Opinion
FSTCV064010572S.
11-09-2012
HEYMAN ASSOCIATES NO. 5, L.P. et al. v. FelCor TRS Guarantor, L.P.
UNPUBLISHED OPINION
TAGGART D. ADAMS, Judge Trial Referee.
I. Introduction
This case involves a dispute between the parties about the validity and enforceability of provisions in a contract, a sublease and a deed prohibiting the operation or use of a hotel located at 700 East Main Street in downtown Stamford, Connecticut as an " upscale hotel" until July 2011. The case, originally filed in this judicial district in 2006, sought a judicial declaration that these provisions (use restrictions) were valid and enforceable. It was removed to and then remanded from federal court, moved slowly toward adjudication, and was assigned to this court for all purposes, including trial, in late 2011. By that time the restriction on the hotel operations had lapsed by its own terms, and the court was first called upon to determine whether the plaintiffs' request for a declaratory judgment upholding the enforceability of the use restriction was moot. The court decided it was not and the first part of a bifurcated trial was scheduled for April 2012 limited to the issues raised in plaintiffs' amended complaint and the defendant's special defenses.
That decision is Heyman Associates v. FelCor, Superior Court, judicial district of Stamford, CV 06 4010572 (December 20, 2011, Adams, JTR).
It was agreed that the trial of defendant's counterclaims would await the outcome of the April 2012 trial.
II. Factual Background
The evidence is undisputed that an entity known as BRS Realty Associates, LLC (" BRS") purchased the subject hotel, a former Ramada Hotel, in Stamford in April 1996. To be precise, BRS assumed a sublease covering the land, a parcel of about 84, 000 square feet, on which the hotel building was actually situated and purchased a much smaller (about 5, 500 square feet) fee simple adjacent to the hotel and at the corner of East Main and Broad Streets. The larger parcel was, and is, owned by the McDonald and Scalzi families. It is subject to a ground lease which in April 1996 was held by an entity known as TK Associates. BRS was jointly owned by several entities, including the plaintiff's Heyman Associates No. 5 (controlled by the family of Sam Heyman) AIM Management, Corp. (controlled by the William Meyer family) and TRJ II (controlled by the Richard Jabara family). Richard Jabara testified the hotel facility was in poor condition when purchased by BRS and had actually lost its affiliation with Ramada earlier in the year. According to Jabara, BRS had hoped to affiliate the hotel with Holiday Inns and had filed an application with Holiday Inns, Inc., (" HII") for their new purchase to be designated a Holiday Inn franchise that would not compete with, but complement, the Stamford Marriott Hotel located two blocks away from the former Ramada and also owned by the Heyman, Jabara and Meyer families through their company HD Hotel, LLC. As Jabara put it, they could put salesmen in the Holiday Inn and executives in the Stamford Marriott. Tr. 4-17-12: 50-51. Soon after applying, HII's president Timothy Lane called Jabara to express interest in buying the property. When Lane assured BRS that they would run the hotel as a mid-scale hotel (Holiday Inn) BRS agreed to sell the property to HII at a profit.
BRS reflected the first names of the principals of these family entities: Bill Meyer, Richard Jabara and Sam Heyman.
The locations of the two hotel properties in downtown Stamford are depicted in Exhibit 6.
Reference to " Tr." followed by numbers are to the transcript of trial proceedings identified by the date in April 2012 of the transcript volume, followed by a colon and a page number.
HII operates or franchises three levels of hotels: Crowne Plaza (upscale), Holiday Inn (midscale) and Holiday Select (emphasis on value). Tr. 4-17-12: 51-52.
The transactional documents concerning the sale of the hotel by BRS to HII reflected the agreement. A Purchase and Sale Agreement (PSA) was executed on June 21, 1996. Exhibit (Ex.) 13. Paragraph 15 of the PSA gave BRS the right to include in the limited warranty deed to the small corner piece of property adjacent to the hotel building and in the assignment and assumption of sublease agreement (Sublease Assignment Agreement) a provision prohibiting HII from operating an upscale hotel in substantially the following form.
The Grantee herein by the acceptance hereof covenants and agrees that it will not operate nor permit the operation of an " upscale" hotel on the premises herein conveyed. " Upscale hotel" as used herein shall mean a hotel which caters to an upscale market, including, without limitation hotels currently catering to an upscale market such as Marriott Hotels, Sheraton Hotels, Hilton Hotels, Omni Hotels, Crowne Plaza, Wyndham Hotels, DoubleTree Hotels and Suites, and Embassy Suites. This restriction shall not prohibit the Grantee herein from operating or permitting the operation of a Holiday Inn Hotel, a Holiday Inn Select Hotel, a Holiday Inn Express Hotel, a Radisson Hotel, or other hotels catering to the same market currently served by these hotels. This restriction is intended to run with the land and shall be binding upon the Grantee, its successors and assigns. This restriction shall expire fifteen (15) years from the date of this deed.Ex. 13, ¶ 15. Pursuant to the PSA the sale to HII closed on July 12, 1996 and both the Sublease Assignment Agreement (Ex. 16), and the limited warranty deed (Ex. 15) contained essentially the same language quoted above whereby HII covenanted and agreed not to operate or allow to be operated an upscale hotel on the property transferred by BRS for a period of fifteen years.
When BRS bought the former Ramada hotel it assumed a sublease from TK Associates which was assigned to HII on July 12, 2006. The PSA provided that if BRS acquired the ground lease from TK Associates within one year, then HII would purchase the ground lease from BRS for $1.6 million. Ex. 13, ¶ 21. BRS acquired the TK Associates ground lease for $1.2 million and the assignment was recorded in the Stamford Land Records, on July 17, 1996. Ex. 14. On July 31, 1996 the ground lease was assigned to HII by means of an Assignment and Assumption of Lease Agreement and of Sublease Agreement. Ex. 18 (Ground Lease Assignment). The Ground Lease Assignment stated:
By and upon delivery of this Assignment by Assignor to Assignee, all of the right, title, interests and estate created by or under the Sublease are automatically fully merged and subsumed into the estate and interest held by Assignee under the Lease, Assignee hereby declaring its express intent to accomplish such merger so that from and after the date hereof neither the Sublease nor the estate created thereunder shall have any further existence and Assignee's interest in the Property shall be solely and exclusively the leasehold estate under the Lease acquired by Assignee hereunder and created by Lease, the same being the interest and estate of Assignee as lessee under the Lease. The Sublease and interests and estates thereunder are hereby fully and completely merged, and declared to be merged, out of existence, without the necessity of any further action by any party.Ex. 18, ¶ 6. The Ground Lease Assignment contains no language similar to the restrictive covenant language found in the PSA, sublease assignment or limited warranty deed.
The evidence at trial showed that after buying the hotel, HII converted the former Ramada into a Holiday Inn Select, a use fully consistent with the restrictive covenants. Jabara testified its operation after the sale by BRS was " identical" to what had been agreed to in the negotiations with HII. Tr. 4-17-12: 65.
In 1997 the hotel ownership business of HII was merged into Bristol Hotel Company, and the hotel at 700 East Main Street then known as Holiday Inn Select became owned by a Bristol subsidiary, Bristol Hotel Asset Company. In 1998 Bristol Hotel Company merged with FelCor Lodging Trust and the Holiday Inn became owned by a subsidiary, FelCor Hotel Asset Company. In 2005 the ground lease on 700 East Main Street was transferred to the defendant FelCor TRS Guarantor (FelCor), a taxable real estate investment trust (REIT"). Jabara testified that in 1999 Thomas Corcoran, chairman or president of FelCor called him to ask that the use restriction be lifted so the property could be " rebranded" as an upscale Crowne Plaza. This overture was rejected by the Heyman, Jabara and Meyer families, as was a similar request by Corcoran in late 2005. Tr. 4-17-12: 70-76.
According to Joel Eastman, former counsel with both Bristol and FelCor, " TRS" signifies a taxable REIT subsidiary. Tr. 4-19-12: 18.
In 2005 FelCor decided to sell the Stamford Holiday Inn when it received an offer from Destination Hotel and Resorts to buy it for $30 million. The evidence at this point is not entirely clear on all points, but suffice it to say that Destination withdrew its offer when the deed restriction and restrictive covenants came to light. In an effort to deal with this problem FelCor consulted with a real estate attorney in Connecticut, Garrett Delehanty, Jr., who told FelCor there was a " good argument" that the use restriction in the sublease had been merged out of existence. Ex. 55. Delehanty offered to record an instrument on the Stamford Land Records on behalf of FelCor " as successor to Holiday Inns" saying to the extent the use restriction still has effect it is " terminated." Id.
On May 25, 2006 FelCor recorded a " Termination" document on the Stamford Land Records purporting to terminate all restrictions on the use of the property contained in the July 12, 1996 Assignment of Sublease. Ex 19. There is no evidence that anyone associated with the plaintiffs or the Stamford Marriott were given prior notice of this action. Shortly thereafter, marketing materials for the hotel noted that " ownership recently took steps ... [and] eliminated a use restriction (which historically impaired the ability to re-brand with most upscale brands)" Ex. 20, p. 5.
When the content of the marketing materials became known to associates of the Heyman, Jabara and Meyer families and the former members of BRS, they took steps to object to FelCor's position. Specifically, attorneys representing " members of BRS" wrote FelCor that the representation in the materials that the use restriction had been eliminated was not correct and the recorded Termination was ineffective and should be corrected. Ex. 21. According to Attorney Tamara Levine, representing the former members of BRS, and confirmed by Delehanty, the latter rejected this position in early November 2006 (Tr. 4-18-12: 60-61; Tr. 4-19-12: 162-63) and the plaintiffs commenced this suit shortly thereafter seeking a declaratory judgment that the use restrictions in the July 12, 1996 documents were valid, binding and enforceable at the time (2006) when the plaintiffs sought to enforce them against FelCor.
III. The Pleadings
In the operative complaint before the court the four plaintiffs include the three former members of BRS: Heyman Associates No. 5 L.P ., TRJ II and AIM Management Corp., and HD Hotel, LLC which owns the Stamford Marriott hotel business. The first two counts seek a declaratory judgment (1) that the Termination was null and void and (2) that the restrictive covenants in the sublease assignment and limited warranty deed were valid, effective and enforceable. The fourth count seeks an award of attorneys fees in accordance with the terms of the sublease assignment and Ground Lease Assignment. The third count, seeking injunctive relief requiring FelCor to cancel the Termination has been withdrawn.
FelCor's operative answer denies the most material allegations in the complaint, asserts several special defenses, including lack of standing, and that the restrictive covenant has been merged out of existence and others that were not pursued at trial. FelCor also asserted counterclaims alleging tortious interference with contract or business expectancies, slander of title and a violation of the Connecticut Unfair Trade Practices Act, General Statutes §§ 42-110a et seq. (CUTPA). The counterclaims seek several million dollars in damages.
The trial of the issues raised by the complaint, answer and special defenses commenced on April 17, 2012 and the last day of testimony was April 26, 2012. Post-trial memoranda and replies were submitted in June, and at the request of the parties, supplemental memoranda were allowed to be filed in July on the effect of a Connecticut Supreme Court decision, Wykeham Rise, LLC v. Federer, 305 Conn. 448 (2012) released on June 18, 2012. All of the parties were well represented by their counsel who exhibited a very high degree of professionalism both during trial and in their written submissions.
IV. Discussion
A. Standing
FelCor's post-trial memoranda attack the standing of the four plaintiffs to maintain this lawsuit. In its original answer FelCor claimed the plaintiffs lacked standing, but the issue was rarely raised again until a few days before the April 2012 trial began when FelCor articulated a desire to move to dismiss the case for lack of standing. Given the significant time already spent on scheduling and preparing for the first portion of the trial, the court did not look kindly on further delays and another briefing schedule that would be occasioned by such a motion, although recognizing that lack of subject matter jurisdiction could properly be raised at any time. FelCor was allowed to, and did, obtain last minute documentary discovery on the standing issue, and evidence was presented on the subject at trial.
Standing, or the lack thereof, implicates a court's subject matter jurisdiction; Electrical Contractors, Inc. v. Department of Education, 303 Conn. 402, 413 (2012); and the first step in adjudicating the claims before the court must be a determination whether the court has subject matter jurisdiction. " Standing is the legal right to set judicial machinery in motion, and one cannot rightfully invoke the jurisdiction of the court unless he [or she] has ... some real interest in the cause of action, or a right, title or interest in the subject matter of the controversy ... Standing requires no more than a colorable claim of injury." Wellswood Columbia, LLC v. Hebron, 295 Conn. 802, 809 (2010). This court has already decided that plaintiffs have a justiciable claim. See n. 1.
The gist of FelCor's lack of standing claim is the undisputed facts that BRS was dissolved shortly after it sold its interest in the hotel to HII and that neither Heyman 5, TRJ II nor AIM (the former members of BRS) nor the fourth plaintiff, HD Hotel, were parties to the agreements and instruments of June and July 1996. Plaintiffs alleged that Heyman 5, TRJ II and AIM are " the former and surviving members of BRS which was dissolved following the conveyance of the Stamford Ramada to HII. The assets of BRS were distributed to the plaintiffs upon dissolution of BRS." Second Amended Complaint, ¶ 11. (Dkt. Entry 178.00.) FelCor contends that the individual members of a limited liability company cannot pursue claims belonging to the entity and cite Superior Court cases sustaining objections to individual members pursuing claims on behalf of the entity. See FelCor Post-Trial Memorandum (Dkt. Entry 262.00) 17 n. 8. However, as pointed out by plaintiffs, these cases involved members pursuing claims derivatively on behalf of an entity that could have pursued the claims itself. See Plaintiffs' Reply Memorandum (Dkt. Entry 262.00) 6 n. 5. The claims being pursued here, according to the former BRS member plaintiffs, are direct claims, not derivative claims, because the assets of BRS which is an LLC (see Ex. 7) devolved to them upon the dissolution of BRS in accordance with General Statutes § 34-210 which states the assets of a limited liability company upon its " winding up" shall be distributed first to creditors, second to members in satisfaction of liabilities for distributions unless otherwise provided in a written operating agreement, and third, unless otherwise provided in the operating agreement, to members for return of their contributions and then to members in accordance to their share of distributions. The plaintiffs further contend that the use restriction was an asset of BRS and the members of BRS never relinquished their right to enforce that restriction, and indeed, took immediate steps to enforce it as soon as they learned of FelCor's steps to sell the hotel without it.
FelCor points to testimony given by James Mazzeo at trial in the form of a deposition transcript in which he stated that the use restriction was not an asset of BRS. Ex. T(9)89. Mazzeo has been the chief financial officer of Heyman Properties since 1985 and oversaw the financial, tax and accounting matters of entities that Heyman Properties had an interest in, including BRS. At trial Mazzeo explained, credibly to the court, that the use restriction was not accorded any cash value by BRS, and therefore it was not carried on BRS' books. When he testified at deposition about the use restriction he was discussing assets that had a cash value reflected on the accounts of BRS. Mazzeo further testified that there was no intent he was aware of to abandon or release the use restriction when BRS was dissolved. Tr., 4-26-12: 127-29.
FelCor further contends that the transfer of the use restriction to Heyman 5, AIM and TRJ II was not pursuant to a writing and therefore in violation of General Statutes § 47-5. The court is not persuaded by this argument. Section 47-5(a) requires that " all conveyances of land shall be ... in writing." While there is no writing conveying the use restriction, Section 47-5(a) does not require one because the use restriction is not " land."
On balance, the court sides with the plaintiffs that the right to enforce the use restriction has passed to Heyman 5, AIM and TRJ II by operation of Section 34-210. This conclusion is fortified by the case of Haddad v. Francis, 40 Conn.Supp. 567 aff'd. 13 Conn.App. 324 (1988) which held that assets of a dissolved corporate entity, when there is no formal assignment or transfer, pass to the shareholders if they have not been abandoned, and the shareholders are the proper parties to enforce or defend the obligations or rights associated with the asset. Haddad, supra, 40 Conn.Supp. at 573. The Appellate Court not only affirmed the trial court, but lauded its memorandum of decision as " so adequately explain[ing] the legal basis for its conclusions that it may be referred to for a detailed discussion of the facts and applicable law." 13 Conn.App. at 325. Connecticut courts have generally applied corporate law principles to LLCs, and the court sees no reason not to apply the rationale of Haddad to this case. The court finds that Heyman No. 5, AIM and TRJ II have not abandoned the use restriction and have standing to seek to enforce the use restriction.
The court also finds that the fourth plaintiff, HD Hotel, has standing to pursue the complaint in this action. At the time the use restriction was created, the Heyman, Meyer and Jabara families not only owned BRS, they also owned the Stamford Marriott Hotel through two entities: HD Realty, LLC which owned the real property where the Marriott Hotel was situated and HD Hotel, LLC which held the ground lease on that property and operated the hotel business. Ex. 1 (HD Hotel operating agreement); Ex. 2 (deed to HD Realty); Ex. 3 (ground lease to HD Hotel); see also testimony of Richard Jabara, Tr. 4-17-12: 33-48. There was substantial and uncontradicted testimony that the purpose of the use restriction was to protect the business of the Stamford Marriott. This was stated by Richard Jabara (e.g. Tr. 4-17-12: 57, 59, 60, 76); it was recognized by Timothy Pakenham, the attorney representing HII in 1996; Tr. 4-18-12: 5-6; Joint Trial Ex. 1001, 15-19; and restated by Kathleen Rorick, Executive Vice President Real Estate of Heyman Properties. Tr. 4-17-12: 149-50 (for benefit specifically of HD Hotels.) David Sinyard, who described himself as the " lead deal guy" for HII in connection with its 1996 purchase of the hotel, testified that HII agreed to the restriction, knew it was for the benefit of the Stamford Marriott and was " fine with it" as HII had no intention of making the property a Crowne Plaza. Joint Trial Ex. 1003: 16, 25-26. The purpose was well recognized by Timothy Lane the CEO of HII, who negotiated with Jabara and who stated it most clearly in his memorandum recommending purchase to his superiors.
Because the present owners of the hotel also own the Marriott, they are imposing a deed restriction on the sale which will prohibit ... branding the hotel as an upscale product ... The owners will not sell the hotel without this restriction. [We] believe that the hotel can compete effectively ...Ex. 12 (next to last page). It is also quite clear that FelCor's Tom Corcoran knew exactly whom to call in 1999 (Richard Jabara) in an effort to lift the use restriction. The court finds that HD Hotel was a third-party beneficiary of the use restriction on the hotel operations created by BRS and HII. The evidence shows persuasively that both BRS and HII understood that the purpose of the use restriction was to benefit the Stamford Marriott and that both intended to confer the restriction's benefits on the Stamford Marriott. Even though HD Hotels is not named or identified expressly as a third-party beneficiary, it may sue to enforce the use restriction. Wykeham Rise, LLC v. Federer, supra, 305 Conn. at 474-75; [quoting Dow & Condon, Inc. v. Brookfield Development Corp ., 226 Conn. 572, 580 (2003) ]; Gateway v. DiNoia, 232 Conn. 223, 230-31 (1995). In contrast, in Grigerik v. Sharpe, 247 Conn. 293 (1998), a case cited by FelCor, the Connecticut Supreme Court found the plaintiff had not proven he was an intended beneficiary of a contract between two other parties. Id. at 310 and n. 15. This court finds that HD Hotel has proven that it was the known and intended beneficiary of the use restriction agreed to by and between BRS and HII, and has standing to sue to enforce the restriction.
A discussion of the admissibility of Ex. 12, the so-called Lane Memorandum, appears herein at Section IV, Part B " Lane Memorandum, " pp. 12-15 infra.
B. Lane Memorandum
During the negotiations between BRS and HII in 1996 Timothy Lane, CEO of HII authorized a memorandum dated July 5, 1996 directed to members of the Executive Committee of Bass PLC, a United Kingdom company and owner of HII, regarding the potential purchase of the International Plaza in Stamford (the former Ramada, having lost that designation, was operating under the International Plaza name. Tr. 4-17-12: 49.) The memorandum was largely prepared by David Sinyard, and sought Bass Executive Committee approval for the purchase and renovation of the hotel owned by BRS. At trial the memorandum was marked as Exhibit 12 for identification, and the parties agreed that the court would rule on its admissibility in the course of deciding this case.
The Lane Memorandum's admission into evidence was objected to by FelCor on the ground that it is hearsay and parol evidence. The court finds that the written memorandum while it may meet the definition of parol evidence even though it is not oral testimony, does not, and is not offered to, vary the terms of the PSA or the July 12, 1996 documents, and therefore is not inadmissible under the parol evidence rule.
The court further finds that the Lane Memorandum is not hearsay because it is not offered to prove the truth of the matters asserted therein, but to show that (1) HII knew and accepted the fact that the fifteen-year use restriction was demanded by BRS to protect the financial interests of the BRS members in the Stamford Marriott, and (2) because the memorandum records the negotiating positions of BRS and HII and the subsequent meeting of the minds and qualifies as a verbal act and again is not offered for the truth of the assertions. As to the argument that to the extent the Lane Memorandum states BRS' negotiating position it is double hearsay, that position was testified to and confirmed by Jabara, who was fully subject to cross examination.
Plaintiffs argue that the memorandum is also admissible under Connecticut Code of Evidence (CCE) § 8-3(1) as a statement of a party opponent, noting that HII is a corporate predecessor of FelCor by operation of merger, and citing two federal court cases applying Federal Rules of Evidence 801(d)(2)(A) to permit testimony of an employee of a corporate predecessor to be used against a corporate successor. See Tracinda Corp. v. Daimler Chrysler AG, 362 F.Sup .2d 487, 504 (D.Del.2005). FelCor counters by citing Calhoun v. Baylor, 646 F.2d 1158 (6th Cir.1981) for the statement that " Rule 801(d)(2) does not include statements by predecessors in interest among the types of statements the rule makes admissible." Id., at 1162. That statement appears to be dicta because the Sixth Circuit had already concluded the plaintiff Bankruptcy Trustee " [i]n a suit alleging fraud by ... Stax employees against Stax's creditors, those creditors should not be bound by the [employees'] statements." Id.
The court notes, as set out in the leading treatise on Connecticut evidence, that FRE 801(d)(2) defines admissions of a party opponent as ‘ non-hearsay’ while CCE § 8-3(1) treats them as hearsay subject to an exception. Tait & Prescott, Tait's Handbook of Connecticut Evidence, § 8-16(2). The court agrees with the authors' assessment that both approaches have the " net effect of admitting such statements." Id.
The plaintiffs assert that the Lane Memorandum is admissible through CCE § 8-3(1)(F) which states, " a statement made by a predecessor in title of the party, provided that the declarant and the party are sufficiently in privity that the statement of the declarant would affect the party's interest in the property in question" is not hearsay. In opposition, FelCor contends that at the time the memorandum was written, June 1996, HII did not hold any interest in the hotel property, citing Aramony v. District of Chapman Beach, Superior Court, CV 08 5004192 (February 10, 2012, Wiese, J.) (2012 WL 695510). Aramony is not on point since the testimony in this case by Paguni, plaintiff's father, that was deemed inadmissible hearsay did not relate to the property in question at all and therefore the Aramony court was faced with a differing fact set from what is present in this case where Lane memorandum relates specifically to the hotel property and is a statement by HII concerning property that HII was considering buying and shortly thereafter did buy. CCE § 8-3(1)(F) is not clear whether the declarant's title had to exist at the time of the statement. However it appears to be a fact that the statement could affect FelCor's interest in the property, and that HII and FelCor are in sufficient privity with respect to the property to meet that requirement of the CCE. Indeed, as plaintiff points out, FelCor, in the Termination filed on the Stamford Land Records, stated it was " successor" to both HII and Bristol Hotel Asset Company, giving it sufficient interest to file the Termination document. Ex. 19.
Based on the above analysis, the court determines there is sufficient basis in the law to admit Exhibit 12 as a full exhibit. Nevertheless, the court will also exercise its discretion under CCE § 8-9 to admit the memorandum. The document is highly relevant as it bears on what was communicated to HII about the necessity of the use restriction as part of the proposed transaction, and the reasons BRS wanted the restriction including the identity of the owners of the Stamford Marriott and the beneficiaries of the restriction. The document is reasonably necessary to be considered given the recent admonition of the Connecticut Supreme Court in Wykeham Rise, LLC v.. Federer, 305 Conn. 448 (2012), that in considering third-party beneficiaries under land use covenants intent is to be determined in light of the circumstances attending their making, " including the motives and purposes of the parties." Id. at 474 [citing Dow & Condon, Inc. v. Brookfield Development Corp., 226 Conn. 572, 580 (2003) ]. The document is also a business document made in the ordinary course of HII's business as described by Sinyard and therefore has the same indicia of reliability as other documents excepted from the hearsay rule by CCE § 8-4 (business records). Finally, the document was confidential and made under circumstances where the sender and recipients were unlikely to be posturing and likely to relate and rely on assertions sustained by facts. Exhibit 12 shall be marked and considered as a full exhibit.
C. Validity, Effectiveness and Enforceability
FelCor has asserted that the use restriction at issue in this case appearing in the sublease assignment and limited warranty deed of July 12, 1996 was not valid, effective or enforceable. In 2011 FelCor sought to amend its answer to add a special defense that the use restriction was void ab initio. This late effort to amend was not allowed by Judge Mottolese. Dkt. Entry 214.00. At this point plaintiffs contend that FelCor is precluded from asserting the use restriction was ineffective from the very beginning, and FelCor asserts that plaintiffs in seeking declaratory relief carry the burden of proving the use restrictions was valid, effective and enforceable when put into place. The court agrees that the plaintiffs have that task as part of their burden of proving it was effective through July 2011.
Connecticut law has recognized restrictions on pursuing certain types of business operations on a particular property. See Dick v.. Sears-Roebuck & Co., 115 Conn. 122, 126 (1932) (restriction on conduct of business on certain land for a reasonable purpose and for a reasonable time not against public policy); Lampson Lumber v. Caporale, 140 Conn. 679, 683 (1954) (same). There is no evidence, and FelCor has not contended, that the fifteen-year restriction against the operation of an upscale hotel was unreasonable in any way.
FelCor's invalidity argument is based on the contention that the use restriction is not among the three types of restrictive covenants recognized under Connecticut law. These types are, according to FelCor, (1) mutual covenants exchanged by owners of adjoining properties, (2) uniform covenants in deeds to property as part of a uniform development plan, and (3) covenants to benefit adjoining land retained by the grantor, citing Stamford v. Vuono, 108 Conn. 359 (1928), and Max's Place v. DJS Realty, LLC, 123 Conn.App. 408, 414 (2010). Even at the time this case was tried, there was certainly a serious question as to whether restrictive covenants were limited by Connecticut law to the three examples set forth in Vuono. For instance, in Dick v. Sears Roebuck & Co., supra, the plaintiff owned property housing a furniture store and sold a non-adjoining piece of property (it was across the street) with a covenant restricting the use of that property so as not to permit a furniture store. The property was then resold to Sears which commenced selling furniture from the location. The Dick court upheld the restriction. More recently, the United States District Court for the District of Connecticut stated flatly " [t]here is no requirement under Connecticut law ... that all restrictive covenants fit neatly into one of these three categories." Calabrase v. McHugh, 170 F.Supp.2d 243, 253 n. 3 (D.Conn.2001). While there may have some prior uncertainty, the recent Connecticut Supreme Court decision in Wykeham Rise has put the question to rest with the following passage:
Although the notion that Connecticut courts ordinarily recognize only three " classes" of restrictive covenants has some support in recent appellate case law; Max's Place, LLC v. DJS Realty, LLC, 123 Conn.App. 408, 414, 1 A.3d 1199 (2010); this idea misconstrues our case law and muddies the already murky law of servitudes. The first articulation of a three category taxomomy of covenants in this state occurred in 1928, when this court was asked to determine whether one property owner could enforce a covenant appearing in another property owner's deed, when both properties had been conveyed by a common grantor. See Stamford v. Vuono, 108 Conn. 359, 143 A. 245 (1928). Relying on New York case law, this court observed: ‘ For our present purposes restrictive covenants of this character may be divided into three general classes: First, when there are mutual covenants in deeds exchanged between owners of adjoining lands; second, when under a general development scheme the owner of property divides it up into building lots to be sold under deeds containing uniform restrictions, and third, where a grantor exacts covenants from its grantee presumptively or actually for the benefit and protection of his adjoining land which he retains. Korn v. Campbell, 192 N.Y. 490, 495, 85 N.E. 687 [1908].’ Stamford v. Vuono, supra, at 364. Contrary to the trial court's interpretation in the present case, this classification was not intended to limit the varieties of covenants that lawfully could be created, but was rather a shorthand device for determining whether a lawfully created covenant subsequently could be legally enforced between parties other than the covenant's original signatories.Wykeham Rise, LLC v. Federer, 305 Conn. 448, 459, see also Id. at 473 n. 24.
FelCor also contends that the use restriction must be " specific as to its beneficiary, " citing and quoting the trial court opinion in Max's Place, LLC v. DJS Realty, LLC, Superior Court, judicial district of Middlesex, CV 07 5002335 (April 2, 2009, Wilson, J.) [ 47 Conn. L. Rptr. 489]. This position is significantly weakened by the Wykeham decision which noted that, while the covenant in question did not mention the adjacent property or any third parties, the circumstances surrounding the creation of the covenant " could provide a factual basis" for concluding that the parties to the original covenant intended the owner of adjacent land to be benefitted. Id. at 478. In this case, the court finds that facts exist to clearly identify the beneficiary as the Stamford Marriott. For the above reasons, the defendant's arguments are not persuasive, and the court determines that the use restriction was valid, effective and enforceable when put into place on July 12, 1996.
D. Effect of July 31, 1996 Ground Lease Assignment on the Use Restriction
FelCor has pleaded as a special defense, and contends that the evidence before the court proves, that the use restriction limiting the hotel at 700 East Main Street, which became the Holiday Inn Select, from operating as an upscale hotel, ceased existence shortly after HII bought and leased the land and took ownership of the facility on July 12, 1996. Specifically, FelCor asserts that the hotel was not subject to the use restriction because the restriction had been extinguished when BRS assigned the ground lease on the hotel property to HII on July 31, 1996. As noted previously that Ground Lease Assignment stated that the sublease previously assigned to HII on July 12, 1996 was " fully merged and subsumed" into the ground lease assigned to HII on July 31, 1996. Ex. 18, p. 4. " The Sublease and interests and estates thereunder are hereby fully and completely merged, and declared to be merged out of existence, without the necessity of any further action by any party." Id. The ground lease assigned to HII did not contain any covenant or restriction on the use of the property as an " upscale hotel, " and FelCor asserts that the plain language merging the sublease " out of existence" operated to extinguish the use restriction on the property subject to the sublease.
In opposition to this interpretation, the plaintiffs argue that the Ground Lease Assignment language did not affect the Sublease Assignment Agreement. They also point out that the sublease itself was dated November 19, 1985 and in the form it was transferred to BRS and then to HII, it never contained any use restriction language. That language was contained in the Sublease Assignment Agreement of July 12, 1996, and the plaintiffs posit that the Ground Lease Assignment merging the " sublease" out of existence had no effect on the Sublease Assignment Agreement containing the restrictive covenant language. Plaintiffs also point out that the Ground Lease Assignment specifically changed the provision of the Sublease Assignment Agreement by releasing on behalf of BRS the right of first refusal retained by BRS as set forth on the third page of the Sublease Assignment Agreement. See Ex. 16, p. 3 released in Ex. 18, p. 3, ¶ 4. In contrast, the absence of any language in the Ground Lease Assignment removing the use restriction contained in the Sublease Assignment Agreement is telling, according to the plaintiffs.
When denying a motion for summary judgment by FelCor at an earlier stage of this case, the Honorable Kevin Tierney cited the Connecticut Supreme Court's language in Honulik v. Greenwich, 293 Conn. 698, 729 (2009), that in construing contracts " we consider not only the language used in the contract but also the circumstances surrounding the making of the contract, the motives of the parties and the purposes they sought to accomplish. " See Dkt. Entry 141.00, p. 12 (emphasis by Honulik court). More recently, the Connecticut Supreme Court has stated:
[i]n construing a deed, a court must consider the language and terms of the instrument as a whole ... Our basic rule of construction is that recognition will be given to the expressed intention of the parties to a deed or other conveyance, and that it shall, if possible, be so construed as to effectuate the intent of the parties. In arriving at the intent expressed ... in the language used, however, it is always admissible to consider the situation of the parties and the circumstances connected with the transaction, and every part of the writing should be considered with the help of that evidence ... The construction of a deed in order to ascertain the intent expressed in the deed presents a question of law and requires consideration of all its relevant provisions in light of the surrounding circumstances.Wykeham Rise, LLC v. Federer, supra, 305 Conn. at 456-57 [quoting Bolan v. Avalon Farms Property Owners Assoc., Inc., 250 Conn. 135, 140-41 (1999) ]; see also Il Giardino, LLC v. Belle Haven Land Co., 254 Conn. 502, 511 quoted in Wykeham Rise, supra, 305 Conn. at 475 " the analysis is a context dependent one: ‘ [i]f the meaning of the language contained in a deed or conveyance is not clear the trial court is bound to consider any relevant extrinsic evidence presented by the parties for the purpose of clarifying the ambiguity.’ "
The court concludes that the language of the Ground Lease Assignment, while clear as far as it goes, says nothing specifically about the use restriction and is ambiguous as to its intended effect, if any, on that restriction. Therefore, the court must review evidence concerning the circumstances of the transaction, the motives of the parties and other documents connected to the transaction in order to ascertain the intent of the parties to the Ground Lease Assignment.
Using a chronological approach, the court considers the Jabara testimony, cited above, at p. 10, as to the importance of a restriction on the use of the hotel property from the plaintiffs' stand point to protect the interests of the Stamford Marriott just two blocks away in downtown Stamford. See Ex. 6. The importance of the proposed use restriction was clearly understood by Lane who negotiated with Jabara and who conveyed it to HII's parent company in the Lane Memorandum which noted at the outset that the owners of the former Ramada had previously purchased and renovated the Stamford Marriott. The memorandum continued:
Because the present owners of the hotel also own the Marriott, they are imposing a deed restriction on the sale which will prohibit HII branding the hotel as an upscale product (Crowne Plaza or any future acquired upscale brand). The owner will not sell the hotel without this restriction.
The memorandum also concluded that the hotel would compete effectively even with the use restriction and proposed making a $14.7 million investment to purchase and renovate it. Ex. 12. The recommendation to purchase with the restriction and renovate was approved by the Bass Executive Committee. Joint Trial Ex. 1003, 33-38, 68.
The PSA is illustrative of the intent of BRS and HII in entering into the transaction. It provided for insertion of the use restriction to last for fifteen years in the Sublease Assignment Agreement and limited warranty deed. It also provided that if BRS was able to acquire the ground lease such would be transferred to HII. Ex. 13, ¶ 21. There was no mention that upon assignment of the ground lease the carefully negotiated use restriction would disappear. There was also a letter dated June 21, 1996 signed by Samuel Heyman and HII respecting the transfer of the ground lease which makes no mention of terminating the use restriction. Ex. 43. The court believes it is also relevant to note that there was no effort to remove the use restriction from the limited warranty deed conveying the corner piece of property.
Representatives of both BRS and HII provided either testimony at trial or through deposition that consistently supported an intent that the use restriction remain in effect for fifteen years as described in the PSA and July 12, 1996 documents. Kathleen Rorick, Executive Vice President of Heyman Properties in charge of real estate, helped develop the list of " upscale" hotels included in the use restriction. Tr. 4-17-12: 116, 148-49. She signed the limited warranty deed for the corner parcel to HII and the sublease assignment for the rest of the property, both of which contained the use restriction. Id. at 153-54. She later signed the assignment of the ground lease to HII. Id. at 156. She testified that she had no authority from BRS to terminate the use restriction, did not intend to do so, and understood at the time that the ground lease assignment did not do so. Id. at 158-59. Attorney Tamara Levine represented BRS in connection with the PSA, and the July 12 and July 31, 1996 transactions. She testified the Ground Lease Assignment was to have no effect on the use restriction and there was no intent to have the Ground Lease Assignment affect the restriction. Tr. 4-18-12: 36, 39.
On the other side of the business deal, David Sinyard who headed up the transaction for HII testified at a deposition that HII agreed to the use restriction, understood it was to protect another hotel in the area owned by the sellers, and stated HII had no intention of making the hotel it was acquiring into an " upscale" hotel, but was satisfied to call it a Holiday Inn. Joint Trial Exhibit 1003: 16, 25-26. He testified he was unaware of any agreement by which that restriction was terminated. Id., at 26-27, 30. He further testified that he had not authorized its termination, and since the restrictive covenant was a significant aspect of the transaction, the termination of it less than a month thereafter would have been brought to his attention. Id. at 46, 73-74. Attorney Timothy Packenham, a commercial real estate lawyer with the law firm Alston & Bird that acted as HII's outside counsel in connection with its purchase of the hotel, drafted the Ground Lease Assignment, and he had no knowledge of any HII intent with respect to that document except to acquire the ground leasehold interest, and does not recall any intent one way or another about terminating the use restriction. Joint Trial Ex. 1001: 6-7, 10-11, 33-34.
There was evidence that HII paid BRS an additional $1.6 million to purchase the ground lease and, while the record is not entirely clear as to the amount, BRS made a gross profit on its sale of several hundred thousand dollars. Ex. 13, ¶ 21; Tr. 4-18-12: 28-29. FelCor asserts this remuneration was the financial incentive for BRS to give up the use restriction. There is no evidence to support this assertion. Indeed Sinyard, who initialed the use restriction language in the PSA and who shepparded the transaction for HII, was not aware that the restriction was given up. Joint Trial Ex. 1003, 41-43, 46, 47 and other references supra. Sinyard also noted that HII was intent on lessening its sublease exposure nationwide. Id. at 36-37, see also Ex. 12: 1, 2.
After the merger with Bristol Hotel, FelCor was aware of the existence of the use restriction in the limited warranty deed. This was testified to by Joel Eastman, a commercial real estate lawyer by training who was formerly general counsel of Bristol Hotel Company at the time of its merger with FelCor, and continued on as senior real estate counsel for FelCor until 2007. Tr. 4-18-12: 169-72, 190-91, 243. He was not concerned about it because the corner property was not part of the hotel property. Id., at 193. Eastman also testified that FelCor was not aware of the existence of a use restriction until Destination made its offer to buy in late 2005. Id. at 201. This does not quite square with the testimony by Jabara that Thomas Corcoran of FelCor called him in 1999 asking to have the use restriction lifted because FelCor wished to have the hotel re-branded as an upscale Crowne Plaza. At no time in these conversations did Corcoran indicate that the use restriction was invalid or terminated. Tr. 4-17-12: 70-74. Jabara's testimony was not contradicted or rebutted in any fashion.
Having considered the documents comprising the transactions between BRS and HII in July 1996, including the fee simple deed to the corner property that contained the same use restriction as appeared in the sublease assignment, but was not mentioned in the Ground Lease Assignment, and having reviewed the testimony of the participants thereto, and examining all the circumstances, the court comes to the firm conclusion that neither BRS nor HII had any intent to terminate the use restriction on the hotel parcel of land when they executed the Ground Lease Assignment. There is no evidence of such intent and such an intent seems to be an implausible change of direction by the parties who knew about the distinct possibility of the Ground Lease Assignment when the PSA was signed on June 21, 1996 and when the deed and sublease assignment documents, all containing the restriction, were signed on July 12, 1996. There is no evidence of any event or change of heart occurring within the nineteen-day period extending to July 31, 1996 to provide a basis for the court to determine that the use restriction was intended by the parties to be undone, so that the language of the Ground Lease Assignment should be construed to effect a termination of the use restriction, and the court declines to do so.
E. Corporate Obligation
At the conclusion of the trial, the court asked counsel to specifically brief the issue of what contractual obligations existed between the parties. In response, FelCor contends that the sublease to which the use restriction attached ceased to exist before it merged with Bristol (which previously had merged with HII) and therefore, it was not a successor in interest to HII as subleasee nor successor to an obligor under the use restriction.
There is some facial attractiveness to that argument, but it ignores the contract obligations undertaken by HII in the purchase of the former Ramada hotel. In the sublease assignment agreement, Ex. 16, HII promised not to operate or permit operation of an upscale hotel on the premises. For the reasons set forth earlier, the plaintiffs were identifiable third-party beneficiaries of that corporate undertaking.
As recounted previously, Bristol acquired HII through merger and subsequently FelCor acquired Bristol through merger. Both mergers were consummated pursuant to Section 252 of the General Corporation Law of Delaware. Exs. 35 and 50. Section 259 of that law states that the surviving corporation shall be subject to all " restrictions, disabilities and duties of each of such corporations so merged ..." As acknowledgment of this responsibility, the FelCor-Bristol merger agreement went to great lengths to identify in the agreement, or in a side letter, the conditions of ownership and restrictions on property owned by Bristol. Ex. 33, § 3.8.
The sublease assignment specifically obligated HII not to operate or permit the operation of an " upscale" hotel for a period of fifteen years. " This restriction is intended to run with the land and shall be binding on Assignee [HII] its successors and assigns." Ex. 16. Recognizing the legal consequences of a merger, FelCor's general counsel from 1996 to 2006 Lawrence Robinson conceded at trial that FelCor assumed the assets and the liabilities associated with the Holiday Inn at 700 East Main Street through its merger with Bristol. Tr. 4-19-12: 111-12. On the basis of the above the court finds that FelCor assumed the obligation undertaken originally by HII that it would " not operate nor permit the operation of an upscale hotel" on the property, and this obligation continued until 2011 and was enforceable by the plaintiffs.
F. The Restriction In the Limited Warranty Deed
The plaintiffs contend that the use restriction in the limited warranty deed to HII for the corner parcel was valid, effective and enforceable. FelCor has not challenged that position. However, the plaintiffs have also asserted that the use restriction that appears in the warranty deed to the corner property prohibited FelCor from using or permitting the use of the hotel as an " upscale hotel." FelCor opposes this assertion by noting that the hotel facility is located entirely on the leased parcel of land owned in fee by the McDonald and Scalzi families and is not affected by the use restriction contained in the deeded property.
Attorney Levine testified that the hotel property consisted of both the small corner parcel and the larger parcel, and the use restriction " hit" or affected the hotel property. Tr. 4-18-12: 155-56. The plaintiffs note that whenever the hotel has changed ownership, the transaction has included both parcels of land and that the insertion of the restriction against an " upscale hotel" is rendered meaningless if it does not apply to both parcels.
Ex. W(2) is a survey which clearly shows that the entire hotel structure, including attached garage, is on the McDonald-Scalzi property. Attorney Levine testified that the restriction in the deed did not apply to the leased property. Tr. 4-18-12: 114-16. The court holds that while the deed restriction might have, and perhaps should have, given notice to an interested party of the potential of a use restriction on the leased property, it could not, and did not by itself act to restrict the leased property's use.
V. Conclusion
For the reasons stated above, the court determines that the plaintiffs are entitled to prevail on their requests for a declaratory judgment that the Termination was null and void, and that the restrictive covenants contained in the sublease assignment and limited warranty deed were valid, effective and enforceable to July 12, 2011 in accordance with their terms.
Counsel for the parties shall attempt to agree on what additional proceedings are necessary to dispose of count four of the complaint (claiming damages for expenses, costs and attorneys fees). If it is determined that this can be done by motion, counsel should attempt to agree on a briefing schedule. If an evidentiary proceeding is necessary, counsel should attempt to agree on one or more dates subject to the court's approval. Counsel should communicate all agreements to the Civil Caseflow office. If the necessary agreements are not reached a status conference should be scheduled through the CCO.
SO ORDERED.