Gov't Guarantee Fund of the Republic of Finland v. Hyatt Corp.

• Decision Date: 12 September 1996
• Docket Number: No. 96–7288.,96–7288.
• Citation: 35 V.I. 483
• Parties: GOVERNMENT GUARANTEE FUND OF the REPUBLIC OF FINLAND; Saastopankkien Keskus–Osake–Pankki (Skopbank); 35 Acres Associates; 12 Acres Associates; Benefori Oy v. HYATT CORPORATION, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

35 V.I. 483

GOVERNMENT GUARANTEE FUND OF the REPUBLIC OF FINLAND; Saastopankkien Keskus–Osake–Pankki (Skopbank); 35 Acres Associates; 12 Acres Associates; Benefori Oy

v.HYATT CORPORATION, Appellant.

No. 96–7288.

United States Court of Appeals,Third Circuit.

Argued Aug. 16, 1996.

Decided Sept. 12, 1996.

Creditors of hotel and purchaser of hotel sought declaratory judgment that manager breached agreement and that agreement was terminated. Manager sued purchaser seeking declaratory judgment regarding rights of parties and damages for civil conspiracy. Cases were consolidated and purchaser moved for partial summary judgment. The United States District Court of the Virgin Islands, 166 F.R.D. 321,Moore, Chief Judge, granted motion in part and denied motion in part. Manager appealed. The Court of Appeals, Greenberg, Circuit Judge, held that: (1) management agreement did not create new business enterprise; (2) manager's contributions were normal incidents of agency relationship and did not create irrevocable agency; and (3) purchaser's alleged breach of agreement did not affect revocable nature of agency.

Affirmed and remanded. Edward G. Biester, III, Michael M. Baylson (argued), Cecelia L. Fanelli, Duane, Morris & Heckscher, Philadelphia, PA, Warren B. Cole, Hunter, Colianni, Cole & Turner, Christiansted, St. Croix, U.S. Virgin Islands, for Appellees.

John A. Zebedee, Office of James L. Hymes, III, Charlotte Amalie, Saint Thomas, U.S. Virgin Islands, Mary A. McLaughlin, Michael F.R. Harris, Dechert, Price & Rhoads, Philadelphia, PA, John A. Sopuch, III, Bickel & Brewer, Chicago, IL, William A. Brewer, III, James S. Renard (argued), John D. van Loben Sels, Michael L. Gaubert, Jamil N. Alibhai, Bickel & Brewer, Dallas, TX, for Appellant.

Before: GREENBERG and ALITO, Circuit Judges, and DEBEVOISE, District Judge.^*

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

Hyatt Corporation is the manager of a resort hotel on St. John in the U.S. Virgin Islands. Hyatt's management powers arise from agreements executed in March 1990 among Hyatt, Great Cruz Bay Development Co., Inc. (“Great Cruz”), the owner of the hotel, and Great Cruz's lender, Saastopankkien Keskus–Osake–Pankki (“Skopbank”).¹ After Skopbank foreclosed on the property in 1991, 35 Acres Associates purchased the hotel pursuant to a judicial sale. Immediately thereafter, 35 Acres purported to terminate Hyatt's management of the hotel, propelling the parties into this acrimonious litigation. The district court, on cross-motions for summary judgment, entered an order granting 35 Acres' motion for partial summary judgment on April 10, 1996, thus terminating Hyatt's presence at the hotel, and ordering the parties to “work together to effect a smooth transition in the management and operation of the Hotel.” The court certified its order as a final judgment pursuant to Fed.R.Civ.P. 54(b) on May 3, 1996.

Hyatt now appeals from the district court's grant of partial summary judgment to 35 Acres. The parties agree that this appeal focuses only on issues concerning 35 Acres' power to terminate Hyatt's agency and 35 Acres' right of possession of the hotel and related property together with issues relating to the transition of the management of the hotel.² The district court had subject matter jurisdiction under either 28 U.S.C. § 1332(a)(2) (action between citizens of a state and citizens or subjects of a foreign state) or 28 U.S.C. § 1332(a)(3) (action between citizens of different states in which citizens or subjects of a foreign state are additional parties). The amount in controversy exceeds $50,000, exclusive of interest and costs. We have jurisdiction over the appeal pursuant to 28 U.S.C. § 1291 and exercise plenary review over the grant of partial summary judgment and abuse of discretion review over the court's transition order.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Factual Background

In view of the procedural posture of the case we present the facts in a light most favorable to Hyatt. From June 1988 through March 1990 Skopbank, a Finnish corporation, loaned Great Cruz and St. John Virgin Grand Villas Associates approximately $120 million for the construction and operation of the property which became known as the “Hyatt Regency St. John at the Virgin Grand Resort.” In 1989 representatives of Great Cruz approached Hyatt to enlist its assistance in addressing operational and financial problems of the resort. Great Cruz sought a professional, experienced, and financially able hotel company with a strong global brand identity and a proven ability in the Caribbean to attract business, so that the resort's value and profitability could be maximized.

Specifically, Great Cruz proposed that the resort bear the “Hyatt” and “Hyatt Regency” registered trademarks and trade names; that the resort join the “Hyatt” chain and participate in Hyatt's comprehensive and proprietary chain-wide programs and services (including, without limitation, Hyatt's global reservations system; worldwide marketing, public relations, and advertising services; employee training programs; and home office and regional sales office convention, business, and promotion services); and that Hyatt manage the resort. Great Cruz particularly sought the use of the prestigious “Hyatt” name and Hyatt's commitment to use its expertise to ensure the success of the resort. With the encouragement of Skopbank, Great Cruz was looking for a company to maximize the economic potential of the resort.

Hyatt was reticent to commit the “Hyatt” and “Hyatt Regency” names to the resort because of the resort's historically poor performance, its financial structure, and the fact that the quality and consistency of service, facilities, and amenities provided by Great Cruz fell far below Hyatt's quality standards. Thus, Hyatt believed that there was substantial economic and reputational risk in allowing the resort to be known as a “Hyatt Regency.”

During the negotiations leading to the execution of the agreements, Hyatt informed Great Cruz that the “Hyatt” and “Hyatt Regency” trademarks, service marks, and trade names were worth billions of dollars to Hyatt's owners and represented decades of time, effort, and financial risk. Hyatt's reputation as a premier resort manager was nowhere higher than in the Caribbean, where it had established itself as the predominant chain. Moreover, Hyatt informed Great Cruz that, even with Hyatt's special knowledge of resort-building and its established relationships with customers and vendors, it would take three to five years from the opening of the resort under the Hyatt name to stabilize its operations and to begin to realize the full potential of the location so that Hyatt could derive the level of financial benefits justifying its participation. Hyatt informed Great Cruz that it only would consider establishing the resort as a “Hyatt Regency” if Great Cruz agreed to conditions that would ensure Hyatt both the power to control the resort's business and an adequate share in the resort's long-term profits that Hyatt believed its contributions could generate.

Hyatt informed Great Cruz during these negotiations that it would not permit the hotel to be known as a “Hyatt” or “Hyatt Regency” or agree to the inclusion of the resort in its worldwide chain unless it also was given powers to protect its contributions to the resort. Hyatt decided that it was absolutely necessary for it to have the power to control the quality of the resort facility as well as the quality of services provided by the hotel by assuming managerial and operational responsibilities for the resort. Hyatt, Great Cruz, and Skopbank therefore agreed to structure their contracts deliberately and carefully to accomplish those objectives to protect Hyatt.

During the negotiations among Hyatt, Great Cruz, and Skopbank, Hyatt analyzed the resort's highly-leveraged financial structure and other issues associated with the resort's financial situation. With such considerations in mind, Hyatt informed Great Cruz that it was willing to consider a financial structure whereby Hyatt invested time and effort and not seek a substantial portion of its normal management fees in exchange for an interest in the enterprise affording it a return on its investment, to be taken in the form of a long-term profit participation. Thus, Hyatt explains that, in order “to protect the investments and property it would contribute as part of its undertaking to build the business of the Resort, [it] required an interest in the profits of the ‘Hyatt Regency St. John.’ ” Br. at 15. Accordingly, Hyatt demanded and Great Cruz consented to a formula under which Hyatt potentially would receive a significant return on its investment. Although, in Hyatt's assessment, the formula contained a low front-end fixed management fee, it also included a substantial back-end share of profits that the parties specifically designed to reflect Hyatt's “capital investment in the property,” id., which included Hyatt's contribution of the difference between its typical market rate front-end fees and the fees applicable in this case.

Further, to protect its interests, Hyatt negotiated for and obtained a 30–year term for the management agreement between it and Great Cruz which the parties agreed could not be terminated except in strict compliance with its express termination provisions. Hyatt explains that, given its substantial “capital investments” in the hotel and the time required to reap a return on its investments, it was not willing to assume the risk that Great Cruz (or a subsequent owner) could revoke and terminate the agreement for reasons, or on grounds, other than those set forth in the contracts. Id. Hyatt informed Great Cruz that it deemed its participation in the enterprise as the clear equivalent of a cash equity investment, and Great Cruz assented to Hyatt's approach to, and view of, the transaction.

In order to protect the proprietary...