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LAGUARDIA ASSOCIATES v. HOLIDAY HOSPITALITY

April 6, 2000

LAGUARDIA ASSOCIATES, AND FIELD HOTEL ASSOCIATES, PLAINTIFFS,
V.
HOLIDAY HOSPITALITY FRANCHISING, INC. DEFENDANT.



The opinion of the court was delivered by: Weinstein, Senior District Judge.

  FINDINGS OF FACT, CONCLUSIONS OF LAW, MEMORANDUM, ORDER and JUDGMENT.

TABLE OF CONTENTS

I INTRODUCTION ................................................................. 121 II FACTS ........................................................................ 122 III FRANCHISE ARRANGEMENTS ....................................................... 123 IV LAW .......................................................................... 127 A. Choice of Law ............................................................. 127 B. Injunction as an Equitable Remedy ......................................... 128
1. Success on the Merits .................................................. 128 a. Contract Modification ............................................... 128 b. Waiver .............................................................. 129 c. Equitable Considerations Limiting Power to Terminate and to Compel Strict Compliance with Fee Schedules ............................... 130 2. Irreparable Harm ....................................................... 130 V RELIEF ....................................................................... 131 VI CONCLUSION ................................................................... 131

I INTRODUCTION

Plaintiffs, LaGuardia Associates ("LGA") and Field Hotel Associates ("FHA"), seek a permanent injunction against defendant Holiday Hospitality Franchising, Inc. ("Holiday") to forestall termination of two franchise agreements ("Agreements") between the parties. Relief is granted in part, for a limited duration. Defendant, as a matter of equity, may not now terminate the franchises, jeopardizing the operations of major hotels at New York's airports and putting at risk the jobs of over 400 employees.

II FACTS

Plaintiffs are New York limited partnerships. They own and operate full service hotels ("Hotels") in the vicinity of the major New York City airports. LGA owns and operates the Crown Plaza Hotel at the LaGuardia Airport; FHA owns and operates the Holiday Inn Hotel at John F. Kennedy International Airport. Together, the hotels employ over 400 people in Queens County, New York.

Defendant is a Delaware corporation with its principal place of business in Atlanta, Georgia. It is a national franchisor which enters into licensing agreements with independently owned hotels throughout the world permitting those hotels to operate under the names "Holiday Inn" and "Crown Plaza."

In December 1990, plaintiffs and Holiday entered into two franchise agreements. Holiday granted plaintiffs authority to use Holiday's service marks, computerized reservation network ("Holidex"), and marketing programs. The Agreements were for a twenty year period, terminating in December 2010.

Pursuant to the terms of the Agreements, fees due Holiday for the franchises were to be calculated on a monthly basis, to be paid "by the 15th day of the following month." Agreements ¶ 6. Plaintiffs contend that this requirement was modified either orally or through a course of conduct, granting them an additional "60-day grace period" in which to pay Holiday.

The Agreements provide that Holiday may terminate the franchise relationships in case of default in payments under a complex notice and time sequence as follows:

Termination by Notice From Licensor.

In accordance with notice from Licensor to Licensee, the License will terminate (without any further notice unless required by law), provided that (i) the notice is mailed at least 30 days (or longer, if required by law) in advance of the termination date, (ii) the notice reasonably identifies one or more breaches of the Licensee's obligations, and (iii) the breach(es) are not fully remedied within the time period specified in the notice. If during the then preceding 12 months Licensee shall have engaged in a violation of this Agreement for which a notice of termination was given and termination failed to take effect because the default was remedied, the period given to remedy defaults will, if and to the extent permitted by law, be 10 days instead of 30.

Agreements ¶ 14(b). In addition to this general termination provision, the Agreements incorporate a shorter period for discontinuing availability of the Holidex reservation system:

Licensor's Responsibilities. . . . During the License Term, so long as the Licensee is in full compliance with its material obligations hereunder, Licensor will furnish Holidex reservation service to the Hotel. . . . Licensor shall give Licensee at least three days' advance notice before it terminates Holidex services to the Hotel.

Agreements ¶ 8.

A choice of law clause in the Agreements states that disputes arising from the interpretation or validity of the Agreement are to "be governed by Tennessee law." Agreements ¶ 17. Modifications or waivers of contractual terms must be in writing; any forebearance of Holiday does not preclude it from requiring strict compliance in the future:

No change in this Agreement will be valid unless in writing signed by both parties. No failure to require strict performance or to exercise any right or remedy hereunder will preclude requiring strict performance or exercising any right or remedy in the future.

Agreements ¶ 17.

Despite the inflexible terms of the Agreements, the practice of Holiday was to allow a 60 day grace period beyond the payment schedule in the Agreements. In 1999, however, an executive at Holiday informed plaintiffs that "there is a new sheriff in town," referring to new management personnel at Holiday.

On April 14, 1999, Holiday notified plaintiffs that they were in arrears for approximately $587,600 for the LaGuardia hotel and approximately $308,500 for the JFK hotel. Holiday also stated that termination of the franchises would occur on May 24, 1999 if all payments due as of May 19, 1999 were not timely made.

Plaintiffs made partial payments, but failed to fully cure their deficiency by the May 24th deadline. Despite the outstanding balance, Holiday did not terminate the Agreements. On August 2, 1999, it notified plaintiffs that it had "administratively extended the established termination date of the Agreement[s] from May 24, 1999 to August 11, 1999, in order to allow time for consideration by [Holiday's] Compliance Committee."

Holiday granted additional extensions, both expressly and implicitly until February 18, 2000. During this time plaintiffs made periodic partial payments, though they remained in arrears under the strict 15 day payment provisions of the Agreements.

On February 18, 2000, Holiday notified plaintiffs that they would be removed from the Holidex reservation system six days later, February 24, 2000. It also declared the franchise Agreements would "be referred to the [Holiday] Compliance Committee for consideration of termination of the Agreement[s]" if all fees then due were not paid in full by March 6, 2000. In addition, Holiday stated that future payments due under the Agreement[s] must be made "strictly in accordance with the terms of the Agreement[s] and by the 15th of the following month, as required in the Agreement[s]." Holiday included within the tally of amounts then due the January fees which, pursuant to the practice of allowing a 60-day grace period, would not have been considered by the plaintiffs as due until mid-April.

On February 24, the Hotels were removed from the Holidex reservation system. On February 25, plaintiffs made partial payment of the overdue sums and the Hotels were reinstated to Holidex on condition that plaintiffs "would agree to pay the remaining outstanding financial defaults by March 10, 2000, comply with their payment obligations under the License Agreements and sign a Special Letter Agreement" by March 8.

Instead of signing the Letter Agreement, plaintiffs filed a complaint in state court on March 8 seeking a temporary restraining order (TRO) prohibiting Holiday from removing plaintiffs from ...


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