Mar 26, 2020 - Judge’s Distribution and Franchise Rulings from the Front Lines by |

Gambling, a Panamanian Government Takeover, and Liquidated Damages

By: Jeffrey M. Goldstein

Although “force majeure” or “act of god” cases do not arise frequently in the franchise litigation world, a relatively recent case in the United States District Court for the Southern District of New York turned in part on this doctrine. Wyndham Hotel Grp. Int’l, Inc. v. Silver Entm’t LLC, No. 15-CV-7996 (JPO), 2018 U.S. Dist. LEXIS 52144 (S.D.N.Y. Mar. 28, 2018). In this regard, in 2015, the Veneto Hotel & Casino, a Wyndham franchise hotel, was seized by the Panamanian government for failure to pay gaming taxes, leading Wyndham to terminate its franchise agreement. Wyndham then sued for damages, and the hotel franchisee counterclaimed for Wyndham’s alleged breaches of the franchise agreement.

The Veneto Hotel & Casino in Panama City, Panama, was owned by Alexander and Andrew Silverman (“the Franchisee” or “Veneto”), who bought the hotel through one of their corporate entities for $85 million in 2006. In March 2007, Silver Entertainment LLC (“Silver” or “the Franchisee”) signed a franchise agreement with Plaintiff Wyndham Hotel Group International, Inc. (the “Franchisor” or “Wyndham”). The hotel operated under the franchise agreement (“the Franchise Agreement”) as the “Veneto — A Wyndham Grand Hotel.”

Under the Franchise Agreement, Silver was required to pay Wyndham recurring fees during the ten-year franchise term, including royalties, a marketing fee, reservation system fees, and an international sales fee.  Also under the Franchise Agreement Wyndham was permitted to terminate the agreement for myriad identified reasons, including but not limited to, an uncured default on past-due fees or the franchisee’s loss of “ownership or possession” of the hotel. The Franchise Agreement also provided that in the event of a premature termination, Wyndham had the right to collect a lump-sum payment as liquidated damages in the event of premature termination.

Several months after the assignment, Wyndham made an $850,000 loan to Veneto in the form of a Development Advance Note (the “Note”), which provided that “one-tenth of the original principal amount will be forgiven without payment” on “each anniversary” of the hotel’s opening date, but that the outstanding balance of the Note would become “immediately due and payable,” with 18% interest, upon early termination of the Franchise Agreement.

During the subsequent five years, the parties continually accused each other of not supporting the other; these disputes led to an amendment to the Franchise Agreement on April 1, 2012 (the “Amendment”). The Amendment reduced some recurring fees until Wyndham had carried out updates to its Spanish reservations system. Separately, Veneto and GACC entered into a loan modification agreement in 2012.

By June of 2014, financial difficulties caused Veneto to fall behind in its royalty payments by $240,383; in turn, Wyndham issued Veneto a notice of monetary default. In January 2015, GACC issued a notice of default to Veneto, accelerated its loan, and stopped disbursing funds to Veneto.

In January 2015, the Panamanian Gaming Control Board notified Veneto that its gaming taxes were in arrears. Because the franchisee failed to cure the deficiency, the Gaming Control Board issued an order in April 2015 appointing a receiver to run the hotel. As a result of the order, the government receiver took control of the hotel and the franchisee was denied access to the property thereafter.

Shortly thereafter, on May 21, 2015, Wyndham issued another notice of default, this time for $547,710.74 in recurring fees, and threatened to terminate the Franchise Agreement if the default was not cured within ten days. After Wyndham did not receive the payment, Wyndham terminated the Franchise Agreement on July 28, 2015. Wyndham cited both Veneto’s failure to cure its financial default and its loss of control of the hotel as grounds for the termination.

At the outset, the Court concluded that the Franchise Agreement and Amendment were unambiguous as to two matters. First, the Amendment fully released liability for “any and all claims” arising on or before April 1, 2012 (the “Release”). Second, the Court held that the Franchise Agreement and Amendment encompassed all of the binding promises made by Wyndham to Silver (and its successor Veneto) and vice versa. The Court then applied the especially rigid parol evidence rule in New Jersey stating that “the text of these contracts makes it clear that the parties intended their terms to be a ‘final expression’ of the parties’ agreement, and consequently, they ‘may not be contradicted by evidence of any prior agreement.’” The Court explained that this meant that it would consider extrinsic evidence of Wyndham’s franchise negotiations with Defendants only to the extent that it helped interpret the explicit terms of the resulting written agreements.

In essence, Defendants alleged that Wyndham breached the Franchise Agreement thereby causing the Veneto hotel to fail. Legally, the franchisee’s first and third counterclaims assert breach of contract and breach of the covenant of good faith and fair dealing. In support of these claims, the franchisee alleged that Wyndham failed to provide Veneto with a variety of franchisor support services, which the Court divided into the following categories: (1) access to Wyndham’s reservation and property management systems, (2) a Spanish-language reservation system, (3) training, and (4) marketing, group sales, and transient sales support. Defendants alleged that Wyndham’s breaches caused the Veneto’s financial distress, which, in turn, ultimately caused Defendants’ loss of the hotel. The Court addressed individually each category of breach.

With regard to Defendants’ first set of allegations, the Franchise Agreement and Amendment required Veneto to remit fees to cover the costs of Wyndham’s centralized reservation, and in exchange, the Franchise Agreement required Wyndham to “make available to Veneto the reservation system provided by Wyndham for all similarly situated Wyndham Hotels.”  After examining the record evidence at the time of the Court’s decision, it concluded that a genuine dispute of material fact existed as to whether Wyndham breached its obligation to provide Veneto with adequate access to its reservation and property management systems. Specifically, the Court pointed out that record evidence revealed the following post-Release issues:

First, during a one-month period, technical issues prevented Veneto customers from booking reservations through Wyndham’s proprietary website. Second, at various times, Wyndham’s reservations website omitted the Veneto hotel from search results and displayed incorrect room rates and availability. Finally, on at least one occasion, Wyndham’s property management system malfunctioned and caused the Veneto to lose access to its customers’ credit card information.

The Court’s ruling on this issue was merely to determine whether sufficient evidence existed in the record to create a disputed issue. In determining that above evidence was sufficiently material to entitle the franchisee to a trial, the Court rejected Wyndham’s motion for summary judgment. In this regard, the Court stated that “whether these events constitute a breach of contract is for a jury to decide.”

Defendants also alleged that Wyndham failed to provide Veneto with a Spanish-language reservation system and website; however, the Court found as a matter of law that “such a failure was not a breach of the Franchise Agreement.” The Court next examined that Franchise Agreement Addendum that stated that the Franchisee “”shall pay [Wyndham] a monthly National Sales Fee … until the later of (i) March 31, 2012 or (ii) such time as a Spanish language reservation system, website and related services for the system have been implemented and tested by Franchisor and are fully operational.” On the occurrence of both, Veneto’s fee was to increase to 1%.  The Court’s interpretation was that “the Franchise Agreement did not obligate Wyndham to provide a Spanish-language reservations website; it merely reduced Veneto’s fees until such time as Wyndham chose to do so.” Because the Franchisee did not allege that it ever paid the higher national sales fee, “no reasonable jury could find that Wyndham breached an obligation to provide a reservations system in Spanish, and summary judgment is granted on this set of allegations.”

The Franchisee’s next claim alleged that Wyndham’s training was defective, based on the Amendment’s requiring Veneto to pay Wyndham a “corporate training fee” “to fund certain training offered by Wyndham’s corporate training department.” Record evidence existed that Wyndham provided training services exclusively in English, which was unhelpful to Veneto’s primarily Spanish-speaking employees, and that this problem persisted until after the April 1, 2012 Release. After reviewing this evidence and the Amendment, the Court concluded that “this evidence is sufficient to raise a genuine dispute that should be resolved by the jury, and summary judgment is denied as to Defendants’ training allegations.” Specifically, as the Court explained: “The Court concludes that this contract provision is ambiguous as to what services were owed to Veneto, and a factual dispute exists as to whether those services were provided.”

Last, the Franchisee alleged that Wyndham failed to provide marketing services and to facilitate “group sales” (reservations in large blocks) and “transient sales” (one-off reservations to individual customers). The Franchisee tethered its claims in this regard to two sections of the Franchise Agreement that required Veneto to pay, including: (1) a “marketing fee” “as a contribution to the Central Marketing Fund,” and (2) a “national sales fee” “for international group sales services, regional convention sales services and transient business sales services provided by Wyndham. These provisions, however, according to the Court, “limited Wyndham’s obligation to provide marketing services in exchange for these fees.” In support of this view, the Court pointed to the following specific language: Wyndham “undertakes no obligation . . . to make expenditures which are equivalent or proportionate to Veneto’s contribution, or to ensure that any particular franchisee benefits directly or pro rata from expenditures from the Central Marketing Fund.” Similar language identified by the Court stated that Wyndham promised to provide international-sales-office services, including group booking services, only “to the extent provided generally by Wyndham for the benefit of [the Veneto hotel] and other Wyndham Hotels in the same division.”

Ultimately on the training issue, the Court ruled that:

based on this contract language, no reasonable jury could find that Wyndham breached its obligations to provide marketing or sales services to Veneto. Defendants have failed to identify any specific evidence that could show (1) what services were owed to Veneto by Wyndham, or (2) that Wyndham performed below that minimum threshold. The Franchise Agreement does not include any promises by Wyndham as to a minimum number of reservations or a minimum occupancy level.

Accordingly, the Court concluded that the Franchisee has “failed to carry [its] burden, and summary judgment is granted [to the Franchisor] on this set of allegations.

Regarding room-night credits, the Franchisee alleged that Wyndham incorrectly calculated certain room-night credits against Veneto’s recurring fees balance. Wyndham argued that Veneto’s claim was based on negotiations in April 2015 that never resulted in a binding agreement. The Court rejected this argument stating that “Wyndham’s characterization of the dispute is mistaken.” As the Court explained, most of Veneto’s recurring fees were measured as a percentage of the hotel’s gross room revenues, but the Franchise Agreement allowed Veneto to exclude a certain number of “complimentary room nights,” offered to casino guests free of charge, from its calculation of gross room revenues. Although the parties did try to resolve a dispute regarding fees in 2015, “Wyndham’s obligation to accurately credit comp rooms derives from the Franchise Agreement, which predates those negotiations.” And “if the credits were improperly calculated, Wyndham owes Veneto an offset against its recurring fees or, if the miscalculation is large enough, reimbursement.” As such, the Court denied Wyndham’s motion for summary judgment as to the Franchisee’s claim for room-night credits.

After concluding that a disputed issue of fact existed regarding whether Wyndham breached its contractual obligations to provide (1) access to its reservation and property management systems, (2) training to Veneto employees, and (3) accurate room-night credits, the Court proceeded to evaluate Wyndham’s argument that the Franchisee failed to identify any recoverable damages as to the first two obligations.

Regarding contractual damages in general, the Court initially set forth the black-letter law that “where it is certain that damage has resulted, mere uncertainty as to the amount will not preclude the right of recovery.” In turn, the Court declared that the Franchisee had presented sufficient evidence to raise a genuine dispute as to the existence of damages caused by Wyndham’s allegedly inadequate franchisor support.

In so concluding, the Court identified the Franchisee’s allegation that Wyndham’s failure to provide a functional reservations system caused it to lose potential customers and forced it to pay higher fees to third-party reservation websites. The Court also ruled that “it is beyond genuine dispute that Veneto’s default on its $55 million loan, and its subsequent inability (or failure) to pay its gaming taxes, were not foreseeable consequences of Wyndham’s alleged failure to provide training and reservations support services.” In this regard, the Court held as a matter of law that Wyndham is not liable for damages flowing from Defendants’ loss of control of the hotel. As the Court explained, “such a dramatic consequence is too outsized and too remote a possibility to have been the foreseeable result of spotty technology and shoddy training.”

After ruling on the Franchisee’s claims against Wyndham, the Court examined the sufficiency of evidence in support of Wyndham’s claims against Veneto. Wyndham’s claims included: (1) recurring fees in the amount of $549,963.69; (2) liquidated damages in the amount of $311,135; and (3) the outstanding principal due under the Note of $255,000. The Court quickly found that it was clear that the Franchisee failed to perform its obligations under the Franchise Agreement and Amendment. As the Court reasoned, “unambiguous contract language required Veneto to pay” both recurring franchise fees and liquidated damages. The record was also clear that the Franchisee paid neither.  Instead, as the Court explained, the Franchisee relied on two affirmative defenses that, if applicable, would excuse performance. The Court rejected each defense in turn.

First, the Franchisee argued that Wyndham committed a prior material breach by materially breaching the Franchise Agreement before Veneto breached the Franchise Agreement. If true, this would have relieved Veneto of its payment obligations under the Franchise Agreement, since “New Jersey law recognizes that a material breach of contract on the part of one party entitles the other party to terminate it.” In refusing to credit the prior material breach doctrine, the Court held that “the trouble for Defendants … is that they did not terminate the Franchise Agreement after those alleged breaches by Wyndham.” Under binding precedent, “when one party to a contract feels that the other contracting party has breached its agreement, the non-breaching party may either stop performance and assume the contract is avoided, or continue its performance and sue for damages.” However, “under no circumstances may the non-breaching party stop performance and continue to take advantage of the contract’s benefits.”

Under New Jersey law, if the non-breaching party continues to perform and receive benefits under the contract, it waives the right to later claim that the contract was terminated. “[A]ny action indicating an intention to perform will operate as a conclusive choice, . . . depriving [the non-breaching party] of any excuse for ceasing performance on [its] own part.” Ramada Worldwide Inc. v. Clinton Commercial Dev., LLC, No. 11 Civ. 4920, 2016 U.S. Dist. LEXIS 131014, 2016 WL 5402204, at *2 (D.N.J. Sept. 26, 2016) (quoting Frank Stamato & Co. v. Lodi, 4 N.J. 14, 21, 71 A.2d 336 (1950)).

By continuing to operate as a Wyndham franchise hotel from 2012 until 2015, Veneto forfeited the right to claim that the Franchise Agreement terminated before Veneto itself breached. Veneto’s “continuous performance [*27] as a [Wyndham] franchisee during the period in which [it] alleges that [Wyndham] materially breached the contract operates as an election under New Jersey law.” Ramada Worldwide Inc. v. Clinton Commercial Dev., LLC, No. 11 Civ. 4920, 2016 U.S. Dist. LEXIS 131014, 2016 WL 5402204, at *2 (D.N.J. Sept. 26, 2016). And because Veneto “elect[ed] to continue performing under the contract,” its remedy for Wyndham’s alleged breach is now limited to “su[ing] for the damages caused by the breach.” In re Nickels Midway Pier, LLC, 372 B.R. 218, 223 (Bankr. D.N.J. 2007).10

Second, the Court addressed the Franchisee’s argument that based on the Franchise Agreement’s force majeure clauses, the Gaming Control Board’s seizure of the Franchisee’s hotel excused Veneto’s performance. On this issue, the Franchise Agreement allowed early termination of the Franchise Agreement in the event of either a “political event,” defined as “conditions that render . . . the performance of this Agreement unlawful”, or a “force majeure,” defined as “acts of God, strikes, lockouts or other industrial disturbances, war, terrorism, riot, epidemic, fire or other catastrophe or other forces beyond [Veneto’s] control.” The Court, refusing to find the language applicable, concluded, as a matter of law, that the Franchisee’s “failure to pay taxes was neither a “political event” nor a “force majeure.” As the Court decided, “Veneto’s own financial default, which resulted in Panama’s lawful seizure of the hotel, is not the kind of unanticipated, blameless event contemplated by the Franchise Agreement’s force majeure clauses.”

Last, the Court did not hesitate to find that under the Note, Veneto owed Wyndham $255,000 plus interest; accordingly, the Court granted summary judgment to Wyndham as to this amount. Similarly, the Court found that there was no dispute that the Franchisee was liable to Wyndham for unpaid recurring fees and liquidated damages; however, because the calculation of these amounts depended on an accurate calculation of gross room revenues, modified by the appropriate exclusion of complimentary room nights, it denied summary judgment on these amounts until after evidence was presented at trial.

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