In re Northwest Airlines Corporation, Case No. 05-17930 (ALG). Jointly Administered (Bankr. S.D.N.Y. 3/11/2008), Case No. 05-17930 (ALG). Jointly Administered

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
Writing for the CourtAllan Gropper
PartiesIn re: NORTHWEST AIRLINES CORPORATION, et al., Chapter 11, Debtors. CAPP SEVILLE, INC., Plaintiff, v. NORTHWEST AIRLINES, INC., Defendant. NORTHWEST AIRLINES, INC., Third Party Plaintiff, v. LARKEN, INC., Third Party Defendant.
Docket NumberCase No. 05-17930 (ALG). Jointly Administered,Adv. No. 06-01446 (ALG).
Decision Date11 March 2008

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In re: NORTHWEST AIRLINES CORPORATION, et al., Chapter 11, Debtors.
CAPP SEVILLE, INC., Plaintiff,
NORTHWEST AIRLINES, INC., Third Party Plaintiff,
LARKEN, INC., Third Party Defendant.
Case No. 05-17930 (ALG). Jointly Administered
Adv. No. 06-01446 (ALG).
United States Bankruptcy Court, S.D. New York.
March 11, 2008

FOLEY & LARDNER, Counsel for Plaintiff and Counterclaim-Defendant, Capp Seville, Inc., By: David B. Goroff, Esq., Derek L. Wright, Esq., Chicago, Illinois, By: Todd C. Norbitz, Esq., Dana C. Rundolf, Esq., New York, New York.

YOST & BAILL, Counsel for Plaintiff and Counterclaim-Defendant, Capp Seville, Inc., By: Daniel W. Boerigter, Esq., Minneapolis, Minnesota.

LEONARD STREET AND DEINARD, Counsel for Defendant and Counterclaimant, Northwest Airlines, Inc., By: Jeffrey A. Eyres, Esq., Brian W. Thomson, Esq., Minneapolis, Minnesota.

CADWALADER, WICKERSHAM & TAFT LLP, Counsel for Defendant and Counterclaimant, Northwest Airlines, Inc., By: Bruce R. Zirinsky, Esq., Gregory M. Petrick, Esq., J. David Leamon, Esq.


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ALLAN GROPPER, Bankruptcy Judge.

Before the Court are cross-motions for summary judgment filed by the defendant/counterclaimant, Northwest Airlines, Inc. ("Northwest"), and the plaintiff/counterclaim-defendant, Capp Seville, Inc. ("Capp"), in a dispute relating to service contracts for the occupancy of hotel rooms. Northwest has moved for summary judgment on the issue whether Capp, the hotel owner, breached the contracts, which were executed by Northwest and a hotel manager, Larken, Inc. ("Larken").1 Capp opposes Northwest's motion and has moved for summary judgment on the breach of contract allegations and also on Northwest's allegation of tortious interference with contract. For the reasons set forth below, the summary judgment motion of Northwest on the issue of Capp's liability for breach of contract is denied. Capp's motion for summary judgment is granted.

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While the parties disagree on many of the facts, the facts necessary to decide these motions are not in material dispute.

Management Agreement

Capp was, prior to the initiation of this lawsuit, the owner of the "real property together with a 16-story hotel improvement located in Bloomington, Minnesota" (the "Hotel"). (Capp Resp. to NWA Facts p. 1.) In 1987, Capp and Larken entered into a Hotel Management Agreement, which was subsequently superceded by a Restated Hotel Management Agreement, dated December 2, 1988 (the "Management Agreement"). Pursuant to the terms of the Management Agreement, Larken was engaged

as the sole and exclusive managing agent for the Hotel, authorized to supervise and direct the management and operation of the Hotel on the terms of this Agreement and for the consideration provided in this Agreement.

(Mgmt. Agmt., ¶ 2.) The Management Agreement designated Capp as "Owner" and Larken as "Manager."2 The Management Agreement provided:

Manager agrees to operate the Property as a hotel, and to pay all expenses and obligations associated therewith . . . under the terms of this Agreement, in full compliance with the standards and requirements of the Best Western Agreement, which operation includes without limitation the rental of rooms and operation of the kitchen and bar facilities, operation of cocktail lounge, lobby and dining areas, leasing of retail and office space, and for all activities in connection therewith which are customary and usual to such operation.

(Management Agreement, § 5(a)). Larken collected the revenues of the Hotel with a percentage of monthly rents paid over to Capp.

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The Management Agreement also contained certain restrictions, one of which was that

In entering into service, maintenance and other contracts and into leases in replacement of or in addition to the Contracts and Leases, Manager agrees that (i) no such contracts and leases shall extend beyond the Term of this Agreement unless they are terminable at the end of the Term, (ii) all such contracts and leases shall be in Manager's name and shall not impose liability on Owner unless assumed by Owner . . . .

(Management Agreement, § 5(e).)3 The Management Agreement originally had a term of ten years, but was subsequently extended through December 31, 2007.

Hotel Service Agreements

During the summer of 2004, Northwest sent out a request for contract proposals for the provision of hotel rooms for Northwest employees. (NWA SMF p. 4.) Larken responded to the request on behalf of the Hotel. Northwest and Larken began negotiations and subsequently agreed on terms for two Hotel Service Agreements (the "HSAs").4 Natalie Goldston, Larken's general manager for the Hotel, negotiated with Northwest on the terms of the HSAs.

The HSAs provided Northwest with a contractual right to occupy rooms in the Hotel at preferential rates. The HSAs are each for a five-year term, from 2004 to August 20, 2009. Both set a fixed price per room for each year of the contract. The HSAs provided that

This Agreement is entered into . . . between Northwest Airlines, Inc. ("Northwest") and the Clarion Hotel ("Hotel") on behalf of, and as

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authorized agent for, the Hotels listed on Appendix A5 for the purposes of setting forth the terms and conditions for the accommodation of Northwest flight crews and other employees and contractors ("Northwest Guests").

The HSAs did not provide for termination of the agreement by the Hotel prior to expiration, absent default by Northwest. (NWA S.J. Memo. p. 8.) It is not contested that the parties performed under the terms of the HSAs for nearly two years. (NWA Undisputed Facts p. 5.)

It is also undisputed that the HSAs were executed on a Northwest template form that was created by Northwest corporate personnel and in-house legal counsel, and that the template has been utilized by Northwest in many similar hotel service agreement transactions. (Capp SMF p. 3.) Three separate signature blocks appear on the HSAs; one for signature by Northwest, another for the Hotel and the third labeled "Acknowledged and Consented To" with a space for the hotel "Owner" to sign. The executed HSAs contain only the signatures of Northwest and the Hotel, the latter having been signed by an employee of Larken as "Director of Operations" for the "Clarion Hotel." It is not disputed that the separate signature block labeled "Hotel Owner" remains blank and unsigned, and that Capp, as the hotel owner, never signed either of the HSAs.6

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In connection with subsequent negotiations between Capp and Larken in the fall of 2004, Capp apparently requested a copy of the HSAs. (NWA Reply Facts p. 75.) The parties dispute when Capp first became aware of the existence of the HSAs or actually received a copy from Larken. Capp claims that it learned for the first time in February 2005 that the HSAs extended until August 21, 2009, almost two years longer than the expiration date of the Management Agreement. (NWA Reply Facts p. 79.) After Capp first saw the HSAs, Capp claims, Lisa Capp told Goldston of Larken that the term of the HSAs violated the Management Agreement and Goldston promised her this would be rectified. (Capp Reply p. 13.) Capp asserts that on April 5, 2005, it advised Larken formally that the HSAs had exceeded Larken's authority and that Larken should inform Northwest that Capp refused to be bound by the HSAs and that it did not agree that the HSAs would run with the land.

It appears that Larken and Northwest continued to perform under the HSAs for some time, even after Northwest filed for bankruptcy on September 14, 2005. It further appears that Larken fell behind on its obligations to Capp and may have breached the Management Agreement. Capp alleges that Larken failed to timely pay rent owed to Capp and failed to pay required real estate taxes. Capp also claims that Larken's entry into the HSAs was a breach of the Management Agreement. Whether or not there was a breach, Capp determined to sell the Hotel and, in connection therewith, disavowed any rights of Northwest for preferential rates for its employees.

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Termination of the HSAs

On November 7, 2005, Capp signed a listing agreement with CB Richard Ellis ("CBRE"), to sell the Hotel. (Capp responses to NW undisputed facts, p. 7). Capp eventually negotiated with La Quinta Acquisition Properties ("La Quinta") with the mutual understanding that Larken's services would be discontinued and that La Quinta would assume management responsibilities. (NW Reply Facts p. 85.) During the course of those negotiations, La Quinta learned of the HSAs. (NWA SMF p. 5.) On March 15, 2006, Capp and La Quinta executed a purchase agreement for the Hotel. On March 30, 2006, CBRE sent La Quinta an email stating that "[w]e told Larken yesterday that they needed to get rid of NW Airlines." (NWA SMF, p. 5.) On March 31, 2006, Larken sent Northwest, copy to Capp, a letter stating as follows:

It is with deep regret that Larken, Inc. (Larken) is compelled to notify you that we must cancel the Contracts referenced above. The cancellation shall be effective in accordance with our understanding of the prospective events further discussed herein and in no event shall the Contracts continue beyond any sale date of the Hotel.

The basis given for the cancellation was that "Due to the financial stress, Larken and Capp agreed that the best result could only come from a sale of the Hotel. It now appears that such a sale is eminent [sic]. It is our understanding that the prospective buyer will not assume the Contracts." (Eyres Decl., Exh. T.) On April 7, 2006, Capp's attorney sent a letter to Larken confirming that, in connection with Capp's sale of the Hotel, it was terminating the Management Agreement. The letter stated, "Capp previously provided a list of contracts for which the buyer is willing to assume the responsibility after the closing. It is Larken's responsibility to terminate all...

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