Red Lion Hotels Franchising Inc v. First Capital Real Estate Investments LLC et al, No. 2:2017cv00145 - Document 44 (E.D. Wash. 2018)

Court Description: ORDER GRANTING 30 Plaintiff's Motion for Summary Judgment. Case Closed. Signed by Judge Rosanna Malouf Peterson. (SK, Case Administrator)

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Red Lion Hotels Franchising Inc v. First Capital Real Estate Investments LLC et al Doc. 44 1 2 3 FI LED I N THE U.S. DI STRI CT COURT EASTERN DI STRI CT OF WASHI NGTON 4 UNITED STATES DISTRICT COURT 5 Sep 06, 2018 SEAN F. MCAVOY, CLERK EASTERN DISTRICT OF WASHINGTON 6 7 RED LION HOTELS FRANCHISING, INC., Plaintiff, 8 9 10 11 12 13 NO: 2:17-CV-145-RMP v. ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT FIRST CAPITAL REAL ESTATE INVESTMENTS, LLC, a California limited liability company; MR. SUNEET SINGAL and MRS. MAJIQUE LADNIER, individually and as the marital community comprised thereof, Defendants. 14 15 BEFORE THE COURT is Plaintiff’s Motion for Summary Judgment, ECF 16 No. 30. The Court heard oral argument on August 28, 2018. Alexander A. Baehr 17 appeared on behalf of Plaintiff Red Lion Hotels Franchising, Inc. (“Red Lion”). 18 Scott Weaver appeared on behalf of Defendant First Capital Real Estate 19 Investments, LLC; Defendant Mr. Suneet Singal; and Defendant Ms. Majique 20 Ladnier (collectively, “Defendants”). The Court has heard the parties’ arguments, 21 has reviewed the pleadings and considered the record, and is fully informed. ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~1 Dockets.Justia.com 1 BACKGROUND Red Lion brings this breach of contract action against three franchise entities 2 3 in default of amounts owed to Red Lion under their Franchise Licensing Agreements 4 (“FLAs”). ECF No. 1. The parties agree that Defendants signed the guaranty 5 contracts that Red Lion alleges have been breached. Id., ¶ 3.5; ECF No. 37 at 5. 6 The Court has subject matter jurisdiction over this matter pursuant to 28 7 U.S.C. § 1332 based on the diversity of the parties and the amount in controversy. 8 Plaintiff is a corporation licensed in Washington. ECF No. 1 ¶ 1.1. Defendant First 9 Capital Real Estate Investments, LLC, is a foreign limited liability company. Id., 10 ¶ 1.2. Defendants Suneet Singal and Majique Ladnier are residents of California. 11 Id., ¶ 1.3. The amount in controversy is at least $1,265,220.53. Id., ¶¶ 4.6, 4.12, 12 4.18. 13 14 15 DISCUSSION Legal Standard for Summary Judgment A court may grant summary judgment where “there is no genuine dispute as 16 to any material fact” of a party’s prima facie case, and the moving party is entitled to 17 judgment as a matter of law. Fed. R. Civ. P. 56(a); accord Celotex Corp. v. Catrett, 18 477 U.S. 317, 322-33 (1986). A genuine issue of material fact exists if sufficient 19 evidence supports the claimed factual dispute, requiring “a jury or judge to resolve 20 the parties’ differing versions of the truth at trial.” T.W. Elec. Serv., Inc. v. Pac. 21 Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987). A key purpose of ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~2 1 summary judgment “is to isolate and dispose of factually unsupported claims.” 2 Celotex, 477 U.S at 323-24. 3 The moving party bears the burden of showing the absence of a genuine issue 4 of material fact, or in the alternative, the moving party may discharge this burden by 5 showing that there is an absence of evidence to support the nonmoving party’s prima 6 facie case. Id. at 325. The burden then shifts to the nonmoving party to set forth 7 specific facts showing a genuine issue for trial. See id. at 324. The nonmoving 8 party “may not rest upon the mere allegations or denials of his pleading, but his 9 response, by affidavits or as otherwise provided . . . must set forth specific facts 10 showing that there is a genuine issue for trial.” Id. at 322 n.3 (internal quotations 11 omitted). The Court will not infer evidence that does not exist in the record. See 12 Lujan v. Nat’l Wildlife Fed., 497 U.S. 871, 888-89 (1990) (court will not presume 13 missing facts). However, the Court will “view the evidence in the light most 14 favorable” to the nonmoving party. Newmaker v. City of Fortuna, 842 F.3d 1108, 15 1111 (9th Cir. 2016). 16 Contract Claims 17 Red Lion asserts that Defendants entered into the FLAs and guaranty 18 agreements for three franchise entities, failed to make timely payments, and then 19 abandoned the hotels in question, allowing Red Lion to invoke the early termination 20 provision of the FLAs. ECF No. 30 at 11-13. By invoking the FLAs’ early 21 termination provision, Red Lion claims it is entitled to damages based on the ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~3 1 liquidated damages clause of the FLAs. Id. Pursuant to the guaranty agreements 2 that Defendants signed, Red Lion argues that Defendants owe Red Lion the money 3 due from early termination, which includes payment of (1) past due licensing fees 4 and (2) lost profits from the early termination of the 20-year licensing agreement, 5 based on a calculation of the hotels’ prior revenue. Id. 6 Defendants do not dispute the nature of their contractual obligations under the 7 FLAs or guaranty agreements. ECF No. 37 at 7. They admit that they formed 8 individual limited liability companies to manage each property, signed guaranty 9 agreements promising Defendants would pay if the individual companies could not, 10 and that Red Lion lawfully terminated the FLAs pursuant to the early termination 11 clause of each FLA. Id. at 5-7. Defendants also do not dispute the amount that 12 Defendants owe in past due licensing fees. See ECF No. 38 at 5. 13 The Defendants do dispute the enforceability of the liquidated damages clause 14 to compensate Red Lion for the damages it suffered from early termination of the 15 FLAs, arguing that the amount due under that clause constitutes an unenforceable 16 penalty. ECF No. 37 at 8-14. Therefore, the Court finds that there is no contention 17 that Red Lion has satisfied the following elements of its claims against Defendants: 18 the Defendants entered into guaranty agreements for the three limited liability 19 companies on the FLAs; Red Lion properly acted on the early termination clause of 20 the FLAs; Defendants are liable for early termination of the FLAs under the 21 guaranty agreements; Defendants abandoned their affirmative defense of unclean ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~4 1 hands; and Defendants owe Red Lion $614,101.47 in past due charges with interest, 2 calculated pursuant to 28 U.S.C. § 1961(a). The remaining issue is whether the 3 liquidated damages clause is enforceable. 4 Assessment of Amount Owed Under Liquidated Damages Clause 5 Defendants argue that the liquidated damages clauses in the three FLAs are 6 unenforceable and unconscionable penalties. ECF No. 37 at 8. Defendants also 7 contend that Red Lion’s claims cannot be decided on summary judgment because 8 the amount of Red Lion’s claimed damages is a material fact still in dispute. Id. at 9. 9 Red Lion argues that Defendants’ penalty defense is an affirmative defense 10 that should have been pleaded in Defendants’ answer; that Defendants failed to 11 timely amend their answer to plead their unconscionability defense; and that the 12 Court should strike the defense. ECF No. 41 at 11. Red Lion also argues that the 13 liquidated damages clauses in the parties’ FLAs are reasonable, enforceable, and 14 appropriately resolved at summary judgment. Id. at 6-10. 15 A. Applicable Law 16 When a federal court sits in diversity, “the law to be applied . . . is the law of 17 the state.” Erie R.R. Co. v. Thompkins, 304 U.S. 64, 78 (1938). “Under the Erie 18 doctrine, federal courts sitting in diversity apply state substantive law and federal 19 procedural law.” Gasperini v. Ctr. For Humanities, Inc., 518 U.S. 415, 427 (1996). 20 A court first asks whether a Federal Rule of Civil Procedure or a federal law 21 governs. In re Cty. of Orange, 784 F.3d 520, 527 (9th Cir. 2015). If one does, then ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~5 1 the court applies the federal law or rule “as long as it is constitutional and within the 2 scope of the Rules Enabling Act.” Id. 3 The Court is faced with two issues in this motion: (1) whether the affirmative 4 defense claiming that the liquidated damages clauses constitute a penalty was timely 5 pleaded by the Defendants; and (2) whether the liquidated damages clauses 6 constitute unenforceable penalties. The Court addresses the applicable law of each 7 issue in turn. 8 Regarding the timeliness of Defendants’ affirmative defense, Federal Rule of 9 Civil Procedure 8 governs. “In responding to a pleading, a party must affirmatively 10 state any avoidance or affirmative defense.” Fed. R. Civ. P. 8(c)(1). “While state 11 law defines the nature of the defenses, the Federal Rules of Civil Procedure provide 12 the manner and time in which defenses are raised and when waiver occurs.” Healy 13 Tibbitts Constr. Co. v. Ins. Co. of N. Am., 679 F.2d 803, 804 (9th Cir. 1982). Thus, 14 the Court finds that federal procedural law applies to the timeliness of Defendants’ 15 affirmative defense of penalty. 16 Regarding the test that determines whether the liquidated damages clause in 17 this case is an unenforceable penalty, no federal law applies. The Court applies 18 extensive Washington case law regarding the enforceability of liquidated damages 19 20 21 ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~6 1 clauses and whether those clauses are unenforceable penalties.1 See Watson v. 2 Ingram, 881 P.2d 247, 249 (Wash. 1994). 3 B. Untimely Affirmative Defense 4 When filing an answer to a complaint, “a party must affirmatively state any . . 5 . affirmative defense.” Fed. R. Civ. P. 8(c)(1). While a failure to plead an 6 affirmative defense normally results in waiver of the defense, “[i]n the absence of a 7 showing of prejudice, . . . an affirmative defense may be raised for the first time at 8 summary judgment.” Camarillo v. McCarthy, 998 F.2d 638, 639 (9th Cir. 1993). 9 The Ninth Circuit has “liberalized the requirement that defendants must raise 10 affirmative defenses in their initial pleadings.” Magana v. Commonwealth of the N. 11 Mar. I., 107 F.3d 1436, 1446 (9th Cir. 1997). Mere delay in asserting the 12 affirmative defense is not enough for a court to strike the defense; the party must 13 show that it was prejudiced by the delay. See Ledo Fin. Corp. v. Summers, 122 F.3d 14 825, 827 (9th Cir. 1997). 15 Red Lion argues that Defendants failed to allege that the liquidated damages 16 clauses constitute penalties as an affirmative defense in Defendants’ answer to the 17 Complaint and that, accordingly, the Court should strike the defense. ECF No. 41 at 18 11. Red Lion argues that it would be prejudicial to allow the defense now, as the 19 20 1 21 ECF No. 41 at 3-8. Both parties apply Washington law in their motions. See ECF No. 37 at 8-12; ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~7 1 deadline for Defendants to amend their answer has passed, discovery is complete, 2 and trial is approximately five months away. Id. at 11-12 (citing Healy Tibbitts, 679 3 F.2d at 804 (new affirmative defense may be alleged in summary judgment motion 4 only where there is no prejudice to opposing party)). 5 Red Lion argues that it is prejudiced by Defendants’ late affirmative defense 6 because of the expenses that it will accrue in responding to the affirmative defense 7 with third party discovery, additional deposition testimony, and possibly new expert 8 witness reports. ECF No. 41 at 10. Red Lion argues “until now, [Defendants] have 9 provided no notice whatsoever of their intent to use the affirmative defense of 10 11 penalty in this case.” Id at 13. The Court agrees that Red Lion would be prejudiced by allowing Defendants 12 to raise this affirmative defense now. This case was filed in April of 2017. ECF No. 13 1. Defendants filed their Answer in May of 2017, in which they claimed several 14 other affirmative defenses. ECF No. 9 at 6-7. Defendants had a chance to raise the 15 affirmative defense again when the issue of their other affirmative defenses was 16 litigated in June 2018, but they did not raise the issue then. ECF No. 28 at 3. 17 Defendants had ample opportunity to supplement their answer with the affirmative 18 defense of penalty, yet Defendants failed to raise this defense until now, just a few 19 months out from trial. ECF No. 36 at 9 (setting trial date for January 7, 2019). 20 21 Further prejudice would occur because discovery already was closed when Defendants filed their response to Red Lion’s Motion for Summary Judgment. ECF ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~8 1 No. 18 at 1 (setting discovery completion date for May 11, 2018). In addition, to 2 support this defense, Defendants pleaded new facts previously unraised in this case, 3 including the collapse of the shale oil industry and the economic viability of the 4 hotels in question. ECF No. 37 at 11-12. If the Court allowed Defendants to plead 5 this defense, discovery would have to reopen, and the trial likely would need to be 6 continued in order to permit Red Lion adequate time to prepare for Defendants’ 7 penalty defense. 8 9 In light of all these factors, the Court finds that Defendants’ delay in asserting its penalty defense is both untimely and prejudicial. Therefore, the Court does not 10 grant leave to raise this defense at this late date. However, even though the Court is 11 not allowing this affirmative defense to go forward, the Court will analyze the merits 12 of Defendants’ penalty defense for the purposes of making a complete record in this 13 case. 14 C. Enforceability of Liquidated Damages Clause 15 In this case, the liquidated damages provision in each FLA states, in part: 16 If the Hotel has been open for less than twenty four (24) months, then in calculating the Termination Fee we will multiply thirty-six (36) by the Average Monthly Fees at the rate of eight and one half percent (8.5%) of Gross Rooms Revenue, from the Opening Date through the month immediately preceding the month of termination. 17 18 19 20 21 ECF No. 34-1 at 39. Red Lion argues that all the parties were sophisticated business people and that Defendants negotiated the terms of the franchising licensing agreements, ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~9 1 including the liquidated damages provisions. ECF No. 41 at 5, 8. Using this 2 liquidated damages provision, Red Lion argues that the damages owed by 3 Defendants are $396,118.08 for the Farmington Hotel, $146,882.52 for the Gallup 4 Hotel, and $140,663.52 for the Grants Hotel. ECF No. 30 at 17. 5 Defendants do not dispute Red Lion’s damages calculations. Instead, they 6 argue that the liquidated damages provision is unenforceable as written because it 7 bears no reasonable relationship to the actual harm to Red Lion. ECF No. 37 at 11. 8 Defendants argue that the clause constitutes an unfair penalty in light of the decline 9 in the Gross Rooms Revenue (“GRR”) from the beginning of the arrangement; the 10 hotels’ status being in the red when Defendants took over operation of the hotels; 11 Defendants’ personal expenditures to “breathe life” into the hotels; and the plummet 12 of clientele due to the shale oil market crash. Id. at 11-12. Defendants argue that the 13 Court can modify the liquidated damages clause to a better calculation of damages 14 under the FLAs’ “Severability and Interpretation” clause. Id. at 12-13. The 15 “Severability and Interpretation” clause, in part, reads: 16 17 If any provision of this Agreement is held unenforceable due to its scope, but may be made enforceable by limiting its scope, the provision will be considered amended to the minimum extent necessary to make it enforceable. 18 ECF No. 33-1 at 28. According to Defendants, this provision allows the Court to 19 amend or “blue line” the liquidated damages clause to a better calculation of 20 damages. ECF No. 37 at 12-13. 21 ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~10 1 In reply, Red Lion urges the Court to enforce the liquidated damages 2 provision as written because the provision was reasonable at the time of contracting. 3 ECF No. 41 at 6-7. Red Lion claims that the facts on which Defendants rely are 4 irrelevant because they all concern events occurring after the parties signed the 5 FLAs. Id. Additionally, Red Lion argues that it would make substantially more 6 money if the hotels had continued to operate over the remaining 18 years on the 7 agreement, even at their lowest rate of revenue showing, illustrating that the 8 damages calculations here are reasonable. Id. at 9-10. 9 “Whether the liquidated damages clause is enforceable, or is punitive and 10 unenforceable, is a question of fact to be determined under the circumstances of the 11 particular case.” Pettet v. Wonders, 599 P.2d 1297, 1301 (Wash. Ct. App. 1979). 12 Washington courts rely on a two part test to determine the enforceability of a 13 liquidated damages clause. Watson v. Ingram, 881 P.2d 247, 249 (Wash. 1994). 14 15 First, the amount fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach. Second, the harm must be such that it is incapable or very difficult of ascertainment. 16 Id. (citing Walter Implement, Inc. v. Focht, 730 P.2d 1340, 1343 (1987)). “Such 17 clauses are favored by the courts and are rarely construed as a penalty.” Nw. 18 Acceptance Corp. v. Hesco Constr., Inc., 614 P.2d 1302, 1306 (Wash. Ct. App. 19 1980). 20 21 The “enforceability of a liquidated damages clause in a commercial transaction rests on whether the liquidated sum is a reasonable preestimate of loss.” ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~11 1 Wallace Real Estate Inv., Inc. v. Groves, 881 P.2d 1010, 1019 (Wash. 1994). “It is 2 sufficient that the amount specified as liquidated damages is a reasonable forecast of 3 the compensation necessary to make the seller whole should the buyer breach.” Id. 4 at 1017-18. Another consideration in determining the reasonableness of a liquidated 5 damages clause is party sophistication, which “may point to the increased 6 enforceability of liquidated damages provisions in commercial agreements.” See id. 7 at 1018. 8 9 The Court finds that the liquidated damages clauses in the FLAs are enforceable as written. First, the liquidated damages clauses are a reasonable 10 forecast of compensation for harm caused by the breach. Defendants, as parties who 11 “specialize[] in turning around failing real estate projects,” knew of the risks 12 associated with the hotels in question, and agreed to the liquidated damages 13 provision. ECF No. 38 at 1-2; see also Wallace Real Estate Inv., 881 P.2d at 1018- 14 19 (holding that increased party sophistication makes liquidated damages clauses 15 more likely to be enforceable). Indeed, Defendants demonstrated their expertise 16 when they negotiated other terms in the FLAs and received concessions from Red 17 Lion. ECF No. 30 at 5-6. Defendants had the ability to negotiate more favorable 18 liquidated damages clauses with Red Lion if they were concerned about early 19 termination, but they entered the agreement with these terms. 20 21 Defendants’ argument that the liquidated damages provision is unreasonable is unpersuasive. Defendants rely on facts that occurred subsequent to the signing of ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~12 1 the FLAs. “The central inquiry is whether the specified liquidated damages were 2 reasonable at the time of contract formation.” Watson, 881 P.2d at 251. Defendants 3 claim the liquidated damages provision is unreasonable because hotel revenues 4 plummeted from the moment that they began operation, and then the shale oil 5 market crashed, but these things occurred after they signed the FLAs. ECF No. 37 at 6 11-12. The Court will not change a term in an agreement negotiated between 7 sophisticated parties just because the agreement did not work for some of the parties. 8 See Wallace Real Estate Inv., 991 P.3d at 1018-19. 9 Further, Defendants argue that “a better forecast of Red Lion’s damages and a 10 conscionable liquidated damages provision requires looking at the GRR immediately 11 preceding the termination of the FLAs,” and, under the “Severability and 12 Interpretation” clause, asks the Court to modify the liquidated damages clause 13 accordingly. ECF No. 37 at 11-13. Regardless of whether this calculation is 14 “better,” the Court does not need to find that the liquidated damages clause is the 15 “best” way of calculating damages; just that it is a reasonable one. See Watson, 881 16 P.2d at 250 (“the nonbreaching party must only establish the reasonableness of the 17 agreement”). Even if there was another, “better” way of calculating damages 18 available to the parties, the other calculation bears no relevance to the enforceability 19 of the calculation that the parties agreed to upon contracting. 20 21 For the foregoing reasons, the Court finds that the liquidated damages clause in the FLAs is reasonable. ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~13 1 Turning to the second factor in Washington’s test for liquidated damages, the 2 Court must find that the harm was “incapable or very difficult of assessment” at the 3 time of contracting. Watson, 881 P.2d at 249. The parties agree that the FLAs 4 involved inherent risks for both parties, given the failing state of the hotels at the 5 time and their location in difficult markets. ECF No. 37 at 5. Further, Washington 6 courts have recognized that the real estate market is an area in which liquidated 7 damages provisions are reasonable. Watson, 881 P.2d at 251-52. Given that these 8 FLAs were for 20-year licensing terms in volatile locations, the Court finds that the 9 harm was “incapable or very difficult of assessment” at the time of contracting. Id. 10 at 249. The liquidated damages provision was reasonable when made. Given the 11 sophistication of the parties and Washington law, the Court finds that the clauses are 12 enforceable as written. Ashley v. Lance, 493 P.2d 1242, 1246 (Wash. 1972). 13 The Court finds that Defendants may not raise the issue of unconscionable 14 penalty at this stage in the proceedings. Even if such a defense had been timely 15 raised, the Court finds that no dispute of material fact exists that the liquidated 16 damages clauses constitute unconscionable penalties. Therefore, Red Lion is 17 entitled to summary judgment for the entirety of its claims. 18 CONCLUSION 19 Accordingly, IT IS HEREBY ORDERED: 20 1. Plaintiff’s Motion for Summary Judgment, ECF No. 30, is GRANTED. 21 2. Judgment shall be entered for Plaintiff, Red Lion, in the amount of ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~14 1 $1,297,765.58, plus interest, calculated as set forth in 28 U.S.C. § 1961(a) 2 to the date of this Order. 3 4 5 The District Court Clerk is directed to enter this Order, enter judgment for the Plaintiff, Red Lion as directed, provide copies to counsel, and close this case. DATED September 6, 2018. 6 7 s/ Rosanna Malouf Peterson ROSANNA MALOUF PETERSON United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT~15

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