Covenants that require an architectural review committee or homeowners association board to approve owner changes to their homes and grounds have been a mainstay in Delaware condominium and non-condominium community documents for many years. A recent Master’s Report in a Delaware Court of Chancery case has invalidated the architectural approval requirements for one Delaware condominium, leaving many other Delaware communities scrambling to determine whether their own covenants are enforceable.

In Benner v. Council of the Narrows Association of Owners, C.A. No. 7503-ML, 2014 Del. Ch. LEXIS 265 (Dec. 22, 2014) (unpublished), the owner of a unit in a 15-unit condominium project created under the Delaware Unit Property Act brought suit to compel approval of exterior alterations to her unit. Specifically, Mrs. Benner wanted to enclose two porches. The condominium Declaration contained typical provisions requiring the condominium Council’s approval of all changes to exterior portions of units, and stated “[n]o Unit Owner shall make any structural addition, alteration or improvement in or to his Unit without the prior written consent thereof of the Council.” The Declaration did not set forth any sort of standard or conditions for the approval of alterations.

The Council claimed that the community standard for architectural approval was that alterations be substantially similar to original construction. The source of this standard was not in the Declaration itself, but a provision in the condominium Code of Regulations that governs repairs. Though these repair provisions stated that “[a]ll repairs and replacement shall be substantially similar to the original construction and installation,” the Code did not require the Council to approve repairs.
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In a Delaware Superior Court case that is somewhat the opposite of the Wells Fargo Bank, N.A. v. Strong case discussed in my February 26 entry, we now have another Delaware pronouncement in a foreclosure case involving seals. In Nationstar Mortgage, LLC d/b/a Champion Mortgage, LLC v. Crane, 215 Del. Super. LEXIS 45 (Jan. 29, 2015), the lender first filed a mortgage foreclosure action in the Court of Chancery, asserting in its complaint that it was filing an equitable foreclosure action in Chancery instead of a foreclosure action at law because the mortgage was not sealed. However, the lender subsequently “discovered” that the mortgage was in fact filed under seal, so the lender transferred the foreclosure action to Superior Court. Naturally, the lender asserted in this second complaint, contrary to the complaint filed in the previous Chancery Court action, that the mortgage was under seal. The defendants in the foreclosure action argued that the Superior Court foreclosure could not proceed because the lender should be prevented–or in other words, estopped– by the pleadings in the earlier case from claiming that the mortgage was under seal.

The Superior Court rejected this judicial estoppel argument because there had been no ruling in the Chancery Court action as to the seal status prior to the case transfer. Therefore, consistent with the Delaware cases on amending case pleadings in general, the court would not be making inconsistent rulings on the seal, and the foreclosure at law could proceed. Unfortunately, the court’s written opinion does not satisfy everyone’s curiosity as to the original mistake and how a fact such as whether the mortgage was sealed or not could be subsequently “discovered.” Since the action of filing the case in Chancery Court originally would have been somewhat time-consuming and expensive, there must have been something questionable about the seal in the first place.

Delaware lenders and their attorneys are accustomed to seeing affidavits at commercial loan closings of borrowers and guarantors authorizing the entry of a judgment by confession, which state their contact with Delaware, and include the mailing address of their residence. The affidavits’ genesis is a Delaware statute, 10 Del. C. § 2306(c), requiring parties that are not Delaware residents to sign this document, which the lender must produce to the Prothonotary in order to enter the judgment. A 2014 Delaware Supreme Court case demonstrates how critical it is to obtain such affidavits in loan closings, but also provides a path to obtain confessed judgments even if the document does not exist.

In Zimmerman v. Customers Bank, 94 A.3d 739 (Del. 2014), Michael Zimmerman, the Dover developer who tragically and unexpectedly passed away earlier this month, and his wife obtained two loans, defaulted under the loans, and entered into a forbearance agreement with the bank. The forbearance agreement included a warrant of attorney to confess judgment. The bank did not obtain the non-resident affidavit required by the statute, as the borrowers had provided Delaware addresses. Customers Bank filed a complaint in Delaware Superior Court seeking the entry of the judgment by confession against the Zimmermans under Superior Court Civil Rule 58.1. The Zimmermans argued at the Superior Court’s hearing on the entry of the judgment that when the forbearance agreement was executed they were residents of Florida; therefore, the bank had not obtained a valid judgment by confession because it did not file the non-resident affidavit with the request for the judgment. The assertion of Florida residence was made despite Delaware notice addresses in the signed loan documents and no change in address having been filed with or requested of the bank.

However, the Supreme Court held that the lack of the affidavit did not matter, because the confessed judgment was not entered by the Prothonotary under Superior Court Civil Rule 58.1; instead it was entered directly by the Superior Court itself under rule 58.2. Unlike the rules regarding the entry of judgment by the Prothonotary, the provisions permitting the Superior Court to enter a judgment by confession do not include the requirement of an affidavit for non-residents.
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A recent Delaware Court of Chancery case reminds us of the persistence of the mortgage seal problem in Delaware. Wells Fargo Bank, NA v. Strong, 2014 Del. Ch. LEXIS 230 (Nov. 19, 2014) is a foreclosure case that was pending for nearly ten years. Mr. Strong failed to make his mortgage payments. MERS (the nominal holder of the mortgage as nominee of MIT Lending) filed a foreclosure action, and the foreclosure was repeatedly halted by three successive bankruptcies filed by Mr. Strong on a pro se basis. After that, the mortgage was assigned of record from MERS to Wells Fargo, which then attempted to move the foreclosure action forward in Superior Court only to find that the mortgage had not been properly sealed. It is settled Delaware law that an unsealed mortgage cannot be foreclosed at law in Superior Court, though it can be foreclosed in an equitable Chancery Court proceeding.

Although the lack of the seal on the mortgage required the Superior Court to dismiss the foreclosure action, a Delaware statute provides that a case dismissed solely on the grounds of the court being without jurisdiction may be transferred to the appropriate court, provided that the party files a written election of transfer and pays the deposit for costs in the second court within 60 days. 10 Del. C. § 1902. While it is certainly some comfort to lenders who forget to require a seal on a Delaware mortgage that, instead of no remedy, they may pursue the more expensive and time-consuming alternative of foreclosing in equity in Chancery Court, in this case Wells Fargo did not post a deposit for costs in the Chancery Court by the deadline. The Delaware Supreme Court held that the equitable foreclosure action was barred due to this timing defect.

This ruling was despite the fact all equities were on the bank’s side: Mr. Strong had drawn out the foreclosure process for many years and had even filed a civil case against the bank and the bank’s foreclosure attorney alleging fraud, forgery, perjury, defamation, conspiracy, malicious prosecution, and deceptive trade practices related to the foreclosure (eventually all of these counts were dismissed), and ultimately the mortgage was rendered unenforceable. Wells Fargo v. Strong is a reminder of the need for a raised or typed “seal,” and how the Delaware Supreme Court values proper procedure and time deadlines.

I have long held the opinion that many contract drafters make a big mistake by including too much language, when they would be better off leaving certain things unsaid. A recent example of this is the Delaware Chancery Court ruling in Tidewater Environmental Services, Inc. v. Bernard DiSabatino, C.A. No. 7737-VCG (Del. Ch. July 11, 2014), which was an action by Tidewater to try to collect on amounts owed to it by two limited liability companies (“LLCs”) in connection with failed real estate developments. Tidewater’s contract for engineering services stated that if the real estate project didn’t go forward, the LLCs would be liable for the costs that Tidewater incurred. Naturally, the project did not go forward and the LLCs were never able to pay on the judgment entered in favor of Tidewater under the contract. In the Chancery Court case, Tidewater tried to “pierce the corporate veil” to collect on the judgment from the members of the LLC. In Delaware it is extremely rare for a court to hold LLC members liable for a LLC’s obligations, and to do so it will always require a finding of actual fraud. While that is already a settled matter of Delaware law, the court found it very important that the contract stated that the LLC, upon execution of the contract, was to forward to Tidewater a copy of its financial information, including tax returns. Yet, Tidewater never obtained any such financial information. This language indicated to the court that Tidewater completely understood the nature of limited liability companies, that it knew it did not have recourse beyond the LLC’s assets, and there could not possibly have been any fraud because there was a failure to check the assets per the contractual right.

Thus, the financial information clause inserted by the attorney, which would have been good if followed-through upon, had the perverse effect of completely eliminating the one basis for setting aside the customary limited liability company protections: that of fraud.

Sometime this past month, a significant shift happened in the way DNREC SIRS treats entrants into the Delaware Brownfields Program and it’s a shift that you need to be aware of if you plan to do Brownfields redevelopment in Delaware. For the past decade or so, if you wanted to redevelop a Brownfields property, you would send in the Brownfields Certification Application and, upon submitting your application (assuming that you are not otherwise a “potentially responsible party” under HSCA), you would receive environmental liability protection from the hazardous substances existing on the property. This is because DNREC interpreted HSCA to say that applicants into the Brownfields program received liability protection upon the submission of the certification application. This interpretation was particularly helpful if you wanted to move quickly to acquire the property and deal with the environmental issues after closing. It was also helpful if you wanted to keep your discussions regarding site acquisition somewhat confidential since there was no public notice required at the time of application submission.

However, that ability to move quickly has now changed. DNREC SIRS has taken another look through HSCA and decided that environmental liability protection only kicks in once the Brownfields Development Agreement (the “BDA”) has been executed. Negotiation of the BDA happens after certification of both the property and the potential Brownfields Developer. Although there is a template BDA, there are circumstances where you may want (or need) to deviate from the standard language in the template. Even under the best circumstances (i.e., assuming no substantial changes to the BDA), DNREC must provide public notice within 20 days after entering into negotiations for a BDA and provide a 20-day public notice and comment period AFTER entering into a BDA. Generally, no comments are received, but if you are looking for certainty in what you will be required to do (or not do) under the BDA, you won’t have that until the end of the comment period.
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What can one say about a Delaware Chancery Court opinion in a consolidated New Castle County action to enforce private restrictive covenants and developer’s action to compel county review of development plans that was issued one day, corrected the next, then withdrawn and re-issued with clarifications three and a half months later by a specially-appointed Vice Chancellor? A case that involves fifty-year-old and forty-six-year-old “private master plans,” the current Unified Development Code “restrictive change statute” (§40.31.130), a plethora of successively-revised record development plans, at least two successive rezonings, another thirty year old Declaration of Covenants, and a series of county council resolutions? Not to mention the interpretation of three previous Delaware court decisions involving the same land? Does the December 30, 2013 opinion in New Castle County v. Pike Creek Recreational Services, C.A. No. 5969-JW, considering cross-motions for summary judgment deal with facts so complex that it is useless in providing guidance beyond the case at hand?

Not at all. The opinion is a treasure trove of tasty tidbits of Delaware real estate law.

The first tidbit: the Chancery Court reiterated the Delaware Supreme Court ruling that a decision of whether proposed plans for Pike Creek conformed to a “master plan” created by private covenants should be left to the courts, not the New Castle County Planning Board. New Castle County v. Richeson, 347 A.2d 135 (Del. 1975). Thus, County Council Resolution 10-217 directed to the Department of Land Use stating that the developer’s development plan for homes violated the golf course required in the master plan was an invalid attempt to interpret the master plan. The master plan (as amended) was binding on the developer as a successor owner even though it was not recorded, because its language showed intent to run with the land and the developer had actual notice of it.
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In a previous article, I mentioned that the DNREC Brownfields program has experienced an excess of funding at the end of the grant year and, as a result, the folks running the program are looking at ways to make more funding available for certain qualified projects. This comes after a few years of belt tightening that saw a reduction in reimbursement for things that rightfully should have been reduced (like a cap on subcontractor mark-ups and lab costs) to other things that probably could have been left alone (like a reduction in the amount of funding available to a for-profit developer from $225,000 to $200,000).

Along with opening the door for a very modified Brownfields VCP-like qualified Brownfields Developer (see my earlier blog entry from 11/10/2013), other changes now being discussed include a complete waiver of the 50-cents-on-the-dollar reimbursement for projects resulting in “affordable housing,” or housing that receives LEED certification, or upon a written request to DNREC for expenses incurred during the months of March through May of the fiscal year. Clearly, this last category seems to make up what I would call the “eggplant” reimbursement package. You know how when you are sautéing eggplant and it will soak up whatever amount of butter you put in the pan? Well, the reimbursement package you send into DNREC during the last quarter of the fiscal year is like the eggplant and the funding is the butter. Your reimbursement package will soak up whatever funding is left to the limit of your qualifying expenses.
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It has now been over six months since the Delaware Commercial Real Estate Broker’s Lien Act became effective on August 1, 2013. This new law gives brokers the ability to quickly place a lien on real estate for commissions – previously brokers had to sue for payment and obtain a judgment first. The new Act still has not been tested, as no such lien has yet been filed (as the proponents of the legislation intended – the threat of the potential lien is what Delaware brokers really wanted).

The Delaware Commercial Real Estate Broker’s Lien Act, Del. Code Ann. tit. 25, §2601, pertains to both sale and leasing transactions, and can also be used to enforce payments to a broker for “management” and other services for “conveyance or acquisition of commercial real estate.” The party claiming the lien must be an individual who holds a Delaware broker license and who is self-employed or employed directly or indirectly by a brokerage organization. The Act applies to any real estate with improvements other than one to four residential units; unimproved land zoned or available for commercial, manufacturing, industrial, retail or multi-family use; unimproved land of any zoning classification being purchased for development or subdivision other than land with four or fewer single-family residential lots; and even real estate used for agricultural purposes unless the purchaser is buying the property for the purpose of continuing agricultural use. The Act also applies to mixed-use real estate, including real estate with one to four residential units that also has another non-residential portion. The Act’s lien cannot be imposed on residential condominiums, town homes, mobile homes or other homes sold or leased on a unit-by-unit basis, even if part of a larger building.

The “brokerage agreement” must meet certain requirements for the lien right to apply: it must state the amount or calculation of the broker’s compensation; that it is a binding contract under state law; and identify the real estate by description or tax parcel number. This could be a stumbling block for brokers wishing to claim liens, so they should dust off their brokerage agreements to make sure they are in correct form.
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The Talbot case pending before Judge Young in Kent County, Delaware Superior Court shows how careful a bank must be in releasing a co-obligor of a loan. Talbot Bank of Easton, Md. v. Albertson, C.A. No. 10L-06-011 RBY, 2014 Del. Super. LEXIS 8 (Jan. 9, 2014). Though this action brought by the bank to foreclose a second mortgage is far from over (the recently-released opinion is a ruling on the mortgagor’s motion for partial summary judgment), regardless of the ultimate outcome this proceeding is a reminder of a basic tenant of surety law and how important it is for a bank to document a release correctly.

Talbot Bank is foreclosing a mortgage from co-owners Edward Albertson and son Kirk Albertson, securing a $350,000 loan. Edward Albertson did not sign a note or guaranty of the loan. Kirk Albertson, William Haddaway and Roger Brown were co-borrowers of the loan; Kirk Albertson also signed a guaranty of the loan; and two additional mortgages also secured the loan (one from William Haddaway and Dawn Hinkle and the other from Roger Brown). Four months later the bank released Roger Brown from his obligations in connection with the loan, and also satisfied Roger Brown’s mortgage. The release documents contain no reservation of the Bank’s rights against either Edward Albertson or Kirk Albertson and did not reference the Albertson mortgage. The bank did not seek or receive consent from Edward Albertson to the release of Roger Brown or his mortgage. Two months later, Edward and Kirk Albertson executed a third mortgage on the same property in favor of the bank securing another note for $75,000.

Edward Albertson raised as an affirmative defense in the foreclosure action the Restatement (First) of Security §122 (1941), which is followed in Delaware, In re International Reinsurance Corp., 48 A2d 529, 511 (Del. Ch. 1946). The Restatement provides “[w]here the creditor releases a principal, the surety is discharged, unless (a) the surety consents to remain liable notwithstanding the release, or (b) the creditor in the release reserves his rights against the surety.” In Talbot, Edward Albertson filed a motion for summary judgment on this affirmative defense, which if he prevailed would have acted to release the mortgage and halt the foreclosure. Previously, Judge Young denied the bank’s own motion for summary judgment on the same issue. Talbot Bank of Easton, Md. v. Albertson, C.A. No. 10L-06-011 RBY, 2013 Del. Super. LEXIS 343 (June 5, 2013). In the more recent opinion, Judge Young then denied the mortgagor’s motion for summary judgment, so the case will proceed with plaintiff and defendants presenting evidence surrounding the circumstances and language of the mortgages and the release. Talbot Bank of Easton, Md. v. Albertson, C.A. No. 10L-06-011 RBY, 2014 Del. Super. LEXIS 8, at *12. (Jan 9, 2014).
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