Southeast Texas Inns v. Prime Hospitality Corp.

• Decision Date: 30 August 2006
• Docket Number: No. 05-5892.,05-5892.
• Citation: 462 F.3d 666
• Parties: SOUTHEAST TEXAS INNS, INC., Plaintiff-Appellant, v. PRIME HOSPITALITY CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

462 F.3d 666

SOUTHEAST TEXAS INNS, INC., Plaintiff-Appellant, v. PRIME HOSPITALITY CORPORATION, Defendant-Appellee.

No. 05-5892.

United States Court of Appeals, Sixth Circuit.

Argued: March 6, 2006.

Decided and Filed: August 30, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Eugene N. Bulso, Jr., Boult, Cummings, Conners & Berry, Nashville, Tennessee, for Appellant. Garry K. Grooms, Stites & Harbison, Nashville, Tennessee, for Appellee.

ON BRIEF:

Eugene N. Bulso, Jr., Melissa Ballengee Alexander, Boult, Cummings, Conners & Berry, Nashville, Tennessee, for Appellant. Garry K. Grooms, Stephen H. Price, Stites & Harbison, Nashville, Tennessee, for Appellee.

Before: SUTTON and GRIFFIN, Circuit Judges; OBERDORFER, District Judge.^*

GRIFFIN, J., delivered the opinion of the court, in which SUTTON, J., joined. OBERDORFER, J. (pp. 682-684), delivered a separate dubitante.

OPINION

GRIFFIN, Circuit Judge.

This cause of action arises from the breach of a lease agreement executed between plaintiff-appellant Southeast Texas Inns, Inc. ("Southeast"), a Tennessee corporation, and May-Ridge, L.P. ("May-Ridge"), a Delaware limited partnership and subsidiary of defendant-appellee Prime Hospitality Corporation ("Prime").¹ Southeast sued Prime, the alleged alter ego of May-Ridge, seeking to pierce May-Ridge's corporate veil in order to hold Prime liable for May-Ridge's breach of contract. The district court granted Prime's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Southeast now timely appeals the order of dismissal. We affirm.

I.

On July 9, 2000, Southeast and May-Ridge executed an eleven-year lease agreement ("the Lease"), whereby May-Ridge agreed to rent and operate three Southeast-owned AmeriSuites hotels located in Texas from July 9, 2000, until June 20, 2011.² Under the pertinent terms of the Lease, May-Ridge was to pay $242,687 per month as "Minimum Rent," along with "Additional Rent," if applicable, "with respect to each Property with respect to each Lease Year beginning with the 2001 Lease Year, in an amount, not less than zero, equal to eight percent (8%) of Excess Total Hotel Sales for such Property." In addition, the parties agreed that May-Ridge's obligations under the Lease were to be secured by, inter alia, certain "Retained Funds" held by Southeast, as well as the hotels' personal property.³ Pursuant to § 21.6 of the Lease, May-Ridge was to maintain a minimum net worth "in an amount at least equal to the aggregate of one year's Minimum Rent payable pursuant to this Agreement; it being expressly understood and agreed that the right to receive the Retained Funds, if assigned to Tenant, may for such purpose be counted as equity at the full amount thereof." Section 3.5 of the Lease further provides that Southeast shall hold the Retained Funds as security for performance by May-Ridge of the terms of the Lease and, in the event of default, Southeast may apply the entire amount of the Retained Funds as may be necessary to compensate Southeast toward the payment of rent or other damages sustained due to such breach by May-Ridge.

The Lease, at § 22.16, also contains a "nonrecourse" provision, which provides that "[n]othing contained in this Agreement shall be construed to impose any liabilities or obligations on Tenant's general partners, limited partners, agents or employees (or any shareholders, officers, directors, agents or employees of any of the foregoing) for the performance of the obligations of Landlord or Tenant hereunder." Although Prime signed the Lease, its signature served only to "acknowledge[] and agree[] to be bound by the provisions of Section 22.11 [the trade area restriction] of the foregoing Lease Agreement," and neither Prime nor any company affiliated with Prime signed a guaranty of the Lease. In fact, although the original purchase agreement expressly contemplated that Prime would provide a limited guaranty of the Lease equal to one year's base rent, the parties intentionally struck and deleted this "Prime Guaranty" provision when the amended purchase agreement was executed.⁴ Finally, § 22.14 of the Lease provides that Tennessee law governs its interpretation, construction, application, and enforcement.

Both parties abided by the terms of the Lease until March 2003, when Douglas Vicari, Prime's chief financial officer and the president of May-Ridge, allegedly advised John Buttolph, president of Southeast, that May-Ridge planned to "walk away" from the Lease for economic reasons and that the March 2003 rent payment would be its last payment.⁵ When May-Ridge failed to pay rent for the month of April, Southeast terminated the Lease effective April 4, 2003. Southeast alleges that, as a result of May-Ridge's breach, it lost over $20 million in gross "Minimum Rent" for the eight-year remainder of the Lease term and that it is owed nearly $10 million in liquidated damages.

The present case is an appeal from one of two cases that were consolidated in the district court. In June 2003, Southeast instituted an action (Case No. 3:03-CV-0635) against May-Ridge Ridgewood, and Prime to recover damages caused by May-Ridge's alleged breach of the Lease.⁶ Southeast alleged that May-Ridge operated as a mere "alter ego" of Prime and Ridgewood and that the latter two defendants were thus legally responsible for May-Ridge's breach. Prime and Ridgewood responded by moving to dismiss pursuant to FED. R. CIV. P. 12(b)(6). Thereafter, in accordance with an Agreed Order, Southeast dismissed without prejudice its claims against Prime and Ridgewood, with leave to amend the pleadings after a designated six-month period of discovery. Rather than amending its pleadings after the discovery period, Southeast commenced the present, separate lawsuit against Prime (Case No. 3:04-CV-0347) on essentially the same grounds, alleging that Prime actually directed and controlled the operation of the Texas hotels and that May-Ridge, now insolvent, is merely the alter-ego of Prime. Southeast advances numerous allegations purportedly entitling it to pierce May-Ridge's corporate veil and hold Prime liable for damages incurred as a result of its subsidiary's breach. The district court consolidated the cases.⁷

Prime promptly filed a Rule 12(b)(6) motion to dismiss in the instant case, contending that Southeast's allegations of undercapitalization or lack of corporate formalities do not rise to the level of fraud or something like fraud necessary to warrant the extreme measure of piercing May-Ridge's corporate veil.

On January 7, 2005, the district court issued an opinion and order granting Prime's motion to dismiss. The district court concluded that Southeast's complaint failed to allege facts sufficient to state a claim against Prime that would warrant piercing May-Ridge's corporate veil. Specifically, the court held that, although Southeast adequately alleged that Prime exerted complete dominion and control over May-Ridge and Ridgewood, the complaint failed to allege circumstances evincing a fraud or similar injustice, a requisite element of an alter-ego claim under Delaware law. The court thus dismissed all claims against Prime. The district court subsequently denied Southeast's motion to alter or amend the judgment. Southeast timely appeals the judgment in favor of Prime.

II.

Southeast appeals from an order entered under FED. R. CIV. P. 12(b)(6), which authorizes the dismissal of any complaint that fails "to state a claim upon which relief can be granted." This court reviews the district court's dismissal of a complaint under Rule 12(b)(6) de novo. Arrow v. Fed. Reserve Bank of St. Louis, 358 F.3d 392, 393 (6th Cir.2004). In order to survive a 12(b)(6) motion, the plaintiff's complaint must allege facts which, if proved, would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In reviewing a 12(b)(6) motion, this court "must construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations as true and determine whether the plaintiff can prove no set of facts in support of his claims that would entitle him to relief." Arrow, 358 F.3d at 393 (citations omitted). "Although this is a liberal pleading standard, it requires more than the bare assertion of legal conclusions. Rather, the complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." NHL Players Ass'n v. Plymouth Whalers Hockey Club, 419 F.3d 462, 468 (6th Cir.2005) (citation omitted).

Moreover, in any complaint averring fraud or mistake, "the circumstances constituting fraud or mistake shall be stated with particularity." FED. R. CIV. P. 9(b). See Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 563 (6th Cir.2003) (citing FED R. CIV. P. 9(b)). "When a cause of action seeks to pierce the corporate veil on the basis of fraud, it is subject to FED. R. CIV. P. 9(b)." Bd. of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 173 n. 10 (3d Cir.2002) (citation omitted).

III.

A threshold issue is whether Tennessee or Delaware law applies in determining if Southeast's complaint states a cognizable claim to pierce the corporate veil of May-Ridge. In assessing Prime's motion to dismiss, the district court held that issues pertaining to the Lease and its construction, application, and enforcement were governed by Tennessee law in accordance with the choice-of-law rules of the forum state⁸ and the express choice-of-law provision contained in § 22.14 of the Lease.⁹ See generally The Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 501 (6th Cir.2003) (noting that, in diversity cases, a district court should apply the choice-of-law provisions of the forum state).

But the district court, citing the "internal affairs" doctrine recognized by the Tennessee courts,¹⁰ applied the law of Delaware,...