Opinion
Index No. 650502/2013 Motion Seq. No.: 013 Motion Seq. No.: 014
03-14-2014
JFK HOTEL OWNER, LLC, Plaintiff, v. HILTON HOTELS CORP., HILTON HOSPITALITY CORP., HLT EXISTING FRANCHISE HOLDING LLC, DOUBLETREE HOTEL SYSTEMS, INC., HILTON WORLDWIDE, CIBX COMMERCIAL MORTGAGE, LLC, and US BANK NATIONAL ASSOCIATION, as trustee for the registered holders of J. P. Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX, Commercial Mortgage Pass-Through Certificates, Series 2012-CIBX, Defendants.
BRANSTEN, J.
In motion sequence 013, Defendant CIBX Commercial Mortgage LLC ("CIBX") moves to dismiss Plaintiff JFK Hotel Owner LLC's ("JFK Hotel") Second Amended Complaint ("SAC") pursuant to CPLR 3211(a)(1) and (a)(7). Plaintiff opposes. In motion sequence 014, Defendants Hilton Hotel Corp. ("HHC"), Hilton Hospitality Corp. ("HHCI"), HLT Existing Franchise Holding LLC ("HLT Existing"), DoubleTree Hotel Systems, Inc. ("DoubleTree"), and Hilton Worldwide ("HW", collectively, "Hilton" or the "Hilton Defendants") move to dismiss JFK Hotel's Second Amended Complaint pursuant to CPLR 3211(a)(1), (a)(5), and (a)(7). For the reasons set forth below, CIBX's motion to dismiss is granted in part and denied in part, and Hilton's motion to dismiss is granted in part and denied in part.
Background
Allegations in this section are drawn from the Second Amended Complaint.
JFK Hotel owns and operates a 385-room hotel near the John F. Kennedy International Airport in Queens, New York (the "Hotel"). (SAC ¶ 21.) In 2006, JFK Hotel contracted with DoubleTree to operate the Hotel under the DoubleTree brand (the "Franchise Agreement"). (SAC ¶ 23.) From 2007 to 2013, Plaintiff operated the Hotel under the DoubleTree franchise. (SAC ¶ 25.) The Franchise Agreement provided the Hotel with access to many benefits, such as Hilton's on-line reservation system, the HiltonHonors database, and signage. (SAC ¶ 24).
In July 2007, the Blackstone Group, a large financial services firm, purchased HHC. (SAC ¶ 33.) Plaintiff alleges that in September 2007, Blackstone caused DoubleTree to assign the Franchise Agreement to HLT Existing. (SAC ¶ 34.) Plaintiff further alleges that since April 2008, various individuals from HW, HLT Existing, and DoubleTree have represented themselves as being agents of HLT Existing. (SAC ¶ 36.) Plaintiff also alleges that a vice president of HHC signed an amendment to the Franchise Agreement reflecting a change in the ownership of the Hotel. (SAC ¶ 35.)
A. Plaintiff Refinances the Hotel
In late 2010, JFK Hotel sought to refinance a loan that was secured by the Hotel. (SAC ¶ 9, 49.) Plaintiff worked with a Canadian bank, CIBC, Inc. ("CIBC"), and dealt with CIBC employees at CIBC offices during the loan process. (SAC ¶¶ 9, 49-51.) However, the final lender was not CIBC, but rather CIBX. (SAC ¶ 51.) Unknown to Plaintiff at the time of lending, CIBX is a joint venture between CIBC, as 17% owner, and BSSF Commercial Mortgage Member, LLC ("BSSF"), as 83% owner. (SAC ¶ 9.) BSSF is a subsidiary of Blackstone Real Estate Debt Strategies, which is a division of the Blackstone Group. (SAC ¶¶ 10-11.)
In order to induce CIBX to enter into the mortgage, an agreement was entered into between CIBX, Plaintiff, and HLT Existing to provide assurances against the loss of the DoubleTree franchise (the "Comfort Letter"). (SAC ¶ 69.) The terms of the Comfort Letter (i) provided CIBX with certain cure rights, (ii) called for Plaintiff to deliver a general release of HLT Existing, and (iii) required HLT Existing to acknowledge that there was no default under the Franchise Agreement. (SAC ¶ 71.) The loan closed in June 2011 for $35,000,000 (the "Loan"). (SAC ¶ 73.) CIBC serviced the Loan until July 2012, when Wells Fargo assumed servicing responsibilities. (SAC ¶ 87.)
In addition to being the original lender, CIBX also served several other roles related to the Loan. (SAC ¶ 9.) On June 22, 2012, CIBX assigned the Loan to US Bank National Association ("US Bank") as trustee for the registered holders of the J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX. (SAC ¶ 83.) CIBX served as both the depositor of the Loan into a mortgage pool and as the sponsor of the offering of securitized interests in the pool. (SAC ¶ 9.) Further, CIBX owned certificates, and as a certificateholder of the pool, served as the "Designated Certificateholder," acting for the controlling class of the mortgage pool. (SAC ¶ 9.)
It was not until roughly one year after the closing of the Loan that public documents showed that Blackstone indirectly controlled CIBX. (SAC ¶ 81.) In addition, CIBX's sale of the Hotel's mortgage to the securitization trust was not recorded in Queens County until April 1, 2013. (SAC ¶ 88.)
B. Events Leading to Termination of Franchise Agreement
Hilton periodically conducts quality inspections of its franchises throughout the world. (SAC ¶ 91.) The Complaint alleges that from August 2009 until February 2011, the scores that the Hotel received on its quality inspection reports steadily improved. (SAC ¶ 92.) The Complaint further alleges that in November 2011, no points were deducted from the Hotel's assessment for its failure to have the proper number of portable tub seats as required by the Americans With Disabilities Act ("ADA"). (SAC ¶ 95.) During an inspection in February 2012, Hilton resulted in a deduction of twenty points for missing tub seats and alarm system issues. (SAC ¶ 103.) During an inspection in July 2012, after the Loan's securitization, Hilton deducted 126 points for failure to have six of twelve tub seats. (SAC ¶ 97.)
Plaintiff alleges that tub seats had been back-ordered since March 2012. (SAC ¶ 98.) Further, Plaintiff avers that the Hotel ordered tub seats again in October 2012, but Hurricane Sandy prevented their delivery. (SAC ¶ 98.) During an inspection on January 3, 2013, 126 points were again deducted for having only eight of twelve required tub seats. (SAC ¶ 103.) The Second Amended Complaint alleges that the tub seats arrived at the Hotel on January 4, 2013 and that no guest ever requested a tub seat without receiving one. (SAC ¶¶ 101, 103.)
C. Franchise Termination and Loan Default
On January 18, 2013, Hilton notified Plaintiff that the Franchise Agreement would be terminated as of February 17, 2013 (the "Termination Notice"). (SAC ¶ 106.) The Termination Notice stated that the default was non-curable in accordance with Section 14(b)(1) of the Franchise Agreement. (SAC ¶ 109.) The Termination Notice described Plaintiff as engaging in the same noncompliance within a consecutive twenty-four month period and in a pattern of non-compliance with DoubleTree system standards over a significant period. (SAC ¶¶ 109-10.) The Termination Notice also demanded $4 million in liquidated damages pursuant to the Franchise Agreement. (SAC ¶ 112.)
US Bank, through its special servicer, Midland Loan Services ("Midland"), sent Plaintiff a notice of default on the Loan dated February 8, 2013 ("Notice of Default"). (SAC ¶ 131.) The Notice of Default accelerated the Loan's due date and increased the interest rate to the default rate. (SAC ¶ 131.) The grounds for default stated in the Notice of Default were (i) a default under the Franchise Agreement that entitled Hilton to terminate, and (ii) the termination of the Franchise Agreement. (SAC ¶¶ 133-34.) US Bank did not exercise any of its cure rights under the Comfort Letter. (SAC ¶ 138.)
On February 9, 2013, Radisson Hotels International, Inc. ("Radisson") approved a franchise for the Hotel. (SAC ¶ 129.) Contrary to Plaintiff's interpretation of the Loan, US Bank required its consent before allowing the Radisson re-branding to proceed. (SAC ¶ 149.) Plaintiff alleges that CIBX, through its control of US Bank and Midland, unreasonably conditioned consent to the re-branding upon Plaintiff paying various fees and establishing a litigation reserve. (SAC ¶ 158.)
D. Plaintiff Files Instant Lawsuit
On February 15, 2013, Plaintiff filed the instant suit, seeking a temporary restraining order enjoining Hilton from terminating the Franchise Agreement, which this Court granted (the "TRO"). On August 15, 2013, Plaintiff settled its claims against US Bank, and US Bank agreed to the Radisson re-branding and to withdraw the Notice of Default. (Aug. 15, 2013, Oral Arg. Tr, at 26:1-38:22 (Nina Koss O.C.R.).) In October 2013, the Hotel successfully re-branded as a Radisson. (Oct. 15, 2013, Oral Arg. Tr., at 4:12-15 (Nina Koss O.C.R.).)
In Plaintiff's Second Amended Complaint, it asserts claims against the Hilton Defendants, CIBX and US Bank. As noted above, all claims against US Bank and Midland have been settled, including Plaintiff's ninth cause of action. In addition, Plaintiff's first, tenth, eleventh, and twelfth causes of action have been withdrawn or rendered moot due to the completion of the re-branding process.
The Second Amended Complaint asserts ten remaining causes of action. As against CIBX, the Second Amended Complaint asserts (i) breach of contract arising out of the Notice of Termination, (ii) breach of contract arising from wrongful acceleration of the Loan's balance, (iii) breach of contract arising from interference with the Radisson re-branding process, (iv) breach of contract arising from concealing the Loan's securitization, (v) breach of the covenant of good faith and fair dealing in the Loan arising from a failure to investigate the circumstances surrounding the Termination Notice, (vi) tortious interference with prospective business relations arising from Radisson re-branding, and (vii) fraudulent inducement for failure to disclose CIBX's and DoubleTree's relationship through Blackstone. Against the Hilton Defendants, the Second Amended Complaint asserts causes of action for (i) breach of contract for wrongful termination of the Franchise Agreement, (ii) breach of the covenant of good faith and fair dealing, (iii) tortious interference with contract by providing the Termination Notice to US Bank and CIBX, and (iv) fraudulent inducement for failure to disclose CIBX's and DoubleTree's relationship through Blackstone.
In motion sequence 013 and 014, CIBX and the Hilton Defendants move to dismiss the Second Amended Complaint.
I. Motion to Dismiss Standard
On a motion to dismiss a complaint for failure to state a cause of action, all factual allegations must be accepted as truthful, the complaint must be construed in a light most favorable to the plaintiffs and the plaintiffs must be given the benefit of all reasonable inferences. Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174 (1st Dep't 2004). "We . . . determine only whether the facts as alleged fit within any cognizable legal theory." Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). This Court must deny a motion to dismiss, "if from the pleadings' four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (internal quotation marks and citations omitted).
However, on a CPLR 3211(a)(1) motion, "[i]t is well settled that bare legal conclusions and factual claims, which are either inherently incredible or flatly contradicted by documentary evidence . . . are not presumed to be true on a motion to dismiss for legal insufficiency." O'Donnell, Fox & Gartner v. R-2000 Corp., 198 A.D.2d 154, 154 (1st Dep't 1993). The court is not required to accept factual allegations that are contradicted by documentary evidence or legal conclusions that are unsupported in the face of undisputed facts. See Zanett Lombardier, Ltd. v. Maslow, 29 A.D.3d 495, 495 (1st Dep't 2006) (citing Robinson v. Robinson, 303 A.D.2d 234, 235 (1st Dep't 2003). Ultimately, under CPLR 3211(a)(1), "dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." Leon, 84 N.Y.2d at 88.
II. CIBX's Motion to Dismiss
In motion sequence 013, Defendant CIBX moves to dismiss the Second Amended Complaint pursuant to CPLR 3211(a)(1) and (a)(7), on the grounds that Plaintiff fails to state a cause of action and that the terms of the Loan foreclose Plaintiff's claims.
A. Breach of Contract Claims Against CIBX Arising from Control of US Bank
Plaintiff alleges three causes of action against CIBX that arise out of US Bank and Midland's conduct in handling the Loan. First, the third cause of action alleges that CIBX breached the Loan's terms by causing US Bank to issue the Notice of Termination. Second, the fourth cause of action alleges breach of contract arising from CIBX causing US Bank to wrongful accelerate the Loan's balance. Finally, the fifth cause of action alleges that CIBX breached the Loan's terms by causing US Bank to interfere with the Radisson re-branding process.
To state a claim for breach of contract, a plaintiff must plead the existence of a valid contract, plaintiff's performance thereunder, defendant's breach and resulting damages. See Morris v. 702 E. Fifth St. HDFC, 46 A.D.3d 478. 479 (1st Dep't 2007). The Second Amended Complaint does not allege that CIBX is in contractual privity with Plaintiff. Rather, Plaintiff alleges that CIBX should be held liable as if it were the contracting party, namely US Bank, because it has some unknown right to direct US Bank's action as relating to the Loan's securitization.
Plaintiff cites Cerchia v. V.A. Mesa, Inc. for the proposition that further discovery is needed to discern the extent of CIBX's control over US Bank and US Bank's handling of the Loan. 191 A.D.2d 377, 378 (1st Dep't 1993). In Cerchia, the First Department held that discovery on jurisdictional issues was necessary and that the complaint should not have been dismissed on jurisdictional grounds. Id. The court stated that "discovery may reveal evidence supporting a conclusion that [the defendant corporation] may be acting as a "dummy" corporation for [the corporation under contract] so that the latter could avoid payment of plaintiff's commissions." Id.
Plaintiff argues that the "degree to which CIBX continues to exercise control over the Loan" is presently unknown. Plaintiff contends that further discovery is needed to discern the terms of the Loan assignment to US Bank and CIBX's continued right to control US Bank. However, Plaintiff's allegations fall short of the allegations in Cerchia sufficient to defeat a motion to dismiss. Here, no discovery is necessary because the veil piercing claim fails on its face.
The Second Amended Complaint alleges that CIBX, as "Designated Certificateholder" controlled the actions of US Bank to perpetrate a wrong against JFK Hotel. Although the Loan in owned by a trust and not a corporation, Plaintiff's breach of contract claims against CIBX, arising from US Bank's conduct, closely resembles an attempt to pierce the corporate veil or some other type of alter ego claim. CIBX can be viewed as the controlling shareholder, and US Bank as the corporation.
As New York courts have long held, "[p]iercing of the corporate veil is not a cause of action independent of that against the corporation; it is established when the facts and circumstances compel a court to impose the corporate obligation on its owners, who are otherwise shielded from liability." Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 174 (1st Dep't 2013) (citing Morris v. New York State Dept. of Tax. and Fin., 82 N.Y.2d 135, 141 (1993). The same concept can be applied to the instant case. The release of the underlying wrong would preclude a plaintiff from asserting claims against the controlling entity. Cf. Skylon Corp. v. Guilford Mills, Inc., 901 F.Supp. 711, 714 n.4 (S.D.N.Y. 1995) ("'Despite that fact that master and servant are not joint tort feasors [sic], a release of one discharges the other.'") (quoting Kinsey v. William Spencer & Son Corp., 165 Misc. 143 (N.Y. Sup. Ct. 1937), aff'd, 255 A.D. 995 (2d Dep't 1938), aff'd, 281 N.Y. 601 (1939)).
Plaintiff has released all of its claims against US Bank as trustee and Midland as special servicer. See Aug. 15, 2013, Oral Arg. Tr., at 31:11-32:7 (Nina Koss O.C.R.). Accordingly, any allegedly wrongful actions taken by US Bank that may have been directed by CIBX have been released and can no longer support a claim. The level of CIBX's control over US Bank's actions is irrelevant because the underlying claims have been settled. Unlike in Cerchia, no amount of discovery will yield a different result.
Therefore, Plaintiff's breach of contract claims against CIBX, arising from US Bank's actions, namely the third, fourth, and fifth causes of action, are dismissed with prejudice.
B. Breach of Contract Arising Out of Securitization and Use of Confidential Information
Plaintiff's sixth cause of action asserts a breach of contract against CIBX for its role in the securitization process of the Loan and improper use of confidential information.
i. Securitization
Plaintiff alleges that the securitization of the Loan triggered Plaintiff's right to sell the Hotel. Plaintiff further alleges that CIBX was the only party with knowledge of the securitization, and therefore CIBX had a duty to notify Plaintiff that its right to sell was triggered. Plaintiff argues that it had no way to discover the securitization and that CIBX breached its implied duty to notify Plaintiff upon securitization. CIBX argues that the Loan does not contain any language that imposes a duty to notify Plaintiff about the securitization.
In order to state a cause of action for breach of contract, the pleading must allege the existence of an agreement, performance by the plaintiff, failure to perform by the defendant, and resulting damages. See, e.g., Harris v. Seward Park Hous. Corp., 79 A.D.3d 425, 426 (1st Dep't 2010). The parties dispute the existence of an agreement requiring CIBX to disclose the securitization. The provision that most closely resembles any such agreement to disclose is Section 4.11(b) of the Loan, which states:
Lender shall not unreasonably withhold its consent to the sale of the Property [if the buyer meets specified criteria] . . . and is otherwise reasonably acceptable to Lender . . . provided that such Sale occurs after the earlier to occur of a Secondary Market Transaction and the date that is two years from the date of this Agreement.See SAC Ex. 5 at 43
When dealing with issues of contract interpretation, courts must construe the agreement according to the parties' intent, and the best evidence of what parties to a written agreement intended is what was said in the writing. See, e.g., Slatt v. Slatt, 64 N.Y.2d 966, 966 (1985). Courts may not fashion a new contract for the parties under the guise of interpreting the writing. See, e.g., Tonking v. Port. Auth. of N.Y. & N.J., 3 N.Y.3d 486, 490 (2004) (holding that a court may not "rewrite the contract and supply a specific obligation the parties themselves did not spell out"); Flag Wharf, Inc. v. Merrill Lynch Capital Corp., 40 A.D.3d 506, 507 (1st Dep't 2007) ("Courts will not rewrite contracts that have been negotiated between sophisticated, counseled commercial entities").
Plaintiff does not point to any specific provision in the Loan that requires CIBX to disclose the securitization. Plaintiff cannot identify any such provision because there is simply no stated obligation in the Loan to disclose the Loan's securitization. See Tanking, 3 N.Y.3d at 490 (courts may not "supply a specific obligation the parties themselves did not spell out"). However, Plaintiff is correct that implied obligations can exist in contracts under certain circumstances. This argument will be addressed in the next section, regarding the implied covenant of good faith and fair dealing.
Beyond the lack of a contractual duty to disclose, Plaintiff fails to plead that its damages are a result of the alleged breach. Under the Loan. Plaintiff always had a right to seek the lender's consent to sell the Hotel. See SAC Ex. 5 at 42 (Loan § 4.11(a)). The Loan's securitization did not change Plaintiff's rights, it only changed the level of discretion that the lender could exercise in refusing to consent to the sale. The Loan states that because the lender is relying on the expertise of Plaintiff in operating the hotel, the lender will have absolute discretion in allowing the sale of the Hotel for up to two years, or until securitization. See SAC Ex. B at 42. After securitization, the lender could not unreasonably withhold consent to a sale. See SAC Ex. B at 42.
Plaintiff avers that its right to sell the Hotel with reasonable consent from the lender was triggered when the Loan was securitized. The Loan was dated June 10, 2011, and the securitization occurred on June 22, 2012. See SAC ¶¶ 80-83, Ex. 5 at 1. Therefore, Plaintiff missed the opportunity to sell the Hotel for one year under the reasonable consent standard, rather than the absolute discretion standard.
However, the Second Amended Complaint fails to plead either what damages were suffered during this year, or how the alleged breach caused those damages. The Plaintiff does not plead any missed sale opportunity or the lender's improper rejection of a proposed sale using an improper standard. Without resulting damages, a claim for breach of contract cannot stand. See Fowler v. Am. Lawyer Media, Inc., 306 A.D.2d 113, 113 (1st Dep't 2003) ("the complaint still fails as it lacks allegations showing any damages.") (citing Lexington 360 Assocs. v. First Union Nat'l Bank, 234 A.D.3d 187, 189-90 (1st Dep't 1996). Therefore, Plaintiff has failed to state a cause of action for breach of contract based upon CIBX's failure to disclose the securitization.
ii. Confidential Information
Plaintiff alleges that CIBX breached its obligations under the Loan by using Plaintiff's confidential information "for purposes other than those permitted under the Loan." More specifically, Plaintiff avers that CIBX disseminated confidential information as demonstrated in a news article, entitled "Hotel Loan Taints Post-Crisis CMBS," which is annexed to the Second Amended Complaint as Exhibit 22. The article cites two financial analysts from Barclays who allegedly learned that the Franchise Agreement was terminated from a Midland "servicing note." See SAC Ex. 22 at 1.
Exhibit 22 to the Second Amended Complaint does not support Plaintiff's theory of breach because the article references only Midland. See SAC Ex. 22. The article states that "Midland Loan Services . . . indicated the . . . franchise agreement was terminated 'for cause.'" See SAC Ex. 22. There is simply no reference to CIBX's disclosures. As noted above, any claims against US Bank and Midland have been settled and cannot support a cause of action against CIBX.
Also as noted above, Plaintiff fails to plead what damages were suffered as a result of the breach, and how those damages were caused by the disclosure of confidential information. See Lexington 360 Assocs. v. First Union Nat. Bank of North Carolina, 234 A.D.2d 187, 190 (1st Dep't 1996) ("Where a party has failed to come forward with evidence sufficient to demonstrate damages flowing from the breach alleged and relies, instead, on wholly speculative theories of damages, dismissal of the breach of contract claim is in order").
CIBX's dissemination of Plaintiff's confidential information as alleged in the Complaint cannot support a breach of contract claim. The alleged disclosure was done through Midland and any claim was settled. Therefore, Plaintiff's sixth cause of action is dismissed, without prejudice to replead other allegedly improper disclosures.
E. Breach of the Covenant of Good Faith and Fair Dealing
Plaintiff's eighth cause of action asserts that CIBX breached the covenant of good faith and fair dealing inherent in the Loan, Plaintiff alleges that (i) CIBX caused Midland to issue the Notice of Default, (ii) CIBX failed to investigate the circumstances around the Termination Notice, (iii) CIBX failed to exercise any cure rights under the Comfort Letter, and (iv) CIBX interfered with the Radisson re-branding process. As already described, these allegations are all derivative of claims against US Bank and Midland that have been settled.
However, Plaintiff also puts forth two allegations that are asserted directly against CIBX. First, Plaintiff maintains that the Loan contained an implied duty requiring CIBX to disclose the securitization. Second, Plaintiff avers that CIBX intentionally concealed its Blackstone affiliation, knowing that Blackstone would be on both sides of the franchisor/lender relationship with the Hotel.
Since at least the early twentieth century, New York courts have stated that implied covenants can exist in a contract. In Wood v. Duff-Gordon, 222. N.Y. 88, 91 (1917), Justice Cardozo held that although a particular provision may not be expressly stated in a contract, a covenant may still be implied where a reasonable person in the position of the promisee would be justified in understanding such a promise. See also 511 W 232nd Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002) ("[T]he duties of good faith and fair dealing . . . encompass 'any promises which a reasonable person in the position of the promisee would be justified in understanding where included.'") (quoting Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 69 (1978)).
i. Duty to Disclose Securitization
The Second Amended Complaint avers that the Loan's securitization implicated Plaintiff's right to sell the Hotel. Plaintiff furthers alleges that CIBX was the only party with knowledge of the securitization, and therefore CIBX had a duty to notify Plaintiff that its right to sell was triggered. Plaintiff argues that because it had no way to discover the securitization on its own, the Loan contained an implied covenant that CIBX would notify Plaintiff upon securitization. CIBX argues that the Loan simply does not impose a duty to notify Plaintiff about the securitization.
The implied covenant of good faith and fair dealing superimposes upon contracts all promises that a reasonable person would understand as being included and are necessary to effectuate the intention of the parties. See 511 W. 232nd Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002). Courts in New York have held that a duty to give notice can be an implied covenant. See Components Direct, Inc. v. Eur. Am. Bank & Trust Co., 175 A.D.2d 227, 230 (2d Dep't 1991) ("[Defendant] had an absolute right to terminate credit under the loan agreement. However, . . . the obligation of good faith would require a period of notice to allow the corporate plaintiff a reasonable opportunity to seek alternate credit.").
Plaintiff's argument fails, however, because a breach of an implied covenant must have the effect of depriving one party of the fruits of the contract. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) (quoting Dalton v. Educational Testing Serv., 87 N.Y.2d 348, 389 (1995)).
In 511 W. 232nd Owners Corp., the defendant was the sponsor of a plan to convert an apartment building into a cooperative, and the plaintiffs were the board of directors and individuals who had purchased cooperative shares. See 98 N.Y.2d 144, 150 (2002). Plaintiffs alleged that the sponsor-defendant rejected offers from prospective buyers, allowed the offering plan to lapse, and retained a majority of the cooperative shares for itself. 511 W. 232nd Owners Corp., 98 N.Y.2d at 150, The Court of Appeals held that the complaint sufficiently pleaded a breach of the implied covenant of good faith because the alleged conduct of the sponsor-defendant "defeated the purpose of the contract." 511 W. 232nd Owners Corp., 98 N.Y.2d at 152. "In sum, plaintiffs allege that the sponsor's retention of shares so drastically undermined the contract that its fundamental objective--the creation of a viable cooperative—has been subverted." 511 W. 232nd Owners Corp., 98 N.Y.2d at 152.
Here, Plaintiff argues that CIBX "concealed the sale of the Loan . . . such that Plaintiff never learned of the acceleration of its rights to sell the Hotel." However, Plaintiff does not argue that CIBX's failure to disclose the securitization drastically undermined the purpose and fundamental objective of the Loan. Further, the Loan does not require a securitization, but merely allows for the possibility of a securitization, suggesting that the Hotel's sale after a securitization was not the primary purpose of the Loan. See SAC Ex. B at 74 ("Borrower acknowledges that Lender may effectuate a Second Market Transaction) (emphasis added). Therefore, CIBX's failure to provide notice of the securitization cannot be said to deprive Plaintiff of the fruits of the contract.
Accordingly, this Court holds that CIBX did not breach its duty of good faith and fair dealing by failing to notify Plaintiff of the securitization. In addition, for the reasons stated above, Plaintiff fails to allege any damages that resulted from the lack of notice.
ii. Implied Duty to Disclose CIBX's Relation to Blackstone
Plaintiff avers that CIBX actively concealed its affiliation with Blackstone with full knowledge that Blackstone would be both the franchisor and lender to the Hotel. Plaintiff argues that CIBX's concealment of this allegedly pivotal fact was material to its decision to enter into the Loan. CIBX argues that Plaintiff points to no actual duty, contractual or statutory, which required its disclosure of the relationship.
Although CIBX had no express duty to disclose, a duty to disclose or give notice can be implied through the covenant of good faith and fair dealing inherent in all contracts. See Lonner v. Simon Prop. Grp., 57 A.D.3d 100, 108 (2d Dep't 2008) ("the terms of the fee disclosure are . . . unclear and hidden, which is sufficient" to support a claim for breach of the implied covenant of good faith); Components Direct, Inc. v. Eur. Am. Bank & Trust Co., 175 A.D.2d 227, 230 (2d Dep't 1991) ("the obligation of good faith would require a period of notice to allow the corporate plaintiff a reasonable opportunity to seek alternate credit.").
Plaintiff sufficiently avers that CIBX's allegedly knowing concealment of the CIBX/Blackstone relationship "ha[d] the effect of destroying or injuring the right of [Plaintiff) to receive the fruits of the contract." See 511 W. 232nd Owners Corp., 98 N.Y.2d at 153. Plaintiff alleges that "the Hilton Defendants' bad faith, improper motive and wrongful acts in connection with the attempted wrongful termination of the Franchise Agreement are motivated in part by their affiliation with Blackstone and CIBX and their intention to benefit Blackstone and CIBX at Plaintiff's expense." See SAC ¶ 209.
Further, in contrast to the lack of allegations regarding the importance of post-securitization sale rights, the Second Amended Complaint repeatedly references the importance of the Blackstone relationship. Plaintiff pleads that it "considered the lack of an affiliation between its franchisor and its lender (whom it perceived to be CIBC) as crucial information in its refinancing decision." See SAC ¶ 60. Further, Plaintiff avers that "[t]he conflict of interest in having under common control the decision-making power on and over both Plaintiff's debt and Plaintiff's franchise . . . is a condition that Plaintiff did not knowingly accept. Information that would have revealed the connection between its franchisor and its lender was affirmatively concealed and in all events wrongfully not disclosed to Plaintiff." See SAC ¶ 61.
Accepting the allegations of the complaint as true and providing every reasonable inference in favor of Plaintiff, this Court cannot say as matter of law that the Second Amended Complaint fails to state a claim for breach of the implied covenant of good faith and fair dealing. Plaintiff sufficiently pleads that the failure to disclose CIBX's Blackstone relationship "drastically undermined the contract [such] that its fundamental objective . . . ha[d] been subverted." 511 W. 232nd Owners Corp., 98 N.Y.2d at 152. Therefore, CIBX's motion to dismiss the eighth cause of action is denied to the extent it alleges a breach of the implied covenant of good faith and fair dealing due to CIBX's concealment of Blackstone relationship and is otherwise granted.
F. Tortious Interference with Prospective Business Relations
Plaintiff's next claim against CIBX, the fourteenth cause of action, alleges that CIBX wrongfully interfered with Plaintiff's relationship with Radisson "through control of the actions of the Special Servicer." See SAC ¶ 251. Again, however, for the reasons stated above, averments against CIBX derived from its alleged actions in controlling US Bank and Midland cannot support a cause of action. All claims arising out of the conduct of both US Bank and Midland have been settled. Therefore, Plaintiff's fourteenth cause of action is dismissed with prejudice.
G. Fraudulent Inducement against CIBX
Plaintiff's final cause of action against CIBX alleges that both CIBX and the Hilton Defendants fraudulently induced Plaintiff to enter into the Loan and the Comfort Letter by failing to disclose the relationship between DoubleTree, as franchisor, and CIBX, as lender, through their ultimate parent corporation the Blackstone Group.
CIBX argues that it had no duty to make any affiliation disclosures to Plaintiff. CIBX contends that neither the Loan nor any statute or common law precept imposed such a disclosure duty. Plaintiff argues that the "special facts" doctrine imposed a duty on CIBX to disclose its corporate parentage because that information was exclusively within CIBX's control and could not have been discovered by Plaintiff.
"It is well established that, absent a fiduciary relationship between the parties, a duty to disclose arises only under the 'special facts' doctrine." Jana L. v. W. 129th St. Realty Corp., 22 A.D.3d 274, 277 (1st Dep't 2005). "The doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within [the] knowledge of [the defendant], and that the information was not such that could have been discovered by [the plaintiff] through the exercise of ordinary intelligence." Jana L., 22 A.D.3d at 278 (internal citations omitted). The Jana L. Court further noted that "[if] the other party has the means available to him of knowing . . . he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations." 22 A.D.3d at 278 (internal citations omitted). The First Department held that the plaintiff could not rely on the special facts doctrine because the plaintiff "had, at the very least, a duty to inquire. If nothing else, the 'exercise of ordinary intelligence' suggests a simple inquiry [is required]." Jana L., 22 A.D.3d at 278.
Here, despite Plaintiff's repeated allegations regarding the extreme importance of CIBX's Blackstone affiliation, the Second Amended Complaint does not aver that Plaintiff asked CIBX about its ownership structure. Further, the Second Amended Complaint also does not allege that Plaintiff conducted any research on this issue prior to closing on the Loan. "It is insufficient for [Plaintiff] to simply make the conclusory statement that the information . . . could not have been obtained [by it] through the exercise of ordinary intelligence." Jana L., 22 A.D.3d at 278.
Accordingly, CIBX's motion to dismiss Plaintiff's fifteenth cause of action for fraudulent inducement, as much as it is asserted against CIBX, is hereby granted, without prejudice to replead facts regarding Plaintiff's inquiry into CIBX's ownership.
III. Hilton's Motion to Dismiss
In motion sequence 014, the Hilton Defendants move to dismiss the Complaint pursuant to CPLR 3211(a)(1), (a)(5), and (a)(7), on the grounds that Plaintiff fail to state a cause of action, that Plaintiff released certain claims in the Comfort Letter, and that the terms of the Franchise Agreement foreclose Plaintiff's claims.
A. Breach of Contract Arising out of Termination Notice
Plaintiff's second cause of action asserts that Hilton breached the Franchise Agreement when it issued the Termination Notice. Plaintiff avers that the Termination Notice was improper because there was neither the same non-compliance with Hilton standards within a twenty-four month period, nor a "pattern" of non-compliance, as required by the Franchise Agreement.
Hilton moves to dismiss the breach of contact claim, arguing that there was a clear pattern of non-compliance. Hilton contends that the pattern of safety hazards and other deficiencies is shown in affidavits that accompanied Hilton's opposition to Plaintiff's motion for a temporary restraining order. Hilton further argues that it had the right to terminate the Franchise Agreement because it had already issued a Notice of Default within the previous twenty-four months.
Plaintiff argues that the Franchise Agreement does not define what constitutes a "pattern." Plaintiff also argues that Hilton certified in the Comfort Letter that there was no existing default, and therefore Hilton cannot base the termination on any conduct predating the Comfort Letter.
Plaintiff's cause of action survives because Hilton raises factual contentions, which are not appropriately considered on a motion to dismiss. See, e.g., Quantum Corp. Funding Ltd v. Sw. Bell Tel., LP, 45 A.D.3d 505, 506 (1st Dep't 2007) (stating that "factual issues . . . cannot be resolved at this early stage of the proceedings"). Hilton's reference to facts that are extraneous to the Second Amended Complaint are irrelevant to the instant motion. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (noting that courts must look to "the pleadings' four comers" on a motion to dismiss). Further, affidavits that "assert the inaccuracy of plaintiff['s] allegations may not be considered, in the context of a motion to dismiss, for the purpose of determining whether there is evidentiary support for the complaint." Tsimerman v. Janoff, 40 A.D.3d 242, 242 (1st Dep't 2007).
Hilton's arguments against the breach of contract claim amount to factual assertions that are inappropriate on a motion to dismiss. The existence of a pattern of noncompliance with Hilton brand standards is a factual one that cannot be considered at this juncture. Accordingly, Hilton's motion to dismiss the second cause of action is denied.
B. Breach of the Covenant of Good Faith and Fair Dealing
Plaintiff's seventh cause of action asserts a breach of the covenant of good faith and fair dealing against Hilton based on several allegations. Plaintiff asserts that Hilton (i) attempted to terminate the Franchise Agreement without providing an opportunity to cure, (ii) disclosed confidential information to CIBX and US Bank, (iii) discriminated against the Hotel on the Hilton website, and (iv) mandated that the Hotel charge a price higher than other Hilton properties nearby.
Hilton argues that Plaintiff's good faith claim is duplicative of its breach of contract claim and must be dismissed. Plaintiff responds that its seventh cause of action is based on a wider array of allegations than the breach of contract claims.
Plaintiff's claims relating to the Termination Notice and disclosure of confidential information are duplicative of the breach of contract claim. Plaintiff's allegations here are based on the same facts alleged in the breach of contract claim. See Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 70 A.D.3d 423, 426 (1st Dep't 2010) (dismissing claim for breach of implied covenant of good faith as duplicative of breach of contract claim).
Plaintiff is correct that its claim here is wider than the breach of contract claim. However, the discrimination allegations that remain are also insufficient to support a claim for breach of the covenant of good faith, for two reasons. First, the Franchise Agreement provided that Hilton had the right to "engage in any Other Businesses, even if they compete with the Hotel, . . . . [which] will not give rise to any liability [for] . . . breach of any applicable implied covenant of good faith and fair dealing, or divided loyalty." See SAC Ex. 1 at 36. This provision forecloses Plaintiff's claim because the implied covenant of good faith "cannot be construed so broadly as effectively to nullify other express terms of a contract." Fesseha v. TD Waterhouse Investor Servs., Inc., 305 A.D.2d 268, 268 (1st Dep't 2003).
Second, Plaintiff does not allege that these alleged discriminatory acts "deprived it of the fruits of the contract." See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002). In fact, the Second Amended Complaint contradicts such an argument, alleging that "the Hotel remained near to or at 100% occupancy through the end of 2012." See SAC ¶¶ 28, 99. Whatever damages Plaintiff did suffer due to the alleged discrimination in favor of other properties cannot be said to have deprived Plaintiff of the fruits of the Franchise Agreement.
Plaintiff's seventh cause of action is dismissed without prejudice to replead.
C. Tortious Interference with Contract against Hilton
Plaintiff's thirteenth cause of action alleges that Hilton tortiously interfered with the Loan by providing the Termination Notice to CIBX and US Bank, causing them to wrongfully accelerate the Loan, Plaintiff argues that Hilton improperly sought benefit its alleged affiliate, CIBX, and to help its other struggling properties that were paying higher franchise fees by issuing the Termination Notice and causing the Loan to go into default.
"Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional procurement of the third-party's breach of the contract without justification, actual breach of the contract, and damages resulting therefrom." Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 (1996).
Plaintiff's claim fails because the Second Amended Complaint does not allege that Hilton lacked justification in providing notice to US Bank. The Comfort Letter requires that Hilton as "Licensor[,] shall notify Lender in writing of any default of Licensee under the Franchise License Agreement." See SAC Ex. 4 at 1. Complying with contractual obligations does not equate to acting without justification. See Foster v. Churchill, 87 N,Y,2d 744, 750 (1996) ("'[p]rocuring the breach of a contract in the exercise of equal or superior right is acting with just cause or excuse and is justification for what would otherwise be an actionable wrong'") (quoting Felson v. Sol Cafe Mfg. Corp., 24 N.Y.2d 682, 687 (1969)). To hold otherwise would require Hilton to choose between breaching its obligations to US Bank under the Comfort Letter or committing a tort against Plaintiff by interfering with the Loan.
Therefore, the Comfort Letter conclusively establishes a defense to Plaintiff's tortious inference claim as a matter of law, and Plaintiff's thirteenth cause of action is dismissed with prejudice.
D. Fraudulent Inducement against Hilton
Plaintiff's fifteenth cause of action asserts that the Hilton Defendants knowingly misrepresented their relationship to CIBX in certain federally-required disclosure documents to induce Plaintiff to sign the Comfort Letter. Hilton argues that any fraud claims were released by the Comfort Letter's express terms. Plaintiff does not dispute that its fraudulent inducement claim is covered by the wording of the release. Rather, Plaintiff contends that the release is invalid because it was not fairly and knowingly made. Section 8 of the Comfort Letter (the "Release") states that Plaintiff
acknowledges that it is aware that it may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those which it now knows or believes to be true, with respect to the matters released herein. Nevertheless, it is the intention of [Plaintiff], through this letter agreement, and with the advice of counsel, to fully and finally settle and release all such matters, and all claims relative thereto, which do now exist, may exist or have existed between [Hilton] and [Plaintiff]. [Plaintiff] hereby acknowledges that it has been advised by its legal counsel, [and] understands and acknowledges the significance and consequence of this release . . . .See SAC Ex. 4 at 5.
"[A] release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is 'fairly and knowingly made.'" Centro Empresarial Cempresa S.A. v. Am, Movil, S.A.B. de C. V., 17 N.Y.3d 269, 276 (2011). "[A] party that releases a fraud claim may later challenge that release as fraudulently induced . . . if it can identify a separate fraud from the subject of the release." Centro Empresarial Cempresa S.A, 17 N.Y.3d at 276. A party may also challenge a release based upon overreaching or unfair circumstances, such as limited time to investigate or deliberate. See Johnson v. Lebanese Am. Univ., 84 A.D.3d 427, 430 (1st Dep't 2011).
Here, Plaintiff argues that the release was not fairly and knowingly made because Hilton failed to disclose its affiliation with CIBX and affirmatively represented that its affiliates did not engage in providing financing to franchisees. However, Plaintiff's allegations regarding the release are identical to the underlying fraud alleged in the Second Amended Complaint. See SAC ¶ 267 ("But for the material omission of the fact that its franchisor was related to its lender, Plaintiff would not have entered the Loan, the Mortgage, the Comfort Letter or any other Loan documents"). Therefore, Plaintiff has failed to plead a fraud separate from the subject of the release as required by New York law. See Centro Empresarial Cempresa S.A., 17 N.Y.3d at 276.
Plaintiff's fifteenth cause of action is dismissed without prejudice to replead either a fraud separate from the underlying fraud or unfair circumstances in the Comfort Letter's execution.
The Court has considered the remaining arguments and finds them unpersuasive.
CONCLUSION
Accordingly, it is hereby
ORDERED that Defendant CIBX's motion to dismiss the Second Amended Complaint as asserted against it is granted in part and denied in part, such that the third, fourth, fifth, and fourteenth causes of action are dismissed with prejudice, the sixth and fifteenth causes of action are dismissed without prejudice to replead, and the motion to dismiss the eighth cause of action is denied; and it is further
ORDERED that the Hilton Defendants' motion to dismiss the Second Amended Complaint as asserted against it is granted in part and denied in part, such that the thirteenth cause of action is dismissed with prejudice, the seventh and fifteenth causes of action are dismissed without prejudice to replead, and the motion to dismiss the second cause of action is denied; and it is further
ORDERED that counsel are directed to appear for a preliminary conference on April 8, 2014 at 10:00 a.m., 60 Centre St, Room 442, New York, NY 10007. Please see the Court's Preliminary Conference Order Form, available at http://www.nycourts.gov/courts/comd
This constitutes the decision and order of the court. Dated: New York, New York
March 14, 2014
ENTER:
__________________________
Hon. Eileen Bransten, J.S.C.