Bhole, Inc. v. Shore Invs., Inc.

• Decision Date: 11 June 2013
• Docket Number: 2012.,No. 305,305
• Citation: 67 A.3d 444
• Parties: BHOLE, INC., Outlet Liquors, LLC, Highway I Limited Partnership, Kiran Patel, and Alexander J. Pires, Jr., Defendants Below, Appellants, v. SHORE INVESTMENTS, INC., Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

67 A.3d 444

BHOLE, INC., Outlet Liquors, LLC, Highway I Limited Partnership, Kiran Patel, and Alexander J. Pires, Jr., Defendants Below, Appellants,

v.SHORE INVESTMENTS, INC., Plaintiff Below, Appellee.

No. 305, 2012.

Supreme Court of Delaware.

Submitted: March 13, 2013.

Decided: June 11, 2013.

Court Below: Superior Court of the State of Delaware, in and for Sussex County, C.A. No. S09C–09–013.

Upon appeal from the Superior Court. AFFIRMED in part, REVERSED in part, and REMANDED.

Stephen W. Spence (argued), Stephen A. Spence, and Aaron C. Baker, Esquires, of Phillips, Goldman & Spence, P.A., Wilmington, Delaware; for Appellants.

John A. Sergovic, Jr. (argued), Elizabeth L. Soucek, Esquires, of Sergovic, Carmean & Weidman, P.A., Georgetown, Delaware; for Appellee.

Before STEELE, Chief Justice, JACOBS and RIDGELY, Justices.

JACOBS, Justice:

INTRODUCTION

In a so-called “efficient breach,” a tenant terminated a commercial lease before the end of the lease term. The lease agreement did not contain an acceleration clause. Before the lease term expired, the landlord brought a Superior Court action to recover the entire unpaid rent for the balance of the lease period. We hold that, although the tenant breached the lease, the court erred by not considering that the lease had no acceleration clause. As a consequence, the trial court's award of contract damages and its award of attorney's fees, must be reversed and remanded to the Superior Court for redetermination. The Superior Court also upheld the landlord's separate claim for tortious interference with its lease, and awarded it punitive damages. We reverse the tortious interference determination and the award of punitive damages, and remand the case for further proceedings in accordance with this Opinion.

FACTS AND PROCEDURAL BACKGROUND

I. Facts

Shore Investments, Inc., the landlord and plaintiff-below (“Shore”), owns a 4400–square–foot commercial building located at 4313 Highway One, Rehoboth Beach, Delaware (the “Old Store”). In 2004, Shore entered into a contract leasing the Old Store to Bhole, Inc., the original tenant (“Bhole”), for use as a liquor store (the “Lease”). At that time, Bhole's president and sole shareholder was Kiran Patel (“Patel”), who was later named as a co-Defendant in this action. The Lease term ran from August 31, 2004 to August 31, 2011, with an option to renew for an additional seven years. Rent was payable in monthly installments on the first of every month. Importantly, the Lease did not have an acceleration clause, i.e., a provision that any unpaid rent for the balance of the Lease term would become immediately due and payable if the tenant breached the contract.

In November 2008, co-Defendant Alexander J. Pires, Jr. (“Pires”) decided to operate a liquor store in Rehoboth Beach. Pires is the managing partner of Highway I Limited Partnership (“Highway I”), an entity that is the sole owner of Outlet Wines, LLC, which was later renamed Outlet Liquors, LLC (“Outlet Liquors”).¹ To accomplish that goal, Pires caused Outlet Wines to purchase Patel's stock ownership interest in Bhole. Pires then caused Bhole to apply to the Delaware Alcoholic Beverage Control Commission (“DABCC”) to transfer Bhole's liquor license from the Old Store to a larger, 20,500–square–foot building.² That building, which was purchased from The Salvation Army (the “Salvation Army Building”), was owned by Highway I, and was located adjacent to the Old Store.

On April 7, 2009, after the DABCC approved Bhole's application, Pires transferred Bhole's entire liquor store operation from the Old Store to the Salvation Army Building. On April 30, 2009, Pires caused Bhole to merge into Outlet Wines, which (as earlier noted) changed its name to Outlet Liquors. The consequence of these transactions is that Pires caused his entities to: (i) purchase Bhole and its business, (ii) assume Bhole's obligations under the Lease with Shore, and (iii) transfer Bhole's liquor store operation from the Old Store to the Salvation Army Building.

Despite having moved the liquor store to a different location, Pires did not terminate the Lease. He caused his entities to continue paying rent to Shore for five additional months, until early September 2009. At that point, Pires terminated the Lease by surrendering the keys to the Old Store to Shore's president, T. Theodore Jones (“Jones”). Mr. Jones then attempted (unsuccessfully) to negotiate with two potential tenants to relet the Old Store. From February 2010 through March 2011, Jones also listed the property with a commercial real estate company. Jones was, however, unable to secure a tenant for the balance of the Lease term, i.e., for the period from early September 2009 (when the Defendants breached the Lease) to August 31, 2011 (when the Lease expired).

II. Procedural Background

After the Defendants breached the Lease, but almost two years before the Lease expired, Shore filed this action in Superior Court against the Defendants on September 10, 2009. Shore alleged claims of breach of contract, tortious interference with the Lease, and tortious interference with its prospective business expectations. Shore sought contract damages, punitive damages, and attorney's fees and related court costs.

After a May 7–8, 2011 bench trial, the Superior Court issued a letter opinion on November 28, 2011.³ The court held that Bhole had breached the Lease by failing to operate a liquor store continuously in the Old Store for the entire Lease term.⁴ The court ruled that moving the liquor store operation to the Salvation Army Building in April 2009 constituted a clear breach of the Lease,⁵ that the breach was material, and that Bhole's continuing to make rental payments until September 2009 did not excuse the breach.⁶

The court also found that Shore had made a reasonable effort to mitigate its damages post-breach by entering into discussions with two prospective tenants and by listing the property with a commercial real estate company.⁷ As a result, the court held, the measure of Shore's contract damages was the unpaid rent for the balance of the Lease term ( i.e., from October 1, 2009 through August 31, 2011).⁸ In its first letter opinion, the court specifically held Bhole and Outlet Liquors liable for those contract damages. ⁹

The court also upheld Shore's claim for tortious interference with the Lease. ¹⁰ The Defendants justified their conduct as reasonable competition with Shore in operating a liquor store. The court found, however, that “Shore and the [D]efendants were not in competition with each other in the marketplace,” because “Shore is in the business of leasing out its building to tenants.... [whereas] [t]he [D]efendants are ... in the business of operating a large liquor store.” ¹¹ Therefore, the Superior Court concluded, although the Defendants tortiously interfered with the Lease, no consequential damages were separately awardable on that basis, because the parties were engaged in different businesses.¹² But, because the Defendants had “intentionally and willfully caused Bhole to breach its lease by moving the liquor store from the [Old Store] to the Salvation Army [B]uilding,” ¹³ the court awarded Shore $25,000 in punitive damages against Pires, Highway I, and Outlet Liquors, jointly and severally.¹⁴

The court, however, declined to award damages to Shore on its tortious interference with its prospective business expectations claim,¹⁵ because Shore had no reasonable expectation that Bhole would renew its Lease after the original Lease term expired.¹⁶ The court reasoned that Shore “certainly had to know” that the Defendants would not renew the Lease once the liquor store operation was moved from the Old Store to the Salvation Army Building.¹⁷

Given the Lease terms, and Shore's success in establishing its breach of contract claim, the Superior Court held that Shore was also entitled to recover its attorney's fees and costs, plus pre—and postjudgment interest, from Bhole. ¹⁸ In a second letter opinion issued on April 9, 2012, the court then determined the amount of the attorney's fee award,¹⁹ but held that only Bhole and Outlet Liquors were liable therefor.²⁰

The court issued its final order on May 7, 2012. In its order and judgment, the court: (i) found no liability against Patel; (ii) held that Highway I, Outlet Liquors, and Pires were jointly and severally liable for all unpaid rent, plus pre—and postjudgment interest, for the period from October 1, 2009 to the expiration of the Lease on August 31, 2011; (iii) awarded punitive damages against those three Defendants; (iv) found that the Defendants had not tortiously interfered with Shore's business expectations; and (v) held Bhole and Outlet Liquors liable for Shore's attorney's fees and court costs.

All parties have appealed to this Court from that final order and judgment.

ANALYSIS

Because the parties advance distinct claims on their respective appeal and cross-appeal, we address those claims separately. On their appeal, the Defendants contest the Superior Court's determinations of: (i) breach of contract damages, (ii) tortious interference with the Lease, and (iii) punitive damages. On its cross-appeal, Shore challenges the court's rulings: (i) rejecting its claim of tortious interference with its business expectations, (ii) declining to impose a damages award against Patel, and (iii) awarding it inadequate attorney's fees and punitive damages.

These claims raise issues of contract interpretation. They also contest the trial court's formulation and application of legal principles. We review both sets of claims de novo.²¹ We review the court's factual findings to determine if they are sufficiently supported by the record, and will not disturb those findings unless they are clearly erroneous.²² We review its damages award for abuse of discretion.²³

I. The Defendants' Claims on AppealA. Breach of Contract Damages

The principal issue on the Defendants' appeal is whether the Superior Court...