                               COURT OF CHANCERY
                                     OF THE
                               STATE OF DELAWARE
KIM E. AYVAZIAN                                                        CHANCERY COURTHOUSE
MASTER IN CHANCERY                                                           34 The Circle
                                                                    GEORGETOWN, DELAWARE 19947
                                                                                 AND
                                                                   NEW CASTLE COUNTY COURTHOUSE
                                                                  500 NORTH KING STREET, SUITE 11400
                                                                   WILMINGTON, DELAWARE 19980-3734




                                                July 25, 2016

Matthew D’Emilio, Esquire
Thomas Uebler, Esquire
Mark Dalle Pazze, Esquire
Cooch & Taylor, P.A.
The Brandywine Building
1000 West Street, 10th Floor
Wilmington, DE 19801

Stephen E. Smith, Esquire
Baird Mandalas Brockstedt, LLC
6 South State Street
Dover, DE 19901

RE:      William V. Ehrlich, Jr., Trustee of the William V. Ehrlich Trust U/W/D May
         5, 1977, as Amended v. Jeffery Ehrlich and Vinn, LLC, C.A. No. 11364-MA

Dear Counsel:

         William V. Ehrlich, Jr. (“William, Jr.”),1 in his capacity as trustee of a

testamentary trust (“the Trust”), has filed a petition seeking a declaratory

judgment, indemnification, and specific performance against his younger brother

Jeffrey Ehrlich (“Jeffrey”), who was the sole residuary beneficiary of the Trust.

The dispute between the parties primarily involves an easement over real property




                                      Page 1 of 14
once owned by the Estate of William V. Ehrlich (“the Estate”), which easement

had been conveyed to the J. Ehrlich Realty Company (“the Realty Company”) by

the co-executors of the Estate by deed dated September 1, 1982 (“the Easement

Deed”).2   The real property underlying the easement was then distributed to the

Trust under the terms of the Last Will and Testament of William V. Ehrlich,

deceased.3 On December 5, 2013, William, Jr., as trustee, distributed the last

remaining parcel of real property in the Trust to Jeffrey free and clear of trust.4



1
  I use first names here to avoid repetition and confusion, and intend no disrespect
by this practice.
2
  The co-executors of the Estate were William, Jr. and his father’s widow, Audrey
Ehrlich, who was Jeffrey’s mother. Shortly before William V. Ehrlich’s death, he
granted the Realty Company an option to purchase two parcels of land and an
easement for $25,000.         Petition for Declaratory Judgment and Specific
Performance (“Petition”), Exhibit B. Both proposed parcels lacked street frontage
and it appears from the rough sketch attached to the recorded option that the two
parcels were to be carved out of the northern portion of Tax Map Lot Number 31
behind a two-story building that housed the Rehoboth Pharmacy in 1981. The
Realty Company exercised its option, and the deed dated September 1, 1982
describes Parcel No. 1 as containing approximately 1,630 square feet and Parcel
No. 2 as containing approximately 84 square feet. A 2013 survey shows Parcel
No. 2 at the end of the alley between the former Rehoboth Pharmacy building and
Parcel No. 1, which is improved by a small one-story masonry building. Petition,
Exhibit J. This survey also depicts the alley as running along the side and rear of
the former Rehoboth Pharmacy building. Id. When the option was granted in
1981, William, Jr. was president of the Realty Company and his father was its
secretary. Upon the death of William V. Ehrlich, William, Jr. inherited his father’s
shares in the Realty Company. See Respondents’ Motion to Dismiss Pursuant to
Chancery Court Rule 12(b)(2) and (6) in lieu of an Answer (“Motion to Dismiss”),
Exhibit A.
3
  Motion to Dismiss, Exhibit A.
4
  Petition, Exhibit M.
                                       Page 2 of 14
      According to the Petition, the Trust had been funded with two parcels of

commercial property along Rehoboth Avenue in the Town of Rehoboth Beach,

Delaware. These commercial properties generated revenue and Aubrey Ehrlich,

the widow of William V. Ehrlich and a co-trustee of the Trust, was the beneficiary

of the trust income. In 2006, Mrs. Ehrlich became incapacitated and William, Jr.

thereafter served as the sole trustee of the Trust. In 2009, Mrs. Ehrlich’s daughter

and court-appointed guardian filed a petition to compel William, Jr., in his capacity

of the sole trustee, to disgorge accumulated income to the guardian of the income

beneficiary. The litigation settled after Mrs. Ehrlich’s death in 2011, and the

parties, including Jeffrey, executed a mutual release and settlement agreement on

April 16, 2011.5

      Thereafter, on June 2, 2011, William, Jr., in his capacity as trustee, conveyed

one parcel, consisting of Tax Map Lot Number 33 and part of Tax Map Lot

Number 35, (“117 Rehoboth Avenue”) to Jeffrey free of trust.6 William, Jr., in his

capacity as trustee, did not file a trust accounting with this Court or obtain a title

search prior to transferring 117 Rehoboth Avenue to Jeffrey. 7 Instead, Jeffrey


5
  Petition, Exhibits E & F. According to the Petition, Jeffrey was anxious to
resolve the litigation because under the terms of the Trust, upon Mrs. Ehrlich’s
death, provided Jeffrey was over 21 years of age, Jeffrey was entitled to receive the
commercial property outright and free of trust. Motion to Dismiss, Exhibit A.
6
  Petition, Exhibit G.
7
  Jeffrey subsequently conveyed 117 Rehoboth Avenue to Vinn, LLC. Petition,
Exhibit I.
                                      Page 3 of 14
agreed to execute a “Waiver of Account, Receipt, Release and Indemnification

Agreement,” in which he waived, among other rights, his right to an account, and

agreed to refund any property erroneously distributed to him by the Trust and to

indemnify William, Jr. for all actions taken with respect to his administration of the

Trust.8

      On December 5, 2013, William, Jr., in his capacity as trustee, conveyed the

remaining parcel, Tax Map Lot Number 31 (“107 Rehoboth Avenue”) to Jeffrey

free of trust. As recited in the deed, 107 Rehoboth Avenue is subject to a perpetual

right of way for ingress and egress over an alley adjacent to and behind the two-

story building located on Tax Map Lot Number 31, which building formerly was

known as the Rehoboth Pharmacy.9            Prior to making this final distribution,

William, Jr., in his capacity as trustee, commissioned a survey of 107 Rehoboth




8
  Petition, Exhibit H.
9
   117 Rehoboth Avenue is improved by a large one-story building that faces
Rehoboth Avenue. 107 Rehoboth Avenue is improved by a two-story building that
faces Rehoboth Avenue and an alley that separates this building from the building
located on 117 Rehoboth Avenue. The alley turns and runs behind the two-story
building until it terminates at the side of a large one-story building owned by the
Realty Company. This building was formerly occupied by a MacDonald’s
restaurant. It faces Rehoboth Avenue and First Street, with an entrance on
Rehoboth Avenue and a back door onto the alley. Behind 107 Rehoboth Avenue
is the Realty Company’s property. It is improved by a one-story masonry building
sandwiched between the former MacDonald’s building and the building on 117
Rehoboth Avenue. The only vehicular access to or from this property owned by
the Realty Company is through the alley. Petition, Exhibit J.
                                      Page 4 of 14
Avenue so that a proper deed could be drafted.10 Upon reviewing the 2013 survey

William, Jr. discovered that the boundary line between 117 Rehoboth Avenue and

107 Rehoboth Avenue did not run along the side of the building on 117 Rehoboth,

but actually ran through the alley. According to the 2013 survey, a portion of the

alley (a 2.3 by 68.12 foot strip) lies on the 117 Rehoboth Avenue property.

William, Jr. asked Jeffrey to execute a confirmatory easement in order to clarify

the Realty Company’s easement on 117 Rehoboth Avenue and to provide notice to

subsequent buyers.         No confirmatory easement was ever executed despite

numerous attempts by the parties’ attorneys to address this issue. According to the

Petition, William, Jr., in his capacity as trustee, made the final distribution of the

Trust on December 5, 2013, conveying 107 Rehoboth Avenue to Jeffrey free and

clear of trust with the belief and understanding that Jeffrey would address the

easement issue after the property was distributed to him. However, Jeffrey refused

to engage in any discussions.

           William, Jr. is now seeking: (1) a declaration that Jeffrey’s real property

(117 Rehoboth Avenue) remains subject to the easement; (2) the return of 117

Rehoboth Avenue to the Trust so that William, Jr., in his capacity as trustee, can

distribute a corrected deed for that parcel reflecting the easement; (3) an order

requiring Jeffrey to fully indemnify William, as trustee, in connection with this


10
     Id.
                                        Page 5 of 14
action; (4) enforcement of an alleged settlement agreement between the parties

requiring Jeffrey to execute a confirmatory easement; and (5) an award of

attorney’s fees and costs.

         Jeffrey has moved to dismiss the petition under Court of Chancery Rules

12(b)(2) and 12(b)(6), arguing that: (1) the trustee is bringing suit against the sole

beneficiary of the Trust for the purpose of vindicating his own personal property

right; (2) the Trust ceased to exist after December 5, 2013; and (3) even if the Trust

still exists, “the idea of a trustee suing the sole beneficiary of a trust to regain trust

property that the trustee himself distributed, is such a clear violation of the

trustee’s fiduciary duty as to render the suit unsustainable.”11            In response,

William, Jr. contends that the Trust continues to hold an asset, a chose in action,

i.e., this claim against Respondents. William, Jr. also accuses Jeffrey of unclean

hands, claiming that Jeffrey reneged upon a previously-acknowledged obligation to

correct the deed, which should preclude dismissal of this action.

         After reviewing the record, I have concluded that the Trust lacks standing to

enforce the claims asserted in this petition. In order to have standing, a petitioner

must have:

         (1) suffered an injury in fact – an invasion of a legally protected interest
         which is (a) concrete and particularized and (b) actual or imminent, not
         conjectural or hypothetical; (2) there must be a casual connection between
         the injury and the conduct complained of – the injury has to be fairly

11
     Motion to Dismiss at ¶¶ 6-8.
                                        Page 6 of 14
      traceable to the challenged action of the [respondent] and not the result of
      the independent action of some third party not before the court; and (3) it
      must be likely, as opposed to merely speculative, that the injury will be
      redressed by a favorable decision.12

The Trust has not suffered an injury in fact. Instead, it is the Realty Company, not

the Trust, who has suffered an injury in fact. The Realty Company has a legally

protected interest in a recorded easement over an alley located on 107 Rehoboth

Avenue. Although the Easement Deed provided metes and bounds descriptions

with starting points on the tax map lot lines for the Realty Company’s two new

parcels, it failed to provide a similar description or any dimensions for the Realty

Company’s easement over the alley.13         According to the Petition, it was the

understanding of William V. Ehrlich, the Estate, and the Realty Company in 1981

and 1982 that the side of the alley ran along the boundary line between 117

Rehoboth Avenue and 107 Rehoboth Avenue.            The 2013 survey subsequently

revealed that that the existing building on 117 Rehoboth Avenue does not extend to

the boundary line between 117 Rehoboth Avenue and 107 Rehoboth Avenue – the



12
   Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26, 38 (Del. Ch. 2012)
(quoting Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d
1103, 1110 (Del. 2003)).
13
   After describing the two new parcels, the Easement Deed recites the following:
       TOGETHER with a right of way in perpetuity to Buyer, its Successors and
Assigns, for pedestrian and vehicular ingress and egress to the structure on Parcels
1 and 2 herein from Rehoboth Avenue over, upon and across the aforesaid alley
adjacent to the Rehoboth Pharmacy and over, upon and across the land behind the
Rehoboth Pharmacy, but it is understood that the Fee Simple Title to the land
                                     Page 7 of 14
building ends slightly more than two feet short of the boundary line. As a result, a

strip of the alley (2.3 by 68.12 foot) between the two buildings is owned by 117

Rehoboth Avenue. This creates a cloud on the Realty Company’s title to the

easement.14 The Realty Company’s injury is causally related to the Respondents’

continuing refusal to execute a confirmatory easement deed for 117 Rehoboth

Avenue.

      The Trust is not the proper party to assert claims on behalf of the Realty

Company. Nevertheless, Court of Chancery Rule 17 provides that no action shall

be dismissed on the ground that it is not prosecuted in the name of the real party in

interest until a reasonable time has been allowed for the substitution of such

party.15 Therefore, I recommend that the Court allow Petitioner 90 days from the

date this report becomes final within which to comply with Rule 17 as to Counts I

(declaratory judgment) and IV (enforcement of settlement agreement), and allow

Respondents to renew their motion to dismiss at the expiration of 90 days if there

has been no compliance. I also recommend that the Court dismiss Counts II

(Breach of Contract – Specific Performance) and III (Indemnification) for failure


covered by the right of way will remain in Seller, his Heirs and Assigns, subject to
this right of way.” Petition, Exhibit C.
14
   A 2.3 foot wide strip of the building owned by the Realty Company on Parcel
No. 1 also lies on 117 Rehoboth Avenue according to the 2013 survey, which
creates a cloud on the Realty Company’s title to that parcel. Because of the way
the Easement Deed was drafted, the potential clouds on the Realty Company’s title
were always present, but they were only revealed in 2013 by the survey.
                                     Page 8 of 14
to state a claim under Rule 12(b)(6) because the Realty Company is not a party to

the “Waiver of Account, Receipt, Release and Indemnification Agreement.”

      Both parties have filed exceptions to my draft report. After reviewing their

respective briefs, I am dismissing the parties’ exceptions and adopting my draft

report as my final report as modified herein.

      William, Jr., in his capacity as trustee of the Trust, has taken exception to

my recommendation that the Court dismiss Counts II and III of the complaint for

failure to state a claim under Court of Chancery Rule 12(b)(6) because the Realty

Company was not a party to the Waiver of Account, Receipt, Release and

Indemnification Agreement (“Release Agreement”). William, Jr. contends that the

Trust has standing to pursue Counts II and III because when the Trust distributed

117 Rehoboth Avenue to Jeffery,16 the easement over the alley should have been,

but was not, expressly excepted from the 2011 deed conveying this real estate. As

a result, according to William, Jr., Jeffery had received more property than he was

entitled to. Furthermore, under the Release Agreement, Jeffery had agreed “to

refund to [William, Jr.] any amount which may at any time be determined to have

been an erroneous distribution to him regardless of the cause of such erroneous




15
  See Court of Chancery Rule 17(a).
16
  I had misspelled Jeffery’s name throughout my draft report and now am using
the correct spelling in my final report.
                                      Page 9 of 14
distribution ….”17 In addition, Jeffery had agreed to indemnify William, Jr. against

any “causes of action, costs and expenses … which may arise from his

administration of the Trust, including … William’s distribution of the assets to

Jeff[ery] in accordance with this Agreement.”18

         The problem with William, Jr.’s argument is two-fold.         First, Jeffery

received the property to which he was entitled under the Trust: 117 Rehoboth

Avenue and 107 Rehoboth Avenue. After distributing 117 Rehoboth Avenue to

Jeffery, William, Jr. commissioned a survey of 107 Rehoboth Avenue and

discovered that a portion of the easement that had been granted to the Realty

Company in 1982 was located on 117 Rehoboth Avenue, creating a cloud on the

Realty Company’s title.        The Trust lacks standing to enforce the Release

Agreement because the Trust was not injured by this distribution, only the Realty

Company. The relief requested in Count II (“order Jeffery to return the 117

Rehoboth Property to the Trust so that William, as trustee, can distribute a

corrected deed for the property reflecting the easement”), if granted, would not

protect or benefit the Trust; instead, it would burden Trust property with an

easement before distributing that property free and clear of trust to Jeffery.

Second, the requested relief would benefit the Realty Company, as the only entity

having a legally protected interest in the recorded easement. The Realty Company


17
     Petition for Declaratory Judgment and Specific Performance, Ex. H, at ¶ 13.
                                       Page 10 of 14
was not a party to the Release Agreement. Moreover, on the limited record before

me, William, Jr. is the president of the Realty Company.19 Under the Release

Agreement, Jeffery agreed to indemnify William, Jr. “in his personal capacity and

as trustee,” but not in his capacity as president of the Realty Company. Therefore,

Counts II and III should be dismissed for failure to state a claim for relief.

         Although William, Jr. does not take exception to my draft report’s

recommendations that (a) the Realty Company should prosecute Count I (to

resolve the cloud on the title to the easement by declaratory judgment), and (b) the

Realty Company should prosecute Count IV (to enforce an alleged settlement

agreement), William, Jr. does takes exception to my conclusion that only the

Realty Company has standing to prosecute Count IV; he argues that the Trust has a

right to enforce the settlement agreement as well. Conversely, in their exception to

my draft report, Respondents Jeffery and Vinn, LLC argue that if Counts II and III

are dismissed for failure to state a claim because the Realty Company was not a

party to the Release Agreement, then the Court also should dismiss Count IV under

Rule 12(b)(6) because the Realty Company was not a party to the alleged

settlement agreement.

         Count IV is based on allegations that after the 2013 survey revealed the

property line discrepancy, William, Jr. had requested Jeffery “execute a


18
     Id. at ¶ 7.
                                      Page 11 of 14
confirmatory easement to make [the Realty Company’s] easement on the 117

Rehoboth Property clear and provide notice to subsequent buyers.”20 William, Jr.

further alleges that Jeffery, through his counsel, Neil F. Dignon, Esq., had agreed

to “remedy the mutual mistake by executing a confirmatory easement.”21 By

August 2013, however, Jeffery refused to honor the agreement; therefore, William,

Jr. is seeking specific enforcement of the settlement agreement and an order

compelling Jeffery to execute the confirmatory easement.

      Respondents argue that in March 2013, William’s attorney was representing

the Trust, not the Realty Company. Any settlement agreement, therefore, existed

between the Trust and Jeffery.        Respondents argue that because the Trust

terminated after the property was distributed and because the Realty Company is

not the appropriate entity to enforce the alleged agreement, Count IV should be

dismissed entirely.

      In my draft report, I concluded that the Realty Company is the real party in

interest in this case. If it can be demonstrated that the Realty Company was a

third-party beneficiary of the alleged settlement agreement,22 then the Realty


19
   Id. Ex. B.
20
   Id. at ¶ 31.
21
   Id. at ¶ 32 & Ex. K.
22
   See Comrie v. Enterasys Networks, Inc., 2004 WL 293337, at *3 (Del. Ch. Feb.
17, 2004) (“To qualify as a third party beneficiary of a contract, (i) the contracting
parties must have intended that the third party beneficiary benefit from the
contract, (ii) the benefit must have been intended as a gift or in satisfaction of a
                                     Page 12 of 14
Company would have standing to prosecute Count IV, which seeks specific

enforcement of the alleged settlement agreement.23 If, on the other hand, the Trust

were to prosecute Count IV, William, Jr.’s conflicting roles as trustee of the Trust

and president of the Realty Company would raise the specter of self-dealing and

breach of fiduciary duty.

      In my draft report, I recommended that the Court allow William, Jr. 90 days

to comply with Rule 17, which provides that no action shall be dismissed on the

ground that it is not prosecuted in the name of the real party in interest until a

reasonable time has been allowed for the substitution of such party. At this stage,

it would be premature to dismiss Count IV because the Realty Company may have

standing to prosecute it. Furthermore, since William, Jr. has not taken exception to

my recommendation that the Realty Company be allowed to substitute for the

Trust in prosecuting Count I, Count IV ultimately may be rendered moot if the

Realty Company obtains an order declaring that 117 Rehoboth Avenue remains

subject to the easement that was established approximately 34 years ago.

      Respondents also have taken exception to my failure to award them

attorneys’ fees. It is premature at this stage of the proceeding to consider an


pre-existing obligation to that person, and (iii) the intent to benefit the third party
must be a material part of the parties’ purpose in entering into the contract.”)
(quoting Madison Realty Partners 7, LLC v. AG ISA, LLC, 2001 WL 406268, at *5
(Del. Ch. Apr. 17, 2001)).
23
   See Astle v. Wenke, 297 A.2d 45, 47 (Del. 1972).
                                      Page 13 of 14
application for attorneys’ fees.   As a result, I am dismissing Respondents’

exceptions to my draft report and William, Jr.’s exceptions to my draft report. The

parties are referred to Rule 144 for the process of taking exception to a Master’s

Final Report.

                                              Respectfully,

                                              /s/ Kim E. Ayvazian

                                              Kim E. Ayvazian
                                              Master in Chancery

KEA/kekz




                                    Page 14 of 14
