Walter v. Holiday Inns, Inc.

• Decision Date: 28 February 1992
• Docket Number: Civ. A. No. 85-4833.
• Citation: 784 F. Supp. 1159
• Parties: Louis WALTER, Lance Walter, individually, as Trustee of the Testamentary Trust created under the Will of Manuel Walter for the benefit of Toni Walter Stern, and as Executor of the Estate of Manuel Walter, Toni Walter Stern, the Walter Company, a California general partnership, Herbert Sturman, individually and as Executor of the Estate of Harvey Fierstein, and Paul Syphus, Plaintiffs, v. HOLIDAY INNS, INC., Harrah's New Jersey, Inc., Harrah's Atlantic City, Inc., and Marina Associates, a New Jersey Partnership, and Embassy Suites, Defendants.
• Court: U.S. District Court — District of New Jersey

784 F. Supp. 1159

Louis WALTER, Lance Walter, individually, as Trustee of the Testamentary Trust created under the Will of Manuel Walter for the benefit of Toni Walter Stern, and as Executor of the Estate of Manuel Walter, Toni Walter Stern, the Walter Company, a California general partnership, Herbert Sturman, individually and as Executor of the Estate of Harvey Fierstein, and Paul Syphus, Plaintiffs, v. HOLIDAY INNS, INC., Harrah's New Jersey, Inc., Harrah's Atlantic City, Inc., and Marina Associates, a New Jersey Partnership, and Embassy Suites, Defendants.

Civ. A. No. 85-4833.

United States District Court, D. New Jersey.

February 28, 1992.

Hillel Chodos, Los Angeles, Cal., Michael Blumenfeld, Fierstein & Sturman, Los Angeles, Cal., Richard D. Wilkinson, Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, N.J., for plaintiffs.

Joseph R. Sahid, New York City, Bruce I. Goldstein, Saiber, Schlesinger, Satz & Goldstein, Newark, N.J., Ronald Reid, Alston & Bird, Atlanta, Ga., for defendants.

OPINION

RODRIGUEZ, District Judge.

This matter comes before the court on defendants' Motion for Judgment as a Matter of Law, pursuant to Fed.R.Civ.P. 50. For the following reasons, defendants' motion will be granted in part and denied in part.

I. INTRODUCTION

This action, originally filed October 7, 1985, arises out of a series of transactions involving Harrah's Marina Hotel & Casino in Atlantic City, New Jersey. It involves big business and big finances, and is a paradigm of hopes and illusions experienced by entrepreneurs seeking high yields.

We begin when legalized gambling was in its infancy with only one casino open on the boardwalk in Atlantic City. The dream was that it would be an industry measured in billions of dollars, dollars which would be invested and spent not only in casino/hotels but also on almost every other facet of economic and social life.

Twenty-five casinos were planned for construction in January, 1979. Six casinos were planned for the marina area, a location two miles away from the Atlantic City Boardwalk.

Many were awakened from the dream by 1981 because the economic climate changed dramatically. Inflation was at thirteen percent (13%) annually. Of the six casinos that were open, only three were profitable. Six casinos were stalled in the planning stage and only one opened in the marina area, Harrah's Marina Hotel/Casino. Threatened competition from surrounding states added to the concern.

The facts are extensive and, at times, complicated; therefore, only an "abbreviated" factual setting is provided in order to address the issues in need of decision at this time.

The principle plaintiffs in this action, Lou Walter, Lance Walter, and Herbert Sturman, are investors who were seeking a business interest in the newly created Atlantic City gaming industry.¹ In August of 1978, they acquired an interest in property in Atlantic City as a prospective site for future construction. See Exh. 1047 at 2. The plaintiffs then courted the defendants, Holiday Inn, Inc., and enticed them to join the venture. See id. at 3. After some negotiation about the corporate entity's structure, in late 1978 the plaintiffs and the defendants entered into a 50-50 partnership agreement to build a hotel and casino in Atlantic City on the marina.² See id. at 3-4.

Midway through 1979, the partnership was able to obtain a bank loan commitment from the Midlantic Bank for $75 million. See id. at 7.

By 1980, construction of the hotel and casino was well under way. In May of 1980, the parties met to discuss expected shortfalls for the project, and the need for additional financing. See Exh. 1046.09, at 1-2. In June of 1980, the parties entered into a Memorandum of Understanding which included, inter alia, a section that directed the parties to attempt to obtain additional financing for the project.³ See Exh. 565, at 2. Later that same month, the parties formally turned over the day-to-day operation of the hotel to Harrahs, Inc., although certain responsibilities remained with the partnership's executive committee. See Exh. 571, at 4.

By August of 1980, the parties had acquired an additional loan commitment from Midlantic Bank in the amount of $20 million, bringing the total loan commitment up to $95 million. Pursuant to this change, a loan modification agreement was executed. See Exh. 1047, at 8.

It is at this point in time when events seemed to spin out of control. The construction costs for the project began to skyrocket, the management of the project site became an issue of concern, and everyone's eyes were directed towards the worsening economic condition faced by the country. To help compound the problem, the New Jersey Casino Control Commission notified the parties that the casino could not open if two top management people, William Dougal and Paul Syphus, were involved in the management. Both had been brought to the project by Lou Walter.

The Harrah's Marina Hotel and Casino opened its doors on November 22, 1980. Although the project was not fully completed, the casino was in operation and all the necessary licensing was in place to permit gambling. See id. at 9. By mid-January of 1981, the executive committee met to discuss the cost overruns and address concerns about the project. See id. at 10.

At this January meeting, the plaintiffs were presented with "worst case" projections for future earnings of the project. See Exh. 613, TAB A, at 2.⁴ Despite these immediate concerns, it appears that the defendants remained sanguine regarding the viability and profitability of the project. This is reflected in the forecasts presented at the March executive committee meeting, See Exh. 613, TAB B, Exh. 702, at 4, in which a mid-case forecast projecting $14.1 million in profits for 1981 was presented. See id. Trans. at 6472, 6481-82; Trans. at 6803-04; Trans. at 1495-96; Trans. at 1832. This projection proved overly optimistic.⁵ See Exh. 1011.01, at A04503; Exh. 1011.03, at A03085; Exh. 1013, TAB E. Trans. at 6691-92, 6769; Trans. at 6495; Trans. at 8778-80.

During this period, the plaintiffs did not invest additional money, and decided that they were interested in selling their shares in the partnership. The plaintiffs approached the defendants with offers to sell,⁶ see Exhs. 1046.15, 1227, 723 at 4-5; Trans. at 6421-22, 6426-28; Trans. at 4283, 4285-86, and also engaged in discussions with other entities.⁷ See Trans. at 6693-94; Trans. at 6506.

Although the plaintiffs did not agree to a sale of their interest until May 9, 1981, see Exh. 1047, at 11-12, they did not honor at least two requests for additional equity contributions ("cash calls") made by Bayfield to L & M Walter. The hotel and casino, meanwhile, continued to operate, and construction neared completion. See Exh. 625; Exh. 1386; Exh. 626.

On July 2, 1981, the buy-out agreement between the plaintiffs and defendants was consummated. As part of the agreement, the defendants agreed to pay the plaintiffs $10.9 million (present value) for their interest, to be paid over a twenty year period at the rate of $1.75 million a year for a guaranteed payout of $35 million. The plaintiffs would also retain a 1% interest in the project. See Exh. 1047, at 11-12.

Between January and July, 1981, three significant events occurred. First, in anticipation of the buy-out negotiations, the defendants prepared a financial projection that included a 10-year projection and a 35-year forecast. This report, known as the Boxer Report, indicated that the defendants were projecting large profits for the hotel/casino project.⁸See Exh. 734. This projection, based on the current financial statements and projected growth, was not seen by the plaintiffs prior to the buy-out. See Plaintiffs' Brief in Opp. at 52-54. There is some conflicting evidence as to whether the plaintiffs were even informed of its existence. See Id. at 52-54. For present purposes, however, what is important is the fact that although the projection itself was not seen by the plaintiffs, the factual bases upon which it was generated was in their possession. See Exh. 1004.01-1104.09; 1008.01-1008.15; Exh. 1009.01-1009.08; 1014.01-1014.06; Exh. 1015.01-105.14.

The second important event was the emergence of the Transaction Review Group report. This report, prepared by the defendants, discusses the problems and concerns regarding the marina project cost overruns. See Exh. 749, at 5. What is most important, according to plaintiffs, is that the report reveals mismanagement as a culprit for the significant cost overruns. See Plaintiffs' Brief in Opp. at 46-47.

The third noteworthy event was the fact that the project turned profitable. Although 1981 ended with roughly $1 million dollars in profit for the defendants, See Exh. 1011.01, at A04503; Exh. 1011.03, A03085; Exh. 1013, TAB E); Exh. 1042 at 5, by 1983 the project was generating substantial sums of money for the defendants. In fact, 1983 was one of the most profitable years to date for the project.

Despite the high profit, in mid-July, 1983, the plaintiffs decided to sell their remaining 1% interest to the defendants for $1.8 million. See Exh. 1329 at 2. This they did, and the relationship between the parties was ended, with the defendants holding the entire interest in the project. See Exh. 100.29; Exh. 1001.42; Exh. 1047 at 12-13.

All was well until 1985, when the plaintiffs were piqued by a comment made by another developer in Atlantic City, Donald Trump. See Plaintiffs' Brief in Opp. at 59. An article published in the newspaper quoting an estimate made by Donald Trump prompted Sturman in June of 1985 to pursue a conversation with Trump, and through lawyers in his firm, to commence an investigation. See Trans. at 6623 (stipulation of the parties). The plaintiffs then brought this action, alleging securities fraud, common law fraud, and breach of fiduciary duty. The plaintiffs further sought rescission of the sale and punitive damages. Estimated damages...