Heyman Assocs. No. 5, L.P. v. Felcor TRS Guarantor, L.P.

• Decision Date: 07 October 2014
• Docket Number: No. 35868.,35868.
• Court: Connecticut Court of Appeals
• Parties: HEYMAN ASSOCIATES NO. 5, L.P., et al. v. FELCOR TRS GUARANTOR, L.P.

153 Conn.App. 387

102 A.3d 87

HEYMAN ASSOCIATES NO. 5, L.P., et al.

v.FELCOR TRS GUARANTOR, L.P.

No. 35868.

Appellate Court of Connecticut.

Argued May 29, 2014.

Decided Oct. 7, 2014.

Robert M. Shields, Jr., with whom were Kenneth J. Bartschi and, on the brief, Wesley W. Horton, Hartford, for the appellant (defendant).

Marc J. Kurzman, with whom were Brian A. Daley and, on the brief, Peter M. Nolin, Stamford, for the appellees (plaintiffs).

LAVINE, KELLER and MIHALAKOS, Js.

Opinion

LAVINE, J.

This case concerns the validity and enforceability of a restrictive covenant prohibiting certain premises from being operated as an “upscale hotel.” The defendant, FelCor TRS Guarantor, L.P., claims that the restrictive covenant was extinguished as a result of certain land transfers, and thus appeals from the judgment of the trial court in favor of the plaintiffs, Heyman Associates No. 5, L.P. (Heyman), HD Hotel, LLC (HD Hotel), AIM Management Corporation AIM), and TRJ II (TRJ).¹ On appeal, the defendant claims that the trial court improperly (1) failed to determine that the restrictive covenant was merged out of existence,² (2) found that the plaintiffs and HD Hotel had standing to enforce the restrictive covenant, and (3) awarded the plaintiffs attorney's fees. We affirm the judgment of the trial court.

The following facts, as found by the trial court in a comprehensive memorandum of decision, and procedural history are relevant to the resolution of this appeal. In 1996, the plaintiffs owned two hotels in Stamford located two city blocks apart: one was a Marriott, which catered to an upscale market; the other, a Ramada Inn, focused on the midscale market. The hotels were owned by two separate business entities each comprised of the Heyman, Meyer, and Jabara families.³ The Stamford Marriott (Marriott) charged higher room rates and provided superior service as compared to the Ramada Inn, but because each hotel catered to a different clientele, the hotels were complementary, and did not impinge on one another's business. Richard Jabara, principal for TRJ, testified that if a large company needed hotel rooms in Stamford for a conference, the plaintiffs could accommodate the salesmen in the Ramada Inn and the executives in the Marriott.⁴

Shortly after the plaintiffs acquired the Ramada Inn in 1996, Holiday Inns, Inc. (Holiday Inn), expressed an interest in purchasing the Ramada Inn. As a condition of selling the premises to Holiday Inn, the plaintiffs required the imposition of a restrictive covenant prohibiting Holiday Inn from operating the premises as an upscale hotel. The purpose of the restrictive covenant was to protect the business of the Marriott, which the plaintiffs owned. Following a brief period of negotiation, Timothy Lane, chief executive officer of Holiday Inn, assured Jabara that the premises would be run as a midscale hotel, such as a Holiday Inn.⁵

In a memorandum dated June 5, 1996, Lane outlined the nature of the transaction to the executive committee of Bass PLC:⁶ “[The premises] [were] purchased most recently by the Meyer and Jabara Hotel Group ... who had previously purchased and renovated the ... Marriott.... [Holiday Inn] was offered the asset for $8.3 [million] with a deed restriction barring upscale branding, including Crowne Plaza, for a term of 15 years.... The [fifteen year] deed restriction against branding of the hotel as an upscale brand could limit sale options in the future, but is not considered a significant concern.”

The plaintiffs and Holiday Inn reached an agreement⁷ on the sale of the premises on June 21, 1996, and the closing occurred on July 12, 1996. On July 12, 1996, the plaintiffs transferred their land interests in the premises, which included a sublease interest to a large parcel of land and a fee interest to a small parcel, to Holiday Inn.⁸ The sublease interest was transferred pursuant to a sublease assignment agreement, and the fee interest was transferred by way of a limited warranty deed. Both the sublease assignment agreement and the limited warranty deed contained a restrictive covenant, prohibiting Holiday Inn from using the premises to operate an “upscale hotel.”

The transaction included a second phase as well. The sublease, which the plaintiffs transferred to Holiday Inn on July 12, 1996, was governed by a ground lease in favor of a third party, TK Associates. On July 22, 1996, the plaintiffs acquired the ground lease from TK Associates, and transferred the ground lease to Holiday Inn on July 27, 1996, by way of a ground lease assignment agreement. Under the terms of the ground lease assignment agreement, the parties agreed that the sublease and ground lease interests would merge. No restrictive covenant was included in the ground lease assignment agreement. Following the sale of the premises, the plaintiffs dissolved the business entity that owned the premises, i.e., BRS Realty Associates, LLC (BRS).

In conformity with the restrictive covenant, Holiday Inn converted the premises into a Holiday Inn Select.

In 1997, Holiday Inn merged with the Bristol Hotel Company, which in turn merged with FelCor Lodging Trust in 1998. In 2005, the ground lease for the premises was transferred to the defendant, a taxable real estate investment trust. There is no dispute on appeal that the defendant is Holiday Inn's corporate successor, and that the defendant assumed Holiday Inn's contractual obligations.⁹

At trial, Jabara testified that in 1999, he received a telephone call from Thomas Corcoran, the chairman or president of the defendant, who requested that the restrictive covenant be lifted so that the premises could be used as a Crowne Plaza—an upscale hotel. Jabara testified that he rejected the request after consulting with the other plaintiffs. According to Jabara, Corcoran made a similar request in late 2005, but the plaintiffs denied it.

In 2005, the defendant received an offer to purchase the premises from Destination Hotel and Resorts for $30 million. This offer, however, was withdrawn when Destination Hotel and Resorts learned of the restrictive covenant. In response, the defendant consulted with Garret Delehanty, Jr., a real estate attorney. Delehanty advised the defendant that there was a “good argument” to be made that the restrictive covenant in the sublease was merged out of existence when the sublease interest merged with the ground lease. Delehanty offered to record a document on the Stamford land records that stated that the restrictive covenant was “terminated.” On May 25, 2006, the defendant recorded a document entitled “Termination” on the Stamford land records without notice to the plaintiffs.

The plaintiffs learned of the termination filing after they discovered marketing materials associated with the premises, which informed prospective buyers that “ownership recently took steps ... [and] eliminated a use restriction (which historically impaired the ability to re-brand with most upscale brands).” The plaintiffs thereafter sent written objections to the defendant concerning the attempted termination of the restrictive covenant, and requested that the termination document filed in the Stamford land records be withdrawn. The defendant did not withdraw the termination document.

On July 12, 2006, the plaintiffs and HD Hotel commenced this action seeking a declaratory judgment that the restrictive covenant was valid, binding, and enforceable. The operative complaint consisted of four counts. In the first count, the plaintiffs sought a declaratory judgment that (1) the termination document filed on the land records was null and void, and (2) the restrictive covenant was valid, effective, and enforceable. In the second count, HD Hotel sought a declaratory judgment that it was the intended beneficiary of the restrictive covenant, and that it was entitled to enforce the restriction. In count four, both the plaintiffs and HD Hotel alleged that they were entitled to an award of attorney's fees pursuant to provisions in the sublease assignment agreement and the ground lease assignment agreement.¹⁰

The defendant denied the material allegations of the complaint and raised several special defenses including that (1) the plaintiffs lacked standing to enforce the restrictive covenant, and (2) the restrictive covenant had been “merged out of existence.” In addition, by way of a counterclaim, the defendant alleged (1) tortious interference with contract or business expectations, (2) slander of title, and (3) a violation of the Connecticut Unfair Trade Practices Act. By agreement the trial was bifurcated. Trial on the issues raised by the complaint and the defendant's special defenses commenced on April 17, 2012. Following the presentation of evidence, the parties submitted posttrial memoranda, and on November 9, 2012, the court filed its memorandum of decision.

In a thorough and persuasive memorandum of decision, the court found in favor of the plaintiffs on their and HD Hotel's declaratory judgment claims. The court found the plaintiffs had standing to enforce the restrictive covenant. The court also found that HD Hotel, as owner of the Marriott, had standing as the intended beneficiary of the restrictive covenant.

The court found that the restrictive covenant was valid and enforceable. The court rejected the defendant's argument that the restrictive covenant was “merged out of existence,” concluding that “the language [that merged the sublease into the ground lease], while clear as far as it goes, says nothing about the [restrictive covenant], and is ambiguous as to its intended effect, if any, on that restriction.” The court determined that extrinsic evidence supported “the firm conclusion that neither BRS nor [Holiday Inn] had any intent to terminate the use restriction on the hotel parcel of land when they executed the ground lease agreement.”

After the court found in favor of the plaintiffs and HD Hotel on their declaratory judgment claims, the plaintiffs filed a motion for attorney's fees....