Saturday, April 26, 2014

S-jay for you, S-jay for me!

Madowitz v. The Woods at Killington Owners’ Assoc., Inc., 2014 VT 21

By Jeffrey M. Messina

This case is the second of two involving the competing interests of a homeowner’s association and a developer; the competing authority of a condominium declaration and warranty deeds; and, ultimately, competing motions for summary judgment.

The Woods at Killington (the “Association”) is a condominium development created by declaration in 1985. The units were conveyed by warranty deed to private owners. The original declaration, as well as the amended declaration (1988), included a limited power of attorney from unit owners granting consent for the developer to amend the declaration and change current unit owner percentage by adding additional units. The original plan called for 147 condos and residential homes. Only 107 were built.

The deeds to 105 of the units contain language limiting the power of attorney to 10 years. This created a conflict between the declaration terms and the terms of the deeds regarding the developer’s right to continue development after the 10-year period.

As (bad) luck would have it, the initial developer was foreclosed upon. After one acquisition, Amherst Realty, LLC (“Amherst”) acquired the rights in 1994 and applied for an amendment to extend the construction-completion date on the existing Act 250 permit. The Association did not participate in the proceedings and Amherst’s application was granted in June 1995.

In the late 1990s, Amherst continued with development plans as the 10-year development window came to an end—and conflict between the Association and Amherst was just beginning. For example, in June 1998, someone from the Association stopped an Amherst contractor from working and told him to leave the property because the contractor was trespassing. Thus began a series of negotiations between the parties over several years, with no resolution. The Association continued to oppose development and refused to cooperate with Amherst and its contractors.

Just before the 2000 construction deadline under the existing Act 250 permit, Amherst applied for another extension which the Association opposed. The District Environmental Commission denied the application, finding that Amherst failed to show it had adequate development rights or that the Association should not have been joined as a co-applicant.

In 2002, Amherst sought a declaratory judgment regarding the scope of development rights and damages for lost profits based on the Association’s alleged interference with those rights under the condominium declaration, which Amherst characterized as a breach of contract: the contract being the condominium declaration as amended in 1988. The Superior Court, in 2008, granted partial summary judgment to Amherst on the dec claim, holding the POA and consent provisions of the condominium declaration as amended controlled over the deed language. The SCOV, on interlocutory appeal, affirmed the dec-judgment decision.

The superior court denied Amherst's motion for summary judgment on the interference claims characterized as breach of contract. The court said the Association had the right as legal representative of unit owners to go before the environmental commission to raise "pertinent issues." The fact that the Association had not prevailed with respect to its claim on the legal effect of the ten-year limitation provision did not make the claim frivolous or show it was "conjured up solely for purposes of delay."

Following the initial interlocutory appeal to SCOV, the superior court allowed the Association to amend by adding a consumer-fraud counterclaim. The trial court disposed of the remaining claims on summary judgment, granting the Association’s motion on the claim for damages for interference and granting Amherst’s motion on the consumer-fraud counterclaim. Amherst appealed the trial court’s grant of summary judgment against it and the Association cross-appealed summary judgment against it on the consumer fraud counterclaim.

The SCOV reviews a summary judgment order with the same standard as the trial court. The Court will find summary judgment appropriate when—say it with me—“there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.”

The SCOV begins with Amherst’s interference claim.

The SCOV notes the trial court declined to read the condominium declaration as containing any affirmative duties that could lead to a breach of a specific provision and therefore characterized Amherst's claim as one for breach of the general covenant of good faith and fair dealing. The SCOV further notes the trial court already ruled in the 2008 summary judgment order that the Association was not liable for opposing the extension of the Act 250 permit—though the trial court left open possible liability for the 1998 trespassing incident.

The trial court also recognized Amherst’s general claim that the Association was liable for "thwarting additional development, specifically by insisting on a resolution of the development issues before allowing [it] to proceed with development." The trial court did not however, definitively rule on whether the Association’s behavior was in fact breach of contract, finding as a matter of law that no damages could be assessed because the damages were speculative, based primarily on the fact that Amherst was a "new business" with no history of profits in Vermont.

On appeal, Amherst argues that the new-business rule should not bar all recovery for lost profits. The Association, on the other hand, argues the continued validity of the new-business rule and that due to the "law of the case" principle, the 2008 summary judgment decision finding no liability for opposing the Act 250 permit extension precludes a damages claim for anything other than the 1998 trespassing incident and also precludes a damages claim for any period after 2000 when the permit extension was denied.

The Association further claims the 1998 incident was covered by the "litigation privilege" because it was essentially a threat to litigate and the Association points out Amherst presented no evidence of damages for the years 1998 to 2000. In reply, Amherst argues notwithstanding the trial court statement that it had already ruled on the issue, the 2008 order was merely a denial of summary judgment and does not, therefore, constitute the law of the case. Amherst also emphasizes that the interference claim is not based on the Association’s opposition to the Act 250 permit, but rather the 1998 trespassing delay as well as the Association’s general opposition and noncooperation.

The SCOV says the issue is whether Amherst is able to prove damages for lost profits. The SCOV then narrows the question by specifying the profits that are potentially at issue—which is the period from 1998 to 2000 under the then-existing Act 250 permit. (Since the Act 250 permit was not extended, Amherst cannot claim any loss from 2000 forward.) The SCOV states that breach of contract damages must be proved with "reasonable certainty" and cannot be based on mere "speculation and conjecture." The SCOV also explains that “recovery for lost profits is not generally allowed for injury to a new business with no history of profits.”

The SCOV states that even though Amherst purchased the development rights in 1994, it took no immediate development action. Further, the SCOV finds that while Amherst had engaged in planning for development and done a little site work, it had not engaged in any building construction. The SCOV cites evidence in the record of a plan for the immediate construction of only two of the 40 units, with construction to have commenced in the spring of 1999. The record also shows that the building permit for one of the units was obtained only in November of 1999. Therefore, according to the SCOV, it is entirely too speculative that Amherst would have completed or even started any construction before the Act 250 permit expired in 2000. Because a claim for lost profits is too speculative, the SCOV affirms the trial court decision.

The SCOV then turns to the Association’s consumer-fraud cross-appeal.

A successful “deceptive act or practice” claim under the Vermont Consumer Fraud Act (“CFA”) requires proving three elements: (1) a representation, omission, or practice likely to mislead customers; (2) a consumer’s reasonable interpretation under the circumstances; and, (3) the misleading effects are material in affecting the customer’s conduct or decision regarding the product. Additionally, to bring a private claim, the plaintiff must be a consumer who “contracts for goods or services in reliance upon false or fraudulent representations or practices . . . [or] . . . sustains damages or injury as a result of any false or fraudulent representations or practices.” Finally, the defendant must be a “seller, solicitor, or other violator.”

The Association’s theory is that the original developer committed deceptive acts—by knowingly putting a legally defective durational limit on development expansion in the warranty deeds to induce purchase—and argues that Amherst, as a “successor” developer, received the benefit of the deception. The Association characterizes Amherst’s action as a ratification of the initial developer’s consumer fraud.

In its analysis, the SCOV points out that in lower proceedings both parties agree that Amherst did not know about the conflict between the declaration and the deeds when it bought the development rights. Further, notes the SCOV, there have been no allegations that Amherst made misleading communications of its own that could fit the definition of “deceptive act.” Accordingly, the only way Amherst could be liable under a consumer-protection theory is if there were some principle under which good-faith successors to original violators assume consumer fraud liability simply by attempting to exercise acquired rights.

The Association claims such a principle exists and calls it “ratification.” The SCOV doesn’t buy it.

Though the SCOV admits ratification is a well-known concept of agency law in which the principal may affirm a prior action by an agent which did not bind the principal but was purportedly done on his or her account, with the ratification “relating back” to the time of the actual act, the SCOV states emphatically it has never extended responsibility for fraud “beyond the context of one party acting on behalf of a cooperative effort between multiple parties.” Here, because the original developer was not an agent of Amherst, nor were they in a cooperative venture, the CFA is not applicable.

The SCOV states the purpose of the CFA is to “protect citizens in consumer transactions from unfair and deceptive business practices and ‘to encourage a commercial environment highlighted by integrity and fairness.’” The point is to allow a consumer to reach the person who committed the consumer fraud. Because Amherst did not perpetrate the fraud, and in many respects was a victim itself of the deceptive act, Amherst cannot be held liable for its predecessor’s misconduct. Accordingly, the trial court's decision is affirmed.

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