American Hotel Management Associates, Inc. v. Jones

• Decision Date: 22 July 1985
• Docket Number: Nos. 84-1954,s. 84-1954
• Parties: AMERICAN HOTEL MANAGEMENT ASSOCIATES, INC.; John R. Connelly and James Noulis, Appellees, v. Hugh JONES, Individually and as an Officer and Director; Norman D. Groh, Individually and as an Officer and Director and National Hotel Management Corp., Appellants, v. Edward HALLORAN, Individually and as an Officer and Director, Third Party Defendant. AMERICAN HOTEL MANAGEMENT ASSOCIATES, INC.; John R. Connelly and James Noulis, Plaintiffs, v. Hugh JONES, Individually and as an Officer and Director; Norman D. Groh, Individually and as an Officer and Director and National Hotel Management Corp., Appellees, v. Edward HALLORAN, Individually and as an Officer and Director, Appellant. (L), 84-1955.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 562

768 F.2d 562

AMERICAN HOTEL MANAGEMENT ASSOCIATES, INC.; John R.

Connelly and James Noulis, Appellees, v. Hugh JONES, Individually and as an Officer and Director;

Norman D. Groh, Individually and as an Officer and

Director and National Hotel Management

Corp., Appellants, v. Edward HALLORAN, Individually and as an Officer and Director, Third Party Defendant.

AMERICAN HOTEL MANAGEMENT ASSOCIATES, INC.; John R.

Connelly and James Noulis, Plaintiffs, v. Hugh JONES, Individually and as an Officer and Director;

Norman D. Groh, Individually and as an Officer and

Director and National Hotel Management

Corp., Appellees, v. Edward HALLORAN, Individually and as an Officer and Director, Appellant.

Nos. 84-1954(L), 84-1955.

United States Court of Appeals, Fourth Circuit.

Argued March 4, 1985.

Decided July 22, 1985.

Elizabeth F. Kuniholm, Raleigh, N.C., Robert S. Smith, New York City (John R. Edwards, Tharrington, Smith & Hargrove, Raleigh, N.C., Robert S. Smith and Shira Perlmutter; Paul, Weiss, Rifkind, Wharton & Garrison, New York City, James L. Blackburn, Raleigh, N.C., on brief), for appellants.

Cecil W. Harrison, Jr., Raleigh, N.C. (David W. Long, Poyner, Geraghty, Hartsfield & Townsend, Raleigh, N.C., on brief), for appellees.

Before RUSSELL, PHILLIPS and MURNAGHAN, Circuit Judges.

PER CURIAM:

Here are two consolidated appeals from a judgment entered on a jury verdict in the United States District Court for the Eastern District of North Carolina. Hugh Jones, Norman Groh, and National Hotel Management Corporation (NHM), who were defendants below, appeal from a judgment entered in favor of John Connelly and James Noulis. Edward Halloran, a third party defendant, appeals from a verdict by the same jury in favor of third party plaintiffs, Jones, Groh, and NHM.

I

The action began on November 22, 1982, when American Hotel Management Associates, Inc. (AHMA), Connelly and Noulis ("plaintiffs") filed a complaint to re-establish their interest in NHM stock. ¹ Connelly and Noulis alleged that Jones had received NHM stock as their representative and then improperly held it for himself. Jones and Groh brought in Halloran as a third party defendant, claiming that his role in the prosecution of plaintiffs' action was tortious and a breach of his fiduciary duty.

The antecedents to the dispute seemed innocent enough at the time, yet the prospect of serious division, upon closer examination, never was far beyond the immediate horizon. The cast of characters is as follows: Connelly and Noulis are principal shareholders and officers of AHMA, a hotel management company located in Raleigh, North Carolina. In 1976 Connelly, Noulis and Jones joined forces and formed an affiliated company--AHMA of Georgia, Inc. Jones' responsibility was to obtain hotel management contracts for the new company. He was paid a salary and received other benefits, including stock in AHMA of Georgia. While working for AHMA of Georgia, Jones rekindled a business relationship with Groh, a Virginia-based hotel owner. Groh, in turn, introduced Jones to Halloran, a wealthy New York businessman who was in the midst of developing what would become known as the Halloran House Hotel, in New York City. Groh and Halloran were partners in the hotel project.

In early 1977, Groh and Halloran invited Jones to join them in forming a company, NHM, to manage Halloran House. All agreed that Jones, Groh, and Halloran would receive equal ownership interests in NHM. Jones, being an employee of AHMA, naturally consulted with Connelly and Noulis about his joining forces with NHM. Connelly and Noulis viewed the New York project as a potential boon for AHMA. Halloran and Groh planned to develop additional property and thus were a potential source of business for AHMA--so Connelly and Noulis agreed to Jones' participation.

It was undisputed that Connelly, Noulis and Jones orally agreed to Jones' participation in the New York project, paying his salary in return for a share of stock in NHM. For various reasons, Groh and Halloran wanted to deal only with Jones for purposes of corporate ownership. They Jones' relationship with Connelly and Noulis deteriorated over the summer of 1977. From AHMA's vantage point, Jones devoted too much time to NHM affairs while offering too little information about the NHM project. Jones ignored repeated requests from Connelly and Noulis for appropriate documentation of their ownership interest in NHM over and beyond the terms of the May 1977 Stock Purchase Agreement. In addition, Connelly wrote several letters to Jones and NHM either complaining about or requesting compensation for the expenses Jones incurred while conducting business for NHM in New York.

                were, however, willing to go along with the agreement reached by the AHMA principals.  Consequently, one-third of the NHM stock was issued in the joint names of Jones, Groh, and Halloran.  A May 18, 1977 stock purchase agreement confirmed that Jones agreed to share his one-third stock interest in NHM with Connelly and Noulis. 2   Connelly and Noulis, however, never saw any actual stock certificates
                

By the fall of 1977, the handwriting was on the wall. A series of increasingly caustic letters reflects the emergence of an adversarial relationship between Jones and AHMA. Correspondence from Connelly reveals continued complaints that AHMA was not receiving much in return for contributing Jones' services. One of the first return salvos was launched by Jones as early as November 28, 1977. In response to inquiries from AHMA, he wrote to Connelly, stating that if AHMA wanted reimbursement for the expenses and salary already paid, a change would have to be made in their NHM ownership interest. At trial, Connelly testified that the letter signalled a change in the oral agreement which established the joint ownership interest in NHM.

In February 1978 Connelly and Noulis had had enough. They terminated Jones' interest in AHMA of Georgia and resolved that their company would seek repayment of monies expended on NHM (some $35,000). Minutes from the meeting where resolutions to that effect were taken reveal that Connelly and Noulis were prepared to sue if reimbursement was not forthcoming. On February 27, 1978 Connelly, expressing his belief that Jones was not living up to his promises, formally demanded a return of the salary and expenses AHMA had paid him, and again complained that he never received confirmation of his ownership interest in the stock in NHM. At this point in time, the remaining ties with Jones frazzled.

A week after the February 1978 letter, Connelly demanded that Jones return the stock he held in AHMA of Georgia. On May 16, 1978 Jones responded to Connelly, writing that, in exchange for returning the AHMA stock, he expected Connelly and Noulis to cancel the May 18, 1977 NHM stock purchase agreement for $10. Enclosed in the letter was a proposed cancellation agreement. ³

Connelly testified that he was very upset by the letter and had assumed that Jones wanted him and Noulis "out" of NHM. By then, according to Connelly, litigation was With regard to NHMC, we have no intention of executing any release or returning any agreement until a satisfactory solution has been reached regarding back expenses and equity value you previously agreed to. In your letters of September 13, 1977 and November 28, 1977, as well as legal minutes of corporate meetings, you made commitments to AHMA, INC. as President of NHMC. These commitments were on the basis of a contractural (sic) agreement wherein we provided services and expenses in exchange for ownership in NHMC. We have fulfilled our part of the contract. This contract is reconfirmed in your letters and at Corporate Board meetings.

inevitable. Connelly wrote to Jones on May 24, 1978 refusing to sign a release. The letter stated, inter alia:

Hugh, you can be guaranteed of our intention to handle this manner on a business like basis and will not allow our agreement with NHMC to be set aside without recourse. The unprofessional manner in which you have handled this entire situation has set the basis for future discussions. We will only communicate through Biff Halloran regarding any settlement with NHMC.

This venture has been extremely costly to our company in that our personnel diverted our revenue and resources to provide income enabling you to develop a company for Biff Halloran and Norman Groh. We, therefore, are entitled to compensation for our expense and ownership in NHMC. ⁴

Protracted negotiations then ensued, and a good bit of the trial focused on whether, during 1978 and 1979, the parties reached a settlement agreement. Eventually lawyers were brought into the picture and six successive proposed agreements were exchanged. No final agreement was ever signed. In August 1979 a written settlement was reached but not finalized. Connelly testified that in September 1979 he travelled to New York and received a check for $10,000, and later received a series of promissory notes for $25,000 plus interest. A dispute over interest computations resulted in Connelly and Noulis deciding not to place in escrow a signed release of their claims to NHM stock, and instead authorized their attorney to reject the series of notes and return a check representing the first interest payment. They retained the $10,000.

Thereafter, in December 1979 Connelly and Noulis mailed a sixth and final version of the settlement agreement to Jones' attorney. Defendants never responded to the final proposal.

In February 1980, Connelly's attorney sent a letter to Jones, Groh, and Halloran, which clearly repudiated the settlement and attempted to reassert the rights of Connelly and Noulis to the NHM stock. Over the next two years, however, plaintiffs did nothing to protect their interest, believing the stock had little value.

The final phase of the story begins in June 1982 when Connelly learned that Halloran was embroiled in litigation of his own, in New York, with Groh...