inter-corporate capital contributions. 

So, was land sold in 2003 and 2004?  If the land transferred to SPR and SMC was “sold or conveyed,” then the transfer would trigger the restriction prohibiting use of the land a place of public resort, barring development of the land for, say, a golf course.   

SMC constructed a golf course on the land near Smalley’s lot in 2005 and 2006, with portions of the golf course located within 200 feet of Smalley’s property line.  Smalley met with officials from the ski resort and construction personnel several times during the construction of the golf course, but it seems he was unsatisfied with the outcome of those conversations.  One year after the golf course was completed, Smalley sued on his claim that portions of the golf course built and operated by SMC violate the restrictive covenants in Smalley’s deed.

In pretrial summary judgment cross-motions, Smalley argued that a sale is a sale, the restrictive covenants are unambiguous, and that he should be award declaratory and injunctive relief.  SMC argued that the there were no sales, but “merely inter-corporate capital transfers among affiliated entities, all of whom were wholly owned or controlled by their parent corporation American International Group (AIG),” so there was no real change in ownership or monetary consideration.   As there was no real sale, SMC argued that the land was not “sold or conveyed” as that phrase was understood by parties to the 1959 deed.  According to SMC, it should be able to cycle the resort property through various subsidiaries of AIG without losing its ability to develop the resort as it may choose.  SMC further asserted that the “sold or conveyed” term was ambiguous and did not run with the land.

The trial court flatly rejected every one of SMC’s arguments.  It found that the restriction was intended to create a 200-foot buffer between residential properties and the resort.  It also found that the 2003 and 2004 transfers were plainly sales under conventional real estate law.  Accordingly, it issued a final judgment in May 2010, permanently enjoining SMC from further violation of the restrictive covenant and ordering that it “remove those portions of the golf course which have been constructed within 200 feet of Smalley’s property, and . . . desist from any public or business use of the said buffer zone for any and all purposes associated with said golf course.”

In today’s case, the SCOV quickly agreed with the trial court that the covenant(s) run with the land, noting that of the four traditional requirements (must (1) be in writing, (2) touch and concern the land, (3) privity of estate must exist, and (4) parties intended it to run with the land) it is the fourth, intention of the parties, that has become the focus in modern law.  The SCOV found it clear that “the 200-foot restriction, like the other residential covenants, was intended to run with the land.” 

But the SCOV did not follow the trial court in determining that the 1959 deed created a 200-foot buffer between Smalley and the resort development.  The deed by its terms imposed no restriction on resort activity within 200 feet of the lot, but rather provided that any land “sold and conveyed” by MMC within 200 feet of the property was subject to the covenant restricting non-residential activity.   

One might think that a conveyance of land, accompanied by a deed reciting consideration and a property tax transfer return, is a sale of land.  And indeed it is, technically.  But the SCOV is less concerned here with technical legal terms than with what the parties intended.  And here, their intent is unclear.  Nor do recitations of consideration in a deed or transfer tax returns establish a sale.  Moreover, Smalley did not raise these issues until a year after the golf course was constructed,  leading SMC to raise the affirmative defenses of equitable estoppel, laches, and unclean hands.  While the trial court summarily dismissed these affirmative defenses, the SCOV is not so hasty. 

In short, the SCOV decided that the issues were not as clear-cut as the trial court made them out to be.  In order to determine the exact nature of the 2003 and 2004 transfers, the intent underlying the “sold and conveyed” clause in the deed, and SMC’s affirmative defenses, more discovery is needed.  Accordingly, the SCOV reversed and remand for further proceedings.    

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