Opinion
EV 02-52-C-B/H
December 9, 2003
ENTRY GRANTING RED ROOF INNS, INC.'S and ACCOR ECONOMY LODGING, INC.'S MOTION FOR SUMMARY JUDGMENT
Before the court is Defendant Red Roof Inns, Inc.'s ("Red Roof) and Defendant Accor Economy Lodging, Inc.'s ("Accor") joint Motion for Summary Judgment. For the reasons set forth below, the court GRANTS Red Roof's and Accor's Motion.
I. Procedural History
On March 15, 2002, Plaintiff/Counter Defendant Encore Hotel Owners II, LLC ("Encore") filed a Complaint against Red Roof and Accor. Encore, a former Red Roof franchisee, asserted claims against Red Roof arising out of the franchise relationship. Encore also asserted claims against Accor, the company that purchased Red Roof while Encore was a Red Roof franchisee. In the Amended Complaint for Declaratory Judgment and Damages ("Amended Complaint"), Encore asserted the following claims:
1. a claim against Red Roof for a declaratory judgment declaring the franchise agreement between the parties void and unenforceable under the Indiana Deceptive Franchise Practices Act, I.C. 23-2-2.7-1 (Count I);
2. a claim against Red Roof for statutory franchise fraud (Count n);
3. a claim against Red Roof for breach of the franchise agreement (Count III);
4. a claim against Red Roof and Accor for breach of alleged duties of good faith and fair dealing (Count IV);
5. a claim against Red Roof for fraud and/or negligent misrepresentation (Count V); and
6. a claim against Red Roof and Accor for tortious interference with prospective business advantages (Count VI).
On April 24, 2002, Red Roof and Accor moved to dismiss Encore's claims for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted. On October 18, 2002, Red Roof filed the following counterclaims:
1. a claim against Encore for breach of the franchise agreement (Count I);
2. claims against Encore and John Dunn ("Dunn"), for breach of two promissory notes (Counts II and III);
3. a claim against DHG for breach of a Multi-Unit Development Agreement (Count IV);
4. a claim against Dunn for breach of a guaranty (Count V); and
5. a claim against Encore, Dunn, and DHG for attorneys' fees (Count VI).
Dunn is President and Chief Executive Officer of Dunn Hospitality Group ("DHG"), an independent hotel management company with franchised properties that include several hotel chains.
On February 12, 2003, the court issued its Entry on Defendants' Motion to Dismiss for Failure to Plead Fraud With Particularity and Failure to State a Claim Upon Which Relief Can Be Granted. On March 28, 2003, the court entered an Order to Clarify the previous order. In short, the court dismissed the following claims with prejudice:
1. Encore's claim against Red Roof for breach of the franchise agreement (Count III);
2. Encore's claims against Red Roof for fraud, statutory fraud, and negligent misrepresentation (Counts II and V); and
3. Encore's claims against Red Roof and Accor for tortious interference with a prospective business advantages (Count VI).
Red Roof and Accor now move for summary judgment on all remaining claims against them and on all but one of Red Roof's counterclaims.
Red Roof does not move for summary judgment on its claim against DHG for breach of the Multi-Unit Development Agreement (Count IV).
II. Summary Judgment Standard
Disposition of a case on summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Fed R. Civ. P.56(c). The record and all reasonable inferences therefrom must be viewed in the light most favorable to the non-moving party. National Soffit Escutcheons, Inc. v. Superior Systems, Inc., 98 F.3d 262, 264 (7th Cir. 1996).
The moving party bears the burden of demonstrating the absence of a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden may be met by demonstrating "that there is an absence of evidence to support the non-moving party's case." Id. at 325. If the moving party meets its burden, the adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading," but must present specific facts to show that there is a genuine issue of material fact. Fed.R.Civ.P. 56(e); see also National Soffit, 98 F.3d at 265 (citing Hughes v. Joliet Correctional Center, 931 F.2d 425, 428 (7th Cir. 1991)).
III. Factual Background A. The Multi-Unit Development Agreement
Encore did not file a "Statement of Material Facts in Dispute" as required by Local Rule 56. 1(b). The court therefore accepts as true the facts included in Red Roofs and Accor's "Statement of Material Facts Not in Dispute." See Local Rule 56.1(e).
On May 27, 1998, DHG and Red Roof entered into a Multi-Unit Development Agreement ("MUDA") for Franchised Properties. (Defendants' Ex. B, Counter-Defendants' Responses to Counter-Plaintiffs First Request for Admission ("RFA"), No. 1). DHG and Red Roof also entered into a First Addendum to the MUDA on May 27, 1998, and a Second Addendum to the MUDA two years later on May 21, 1999. ( Id. Nos. 2, 3). Pursuant to the MUDA, DHG agreed to use its best efforts to develop no fewer than six Red Roof Inns during a three-year period in accordance with an agreed-upon development schedule. In turn, Red Roof agreed to provide funding to assist with the purchase of potential hotel sites and to award a franchise for each location. ( Id. No. 4).
B. The Franchise Agreement
On December 31, 1998, Encore, an affiliate of DHG, and Red Roof entered into a franchise agreement for the first site to be developed by DHG pursuant to the MUDA. ( Id. No. 6). Red Roof granted Encore a non-exclusive license to own and operate a Red Roof Inn located at 2631 South Lynhurst Drive, Indianapolis, Indiana (the "Inn") for a period of twenty (20) years. ( Id. No. 7). The parties amended this agreement twice, on December 31, 1998, and on March 16, 2001. ( Id. No. 8).
In May 2001, Red Roof and Encore entered into a "Post Effective Amendment," whereby they agreed to enter into a new franchise agreement (the "Franchise Agreement"). ( Id. No. 9; Deposition of John Dunn ("Dunn Dep."), Ex. 10). Red Roof and Encore executed the Franchise Agreement on June 18, 2001. (RFA No. 10). In the Franchise Agreement, Encore expressly acknowledged that it had independently investigated the business franchised thereunder, including current and potential market conditions, competitive factors and risks, and recognized both that the business venture contemplated by the Franchise Agreement involved business risks and that its success would be largely dependent upon the ability of Encore as an independent business owner. ( Id. No. 12; Franchise Agreement ¶ 23.1). Encore further expressly disclaimed the making of, and acknowledged that it had not received or relied on, any representation, warranty, or guaranty, express or implied, whatsoever, including, but not limited to, the potential volume, profits, or success of the business venture contemplated by the Franchise Agreement, or that otherwise contradicted the information in Red Roof's Uniform Franchise Offering Circular. (RFA No. 12; Franchise Agreement ¶ 22.1).
The parties agreed that the Franchise Agreement would be governed, construed, and interpreted by the laws of the State of Texas (where Red Roof's principal office is located, where the agreement was negotiated and accepted, and where certain obligations under the agreement were performable), without regard to application of Texas conflict-of-law rules. (RFA No. 12, Franchise Agreement ¶ 22.1).
Under the Franchise Agreement, Encore received a non-exclusive license and franchise to use Red Roof's trade names and trademarks, distinctive designs for buildings, signs, and equipment, and standardized procedures for opening, operating, and promoting Red Roof lodging facilities. In return, among other provisions, the Franchise Agreement required Encore to pay a monthly royalty fee. (RFA No. 12, Franchise Agreement ¶¶ 1.1 and 4.3).
The Franchise Agreement in effect was for a term of twenty years and could not be terminated by Encore at any time before two full years from the Opening Date and then, only if Encore had satisfied all obligations under the Franchise Agreement. (RFA No. 12, Franchise Agreement ¶¶ 2.1 and 13.1).
Paragraph 13.6 of the Franchise Agreement contained a liquidated damages provision. Encore acknowledged and agreed that in the event the Franchise Agreement was terminated as a result of Encore's default, such termination might result in lost future revenue and profits to Red Roof, harm to the goodwill associated with the system and the proprietary marks, and increased cost to Red Roof to redevelop or re-franchise the market in which the Inn is located Encore and Red Roof agreed that such damages may be difficult to quantify or estimate. Encore accordingly agreed to pay Red Roof a lump sum payment (for early termination only, and not as a penalty in lieu of any other payments required under the Franchise Agreement), equal to (a) the average of monthly Royalty Fees required under Section 4.3 for the 36 months preceding Encore's termination or, if Encore has been operating the Inn for less than 36 months, the average of the months that Encore operated the Inn prior to termination, (b) multiplied by the lesser of (i) 36, or (ii) the number of months remaining in the term of the agreement. Such payment was to be made by Encore within five days following termination of the Franchise Agreement.
(RFA No. 12; Franchise Agreement ¶ 13.6). The Franchise Agreement also contained a provision that allowed the franchisor "to obtain such other relief in law or equity as provided for in this agreement." (Franchise Agreement ¶ 13.6).
The Franchise Agreement additionally contained an attached "Indiana Amendment." (Franchise Agreement, Ex. D-3). The Indiana Amendment was attached to the Franchise Agreement "[i]n recognition of the requirements of the Indiana Franchise Disclosure Law, Indiana Code §§ 23-2-2.5-1 to 23-2-2.5-51, and the Indiana Deceptive Franchise Practices Act, Indiana Code §§ 23-2-2.7-1 to 23-2-2.7-10." The Indiana Amendment modified the Franchise Agreement to ensure that it met all applicable Indiana laws. Encore opened the Inn on May 12, 2000. (RFA No. 13).
C. The Dunn Guarantee
As an inducement to Red Roof to execute the Franchise Agreement, Dunn individually executed a Guarantee, Indemnification and Acknowledgment (the "Guarantee"). (RFA No. 14; Dunn Dep., Ex. 12). Dunn thereby unconditionally guaranteed to Red Roof and its successors and assigns that all of Encore's obligations under the Franchise Agreement would be punctually paid and performed. (RFA No. 15). Dunn agreed, upon demand by Red Roof, to immediately make each payment required of Encore under the Franchise Agreement, including all damages, costs, and expenses owed by Encore. Dunn further agreed to pay Red Roof for all costs and expenses (including, but not limited to, reasonable attorneys' fees and court costs) incurred by and in connection with any action brought to enforce the Guarantee or any other action related to or arising out of the Guarantee in which Red Roof is deemed to be the prevailing party. (RFA No. 15).
D. The Fee Note
To secure the funding that Red Roof agreed to provide under the MUDA, Encore and Dunn executed two promissory notes in favor of Red Roof. (RFA No. 16). The first promissory note (the "Fee Note") was in the original principal amount of $100,000 and was dated May 21, 1999. (RFA Nos. 17 and 18; Dunn Dep., Ex. 8). The principal sum was due and payable on May 27, 2001, unless sooner paid. (RFA No. 18).
Upon the occurrence of certain defined events of default, the Fee Note gave Red Roof the right, without notice or demand, to accelerate the maturity of the obligations, making them immediately due and payable. Events of default include the failure to pay any principal or interest when due; the failure to perform any provision in the MUDA; the failure to comply with any provision of any Franchise Agreement[s] in effect between the parties; and default on the Fund Note (described below). The Fee Note further provided that in the event Red Roof was required to institute any action for the enforcement or collection of the obligations evidenced thereunder, Encore and Dunn would pay all costs and expenses of such action, including reasonable attorneys' fees. (RFA No. 18).
E. The Fund Note
Encore and Dunn executed a second promissory note (the "Fund Note") dated May 21, 1999, in the principal amount of $562,820.62, together with interest. (RFA Nos. 19 and 20; Dunn Dep., Ex.9).
Upon the occurrence of certain defined events of default, the Fund Note gave Red Roof the right, without notice or demand, to accelerate the maturity of the obligations evidenced, which obligations would be immediately due and payable. Events of default include the failure to pay any principal or interest when due; the failure to perform any provision in the MUDA; the failure to comply with any provision of any Franchise Agreement[s] in effect between the parties; and default on the Fee Note. The Fund Note further provided that in the event Red Roof was required to institute any action for the enforcement or collection of the obligations evidenced thereunder, Encore and Dunn would pay all costs and expenses of such action, including reasonable attorneys' fees. (RFA No. 20).
F. Encore Terminates the Franchise Agreement
On March 12, 2002, less than two years after it opened the Inn, Encore terminated the Franchise Agreement and thereafter began operating the Inn as a Quality Inn. (RFA No. 27).
IV. Discussion
A. Count I of Encore's Amended Complaint
In Count I of Encore's Amended Complaint, Encore seeks a declaration that the Franchise Agreement is unenforceable, citing three provisions in the Franchise Agreement. They are: (1) Paragraph 13.6, which provides for liquidated damages in certain circumstances: (2) Paragraph 22.5, wherein the parties waive trial by jury; and (3) Paragraph 22.6, wherein the parties waive the right to punitive damages. Encore raises only one ground in its Response to Red Roof's and Accor's Motion for Summary Judgment — whether the liquidated damages provision of the Franchise Agreement is enforceable. The court therefore concludes that Encore has abandoned its claims under Paragraph 22.5 and Paragraph 22.6, and now turns to its claim under Paragraph 13.6.
Encore argues that Paragraph 13.6 of the Franchise Agreement violates the Indiana Deceptive Franchise Practices Act (I.C. § 23-2-2.7-1(10)) by improperly limiting the parties' opportunities to litigate damages. That section reads:
Sec. 1. It is unlawful for any franchise agreement entered into between any franchisor and a franchisee who is either a resident of Indiana or a nonresident who will be operating a franchise in Indiana to contain any of the following provisions:
(10) Limiting litigation brought for breach of the agreement in any manner whatsoever.
I.C. § 23-2-2.7-1(10).
There are no Indiana cases which address this precise issue. However, based upon the plain language of the statute, the court finds Paragraph 13.6 does not "limit the litigation." Rather, the liquidated damages provision facilitates litigation by providing a means to calculate damages that may otherwise be difficult to quantify or estimate. See Rogers v. Lockard, 767 N.E.2d 982 (Ind.Ct.App. 2002) (the purpose of a liquidated damages provision is to quantify damages that might otherwise be too difficult to estimate). We thus conclude that the liquidated damages provision does not violate the Indiana Deceptive Franchise Practices Act.
In fact, the parties expressly agreed in writing that if the Franchise Agreement were terminated as a result of Encore's default, "it may be difficult to quantify or estimate" Red Roofs lost future revenue and profits, harm to Red Roof's goodwill and intellectual property, and costs to redevelop or refranchise the market. See Franchise Agreement ¶ 13.6. As a result, Encore agreed to pay Red Roof a lump sum specified in the Franchise Agreement.
Encore also argues that Rogers, supra., supports its position that the liquidated damages provision is unenforceable because it operates as a penalty in violation of Indiana common law. In Rogers, the prospective buyer of real estate signed a contract for the purchase of a home in Plainfield, Indiana. Id. at 984. The purchase agreement provided: "If this offer is accepted and Buyer fails or refuses to close the transaction, without legal cause, the earnest money shall be forfeited by Buyer and Seller as liquidated damages, and Seller may pursue any other legal and equitable remedies." Id.at 989. The buyer ultimately defaulted, and the seller sold the house to a second party for a lower price. Id. The seller then sued the buyer for the monetary loss he suffered for selling the property at a lower price. Id. at 989.
In rendering its decision, the Indiana Court of Appeals stated that liquidated damages are generally enforceable in situations where the calculation of damages would be difficult or uncertain. Id. at 990. However, the Court determined that under the facts of the case, actual damages were easy to determine, and if the seller were allowed to recover liquidated damages in addition to actual damages, he would recover more than he had lost. Id. at 992. The Court therefore concluded that the liquidated damages provision acted as an unenforceable penalty. Id.
The court finds the liquidated damages provision at issue here does not operate as a penalty. First, the parties agreed in advance that damages would be difficult, if not impossible, to calculate in a case such as this, where the damages sustained include lost profits, damage to goodwill, and harm to intellectual property. Second, the provision at issue does not act as a penalty for the simple reason that Red Roof does not seek actual damages in addition to liquidated damages for the same breach. Instead, Red Roof seeks liquidated damages as the exclusive measure of damages. Finally, the liquidated damages amount is not grossly disproportionate to the loss incurred as a result of the breach. Gershin v. Demming, 685 N.E.2d 1125, 1127 (Ind.Ct.App. 1997) (Indiana courts enforce liquidated damages provisions where the stipulated sum is not grossly disproportionate to the loss which may result from the breach). For these reasons, the court finds the liquidated damages provision does not violate I.C. § 23-2-2.7-1(10), nor is it an illegal
penalty under Indiana law. Red Roof's and Accor's Motion for Summary Judgment on Count I of Encore's Amended Complaint is therefore GRANTED.
B. Count I of Red Roofs Counterclaim
In Count I of Red Roof's Counterclaim, it alleges that Encore breached the Franchise Agreement because Encore terminated the agreement prematurely. Under the Franchise Agreement, Encore could not terminate the agreement for the first two years after the Inn opened. (Franchise Agreement ¶ 13.1). Encore terminated the Franchise Agreement on March 12, 2002, less than two years after opening the Inn on May 12, 2000.
In its response, Encore concedes that it breached the Franchise Agreement. It argues, however, that the liquidated damages provision is unenforceable. Because the court finds that the liquidated damages provision is enforceable (see Section IV. A), Red Roof's Motion for Summary Judgment on Count I of its counterclaim is GRANTED. Pursuant to Section 13.6 of the Franchise Agreement, Encore owes Red Roof $181,966.68 in liquidated damages for breach of the Franchise Agreement.
C. Count IV of Encore's Amended Complaint
In Count IV of Encore's Amended Complaint, Encore alleges that Red Roof and Accor breached their duty of good faith and fair dealing with Encore. Generally, Indiana does not recognize such a cause of action. See Bob Nicholson Appliance, Inc. v. Maytag Co., 883 F. Supp. 321, 327 (S.D.Ind. 1994) ("It is well-known that Indiana does not recognize an implied good faith and fair dealing in contracts."). Indiana courts, however, have implied a duty of good faith and fair dealing when there exists a fiduciary relationship between the parties. Beacham v. MacMillan, Inc., 837 F. Supp. 970, 975 (S.D.Ind. 1993) ("Indiana courts have only implied a duty of good faith and fair dealing against insurance companies and fiduciaries").
In the court's Entry on Defendants' Motion to Dismiss for Failure to Plead Fraud With Particularity and Failure to State a Claim upon which Relief Can Be Granted, the court employed Indiana law rather than Texas law since the outcome of the motion would have been the same under either Indiana law or Texas law. For the same reasons, the court will employ Indiana law in this motion as well. See International Adminstrators, Inc. v. Life Ins. Co. of North America, 753 F.2d 1373, 1376 n. 4 (7th Cir. 1985) (recognizing that "[c]onflicts rules are appealed to only when a difference in law will make a difference in the outcome."); Loos v. Farmer's Tractor and Implement Co., Inc., 738 F. Supp. 323, 324-25 n. 1 (S.D.Ind. 1990).
Under Indiana law, a fiduciary relationship exists when three elements are present: (1) confidence is reposed by one party in another with resulting superiority and influence exercised by the other; (2) the party reposing the confidence is in a position of inequality, dependence, weakness, or lack of knowledge; and (3) the dominant party wrongfully
abuses this confidence by improperly influencing the weaker so as to obtain an unconscionable advantage. Peoples Trust v. Braun, 443 N.E.2d 875, 879 (Ind.App. 1983).
In this case, there is no evidence that one party had superiority or influence over the other. Indeed, Dunn has had experience in the hotel industry for over 30 years. Dunn's experience in the industry began in the mid 1960's, and he has been involved in the hospitality business full time since 1978. (Dunn Dep. at 10, 12). Dunn, through various companies, has built between 15 and 17 hotels, bought three or four others, and sold three or four hotels. ( Id. at 12). Dunn has been involved with hotel franchisors since approximately 1985, and of the 15 or so hotels he has built, all but one is a franchise hotel. ( Id. at 12, 16). Dunn has developed franchisor/franchisee relationships not only with Red Roof, but also with Holiday Inn, Hilton, Marriott, Promise Hotels, and Choice Hotels. (Id.at 26). At the time Dunn signed the Franchise Agreement with Red Roof, Dunn and his companies had negotiated and signed approximately 15 other franchise agreements. ( Id.at 40).
This evidence reflects the fact that Dunn and Encore were experienced, sophisticated parties, not novices, at the time they negotiated with Red Roof and ultimately signed the Franchise Agreement. The record also reflects that Encore conducted its own due diligence and investigation before it signed the Franchise Agreement. (Dunn Dep. at 59, 62, and 63). Further, Encore was represented by highly respected and competent counsel at all relevant times. Finally, Encore admits that the terms of the Franchise Agreement were not onerous or ambiguous. (Dunn Dep. at 125). For all of these reasons, the court finds Encore and Red Roof did not have a fiduciary and/or confidential relationship; instead, their relationship was strictly a commercial, arm's length relationship in which Encore possessed substantial experience, sophistication, and bargaining power. See Comfax Corp. v. North American Valve Lines, Inc., 587 N.E.2d 118, 125-26 (Ind.Ct.App. 1992) (affirming summary judgment on breach of fiduciary duty claim because fiduciary duty could not be based upon arm's length commercial relationship between software vendor and its customer); see also Flintridge Station Assocs. v. American Fletcher Mort. Co., 761 F.2d 434, 440 (7th Cir. 1985) (holding commercial lending agreement between mortgage company and real-estate developer did not create fiduciary relationship). Consequently, Red Roof's and Accor's Motion for Summary Judgment on Count IV of Encore's Amended Complaint is GRANTED.
D. Counts II, V, and VI of Red Roofs Counterclaim
Encore failed to respond with contrary evidence or legal argument with regard to Red Roof's counterclaims for breach of the Fund Note (Count II), breach of the Fee Note (Count II), breach of the Dunn Guarantee (Count V), and attorneys' fees (Count VI). Accordingly, Red Roof's Motion for Summary Judgment on Counts II, V, and VI of its counterclaim is GRANTED. Red Roof is therefore entitled to $373,282.01 on the Fund Note and $110,658.63 on the Fee Note. Both of these figures are computed as of June 13, 2003, and do not take into consideration the daily rate of interest from that date to the present. In addition, pursuant to the Dunn Guarantee, Dunn is liable to Red Roof for Encore's breach of the Franchise Agreement and failure to pay liquidated damages under the Franchise Agreement. Finally, Red Roof is entitled to attorneys' fees and court costs pursuant to Section 22.8 of the Franchise Agreement. The parties are ordered to submit these figures to the court within thirty (30) days from the date of this ruling.
V. Conclusion
For the reasons stated in this Entry, the court GRANTS Red Roof's and Accor's Motion for Summary Judgment. The only claim remaining is Red Roof's counterclaim against DHG for breach of the Multi-Unit Development Agreement (Count IV). Entry of Final Judgment shall be withheld until that issue is also resolved.