In re MSR Resort Golf Course LLC

• Decision Date: 07 August 2014
• Docket Number: Case No. 11–10372 (SHL) (Jointly Administered)
• Citation: 515 B.R. 36
• Parties: In re: MSR Resort Golf Course LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

515 B.R. 36

In re: MSR Resort Golf Course LLC, et al., Debtors.

Case No. 11–10372 (SHL) (Jointly Administered)

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

Signed August 7, 2014

KIRKLAND & ELLIS LLP, Attorneys for MSR Resort Golf Course LLC, et al., 153 East 53^rd Street, New York, New York 10022, By: Eric F. Leon, Esq., Hunter Murdock, Esq.

GORDON & REES, LLP, Attorneys for The Conlon Group Arizona, LLC, 111 West Monroe Street, Suite 1600 Phoenix, Arizona 85003, By: Stephen W. Tully, Esq.

Chapter 11

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are cross-motions for summary judgment by MSR Resort Golf Course LLC, et al. (the “Debtors”) and The Conlon Group Arizona, LLC (“Conlon”). (ECF Nos. 1750, 1753 (the “MSR MSJ” and “Conlon MSJ,” respectively)). The parties dispute what, if any, cure amounts are due to Conlon by virtue of the Debtors' assumption of the Arizona Biltmore Rental Pool Agreements. See ECF No. 1114 (the “Assumption Motion”); see also ECF No. 1227 (Conlon's Limited Objection to Assumption Motion, the “Ltd. Obj.”). At issue in the motions is whether any or all of Conlon's present claims for cure damages—including the so-called Revenue Claims and 17 Percent Claims—are barred by prior litigation in federal district court in Arizona. For the reasons that follow, the Court agrees with the Debtors that Conlon's Revenue Claims are barred by the doctrine of res judicata, but concludes that some—but not all—of Conlon's 17 Percent Claims are precluded by collateral estoppel.

BACKGROUND

A. The Hotel

The material facts are not in dispute.¹ Debtor MSR Biltmore Resort, LP (“MSR Biltmore”), owned the Arizona Biltmore Hotel (the “Hotel”). Kamensky Decl., Ex. B (ECF No. 3).² Immediately adjacent to the Hotel was a development of seventy-eight villa-style condominiums. MSR 7056 ¶ 1; Conlon Reply to MSR 7056 ¶ 1. Each villa owner had the option to enter into a rental pool agreement (“RPA”) ³ with the Hotel whereby the villa units were made available as part of the Hotel's room inventory in exchange for villa owners receiving a portion of the revenue generated by the villas. See MSR 7056 ¶ 1; Conlon Reply to MSR 7056 ¶ 1; Ltd. Obj. at 86; see also Kamensky Decl. ¶ 23. The RPAs set forth how the villa owners were to be compensated. First, revenues earned from renting out the villa units would be pooled amongst all units that participated in the rental pool on a particular day (the “Rental Pool”), and then allocated pro-rata to each unit on a daily basis. RPA ¶ 8 (Murdock Decl. Ex. C) (ECF No. 1525). The Hotel would receive 50 percent of those revenues; the villa owners would receive the rest.⁴ RPA ¶ 9. Distributions to villa owners were to be made on a quarterly basis, accompanied by a statement detailing the various calculations and allocation amounts. RPA ¶ 12.

Sixty-five villas participated in the Rental Pool as of November 2012. MSR 7056 ¶ 2; Conlon Reply to MSR 7056 ¶ 2. In 2003, Conlon purchased six villa units and entered into individual RPAs for each unit. MSR 7056 ¶ 4; Conlon Reply to MSR 7056 ¶ 4; see also Ltd. Obj., Ex. C (collecting relevant RPAs). Conlon is owned and operated by Mr. Mark Finney, who is also the president of the villa owners' condominium association. Ltd. Obj. at 2, n.1.

B. The Conlon Lawsuits in Arizona

Conlon contends that the Debtors did not properly compensate Conlon for the use of its villas under the RPAs. The present dispute is only the latest litigation on this subject, which has been addressed in several prior lawsuits. Two of these lawsuits are particularly relevant here. In June 2006, Conlon first sued the Debtors' corporate predecessors in the United States District Court for the District of Arizona (Case No. CV06–2065–PHX–FJM) (“Conlon I”). MSR 7056 ¶ 5; Conlon Reply to MSR 7056 ¶ 5; see also Order, dated May 21, 2007, at 2; Murdock Suppl. Decl., Ex. C (ECF No. 1798). Conlon I was a dispute “between the parties over the proper allocation of expenses and revenue under the [RPA]. Accordingly, Conlon sought to inspect the books and records maintained by defendants in order to conduct an audit.” Order, dated May 21, 2007, at 2. Conlon also sought “judgment for any funds owed” to it under the RPA pursuant to the requested accounting. See Conlon I Pl.'s Trial Mem. at 2 (Murdock Suppl. Decl., Ex. D). The Arizona court granted Conlon's request for access to books and records. Order, dated May 21, 2007, at 4:3–8 (Murdock Decl., Ex. E). Prior to a trial on damages, the Hotel agreed to pay Conlon $41,726 plus prejudgment interest for a variety of items, including overcharging Conlon for travel agent and credit card fees, and giving complimentary villa rooms to employees for more than one week. Judg't, dated June 4, 2008, at 2 (Klest.Decl., Ex. F) (ECF No. 1750–3); see also MSR 7056 ¶ 6; Conlon 7056 ¶ 9. The only claim that went to trial was Conlon's allegation that the Hotel provided complimentary villa rooms to guests at a disproportionately high rate, thus improperly depriving Conlon of income. Order, dated April 11, 2008, at 1:18–22; 1:24–2:2 (Murdock Decl., Ex. G); see also MSR 7056 ¶ 6. The Arizona court dismissed that claim with prejudice, finding that Conlon failed to prove that the hotel abused its discretion in offering complimentary rooms to guests. Judg't, dated June 4, 2008, at 2; Order, dated April 11, 2008, at 4:3–11.

More litigation about the RPAs ensued in 2008. At that time, Conlon and some other villa unit owners sued the owners of the Hotel ⁵ for an accounting, breach of contract, and breach of implied covenant of good faith and fair dealing (Case No. CV08–00965–PHX–FJM) (“Conlon III”).⁶ Conlon III Third Am. Compl. at 4–6 (Murdock Suppl. Decl., Ex. F); see also MSR 7056 ¶ 7; Conlon 7056 ¶ 15. In Conlon III, Conlon acted as assignee of the rights of other villa owners. MSR 7056 ¶ 7; see also Order, dated July 27, 2009, at 2:20–21 (Murdock Decl., Ex. I) (“On February 26, 2008 ... Conlon filed the present action against the Hotel as agent of the other villa owners.”).

The Arizona court characterized Conlon III as “a re-do of Conlon I” as other villa owners sought damages on many of the same items that Conlon pursued in Conlon I. Order, dated Nov. 4, 2009, at 2:6 (Murdock Decl., Ex. D); see Conlon III Third Amended Compl. ¶¶ 20–23, 26, 31, 34. The Conlon III case included the same allegations as Conlon I regarding overcharges, complimentary rooms, and undercharging for villa units. The Arizona court permitted these duplicate claims to go forward because the plaintiffs in Conlon III included villa unit owners who were not previously represented in Conlon I. See Order, dated July 27, 2009, at 5:14–26; MSR 7056 ¶ 7; Conlon 7056 ¶ 15. There was one new claim raised in Conlon III, however, which was “[the] claim that the Hotel's practice of capping revenue [to villa owners] at 17 [percent of total hotel revenues] breache[d] the rental pool agreement....” Order, dated July 27, 2009, at 2:23–26.

Just like in Conlon I, the defendants in Conlon III conceded liability for the claims for travel agent and credit card overcharges, and complimentary employee rooms. See Order, dated Nov. 4, 2009, at 2:12–14. The Arizona court rejected both parties' proposed damages amount on these conceded items, instead determining that a damage award of $525,000 was appropriate for these claims. Id. at 3:3–6. The Arizona court then found in favor of the Hotel on the claims related to complimentary rooms to guests, and villa unit undercharging. Id. at 3:27; 4:17–18. Lastly, the Arizona court rejected Conlon's argument about the capping of revenue at 17 percent, instead finding that the Hotel's methodology was not arbitrary or an abuse of discretion. Order, dated Nov. 4, 2009, at 5:20–27.

C. The MSR Bankruptcy, Assumption Motion, and the Limited Objection

The Debtors commenced their Chapter 11 cases in February 2011. Kamensky Decl. ¶ 6. A little more than one year later, the Debtors sought to assume the RPAs for the Arizona Biltmore, together with some related relief. See generally Assumption Motion. Conlon objected. Several months later, the Debtors filed a Disclosure Statement and Proposed Second Amended Joint Plan of Reorganization (the “Plan”). See Discl. St. (ECF No. 1849); Proposed Second Amended Joint Plan (ECF No. 1848) (both filed Dec. 13, 2012). On February 22, 2013, the Court approved the Plan, which provided for the sale of substantially all of the Debtors' assets and the subsequent creation of a liquidating trust to administer the remaining assets. See Order Confirming the Second Amended Joint Plan (the “Confirmation Order”) (ECF No. 2071). The Plan also provided for the assumption of all executory contracts, including the RPAs, and for a mechanism to address cure amounts owed under these executory contracts. See Plan Art. V §§ A, D. The Confirmation Order also explicitly preserved the parties' rights to litigate the matters arising out of the assumption of the RPAs. Conf. Order ¶ 146; see Revised Plan Supplement for the Second Amended Joint Plan of Reorganization Ex. B (ECF No. 2090).

The heart of Conlon's current objection is the Debtors' alleged “omission and nonproportional allocation of certain Room Revenue categories ... [and] the overcharging of Rental Pool participants for certain items ...” Ltd. Obj. ¶ 47. In sum, Conlon seeks

an unbiased, impartial interpretation of the Rental Pool Agreements requir [ing] that the MSR Biltmore pay Rental Pool Participants a portion of the lucrative fees it assesses guests. Accordingly, Conlon respectfully requests that this Court interpret the Rental Pool Agreements consistent with the foregoing and determine that the fees and charges are earned....

Id. at 16.

The majority of Conlon's claims fall into two broad categories: “Revenue Claims” and “17 [Percent]” Claims. See MSR 7056 ¶ 14; Conlon Reply to MSR 7056 ¶ 14.⁷ The Revenue Claims relate to guest charges that the Hotel does not include...