Bergman et al v. Spruce Peak Realty, LLC et al
Filing
40
MEMORANDUM OPINION AND ORDER granting in part and denying in part 28 Motion to Dismiss. Counts IV, V and VI and portions of Count I and III are dismissed for failure to state a claim upon which relief can be granted, with leave to replead these claims within thirty days of the date of this order. Signed by Judge William K. Sessions III on 3/20/2012. (law)
UNITED STATES DISTRICT COURT
FOR THE
DISTRICT OF VERMONT
MICHELLE BERGMAN, JEFFREY D.
BERGMAN, DAVID FRIEND, STEPS AWAY
AT STOWE MOUNTAIN LLC, PATRICK
SULLIVAN, SHELAGH SULLIVAN, KAREN
HESSE FLATOW, TALL PINES LLC, and
GEORGE WILSON, individually and on
behalf of a class of similarly
situated persons,
Plaintiffs,
v.
SPRUCE PEAK REALTY, LLC and
STOWE MOUNTAIN LODGE, LLC,
Defendants.
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Case No. 2:11-cv-128
MEMORANDUM OPINION and ORDER
Plaintiffs, owners of interests in residential units in the
Stowe Mountain Lodge Condominium (“Condominium”), brought two
class action suits against the developers of the Condominium,1
alleging that Defendants have illegally and fraudulently
allocated expenses and voting rights in order to favor their
commercial units; have illegally charged back to the residential
unit owners a substantial portion of the fees that Defendants
should be paying; have illegally charged residential units for
more than their share of the electricity bill; and have illegally
and fraudulently imposed exorbitant charges for so-called shared
1
Defendant Spruce Peak Realty, LLC (“Spruce Peak”) was the
original developer until Defendant Stowe Mountain Lodge (“SML”)
succeeded it in 2007.
amenities services.
See Class Action Compl., ECF No. 1, Bergman
v. Spruce Peak Realty, LLC, No. 2:11-cv-127 (D. Vt. filed May 13,
2011); First Am. Class Action Compl. (“FAC”), ECF No. 23.
Plaintiffs asserted that they were forced to split their
claims because the Condominium documents contained inconsistent
arbitration clauses.
The Declaration of Covenants, Conditions,
Easements and Restrictions for the Condominium (“Declaration”)
contained a mandatory arbitration clause for all disputes arising
under it, except for claims for indemnity or unpaid assessments.
Decl. ¶ 12.18, ECF No. 23-1.
A covenant referenced in the
Declaration, the Shared Amenities and Services Covenant (“SAS
Covenant”), contained a permissive arbitration clause, but
excluded owners from exercising any rights under it.
SAS
Covenant ¶ 12.14, ECF No. 23-13.
In Docket No. 2:11-cv-127, in which Plaintiffs brought
claims related to the Declaration, Plaintiffs sought and received
a stay of proceedings pending arbitration.
dated Nov. 14, 2011, ECF No. 33.
See Mem. Op. & Order
In this docket, in which
Plaintiffs bring claims related to the SAS Covenant, Defendants
have moved to dismiss Plaintiffs’ FAC in its entirety for lack of
subject matter jurisdiction, failure to plead fraud with
particularity and failure to state a claim.
12(b)(1), 12(b)(6), 9(b).
See Fed. R. Civ. P.
For the reasons that follow, the
motion, ECF No. 28, is granted in part and denied in part.
2
Background
The following facts are drawn from the FAC, the Class Action
Complaint in Docket No. 2:11-cv-127, and appended documents.
The
Condominium is a common interest community located on Mount
Mansfield in Stowe, Vermont, consisting of residential units,
held either in whole or fractional ownership; commercial units,
consisting of the Retail Unit, the Spa Unit and the Shared
Amenities Unit;2 and common elements, which are the remaining
portions of the Condominium—land, buildings and
improvements—other than the residential and commercial units.
The Shared Amenities Unit is divided into an Exclusive
Shared Amenities Unit Area that benefits Defendants exclusively
(including the conference center, the ballroom, bar and
restaurant) and the Shared Amenities Use Areas (including the
lobby, the pool, the parking garage, reservation desk area and
landscaped outdoor areas).
Unit.
Spruce Peak owns the Shared Amenities
SML owns the Retail Unit, the Spa Unit and unsold
residential units.
The Condominium was marketed as a four-star, full-service,
high-end resort.
The Condominium is managed by the Stowe
Mountain Lodge Condominium Owners Association (“SMLCOA”).
All
unit owners are members of the SMLCOA.
2
In 2005, when Defendants began marketing the Condominium,
the Shared Amenities Unit was called the Hotel Services Unit.
3
Spruce Peak began marketing the Condominium in 2005, prior
to its construction, through a Public Offering Statement (“2005
POS”).
The 2005 POS explained that it was a summary description
of the Condominium, and that a prospective purchaser should read
the entire set of disclosure materials attached to the POS.
POS 2, ECF No. 23-2.
2005
The 2005 POS appended as Schedules drafts
of the SML Declaration, the Hotel Access and Services Covenant
(“HAS Covenant”) and the SMLCOA projected annual operating
budget, among other documents.
The 2005 POS provided that the unit owners would share the
cost of operating and maintaining the common elements of the
Condominium.
Id. at 17.
member Board of Directors.
The SMLCOA would be governed by a fiveId. at 18.
The SMLCOA would collect
assessments from the unit owners to cover the costs of operation,
management and maintenance of the Condominium.
Id. at 19.
The
2005 POS presented a projected budget for the SMLCOA, but warned
that the budget was based upon estimates of costs and expenses,
that the budgeted expenses were subject to change, and that there
was no guarantee that the SMLCOA would choose to maintain the
level of services established by the budget.
Id. at 25.
The 2005 POS projected condominium assessment for the first
year of operation was $2866 for a studio unit and $11,465 for a
three-bedroom unit.
Id.
In addition, the 2005 POS estimated
“Master Association” assessments, constituting condominium common
4
expenses, as $483 for a studio unit, and $2415 for other units.
Id. at 26.
The 2005 POS also explained that unit owners would be
granted access to and use of certain facilities and amenities
located in the Hotel Services Unit, and that a Hotel Access and
Services Fee would be collected from unit owners, as detailed in
the HAS Covenant.
Id. at 34-36.
The HAS Covenant covered the use of shared facilities and
the allocation of shared facilities expenses.
Shared facilities
expenses would consist of “maintenance and operation expenses”
and “hotel service expenses.”
HAS Covenant ¶ 7.2, ECF No. 23-3.
Hotel services were defined as services—such as reception, checkin, reservations, bell staff, valet parking, charging privileges,
ski and door attendants, pool, concierge and shuttle
services—provided by the Hotel Services Unit owner primarily for
the benefit of the “contributing owners,” defined as the owners
of the residential units.
Id. Exs. C-1, C-2.
The hotel services
fee would accrue on a nightly basis based on actual usage, and
the maintenance and operation fee would be invoiced on a
quarterly basis.
Id. Ex. C-2.
The Hotel Services Unit owner
would have complete control over the budget upon which these fees
would be calculated, 2005 POS 36, and the residential unit owners
would be responsible for the actual shared facilities expenses,
if the fees assessed did not cover the actual expenses.
Covenant ¶ 7.2.2.
5
HAS
Under the HAS Covenant, a residential unit owner would be
assessed $41 per night per bedroom for hotel services when the
residential unit owner or a tenant occupied the unit.
FAC ¶¶ 97-
98.
In June 2005, many residential unit owners signed Purchase
and Sale Agreements (“P&S Agreements”) with SPR and paid nonrefundable ten percent deposits.
The P&S Agreements contemplated
a completion date of June 30, 2007, subject to change.
The P&S
Agreements referenced the 2005 POS and its schedules, and advised
purchasers that they would be responsible for Hotel Access and
Services Fees, which “may be increased subject to the limitations
set forth in the Condominium Governing Instruments and the [HAS
Covenant].”
P&S Agreement ¶ 11, ECF No. 23-4.
It also advised
that those documents were subject to modification and termination
in accordance with their terms.
Id. ¶ 21(b).
Sometime prior to April 2006, Defendants determined that
they could not complete construction by June 2007.
As a result
they were required by the Interstate Land Sales Full Disclosure
Act of 1968 (“ILSA”), 15 U.S.C. §§ 1701-1720 (2006), to provide a
Property Report to all potential residential unit purchasers.
See id. § 1707.
In October 2006, SPR provided a Property Report
to all prospective purchasers, including those who had previously
signed P&S Agreements.
The Property Report included a list of
major costs, “subject to change.”
6
Property Report 33, ECF No.
23-10.
The estimated amount of the Shared Services Contribution3
would be $410 annually for a studio unit, and $1000 annually for
a three-bedroom unit, based on ten days of owner usage, and would
increase with higher use.
Id. at 34.
The Property Report did
not mention that the residential unit owners would be responsible
for actual expenses that exceeded the estimate.
At the same time SPR provided an amendment to each
purchaser’s P&S Agreement, which among other things replaced the
terms “Hotel Access Unit Owner” with “Shared Amenities Unit
Owner;” “Hotel Access and Services Covenant” with “Shared
Amenities and Services Covenant (“SAS Covenant”);” and “Hotel
Access and Services Fee” with “Shared Amenities and Services
Contribution.”
P&S Amendment, ECF No. 23-8.
Purchasers who had
signed P&S Agreements in 2005 were given the option of agreeing
to the amendments or canceling their P&S Agreements.
Id.; ECF
No. 23-9.
In June 2007 all purchasers who had not cancelled their
agreements paid an additional ten percent deposit.
On January 30, 2008, SML, as the successor to Spruce Peak,
prepared a revised Public Offering Statement (“2008 POS”).
The
2008 POS appended a revised SAS Covenant and a revised projected
annual operating budget as schedules.
3
See 2008 POS, ECF No. 23-
“Shared Services” replaced the term “Hotel Services” that
had been employed in the HAS Covenant.
7
11; SAS Covenant; Draft Operating Budget, ECF No. 35-1.
On
February 18, 2008, SML sent purchasers who had signed a P&S
Agreement and placed a deposit on a Condominium unit a letter
enclosing a CD-ROM disk containing 758 PDF pages,4 including a
copy of the 2008 POS, marked to show the changes from the 2005
POS.
The letter stated “[m]ost of the changes are minor and are
intended to make the language clearer, easier and/or more fair
for all of our owners.”
SML Letter, ECF No. 23-12.
The letter
stated further:
[I]n response to feedback from you, we have revised the
way you will be billed for your portion of the Shared
Services Contribution [formerly the Hotel Services
Fee]. It is no longer a contribution that accrues
nightly, but will be an annual cost, billed quarterly,
regardless of occupancy of your unit.
Id.
Under the revised SAS Covenant, the Shared Amenities Unit
owner continued to retain complete control over the Shared
Amenities budget, SAS Covenant ¶ 1.5, and the residential unit
owners continued to remain responsible for the actual shared
amenities expenses, regardless of the budgeted amount.
Id. ¶
7.2.2.
The change in the method of assessing the Shared Services
Contribution meant that rather than $41 per night while the unit
4
The Class Action Complaint in Docket No. 2:11-cv-127
states that the 2008 POS was contained in a 542-page PDF file on
a CD-ROM disk. Compl. ¶ 64.
8
was occupied, a studio unit owner would now be billed $6,892 per
year, regardless of occupancy.
Rather than $123 per night while
a three-bedroom unit was occupied, the owner would now be billed
$20,676 per year, regardless of occupancy.
Budget 3.
See Draft Operating
Under the 2008 POS and the revised SAS Covenant,
therefore, residential unit owners could not limit their
occupancy to reduce their bill for shared services.
SML did not provide purchasers with the opportunity to
cancel their P&S Agreements following their receipt of the 2008
POS and revised SAS Covenant.
Nor did it provide a written
amendment to the P&S Agreement noting a change in the method of
estimating the residential unit owners’ Shared Services
Contribution.
The revised projected annual operating budget did
show the change in the shared services contribution, however.
Plaintiffs closed on the purchase of their units beginning
in May 2008.
After repeated inquiries concerning their Shared Amenities
and Services Contributions, Defendants agreed to provide a SAS
budget presentation in February 2010.
At the budget
presentation, Plaintiffs learned that SPR as the Shared Amenities
Unit Owner was allocating its Condominium assessment and charging
the residential unit owners through their Shared Amenities and
Services Contributions, allegedly in violation of the SAS
Covenant.
9
According to the FAC, the residential unit owners complained
to the SMLCOA Board of Directors in 2009 and 2010, and in 2010
SMLCOA requested mediation of the issues in dispute.
No
resolution was reached.
The Plaintiffs filed this lawsuit as a class action on May
13, 2011, seeking a declaration that the SAS Covenant is void and
unenforceable.
Alternatively, they request reformation of the
SAS Covenant to comply with Vermont statutory and common law.
As
a further alternative, they seek rescission of their Condominium
purchases.
In addition, they seek damages for breach of the SAS
Covenant, fraud and violations of state and federal law.
On the same day, Plaintiffs filed their companion class
action lawsuit, seeking reformation of the Declaration to comply
with Vermont statutory and common law, plus monetary damages for
fraud and violations of state law.
Pursuant to the Declaration’s
arbitration clause providing that “all disputes . . . arising
under this Condominium Declaration between Shared Amenities Unit
Owner, Declarant, the Resort Manager, the Condominium Association
or the Condominium Association Manager, on the one hand, and any
Owner, on the other hand, shall, upon the request of any party,
be resolved by binding arbitration . . .,” Decl. ¶ 12.18, the
Plaintiffs commenced a class arbitration proceeding before the
American Arbitration Association.
In their arbitration demand,
they described the nature of the dispute as
10
Class action arbitration brought by nine residential
condominium owners as class representatives of 324
residential owners against a condominium hotel
developer for violations of Vermont statutory and
common law. . . . including, inter alia, unlawfully
discriminating in favor of developer-owned units in the
allocation of common expenses and voting rights, the
failure to pay the full amount of the developer’s fees
and assessments, and the failure to sub-meter
electrical costs.
Arbitration Demand, Docket No. 2:11-cv-127, ECF No. 6-1.
On June
7, 2011, Plaintiffs moved for a stay of proceedings pending
arbitration.
Docket No. 2:11-cv-127, ECF No. 6.
granted November 14, 2011.
The motion was
Id. ECF No. 33.
Discussion
I.
Subject Matter Jurisdiction
Ordinarily, subject matter jurisdiction must “be established
as a threshold matter,”
Steel Co. v. Citizens for a Better
Env’t, 523 U.S. 83, 94-95 (1998), and the Court accordingly turns
first to Defendants’ argument that Plaintiffs’ suit must be
dismissed for lack of subject matter jurisdiction under Federal
Rule of Civil Procedure 12(b)(1) because individual unit owners
lack standing to sue under the SAS Covenant.
“In every federal case, the party bringing the suit must
establish standing to prosecute the action.”
Elk Grove Unified
Sch. Dist. v. Newdow, 542 U.S. 1, 11 (2004).
“[S]tanding is
gauged by the specific common-law, statutory or constitutional
claims that a party presents.”
Int’l Primate Prot. League v.
11
Adm’rs of Tulane Educ. Fund, 500 U.S. 72, 77 (1991).
The
question of standing “involves both constitutional limitations of
federal-court jurisdiction and prudential limitations on its
exercise.”
Warth v. Seldin, 422 U.S. 490, 498 (1975).
In cases
such as this one, where jurisdiction is based in part on
diversity of citizenship, “a plaintiff must have standing under
both Article III of the Constitution and applicable state law in
order to maintain a cause of action.”
Mid-Hudson Catskill Rural
Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 173 (2d
Cir. 2005).
Within a paragraph captioned “Arbitration,” the relevant
portion of the SAS Covenant states:
[I]n no event shall any Owner have the standing to
exercise any rights under this [SAS Covenant]. In the
event any such Owner is aggrieved and wishes to pursue
a claim with respect to any provision hereunder or
otherwise against Shared Amenities Unit Owner, such
Owner may only do so through action it causes the
[SMLCOA] to take on its behalf.
SAS Covenant ¶ 12.14.
Defendants argue that Plaintiffs lack standing because they
are “contractually barred” from bringing suit individually.
Defs.’ Mem. 19, ECF No. 28-1.
Defendants do not appear to
contend that Plaintiffs lack Article III standing, i.e., that
Plaintiffs have not adequately alleged a concrete,
particularized, actual or imminent injury; fairly traceable to
the challenged action; that is redressable by a favorable
12
decision.
E.g., Monsanto Co. v. Geertson Seed Farms, 130 S. Ct.
2743, 2752 (2010); see Lujan v. Defenders of Wildlife, 504 U.S.
555, 560-61 (1992).
The only prudential standing consideration that might
arguably apply is whether Plaintiffs’ claims fall within the zone
of interests protected by the law invoked.
See Elk Grove, 542
U.S. at 12 (“[P]rudential standing encompasses ‘the general
prohibition on a litigant’s raising another person’s legal
rights, the rule barring adjudication of generalized grievances
more appropriately addressed in the representative branches, and
the requirement that a plaintiff’s complaint fall within the zone
of interests protected by the law invoked.’”) (quoting Allen v.
Wright, 468 U.S. 737, 751 (1984)); accord Selevan v. N.Y. Thruway
Auth., 584 F.3d 82, 91 (2d Cir. 2009).
Plaintiffs present state
common law fraud and breach of contract claims, and violations of
federal and state statutes, specifically the VCIOA, the Vermont
Consumer Fraud Act and the ILSA.
Their claims depend on the
contentions that they were duped into buying their condominium
units by relying on documents that contained material
misstatements or omissions, that the SAS Covenant was illegally
revised, and that the SAS Covenant is void and unenforceable.
Such claims are clearly within the zone of interests protected by
these laws.
In casting their argument as one of lack of subject matter
13
jurisdiction, Defendants essentially contend that the parties
contracted to deprive a federal court of the power that it
otherwise would have under 28 U.S.C. § 1331, § 1332(d) and §
1367(a) to entertain this suit.
A district court would
ordinarily have subject matter jurisdiction over an alleged
scheme to mislead and defraud residential unit purchasers, where
plaintiffs have properly alleged diversity jurisdiction, federal
question jurisdiction and supplemental jurisdiction over their
state claims.
“A plaintiff properly invokes § 1331 jurisdiction
when she pleads a colorable claim “arising under” the
Constitution or laws of the United States.
She invokes § 1332
jurisdiction when she presents a claim between parties of diverse
citizenship that exceeds the required jurisdictional amount. . .
.”
Arbaugh v. Y&H Corp., 546 U.S. 500, 513 (2006) (citation
omitted).
Defendants are actually making a merits argument that
Plaintiffs fail to state a claim upon which relief can be granted
because they did not cause the SMLCOA to act on their behalf
against Spruce Peak.
See e.g., Sarhank Group v. Oracle Corp.,
404 F.3d 657, 660 (2d Cir. 2005) (distinguishing between lack of
subject matter jurisdiction and failure to state a claim); Da
Silva v. Kinsho Int’l Corp., 229 F.3d 358, 362-64 (2d Cir. 2000)
(discussing categories of disputes that do or do not concern
subject matter jurisdiction); see also Steel Co., 523 U.S. at 89
14
(“It is firmly established in our cases that the absence of a
valid (as opposed to arguable) cause of action does not implicate
subject-matter jurisdiction, i.e., the courts’ statutory or
constitutional power to adjudicate the case.”).
Sections 1331, 1332(d) and 1367 provide the bases for
exercise of subject matter jurisdiction over Plaintiffs’ claims,
in the absence of any indication that the claims “‘clearly
appear[] to be immaterial and made solely for the purpose of
obtaining jurisdiction or where such [] claim[s are] wholly
insubstantial and frivolous.’”
U.S. 678, 682-83 (1946)).
Id. (quoting Bell v. Hood, 327
Plaintiffs’ claims are neither
insubstantial nor frivolous nor immaterial.
“‘Once a federal
court has determined that a plaintiff’s jurisdiction-conferring
claims are not insubstantial on their face, no further
consideration of the merits of the claim is relevant to a
determination of the court’s jurisdiction of the subject
matter.’”
So. New England Tel. Co. v. Global NAPS, 624 F.3d 123,
133 (2d Cir. 2010) (quoting In re Stock Exchs. Options Trading
Antitrust Litig., 317 F.3d 134, 150 (2d Cir. 2003)).
The motion
to dismiss for lack of subject matter jurisdiction is therefore
denied.
II.
Duplicative Litigation
Before addressing Defendants’ various additional grounds for
15
dismissal of Plaintiffs’ claims, the Court sua sponte considers
whether Plaintiffs’ filing separate actions constitutes improper
claim-splitting, notwithstanding their contention that
inconsistent arbitration clauses forced them to do so.
“The rule
against claim-splitting requires a plaintiff to assert all of its
causes of action arising from a common set of facts in one
lawsuit.”
Katz v. Gerardi, 655 F.3d 1212, 1217 (10th Cir. 2011).
As the Plaintiffs themselves recognize, the two lawsuits
arise from a common set of facts.
See Compl. ¶ 6, Docket No.
2:11-cv-127 (“Plaintiffs were forced to split their claims into
two separate cases . . . .”); FAC ¶ 12 (“Plaintiffs needed to
split their claims into two cases . . . .”).
A considerable
number of the factual allegations of the complaints in both
dockets are identical or substantially the same.
The suit on the Declaration, Docket No. 2:11-cv-127, has
been stayed pending arbitration.
demand is broad:
The scope of the arbitration
violations of Vermont statutory and common law,
including three specific instances of conduct, among other
things.
Appended to the arbitration demand is a Class Action
Arbitration Demand which tracks the Class Action Complaint in
that docket virtually word for word.
An entire subsection of
that Demand/Complaint is devoted to the SAS Covenant and the
Defendants’ use of it to achieve a reduction of SPR’s Condominium
assessments, see Class Action Compl. ¶¶ 90-106, and it would
16
appear that a substantial amount of effort in the arbitration
proceedings will be devoted to determining the appropriate
treatment and interpretation of the SAS Covenant.
The SML Declaration’s arbitration clause requires
arbitration of “all disputes not involving claims for indemnity
or unpaid Assessments and arising under this Condominium
Declaration . . . .”
Decl. ¶ 12.18.
Should the arbitrator find
that the class action is arbitrable,5 the arbitrator may proceed
to determine the scope of the arbitration.
In determining the
scope of the arbitration demand, the arbitrator may deem a
dispute over a change to the SAS Covenant to be a dispute that
arises under the Declaration.
For one thing, the Declaration
itself describes the SAS Covenant in its Article III: Property
Use Rights and Restrictions, and refers the reader to the SAS
Covenant for further details.
See Declaration ¶ 3.12;6 but see
ACE Capital Re Overseas Ltd. v. Cent. United Life Ins. Co., 307
5
Because the Declaration arbitration provision neither
expressly permits nor prohibits class arbitration, the arbitrator
will first determine whether the parties agreed to class
arbitration.
6
The Declaration provision reads:
Shared Amenities and Services Covenant. Pursuant to
the terms and conditions of the [SAS Covenant],
including the payment of the Shared Amenities and
Services Contribution, Owners are granted access to and
use of certain facilities and amenities located in the
shared Amenities Unit and are provided certain services
by the Shared Amenities Unit Owner, as further
described in the [SAS Covenant].
Decl. ¶ 3.12.
17
F.3d 24, 26 (2d Cir. 2002) (reaffirming that use of the precise
phrase “arising under” in an arbitration clause results in a
narrow arbitration clause that will not permit arbitration of a
fraudulent inducement claim).
Assuming that the SML Declaration incorporated the SAS
Covenant by reference, “under normal circumstances, when an
agreement includes two dispute resolution provisions, one
specific . . . and one general . . ., the specific provision will
govern those claims that fall within it.”
F.3d 95, 97 (2d Cir. 2002) (per curiam).
Katz v. Feinberg, 290
If the Plaintiffs’
claims arise under the SAS Covenant, then the specific provision
in the SAS Covenant will govern.
Claims that fall outside the
scope of either arbitration agreement, however, may proceed in
this Court.
See Schlaifer Nance & Co. v. Estate of Warhol, 764
F. Supp. 43, 46-47 (S.D.N.Y. 1991) (observing that parties’
agreement to a limited arbitration clause entails agreement to
split claims between arbitration and litigation); see also Dean
Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) (holding
that agreements to arbitrate are rigorously enforced, “even if
the result is ‘piecemeal’ litigation.”).
Therefore, despite the
potential for piecemeal litigation, the Court will consider the
remainder of Defendants’ arguments for dismissal.
18
III. 12(b)(6) Defenses
To survive a motion to dismiss for failure to state a claim
upon which relief can be granted, a complaint must contain
sufficient facts, accepted as true, to “state a claim to relief
that is plausible on its face.”
U.S. 544, 570 (2007).
Bell Atl. Corp. v. Twombly, 550
“A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.”
(2009).
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
“‘Conclusory allegations or legal conclusions
masquerading as factual conclusions’” cannot withstand a motion
to dismiss, however.
Achtman v. Kirby, McInerney & Squire, LLP,
464 F.3d 328, 337 (2d Cir. 2006) (quoting Smith v. Local 819
I.B.T. Pension Plan, 291 F.3d 236, 240 (2d Cir. 2002)).
The
question is not whether Plaintiffs may ultimately prevail, but
whether they are entitled to offer evidence to support their
claims.
Wright v. Ernst & Young LLP, 152 F.3d 169, 173 (2d Cir.
1998).
A.
The SAS Covenant Arbitration Clause
Defendants have argued that Plaintiffs are barred from
bringing suit on the SAS Covenant, because they have not caused
SMLCOA to act on their behalf.
Plaintiffs apparently concede
that, as aggrieved owners wishing to pursue a claim with respect
19
to a provision of the SAS Covenant, they did not cause the SMLCOA
to take action on their behalf.7
They argue instead, among other
things, that the clause is unconscionable and therefore
unenforceable.
Under Vermont law,8 terms of a contract may be avoided as
unconscionable if they are procedurally or substantively unfair.
See Val Preda Leasing, Inc. v. Rodriguez, 540 A.2d 648, 651 (Vt.
1987).
Unconscionability may be based upon
“evidence of some overreaching on the part of one of
the parties such as that which results from an
inequality in bargaining power or under other
circumstances in which there is an absence of
meaningful choice on the part of one of the parties,
together with contract terms which are unreasonably
favorable to that party.”
Maglin v. Tschannerl, 800 A.2d 486, 491 (Vt. 2002) (emphasis
omitted) (quoting Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo.
1986)).
Thus, unequal bargaining power coupled with lack of
meaningful choice, plus unreasonably favorable contract terms,
may supply grounds for avoiding the terms of a contract on
unconscionability grounds.
Id. at 490-91.
7
The Court notes that, according to the FAC, Residential
Unit Owners brought their grievances to the SMLCOA, and the
SMLCOA engaged in mediation with them. See FAC ¶¶ 235-238. The
SMLCOA did not, apparently, pursue those claims with the Shared
Amenities Unit Owner. Nor, apparently, did Plaintiffs demand
that the SMLCOA act on their behalf.
8
The SAS Covenant provides that it is governed by the laws
of the State of Vermont. SAS Covenant ¶ 12.10.
20
Plaintiffs list several factors which they contend support a
claim that the SAS Covenant is both procedurally and
substantively unconscionable, among them that the SAS Covenant is
a contract of adhesion; that they had no opportunity to negotiate
its terms; that significant features of the SAS Covenant were
buried within hundreds of pages of documents; that residential
unit owners may only pursue a claim by causing the SMLCOA to act
on their behalf, whereas Defendants control the SMLCOA by virtue
of the voting rights allocations; and that Spruce Peak may
initiate a lawsuit against a residential unit owner for failure
to pay the assessment, but the residential unit owner may only
act through the SMLCOA, and such action must be resolved by
binding arbitration at the request of either party.
Assuming the truth of these allegations, Plaintiffs have
stated a claim that certain terms within the arbitration clause
of the SAS Covenant are unenforceable as unconscionable.
Plaintiffs are entitled to present evidence that the provision in
the arbitration clause that forces them to act through the SMLCOA
is unenforceable, and that therefore they are not contractually
barred from bringing suit.
B.
Statutes of Limitations Defenses
1.
Defendants argue that Plaintiffs’ claims are time-
barred because the Declaration and the SAS Covenant contain a
21
one-year limitations period for presentation of claims pertaining
to the Declaration or the SAS Covenant.9
Acknowledging that
under Vermont law a contractual provision that shortens a period
of limitation is null and void, see Vt. Stat. Ann. tit. 12, ¶ 465
(2002), Defendants nevertheless assert that the one-year limit is
valid because neither a covenant nor a declaration is a contract.
“A covenant is a contract, and damages are recoverable for
its breach.”
Pinckard v. Am. Freehold Land Mortg. Co., 39 So.
350, 351 (Ala. 1905), quoted in Fine Foods, Inc. v. Dahlin, 523
A.2d 1228, 1230 (Vt. 1986).
Given that Defendants conceded the
point when they argued that Plaintiffs are “contractually barred”
from bringing claims individually, citing the same provision of
the SAS Covenant that contains the limitations period, their
about-face four pages later warrants no further discussion.
Compare Defs.’ Mem. 19 with Defs.’ Mem. 23.
Moreover, Defendants
have argued at length that Plaintiffs’ complaints about the SAS
Covenant sound in contract, and admit that a covenant such as
9
The relevant provision in the SAS Covenant states:
Any claim which any party has against another party
pertaining to the matters set forth or referred to in
this [SAS Covenant] must be presented by the claiming
party to the other within one (1) year of the date the
claiming party knew or should have known of the facts
giving rise to the claim. Unless the party against
whom any claim is asserted waives the time limits set
forth above, any claim not brought within the time
periods specified shall be waived and forever barred.
SAS Covenant ¶ 12.14. The Declaration provision is identical,
substituting Declaration for SAS Covenant. Decl. ¶ 12.18.
22
this one imposes “contractual duties.”
Defs.’ Reply Mem. 6-11, 27.
See Defs.’ Mem. 31-32;
The provision in the SAS Covenant
that requires a party to present a claim within one year of the
date the claiming party knew or should have known of the facts
giving rise to the claim is null and void.
Vt. Stat. Ann. tit.
12, § 465.10
As to the validity of the Declaration’s one-year limit,
briefly, Plaintiffs do not bring their claims in this docket
under the Declaration.
If they did, they would be subject to the
Declaration’s mandatory arbitration provision.
2.
Defendants also argue that the statutory
limitations period under the ILSA bars Plaintiffs’ § 1703(a)(1)
claim.
In Count V, Plaintiffs assert that Defendants violated §
1703(a)(1) when they eliminated the nightly usage fee and
10
The recent Vermont Supreme Court decision in Estate of
Alden v. Dee, 2011 VT 64, ¶ 29, 35 A.3d 950, 960, does not impel
a different outcome. In a declaratory judgment action, trust
beneficiaries had counterclaimed against the trustee for breach
of fiduciary duty and fraud. Remarking that “[a] trust is
fundamentally different from a contract,” and that the lawsuit
was “not an action under a contract,” the Court rejected the
application of section 465 to void a trust document’s sixty-day
time limit for objecting to an annual accounting. Id.
Challenges to the trust distributions were therefore barred by
the trust provision, although the six-year statute of limitations
set forth in section 511 of Title 12, Vermont Statutes Annotated,
still applied to the breach of fiduciary duty and fraud claims.
Estate of Alden is not applicable in this case, which involves
the interpretation of contractual terms: the “promise of one
unit owner to provide amenities or services to another unit owner
in exchange for a fee,” as Defendants characterize the SAS
Covenant. Defs.’ Mem. 18.
23
instituted the annual contribution for shared amenities services,
by failing to fully and accurately disclose in an amended
Property Report the expected fees or charges to be paid.
348; see 15 U.S.C. § 1703(a)(1).
FAC ¶
Among other things, §
1703(a)(1) prohibits a developer from selling a lot where any
part of the Property Report contains an untrue statement of
material fact or omits a material fact that must be disclosed.
15 U.S.C. § 1703(a)(1)(C).
A purchaser may bring suit for a
violation of § 1703(a)(1), and recover damages or equitable
relief.
Id. § 1709.
Section 1711(a) of the ILSA provides that “[n]o action shall
be maintained . . . with respect to . . . a violation of
subsection (a)(1) . . . more than three years after the date of
signing of the contract of sale or lease.”
1711(a)(1).
15 U.S.C. §
The FAC does not specify when the parties executed
P&S Agreements.
It appears that some P&S Agreements or amended
P&S Agreements were executed no later than June 2007, when the
purchasers’ second ten percent deposit was paid.
There may have
been other P&S Agreements executed no later than February 27,
2010.
See FAC ¶ 60.
To be within the time bar, the sales contracts must have
been signed no earlier than May 13, 2008, three years before the
Class Action Complaint was filed on May 13, 2011.
Plaintiffs
assert that the three-year period does not begin to run until
24
both parties have signed “all the purchase contract documents,”
Pls.’ Mem. 48, and that the SAS Covenant is one of the purchase
contract documents.
They argue that the time period should run
from the time the SAS Covenant was signed and recorded.
According to Plaintiffs, the SAS Covenant was signed by
Defendants on May 16, and was recorded on May 19, 2008.
The statute, however, does not mention “purchase contract
documents,” much less define them.
Section 1711(a)(1) starts the
running of the limitations period from the signing of the
contract of sale.
The parties do not dispute that the P&S
Agreement as amended is the contract of sale.
See P&S Agreement
Recital C (“By this Agreement, Seller agrees to sell to
Purchaser, and Purchaser agrees to purchase from Seller the
Condominium Unit.”); P&S Amendment.
The SAS Covenant is referred
to (by its former name) in the Recital and Terms and Conditions
sections of the P&S Agreement, as the document that sets forth
the terms and conditions of access to and use of the hotel
services.
Plaintiffs have cited no authority for the notion that a
document referred to in an agreement of sale must itself be
executed for the contract of sale to have been signed.
There is,
moreover, no reason to believe that purchasers sign the SAS
Covenant.
Under Plaintiffs’ interpretation of the statutory
language, a buyer could prevent the ILSA’s statute of limitations
25
from running by failing to sign a document that does not require
the buyer’s signature.
Although Plaintiffs make a strong policy argument for a
liberal construction in order to effectuate the remedial purpose
of the Act, there is simply no ambiguity in the term “signing of
the contract of sale” that would afford any leeway in
interpretation.
Cf. Bodansky v. Fifth on Park Condo, LLC, 635
F.3d 75, 83 (2d Cir. 2011) (holding that, for ILSA purposes, the
time of sale is the date of signing a contract or agreement to
purchase, and finding no ambiguity in the terms).
Plaintiffs’ § 1703(a)(1) claim is time-barred for any
Plaintiff whose P&S Agreement or amended P&S Agreement was
executed before May 13, 2008.
Count V is hereby dismissed, with
leave to replead for those Plaintiffs if any whose P&S Agreements
were executed on or after May 13, 2008, and who wish to pursue a
§ 1703(a)(1) claim.
C.
ILSA § 1703(a)(2) Claim (Count VI)
The ILSA was originally “designed to prevent false and
deceptive practices in the sale of unimproved tracts of land by
requiring developers to disclose information needed by potential
buyers.”
Flint Ridge Dev. Co. v. Scenic Rivers Ass’n of Okla.,
426 U.S. 776, 778 (1976).
The Act applies to non-exempt
condominium developments.
E.g., Bodansky, 635 F.3d at 76; Winter
26
v. Hollingsworth Props., Inc., 777 F.2d 1444, 1449 (11th Cir.
1985).
The ILSA’s anti-fraud provision makes it unlawful for any
developer to use the means or instruments of transportation or
communication in interstate commerce or of the mails, with
respect to the sale or offer to sell any lot:
(A) to employ any device, scheme, or artifice to
defraud; (B) to obtain money or property by means of
any untrue statement of a material fact, or any
omission to state a material fact necessary in order to
make the statements made (in light of the circumstances
in which they were made and within the context of the
overall offer and sale . . .) not misleading, with
respect to any information pertinent to the lot or
subdivision; [or] (C) to engage in any transaction,
practice, or course of business which operates or would
operate as a fraud or deceit upon a purchaser . . . .”
15 U.S.C. § 1703(a)(2).
Plaintiffs allege that Defendants violated the ILSA by
failing to disclose that they would be charged for payment of a
portion of the Condominium assessments allocated to the Shared
Amenities Unit through the SAS Covenant.
FAC ¶ 352.
Defendants
contend that this claim is deficient because the ILSA does not
apply to the SAS Covenant, and even if it did, there was no
failure to disclose.
By its language, the ILSA applies to any sale or offer to
sell a lot where a scheme to defraud has been employed, or money
or property has been obtained through material false statements
or omissions, or a fraud has been perpetrated upon a purchaser.
The statute does not limit or categorize the types of documents
27
that may trigger civil liability for a violation.
If a trier of
fact could find that the Defendants employed the SAS Covenant in
such a fashion in connection with the sale of residential units,
then Defendants may be held liable.
Defendants state, correctly, that the ILSA does not require
developers to provide purchasers with an exhaustive list of all
assessments that may become due, but Plaintiffs make no such
allegation.
They allege that Spruce Peak has been charging a
portion of its own condominium assessments to residential unit
owners in the guise of Shared Amenities and Services
Contributions, and that by this scheme the residential unit
owners are being billed for expenses that are not directly
related to the operation and maintenance of the Shared Amenities
Use Areas.
Assuming the truth of these allegations, however, it
is not clear that they state a claim for relief under the ILSA.
Although Plaintiffs have sufficiently alleged conduct that
may plausibly demonstrate a material nondisclosure, it is not
clear from the FAC that this conduct occurred with respect to the
sale or offer to sell the residential units, or that Defendants
made use of any means or instruments of transportation or
communication in interstate commerce or the mails to engage in
prohibited activities.
According to the FAC, the scheme came to
light at the budget presentation in February 2010, and through
subsequent communications.
FAC ¶ 218.
28
Section 1703(a)(2)
prohibits certain activities in connection with the sale or offer
of sale of a unit.
Although the scheme may have been in place by
June 2007, and the omission of this information may have been
material to a purchaser’s decision to buy, these essential
elements of a § 1703(a)(2) claim have not been pled.
Plaintiffs have failed to state a claim for relief in Count
VI, and it is therefore dismissed, with leave to replead the
facts if any that may support the omitted essential elements.
D.
VCIOA Claims
The Vermont Common Interest Ownership Act (“VCIOA” or
“Act”), Vt. Stat. Ann. tit. 27A, §§ 1-101 to 4-120 (2006 & Supp.
2011), applies to most common interest communities created within
the State after the VCIOA’s effective date of January 1, 1999.
Id. § 1-201.
A common interest community is defined as “real
estate described in a declaration with respect to which any
person, by virtue of the person’s ownership of a unit, is
obligated to pay real estate taxes on; insurance premiums on;
maintenance of; or improvement of any other real estate other
than that unit described in the declaration.”
Id. § 1-103(7).
A
condominium is defined as “a common interest community in which
portions of the real estate are designated for separate ownership
and the remainder of the real estate is designated for common
ownership solely by the owners of those portions.”
103(8).
Id. § 1-
“Common elements” are “all portions of the common
29
interest community other than the units.”
Id. § 1-103(4)(A).
Plaintiffs have alleged that the VCIOA applies to the
implementation of the SAS Covenant, and that its implementation
violates the VCIOA in several ways, including 1) requiring
residential unit owners to pay a portion of the condominium
assessments that are allocated to the Shared Amenities Unit; 2)
permitting the Shared Amenities Unit Owner to pay a reduced
amount rather than its full share of the Shared Amenities and
Services Contribution; 3) failing to provide access to financial
records; 4) failing to permit Plaintiffs to vote on the budget
for the Shared Amenities Services; and 5) unlawfully
discriminating in favor of declarant-owned units.
FAC ¶¶ 316-
317.
Defendants concede that the Declaration created a common
interest community, specifically a condominium, and that the
common interest community is governed by the VCIOA.
They argue
that the SAS Covenant is not within the scope of the VCIOA, but
is a separate agreement that sets forth the terms and conditions
for the provision of shared amenities services.
Assuming
Defendants correctly describe the SAS Covenant as a separate
agreement, that fact does not as a matter of law place matters
concerning the SAS Covenant outside the protections of the VCIOA.
The VCIOA governs the creation and management of common
interest communities, and provides protection to purchasers.
30
See
Vt. Stat. Ann. tit. 27A. Arts. 2, 3, 4.
Among the VCIOA’s
protections is the requirement that a declarant prepare a public
offering statement conforming to various requirements of the Act
before selling a unit.
Id. § 4-102.
Among these requirements, a
public offering statement must accurately disclose “[a]ll unusual
and material circumstances, features and characteristics of the
common interest community and the units.”
Id. § 4-103(17).
Defendants cannot dispute that they were required to
disclose the terms and conditions of the SAS Covenant in the 2008
POS.
A section of the 2008 POS entitled “Unusual and Material
Circumstances and Characteristics of [SML] Condominium or Spruce
Peak Master Community” summarizes the SAS Covenant, describes the
Shared Amenities Unit, states that the Shared Amenities Unit
Owner has agreed to grant access subject to the obligation to pay
the Shared Amenities and Services Contribution, summarizes the
shared amenities services, and refers the reader to the SAS
Covenant for further details.
2008 POS ¶ Q.
Regardless of
whether the SAS Covenant is “part of the common interest
community” as Plaintiffs argue, relevant provisions of the VCIOA
govern unusual and material circumstances or characteristics of a
common interest community, such as the terms and conditions set
forth in the SAS Covenant.
Declarants may be liable for
misrepresentations and material omissions in a public offering
statement, Vt. Stat. Ann. tit. 27A, § 4-102(c), as well as for
31
failure to comply with any provision of title 27A or any
provision of the declaration or bylaws.
Id. § 4-117(a).
The
terms and conditions of the SAS Covenant are specifically
referenced in the Declaration.
Defendants cannot achieve
dismissal of Plaintiffs’ VCIOA claims by simply asserting that
the VCIOA does not apply to the SAS Covenant.
Defendants also argue that the arrangement between Spruce
Peak as the Shared Amenities Unit owner and the residential unit
owners complies with the VCIOA.
That may or may not prove to be
true, but at this stage of the litigation, all Plaintiffs must do
to survive dismissal is allege a claim for relief that is
plausible.
E.
This they have done.
Vermont Consumer Fraud Act Claim
The Vermont Consumer Fraud Act (“VCFA”), Vt. Stat. Ann. tit.
9, §§ 2451-2480n (2006 & Supp. 2011), prohibits “unfair methods
of competition in commerce, and unfair or deceptive acts or
practices in commerce.”
Id. § 2453(a).
A deceptive act or
practice “is a material representation, practice or omission
likely to mislead a reasonable consumer.”
A.2d 1256, 1261 (Vt. 1993).
Bisson v. Ward, 628
A well-pleaded VCFA claim must
allege that (1) defendants misrepresented or omitted information
in a manner likely to mislead consumers; (2) the consumers
interpreted the message reasonably under the circumstances; and
(3) the misleading representation was material in that it
32
affected the consumers’ purchasing decision.
Jordan v. Nissan N.
Am., 2004 VT 27 ¶ 5, 853 A.2d 40, 43.
Defendants argue that Plaintiffs may not bring a claim under
the VCFA, because Plaintiffs are not citizens of Vermont.
The
VCFA affords “any consumer” who has been harmed by unfair methods
of competition in commerce or unfair or deceptive acts or
practices in commerce a right to sue for damages or equitable
relief.
Vt. Stat. Ann. tit. 9, § 2461(b).
A consumer is “any
person who purchases, leases, contracts for, or otherwise agrees
to pay consideration for goods or services . . . .”
2451a(a).
Id. §
The express legislative intent of the VCFA “is to
complement the enforcement of federal statutes and decisions
governing the unfair methods of competition and unfair or
deceptive acts or practices in order to protect the public, and
to encourage fair and honest competition.”
Id. § 2451.
The
Vermont Supreme Court “has repeatedly held that the VCFA is
‘remedial in nature’ and therefore must be construed ‘liberally
so as to furnish all the remedy and all the purposes intended.’”
Elkins v. Microsoft Corp., 817 A.2d 9, 13 (Vt. 2002) (quoting
State v. Custom Pools, 556 A.2d 72, 74 (Vt. 1998)).
The VCFA
does not impose a citizenship requirement in order to invoke its
protections, but in plain language extends a remedy to consumers.
Whatever the outer limits of the statute’s reach may be, see
Sherman v. Ben & Jerry’s Franchising, Inc., No. 1:08-CV-207, 2009
33
WL 2462539 at *9 (D. Vt. 2009) (holding that nonresident
franchisees had an insufficient nexus to the state to be Vermont
consumers), purchasers of condominium residential units in Stowe,
Vermont, meet the VCFA’s definition of consumer.
Defendants have also suggested that a VCFA claim must be
pled with the specificity required by Rule 9(b).
The Vermont
Supreme Court drew an important distinction between common law
fraud and Vermont’s Consumer Fraud Act in Poulin v. Ford Motor
Co. when it refused to require a statutory consumer fraud claim
to satisfy the higher standard of proof by clear and convincing
evidence that a common law fraud claim must meet.
1172 (Vt. 1986).
513 A.2d 1168,
The Court stated:
The mere fact that the word ‘fraud’ appears in the
title of our consumer protection statute does not give
rise to an inference that the legislature intended to
require a higher degree of proof than that ordinarily
required in civil cases. The purpose of our Consumer
Fraud Act is to protect consumers by adding a claim for
relief that is easier to establish than is common law
fraud. To require the higher degree of proof would
frustrate the legislative intent.
Id.
It is likewise not likely that the Vermont legislature
intended to require a heightened pleading standard for claims for
relief under the VCFA.
Cf. Pelman v. McDonald’s Corp., 396 F.3d
508, 511 (2d Cir. 2005) (holding that an action under New York’s
Deceptive Practices Act is not subject to the requirements of
Rule 9(b)).
Although this Court does not believe that a VCFA
claim must satisfy the Rule 9(b)’s heightened pleading standard,
34
it is unnecessary to decide the issue in this case.
Except as
discussed below, Plaintiffs’ VCFA claim has alleged facts with
sufficient particularity to notify Defendants of “‘the who, what,
when, where, and how’” of the claim.
In re Initial Pub. Offering
Sec. Litig., 241 F. Supp. 2d 281, 327 (S.D.N.Y. 2003) (quoting
DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)).
The FAC alleges that Defendants violated the VCFA 1) by
failing to fully and accurately disclose the expected fees or
charges when they instituted the SAS Covenant’s annual
contribution without regard to occupancy; 2) by failing to
disclose that Plaintiffs would be charged for payment of a
portion of the Condominium assessments allocated to the Shared
Amenities Unit; and 3) by failing to disclose that Plaintiffs
would be charged for expenses associated with operating and
maintaining the Exclusive Shared Amenities Use Area.
FAC ¶¶ 59-
60.
Defendants assert that their written disclosures destroy any
VCFA claim.
They point out that their February 18, 2008, letter
that accompanied the 2008 POS advised that they had changed the
billing for the Shared Services Contribution:
“It is no longer a
contribution that accrues nightly, but will be an annual cost,
billed quarterly, regardless of occupancy of your unit.”
Letter, ECF No. 23-12.
SML
The letter referred to the relevant
schedules to review to understand these changes, including a
35
revised operating budget.
The budget set forth the expected
Shared Services Contribution as $6892 annually for studios and
$20,676 annually for three-bedroom units.
Draft Operating
Budget, ECF NO. 35-1.
The summary letter certainly put Plaintiffs on inquiry
notice that their Shared Services Contribution had changed and
would likely increase.
The details were ascertainable by
reviewing the revised budget that was supplied with the 2008 POS
and to which the letter referred.
Plaintiffs have pleaded
sufficient facts, however, “to state a claim to relief that is
plausible on its face.”
Iqbal, 129 S. Ct. at 1949.
Specifically
they have alleged that Defendants failed to fully and accurately
disclose the expected fees, that “most” of the changes were
characterized as “minor” and buried in hundreds of pages of
documents, that they did not understand the impact of the
revision, and that the change materially affected purchasers’
financial obligations within months of their closings on their
units.
The failure to disclose the allocation of Shared Amenities
Unit assessments and the expenses for the Exclusive Shared
Amenities Use area, however, fails to satisfy Rule 8's pleading
standard.
This information came to light, according to the FAC,
in February 2010.
Plaintiffs have not pled that failure to
disclose these schemes affected their decision to purchase their
36
units, nor is that a reasonable inference that may be drawn from
the facts as alleged.
Accordingly, Plaintiffs’ VCFA claims in Count III and
relevant portions of Count I with regard to the allocation of
Shared Amenities Unit assessments and charges for Exclusive
Shared Amenities Use Area expenses are dismissed for failure to
state a claim, with leave to replead facts if any that may
support the omitted essential element of a VCFA claim with
respect to the allocation of Shared Amenities Unit assessments
and expenses for the Exclusive Shared Amenities Use area.
F.
Common Law Fraudulent Concealment Claim
In Vermont,11 a claim for fraudulent concealment must allege
“‘concealment of facts by one with knowledge, or the means of
knowledge, and a duty to disclose, coupled with an intention to
mislead or defraud.’”
Lay v. Pettingill, 2011 VT 127, ¶ 14, ___
A.3d ___ (quoting Silva v. Stevens, 589 A.2d 852, 857 (Vt.
1991)).
Defendants argue that the FAC does not adequately allege
concealment of facts, duty to disclose or intention to mislead or
defraud.
The FAC, however, alleges concealment of the following
facts:
1) that the Shared Amenities and Services Contribution
could not be ascertained from the SAS Covenant; 2) that
11
Defendants have accepted the application of Vermont law
to this claim for purposes of this motion.
37
residential unit owners pay for benefits the commercial unit
owners enjoy in the Shared Amenities Use Area; 3) that the Shared
Amenities Unit Owner has been charging a portion of its
Condominium assessments in its Shared Amenities and Services
Contribution calculation; 4) that the Defendants are using an
allocation that is not authorized by the SAS Covenant; 5) that
residential unit owners are being billed for expenses in
violation of the SAS Covenant; and 6) that residential unit
owners are paying property taxes attributable to the Exclusive
Shared Amenities Unit Area that should be paid by Spruce Peak.
See FAC ¶¶ 201, 203, 218, 221, 224-226.
This satisfies Rule
9(b)’s particularity requirement.
With regard to a duty to disclose, the FAC states that
“[t]he duty to disclose can arise from a relationship of trust
and confidence, superior knowledge or means of knowledge,” and
that “Defendants had a duty to disclose to Plaintiffs all
material facts concerning the Condominium units including without
limitation the expected cost of services under the SAS Covenant.”
FAC ¶¶ 341, 342.
It is of course well established that a “duty
to disclose can arise from a relationship of trust and
confidence, superior knowledge or means of knowledge.”
Roy v.
Mugford, 642 A.2d 688, 693 (Vt. 1994) (citing Silva, 589 A.2d at
857).
In their opposition brief, Plaintiffs specify that they
rely on a duty to disclose based on the superior knowledge of a
38
seller of real estate.
A duty to disclose arises from superior
knowledge “‘where material facts are accessible to the vendor
only, and he knows them not to be within the reach of the
diligent attention, observation, and judgment of the purchaser.’”
Cushman v. Kirby, 536 A.2d 550, 553 (Vt. 1987) (quoting Lawson v.
Citizens & S. Nat’l Bank, 193 S.E.2d 124, 128 (S.C. 1972)).
The FAC, despite hundreds of paragraphs of details of the
documents, transactions and events at issue, fails to present
facts—as opposed to legal conclusions—that would permit a court
to draw the reasonable inference that Defendants were under a
duty to disclose more than they did about the change in
calculation of the Shared Amenities and Services Contribution or
other expected costs of services under the SAS Covenant.
It is
undisputed that Plaintiffs were provided with the facts about the
Shared Amenities and Services Contribution calculation, including
that the method of calculating it had changed, that it was an
estimate and that unit owners would be responsible for actual
costs.
It is undisputed that Plaintiffs were provided with
estimates of other costs in connection with ownership of their
units.
Although Plaintiffs may have viable claims that
Defendants have breached the terms of their agreements, or that
their disclosures violated statutory requirements, they have
failed to state a claim for fraudulent nondisclosure.
See
Monahan v. GMAC Mortg. Corp., 2005 VT 110, ¶¶ 65-69, 893 A.2d
39
298, 320-21 (holding that providing the lower of two repair
estimates and withholding the higher one did not support an
inference of fraudulent nondisclosure where the document
indicated that it had been revised, and was not intended to be an
estimate of the total cost for all repairs); see also Winey v.
William E. Dailey, Inc., 636 A.2d 744, 749 (Vt. 1993) (cautioning
“against confusing principles of contract with principles of
fraud so that the elements of fraud are made out by a mere breach
of contract”); Bevins v. King, 514 A.2d 1044, 1045 (Vt. 1986)
(“[P]rinciples of contract and principles of fraud must be kept
separate and distinct.”).
Moreover, Plaintiffs have not adequately pleaded an
intention to mislead or defraud with regard to the charges and
allocations that were disclosed at the 2010 budget presentation.
The FAC alleges that Defendants intentionally concealed this
information from the residential unit owners.
FAC ¶ 225.
Although Rule 9(b) permits intent to be alleged generally, see
Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996), a
fraud claim “must allege facts that give rise to a strong
inference of fraudulent intent . . . [either] by (1) alleging
facts to show that defendants had both motive and opportunity to
commit fraud, or by (2) alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or
recklessness.”
S.Q.K.F.C, Inc. v. Bell Atl. TriCon Leasing
40
Corp., 84 F.3d 629, 634 (2d Cir. 1996).
Although an intentional
concealment of information may provide some evidence of an intent
to mislead or defraud, that fact alone does not tend to show
motive, conscious misbehavior or recklessness.
Plaintiffs’ common law fraud claim (Count IV) is dismissed
for failure to state a claim.
G.
Claims that Adoption and Implementation of the SAS
Covenant Violates a Covenant of Good Faith and Fair
Dealing and that the SAS Covenant is Unconscionable.
1.
A covenant of good faith and fair dealing is
implied in every Vermont contract, and is imposed on every
contract or duty governed by the VCIOA.
See Carmichael v.
Adirondack Bottled Gas Corp., 635 A.2d 1211, 1216 (Vt. 1993); Vt.
Stat. Ann. tit. 27A, § 1-113.
basic principle . . .:
The VCIOA provision “sets forth a
in transactions involving common interest
communities, good faith is required in the performance and
enforcement of all agreements and duties.
Good faith, as used in
this Act, means observance of two standards: ‘honesty in fact,’
and observance of reasonable standards of fair dealing.
official cmt.
Id.
The implied covenant “ensure[s] that parties to a
contract act with ‘faithfulness to an agreed common purpose and
consistency with the justified expectations of the other party.’”
Carmichael, 635 A.2d at 1216 (quoting Restatement (Second) of
Contracts § 205 cmt. a (1981)); accord Century Partners, LP v.
Lesser Goldsmith Enters., Ltd., 2008 VT 40, ¶ 21, 958 A.2d 627,
41
633.
“Contextual and fact-specific, the implied good-faith
covenant . . . protects against ‘a variety of types of conduct
characterized as involving bad faith because they violate
community standards of decency, fairness or reasonableness.’”
Carmichael, 635 A.2d at 1216 (quoting Restatement § 205 cmt. a).
It is “ordinarily a question of fact, one particularly wellsuited for juries to decide.”
Id. at 1217.
Plaintiffs allege, among other things, that Defendants
secretly charged residential unit owners with a portion of the
Condominium assessments and property taxes that are allocated to
the Shared Amenities Unit owner, and that the SMLCOA Board of
Directors, controlled by Defendants, failed to respond in good
faith to Plaintiffs’ requests for information about their SAS
Contributions.
Although Plaintiffs may or may not prevail at
summary judgment or at trial, they have adequately stated a claim
for breach of an implied or statutory covenant of good faith and
fair dealing.
2.
As discussed above in section A., terms of a
contract may be avoided as unconscionable if they are
procedurally or substantively unfair.
A.2d at 651.
See Val Preda Leading, 540
“‘The principle is one of the prevention of
oppression and unfair surprise and not of disturbance of
allocation of risks because of superior bargaining power.’”
Wilk
Paving, Inc. v. Southworth-Milton, Inc., 649 A.2d 778, 783 (Vt.
42
1994) (quoting Vt. Stat. Ann. tit. 9A, § 2-302 (1994) official
cmt. 1); see also Vt. Stat. Ann. tit. 27A § 1-112.
Assuming the
truth of the allegations of the FAC, Plaintiffs have adequately
stated a claim of unconscionability, and are entitled to present
evidence to prove their claim.
Conclusion
Defendants’ Motion to Dismiss Plaintiffs’ Amended Class
Action Complaint, ECF No. 28, is granted in part and denied in
part.
Counts IV, V and VI and portions of Count I and III are
dismissed for failure to state a claim upon which relief can be
granted, with leave to replead these claims within thirty days of
the date of this order.
Dated at Burlington, in the District of Vermont, this 20th
day of March, 2012.
/s/ William K. Sessions III
William K. Sessions III
District Court Judge
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