Days Inn Worldwide, Inc. v. Sai Baba, Inc.

• Decision Date: 26 January 2004
• Docket Number: No. 3:03CV7148.,3:03CV7148.
• Citation: 300 F.Supp.2d 583
• Parties: DAYS INN WORLDWIDE, INC., Plaintiff/Counterclaim Defendant v. SAI BABA, INC., et al., Defendants/Counterclaim Plaintiffs.
• Court: U.S. District Court — Northern District of Ohio

300 F.Supp.2d 583

DAYS INN WORLDWIDE, INC., Plaintiff/Counterclaim Defendant v. SAI BABA, INC., et al., Defendants/Counterclaim Plaintiffs.

No. 3:03CV7148.

United States District Court, N.D. Ohio, Western Division.

January 26, 2004.

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Eric B. Levasseur, Hahn, Erica L. Calderas, Nancy A. Oliver, Steven A. Goldfarb, Hahn, Rose Marie Fiore, Hahn, Loeser & Parks, Cleveland, OH, for Days Inns Worldwide, Inc., fka Days Inns of America, Inc., Plaintiffs.

Mark D. Wagoner, Jr., Shumaker, Loop & Kendrick, Toledo, OH, for Sai Baba, Inc., Anil Megha, Rakesh Megha, Defendants.

ORDER

CARR, District Judge.

This is a contract case in which plaintiff Days Inn Worldwide, Inc. ("Days Inn") accuses defendants Sai Baba, Inc. ("Sai Baba"), Anil Megha, and Rakesh Megha of failing to meet their contractual obligations under a franchise license agreement. Defendants have filed six counterclaims against plaintiff, alleging that it acted improperly during the course of their contractual relationship. This court has jurisdiction pursuant to 28 U.S.C. § 1332.

Pending is plaintiff/counterclaim defendant Days Inn's Fed.R.Civ.P. 12(b)(6) motion to dismiss the counterclaims. For the following reasons, that motion will be granted in part and denied in part.

BACKGROUND

Defendants Anil and Rakesh Megha are residents of Indiana and owners of defendant Sai Baba, Inc., an Ohio corporation. Until late 2002, defendants operated a hotel in Van Wert, Ohio pursuant to a franchise agreement with plaintiff. Plaintiff Days Inn is a large national hotel franchisor, and is a Delaware corporation with its principal place of business in New Jersey.

Defendants operated the Van Wert Days Inn hotel for approximately ten years before expiration of their first license agreement in 1999. The parties executed a second license agreement on June 23, 1999.¹ Defendants continued to operate their hotel as a Days Inn hotel until late 2002, when plaintiff terminated the license agreement and filed the instant suit for damages. Plaintiff claims that it terminated the agreement because defendants' hotel repeatedly failed to meet minimum quality assurance standards as required in the license agreement.

Defendants allege six counterclaims for: 1) equitable reformation of contract; 2) breach of an implied covenant of good faith and fair dealing; 3) violation of the Indiana Deceptive Franchise Practices Act, Indiana Code Ann. § 23-2-2.7-1; 4) declaratory judgment; and 5) tortious interference with prospective business relationships. Plaintiff alleges that defendants' complaint fails to state any claim on which relief can be granted and therefore requests that the court dismiss each of defendants' counterclaims.

A. Equitable Reformation Counterclaim

Defendants' claim for equitable reformation alleges that the June 23, 1999, license agreement is null and void according to a provision agreed upon by the parties but not included in the final version of the contract. Defendants allege that on November 1, 1998, they signed and returned to plaintiff a "slip page" that altered the standard license agreement and stated:

Conditions for a Legally Binding Contract. All parties (we & you) hereto understand and agree that in the event said Days Inn fails to score a minimum of 425 points for quality assurance on or before November 8, 1999, then this entire license agreement, any and all documents related thereto, all notes executed by you, or any other evidence of indebtedness executed by you to us or any related parties shall become null and void; no franchise granted to you.

(Doc. 35, at 15).

This alteration was not included in the license agreement attached to plaintiff's complaint; plaintiff denies that this term was ever agreed on as part of the license agreement. Defendants claim that they did not know that this term had been omitted because they never received a final copy of the entire license agreement incorporating all of the "slip page" alterations to which they agreed. Defendants state that they repeatedly asked plaintiff for a complete copy of the agreement, but never received one.

Defendants' hotel failed to earn a quality assurance score of at least 425 prior to November 8, 1999. Thus, defendants contend, pursuant to the foregoing condition, the entire license agreement became "null and void."

B. Breach of Implied Covenant of Good Faith and Fair Dealing Counterclaim

According to defendants, plaintiff instituted a program called "Project Restore" in August, 2002, as "a concerted effort to remove up to 300 properties from the Days Inn system and to increase [plaintiff's] profitability." (Doc. 35, at 17). Plaintiff terminated the license agreement with defendants on the same day it announced "Project Restore." Defendants allege that this action was a breach of the implied covenant of good faith and fair dealing because plaintiff "manufactured" defendants' quality assurance defaults to "meet its goal of terminating 300 franchises and collecting liquidated damages from [them.]" (Id. at 18).

Additionally, defendants allege that plaintiff breached the implied covenant of good faith and fair dealing by misrepresenting the status of defendants' hotel through its national phone reservation system. Plaintiff operates the reservation system as a service to its franchisees. The service allows prospective customers to call a single phone number to make reservations at the Days Inn hotel in the area to which they are planning to travel.

Sometime between 1999-2002, plaintiff discontinued this reservation service for defendants' hotel, citing as its reason defendants' alleged repeated failure to meet minimum quality assurance standards. Defendants allege that plaintiff acted in bad faith when it discontinued the service because it misrepresented to callers that defendants' hotel was fully booked and had no rooms available, even though this was not true.

C. Indiana Deceptive Franchise Practices Act Counterclaim

Defendants claim that plaintiff has violated the Indiana Deceptive Franchise Practices Act by failing to have good cause for the termination of the license agreement, modifying the license agreement without obtaining defendants' consent in writing, and "engaging in deceptive acts in connection with the franchise." (Doc. 35, at 19).

Defendants argue that Indiana law applies in this situation because defendants Anil and Rakesh Megha, residents of Indiana, are the alter ego of defendant Sai Baba, Inc., the franchisee, and are therefore franchisees for the purposes of the Indiana Act.

D. Tortious Interference with Prospective Business Relationships Counterclaim

Defendants' claim for tortious interference with prospective business relationships is based on plaintiff's alleged actions in connection with its decision to discontinue its national reservation system service for defendants' hotel. Defendants allege that plaintiff committed a tort by misrepresenting the availability of defendants' hotel to reservation system callers by claiming that defendants' hotel was fully booked and had no rooms available. Defendants argue that this misrepresentation "improperly diverted business away" (Doc. 40, at 18) from their hotel and directed callers to another Days Inn about ten miles from defendants' hotel.

STANDARD OF REVIEW

When ruling on a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted, the court reads the complaint in the light most favorable to the complaining party, and all of the complaining party's factual allegations are accepted as true. Dugan v. Brooks, 818 F.2d 513, 516 (6th Cir.1987). The court's task is to determine not whether the complaining party will prevail on its claims but whether it is entitled to offer evidence to support those claims. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). Dismissal is appropriate only if it appears beyond doubt that the complaining party can prove no set of facts in support of the claims that would entitle him or her to relief. Pfennig v. Household Credit Servs., 295 F.3d 522, 525-26 (6th Cir.2002) (citing Bibbo v. Dean Witter Reynolds, Inc., 151 F.3d 559, 561 (6th Cir.1998)).

DISCUSSION

A. Equitable Reformation Counterclaim

Defendants seek to reform the second license agreement to include the language from a slip page, which they allege was not, but should have been, included in the final version of the June 23, 1999 license agreement. This provision, according to defendants, would make the contract voidable because defendants' hotel failed to earn a quality assurance score of at least 425 by November 8, 1999.

Under New Jersey law, "[t]he basic principle applicable to reformation of contracts is that a court, in reforming a contract, may not impose an agreement more favorable to either party than was intended." Town of Secaucus v. City of Jersey City, 19 N.J.Tax 10, 42 (N.J.Tax 2000) (citing St. Pius X House of Retreats v. Diocese of Camden, 88 N.J. 571, 443 A.2d 1052, 1066-67 (1982)). The equitable remedy of reformation is available when "it would serve to effectuate the true intention of the parties and would not otherwise defeat or distort their intent as to other terms of the contract." St. Pius X House of Retreats, 443 A.2d at 1067.

Plaintiff, however, claims that the parol evidence rule applies to bar the application of equitable reformation in this case. The parol evidence rule states that "a binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them." Restatement (Second) of Contracts § 213(1) (1981). New Jersey recognizes the rule. "Where the parties have made the writing the sole repository of their bargain, there is the integration which precludes evidence to antecedent understandings and negotiations to vary or contradict the writing." Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 96 A.2d 652, 657 (1953). Because the parties in ...