Opinion
8:98CV487
July, 2000
ORDER
I. Introduction
I have before me the defendants' motions for summary judgment. Resource America, Inc. ("RA") and Scott Schaeffer filed one motion (Filing No. 42); Brandywine Construction Management, Inc., Mark Berman, and Mark Esworthy (collectively, "Brandywine") filed the other motion (Filing No. 44). Both motions are supported by briefs and indexes of evidence (Filing Nos. 43 and 45). GHMC submitted a brief and filed indexes of evidence (Filing Nos. 49 and 52) opposing the motions.
The defendants also filed motions in limine (Filing Nos. 38 and 41), supported by briefs and indexes of evidence (Filing Nos. 39 and 45), to exclude the expert testimony of Chuck Pinkowski. GHMC filed indexes of evidence (Filing Nos. 49 and 52) opposing the motions.
The plaintiff, GHMC, Inc., originally brought this suit in Douglas County District Court in Omaha, Nebraska, alleging tortious interference with contract, business relations, and/or business expectancy. The defendants removed the action to federal court in October 1998. The basis of the defendants' motions for summary judgment is that GHMC's present suit is barred by a previous lawsuit heard in the Douglas County District Court, 1504 Harney Assoc., L.P. v. GHMC, Inc., Doc. 973, Pg. 351. This suit involved GHMC and 1504 Harney Associates ("Harney Associates"), the owner of the Redick Plaza Hotel ("Redick"). Harney Associates sought to rescind the agreement between itself and GHMC for the management of the Redick. The case went to arbitration and the state district court subsequently confirmed the arbitrator's award rejecting most of GHMC's damage allegations. The defendants now contend that GHMC raises the identical factual allegations in this suit. The defendants also argue that GHMC cannot establish that the defendants unjustifiably interfered in the contract between GHMC and Harney Associates.
I entertained oral argument on the motions on June 30, 2000, and took them under advisement. I now grant the defendant's motions for summary judgment and deny as moot the defendant's motions in limine.
II. Standard of Review
Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, the court grants summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). When viewing the evidence, all ambiguities and inferences to be drawn from the underlying facts should be resolved in favor of the party opposing the motion, and all doubts as to the existence of a genuine issue for trial should be resolved against the moving party. Adickes v. S.H. Kress Co., 398 U.S. 144, 158-59 (1970). The trial court's "function at the summary judgment stage is not to weigh the evidence, but to determine whether there is a genuine issue for trial." Rayes v. Eggars, 838 F. Supp. 1372, 1377 (D.Neb. 1993) ( citing Anderson v. Liberty Lobby, Inc., 477 U.S. at 249). The Eighth Circuit has recognized that primarily legal issues and particularly questions of contract interpretation are issues amenable to summary disposition. See, e.g., Mansker v. TMG Life Ins. Co., 54 F.3d 1322, 1326 (8th Cir. 1995); Mumford v. Godfried, 52 F.3d 756, 759 (8th Cir. 1995); and Crain v. Board of Police Comm'rs, 920 F.2d 1402, 1405-06 (8th Cir. 1990).
III. Background
GHMC had managed the Redick since the late 80s, getting paid a monthly management fee of $4,000 or 3% of gross revenues, whichever was greater, plus an incentive fee. GHMC's president, Mark Guilds, was fully involved in the management of the hotel. When the Redick filed for bankruptcy in 1997, Harney Associates and GHMC entered into a new management agreement. GHMC was still responsible for on-site operations and property management of the hotel, but Harney Associates hired Brandywine to take over the financial management of the hotel and to act as the liaison between GHMC and Harney Associates. Harney Associates also retained Brandywine to act as its agents in representing Harney Associates' interests in the Redick. Brandywine acted pursuant to an Administrative Services Agreement with Harney Associates and at the direction of defendant Scott Schaeffer, who is employed by RA, the corporation that owns mortgage on the Redick. Harney Associates has no employees of its own.
The defendants informed Harney Associates and RA that GHMC refused to cooperate with Brandywine employees on business and accounting matters, made costly poor business decisions, failed to pay utility bills and to make needed repairs, and was unable to reverse persistent low occupancy levels. See Defendant Resource America's Index of Evidence, Aff. of R. Lannin, Ex. 1, "Petition in Equity." When Schaeffer finally told Guilds in June 1998 that Harney Associates wanted to exercise the contract provisions allowing it to terminate the agreement with GHMC, the defendants allege that Guilds reacted so badly that Schaeffer sought a TRO to have GHMC removed from the Redick's premises. Schaeffer also directed Berman and Esworthy, Brandywine employees, to file suit to rescind the management agreement and to immediately remove GHMC from the hotel. GHMC maintains that it received no deficiency notices before the defendants terminated the management agreement, even though the agreement required such notice. GHMC therefore counterclaimed in Harney Associates' suit, alleging that Harney Associates breached the management agreement by failing to pay the cancellation fee mandated by that agreement and seeking compensatory damages and attorney fees.
In the state court action, Judge Mullen dissolved the TRO and ruled that Harney Associates was in breach for not paying the $4,00 a month management fee for the three months prior to termination (June-August 1998). He awarded GHMC $12,000 in damages (three $4,000/month payments due under the management agreement), and then referred the matter for arbitration as the management contract required.
The arbitrator decided in March 2000 that although he did not find grounds to equitably rescind the management agreement, GHMC was entitled only to $48,000 as an award under the agreement's termination clause. On GHMC's counterclaim for damages, the arbitrator decided that GHMC's claims for repudiation of the contract, its incentive fees, and its projections for lost profits were "speculative" and "conjectural" in light of the shaky financial condition of the hotel. He threw out GHMC's claim for loss of business because the claim lacked the certainty needed for an award of damages. He also found that GHMC was not entitled to an award for the remaining term of the contract because Harney Associates was justified in terminating the contract based on GHMC's conduct. The arbitrator wrote that Harney Associates had a "sufficient basis . . . to have invoked the termination clause of the contract, and the fact that [Harney Associates] sought to seek a rescission of the contract rather than invoke the contract itself does not change that fact." See Defendant Resource America's Index of Evidence, Aff. of R. Lannin, Arbitrator's Award. He further found that GHMC had not presented sufficient evidence of loss of reputation to entitle it to damages. Finally, he found that GHMC was entitled to attorneys' fees and costs for having to defend against Harney Associates's TRO/rescission action. Judge Mullen confirmed the award.
Harney Associates has appealed to the Nebraska Supreme Court Judge Mullen's award of $12,000 in damages and the arbitrator's award of the $48,000 cancellation fee, attorneys' fees, and costs.
GHMC contends in its response to the motions for summary judgment that because Schaeffer increased the hotel's mortgage obligation when GHMC and Harney Associates signed the 1997 management agreement, it can be reasonably inferred that RA had an interest in terminating GHMC's contract to avoid paying incentive fees to GHMC. GHMC also contends that it has met all the defendants' allegations of nonperformance, thus creating factual questions that preclude a grant of summary judgment. Further, it contends that this action differs from the state action because the tort issues could not have been considered by arbitrator who was charged only with interpreting the contract.
IV. Discussion A. Defendants' Summary Judgment Motions
The defendants contend that they are entitled to summary judgment as a matter of law 1) based on the doctrines of collateral estoppel and res judicata, or, alternately, 2) because they did not tortiously interfere with the contractual relationship between GHMC and Harney Associates.
1. Collateral Estoppel
"[C]ollateral estoppel in a diversity action is a question of substantive law controlled by state common law." Lane v. Sullivan, 900 F.2d 1247, 1250 (8th Cir. 1990). Under Nebraska law, four conditions must exist for the doctrine of collateral estoppel to apply: 1) The identical issue was decided in a prior action; 2) there was a judgment on the merits which was final; 3) the party against whom the rule is applied was a party or in privity with a party to the prior action; and 4) there was an opportunity to fully and fairly litigate the issue in the prior case. Cunningham v. Prime Mover, Inc., 567 N.W.2d 178 (Neb. 1997).
a. Identical Issue
To determine if an issue is identical, a court looks to the evidence submitted, the pleadings, and the jury instructions actually used in the prior case, if any. Bartunek v. George A. Hormel Co., 513 N.W.2d 545 (Neb.Ct.App. 1994). It appears that the underlying facts have not changed between the decision in the state district court action and this action. Further, the initial disclosures filed in this case indicate that GHMC is claiming the same damages in this action that it sought in its counterclaim in state court, even though it now uses a different theory to ask for those damages and seeks them instead from Harney Associates' agents, Brandywine, and the mortgage holder, RA. The arbitrator in the state court action ruled on every single element of damage GHMC now seeks.
GHMC argues that because it cannot discern the basis for the rejection by the state court and the arbitrator of its claim for base management fees and incentive fees, the award of the arbitrator and the judgment of the state court are "uncertain" and hence those fee issues were not "actually decided" in the prior litigation. GHMC argues that because the arbitrator did not explicitly determine that GHMC's conduct was a breach of the contract, it is therefore entitled to sums in addition to the trial court's award of $12,000 and the $48,000 awarded by the arbitrator — in particular, to the $4,000 monthly payments for the balance of the contract term. The arbitrator, however, heard evidence on and considered each element of GHMC's counterclaim for damages. If GHMC in fact had a "legitimate business expectancy" in the balance of the $4,000 monthly payments that it now claims in this tort suit, the arbitrator would certainly have awarded GHMC that sum on its contract counterclaim.
I therefore find that the identical issue — GHMC's damages — was decided in the prior state court action.
b. Final Judgment on the Merits
Arbitrators' awards that are confirmed by a court of competent jurisdiction are final orders for purposes of collateral estoppel and res judicata. Merrill, Lynch, Pierce, Fenner Smith, Inc. v. Nixon, 210 F.3d 814, 817 (8th Cir. 2000) ( citing Val-U Construction Co. v. Rosebud Sioux Tribe, 146 F.3d 573, 581-82 (8th Cir. 1998)). GHMC argues, however, that the state court award and confirmation cannot be considered final because the defendants have appealed Judge Mullen's order to the Nebraska appellate courts.
Generally, the pendency of an appeal does not affect the conclusive effect of a judgment as evidence. Peterson v. Nebraska Nat. Gas Co., 281 N.W.2d 525 (Neb. 1979). Thus, the defendants argue, even though the time for an appeal of the arbitrator's award in the state court action may not have run, the award itself still represents evidence of a final judgment on the merits. I agree and find that the defendants may raise the award as bar to this second action.
c. Party or in Privity
"Defensive use of collateral estoppel precludes a plaintiff from relitigating identical issues merely by `switching adversaries.'" Thomas Lake Owners Ass'n v. Riley, 612 N.W.2d 529, ___, 2000 WL 781104, *6 (Neb.Ct.App. 2000) ( quoting Parklane Hosiery Co. v. Shore, 439 U.S. 322, 329 (1979)). Whether collateral estoppel is used defensively or offensively, Nebraska law requires that "the party against whom collateral estoppel is asserted has litigated and lost in an earlier action," although the party asserting collateral estoppel need not have been a party to the prior action. Id. at *6-*7. Plainly, GHMC is a party in both suits and, by filing this suit, apparently concedes that it "lost" in the earlier suit.
d. Opportunity to Fully and Fairly Litigate
"When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim." Restatement (Second) of Judgments § 27 (1980). I find GHMC had a full and fair opportunity to litigate each element of its claims against Harney Associates during the arbitration in state court, as the arbitrator's award amply demonstrates.
Guilds testified at length about the damages GHMC allegedly suffered and about GHMC's relationship with Harney Associates and its agents and representatives — the defendants in this case. Harney Associates testified through its agents and representatives — the defendants in this case — about why it was justified in terminating or rescinding the contract because of GHMC's conduct and about why GHMC was entitled only to the $48,000 allowed by the termination clause of the management agreement.
It is completely reasonable to hold that the nonparticipating nonparty to the first suit is able to assert preclusion against a plaintiff in the second suit if the plaintiff in Suit II was a losing party in the first suit, regardless of the position he occupied in Suit I. In these situations in which a defendant in Suit I has had an opportunity to present his side of a controversy fully and completely and has lost, it seems completely unreasonable to say that he can then start an action as a plaintiff and relitigate the matters which have been decided against him. Such a party should be bound by the decision which has been handed down.JED Constr. Co. v. Lilly, 305 N.W.2d 1, 3-4 (Neb. 1981). Guilds and GHMC had their day in court. Repleading the claim in tort rather than contract does not change the ultimate issues. GHMC should not get another bite at the apple.
I therefore find that GHMC's claim is barred by collateral estoppel and that the defendants' motion for summary judgment should be granted.
2. Claim Preclusion
In addition to its argument under the doctrine of collateral estoppel, Brandywine argues that it is entitled to summary judgment under the doctrine of res judicata or claim preclusion. Under Nebraska law, the doctrine bars relitigation between parties or their privies of any rights, facts, or matters in issue directly adjudicated or necessarily involved in the determination of an action before a competent court in which a judgment or decree is rendered on the merits. Vann v. Norwest Bank Nebraska, N.A., 591 N.W.2d 574, 577 (Neb. 1999).
Res judicata bars not only issues actually litigated in the prior proceeding, but also issues which could have been raised. The doctrine applies "not only to points upon which the court was actually required by the parties to form an opinion, but to every point which properly belonged to the subject of the litigation and which the parties exercising reasonable diligence might have brought forward at the time." Id. (holding that matters in an action for an accounting were not germane to the subject of an action for a declaratory judgment).
The only real questions here are whether the second suit is the "same" cause of action and whether the defendants in the second suit are in privity with Harney Associates. The first question is easily disposed of. Whether GHMC's claim sounds in contract or tort, the facts from the first suit are the same in this second suit. GHMC is seeking a second day in court on tort theories — tortious interference with contract, business relations, and/or business expectancy — which it could have advanced in its counterclaim in state court. See Gatzemeyer v. Vogel, 589 F.2d 360, 363 (8th Cir. 1978). The general issue in both suits is the amount of damages GHMC claims to have incurred when Harney Associates terminated the management contract.
The second question can be disposed of almost as quickly. Privity requires, "at a minimum, a substantial identity between the issues in controversy and showing the parties in the two actions are really and substantially in interest the same." VanDeWalle v. Albion Nat'l Bank, 500 N.W.2d 566, 573 (Neb. 1993). Privity depends on the
relation of the parties to the subject matter, rather than their activity in a suit relating to it after the event. . . . Privity implies a relationship by succession or representation between the party to the second action and the party to the prior action in respect to the right adjudicated in the first action.Gottsch v. Bank of Stapleton, 458 N.W.2d 443, 457 (Neb. 1990). Brandywine was clearly in privity with Harney Associates based on the terms of the Administrative Services Agreement between them. Brandywine became the agents for Harney Associates, a business entity that no employees of its own.
I therefore find that GHMC's claim is also barred by res judicata and that the defendants' motion for summary judgment should be granted.
3. Tortious Interference with Contractual Relations
Finally, Brandywine argues that it is entitled to summary judgment on GHMC's tort claim. Brandywine first notes that the arbitrator found that Harney Associates was justified in seeking rescission or termination of the contract with GHMC because of the deterioration of their business relationship, and that Judge Mullen subsequently confirmed the arbitrator's award. As a result, Brandywine maintains that GHMC is collaterally estopped from relitigating as an issue in this action whether its conduct constituted an unjustified, intentional interference, one of the elements in the tort of tortious intereference. Brandywine also argues that the plaintiff does not have evidence to establish the other elements of the tort: existence of a valid business relationship or expectancy; knowledge by the interferer of the relationship or expectancy; proof that the interference caused the harm allegedly sustained; and damage to the party whose relationship or expectancy was disrupted. See Wiekhorst Bros. Excavating Equipment Co. v. Ludewig, 529 N.W.2d 33, 39 (Neb. 1995).
In this situation, Brandywine was an agent working within the scope of its employment with Harney Associates, the entity involved in the management contract with GHMC. As an agent, it could not have interfered with its principal's contractual relationship with GHMC without incurring liability for breach of its fiduciary duties. Nor could Brandywine have interfered with GHMC's contractual relationship with Harney Associates merely by carrying out its assigned contractual obligations to Harney Associates.
Guilds admitted in a deposition that the owner of the Redick, Harney Associates, was essentially a shell entity and that Schaeffer served as the owner's representative. Schaeffer testified as such at the arbitration hearing. It was Schaeffer who hired Brandywine to take over the Redick's accounting functions and to oversee its operations. When Brandywine reported to Schaeffer what it found at the Redick when it assumed its duties, Schaeffer directed Brandywine to file for the TRO against GHMC and Guilds. Under the Administrative Services Agreement, Brandywine had the authority to carry out Schaeffer's directive. Brandywine never operated outside the scope of its agency in its dealings with GHMC.
Justification and privilege are both defenses to an action for tortious interference with contractual relations. Justification exists when the alleged interferer, acting without malice or bad faith, carries out its contractual obligations to its principal. Wiekhorst, 529 N.W.2d at 40 (design professionals acting within the scope of their contractual obligations are privileged to give the owner advice which may lead to the termination of a contractor: "Absent a showing of bad faith or malice, a design professional's intentional, but justified, act of interference will not subject it to liability for tortious interference with business."). In dealing with GHMC, Brandywine was acting only in the interests of and at the direction of its principal, Harney Associates. The actions that Brandywine took, therefore, in removing GHMC from the Redick are justified because Brandywine was the contractual agent of Harney Associates and Schaeffer, charged with preventing further economic harm to its principal's property. Brandywine's removal of GHMC from the hotel was not a malicious, bad faith interference with GHMC's contract with Harney Associates, but a business decision made by Schaeffer and Brandywine to protect the single asset of Harney Associates. Its actions were therefore justified or privileged. As a consequence, Brandywine is entitled to summary judgment on GHMC's claim for tortious interference.
B. Defendants' Motions in Limine
Because I have granted the defendants' motions for summary judgment, it is unnecessary to discuss their motions in limine. The defendant's motions (Filing Nos. 38 and 41) are denied as moot.
IT IS THEREFORE ORDERED:
1. The motion (Filing No. 42) for summary judgment by defendants Resource America, Inc. and Scott Schaeffer is granted.
2. The motion (Filing No. 44) for summary judgment by defendants Brandywine Construction Management, Inc., Mark Berman, and Mark Esworthy is granted.
3. The defendants' motions in limine (Filing Nos. 38 and 41) are denied as moot.
DATED this _____ day of July, 2000.