Century Pacific, Inc. v. Hilton Hotels Corp.

• Decision Date: 17 October 2007
• Docket Number: No. 03-CV-8258 (KMK).,03-CV-8258 (KMK).
• Citation: 528 F.Supp.2d 206
• Parties: CENTURY PACIFIC, INC., and Becker Enterprises, Inc., Plaintiffs, v. HILTON HOTELS CORP., Doubletree Corp., and Red Lion Hotels, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

528 F.Supp.2d 206

CENTURY PACIFIC, INC., and Becker Enterprises, Inc., Plaintiffs, v. HILTON HOTELS CORP., Doubletree Corp., and Red Lion Hotels, Inc., Defendants.

No. 03-CV-8258 (KMK).

United States District Court, S.D. New York.

October 17, 2007.

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Dwight J. Davis, Esq., Courtland Reichman, Esq., King & Spalding, LLP, Atlanta, GA, for Plaintiffs.

Jonathan Solish, Esq., Glenn J. Plattner, Esq., Bryan Cave, LLP, Los Angeles, CA, Lee W. Stremba, Esq., Troutman Sanders, LLP, New York City, for Defendants.

OPINION AND ORDER

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 fiftysix 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.")¹.) 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. (Pis.' 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 Botch 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 Botch. (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 West-Coast 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.)

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