JFK Hotel Owner, LLC v Hilton Hotels Corp.

JFK Hotel Owner, LLC v Hilton Hotels Corp.2014 NY Slip Op 30676(U)

March 14, 2014Sup Ct, New York County

Docket Number: 650502/2013Judge: Eileen Bransten

Cases posted with a "30000" identifier, i.e., 2013 NYSlip Op 30001(U), are republished from various state

and local government websites. These include the NewYork State Unified Court System's E-Courts Service,

and the Bronx County Clerk's office.This opinion is uncorrected and not selected for official

publication.

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART THREE

--------------------------------------------------------------------){ JFK HOTEL OWNER, LLC,

Plaintiff,

- against-

HILTON HOTELS CORP., HILTON HOSPITALITY CORP., HL T EXISTING FRANCHISE HOLDING LLC, DOUBLETREE HOTEL SYSTEMS, INC., HILTON WORLDWIDE, CIBX COMMERCIAL MORTGAGE, LLC, and US BANK NATIONAL ASSOCIATION, as trustee for the registered holders of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX, Commercial Mortgage Pass-Through Certificates, Series 2012-CIBX,

Defendants.

--------------------------------------------------------------------X BRANS TEN, J.

Index No. 650502/2013 Motion Date: 11/06/13 Motion Seq. No.: 013, 014

In motion sequence 013, Defendant CIBX Commercial Mortgage LLC ("CIBX")

moves to dismiss Plaintiff JFK Hotel Owner LLC's ("JFK Hotel") Second Amended

Complaint ("SAC") pursuant to CPLR 32ll(a)(l) and (a)(7). Plaintiff opposes. In

motion sequence 014, Defendants Hilton Hotel Corp. ("HHC"), Hilton Hospitality Corp.

("HHCI"), HL T Existing Franchise Holding LLC ("HL T Existing"), DoubleTree Hotel

Systems, Inc. ("DoubleTree"), and Hilton Worldwide ("HW", collectively, "Hilton" or

the "Hilton Defendants") move to dismiss JFK Hotel's Second Amended Complaint

pursuant to CPLR 321 l(a)(l), (a)(5), and (a)(7). For the reasons set forth below, CIBX's

motion to dismiss is granted in part and denied in part, and Hilton's motion to dismiss is

granted in part and denied in part.

[* 1]

JFK Hotel v. Hilton

Background1

Index No. 650502/2013 Page2 of34

JFK Hotel mvns and operates a 385-room hotel near the John F. Kennedy

International Airport in Queens, New York (the ''Hotel"). (SAC, 21.) In 2006, JFK

Hotel contracted with DoubleTree to operate the Hotel under the DoubleTree brand (the

"Franchise Agreement"). (SAC, 23.) From 2007 to 2013, Plaintiff operated the Hotel

under the DoubleTree franchise. (SAC, 25.) The Franchise Agreement provided the

Hotel with access to many benefits, such as Hilton's on-line reservation system, the

HiltonHonors database, and signage. (SAC , 24 ).

In July 2007, the Blackstone Group, a large financial services firm, purchased

HHC. (SAC~ 33.) Plaintiff alleges that in September 2007, Blackstone caused

DoubleTree to assign the Franchise Agreement to HLT Existing. (SAC, 34.) Plaintiff

further alleges that since April 2008, various individuals from HW, HL T Existing, and

DoubleTree have represented themselves as being agents ofHLT Existing. (SAC, 36.)

Plaintiff also alleges that a vice president of HHC signed an amendment to the Franchise

Agreement reflecting a change in the ownership of the Hotel. (SAC, 35.)

1 Allegations in this section are drawn from the Second Amended Complaint.

[* 2]

JFK Hotel v. Hilton

A. Plaintiff Refinances the Hotel

Index No. 650502/2013 Page 3of34

In late 2010, JFK Hotel sought to refinance a loan that was secured by the Hotel.

(SAC, 9, 49.) Plaintiff worked with a Canadian bank, CIBC, Inc. ("CIBC"), and dealt

with CIBC employees at CIBC offices during the loan process. (SAC,, 9, 49-51.)

However, the final lender was not CIBC, but rather CIBX. (SAC~ 51.) Unknown to

Plaintiff at the time of lending, CIBX is a joint venture between CIBC, as 17% owner,

and BSSF Commercial Mortgage Member, LLC ("BSSF"), as 83% owner. (SAC, 9.)

BSSF is a subsidiary of Blackstone Real Estate Debt Strategies, which is a division of the

Blackstone Group. (SAC,, 10-11.)

In order to induce CIBX to enter into the mortgage, an agreement was entered into

between CIBX, Plaintiff, and HLT Existing to provide assurances against the loss of the

DoubleTree franchise (the "Comfort Letter"). (SAC, 69.) The terms of the Comfort

Letter (i) provided CIBX with certain cure rights, (ii) called for Plaintiff to deliver a

general release of HL T Existing, and (iii) required HL T Existing to acknowledge that

there was no default under the Franchise Agreement. (SAC, 71.) The loan closed in

June 2011 for $35,000,000 (the "Loan"). (SAC 173.) CIBC serviced the Loan until July

2012, when Wells Fargo assumed servicing responsibilities. (SAC, 87.)

In addition to being the original lender, CIBX also served several other roles

related to the Loan. (SAC 19.) On June 22, 2012, CIBX assigned the Loan to US Bank

[* 3]

JFK Hotel v. Hilton Index No. 650502/2013 Page 4 of34

National Association ("US Bank") as trustee for the registered holders of the J.P. Morgan

Chase Commercial Mortgage Securities Trust 2012~CIBX. (SAC~ 83.) CIBX served as

both the depositor of the Loan into a mortgage pool and as the sponsor of the offering of

securitized interests in the pool. (SAC 19.) Further, CIBX owned certificates, and as a

certificateholder of the pool, served as the "Designated Certificateholder," acting for the

controlling class of the mortgage pool. (SAC 19.)

It was not until roughly one year after the closing of the Loan that public

documents showed that Blackstone indirectly controlled CIBX. (SAC 181.) In addition,

CIBX's sale of the Hotel's mortgage to the securitization trust was not recorded in

Queens County until April 1, 2013. (SAC~ 88.)

B. Events Leading to Termination of Franchise Agreement

Hilton periodically conducts quality inspections of its franchises throughout the

world. (SAC 191.) The Complaint alleges that from August 2009 until February 2011,

the scores that the Hotel received on its quality inspection reports steadily improved.

(SAC~ 92.) The Complaint further alleges that in November 2011, no points were

deducted from the Hotel's assessment for its failure to have the proper number of portable

tub seats as required by the Americans With Disabilities Act ('~ADA"). (SAC 195.)

During an inspection in February 2012, Hilton resulted in a deduction of twenty points for

[* 4]

JFK Hotel v. Hilton Index No. 650502/2013 Page 5of34

missing tub seats and alarm system issues. (SAC 1 103.) During an inspection in July

2012, after the Loan's securitization, Hilton deducted 126 points for failure to have six of

twelve tub seats. (SAC 197.)

Plaintiff alleges that tub seats had been back-ordered since March 2012. (SAC 1

98.) Further, Plaintiff avers that the Hotel ordered tub seats again in October 2012, but

Hurricane Sandy prevented their delivery. (SAC 198.) During an inspection on January

3, 2013, 126 points were again deducted for having only eight of twelve required tub

seats. (SAC 1103.) The Second Amended Complaint alleges that the tub seats arrived at

the Hotel on January 4, 2013 and that no guest ever requested a tub seat without receiving

one. (SAC 11 101, 103.)

C. Franchise Termination and Loan Default

On January 18, 2013, Hilton notified Plaintiff that the Franchise Agreement would

be terminated as of February 17, 2013 (the '~Termination Notice"). (SAC 1106.) The

Termination Notice stated that the default was non-curable in accordance with Section

14(b)(l) of the Franchise Agreement. (SAC 1 109.) The Termination Notice described

Plaintiff as engaging in the same noncompliance within a consecutive twenty-four month

period and in a pattern of non-compliance with Double Tree system standards over a

[* 5]


significant period. (SAC iii! 109-10.) The Termination Notice also demanded $4 million

in liquidated damages pursuant to the Franchise Agreement. (SAC if 112.)

US Bank, through its special servicer, Midland Loan Services ("Midland"), sent

Plaintiff a notice of default on the Loan dated February 8, 2013" ("Notice of Default").

(SAC if 131.) The Notice of Default accelerated the Loan's due date and increased the

interest rate to the default rate. (SAC if 131.) The grounds for default stated in the Notice

of Default were (i) a default under the Franchise Agreement that entitled Hilton to

terminate, and (ii) the termination of the Franchise Agreement. (SAC 4j[4j[ 133-34.) US

Bank did not exercise any of its cure rights under the Comfort Letter. (SAC if 138.)

On February 9, 2013, Radisson Hotels International, Inc. ("Radisson") approved a

franchise for the Hotel. (SAC 4i[ 129.) Contrary to Plaintiffs interpretation of the Loan,

US Bank required its consent before allowing the Radisson re-branding to proceed. (SAC

4i[ 149.) Plaintiff alleges that CIBX, through its control of US Bank and Midland,

unreasonably conditioned consent to the re-branding upon Plaintiff paying various fees

and establishing a litigation reserve. (SAC 4i[ 158.)

D. Plaintiff Files Instant Lawsuit

On February 15, 2013, Plaintiff filed the instant suit, seeking a temporary

restraining order enjoining Hilton from terminating the Franchise Agreement, which this

[* 6]


Court granted (the "TROn). On August 15, 2013, Plaintiff settled its claims against US

Bank, and US Bank agreed to the Radisson re-branding and to withdraw the Notice of

Default. (Aug. 15, 2013, Oral Arg. Tr., at 26: 1-38:22 (Nina Koss O.C.R.).) In October

2013, the Hotel successfully re-branded as a Radisson. (Oct. 15, 2013, Oral Arg. Tr., at

4:12-15 (Nina Koss O.C.R.).)

In Plaintiff's Second Amended Complaint, it asserts claims against the Hilton

Defendants, CIBX and US Bank. As noted above, all claims against US Bank and

Midland have been settled, including Plaintiffs ninth cause of action. In addition,

Plaintiff's first, tenth, eleventh, and twelfth causes of action have been withdrawn or

rendered moot due to the completion of the re-branding process.

The Second Amended Complaint asserts ten remaining causes of action. As

against CIBX, the Second Amended Complaint asserts (i) breach of contract arising out

of the Notice of Termination, (ii) breach of contract arising from wrongful acceleration of

the Loan's balance, (iii) breach of contract arising from interference with the Radisson re-

branding process, (iv) breach of contract arising from concealing the Loan's

securitization, (v) breach of the covenant of good faith and fair dealing in the Loan

arising from a failure to investigate the circumstances surrounding the Termination

Notice, (vi) tortious interference with prospective business relations arising from

Radisson re-branding, and (vii) fraudulent inducement for failure to disclose CIBX's and

[* 7]


DoubleTree's relationship through Blackstone. Against the Hilton Defendants, the

Second Amended Complaint asserts causes of action for (i) breach of contract for

wrongful termination of the Franchise Agreement, (ii) breach of the covenant of good

faith and fair dealing, (iii) tortious interference with contract by providing the

Termination Notice to US Bank and CIBX, and (iv) fraudulent inducement for failure to

disclose CIBX's and DoubleTree's relationship through Blackstone.

In motion sequence 013 and 014, CIBX and the Hilton Defendants move to

dismiss the Second Amended Complaint.

I. Motion to Dismiss Standard

On a motion to dismiss a complaint for failure to state a cause of action, all factual

allegations must be accepted as truthful, the complaint must be construed in a light most

favorable to the plaintiffs and the plaintiffs must be given the benefit of all reasonable

inferences. Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174 (1st

Dep't 2004). "We ... determine only whether the facts as alleged fit within any

cognizable legal theory." Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). This Court

must deny a motion to dismiss, "if from the pleadings' four comers factual allegations are

discerned which taken together manifest any cause of action cognizable at law." 511 W.

[* 8]


232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (internal

quotation marks and citations omitted).

However, on a CPLR 321 l(a){l) motion, "[i]t is well settled that bare legal

conclusions and factual claims, which are either inherently incredible or flatly

contradicted by documentary evidence ... are not presumed to be true on a motion to

dismiss for legal insufficiency." O'Donnell, Fox & Gartner v. R-2000 Corp., 198 A.D.2d

154, 154 (1st Dep't 1993). The court is not required to accept factual allegations that are

contradicted by documentary evidence or legal conclusions that are unsupported in the

face of undisputed facts. See Zanett Lombardier, Ltd. v. Maslow, 29 A.DJd 495, 495

(1st Dep't 2006) (citing Robinson v. Robinson, 303 A.D.2d 234, 235 (1st Dep't 2003).

Ultimately, under CPLR 321 l(a)(l}, "dismissal is warranted only if the documentary

evidence submitted conclusively establishes a defense to the asserted claims as a matter of

law." Leon, 84 N.Y.2d at 88.

II. CIBX's Motion to Dismiss

In motion sequence 013, Defendant CIBX moves to dismiss the Second Amended

Complaint pursuant to CPLR 321 l(a)(l) and (a)(7), on the grounds that Plaintiff fails to

state a cause of action and that the terms of the Loan foreclose Plaintiff's claims.

[* 9]


A. Breach of Contract Claims Against CIBX Arising from Control of US Bank

Plaintiff alleges three cause·s of action against CIBX that arise out of US Bank and

Midland's conduct in handling the Loan. First, the third cause of action alleges that

CIBX breached the Loan's terms by causing US Bank to issue the Notice of Termination.

Second, the fourth cause of action alleges breach of contract arising from CIBX causing

US Bank to wrongful accelerate the Loan's balance. Finally, the fifth cause of action

alleges that CIBX breached the Loan's terms by causing US Bank to interfere with the

Radisson re-branding process.

To state a claim for breach of contract, a plaintiff must plead the existence of a

valid contract, plaintiffs performance thereunder, defendant's breach and resulting

damages. See Morris v. 702 E. Fifth St. HDFC, 46 A.D.3d 478. 479 (1st Dep't 2007).

The Second Amended Complaint does not allege that CIBX is in contractual privity with

Plaintiff. Rather, Plaintiff alleges that CIBX should be held liable as if it were the

contracting party, namely US Bank, because it has some unknown right to direct US

Bank's action as relating to the Loan's securitization.

Plaintiff cites Cerchia v. VA. Mesa, Inc. for the proposition that further discovery

is needed to discern the extent of CIBX's control over US Bank and US Bank's handling

of the Loan. 191A.D.2d377, 378 (1st Dep't 1993). In Cerchia, the First Department

held that discovery on jurisdictional issues was necessary and that the complaint should

[* 10]


not have been dismissed on jurisdictional grounds. Id. The court stated that "discovery

may reveal evidence supporting a conclusion that [the defendant corporation] may be

acting as a "dummy" corporation for [the corporation under contract] so that the latter

could avoid payment of plaintiffs commissions." Id.

Plaintiff argues that the "degree to which CIBX continues to exercise control over

the Loan;; is presently unknown. Plaintiff contends that further discovery is needed to

discern the terms of the Loan assignment to US Bank and CIBX's continued right to

control US Bank. However, Plaintiffs allegations fall short of the allegations in Cerchia

sufficient to defeat a motion to dismiss. Here, no discovery is necessary because the veil

piercing claim fails on its face.

The Second Amended Complaint alleges that CIBX, as "Designated

Certificateholder" controlled the actions of US Bank to perpetrate a wrong against JFK

Hotel. Although the Loan in owned by a trust and not a corporation, Plaintiffs breach of

contract claims against CIBX, arising from US Bank's conduct, closely resembles an

attempt to pierce the corporate veil or some other type of alter ego claim. CIBX can be

viewed as the controlling shareholder, and US Bank as the corporation.

As New York courts have long held, "[p]iercing of the corporate veil is not a cause

of action independent of that against the corporation; it is established when the facts and

circumstances compel a court to impose the corporate obligation on its owners, who are

[* 11]


otherwise shielded from liability." Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d

167, 174 (1st Dep't 2013) (citing Morris v. New York State Dept. of Tax. and Fin., 82

N.Y.2d 135, 141 (1993). The same concept can be applied to the instant case. The

release of the underlying wrong would preclude a plaintiff from asserting claims against

the controlling entity. Cf Skylon Corp. v. Guilford Mills, Inc., 901 F.Supp. 711, 714 n.4

(S.D.N.Y. 1995) ('"Despite that fact that master and servant are not joint tort feasors

[sic], a release of one discharges the other.'") (quoting Kinsey v. William Spencer & Son

Corp., 165 Misc. 143 (N.Y. Sup. Ct. 1937), ajf'd, 255 A.D. 995 (2d Dep't 1938), ajf'd,

281 N.Y. 601 (1939)).

Plaintiff has released all of its claims against US Bank as trustee and Midland as

special servicer. See Aug. 15, 2013, Oral Arg. Tr., at 31: 11-32:7 (Nina Koss O.C.R.).

Accordingly, any allegedly wrongful actions taken by US Bank that may have been

directed by CIBX have been released and can no longer support a claim. The level of

CIBX's control over US Bank's actions is irrelevant because the underlying ciaims have

been settled. Unlike in Cerchia, no amount of discovery will yield a different result.

Therefore, Plaintiffs breach of contract claims against CIBX, arising from US

Bank's actions, namely the third, fourth, and fifth causes of action, are dismissed with

prejudice.

[* 12]


B. Breach of Contract Arising Out of Securitization and Use of Confidential

Information

Plaintiffs sixth cause of action asserts a breach of contract against CIBX for its

role in the securitization process of the Loan and improper use of confidential

information.

1. Securitization

Plaintiff alleges that the securitization of the Loan triggered Plaintiff's right to sell

the Hotel. Plaintiff further alleges that CIBX was the only party with knowledge of the

securitization, and therefore CIBX had a duty to notify Plaintiff that its right to sell was

triggered. Plaintiff argues that it had no way to discover the securitization and that CIBX

breached its implied duty to notify Plaintiff upon securitization. CIBX argues that the

Loan does not contain any language that imposes a duty to notify Plaintiff about the

securitization.

In order to state a cause of action for breach of contract, the pleading must allege

the existence of an agreement, performance by the plaintiff, failure to perfonn by the

defendant, and resulting damages. See, e.g., Harris v. Seward Park Hous. Corp., 79

A.D.3d 425, 426 (1st Dep't 2010). The parties dispute the existence of an agreement

[* 13]


requiring CIBX to disclose the securitization. The provision that most closely resembles

any such agreement to disclose is Section 4.1 l(b) of the Loan, which states:

Lender shall not unreasonably withhold its consent to the sale of the Property [if the buyer meets specified criteria] ... and is otherwise reasonably acceptable to Lender ... provided that such Sale occurs after the earlier to occur of a Secondary Market Transaction and the date that is two years from the date of this Agreement.

See SAC Ex. 5 at 43

When dealing with issues of contract interpretation, courts must construe the

agreement according to the parties' intent, and the best evidence of what parties to a

written agreement intended is what was said in the writing. See, e.g., Slatt v. Slatt, 64

N.Y.2d 966, 966 (1985). Courts may not fashion a new contract for the parties under the

guise of interpreting the writing. See, e.g., Tanking v. Port. Auth. of NY & NJ., 3

N.Y.3d 486, 490 (2004) (holding that a court may not ''rewrite the contract and supply a

specific obligation the parties themselves did not spell out"); Flag Wharf, Inc. v. Merrill

Lynch Capital Corp., 40 A.D.3d 506, 507 (1st Dep't 2007) ("Courts will not rewrite

contracts that have been negotiated between sophisticated, counseled commercial

entities").

Plaintiff does not point to any specific provision in the Loan that requires CIBX to

disclose the securitization. Plaintiff cannot identify any such provision because there is

simply no stated obligation in the Loan to disclose the Loan's securitization. See

[* 14]


Tanking, 3 N.Y.3d at 490 (courts may not "supply a specific obligation the parties

themselves did not spell out"). However, Plaintiff is correct that implied obligations can

exist in contracts under certain circumstances. This argument will be addressed in the

next section, regarding the impJied covenant of good faith and fair dealing.

Beyond the lack of a contractual duty to disclose, Plaintiff fails to plead that its

damages are a result of the alleged breach. Under the Loan, Plaintiff always had a right

to seek the lender's consent to sell the Hotel. See SAC Ex. 5 at 42 (Loan§ 4.1 l(a)). The

Loan's securitization did not change Plaintiffs rights, it only changed the level of

discretion that the lender could exercise in refusing to consent to the sale. The Loan

states that because the lender is relying on the expertise of Plaintiff in operating the hotel,

the lender will have absolute discretion in allowing the sale of the Hotel for up to two

years, or until securitization. See SAC Ex. B at 42. After securitization, the lender could

not unreasonably withhold consent to a sale. See SAC Ex. B at 42.

Plaintiff avers that its right to sell the Hotel with reasonable consent from the

lender was triggered when the Loan was securitized. The Loan was dated June I 0, 2011,

and the securitization occurred on June 22, 2012. See SAC~ 80·83, Ex. 5 at 1.

Therefore, Plaintiff missed the opportunity to sell the Hotel for one year under the

reasonable consent standard, rather than the absolute discretion standard.

[* 15]


However, the Second Amended Complaint fails to plead either what damages were

suffered during this year, or how the alleged breach caused those damages. The Plaintiff

does not plead any missed sale opportunity or the lender's improper rejection of a

proposed sale using an improper standard. Without resulting damages, a claim for breach

of contract cannot stand. See Fowler v. Am. Lawyer Media, Inc., 306 A.D.2d 113, 113

(1st Dep't 2003) ("the complaint still fails as it lacks allegations showing any damages.")

(citing Lexington 360 Assocs. v. First Union Nat'! Bank, 234 A.D.3d 187, 189-90 (1st

Dep't 1996). Therefore, Plaintiff has failed to state a cause of action for breach of

contract based upon CIBX's failure to disclose the securitization.

u. Confidential Information

Plaintiff alleges that CIBX breached its obligations under the Loan by using

Plaintiffs confidential information "for purposes other than those permitted under the

Loan." More specifically, Plaintiff avers that CIBX disseminated confidential

information as demonstrated in a news article, entitled ~~Hotel Loan Taints Post-Crisis

CMBS," which is annexed to the Second Amended Complaint as Exhibit 22. The article

cites two financial analysts from Barclays who allegedly learned that the Franchise

Agreement was terminated from a Midland "servicing note." See SAC Ex. 22 at 1.

[* 16]


Exhibit 22 to the Second Amended Complaint does not support Plaintiff's theory

of breach because the article references only Midland. See SAC Ex. 22. The article

states that "Midland Loan Services ... indicated the ... franchise agreement was

terminated 'for cause."' See SAC Ex. 22. There is simply no reference to CIBX's

disclosures. As noted above, any claims against US Bank and Midland have been settled

and cannot support a cause of action against CIBX.

Also as noted above, Plaintiff fails to plead what damages were suffered as a result

of the breach, and how those damages were caused by the disclosure of confidential

information. See Lexington 360 Assocs. v. First Union Nat. Bank of North Carolina, 234

A.D.2d 187, 190 (1st Dep't 1996) ("VVhere a party has failed to come forward with

evidence sufficient to demonstrate damages flowing from the breach alleged and relies,

instead, on wholly speculative theories of damages, dismissal of the breach of contract

claim is in order").

CIBX's dissemination of Plaintiff's confidential information as alleged in the

Complaint cannot support a breach of contract claim. The alleged disclosure was done

through Midland and any claim was settled. Therefore, Plaintiff's sixth cause of action is

dismissed, without prejudice to replead other allegedly improper disclosures.

[* 17]

JFK Hotel v. Hilton Index No. 65050212013 Page 18 of34

E. Breach of the Covenant of Good Faith and Fair Dealing

Plaintiffs eighth cause of action asserts that CIBX breached the covenant of good

faith and fair dealing inherent in the Loan. Plaintiff alleges that (i) CIBX caused Midland

to issue the Notice of Default, (ii) CIBX failed to investigate the circumstances around

the Termination Notice, (iii) CIBX failed to exercise any cure rights under the Comfort

Letter, and (iv) CIBX interfered with the Radisson re-branding process. As already

described, these allegations are all derivative of claims against US Bank and Midland that

have been settled.

However, Plaintiff also puts forth two allegations that are asserted directly against

CIBX. First, Plaintiff maintains that the Loan contained an implied duty requiring CIBX

to disclose the securitization. Second, Plaintiff avers that CIBX intentionally concealed

its Blackstone affiliation, knowing that Blackstone would be on both sides of the

franchisor/lender relationship with the Hotel.

Since at least the early twentieth century, New York courts have stated that implied

covenants can exist in a contract. In Wood v. Duff-Gordon, 222. N.Y. 88, 91 (1917),

Justice Cardozo held that although a particular provision may not be expressly stated in a

contract, a covenant may still be implied where a reasonable person in the position of the

promisee would be justified in understanding such a promise. See also 511 W. 232nd

Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002) ("[T]he duties of good

[* 18]


faith and fair dealing ... encompass 'any promises which a reasonable person in the

position of the promisee would be justified in understanding where included."') (quoting

Rowe v. Great At!. & Pac. Tea Co., 46 N.Y.2d 62, 69 (1978)).

t. Duty to Disclose Securitization

The Second Amended Complaint avers that the Loan's securitization implicated

Plaintiffs right to sell the Hotel. Plaintiff furthers alleges that CIBX was the only party

with knowledge of the securitization, and therefore CIBX had a duty to notify Plaintiff

that its right to sell was triggered. Plaintiff argues that because it had no way to discover

the securitization on its own, the Loan contained an implied covenant that CIBX would

notify Plaintiff upon securitization. CIBX argues that the Loan simply does not impose a

duty to notify Plaintiff about the securitization.

The implied covenant of good faith and fair dealing superimposes upon contracts

all promises that a reasonable person would understand as being included and are

necessary to effectuate the intention of the parties. See 511 W. 232nd Owners Corp. v.

Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002). Courts in New York have held that a

duty to give notice can be an implied covenant. See Components Direct, Inc. v. Eur. Am.

Bank & Trust Co., 17 5 A.D .2d 227 ~ 230 (2d Dep 't 1991) ("(Defendant] had an absolute

right to terminate credit under the loan agreement. However, ... the obligation of good

[* 19]


faith would require a period of notice to allow the corporate plaintiff a reasonable

opportunity to seek alternate credit.").

Plaintiffs argument fails, however, because a breach of an implied covenant must

have the effect of depriving one party of the fruits of the contract. See 511 W. 232nd

Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) (quoting Dalton v.

Educational Testing Serv., 87 N.Y.2d 348, 389 (1995)).

In 511 W. 2 32nd Owners Corp., the defendant was the sponsor of a plan to convert

an apartment building into a cooperative, and the plaintiffs were the board of directors

and individuals who had purchased cooperative shares. See 98 N.Y.2d 144, 150 (2002).

Plaintiffs alleged that the sponsor-defendant rejected offers from prospective buyers,

allowed the offering plan to lapse, and retained a majority of the cooperative shares for

itself. 511 W. 232nd Owners Corp., 98 N.Y.2d at 150. The Court of Appeals held that

the complaint sufficiently pleaded a breach of the implied covenant of good faith because

the alleged conduct of the sponsor-defendant ''defeated the purpose of the contract." 511

W. 232nd Owners Corp., 98 N.Y.2d at 152. "In sum, plaintiffs allege that the sponsor's

retention of shares so drastically undermined the contract that its fundamental objective--

the creation of a viable cooperative--has been subverted." 511 W. 232nd Owners Corp.,

98 N.Y.2d at 152.

[* 20]


Here, Plaintiff argues that CIBX "concealed the sale of the Loan ... such that

Plaintiff never learned of the acceleration of its rights to sell the Hotel." However,

Plaintiff does not argue that CIBX's failure to disclose the securitization drastically

undermined the purpose and fundamental objective of the Loan. Further, the Loan does

not require a securitization, but merely allows for the possibility of a securitization,

suggesting that the Hotel's sale after a securitization was not the primary purpose of the

Loan. See SAC Ex. B at 7 4 ("Borrower acknowledges that Lender may effectuate a

Second Market Transaction) (emphasis added). Therefore, CIBX' s failure to provide

notice of the securitization cannot be said to deprive Plaintiff of the fruits of the contract.

Accordingly, this Court holds that CIBX did not breach its duty of good faith and

fair dealing by failing to notify Plaintiff of the securitization. In addition, for the reasons

stated above, Plaintiff fails to allege any damages that resulted from the lack of notice.

11. Implied Duty to Disclose CIBX's Relation to Blackstone

Plaintiff avers that CIBX actively concealed its affiliation with Blackstone with

full knowledge that Blackstone would be both the franchisor and lender to the Hotel.

Plaintiff argues that CIBX's concealment of this allegedly pivotal fact was material to its

decision to enter into the Loan. CIBX argues that Plaintiff points to no actual duty~

contractual or statutory, which required its disclosure of the relationship.

[* 21]

JFK Hotel v. Hilton Index No. 650502/2013 Page22of34

Although CIBX had no express duty to disclose, a duty to disclose or give notice

can be implied through the covenant of good faith and fair dealing inherent in aU

contracts. See Lonner v. Simon Prop. Grp., 57 A.D.3d 100, 108 (2d Dep't 2008) ("the

terms of the fee disclosure are ... unclear and hidden, which is sufficienf' to support a

claim for breach of the implied covenant of good faith); Components Direct, Inc. v. Eur.

Am. Bank & Trust Co., 175 A.D.2d 227, 230 (2d Dep't 1991) ("the obligation of good

faith would require a period of notice to allow the corporate plaintiff a reasonable

opportunity to seek alternate credit.").

Plaintiff sufficiently avers that CIBX' s allegedly knowing concealment of the

CIBX/Blackstone relationship "ha[ d] the effect of destroying or injuring the right of

[Plaintiff) to receive the fruits of the contract." See 51 l W: 232nd Owners Corp., 98

N. Y .2d at 153. Plaintiff alleges that "the Hilton Defendants' bad faith, improper motive

and wrongful acts in connection with the attempted wrongful termination of the Franchise

Agreement are motivated in part by their affiliation with Blackstone and CIBX and their

intention to benefit Blackstone and CIBX at Plaintiff's expense." See SAC ~ 209.

Further, in contrast to the lack of allegations regarding the importance of post-

securitization sale rights, the Second Amended Complaint repeatedly references the

importance of the Blackstone relationship. Plaintiff pleads that it "'considered the lack of

an affiliation between its franchisor and its lender (whom it perceived to be CIBC) as

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crucial information in its refinancing decision." See SAC ii 60. Further, Plaintiff avers

that "[t]he conflict of interest in having under common control the decision-making

power on and over both Plaintiffs debt and Plaintiffs franchise ... is a condition that

Plaintiff did not knowingly accept. Information that would have revealed the connection

between its franchisor and its lender was affirmatively concealed and in all events

wrongfully not disclosed to Plaintiff." See SAC 'if 61.

Accepting the allegations of the complaint as true and providing every reasonable

inference in favor of Plaintiff, this Court cannot say as matter of law that the Second

Amended Complaint fails to state a claim for breach of the implied covenant of good faith

and fair dealing. Plaintiff sufficiently pleads that the failure to disclose CIBX's

Blackstone relationship "drastically undermined the contract [such] that its fundamental

objective ... ha[d] been subverted." 511 W. 232nd Owners Corp., 98 N.Y.2d at 152.

Therefore, CIBX' s motion to dismiss the eighth cause of action is denied to the extent it

alleges a breach of the implied covenant of good faith and fair dealing due to CIBX' s

concealment of Blackstone relationship and is otherwise granted.

F. Tortious Interference with Prospective Business Relations

Plaintiffs next claim against CIBX, the fourteenth cause of action, alleges that

CIBX wrongfully interfered with Plaintiffs relationship with Radisson "through control

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of the actions of the Special Servicer." See SAC~ 251. Again, however, for the reasons

stated above, avennents against CIBX derived from its alleged actions in controlling US

Bank and Midland cannot support a cause of action. All claims arising out of the conduct

of both US Bank and Midland have been settled. Therefore, Plaintiff's fourteenth cause

of action is dismissed with prejudice.

G. Fraudulent Inducement against CIBX

Plaintiffs final cause of action against CIBX alleges that both CIBX and the

Hilton Defendants fraudulently induced Plaintiff to enter into the Loan and the Comfort

Letter by failing to disclose the relationship between DoubleTree, as franchisor, and

CIBX, as lender, through their ultimate parent corporation the Blackstone Group.

CIBX argues that it had no duty to make any affiliation disclosures to Plaintiff.

CIBX contends that neither the Loan nor any statute or common law precept imposed

such a disclosure duty. Plaintiff argues that the 4'special facts" doctrine imposed a duty

on CIBX to disclose its corporate parentage because that information was exclusively

within CIBX's control and could not have been discovered by Plaintiff.

"It is well established that, absent a fiduciary relationship between the parties, a

duty to disclose arises only under the 'special facts' doctrine." Jana L. v. W. l 29th St.

Realty Corp., 22 A.D.3d 274~ 277 (1st Dep't 2005). "The doctrine requires satisfaction of

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a two-prong test: that the material fact was infonnation peculiarly within [the] knowledge

of [the defendant), and that the information was not such that could have been discovered

by [the plaintiff] through the exercise of ordinary intelligence." Jana L., 22 A.D.3d at

278 (internal citations omitted). The Jana L. Court further noted that "(if] the other party

has the means available to him of knowing ... he must make use of those means, or he

will not be heard to complain that he was induced to enter into the transaction by

misrepresentations." 22 A.D.3d at 278 (internal citations omitted). The First Department

held that the plaintiff could not rely on the special facts doctrine because the plaintiff

"hadt at the very least, a duty to inquire. If nothing else, the 'exercise of ordinary

intelligence' suggests a simple inquiry [is required]." Jana L., 22 A.D.3d at 278.

Here, despite Plaintiffs repeated allegations regarding the extreme importance of

CIBX' s Blackstone affiliation, the Second Amended Complaint does not aver that

Plaintiff asked CIBX about its ownership structure. Further, the Second Amended

Complaint also does not allege that Plaintiff conducted any research on this issue prior to

closing on the Loan. "It is insufficient for [Plaintiff] to simply make the conclusory

statement that the information ... could not have been obtained [by it] through the

exercise of ordinary intelligence." Jana L., 22 A.D.3d at 278.

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Accordingly, CIBX's motion to dismiss Plaintiff's fifteenth cause of action for

fraudulent inducement, as much as it is asserted against CIBX, is hereby granted, without

prejudice to replead facts regarding Plaintiffs inquiry into CIBX's ownership.

III. Hilton's Motion to Dismiss

In motion sequence 014, the Hilton Defendants move to dismiss the Complaint

pursuant to CPLR 321 l(a)(l), (a)(5), and (a)(7), on the grounds that Plaintiff fail to state

a cause of action, that Plaintiff released certain claims in the Comfort Letter, and that the

terms of the Franchise Agreement foreclose Plaintiffs claims.

A. Breach of Contract Arising out of Termination Notice

Plaintiff's second cause of action asserts that Hilton breached the Franchise

Agreement when it issued the Termination Notice. Plaintiff avers that the Termination

Notice was improper because there was neither the same non-compliance with Hilton

standards within a twenty-four month period, nor a "pattern" of non-compliance, as

required by the Franchise Agreement.

Hilton moves to dismiss the breach of contact claim, arguing that there was a clear

pattern of non-compliance. Hilton contends that the pattern of safety hazards and other

deficiencies is shown in affidavits that accompanied Hilton's opposition to Plaintiffs

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motion for a temporary restraining order. Hilton further argues that it had the right to

terminate the Franchise Agreement because it had already issued a Notice of Default

within the previous twenty-four months.

Plaintiff argues that the Franchise Agreement does not define what constitutes a

"pattern." Plaintiff also argues that Hilton certified in the Comfort Letter that there was

no existing default, and therefore Hilton cannot base the termination on any conduct pre-

dating the Comfort Letter.

Plaintiffs cause of action survives because Hilton raises factual contentions,

which are not appropriately considered on a motion to dismiss. See, e.g., Quantum Corp.

Funding Ltd. v. Sw. Bell Tel., LP, 45 A.D.3d 505, 506 (1st Dep't 2007) (stating that

"factual issues ... cannot be resolved at this early stage of the proceedings"). Hilton's

reference to facts that are extraneous to the Second Amended Complaint are irrelevant to

the instant motion. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d

144, 152 (2002) (noting that courts must look to "the pleadings' four comers" on a

motion to dismiss). Further, affidavits that "assert the inaccuracy of plaintiffI's]

allegations may not be considered, in the context of a motion to dismiss, for the purpose

of determining whether there is evidentiary support for the complaint." Tsimerman v.

Janoff, 40 A.D.3d 242, 242 (1st Dep't 2007).

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Hilton's arguments against the breach of contract claim amount to factual

assertions that are inappropriate on a motion to dismiss. The existence of a pattern of

noncompliance with Hilton brand standards is a factual one that cannot be considered at

this juncture. Accordingly, Hilton's motion to dismiss the second cause of action is

denied.

B. Breach of the Covenant of Good Faith and Fair Dealing

Plaintiffs seventh cause of action asserts a breach of the covenant of good faith

and fair dealing against Hilton based on several allegations. Plaintiff asserts that Hilton

(i) attempted to tenninate the Franchise Agreement without providing an opportunity to

cure, (ii) disclosed confidential information to CIBX and US Bank, (iii) discriminated

against the Hotel on the Hilton website, and (iv) mandated that the Hotel charge a price

higher than other Hilton properties nearby.

Hilton argues that Plaintiffs good faith claim is duplicative of its breach of

contract claim and must be dismissed. Plaintiff responds that its seventh cause of action

is based on a wider array of allegations than the breach of contract claims.

Plaintiff's claims relating to the Termination Notice and disclosure of confidential

information are duplicative of the breach of contract claim. Plaintiffs allegations here

are based on the same facts alleged in the breach of contract claim. See Amcan Holdings,

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Inc. v. Canadian Imperial Bank o[Commerce, 70 A.D.3d 423, 426 (1st Dep't 2010)

(dismissing claim for breach of implied covenant of good faith as duplicative of breach of

contract claim).

Plaintiff is correct that its claim here is wider than the breach of contract claim.

However, the discrimination allegations that remain are also insufficient to support a

claim for breach of the covenant of good faith, for two reasons. First, the Franchise

Agreement provided that Hilton had the right to ~~engage in any Other Businesses, even if

they compete with the Hotel, .... [which] will not give rise to any liability [for] ...

breach of any applicable implied covenant of good faith and fair dealing, or divided

loyalty." See SAC Ex. 1 at 36. This provision forecloses Plaintiffs claim because the

implied covenant of good faith "cannot be construed so broadly as effectively to nullify

other express terms of a contract." Fesseha v. TD Waterhouse Investor Servs., Inc., 305

A.D.2d 268, 268 (1st Dep't 2003).

Second, Plaintiff does not allege that these alleged discriminatory acts "deprived it

of the fruits of the contract." See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98

N.Y.2d 144, 153 (2002). In fact, the Second Amended Complaint contradicts such an

argument, alleging that "the Hotel remained near to or at 100% occupancy through the

end of2012." See SAC~~ 28, 99. Whatever damages Plaintiff did suffer due to the

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alleged discrimination in favor of other properties cannot be said to have deprived

Plaintiff of the fruits of the Franchise Agreement.

Plaintiffs seventh cause of action is dismissed without prejudice to replead.

C. Tortious Interference with Contract against Hilton

Plaintiff's thirteenth cause of action alleges that Hilton tortiously interfered with

the Loan by providing the Termination Notice to CIBX and US Bank, causing them to

wrongfully accelerate the Loan. Plaintiff argues that Hilton improperly sought benefit its

alleged affiliate, CIBX, and to help its other struggling properties that were paying higher

franchise fees by issuing the Termination Notice and causing the Loan to go into default.

"Tortious interference with contract requires the existence of a valid contract

between the plaintiff and a third party, defendant's knowledge of that contract,

defendant's intentional procurement of the third-party's breach of the contract without

justification, actual breach of the contract, and damages resulting therefrom." Lama

Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 (1996).

Plaintiff's claim fails because the Second Amended Complaint does not allege that

Hilton lacked justification in providing notice to US Bank. The Comfort Letter requires

that Hilton as "Licensor[,] shall notify Lender in writing of any default of Licensee under

the Franchise License Agreement." See SAC Ex. 4 at I. C::omplying with contractual

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obligations does not equate to acting without justification. See Foster v. Churchill, 87

N.Y.2d 744, 750 (1996) ("'[p]rocuring the breach of a contract in the exercise of equal or

superior right is acting with just cause or excuse and is justification for what would

otherwise be an actionable wrong"') (quoting Felson v. Sol Cafe Mfg. Corp., 24 N.Y.2d

682, 687 (1969)). To hold otherwise would require Hilton to choose between breaching

its obligations to US Bank under the Comfort Letter or committing a tort against Plaintiff

by interfering with the Loan.

Therefore, the Comfort Letter conclusively establishes a defense to Plaintiff's

tortious inference claim as a matter of law, an.d Plaintiffs thirteenth cause of action is

dismissed with prejudice.

D. Fraudulent Inducement against Hilton

Plaintiffs fifteenth cause of action asserts that the Hilton Defendants knowingly

misrepresented their relationship to CIBX in certain federally-required disclosure

documents to induce Plaintiff to sign the Comfort Letter. Hilton argues that any fraud

claims were released by the Comfort Letter's express terms. Plaintiff does not dispute

that its fraudulent inducement claim is covered by the wording of the release. Rather,

Plaintiff contends that the release is invalid because it was not fairly and knowingly made.

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JFK Hotel v. Hilton

Section 8 of the Comfort Letter (the "Release") states that Plaintiff

Index No. 650502/2013 Page 32 of34

acknowledges that it is aware that it may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those which it now knows or believes to be true, with respect to the matters released herein. Nevertheless, it is the intention of [Plaintiff], through this letter agreement, and with the advice of counsel, to fully and finally settle and release all such matters, and all claims relative thereto, which do now exist, may exist or have existed between [Hilton] and [Plaintiff]. [Plaintiff] hereby acknowledges that it has been advised by its legal counsel, [and] understands and acknowledges the significance and consequence of this release ....

See SAC Ex. 4 at 5.

"[A] release may encompass unknown claims, including unknown fraud claims, if

the parties so intend and the agreement is 'fairly and knowingly made."' Centro

Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C. V., 17 N.Y.3d 269, 276 (2011).

"[A] party that releases a fraud claim may later challenge that release as fraudulently

induced ... if it can identify a separate fraud from the subject of the release." Centro

Empresarial Cempresa SA., 17 N.Y.3d at 276. A party may also challenge a release

based upon overreaching or unfair circumstances, such as limited time to investigate or

deliberate. See Johnson v. Lebanese Am. Univ., 84 A.D.3d 427, 430 (1st Dep't 2011).

Here, Plaintiff argues that the release was not fairly and knowingly made because

Hilton failed to disclose its affiliation with CIBX and affirmatively represented that its

affiliates did not engage in providing financing to franchisees. However, Plaintiff's

allegations regarding the release are identical to the underlying fraud alleged in the

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Second Amended Complaint. See SAC ii 267 ("But for the material omission of the fact

that its franchisor was related to its lender, Plaintiff would not have entered the Loan, the

Mortgage, the Comfort Letter or any other Loan documents"). Therefore, Plaintiff has

failed to plead a fraud separate from the subject of the release as required by New York

law. See Centro Empresarial Cempresa S.A., 17 N.Y.3d at 276.

Plaintiff's fifteenth cause of action is dismissed without prejudice to replead either

a fraud separate from the underlying fraud or unfair circumstances in the Comfort Letter's

execution.

The Court has considered the remaining arguments and finds them unpersuasive.

(Order of the Court appears on the following page.)

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JFK Hotel v. Hilton

Accordingly, it is hereby CONCLUSION

Index No. 650502/2013 Page 34 of34

ORDERED that Defendant CIBX' s motion to dismiss the Second Amended

Complaint as asserted against it is granted in part and denied in part, such that the third,

fourth, fifth, and fourteenth causes of action are dismissed with prejudice, the sixth and

fifteenth causes of action are dismissed without prejudice to replead, and the motion to

dismiss the eighth cause of action is denied; and it is further

ORDERED that the Hilton Defendants' motion to dismiss the Second Amended

Complaint as asserted against it is granted in part and denied in part, such that the

thirteenth cause of action is dismissed with prejudice, the seventh and fifteenth causes of

action are dismissed without prejudice to replead, and the motion to dismiss the second

cause of action is denied; and it is further

ORDERED that counsel are directed to appear for a preliminary conference on

April 8, 2014 at 10:00 a.m., 60 Centre St., Room 442, New York, NY 10007. Please see

the Court's Preliminary Conference Order Form, available at'

http://www.nycourts.gov/courts/comdiv/PDFs/PreliminaryConferenceOrderPart3.pdf

This constitutes the decision and order of the court.

Dated: New York, New York

March ( \{ , 2014 ENTER:

Hon. Eileen Bransten, J.S.C.

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JFK Hotel Owner, LLC v Hilton Hotels Corp.

Documents

Transcript of JFK Hotel Owner, LLC v Hilton Hotels Corp.