MHP Management, LLC v. DTR MHP Management, LLC ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: March 23, 2022
Date Decided: June 21, 2022
F. Troupe Mickler IV, Esquire Daniel J. Goettle, Esquire
Ashby & Geddes Jeffrey J. Lyons, Esquire
500 Delaware Avenue, 8th Floor Baker & Hostetler LLP
P.O. Box 1150 1201 North Market Street
Wilmington, Delaware 19801 Suite 1402
Wilmington, Delaware 19801
RE: MHP Management, LLC. v. DTR MHP Management, LLC, et al.,
C.A. No. 2020-0365-LWW
Dear Counsel:
This letter decision addresses the parties’ cross-motions for summary
judgment regarding a March 23, 2020 arbitration award. The plaintiff seeks an order
confirming the award; the defendants seek an order vacating it. For the reasons
explained below, the plaintiff’s motion is granted and the defendants’ motion is
denied.
I. FACTUAL BACKGROUND
Until recently, the principals of plaintiff MHP Management, LLC (“MHP”)
and of defendants DTR MHP Management, LLC (“DTR”), Colonial Kitchen, LLC,
and WaterTree Capital, Inc. managed a group of investment funds that own and
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C.A. No. 2020-0365-LWW
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operate mobile home parks throughout the United States.1 On March 24, 2016, the
parties formed Delaware limited liability company MHCA Management, LLC (the
“Company”) to manage one of the parties’ investment funds—MHC America Fund,
LLC, a $150 million fund holding interests in various mobile home communities.2
The Company was originally managed by MHP, DTR, Colonial Kitchen, and
WaterTree, each of whom are signatories to a 2016 Limited Liability Company
Agreement (the “LLC Agreement”).
A. The 2017 Written Consent
On April 5, 2017, a document titled “Written Action of the Members of
MHCA Management, LLC” was executed (the “2017 Written Consent”).3 The
1
Am. Compl. ¶ 10 (Dkt 20). MHP is a Florida limited liability company that is managed
by JRS MHP Management, LLC, a Florida limited liability company, that is itself managed
by Jamie and Ryan Smith. See Transmittal Decl. of F. Troupe Mickler IV in Supp. of the
Pl.’s Opening Br. (“Mickler Decl.”) Ex. 1 (“Award”) at 3-4 (Dkt. 32). DTR is a Colorado
limited liability company that is managed by Dave Reynolds. Id. Colonial Kitchen is a
Texas limited liability company that is managed by Frank Rolfe. Id. WaterTree is a
California corporation managed by Eric Siragusa. Id.
2
Am. Compl. ¶¶ 8, 10; see Mickler Decl. Ex. 2 (“LLC Agreement”) § 3.1.
3
Decl. of Jeffrey J. Lyons in Supp. of Defs.’ Opening Br. (“Lyons Decl.”) Ex. C (Dkt. 36).
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document purportedly appointed DTR as managing member of the Company.4 MHP
has disputed the validity of the 2017 Written Consent.5
B. The Unsuitability Determination
In a letter dated September 5, 2018, MHP sent a Notice of Unsuitability to the
defendants.6 The notice stated that MHP was issuing an “Unsuitability
Determination” because MHP had concluded that the defendants committed acts
constituting “Good Cause” under the LLC Agreement.7 MHP’s stated reasons for
this determination included its belief that the defendants had engaged in a self-
dealing transaction and had sold property without MHP’s knowledge.8
The LLC Agreement defines “Unsuitability Determination,” in relevant part,
as the “Unaffected Members’” determination that another member “has committed
any act or omission constituting Good Cause.”9 “Good Cause” is defined to include
“a good faith determination that a Member has committed an act or omission
constituting: (i) a material breach of the Member’s duties or authority hereunder;
4
Id.
5
See Lyons Decl. Ex. E.
6
Lyons Decl. Ex. I.
7
Id.
8
Id.
9
LLC Agreement § 1.
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(ii) willful or wanton misconduct; or (iii) fraud.”10 The LLC Agreement further
provides that a member who is the subject of an Unsuitability Determination “shall
automatically be removed” as a member of the Company.11
C. The Arbitration
On September 13, 2018, the defendants (and purportedly the Company)
initiated arbitration proceedings against MHP to challenge the validity of the
Unsuitability Determination.12 The LLC Agreement mandates binding arbitration
of any disputes between the parties and requires that Delaware law be applied to any
such dispute.13 The LLC Agreement also provides that an arbitrator lacks “any
authority, power or right to alter, change, amend, modify, add to, or subtract from”
the LLC Agreement’s provisions.14
In their Statement of Claims, the defendants argued that MHP’s Unsuitability
Determination was not made in good faith and sought a finding that the Unsuitability
Determination was invalid.15 A panel of three arbitrators was selected by the parties,
10
Id.
11
Id. § 12.1.C.
12
Lyons Decl. Ex. K.
13
LLC Agreement §§ 14.1, 15.12.
14
Id. § 14.5.
15
See Lyons Decl. Exs. K, L; see also id. Ex. Q.
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which received multiple submissions and briefs during the arbitration. A seven-day
evidentiary hearing was held before the panel in September 2019. The record
considered by the panel included 433 documentary exhibits and the testimony of
eight witnesses.
On March 23, 2020, the arbitration panel issued the Arbitrators’ Reasoned
Award—a 54-page written decision (the “Award”). The panel concluded that DTR,
Colonial Kitchen, and WaterTree did not carry their burden of showing that the
Unsuitability Determination was not issued in good faith.16 It determined that
MHP’s “September 5, 2018 Unsuitability Determination was valid.”17 The panel
also concluded that it was unnecessary to determine the “legal effect” of the 2017
Written Consent in reaching its decision.18
E. This Litigation
On May 13, 2020, the plaintiff filed a Verified Complaint to Confirm
Arbitration Award in this court, alleging that the defendants had refused to accept
the Award and continued to act as members of the Company.19 The case was stayed
16
Award at 52-53.
17
Id. at 46-54.
18
Id. at 25, 43, 49, 51-52.
19
Dkt. 1.
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by stipulation pending the outcome of earlier-filed litigation in Florida state court,
whereby the defendants sought to vacate the Award.20 The Florida court dismissed
that action on October 28, 2020 and that decision was affirmed on appeal on August
24, 2021.21
On August 29, 2021, this court entered an order lifting the stay and the
plaintiff filed an amended complaint the following day.22 The defendants answered
that complaint and advanced a counterclaim seeking to vacate the Award.23
The parties proceeded to cross-move for summary judgment on November 1,
2021. The plaintiff’s motion for summary judgment asks that the court confirm the
Award.24 The defendants’ motion for summary judgment asks that the court vacate
the Award.25 Briefing on the motions was completed on January 14, 2022. Oral
argument was held on March 23, 2022.
20
Dkt. 11.
21
See Dkt. 19
22
Dkts. 19, 20.
23
Dkt. 23.
24
See Dkt. 32.
25
See Dkt. 34.
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II. LEGAL ANALYSIS
Summary judgment is appropriate under Court of Chancery Rule 56 where
“there is no genuine issue as to any material fact and . . . the moving party is entitled
to a judgment as a matter of law.”26 A summary judgment motion “provides an
appropriate judicial mechanism for reviewing an arbitration award, because the
complete record is before the court and no de novo hearing is permitted.”27 This is
so under either the Delaware Uniform Arbitration Act or the Federal Arbitration Act
(“FAA”).28
The parties’ arbitration agreement does not reference the Delaware Uniform
Arbitration Act and the parties have briefed the dispute under the FAA.29 The Court
of Chancery has jurisdiction to enforce or vacate arbitration awards that do not
reference the DUAA “in conformity with the [FAA] and such general principles of
26
Ct. Ch. R. 56(c).
27
Wier v. Manerchia, 1997 WL 74651, at *7 (Del. Ch. Jan. 28, 1997); see also Beebe Med.
Ctr., Inc. v. InSight Health Servs. Corp., 751 A.2d 426, 431 (Del. Ch. 1999) (explaining
that a summary judgment motion is the “common [method] for this court to determine
whether to vacate or confirm an arbitration award”).
28
See TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Secs., Inc., 953 A.2d 726, 730-31
(Del. Ch. 2008).
29
LLC Agreement § 14.
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law and equity as are not inconsistent with that Act.”30 Section 9 of the FAA
provides that if a party applies for an order confirming an arbitration award within
one year after the award is made, “the court must grant such an order unless the
award is vacated, modified, or corrected as prescribed in” other provisions of the
FAA.31
The Supreme Court has explained that only the statutorily enumerated
circumstances in the FAA provide grounds for a court to grant vacatur or
modification of an arbitration award.32 “Of course, ‘[n]either the FAA nor the
Delaware Uniform Arbitration Act derogates this Court’s inherent equity
jurisdiction to enforce, modify or vacate arbitration awards.’”33 The review it must
30
10 Del. C. § 5702(c); see Gulf LNG Energy, LLC v. Eni USA Gas Mktg. LLC, 242 A.3d
575, 579 n.11 (Del. 2020) (“Because the parties[’] [agreement] did not designate the
Delaware Uniform Arbitration Act, the FAA governs their arbitration.”).
31
9 U.S.C. § 9.
32
Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576, 584 (2008) (“We now hold that §§ 10 and
11 respectively provide the FAA’s exclusive grounds for expedited vacatur and
modification.”); Gulf LNG Energy, 242 A.3d at 583 (“Once an arbitration is completed,
however, and the parties have agreed that the FAA controls their arbitration, Sections 10
and 11 of the FAA provide the exclusive means to vacate, modify, or correct the award.”).
33
TD Ameritrade, 953 A.2d at 732 (quoting SBC Interactive, Inc. v. Corp. Media P’rs,
1998 WL 749446, at *1 (Del. Ch. Oct. 7, 1998)).
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conduct, however, is governed by “one of the narrowest standards of judicial review
in all of American jurisprudence.”34
“Arbitration awards . . . are not lightly disturbed, and ‘[c]ourts must accord
substantial deference to all decisions of arbitrators.’”35 “It is not enough for
petitioners to show that the panel committed an error—or even a serious error.”36
Rather, “[t]o successfully convince the Court to vacate the award of an arbitration
panel, the movant must show ‘something beyond and different from a mere error in
the law or failure on the part of the arbitrators to understand or apply the law.’”37
The defendants contend that the Award must be vacated because the
arbitration panel exceeded its authority and because the panel’s Award was not final
and definite. The plaintiff disagrees. For the reasons discussed below, the
defendants’ arguments fall well short of the high bar they must meet to obtain
vacatur of the Award. The Award is confirmed.
Gov’t Empls. Ins. Co. v. Progressive Direct Ins. Co., 2016 WL 6477026, at *4 (Del. Ch.
34
Nov. 2, 2016) (citation omitted).
35
Agspring, LLC v. NGP X US Hldgs., L.P., 2022 WL 170068, at *3 (Del. Ch. Jan. 19,
2022) (quoting TD Ameritrade, 953 A.2d at 732).
36
Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013) (quoting Stolt-Nielsen
S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671 (2010)).
37
Agspring, 2022 WL 170068, at *3 (quoting TD Ameritrade, 953 A.2d at 732-33).
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A. The Arbitration Panel Did Not Exceed Its Powers
The defendants argue that the Award should be vacated under Section 10(a)(4)
of the FAA, which states that a court may vacate an arbitration award “where the
arbitrators exceeded their powers.”38 A party seeking to vacate an arbitration award
on that basis “bears a heavy burden.”39 The Delaware Supreme Court has explained
that an arbitrator exceeds its powers when acting “in manifest disregard of the
law.”40 That is, vacatur is available where “the arbitrator (1) knew of the relevant
legal principles, (2) appreciated that this principle controlled the outcome of the
disputed issue, and (3) nonetheless willfully flouted the governing law by refusing
to apply it.”41
According to the defendants, the arbitration panel exceeded its powers by
ignoring the express terms of the LLC Agreement in favor of rewriting or modifying
them.42 The panel did so, the defendants contend, by effectively removing DTR as
38
9 U.S.C. § 10(a)(4).
39
Oxford Health, 569 U.S. at 569.
40
Auto Equity Loans of Del., LLC v. Baird, 232 A.3d 1293, 2020 WL 2764752, at *3 (Del.
2020) (TABLE).
41
Aspring, 2022 WL 170068, at *4 (quoting SPX Corp. v. Garda USA, Inc., 94 A.3d 745,
750 (Del. 2014)).
42
Defs.’ Opening Br. 17-32 (Dkt. 32).
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the Company’s managing member in disregard of the 2017 Written Consent and by
modifying the unanimous consent requirement for an Unsuitability Determination.
On the first issue, the parties would have the court wade into a debate about
whether the 2017 Written Consent was valid and, thus, whether DTR was the
managing member of the Company. But those factual disputes are irrelevant to my
determination of whether the Award should be confirmed or vacated. Simply put,
the 2017 Written Consent was not ignored or flouted by the panel.
The panel concluded that the 2017 Written Consent was not determinative of
the question presented to them for resolution. The Award explains that “[h]aving
considered the issue” of the legal effect of the 2017 Written Consent “at length,” the
panel did not believe it would be “prudent” to resolve it.43 Moreover, the panel
“conclude[d] that a determination as to the technical legal effect of the 2017 [Written
Consent] would not change its conclusion with respect to any issue” before it.44
Instead, the panel’s decision rested on “the validity, under the terms of the LLC
Agreement,” of MHP’s Unsuitability Determination.45
43
Award at 25.
44
Id.45
Id. Thus, whether the 2017 Written Consent was valid is not (as the defendants argue) a
genuine issue of material fact precluding the entry of summary judgment in MHP’s favor.
In determining whether an arbitration award should be vacated, this court “is not to pass
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The arbitration panel read Article 12 of the LLC Agreement to provide that
if the Company’s “Unaffected Members” (i.e., the members not accused of
committing a material breach) made a good faith determination that another member
had committed a material breach of that member’s duties, the Unaffected Members
could make an Unsuitability Determination against the breaching member. 46 The
panel went on to determine that MHP was the sole Unaffected Member under the
LLC Agreement and that MHP’s Unsuitability Determination was effective.47
That reading of the LLC Agreement cannot properly be disturbed by this
court. When parties agree to submit questions of contract interpretation to an
an independent judgment on the evidence or applicable law.” TD Ameritrade, 953 A.2d at
733 (quoting Audio Jam, Inc. v. Fazelli, 1997 WL 153814, at *1 (Del. Ch. Mar. 20, 1997)).
I therefore decline to address the various arguments about the significance, applicability,
and effect of the 2017 Written Consent on the merits of the matter placed before the panel.
46
Section 12.2 of the LLC Agreement provides that “[u]pon the occurrence of an
Unsuitability Determination [against a member] and after the expiration of any applicable
cure (if any), the Company shall promptly exercise its right to redeem” the members
interest in the company at a set price. LLC Agreement § 12.2.
47
The definition of the term “Unaffected Members” is not obvious under the plain language
of the LLC Agreement. The term is defined to mean “those Members other than an
Affected Member.” Id. § 1. The term “Affected Member” is defined to mean “any Member
that is an Unsuitable Person.” Id. But a vote of the Unaffected Members is required to
find that a member is an Unsuitable Person. Id. Faced with this circular definition, the
arbitration panel interpreted the LLC Agreement to provide that a member is not an
Unaffected Member “with respect to any determination of its own Unsuitability and is also
disqualified from deliberating or voting on determinations of Unsuitability for other
Members if those determinations are based on ‘related matters.’” Award at 41.
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arbitrator, a court reviewing an arbitration award “is confined to ascertaining
whether the award draws its essence from the contract.”48 The only question for the
court “is whether the arbitrator (even arguably) interpreted the parties’ contract, not
whether he got its meaning right or wrong.”49 Here, that question must be answered
in the affirmative.
The panel similarly did not exceed its authority with regard to the second issue
of contract interpretation raised by the defendants.50 The defendants argue that the
panel “rewrote” Section 7.2 of the LLC Agreement by requiring unanimous consent
for actions taken by the Company that the LLC Agreement permitted to be
accomplished by a majority or super-majority vote. The panel did not, however,
48
United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 30 (1987);
MarkDutchCo 1 B.V. v. Zeta Interactive Corp, 2021 WL 3503805, at *5 (3d Cir. Aug. 10,
2021) (“Because the Arbitrator’s decision ‘dr[ew] its essence from the contract,’ we are
unpersuaded that he ‘act[ed] outside the scope of his contractually delegated authority.’”
(quoting Oxford Health, 569 U.S. at 569)).
49
Oxford Health, 569 U.S. at 569; see also United Paperworkers, 484 U.S. at 30 (“As long
as the arbitrator is even arguably construing or applying the contract and acting within the
scope of his authority, the court cannot overturn his decision simply because it disagrees
with his factual findings, contract interpretations, or choice of remedies.”).
50
Section 7.2 of the LLC Agreement provides that “each Member . . . shall be entitled to
vote on all matters that provide for a vote of the Members and in accordance with the
Member’s Membership Interest.” LLC Agreement § 7.2. Certain actions require the
unanimous consent of all of the members, while other actions require the consent of
members holding either a majority or super majority of the Company’s membership
interests. Id.
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conclude that unanimous consent was required for the transactions that led to the
Unsuitability Determination. Rather, the Award explained that the lack of a formal
vote “legitimize[d] MHP’s concerns that [the defendants] were able to act and had
acted without regard to MHP’s interests” and supported the conclusion that the
MHP’s Unsuitability Determination was made in good faith.51
Accordingly, the panel did not exceed its powers. Its decision not to consider
any legal effect of the 2017 Written Consent falls short of the kind of error that could
justify vacatur. The panel’s determinations were plainly based on its interpretation
of the LLC Agreement. I therefore decline to vacate the Award.
B. The Award Is Final and Definite
The defendants next contend that the arbitration panel did not execute a final
award. Under Section 10(a)(4) of the FAA, a court may vacate an arbitration award
where the arbitrators “so imperfectly executed [its powers] that a mutual, final, and
definite award upon the subject matter submitted was not made.”52 A final
arbitration award must “evidence[] the arbitrators’ intention to resolve all claims
submitted in the demand for arbitration and . . . resolve them definitively enough so
51
Award at 49.
52
9 U.S.C. § 10(a)(4).
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that the rights and obligations of the two parties, with respect to the issues submitted,
do not stand in need of further adjudication.”53
Once again, the parties’ arguments concern the 2017 Written Consent. The
defendants assert that the arbitration panel imperfectly executed its powers by
declining to consider and determine the effect of the 2017 Written Consent. In
refuting this argument, MHP points to the language of the Award itself which
discusses the panel’s treatment of the 2017 Written Consent.
As discussed above, the panel stated that it had considered the matter of the
2017 Written Consent “at length.”54 The Award acknowledged that “even after the
April 2017 Written Consent was signed, all of the members of [the Company] acted
in a manner consistent with the terms of the LLC Agreement.”55 The panel did not,
however, opine on the validity of the 2017 Written Consent or its legal effect.
But it did not need to do so to issue a final and definite award. The validity
of the 2017 Written Consent was not a claim submitted in the defendants’ demand
53
PG Publ’g, Inc. v. Newspaper Guild of Pittsburgh, 19 F.4th 308, 323 (3d Cir. 2021)
(internal quotations omitted); Astrum Fund I GP, LP v. Maracci, 2022 WL 252343, at *6
(Del. Ch. Jan. 27, 2022) (“In general, ‘[a]n arbitration award is not final if it reveals that
the arbitrators have yet to resolve each issue that the parties have empowered the arbitrators
to decide.’” (quoting PG Publ’g, 19 F.4th at 323)).
54
Supra at note 43 (quoting Award at 25).
55
Award at 25.
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for arbitration.56 The defendants’ sole claim concerned whether the plaintiff’s
Unsuitability Determination had been made in good faith.57 That issue was decided
by the panel, which concluded that a determination of the legal effect of the 2017
Written Consent was irrelevant to the outcome of the matters properly before it.58 It
does not fall to this court to second-guess that decision.
III. CONCLUSION
For the reasons stated above, there is no basis to vacate the arbitration panel’s
Award. The plaintiff’s motion for summary judgment seeking an order confirming
the Award is granted and the defendants’ motion for summary judgment seeking to
vacate the Award is denied.
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
56
Lyons Decl. Exs. K, L.
57
Lyons Decl. Exs. K, L.
58
Award at 25.