Walter v. Holiday Inns, Inc.

• Decision Date: 16 February 1993
• Docket Number: Nos. 92-5146,92-5146,L,92-5147 and 92-5152,No. 92-5114,Nos. 92-5114,92-5114,s. 92-5146,s. 92-5114
• Citation: 985 F.2d 1232
• Parties: Fed. Sec. L. Rep. P 97,344 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 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, v. HOLIDAY INNS, INC.; Harrah's New Jersey, Inc.; Harrah's Atlantic City, Inc.; Marina Associates; Holiday Corporation; the Promus Companies Incorporated; and Embassy Suites, Inc., Louis Walter, Appellant inouis 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, Appellants in/5147/5152.
• Court: U.S. Court of Appeals — Third Circuit

Page 1232

985 F.2d 1232

Fed. Sec. L. Rep. P 97,344

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 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, v. HOLIDAY INNS, INC.; Harrah's New Jersey, Inc.; Harrah's

Atlantic City, Inc.; Marina Associates; Holiday

Corporation; the Promus Companies Incorporated; and

Embassy Suites, Inc., Louis Walter, Appellant in No. 92-5114,

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, Appellants in Nos.

92-5146/5147/5152.

Nos. 92-5114, 92-5146, 92-5147 and 92-5152.

United States Court of Appeals, Third Circuit.

Argued Dec. 3, 1992.

Decided Feb. 16, 1993.

Hillel Chodos (argued), Los Angeles, CA, Richard D. Wilkinson, Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, NJ, Michael Blumenfeld, Fierstein & Sturman, Los Angeles, CA, for appellants.

Ronald L. Reid, Alston & Bird, Atlanta, GA, Joseph R. Sahid (argued), Stuart W. Gold, Cravath, Swaine & Moore, New York City, Bruce I. Goldstein, Saiber, Schlesinger, Satz & Goldstein, Newark, NJ, for appellees.

Before: SLOVITER, Chief Judge, GREENBERG and SEITZ, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Chief Judge.

Plaintiffs are several individuals and a corporation who formed a 50-50 partnership with Holiday Inns, Inc. (Holiday) in 1979 to develop and operate Harrah's Marina Hotel and Casino in Atlantic City, New Jersey. ¹ In 1981, plaintiffs sold their 49% interest in the partnership to Holiday. In 1983, plaintiffs sold their remaining 1% interest to Holiday. In 1985, four years after the first sale, by which time the hotel/casino complex had become highly profitable, they filed this suit claiming that in the buy-out transaction Holiday committed common law fraud, violated federal securities laws, and breached the fiduciary duty it owed to plaintiffs. After plaintiffs presented their case, the district court granted Holiday's motion for judgment as a matter of law on the breach of fiduciary duty claim. See Walter v. Holiday Inns, Inc., 784 F.Supp. 1159 (D.N.J.1992). At the conclusion of the trial, the jury decided for Holiday on the remaining claims. Plaintiffs appeal.

I. FACTS AND PROCEDURAL HISTORY

In August 1978, shortly after New Jersey legalized gambling, the plaintiffs purchased a tract of land with the intent of developing a hotel and casino complex at a marina in Atlantic City. Plaintiffs then created two New Jersey corporations (L & M Walter Enterprises, Inc. and Bayfield Enterprises, Inc.) and had both entities form a general partnership known as Marina Associates. After looking for a suitable partner to develop the casino, plaintiffs sold Bayfield Enterprises to Holiday on January 30, 1979 and entered into a 50-50 Partnership Agreement with the hotel chain. Both parties agreed to make an initial capital contribution of $2 million each to the partnership business.

The partners successfully obtained a $75 million loan for the project from Midlantic National Bank, which later advanced an additional $20 million to the partnership. Construction commenced in early 1980 and proceeded at a rapid pace.

While the construction of the casino was progressing, the partners executed several documents that defined the nature of their relationship. Pursuant to a Memorandum of Understanding dated June 6, 1980, the partners agreed to advance in equal shares additional capital to the casino on an as-needed basis to cover project development (pre-opening) or operating (post-opening) cash shortfalls. If one partner was unable to meet its share, the other could advance the funds and then serve a written "cash call" letter on the non-contributing partner. The Memorandum provided that a failure to comply with a strict timetable for repayment of the cash call would result in a dilution of the non-contributing partner's interest in the casino, with the degree of dilution linked to the total amount of the cash call. The conditions for relief from dilution because of failure to meet a project development cash call were more formidable than those for an operating cash call.

A second Memorandum of Understanding dated June 20, 1980 set forth how the casino was to be managed. The day-to-day operations were turned over to Harrah's, Inc., a subsidiary of Holiday. The more important management and financing decisions remained with the partnership's Executive Committee, which was composed of two Holiday executives and two of the plaintiffs, Louis Walter and Lance Walter. The Executive Committee's decision-making power included, inter alia, overseeing the completion of the casino's construction and development, approving capital expenditures for replacement and expansion that exceeded 4% of total revenues for any year, the creation of long-term debt, and the creation of short-term debt for working capital in excess of $2 million.

The hotel and casino complex opened its doors to the public on November 22, 1980, before all of the construction was completed. However, construction costs rose substantially over budget, and financial concerns mounted. At a meeting of the Executive Committee in January 1981, the plaintiffs were presented with financial projections for the casino. Walter Haybert, the Chief Financial Officer of Marina Associates, presented "a 'worst case' projection of profit and loss for 1981 with related projections of monthly cash flow." Minutes of meeting, App. at 28007. He explained the need to substantially supplement working capital in the project development budget.

Shortly thereafter, two separate cash call letters were issued formally demanding that plaintiffs make equity contributions to the project. The first letter advised that an equity contribution of $18.8 million was required to cover expenditures in connection with the project development budget (plaintiffs' half being $9.4 million). The second letter, which cited Marina Associates' negative cash flow, was a call for cash increments due from November 1980 to May 1981 totaling $15.7 million (plaintiffs' share being $7.85) to cover operating shortfalls for the project.

Plaintiffs determined not to supply their share of the funds requested, allegedly relying on Holiday's pessimistic predictions about the financial prospects of the Marina. As a result, Holiday advanced its own funds to cover the shortfalls, and plaintiffs' partnership interest was diluted pursuant to the formula specified in the partners' prior agreements.

At the same January 1981 Executive Committee meeting, the partners also approved an Information Flow Agreement that specified the items of partnership financial data, such as financial statements and internal audit reports, that would be provided to the plaintiffs.

The financial situation presented at the January 1981 Executive Committee Meeting apparently precipitated plaintiffs' efforts to sell their interest in the casino to outside investors. However, there is some evidence in the record that in 1980 plaintiffs had approached Holiday and others to purchase plaintiffs' partnership interest. After the January 1981 meeting, negotiations Sometime after the 1981 buy-out, the casino became a profitable enterprise. Under New Jersey law, the casino's profits and losses were a matter of public record and plaintiffs implicitly concede that they were aware of the highly profitable operations of Marina from 1982 to 1984. Nevertheless, plaintiffs did not challenge the buy-out transaction until this suit was brought in 1985. In that period, they sold their remaining 1% interest to Holiday and continued to do business with Holiday elsewhere. Louis Walter claims he was prompted to file this action by a newspaper article in which Donald Trump, the owner of another casino, suggested that Holiday had taken advantage of the plaintiffs in connection with the 1981 buy-out.

                with Holiday resumed at plaintiffs' request.   They continued until the parties agreed on the terms of a buy-out on May 9, 1981, whereby Holiday agreed to acquire plaintiffs' 49% interest in the partnership for payments to plaintiffs of $1.75 million per year for twenty years, which plaintiffs calculate had a present value of $10.9 million.   In July 1983, plaintiffs sold their remaining 1% interest to Holiday for an additional $1.8 million
                

Plaintiffs filed this suit against Holiday on October 7, 1985. Although the complaint refers to "defendants fraudulent misrepresentations and concealment of material facts and ... breach of fiduciary duties owed to plaintiffs," the essence of plaintiffs' claims is that Holiday failed to provide them with certain information that they needed to negotiate the buy-out transaction from an equal position with Holiday. They also assert that Holiday had designed a "cash call strategy" to force the buy-out on terms unfavorable to plaintiffs.

Nearly six years of pre-trial discovery followed the filing of the complaint. Some of that time was spent on motions relating to the production of almost 200 documents that Holiday claimed were protected by the attorney-client or work-product doctrine privilege. Inexplicably, Holiday's motion for a protective order was under submission to the Magistrate Judge for three and one half years, and plaintiffs did not receive the documents until the spring of 1991.

A jury was empaneled in September 1991. After plaintiffs rested their case-in-chief, Holiday moved for judgment as a matter of law on all claims. The district court granted...