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Century Pacific, Inc. v. Hilton Hotels Corp.

October 17, 2007


The opinion of the court was delivered by: Kenneth M. Karas, District Judge


Plaintiffs Century Pacific, Inc. ("Century"), and Becker Enterprises, Inc. ("Becker"), are hotel operators that entered into agreements in early 2001 with Defendants Hilton Hotels Corp. ("Hilton"), Doubletree Corp. ("Doubletree"), and Red Lion Hotels, Inc. ("Red Lion"), to convert hotels owned by Plaintiffs in Colorado into Red Lion hotel franchises. The pending causes of action from Plaintiffs' First Amended Complaint are for: (1) common law fraud; (2) negligent misrepresentation; and (3) fraudulent misrepresentation. In addition, Plaintiffs have purported to state "Reply Counterclaims" asserting an additional cause of action against Red Lion alleging breach of the Franchise Agreement ("Agreement") and of the implied covenant of good faith and fair dealing. Defendants moved for summary judgment on all claims and to strike portions of the evidence submitted by Plaintiffs in opposition to summary judgment. For the reasons stated herein, Defendants' Motion to Strike Evidence is granted in part and denied in part and Defendants' Motion for Summary Judgment is granted in its entirety.

I. Background

A. Factual History

1. Red Lion's Pre-Franchise History

Defendant Doubletree purchased Defendant Red Lion in 1996. (Defs.' Statement Pursuant to Local Rule 56.1 ¶ 10 ("Defs.' 56.1"); Pls.' Resp. to Defs.' Statement Pursuant to Local Civil Rule 56.1 ¶ 10 ("Pls.' 56.1").) At the time, Red Lion was a fifty-six hotel chain, with most of its properties in the Pacific Northwest. (Defs.' 56.1 ¶ 11.) In 1997, Doubletree merged with Promus Hotel Corporation ("Promus"), which owned the Embassy Suites, Hampton Inn, and Homewood Suites hotel brands. (Id. ¶ 12; Pls.' 56.1 ¶ 12.) By the end of 1997, Promus had converted all but sixteen Red Lion hotels to the Doubletree hotel brand, and had no specific plans to grow Red Lion. (Defs.' 56.1 ¶¶ 13.)

Following management changes in early 1999, new CEO Norm Blake asked James R. Dina ("Dina"), chief operating officer for Red Lion, to develop a plan for the Red Lion brand. (Id. ¶ 15; Deposition of James R. Dina 29 ("Dina Dep.")*fn1 .) Dina responded with a proposal to "revitalize" the Red Lion brand, including by franchising the brand and creating a guest loyalty program dubbed the Red Lion Club. (Defs.' 56.1 ¶ 16.) In October 1999, Promus relaunched the Red Lion brand with a campaign entitled "We're back," that included a new advertising strategy and conversion of approximately "six or seven" hotels into the Red Lion brand. (Id. ¶ 16; Dina Dep. 86.)

2. Red Lion's Franchise Plan

Red Lion changed ownership again as part of a merger between Promus and Defendant Hilton that was announced in early September 1999 and consummated on November 30, 1999. (Defs.' 56.1 ¶¶ 17, 19; Pls.' 56.1 ¶ 17, 19.) Hilton's documents from the transaction show that, during this period, the company considered "discontinu[ing]" or "eliminat[ing]" the Red Lion brand as part of the merger. (Pls.' 56.1 ¶ 20; Affirmation of Douglas L. Friedman in Support of Plaintiffs' Opposition to Defendants' Motion for Summary Judgment ("Friedman Aff.") Exs. 50-61.) Dina, who initially remained chief operating officer of Red Lion for Hilton, left the company only about thirty days following the merger. (Defs.' 56.1 ¶¶ 20; Pls.' 56.1 ¶ 20; Dina Dep. 11-12.).

Hilton appointed Tom Murray ("Murray") to succeed Dina as the executive in charge of Red Lion. (Defs.' 56.1 ¶ 21; Pls.' 56.1 ¶ 21.) Dieter Huckestein ("Huckestein"), Hilton executive vice president and president of hotel operations, instructed Murray in early 2000 to make an assessment of the Red Lion line of business and to report back to Huckestein with a five-year plan. (Id.; Defs.' Notice of Motion Ex. 11 at 11, 13 ("Huckestein Dep.").) Murray reported his plan in June 2000, calling for an aggressive expansion of the Red Lion brand, and Hilton approved it and directed him to implement it. (Defs.' 56.1 ¶ 21, 26; Pls.' 56.1 ¶ 21, 26.) Among other things, the Murray plan called for Red Lion to develop its own guest loyalty plan, and so the chain continued to use the Red Lion Club and did not join "Hilton Honors," the company's larger guest loyalty program. (Defs.' 56.1 ¶ 24; Pls.' 56.1 ¶ 24.) This made Red Lion the only brand in the Hilton family of hotel chains that did not participate in the Hilton Honors program. (Huckestein Dep. 29.)

3. The Parties' Franchise Negotiations

Plaintiff Century began discussions with Red Lion in August 2000 to convert a Colorado Springs, Colorado, hotel property it had owned since 1990 into a Red Lion franchise. (Defs.' 56.1 ¶¶ 27-28; Pls.' 56.1 ¶¶ 27-28.) Century's president, Kenneth R. Riley ("Riley"), had been in the hotel business since the 1960s and had built, owned, and/or operated hotels in at least nine other cities prior to the Red Lion Franchise Agreement. (Defs.' 56.1 ¶¶ 2-3; Pls.' 56.1 ¶¶ 2-3; Friedman Aff. Ex. 12 at 7-17 ("Riley Dep.").) Riley was an experienced hotel franchisee, having owned properties in the Best Western and Travelodge franchise systems during the 1990s. (Defs.' 56.1 ¶ 4; Pls.' 56.1 ¶ 4.) Century was represented by counsel during the negotiations. (Defs.' 56.1 ¶ 29; Pls.' 56.1 ¶ 29.)

During the course of negotiations and before the Agreement had been signed, Riley and Al Teles, a Century manager, became concerned about a provision in the proposed agreement that would give Hilton a right to sell Red Lion. (Defs.' 56.1 ¶ 33-34; Pls.' 56.1 ¶ 33-34.) According to Century, Riley and Teles were given oral assurances by Red Lion's representatives that Hilton would not sell the Red Lion brand. (Pls.' 56.1 ¶¶ 32-35.) Not content merely to rest on these representations, in January 2001, Century negotiated a contract provision (the "Three-Year Window"), Paragraph 14(f), providing Century with termination rights on its franchise agreement at any time between the third and fifth anniversaries in the event that Hilton "no longer owns, manages, controls or franchises the Red Lion brand. . . ." (Defs.' 56.1 ¶¶ 35-36; Pls.' 56.1 ¶¶ 35-36.) Even with the addition of the Three-Year Window clause, however, Hilton expressly retained the right to sell Red Lion in the final Agreement. (Defs.' 56.1 ¶ 37; Pls.' 56.1 ¶ 37; Friedman Aff. Ex. 45 at 11). The Century Agreement with Red Lion was signed on April 20, 2001, although the Agreement was backdated to February 13, 2001, and the Century hotel opened for business as a Red Lion on June 25, 2001. (Defs.' 56.1 ¶ 38.)

Plaintiff Becker began negotiations in the fall of 2000 to convert a hotel it owned in Pagosa Springs, Colorado, into a Red Lion franchise. (Defs.' 56.1 ¶ 39; Pls.' 56.1 ¶ 39.) Becker's President, Donald Becker, was experienced in the business as a licensed contractor who had constructed approximately twenty-one hotels, including the construction and renovation of at least one Red Lion property. (Defs.' 56.1 ¶¶ 6-99; Pls.' 56.1 ¶¶ 6-9.) Though Donald Becker was aware of Hilton's right to sell Red Lion under the Agreement (Defs.' 56.1 ¶¶ 44; Pls.' 56.1 ¶ 44), Becker did not protest the right-to-sell provision, and did not negotiate for a Three-Year Window provision in its franchise agreement as had Century. The Becker franchise agreement was executed by its parties during March 2001. (Defs.' 56.1 ¶¶ 45; Pls.' 56.1 ¶ 45.)

4. Hilton's Sale of Red Lion

In March 2001, a Texas-based business consultant approached Hilton suggesting a deal between Red Lion and the Rotch Group, owner of a chain of "Red Lion" pubs in England. (Defs.' 56.1¶ 50; Pls.' 56.1 ¶ 50.) Hilton and Rotch executives met on March 14, 2001, and Hilton provided Rotch with information about Red Lion and certain Doubletree properties. (Defs.' 56.1¶¶ 50-51; Pls.' 56.1 ¶¶ 50-51.) Hilton asked Rotch to provide an estimated valuation for those assets before Hilton invested further resources in a possible transaction. (Id.) On May 7, 2001, Rotch responded with a $70 million estimated valuation. (Defs.' 56.1¶¶ 52; Pls.' 56.1 ¶¶ 52.) Because Hilton internally valued the same assets as worth more than $150 million, it terminated the discussion and had no further contact with Rotch. (Defs.' 56.1¶¶ 53; Pls.' 56.1 ¶¶ 53.)

Meanwhile, also in March 2001, Lehman Brothers ("Lehman") had approached Hilton and suggested that Hilton expand the Red Lion brand by purchasing WestCoast Hotels, a company based in Spokane, Washington, that owned a smaller chain of hotels. (Defs.' 56.1¶¶ 55; Pls.' 56.1 ¶¶ 55.) Hilton indicated to Lehman that it was not interested. (Defs.' 56.1¶¶ 57; Pls.' 56.1 ¶¶ 57.) Lehman next suggested to WestCoast that WestCoast buy Red Lion from Hilton, and, on June 7, 2001, Lehman first contacted Hilton regarding a possible sale of Red Lion. (Defs.' 56.1¶¶ 59-60.)

By this time, Plaintiffs had signed their franchise agreements. Neither Plaintiff, however, had yet reopened its hotel as a Red Lion because each was in the process of modification and renovation in anticipation of opening. (Pls.' 56.1 (additional facts) ¶¶ 33-34.) Hilton, meanwhile, was upgrading fire safety systems at all of the previously Promus-owned hotels, a project that was estimated to cost $24 million. (Defs.' 56.1 ¶ 63.) The Becker hotel opened for business as a Red Lion on June 22, 2001. (Id. ¶ 45.) The Century hotel opened for business as a Red Lion hotel on June 25, 2001. (Id. ¶ 38.)

Also on June 25, 2001, Hilton, Lehman, and WestCoast signed a confidentiality agreement governing exchange of information about the possible sale of the Red Lion chain. (Id. ¶ 60.) In August 2001, Hilton management investigated the tax consequences of selling Red Lion and determined that the sale would create substantial tax benefits of between $90 and 150 million. (Id. ¶ 65; Freidman Aff. Ex. 3 at 120 ("Bollenbach Dep.").)

After meeting in person for the first time on September 25, 2001, Hilton and WestCoast representatives negotiated their transaction from a starting proposal by WestCoast of $100 million for a package of properties owned and leased by Hilton. (Defs.' 56.1 ¶ 67.) WestCoast encountered financing difficulties, however, and so Hilton withdrew some of the properties in the deal, reducing the price to approximately $50 million. (Defs.' 56.1 ¶ 67.) The sale was completed on December 31, 2001. (Defs.' 56.1 ¶ 69.)

WestCoast assumed operation of the Red Lion chain on January 1, 2002, and took over Red Lion marketing at about the same time. (Defs.' 56.1 ¶ 72, 83.) Despite the change in ownership, Hilton's reservation service, Hilton Reservations Worldwide ("HRW"), continued to service reservations for Red Lion until February 2003, when WestCoast implemented a new reservation system and Red Lion reservations were transferred to it. (Defs.' 56.1 ¶¶ 72-73.)

Plaintiff Becker terminated its Agreement with Red Lion effective May 19, 2003. (Defs.' 56.1 ¶ 79.) Plaintiff Century did the same effective October 13, 2003. (Defs.' 56.1 ¶ 80.) On October 17, 2003, Plaintiffs filed this lawsuit under diversity jurisdiction.

B. Procedural History

Plaintiffs' Complaint states five causes of action. On April 21, 2004, the Honorable Shira J. Scheindlin, to whom this case was initially assigned, dismissed Plaintiffs' claims for two separate violations of the New York General Business Laws governing franchises. See Century Pac. v. Hilton Hotels Corp., No. 03-CV-8258, 2004 WL 868211 (S.D.N.Y. Apr. 21, 2004) [hereinafter Century Pac. I]. Plaintiffs thus have pending causes of action for: (1) common law fraud; (2) negligent misrepresentation; and (3) fraudulent omission.*fn2

On May 25, 2004, Defendants filed their Answer. As permitted by Federal Rule of Civil Procedure 13, the Answer asserted two counterclaims for breach of contract, one against each Plaintiff. On June 18, 2004, Plaintiffs replied to the counterclaims, as they were permitted to do under Federal Rule of Civil Procedure 7(a). In addition, they purported to state a "Counterclaim of Plaintiffs" against Red Lion for breach of contract.*fn3 This case was transferred to the undersigned on September 8, 2004. Defendants made a Motion to Strike Jury Demand on March 30, 2005, which this Court granted on May 10, 2006.

II. Motion to Strike Evidence

A. Standard of Review

Because "a decision on the motion to strike may affect [the movant's] ability to prevail on summary judgment," it is appropriate to consider the Motion to Strike prior to the Motion for Summary Judgment. Gucci Am., Inc. v. Ashley Reed Trading, Inc., No. 00-CV-6041, 2003 WL 22327162, at *2 (S.D.N.Y. Oct. 10, 2003). Federal Rule of Civil Procedure 56(e) requires that, in a summary judgment motion, "[s]supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein." Therefore, "[a] court may 'strike portions of an affidavit that are not based upon the affiant's personal knowledge, contain inadmissible hearsay or make generalized and conclusory statements.'" Rockport Co. v. Deer Stags, Inc., 65 F. Supp. 2d 189, 191 (S.D.N.Y. 1999) (quoting Hollander v. Am. Cyanamid Co., 172 F.3d 192, 198 (2d Cir. 1999)); see also Patterson v. County of Oneida, 375 F.3d 206, 219 (2d Cir. 2004) (holding that inadmissible statements in affidavits submitted in support of a summary judgment motion are incapable of raising material issues of fact). Defendants have moved to strike portions of several exhibits submitted by the Plaintiffs in response to Defendants' motion. The Court will consider each in turn.

B. Plaintiffs' Exhibit 3: Deposition of Stephen Bollenbach

1. Page 7

Defendants assert irrelevancy, and thus inadmissability under Federal Rules of Evidence 401 and 402, of the deposition testimony of Stephen Bollenbach ("Bollenbach") regarding Hilton's net income for 2001, (Bollenbach Dep. at 7). The standard for relevance of a given piece of evidence is broad. UnderRule 401, "'[r]elevant evidence' means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed. R. Civ. P. 401. As Plaintiffs concede, testimony concerning Hilton's net income is relevant only to the issue of damages. See Hamm v. Potamkin, No. 98-CV-7425, 1999 WL 249721, at *2 (S.D.N.Y. Apr. 28, 1999) ("Because a court may take a defendant's financial circumstances, wealth, or net worth into consideration when determining the exemplary damages to be awarded against that defendant, defendants' financial information is certainly relevant to plaintiffs' claims for punitive damages." (internal citations omitted)). Because damages are not the subject of the present summary judgment motion, however, this testimony is inadmissible here. Nevertheless, the fate of the summary judgment motion is unaffected by the inadmissibility of this information.

2. Pages 76-77

Bollenbach was asked during his deposition whether he agreed that Plaintiffs' interpretation of language in an e-mail message neither sent nor received by Bollenbach was "fair." (Bollenbach Dep. 76.) Bollenbach never agreed with Plaintiffs; however, he stated "I guess you can read it that way." (Id. 77.) Defendants seek to strike this testimony, arguing that Bollenbach lacked personal knowledge of the e-mail.

As Defendants argue, Bollenbach's testimony cannot be used to prove conclusively that Plaintiffs' interpretation of the e-mail was correct because he had no prior personal knowledge of the e-mail's content. Considering Bollenbach's position as Hilton's CEO, however, the testimony may be admitted as a statement of a party opponent under Federal Rule of Evidence 801. Admissions are not subject to the firsthand knowledge rule. See Fed. R. Evid. 801(d)(2) advisory committee note ("The freedom which admissions have enjoyed from . . . the restrictive influences of the opinion rule and the rule requiring firsthand knowledge . . . calls for generous treatment of this avenue to admissibility."); United States v. Southland Corp., 760 F.2d 1366, 1376 n.4 (2d Cir. 1985) (noting that although the Second Circuit had not decided the issue, the Third, Seventh, and Eighth Circuits have found that the firsthand knowledge rule does not apply to admissions admissible under Rule 801(d)(2)). This statement is admissible, however, solely to prove that Bollenbach made the statement "I guess you could read it that way," and not as evidence that the e-mail was actually "read that way" or was intended in a particular way by those who sent and/or received it. Thus, the motion to strike this testimony is denied, but again it does not alter the outcome of Defendants' summary judgment motion.

C. Plaintiffs' Exhibit 16: Deposition of Susan Storey

Defendants argue that portions of the deposition of Susan Storey (Friedman Aff. Ex. 16 ("Storey Dep.")), taken pursuant to Federal Rule of Civil Procedure 30(b)(6), should be excluded because they constitute hearsay and lack foundation. Specifically, Defendants seek to exclude testimony given by Susan Storey ("Storey") about a phone call taking place between Becker and a Red Lion executive. Plaintiffs counter that hearsay evidence is admissible at the summary judgment stage if an admissible version of the testimony could be submitted at trial. They contend that the deposition ("Becker Dep.")*fn4 and declaration of Donald Becker (Friedman Aff. Ex. 72 ("Becker Decl.")), provide documentary support to Storey's otherwise-hearsay testimony.

Hearsay evidence is admissible at the summary judgment stage if the contents would otherwise be admissible at trial. See Santos v. Murdock, 243 F.3d 681, 683 (2d Cir. 2001) ("Affidavits submitted to defeat summary judgment must be admissible themselves or must contain evidence that will be presented in an admissible form at trial.").At the summary judgment stage, however, inadmissible affidavits may in practice guide the court to documentary evidence in the record supporting their conclusions. See, e.g., Societe Generale Energie Corp. v. N. Y. Marine & Gen. Ins. Co., 3 ...

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