SUPERIOR COURT OF THE DISTRICT OF COLUMBIA CIVIL DIVISION ORDER. Before the Court is plaintiff s Motion for Summary Judgment, filed January 23, 2015.

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1 SUPERIOR COURT OF THE DISTRICT OF COLUMBIA CIVIL DIVISION MUSEUM SQUARE TENANTS ASSOCIATION, INC, Plaintiff v. PARCEL ONE PHASE ONE ASSOCIATES, L.L.P., Defendant Docket No CA R(RP) Civil 2 Calendar #11 Judge Stuart G. Nash ORDER Before the Court is plaintiff s Motion for Summary Judgment, filed January 23, Defendant has filed an opposition thereto, and plaintiff has filed a reply. For the following reasons, the motion is granted. I. Background Plaintiff Museum Square Tenants Association, Inc. purports to represent the tenants of Museum Square Apartments ( Museum Square ), located at 401 K Street, NW, Washington, D.C. Museum Square has operated as a subsidized, low-income apartment building for over thirty years, and currently contains 302 residential units. Defendant, Parcel One Phase One Associates, LLC ( Parcel One ) is the owner of the property. Parcel One intends to demolish the building and replace it with market-rate apartments, condominiums, and commercial space. The D.C. Tenant Opportunity to Purchase Act ( TOPA ) requires that prior to demolishing a rental property, the owner of the property must first give the tenants the opportunity to purchase the property at a price and terms that represent a bona fide offer of sale. D.C. Code et seq. Pursuant to TOPA, on June 6, 2014, defendant delivered an offer of sale to the tenants with an asking price of $250 million. The offer of sale indicated that 1

2 the property was offered as is, for cash payment only, with a 5% down payment, and the balance due at closing. As contemplated under TOPA, the tenants took steps to form and register a tenant organization to negotiate with Parcel One. See D.C. Code The resulting entity, the Museum Square Tenants Association, Inc. ( Tenants Association ), is the plaintiff in this case. The Tenants Association was incorporated on July 10, 2014, and purported to register with the Mayor, as required by the TOPA statute, on July 21, The registration application included the Association s membership list, Certificate of Incorporation, Articles of Incorporation, and what purported to be the bylaws of the association. Also in compliance with TOPA, the Tenants Association sent to Parcel One a letter officially expressing its interest in purchasing Museum Square. The Tenants Association asserts that it never received from Parcel One a bona fide offer of sale regarding the property. The Tenants Association argues that the $250 million offer did not represent an offer consistent with TOPA because it did not reflect a rational, fair, and objective value of the Property. Plaintiff s Mem. At 2. Defendant Parcel One argues, preliminarily, that the Tenants Association did not register in compliance with applicable law, and therefore lacks standing to pursue this action. Alternatively, Parcel One argues that Parcel One did comply in all respects with TOPA, and that its $250 million offer of sale to the Tenants Association represented a bona fide offer under the applicable legal standards. II. Analysis a. Legal Standard Under Rule 56(c), summary judgment shall be granted forthwith if the record shows that there is no genuine issue of material fact, and that the moving party is entitled to judgment as a 2

3 matter of law. See Osbourne v. Capital City Mortgage Corp., 667 A.2d 1321, 1324 (D.C. 1995); Smith v. Washington Metropolitan Area Transit Authority, 631 A.2d 387, 390 (D.C. 1993). A genuine issue of material fact exists if the record contains some significant probative evidence... so that a reasonable fact-finder would return a verdict for the non-moving party. Brown v K Street Limited Partnership, 31 A.3d 902, 908 (D.C. 2011) (citation omitted). To determine which facts are material, a court must look to the substantive law on which each claim rests. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court must consider the evidence in the light most favorable to the non-moving party and grant summary judgment only if no reasonable juror could find for the non-moving party as a matter of law. Biratu v. BT Vermont Avenue, LLC, 962 A.2d 261, 263 (D.C. 2008); Tucci v. District of Columbia, 956 A.2d 684, 690 (D.C. 2008). The Court cannot resolve issues of fact or weigh evidence at the summary judgment stage. Barrett v. Covington & Burling, LLP, 979 A.2d 1239, 1244 (D.C. 2009). Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts, are jury functions, not those of a judge deciding a motion for summary judgment. Anderson, 477 U.S. at 255. b. Standing Parcel One argues that plaintiff s motion must be denied because the Tenant s Association lacks standing to bring this claim. Defendant asserts that there are irregularities in the paperwork filed by the tenants of Museum Square in their attempt to register as a tenants association as required by TOPA, and that those irregularities fatally undermine the status of plaintiff in this case as an entity with which Parcel One was obligated to negotiate. Parcel One first contends that there is an issue with the process by which the Tenants Association was incorporated. Specifically, Parcel One points out that the bylaws initially 3

4 adopted by the Tenants Association were dated July 8, 2010 two days before the date that the Tenants Association was incorporated and that the purported bylaws bear a different name than the entity being incorporated. The timing issue does not appear to pose a problem under D.C. law. D.C. Code provides that [t]he incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation. (emphasis added). The law is not explicit as to when the bylaws must be adopted. Moreover, since the D.C. Code provides that the affairs of a corporation will be governed by a board of directors after incorporation (D.C. Code ; ), the clear inference from D.C. Code is that the corporate bylaws may be adopted by the incorporators contemporaneously with, or even prior to, the date of incorporation. Similarly, the fact that the bylaws bear a name different than that of the incorporated entity is adequately explained in the factual record before the Court. Caroline Hennessy, who served as the incorporator of the Tenants Association, has submitted an affidavit to the Court, which explains, [O]n July 8, 2014,... I adopted bylaws for the association that are titled in the name of a previous tenants association..... The document... provided to Defendant in discovery... is a true and correct copy of the bylaws adopted on July 8, Hennessy Aff. at 3. Nothing in the record before this Court undercuts those assertions. The fact that the bylaws, as adopted, bear the name of the prior tenants association, rather than the new tenants association being incorporated, is plainly a simple oversight of draftsmanship, and does nothing to call into question the legitimacy of the incorporation process. Next, Parcel One contests the validity of the amended bylaws that were submitted to the Mayor in conjunction with the Tenants Association registration packet on July 21, Parcel 4

5 One argues that if invalid bylaws were submitted as part of the registration process, then the registration must be invalidated in its entirety. 1 Prior to registration, the name of the Tenants Association was changed by Ms. Hennessy from Museum Square to Museum Square Tenants Association, Inc. Again, Parcel One challenges the fact that the bylaws for the newly-named entity were adopted prior to the date that the entity was renamed. Again, Ms. Hennessy s affidavit asserts that she adopted the new bylaws in her capacity as the sole incorporator of the Tenants Association. Hennessy Aff. at 6. As above, the Court discerns no legal issue with the fact that the incorporator undertook this action prior to the date that the tenants association was recognized under its new name. As discussed above, the incorporator had the authority to adopt bylaws for the newly-named entity prior to its official recognition as a juridical entity. As a result, there appears to be no issue of material fact that would deprive the plaintiff of standing. 2 For the foregoing reasons, the Court rejects defendant s challenge to plaintiff s standing to pursue this lawsuit. 1 It is by no means clear that a technical deficiency in the adoption of the bylaws would have the effect of invalidating the registration as a whole. In the principal case relied upon by the defendant, Richman Towers Tenants Association, Inc. v. Richman Towers LLC, 17 A.3d 590 (D.C. 2011), the Court of Appeals did find a lack of standing after determining that certain of the relevant tenants associations did not, as required by TOPA, represent a majority of the tenants. However, resolution of that issue involved an issue of statutory construction that was plainly within the province of the courts. By contrast, the issue in this case, whether the bylaws of the Tenants Association were properly adopted prior to registration, involves no such issue of statutory construction. Accordingly, the D.C. Department of Housing and Community Development s acceptance of plaintiff s registration as adequate and complete is entitled to considerable deference by this Court. See, e.g.., D.C. Office of Human Rights v. D.C. Department of Corrections, 40 A.3d 917, 923 (D.C. 2010). In any event, because the Court ultimately does not find that there was, in fact, any technical deficiency with the plaintiff s adoption of the bylaws in this case, the Court need not resolve whether any such deficiency would have invalidated the registration as a whole. 2 A written document purported to authorize Ms. Hennessy to proceed unilaterally with certain incorporation procedures, including adoption of the bylaws, in lieu of convening a corporate organizational meeting. The text of the authorizing document states that the bylaws in question were attached to the document. Apparently, the copy of the document that was provided to defendant in discovery did not have any bylaws physically attached to it. The Court rejects defendant s request to infer from that fact that Ms. Hennessy s affidavit is untruthful when she states that the bylaws elsewhere provided to defendant in discovery were the bylaws she adopted on July19. See Hennessy Aff. at 6. 5

6 c. TOPA Requirements Having determined that the plaintiff has standing to pursue this claim, the Court must proceed to the merits of whether Parcel One s $250 million offer to the tenants was a bona fide offer of sale as required by TOPA. At the time that Parcel One communicated its offer, the term bona fide offer of sale was undefined in the statute. 3 In the most typical TOPA scenario, a tenant s TOPA rights arise when a property owner offers to sell his or her property. When an owner has actually reached a contract of sale with a third party, the statute provides that it is prima facie evidence of bad faith if the owner fails to offer the tenant a price or term at least as favorable as that offered to a third party. D.C. Code Thus, in those cases involving a third party purchaser, the price negotiated for the property on the open market becomes the presumptive price of a bona fide offer of sale. However, in situations, such as the instant case, in which there is no third party contract to establish the presumptive value of the property, determining whether an offer satisfies TOPA s mandate is a more difficult question. The leading case interpreting TOPA s bona fide offer of sale clause is 1618 Twenty- First Street Tenants Association, Inc. v. The Philips Collection, 829 A.2d 201, 204 (D.C. 2003) 3 In October 2014, the D.C. Council passed, and Mayor Vincent Gray signed, two pieces of legislation, an emergency bill and a temporary bill, both of which temporarily established a new definition of bona fide offer of sale and purported to apply that new definition retroactively to January 1, The defendant challenges the constitutionality of both of those laws on the grounds that: (1) they effectuate an unconstitutional taking; (2) they constitute impermissible ex post facto laws; and (3) they are bills of attainder. The Court does not need to address the constitutionality of these pieces of legislation, however, because, as discussed below, the Court finds that the defendant s $250 million offer did not satisfy the less demanding standard for bona fide offer of sale that existed prior to the Council s attempt, in October 2014, to retroactively impose a more onerous requirement. 6

7 ( Phillips ). An extended discussion of that case is necessary, because the parties conflicting interpretations of that decision are at the crux of this dispute. The Philips Collection ( Philips ) is a non-profit organization that owns a museum located at st Street, NW in Washington, DC. Id. at 202. In May 1999, it purchased an apartment building that was adjacent to the museum for approximately $1.4 million. Id. It intended to demolish the existing apartment building and build a Center for the Study and Appreciation of Modern Art. Id. In December 2001, Philips issued a Notice to Vacate to the tenants, along with a simultaneous offer of sale, under TOPA, in the amount of $7.8 million. Id. at 203. The amount was based on what Philips would have had to pay to purchase a different building, suitably proximate to the existing museum, to proceed with their plans for the art study center. Id. The tenants rejected the offer, asserting that it was not a bona fide offer of sale. Id. Philips sought a declaratory judgment that it had adequately complied with TOPA. Id. The Superior Court found in favor of Philips and the tenants appealed. Id. The Court of Appeals held that Philips offer was a bona fide offer of sale within the meaning of the statute, given the unique circumstances that exist in this case. Id. at 208. Since there was no third party contract to look at to determine whether the offer was bona fide, the Court had to determine what bona fide meant in that context. Id. at 205. The Court adopted the common law definition of bona fide, as defined in Black s Law Dictionary: In or with good faith; honestly, openly, and sincerely; without deceit or fraud. Truly; actually; without simulation or pretense. Innocently; in the attitude of trust and confidence; without notice of fraud, etc. Real, actual, genuine, and not feigned. Id. (quoting Black s Law Dictionary 177 (6 th ed. 1990)). The Court explained that D.C. Code does not require that the offer to the tenants be based on market value, appraised value, or the value of the building as rental 7

8 housing... Id at 206. Where there is no third party, the Court reasoned that bona fide offer of sale simply requires an objectively good faith, honest offer of sale. Id. The Court affirmed the decision of the trial court that the Philips offer was based upon an objectively fair analysis of the value of the property to Philips based on its intended use. Id. at 207. The Court explained that these were unique circumstances, however: [a]s opposed to being turned into condominiums or into a retail development, which might have a more easily ascertainable tangible financial value to the owners, the 1618 property had a unique value to Philips because the space was located adjacent to the existing building and would provide more space for its collection by creating the Art Study Center. Id. Parcel One urges the Court to focus on the language in the Philips decision that asserts that the offer does not have to reflect appraised value or market value to be bona fide. Id. at 205. If Parcel One s position is correct, and the property s market value is not the requisite benchmark for assessing whether an offer of sale is bona fide, then Parcel One contends that the issue of whether its offer was, in fact, bona fide, and therefore compliant with TOPA, is, at a minimum, a contested issue of fact that would defeat plaintiff s motion for summary judgment. The Tenants Association, by contrast, characterizes the situation in Philips as a nonstandard set of circumstances. The Tenants Association argues that a market value offer was not required in Philips solely because the property in question had a unique value to the owner, given its proximity to the existing museum, that was in excess of its market value. The Tenants Association argues that, in a more typical situation, such as that presented here, where the property has no unique value to the owner, then a bona fide offer must be assessed in relation to the market value of the property (which would include a monetization of any increased value to 8

9 the property that the owner, or some other developer, could attain by developing the property to a more lucrative permissible use). The Tenants Association clearly has the better of this argument. The problem with Parcel One s interpretation is that, if market value is removed as the basis for ascertaining whether an offer has been made in good faith, there is no readily identifiable alternative. Even Parcel One does not take the extreme position that market value is completely irrelevant to the good faith/bona fide offer determination. See Defendant s Mem. At (discussing various methods for valuation of the property). As Parcel One acknowledges, Philips expressly rejects a purely subjective analysis regarding the good faith inhering in an owner s offer; rather, according to Philips, a belief that an offer has been made in good faith must have some reasonable basis. Philips, 829 A.2d at 205. In the context of this case, in which the property owner has no reason for valuing the property any differently from any other actor in the marketplace, it is impossible for this Court to imagine any criteria for ascertaining whether an offer has some reasonable basis, other than by comparing the offer to the market value of the property. Accordingly, this Court interprets Philips to carve out an exception to the general rule. Market value need not always be the measure of whether a property owner s offer of sale is bona fide or made in good faith. There may be special circumstances, as were present in Philips, in which a property owner is justified in valuing its property higher than the market value, and extending an offer of sale consistent with that higher valuation. However, the default position, in the absence of proof of such special circumstances, is that market value is the essential touchstone in assessing whether an owner has made a bona fide offer. 9

10 Thus, the final question in resolving this motion for summary judgment is whether any reasonable fact finder could find that Parcel One s offer was a bona fide offer in relation to the market value of the property at the time the offer was made. Parcel One argues that [t]his case is in its infancy, and that resolution of the case will be dependent on a battle of the experts, at trial, on the issue of valuation. Defendant s Mem. at 11. The problem with Parcel One s position is that the methodology utilized by Parcel One to arrive at its offer is a matter of undisputed fact, and that methodology is indisputably not an accurate measure of the property s current market value. See CBRE Appraisal at 1 ( We have been instructed by the client [Parcel One] to... [p]rovide a value of the proposed apartment rental units upon stabilization [projected for February 1, 2019] and a gross retail sellout of the condominium units [projected for October, 1, 2021]. As such the report does not address the As-Is value. ). 4 As the Tenants Association argues, the valuation methodology employed by Parcel One suffers from at least one obvious shortcoming in serving as a reasonable basis for a current offer of sale. The valuation methodology arrives at a net value of the developed property, after deduction of construction costs, at a point in time several years in the future. Thus, even if all the assumptions included in that valuation are deemed accurate and reasonable, the valuation fails to discount the resulting figure to a present market value. 5 4 To its credit, Parcel One does not contend that its valuation is intended to measure current market value. Parcel One has candidly represented throughout the litigation that its valuation methodology calculates the value of the property as fully developed in Parcel One s position is that, under Philips, market value need not be the sole standard for evaluating whether a bona fide offer of sale has been made. Having failed to persuade the Court on that point, Parcel One has no chance to prevail. 5 The Tenants Association has submitted the affidavit of Richard R. Harps, a professional real estate appraiser, who has, using the figures in the CBRE appraisal, calculated the present market value of the property at $68,000,000, using a discount rate of 14%. In the absence of any cross-examination or opposing expert testimony, the Court is in no position to judge the reasonableness of the assumptions employed by Mr. Harps. Yet even using an exaggeratedly low discount rate of 2% over the smallest applicable timeframe 4.5 years the Court calculates a present value more than $20 million lower than Parcel One s $250 million offer of sale. 10

11 Parcel One is correct that there are potentially multiple different approaches for valuing commercial real estate. Valuation under any of those approaches would require certain assumptions, any of which may or may not be reasonable. In most circumstances a trial would indeed be necessary to ascertain the legitimacy of a particular valuation methodology and the reasonableness of the assumptions made regarding the variables inputted into that methodology. In this case, however, it is beyond dispute that the methodology adopted by the defendant was neither designed to, nor did, achieve a reasonable estimate of the property s current market value. Accordingly, the Court finds that no reasonable fact finder would be able to return a verdict on behalf of the defendant. Summary judgment for the plaintiff is therefore appropriate. 6 For the foregoing reasons, it is this 22 nd day of April 2015, ORDERED that plaintiff s Motion for Summary Judgment is GRANTED; and it is further ORDERED that the parties appear before the Court on Wednesday, April 29, 2015 at 2:00 p.m. to discuss the scope of the relief that should be granted in the Court s Entry of Judgment. Stuart G. Nash Judge Signed in chambers 6 Parcel One makes one further argument that does not merit extensive discussion. Parcel One claims that TOPA is preempted by the Federal Housing Act of 1937, as amended, which establishes the Section 8 housing program, because TOPA allegedly impermissibly burdens the right of a housing providers to opt out of the Section 8 program. However, contrary to Parcel One s claim, TOPA imposes no burden on a housing provider s decision to cease participation in Section 8. Assuming it were otherwise permitted by federal law, Parcel One could opt out of Section 8 at any time, including during the pendency of this lawsuit. What Parcel One cannot do is sell or demolish its rental units without making a qualifying offer of sale under TOPA, and that obligation exists independently of whether Parcel One chooses to participate in Section 8. Accordingly, there is no valid basis for Parcel One s claim of preemption. 11

12 Copies provided via Case File Xpress: Zenobia Lai, Esq. Julie H. Becker, Esq. Matthew A. Eisenstein, Esq. Blake A. Biles, Esq. Paige Sharpe, Esq. Counsel for Plaintiff Roger N. Simon, Esq. William C. Casano, Esq. Counsel for Defendant 12