Opinion ID: 4677424
Heading Depth: 2
Heading Rank: 1

Heading: Ability to Compel Discovery

Text: Wild Meadows argues that an arbitrator lacks statutory authority to compel discovery because the text of the Act omits any reference to discovery proceedings. According to Wild Meadows, a community owner must produce whatever it intends to rely on to justify its rents.35 If the homeowners request additional information to test the community owner’s justifications and the community owner does not comply, then the community owner runs the risk that the arbitrator will find the rent increase unjustified. Thus, according to Wild Meadows, the community owner completely controls the flow of information in a rent justification proceeding.36 We disagree with this interpretation of the Act. An arbitrator may compel the production of documents under the Act and applicable provisions of the Delaware Administrative Code. The General Assembly, through the and their personal predilections as to what the law should be have no place in efforts to override properly stated legislative will.”). 33 Arnold v. State, 49 A.3d 1180, 1183 (Del. 2012) (citing Dennis v. State, 41 A.3d 391, 393 (Del. 2012)). 34 Leatherbury v. Greenspun, 939 A.2d 1284, 1289 (Del. 2007) (citing Rubick v. Sec. Instrument Corp., 766 A.2d 15, 18 (Del. 2000)). 35 Opening Br. 22. 36 Id. at 24-30. 8 Manufactured Home Owners and Community Owners Act, created the Authority.37 The Authority was tasked with overseeing manufactured home communities and was granted the explicit power to “[a]dopt a plan of operation and articles, bylaws, and operating rules.”38 Under 25 Del. C. § 7011(c)(1), the Authority has the power to create regulations; the most relevant here are the Rent Increase Dispute Resolution Procedures.39 Under 1 Del. Admin. C. § 202-1.0, the Authority recognized its obligation to “implement[] and oversee[] the process by which rent increase disputes are resolved . . . .”40 To that end, the Authority promulgated § 202-7.10, which expressly allows an arbitrator to compel discovery of documents that are relevant to the rent increase at issue. The arbitrator is authorized to schedule an informal preliminary conference with the parties (in person or by telephone) as the arbitrator deems appropriate in order to narrow the issues and minimize the expense of the arbitration process. The arbitrator is authorized to require the parties to exchange or provide to the other parties documents relevant to the rent increase at issue, including documents related to the standards set forth in 25 Del. C. § 7042.41 This regulation is consistent with the overall purpose of the Act. The General Assembly enacted the Rent Justification Act to “protect the substantial investment made by manufactured homeowners, and enable the State to benefit from the availability of affordable 37 25 Del. C. § 7011 (2013) (current version at 25 Del. C. § 7041). 38 Id. § 7011(c)(1). 39 See 1 Del. Admin. C. §§ 202-1.0 to 9.0. 40 Id. § 202-1.0. 41 Id. § 202-7.10 (emphasis added). 9 housing for lower-income citizens, without the need for additional state funding.”42 At the same time, the General Assembly recognized the property and other rights of manufactured home community owners and sought to provide them with fair return on their investment.43 Therefore, the overarching purpose of the Act is to balance the conflicting interests of protecting manufactured homeowners from “unreasonable and burdensome . . . rental increases while simultaneously providing . . . community owners . . . a just, reasonable, and fair return on their property.”44 To ensure a fair return on their property, community owners may raise a homeowner’s rent in an amount greater than the CPI-U. But to protect the homeowners from an “unreasonable increase,” a community owner must demonstrate that such an increase is justified.45 To make this showing, the community owner must show that it “has not been found in violation of” health and safety regulations “during the preceding 12-month period,” and that “[t]he proposed rent increase is “directly related to operating, maintaining, or improving the manufactured home community, and justified by 1 or more factors listed under subsection (c) . . . .”46 In Bon Ayre II, we explained the “directly related” inquiry as such: To impose an increase beyond CPI-U, the landowner must prove more. In particular, it must show that the increase is 42 25 Del. C. § 7040. 43 Id. 44 Id. 45 Id. § 7042(a). 46 Id. § 7042(a)(2); see id. § 7042(c). 10 “directly related to operating, maintaining or improving the manufactured home community.” That is, the landowner must show that its original expected return has declined, because the cost side of its ledger has grown. If a landowner can show that its costs have gone up, that opens the door to a rent increase based on § 7042(c)’s factors, including market rent. If a landowner invests in its development, and therefore has “improve[ed]” the community, it can also reap the reward from that investment through higher-than-inflation rent increases. But, unless the landowner has seen its costs increase for “operating, maintaining or improving the manufactured home community,” the Rent Justification Act preserves the initial relationship the landowner creates between its revenue and its costs. The homeowner with her home semi-permanently planted in the community is protected from material increases in rent unrelated to the benefits and costs of living in the community, and the landowner receives the return it originally anticipated.47 Thus, “[t]o make a prima facie case that a rent increase is directly related to improving the community—a requirement that we have previously described as ‘modest’—it suffices for the community owner to offer evidence that in making some capital improvement, the community owner has incurred costs that are likely to reduce its expected return.”48 Once the community owner has established its prima facie case, homeowners are “entitled to rebut that prima facie case by offering evidence of [their] own that the expenditure did not in fact reflect any increase in costs—for example because the expenditure was offset by reduced 47 Bon Ayre Land, LLC v. Bon Ayre Cmty. Ass’n. (Bon Ayre II), 149 A.3d 227, 234-35 (Del. 2016). 48 Sandhill Acres, 210 A.3d at 729 (citing Bon Ayre II, 149 A.3d at 235–36). 11 expenses in other areas . . . .”49 Homeowners are allowed to “fairly test” the community owner’s proffered justifications.50 If adopted, Wild Meadows’ interpretation of the Act would negate a homeowner’s ability to rebut a prima facie case, undermining the Act’s stated goal of balancing the homeowner’s and community owner’s competing interests. If tenants are not allowed to compel the production of documents relevant to the proceedings, the process skews heavily in the favor of community owners, leaving the tenants little opportunity to reasonably vet the information selected and provided by the community owner. Permitting an arbitrator to compel production of documents, subject to reasonable confidentiality protections, furthers the Act’s goals of ensuring a fair process for all parties in a rent justification dispute. Furthermore, this Court has implicitly, if not explicitly, recognized the importance of a homeowner’s ability to test a community owner’s justifications. For example, in Donovan Smith HOA v. Donovan Smith MHP, LLC, we affirmed the arbitrator’s holding that the increase in rent was justified.51 But we expressly rejected the idea that nothing in the statute requires the community owner to expose its financial information (i.e. its underlying business records) to scrutiny.52 We explained that “it is not the case that a landowner may proceed under the [Act] to argue that it is entitled to an above-inflation rent increase without 49 Id. 50 See Donovan Smith HOA v. Donovan Smith MHP, LLC, 2018 WL 3360585, at  (Del. July 10, 2018). 51 Id. at . 52 Id. at -3. 12 also being willing to produce documents to contesting homeowners that allow them to fairly test that assertion.”53 Further, we recognized that the arbitrator may control the production of documents by imposing “appropriate conditions” to address confidentiality concerns and may “require production” of the relevant books and records if the homeowners “fairly demand” that discovery.54 This Court expanded its discussion of discovery in Sandhill Acres MHC, LLC v. Sandhill Acres Home Owners Association.55 We explained that “both sides of the community owner’s financial statements bear logically on whether and to what extent a rent increase is ‘directly related to operating, maintaining or improving the manufactured housing community’ under the Act.”56 Additionally, we emphasized that the parties to a case should shape the record by exchanging requests for information and stressed that a community owner seeking a rent increase would not be in any equitable or legal position to resist a reasonable request for information about its costs and profit margins . . . . As a bottomline matter, the community owner must make a choice. Refrain from seeking an increase above inflation and thus be able to keep its financial information to itself, or seek an increase and be willing to incur the concomitant requirement to justify that 53 Id. at  (emphasis added). 54 See id. (“To the extent that there is a legitimate basis for claiming confidentiality as to any business record—a status that has to be proven—the Superior Court, or the arbitrator in the first instance, may condition discovery and use of the document to appropriate conditions.”); id. (“[T]he outcome could be quite different, especially if the homeowners fairly demand discovery of the landowner’s books and records relevant to the question of whether the proposed above-inflation rent increase is ‘directly related to operating, maintaining or improving the manufactured home community’ and the arbitrator fails to require production of those records.”). 55 210 A.3d at 731-32. 56 Id. at 731. 13 increase. On a complete record, that allows the tenants to make fair arguments and the arbitrator to assess whether the proposed increase satisfies the directly related requirement in view of a balanced record taking into account both key factors: revenues and costs.57 We have also acknowledged the arbitrator’s power to oversee and direct such discovery by addressing legitimate confidentiality concerns through restrictions or by denying excessively burdensome requests.58 Both Donovan Smith and Sandhill Acres acknowledge that a community owner’s relevant business records are a necessary part of a homeowner’s ability to rebut a community owner’s prima facie case. Thus, based on a plain reading of the Act, the applicable sections of the Delaware Administrative Code, and our jurisprudence, we conclude that the Superior Court correctly held that Weidman, as an arbitrator, possessed the authority to compel the production of documents. Furthermore, the Superior Court did not err in ruling that Weidman correctly compelled the discovery of Wild Meadows relevant financial information. Wild Meadows cannot create a unilateral process where it, as the community owner, gets to singularly choose what documents make the record. If failing to obtain an aboveinflation rent increase poses an “enormous risk for the community owner,”59 then being assessed an above-inflation rent increase without a mechanism to test the community owner’s assertions poses an enormous risk to homeowners, particularly given the deference 57 Id. (emphasis added). 58 Id. 59 Reply Br. 10-11. 14 that a reviewing court applies to an arbitrator’s decision.60 Imposing such an asymmetric burden on homeowners is contrary to the statute’s purpose of “accommodate[ing] the conflicting interests” of homeowners and landowners.61 Therefore, Weidman acted within his authority by compelling Wild Meadows to produce business records to afford the HOA a chance to fairly test Wild Meadows’ justifications for its rent increase. To raise rent above the CPI-U is a business decision that community owners should not take lightly. A community owner has two options—either keep rent adjustments at inflation and keep business records private or seek higher rent adjustments and bear the responsibility of justifying that increase.62 Community owners have a modest threshold burden to justify the increase; but homeowners are afforded the opportunity to test that threshold. Here the community owner sought an increase above inflation; thus, it may be compelled to produce records relating to its revenues and costs.63 60 See, e.g., Sandhill Acres, 210 A.3d at 731 n.37 (“The Rent Justification [Act] is somewhat unclear about the appellate standard of review, stating that the reviewing court must determine ‘whether the record created in the arbitration is sufficient justification for the arbitrator’s decisions and whether those decisions are free from legal error.’ Considering substantially similar language in a prior version of the statute, we previously observed that this language sounds somewhat like substantial evidence review. . . . We therefore conclude that substantial evidence review is the appropriate standard of review for the arbitrator’s factual findings.” (quoting 25 Del. C. § 7044 (current version at § 7054)) (citing Bon Ayre Land LLC v. Bon Ayre Cmty. Ass’n (Bone Ayre I), 133 A.3d 559, 2016 WL 747989, at  n.11 (Del. Feb. 25, 2016) (TABLE))). 61 See 25 Del. C. § 7040. 62 210 A.3d at 731. 63 Id. 15