United States District Court, S.D. New York
April 20, 2004.
CENTURY PACIFIC, INC., BECKER ENTERPRISES, INC., Plaintiffs; -against- HILTON HOTELS CORPORATION, DOUBLETREE CORPORATION, RED LION HOTELS, INC., Defendants
The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge
OPINION AND ORDER
Plaintiffs Century Pacific, Inc. and Becker Enterprises, Inc. filed
this action against defendants Hilton Hotels Corporation, Doubletree
Corporation, (collectively "Hilton/Doubletree"), and Red Lion, Inc.
claiming violations of the New York Franchise Sales Act and common law
fraud, negligent misrepresentation, and fraudulent omission. The claims
arise from the circumstances surrounding the Red Lion hotel franchise
agreements plaintiffs entered into with defendants in 2001. Plaintiffs
allege that they were victims of a "bait and switch" strategy through
which defendants induced plaintiffs to sign long term franchise
agreements by misrepresenting Hilton/Doubletree's plans to retain the Red Lion hotel chain. Plaintiffs claim that at the time
of their franchise negotiations with defendants, defendants had, in fact,
already decided to sell Red Lion to a smaller, less profitable
hotel chain. Plaintiffs further allege that defendants pursued the
franchise agreements with plaintiffs in order to increase
Hilton/Doubletree's profits in the planned resale of Red Lion. Defendants
move to dismiss on the grounds that the New York Franchise Sales Act does
not apply to the franchise agreements and that plaintiffs cannot state
viable claims for fraud, negligent misrepresentation, or fraudulent
omission. For the following reasons, defendants' motion to dismiss is
granted in part and denied in part.
Plaintiffs allege the following facts, all of which are deemed true for
the purposes of this motion.
A. The Parties
Plaintiffs Century Pacific, a Texas corporation, and Becker
Enterprises, a Nevada corporation, entered into franchise agreements with
defendants and converted hotels they operated in Colorado into Red Lion
franchises in early 2001. See Complaint ¶¶ 4-5, 22.
Defendant Hilton Hotels is a Delaware corporation with a principal
place of business in Beverly Hills, California. Id. ¶ 6.
Hilton develops, owns, manages, or franchises approximately 2,000 hotels and resort and
vacation properties around the world. The Hilton family of hotels
includes defendant Doubletree Hotels, a Delaware corporation and wholly
owned subsidiary of Hilton, as well as Embassy Suites Hotels, Hampton
Inn, Homewood Suites, and Hilton Garden Inn. Id. ¶¶ 7,
Defendant Red Lion is a Delaware corporation with a main office in
Spokane, Washington. Id. ¶ 8. Red Lion was acquired by
Doubletree in 1996 and by Hilton in 1999. Id. ¶¶ 15-16.
Hilton sold Red Lion to WestCoast Hospitality Corporation ("WestCoast")
in early 2002. Id. ¶ 36. Jurisdiction is premised on
diversity of citizenship. Id. ¶ 13.
B. The Red Lion Chain
Red Lion was founded in 1959 and is best known for its hotel operations
in the Northwest and Western U.S. Id. ¶ 15. For
Hilton/Doubletree, Red Lion represented a less well known brand
name and was acquired only as part of a larger acquisition by Hilton in
1999 of the Promus Hotel Corporation which included more valuable brands
like Embassy Suites and Hampton Inn. Id. ¶¶ 15-16.
Hilton/Doubletree initially intended to eliminate the Red Lion brand and
began closing down and converting Red Lion hotels after the acquisition.
Id. ¶¶ 17-18. Sometime in 2000, Hilton/Doubletree
secretly decided instead to actively market the Red Lion brand, build up its value, and then sell it
within a very short time frame. Id. ¶ 19. Publicly, however,
Hilton/Doubletree represented that they were working to reinvigorate and
expand the Red Lion brand; Hilton/Doubletree converted several of their
hotels to Red Lions and aggressively campaigned to sell Red Lion
franchises to other existing hotels. Id. ¶¶ 19-20, 28.
Their strategy was apparently to lock in as many long term
franchise agreements as possible in order to increase the purchase price
of Red Lion. Id. ¶ 21.
1. Franchise Negotiations and Agreements
Plaintiffs were among those existing hotel operators who were targeted
by defendants' marketing campaign. Between Fall of 2000 and February
2001, plaintiffs received Uniform Franchise Offering Circulars ("UFOCs")
and negotiated with defendants before entering into Red Lion franchise
agreements. Id. ¶ 22. Defendants persuaded plaintiffs to
become Red Lion franchisees by promoting the value of the "Hilton" name
and the benefits of being part of the Hilton family of hotels.
Id. ¶ 23. These benefits included: access to Hilton's world
wide reservation and group sales systems, cross selling
with sister brands, participation in Hilton's group purchasing program,
and future participation in the Hilton HHonors program. Id.
Officers and employees of Hilton/Doubletree and Red Lion, including Tom Murray and Manfred Gerling, repeatedly assured plaintiffs that
Red Lion was an important and growing part of the Hilton group.
Id. ¶ 24. These officers and employees specifically told
plaintiffs that Hilton/Doubletree had long term plans to own and
grow Red Lion. Murray represented to plaintiffs that he was given
"repeated assurances from his seniors that Red Lion is an important part
of the Hilton family." Id. Plaintiffs also received express
assurances from Gerling that "we told you before, [Red Lion] is not for
sale" and that "Red Lion would have 200 franchises within five years."
Id. None of defendants' sales and marketing materials, oral
statements, or correspondence conveyed to plaintiffs that
Hilton/Doubletree had a current intent or desire to sell the Red Lion
brand. Id. ¶ 25. Instead, those statements and materials all
indicated that the Hilton connection was the most important attraction to
prospective franchisees. Id. ¶ 31.
Plaintiffs relied on those oral and written statements and entered into
franchise agreements with defendants on the basis of Hilton/Doubletree's
representations as to their intent to keep and grow Red Lion and the
benefits Red Lion franchisees would reap as members of the Hilton family.
Id. ¶¶ 27,32-33.
Plaintiff Becker Enterprises executed a franchise agreement with Red
Lion on January 26, 2001 and plaintiff Century Pacific executed an
agreement on February 13, 2001. Id. ¶ 22. To meet the terms of those agreements and become Red Lion franchisees,
plaintiffs spent considerable time and money on converting their existing
hotels into Red Lion hotels and on associated renovations, employee
training, and advertising. Id. ¶ 29. Plaintiffs also agreed
to pay substantial royalty fees to become part of the Hilton family.
Id. ¶ 30. Plaintiffs believed these expenses would be offset
by the increased business they would receive as Hilton affiliated
hotels. Id. ¶¶ 33, 37.
2. Sale of Red Lion
Plaintiffs first became aware of Hilton/Doubletree's plans to sell Red
Lion on October 19, 2001, when Hilton and WestCoast issued a press
release announcing an intended sale to WestCoast. Id. ¶ 35.
WestCoast acquired Red Lion on or about January 2, 2002 for approximately
$50 million. Id. ¶ 36.
WestCoast is a small, regional hotel chain with less than ten hotels in
five states. Id. ¶ 38. WestCoast does not offer the kind of
benefits or resources that Hilton offered to Red Lion franchisees.
Id. WestCoast's lack of name brand recognition and franchisee
benefits has negatively affected plaintiffs' business. Id.
Plaintiffs would not have signed franchise agreements with defendants had
they known that Red Lion would become affiliated with WestCoast instead
of Hilton. Id. Contrary to their statements and other representations to
plaintiffs, defendants knew at the time they were negotiating and
executing the franchise agreements that Hilton/Doubletree did not intend
to retain the Red Lion brand. Id. ¶¶ 27,39. Plaintiffs
relied to their detriment on defendants' misrepresentations and failure
to disclose their intent to sell Red Lion. Id. ¶¶
40-41. Since the sale of Red Lion to WestCoast, plaintiffs have been and
continue to be harmed by decreased bookings, loss of walk ins and
regular clientele, and an overall lower value of their franchise hotels
because of the brand and name change. Id.
II. LEGAL STANDARD
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion
to dismiss should be granted only if `"it appears beyond doubt that the
plaintiff[s] can prove no set of facts in support of [their] claim[s]
which would entitle [them] to relief."' Weixel v. Board of Educ. of
New York, 287 F.3d 138, 145 (2d Cir. 2002) (quoting Conley v.
Gibson, 355 U.S. 41,45-46 (1957)). The task of the court in ruling
on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of
the complaint, not to assay the weight of the evidence which might be
offered in support thereof." Levitt v. Bear Stearns & Co.,
Inc., 340 F.3d 94, 101 (2d Cir. 2003) (quotation marks and citations
omitted). When deciding a motion to dismiss, courts must accept all
factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor.
See Chambers v. Time Warner Inc., 282 F.3d 147, 152 (2d Cir.
A. Claims Under the New York Franchise Sales Act
Plaintiffs bring their first and second causes of action under the New
York Franchise Sales Act, N.Y. Gen. Bus. Law § 680 et seq
("the Act"). First, plaintiffs claim that defendants violated
§ 683(2)(n) of the Act which requires that the offeror of a franchise
provide prospective franchisees an offering prospectus that includes: "A
statement of any past or present practice or of any intent of the
franchisor to sell, assign, or discount to a third party any note,
contract, or other obligation of the franchisee or subfranchisor in whole
or in part." N.Y. Gen. Bus. Law § 683(2)(n) (2004). Plaintiffs argue
that defendants violated this provision by failing to include, in the
UFOC they issued to plaintiffs, a statement of Hilton/Doubletree's
present intent to sell the Red Lion franchise. See Complaint
¶ 47. Second, plaintiffs allege that defendants' failure to
disclose a present intent to sell Red Lion also violated the antifraud
section of the Act which deems it unlawful for a person "in connection
with the offer, sale, or purchase of any franchise, to directly or
indirectly . . . (b) [m]ake any untrue statement of a material fact or
omit to state a material fact. . . ." N.Y. Gen. Bus. Law §
687(2)(b) (2004). Plaintiffs invoke the Act on the basis of the choice of law provision
in their franchise agreements which specifies New York law as controlling
in any contract, tort, or other dispute between the parties. See
Franchise License Agreement, Red Lion Inn & Suites Pagosa Springs
("Franchise Agreement") ¶ 16(b) (attached as Exhibit 1 to the
Affirmation of Tom McKeirnan, Vice President and General Counsel for
WestCoast (as parent company of Red Lion), in Support of Defendants'
Motion to Dismiss).*fn1 The choice of law provision reads as follows:
We each agree that the State of New York has a deep
and well developed history of business decisional
law. For this reason, we each agree that except to
the extent governed by the United States Trademark
Act of 1946 (Lanham Act; 15 U.S.C. ¶ 1050
et seq.), as amended, this Agreement, all
relations between us, and any and all disputes
between us, whether sounding in contract, tort, or
otherwise, are to be exclusively construed in
accordance with and/or governed by (as applicable)
the laws of the State of New York without recourse
to New York (or any other) choice of law conflicts
of law principles. If, however, any provision of
this Agreement would not be enforceable under the
laws of New York, and if the Hotel is located
outside of New York and the provision would be
enforceable under the laws of the state in which
the Hotel is located, then the provision in
question (and only that provision) will be interpreted and construed under the laws of
that state. Nothing in this section is intended to
invoke the application of any franchise, business
opportunity, antitrust, "implied covenant," unfair
competition, fiduciary or any other doctrine of law
of the State of New York or any other state which
would not otherwise apply absent this Paragraph
Franchise Agreement ¶ 16(b). The same section of the agreements
also includes a New York forum selection provision. See id,
Defendants argue that notwithstanding the New York choice of law
provision, plaintiffs cannot invoke the Act because it regulates only
franchise offers and sales made in New York or franchises located in New
York. Under the Act, "[a]n offer or sale of a franchise is made in this
state when an offer to sell is made in this state, or an offer to buy is
accepted in this state, or, if the franchisee is domiciled in this state,
the franchised business is or will be operated in this state." N.Y. Gen.
Bus. Law § 681(12)(a) (2004). Defendants further argue that the last
sentence of the choice of law provision in the franchise agreements
expressly "carves out" any New York franchise law that would not
otherwise apply to the transaction. This sentence provides: "Nothing in
this section is intended to invoke the application of any franchise,
business opportunity, antitrust, `implied covenant,' unfair competition,
fiduciary or any other doctrine of law of the State of New York or any
other state which would not otherwise apply absent this Paragraph 16b."
Franchise Agreement ¶ 16(b). Plaintiffs do not allege that the franchise offers or sales were
actually made in New York but respond that the New York choice of law
provision alone is sufficient to invoke the Act. Plaintiffs also argue
that the "carve out" clause of the choice of law provision should not bar
their claims because it is ambiguous and should be construed against
defendants or, alternatively, because it should be deemed void against
public policy for allowing defendants to circumvent the protections of
the chosen state law.
A choice of law provision may provide for extraterritorial application
of the New York Franchise Sales Act in certain cases. See, e.g.,
Schwartz v. Pillsbury, Inc., 969 F.2d 840, 847 (9th Cir. 1992);
Mon Shore Management, Inc. v. Family Media, Inc.,
584 F. Supp. 186, 193 (S.D.N.Y. 1984). The provision in plaintiffs' contract,
however, unambiguously bars extension of the Act to their franchises.
"Under New York law, a written contract is to be interpreted so as to
give effect to the intention of the parties as expressed in the
unequivocal language they have employed." Cruden v. Bank of New
York, 957 F.2d 961, 976 (2d Cir. 1992); see also Paine Webber
Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) ("In interpreting a
contract, `[w]ords and phrases are given their plain meaning.'"
(citations omitted)). Similarly, "[a] court may neither rewrite, under
the guise of interpretation, a term of the contract when the term is clear and
unambiguous, nor redraft a contract to accord with its instinct for the
dispensation of equity upon the facts of a given case." Cruden,
957 F.2d at 976 (citations omitted).
Accordingly, the carve out clause in plaintiffs' agreements, providing
that "[n]othing in this [choice of law] section is intended to invoke
the application of any franchise [law] . . . of the State of
New York . . . which would not otherwise apply . . .," Franchise
Agreement ¶ 16, must be read to preclude the application of New York
franchise regulations like the Franchise Sales Act that "[are]
applicable only to specific transactions solicited or accepted in New
York, or affecting New York." Mon Shore, 584 F. Supp.
This finding is also consistent with the cases plaintiffs cite in which
courts have held that the Act can reach non New York franchises
through a choice of law provision. In each of those cases, the court
applied the Act specifically because the choice of law language in the
franchise agreement provided that the franchise "shall be deemed to
have been made in New York." See Mon Shore, 584 F. Supp. at
193; Schwartz, 969 F.2d at 847; McGowan v. Pillsbury
Co., 723 F. Supp. 530, 536 (W.D. Wash. 1989). Plaintiffs' agreements
have no such clause and instead expressly qualify the scope of
New York law that will apply in any dispute. Plaintiffs' alternative argument, that the carve out provision should
be held void as against public policy, must also fail because it is based
on the mistaken assumption that the New York Franchise Sales Act was
intended to apply to and proscribe waiver clauses in any agreement that
invokes New York law. As discussed above, however, the Act "does not
apply to commerce that takes place `wholly outside' of New York," Mon
Shore, 584 F. Supp. at 190, unless the contract terms
express this intent by providing for a constructive offer and/or sale in
In sum, because the primary objective in interpreting a contract "is to
give effect to the intent of the parties as revealed by the language they
chose to use," Seiden Assocs., Inc. v. ANC Holdings, Inc.,
959 F.2d 425, 428 (2d Cir. 1992), the unambiguous carve out of New York
franchise law from the parties' choice of law provision must be honored
by dismissing plaintiffs' claims under the Act.
B. Common Law Fraud Claim
Plaintiffs' third cause of action asserts that defendants committed
common law fraud by knowingly making material misrepresentations and
false statements about Hilton/Doubletree's plans for Red Lion. Defendants
argue that the claim is not viable because plaintiffs cannot claim
reasonable reliance on defendants' oral statements about their plans for Red Lion.
Specifically, defendants contend that any oral statements to plaintiffs:
(1) were contradicted by express provisions in the franchise agreements
giving defendants the right to transfer Red Lion; (2) were canceled by
the integration clause of the agreements; and/or (3) amounted to non
actionable "puffing" or "trade talk." Plaintiffs respond that
because fraud lies in the specific misrepresentations of fact, their
claims that defendants misrepresented their present intent to retain Red
Lion survive challenges based on contract terms or the rule that
promissory statements are generally not actionable.
To recover for common law fraud in New York, plaintiffs must
demonstrate: (1) a misrepresentation of material fact made with knowledge
of falsity; (2) justifiable reliance on such misrepresentation; and (3)
resulting harm. See Lama Holding Co. v. Smith Barney Inc.,
88 N.Y.2d 413, 421 (1996). Plaintiffs claim that they decided to enter into
franchise agreements with defendants in reliance on, among other things,
oral assurances by officers and employees, including Tom Murray and
Manfred Gerling, that "[Red Lion] is not for sale" and that
Hilton/Doubletree had long term plans to grow Red Lion as a
Hilton subsidiary. Plaintiffs' ability to show reliance is precluded
neither by the contract terms defendants cite nor by the "puffing"
doctrine. First, the terms of the franchise agreement granting
defendants an express right to transfer Red Lion do not contradict or
supersede oral statements by defendants about their present intent to
retain Red Lion. Plaintiffs could have reasonably relied on defendants'
statements that Hilton/Doubletree had no existing plans to transfer Red
Lion while also agreeing to and appreciating defendants' right to
transfer Red Lion at any time.
Second, the merger or integration clause of paragraph 16(d) of
plaintiffs' franchise agreements does not bar admission of defendants'
previous oral statements in support of plaintiffs' fraud claims.*fn2
Under New York law, a general merger clause precludes neither an action
for fraud in the inducement nor parol evidence concerning fraudulent
representations. See Lee v. Goldstrom, 522 N.Y.S.2d 917, 918 (2d Dep't 1987). A court should only bar such
evidence where the merger clause contains a provision that specifically
contradicts a claimed oral representation. See Bibeault v. Advanced
Health Corp., No. 97 Civ. 6026, 2002 WL 24305, *3-4 (S.D.N.Y. Jan.
8, 2002) (citing Danann Realty Corp. v. Harris, 5 N.Y.2d 317,
320-321 (1959)). The only specific language in the otherwise boilerplate
general merger clause of plaintiffs' franchise agreements provides that
plaintiffs "agree that no claims, representations or warranties of
earnings, sales, profits, success or failure of the Hotel have been made
to you." Franchise Agreement ¶ 16(d). The subject of defendants'
alleged misrepresentations Hilton/Doubletree's present intent to
retain Red Lion is not enumerated in the merger clause.
Accordingly, the clause does not bar admission of parol evidence to
support plaintiffs' claims.
Finally, defendants' representations about their present intent to
retain Red Lion cannot be summarily dismissed as nonactionable "puffing."
New York law recognizes that:
[w]hile [m]ere promissory statements as to what
will be done in the future are not
actionable, . . . it is settled that, if a
promise was actually made with a preconceived and
undisclosed intention of not performing it, it
constitutes a misrepresentation of material
existing fact upon which an action for
recision [based on fraudulent inducement] may be
predicated. Stewart v. Jackson & Nash, 976 F.2d 86, 89 (2d Cir.
1992) (quoting Sabo v. Delman, 3 N.Y.2d 155, 160 (1957)
(emphasis added)). See also Cohen v. Koenig, 25 F.3d 1168, 1172
(2d Cir. 1994) ("The failure to fulfill a promise to perform future acts
is not ground for a fraud action unless there existed an intent not
to perform at the time the promise was made." (emphasis added)).
Plaintiffs have adequately alleged that defendants knew, at the time
they were negotiating with plaintiffs, that Hilton/Doubletree was
actually planning to sell the subsidiary shortly after closing franchise
deals with plaintiffs and others. Accordingly, because plaintiffs may be
able to show that defendants' oral promises about their long term
plans to grow Red Lion were made with an intent not to perform, their
common law fraud claim may proceed.
C. Negligent Misrepresentation Claim
Plaintiffs' fourth cause of action alleges that defendants negligently
or recklessly disregarded the falsity of their oral and written
statements about Hilton/Doubletree's intent to continue to hold and
promote Red Lion and thereby breached a duty not to make
misrepresentations to plaintiffs. Defendants argue for dismissal of the
claim on the ground that there was no special relationship between the
parties and therefore no duty owed by defendants to plaintiffs.
Defendants further contend that the alleged misrepresentations are not
actionable because they were promissory rather than factual in nature. Plaintiffs respond
that a special relationship and corresponding duty existed because of
defendants' superior knowledge and awareness that plaintiffs would rely
on their misrepresentations. Plaintiffs also reiterate their claim that
defendants' misrepresentations were factual because they involved
defendants' present intent.
Under New York law, a claim of negligent misrepresentation must satisfy
the following five elements:
(1) the defendant had a duty, as a result of a
special relationship, to give correct information;
(2) the defendant made a false representation that
he or she should have known was incorrect; (3) the
information supplied in the representation was
known by the defendant to be desired by the
plaintiff for a serious purpose; (4) the plaintiff
intended to rely and act upon it; and (5) the
plaintiff reasonably relied on it to his or her
Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8
20 (2d Cir. 2000). Defendants contest plaintiffs' ability to meet the
first and fifth elements.
First, in order to determine the existence of a special relationship
and duty in the context of a negligent misrepresentation claim, the
Second Circuit has held that New York law requires a fact finder to
consider the following three factors: "whether the person making the
representation held or appeared to hold unique or special expertise;
whether a special relationship of trust or confidence existed between the
parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that
purpose." Suez Equity Investors, L.P. v. Toronto Dominion
Bank, 250 F.3d 87, 103 (2d Cir. 2001) (quotation marks and citation
omitted). In Kimmell v. Schaefer, 89 N.Y.2d 257 (1996), the New
York Court of Appeals explained that "[i]n the commercial context, a duty
to speak with care exists when the relationship of the parties, arising
out of contract or otherwise, [is] such that in morals and good
conscience the one has the right to rely upon the other for information."
89 N.Y.2d at 263 (quotation marks and citation omitted).
In general, a simple commercial relationship, such as that between a
buyer and seller or franchisor and franchisee, does not constitute the
kind of "special relationship" necessary to support a negligent
misrepresentation claim. See Dimon, Inc. v. Folium, Inc.,
48 F. Supp.2d 359,373 (S.D.N.Y. 1999). A commercial relationship may become a
special relationship, however, where "the parties . . . enjoy a
relationship of trust and reliance `closer . . . than that of the
ordinary buyer and seller.'" Polycast Tech. Corp. v. Uniroyal,
Inc., No. 87 Civ. 3297, 1988 WL 96586, at *10 (S.D.N.Y. Aug. 31,
1988) (citations omitted). Courts have found a special relationship and
duty, for example, where defendants sought to induce plaintiffs into a
business transaction by making certain statements or providing specific
information with the intent that plaintiffs rely on those statements or information. See Kimmell, 89 N.Y.2d at
264-65; Suez Equity Investors, 250 F.3d at 103; New York
Islanders Hockey Club, LLP v. Comerica Bank Texas,
71 F. Supp.2d 108, 119 (E.D.N.Y. 1999).
Plaintiffs here have adequately pled a similar fact pattern; their
allegations that defendants made numerous false statements about their
plans for Red Lion with the specific intent of earning plaintiffs' trust
and reliance require a denial of defendants' motion to dismiss this
claim. Although it is not clear that defendants' superior knowledge about
their own business plans constitutes the kind of unique expertise
enumerated in the Suez Equity Investors test, the absence of
this factor is not fatal at this stage. Courts in this circuit have held
that a determination of whether a special relationship exists is highly
fact specific and "generally not susceptible to resolution at the
pleadings stage." Nasik Breeding & Research Farm Ltd. v. Merck
&Co., 165 F. Supp.2d 514, 536 (S.D.N.Y. 2001).
Defendants' second argument, that plaintiffs cannot state a claim for
negligent misrepresentation because they cannot meet the fifth element of
showing that they "reasonably relied" on defendants' statements, also
falls short. As previously discussed in the fraud analysis, plaintiffs'
allegations of misrepresentation are based not on defendants' failure to
fulfill promises about future conduct but on defendants' intent at the
time they made the statements about Hilton/Doubletree's plans to retain Red Lion. Accordingly,
because plaintiffs have pled that defendants made those promises with a
present intent not to perform them, their claim of negligent
misrepresentation survives along with their fraud claim. See Murray
v. Xerox Corp., 811 F.2d 118, 121-22 (2d Cir. 1987).
D. Fraudulent Omission Claim
Finally, plaintiffs' fifth cause of action alleges that defendants had
a duty to disclose to plaintiffs their present plans to sell the Red Lion
subsidiary but instead withheld the information with the intent to
defraud plaintiffs. Plaintiffs claim that they relied on and were harmed
by this fraudulent omission. Defendants contend that this omission is
nonactionable because the law imposes no duty on a franchisor to disclose
to a franchisee the possibility or probability of such a sale. Plaintiffs
argue that defendants' duty to disclose arose both from its superior
knowledge and from the disclosure provisions of the New York Franchise
New York law recognizes fraudulent omission as a permutation of the
common law action for fraud. See, e.g., Callahan v. Callahan,
514 N.Y.S.2d 819, 821 (3d Dep't 1987) ("nondisclosure is tantamount to an
affirmative representation where a party to a transaction is duty
bound to disclose certain pertinent information."). An omission is actionable only in the
context of a duty to disclose, "but a fiduciary duty is not the
sine qua non of fraudulent omissions." United States v. Autuori,
212 F.3d 105, 119 (2d Cir. 2000). The Second Circuit has held that
New York recognizes a duty by a party to a business
transaction to speak in three situations: first,
where the party has made a partial or ambiguous
statement, on the theory that once a party has
undertaken to mention a relevant fact to the other
party it cannot give only half of the truth;
second, when the parties stand in a fiduciary or
confidential relationship with each other; and
third, where one party possesses superior
knowledge, not readily available to the other, and
knows that the other is acting on the basis of
Brass v. American Film Technologies, Inc., 987 F.2d 142
150 (2d Cir. 1993) (citations and internal quotations omitted). The court
in Brass also noted "a tendency in New York to apply the rule of
`superior knowledge' in an array of contexts in which silence would at
one time have escaped criticism." Id. at 151.
Plaintiffs' claim of fraudulent omission is actionable under either the
first or third contexts described by Brass as requiring
disclosure. Assuming plaintiffs' allegations are true, plaintiffs
specifically questioned defendants during negotiations about
Hilton/Doubletree's plans to hold or sell Red Lion, and defendants
responded not only with enthusiastic guarantees of their commitment to
the Red Lion brand but with specific assurances that they were not
planning to sell. These statements thus triggered, under the first
Brass scenario, a duty to disclose related or corrective
information. Similarly, the third Brass scenario is relevant if,
as alleged, defendants actually had plans to put Red Lion on the market
after sealing the franchise deals and knew that plaintiffs' decision to
enter into the agreements was based, at least in part, on an
understanding that defendants had no present plans to divest or sell Red
Lion. Plaintiffs have thus stated a viable claim of fraudulent omission
under New York common law.
Defendants cite a series of cases involving the sale by General Foods
of its Burger Chef line of franchises in support of the rule that a
franchisor has no duty to disclose a pending sale to a franchisee. These
cases are unavailing, however, because they involve plaintiffs who were
existing franchisees claiming that they should have been made privy to
the franchisor's business plans. See, e.g., Vaughn v. General Foods
Corporation, 797 F.2d 1403, 1414 (7th Cir. 1986) (describing a
fourteen year arms length relationship between plaintiff
franchisee and defendant franchisor).
In sum, after considering all of defendants' arguments in support of
their motion to dismiss, their motion is granted as to plaintiffs' claims
under the New York Franchise Sales Act and denied as to plaintiffs'
claims of common law fraud, negligent misrepresentation, and fraudulent omission.
The Clerk of the Court is directed to close this motion [docket #8]. A
conference is scheduled for April 27, 2004 at 4:30.