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Goat Island South Condominium Association, Inc. v. IDC Clambakes, Inc.

United States Court of Appeals, First Circuit

March 24, 2017

GOAT ISLAND SOUTH CONDOMINIUM ASSOCIATION, INC.; CAPELLA SOUTH CONDOMINIUM ASSOCIATION, INC., Appellees, Cross-Appellants,
v.
IDC CLAMBAKES, INC., Appellant, Cross-Appellee.

         APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND, Hon. William E. Smith, Chief U.S. District Judge, Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge

          Matthew J. McGowan, with whom Salter McGowan Sylvia & Leonard, Inc., William P. Devereaux, Matthew C. Reeber, Joel K. Goloskie, and Pannone Lopes Devereaux & West LLC were on brief, for appellant/cross-appellee.

          William R. Grimm, with whom Adam M. Ramos, Hinckley, Allen & Snyder LLP, Charles D. Blackman, and Levy & Blackman LLP were on brief, for appellees/cross-appellants.

          Before Lynch, Baldock, [*] and Kayatta, Circuit Judges.

          LYNCH, Circuit Judge.

         This bankruptcy appeal is the latest in decades-long litigation over a lucrative banquet facility, the Regatta Club in Newport, Rhode Island, which was constructed on a parcel of land at a time when the validity of the development rights to that parcel was in dispute. In 2004 and 2005, the Rhode Island Supreme Court found that the development rights had expired at the time of construction. See Am. Condo. Ass'n v. IDC, Inc. ("America I"), 844 A.2d 117, 134 (R.I. 2004); Am. Condo. Ass'n v. IDC, Inc. ("America II"), 870 A.2d 434, 443 (R.I. 2005). As a result, it found that title to both the land and the Regatta Club belonged to a group of condominium associations, not to IDC, Inc. and IDC Properties, Inc. ("Properties"), the development entities that had incurred the cost to build the Club. Two of the title-holding associations, Capella South Condominium Association, Inc. and Goat Island South Condominium Association, Inc. ("the Associations"), are the appellees and cross-appellants in this suit. IDC Clambakes, Inc. ("Clambakes"), the debtor here, was not a party before the Rhode Island Supreme Court.

         Following the America decisions, Clambakes, which operated the Regatta Club, voluntarily filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The Associations then filed proofs of claim seeking relief for Clambakes' alleged trespass on their property between 1998 and April 8, 2005, the date of the America II decision. In 2013, this court rejected that trespass claim, affirming the bankruptcy court's finding that the Associations had impliedly consented to Clambakes' use and occupancy of the Regatta Club. See In re IDC Clambakes, Inc., 727 F.3d 58, 69 (1st Cir. 2013). We also remanded on the issue of whether there was a corresponding implied obligation that Clambakes pay the Associations for its use and occupancy of the Club. See id. at 72.

         On remand, the bankruptcy court first found that there was no implied-in-fact contract between the parties such that Clambakes was contractually obligated to make rent payments to the Associations. The bankruptcy court then considered whether the Associations were nonetheless entitled to relief under a theory of unjust enrichment. The court answered that question in the negative, finding that the benefit that the Associations conferred on Clambakes was fully offset by the value that the Associations themselves gained by being awarded ownership over the Regatta Club facility. See In re IDC Clambakes, Inc. ("Clambakes"), 510 B.R. 678, 695 (Bankr. D.R.I. 2014).

         The district court disagreed, finding clear error in the bankruptcy court's characterization of the benefit conferred on Clambakes as merely a ground lease, as well as in the bankruptcy court's unjust enrichment analysis. Central to the district court's reasoning was its reading of the America opinions as to the ownership of the Regatta Club. The district court held that the findings in the America opinions must serve as "established facts" and bind "[a]ny equitable analysis" in this lawsuit. Goat Island S. Condo. Ass'n v. IDC Clambakes, Inc. ("Goat Island"), 533 B.R. 845, 848-49 (D.R.I. 2015). Ultimately, the district court concluded that Clambakes owed the Associations $2.6 million for its use and occupancy of the Regatta Club during the claim period. Id. at 851.

         We affirm the bankruptcy court's decision to award no equitable relief to the Associations. No implied-in-fact contract existed between the parties. As to unjust enrichment, we see nothing in the America opinions to suggest that their holding regarding the Regatta Club's ownership should bear on, much less control, the question of whether principles of equity entitle the Associations to even more relief than the Rhode Island Supreme Court already afforded them. Having concluded that the America opinions did not bind the bankruptcy court's equitable authority, we find no abuse of discretion in the bankruptcy court's ultimate decision that the Associations failed to meet their burden of showing that inequity would result if Clambakes did not pay them for the use and occupancy of the Regatta Club during the claim period. Equity does not bestow additional relief on the Associations, which continue to benefit from the Regatta Club facility that they inherited without any investment of their own.

         I.

         The saga of this litigation has been exhaustively documented by various state and federal courts. We recite only those facts relevant to this appeal. We rely principally on the bankruptcy court's recounting of the facts, which the district court also adopted in full. See Clambakes, 510 B.R. at 682-85; Goat Island, 533 B.R. at 847.

         In January 1988, Globe Manufacturing Co. ("Globe") recorded a declaration of condominium in the Land Evidence Records of the City of Newport. Clambakes, 510 B.R. at 682. That declaration, as amended and restated in March 1988, reserved Globe's right to develop a parcel of land known as the Reserved Area, but the development rights would expire if not exercised by December 31, 1994. Id. Globe assigned its development rights to IDC, Inc. and then to Properties.[1] Id. From April to December 1994, Properties introduced multiple amendments to the declaration seeking to extend the expiration date for the development rights and to exercise those rights. Id. The Associations questioned the validity of these amendments, and negotiations over the amendments carried on for years. Id.

         In late 1997 and early 1998, while negotiations over Properties' development rights were ongoing, Properties spent approximately $3 million to construct the Regatta Club in the Reserved Area. Id. Despite the ongoing dispute over the development rights, the record reveals no evidence that the Associations sought to halt the construction. Id. As the bankruptcy court noted:

In an oft-cited letter during this conflict, a representative of the America Condominium Association wrote to the Newport building inspector on February 9, 1998: "It's our understanding that a permit application has been filed with your Office for the purpose of constructing [the Regatta Club] . . . . While we don't have a particular objection as to the land use with respect to the building itself, we do have a substantial problem with the parking requirements for that [building] . . . ."

Id. (alterations in original).

         Clambakes came into existence on April 18, 1996 as a corporate entity separate from the other IDC entities. Id. at 683. On March 1, 1998, Clambakes and Properties entered into a twenty-year lease, under which Clambakes would "use the Regatta Club and surrounding land making up the Reserved Area to provide event hosting and catering services." Id. Clambakes would pay Properties an annual rent equal to the higher of $180, 000 or six percent of Clambakes' annual gross revenues. Id. Clambakes began operating the Club in late 1998 and began paying rent to Properties in 1999. Id. Until Clambakes filed for bankruptcy on June 16, 2005, "it ran a profitable business during the approximately seven years it operated the Regatta Club." Id.

         A. The America Litigation

         On May 29, 1999, the Associations sued Roos, IDC, Inc., and Properties in state court. Id. Clambakes was not a party to that suit. The Associations alleged that Properties had failed to exercise its development rights with respect to the Reserved Area before the December 31, 1994 expiration date; that the 1994 declaration amendments that had sought to extend the expiration date were invalid; and that "as a result, fee simple title to the Reserved Area had vested in the condominium unit owners on whose behalf the Associations acted." Id.

         In America I, the Rhode Island Supreme Court ruled in favor of the Associations. See 844 A.2d at 133. It found that the amendments were invalid because they did not conform to the requirements of the Rhode Island Condominium Act. See R.I. Gen. Laws §§ 34-36.1-1.01 to -4.20; America I, 844 A.2d at 127-30. Accordingly, Properties had failed to exercise its development rights before their expiration, and title to the disputed property had vested in the Associations. Id. at 133. In reaching this conclusion, the Supreme Court rejected the defendants' argument that they had invested $3 million in developing the Regatta Club and that this investment should weigh against the Associations' winning title to the Club: "Considering that [the defendants] developed the Reserved Area at a time when they were on notice that their right to do so was in dispute, we conclude that they constructed the parcel at their peril and cannot now contend that equity should prevent plaintiffs from prevailing because of their expenditures." Id. at 135.

         Nonetheless, the Rhode Island Supreme Court remanded for an accounting of the common expenses that Properties had continued to pay for the Reserved Area after December 31, 1994, the date on which its development rights expired. Id. "[T]o permit the plaintiffs to enjoy the benefits of such expenditures would constitute an inequitable windfall." Id. In remanding for this purpose, the court expressly stated that the accounting should "not include any ...


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