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Trinity Hotel Investors, LLC v. Sunstone OP Properties

February 5, 2009

TRINITY HOTEL INVESTORS, LLC, ET AL., PLAINTIFFS,
v.
SUNSTONE OP PROPERTIES, LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Alicemarie H. Stotler United States District Judge

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS SECOND AMENDED COMPLAINT WITH LEAVE TO AMEND

I. PROCEDURAL BACKGROUND

On August 4, 2008, defendants Sunstone OP Properties, LLC, Sunstone SH Hotels, LLC, WHP Hotel Owner-1, L.P., SHP Ogden, LLC, and WB Sunstone-Boise, LLC (collectively "defendants" or "Sunstone") filed a Motion to Dismiss or, in the Alternative, for More Definite Statement against claims one and three in the Second Amended Complaint ("SAC"). On August 22, 2008, plaintiffs Trinity Hotel Investors, LLC ("Trinity"), HI Boise LLC, HI Craig LLC, HS Kent LLC, CA Santa Fe LLC, Lynnwood LLC, HI Price LLC, MA Pueblo LLC, CP Williamsburg LLC, HI Renton LLC, HI San Diego LLC, and CP Englewood LLC (collectively "plaintiffs") filed opposition. On September 8, 2008, defendants filed a Reply. The Court took the matter under submission on October 15, 2008.

Having read and considered the arguments and authorities raised in the parties' briefs and submissions, the Court grants defendants' motion to dismiss in part, with leave to amend.

II. SUMMARY OF SECOND AMENDED COMPLAINT

Plaintiffs purchased thirteen hotels from defendants pursuant to a Purchase and Sales Agreement and Escrow Instructions dated June 19, 2006 ("Agreement"). (SAC ¶ 1.) Plaintiffs agreed to purchase: (1) Boise Holiday Inn; (2) Craig Holiday Inn; (3) Englewood Crowne Plaza; (4) Fresno Courtyard by Marriott - Airport; (5) Kent Hawthorn Suites; (6) Lynnwood Courtyard by Marriott; (7) Ogden Marriott; (8) Price Holiday Inn; (9) Pueblo Marriott -Convention Center; (10) Renton Holiday Inn Select; (11) San Diego Holiday Inn - Stadium ("San Diego Hotel"); (12) Santa Fe Courtyard by Marriott; and (13) Williamsburg Crowne Plaza. (Id. at ¶ 26.) Ten amendments were made to the Agreement between August 4 and September 6, 2006. (Id. at ¶¶ 27-36.) On September 12, 2006, the parties signed two "closing letters" regarding the resale of personal property, property improvement plan ("PIP") work, and other post-closing obligations. (Id. at ¶¶ 37-38.) The Agreement, along with the amendments and closing letters comprise the "Purchase Agreement." (Id. at ¶ 38.)

Defendants breached the Purchase Agreement and misrepresented material facts regarding the properties. (SAC ¶ 41.) Defendants breached the Purchase Agreement in four ways: (1) failure to complete certain PIP work; (2) failure to abide by the second closing letter with regard to water damage sustained at the Williamsburg Crowne Plaza; (3) failure to pay certain sales tax associated with the transaction; and (4) concealment of structural defects at the San Diego Hotel.

First, defendants were to complete certain PIP work at certain hotel properties, as required by the various franchisors, for the issuance of new franchise agreements. (Id. at ¶ 42.) At least twenty days before the closing date, defendants were to provide: (1) invoices for the PIP work that had been completed; and, (2) a cost estimate for the PIP work that had been contracted for but not performed and the PIP work for which defendants had not contracted. (Id. at ¶ 44.) Defendants provided plaintiffs with a list of the PIP work completed and the PIP work that remained outstanding along with estimated completion costs ("PIP Reconciliations"). (Id. at ¶ 45.) A credit was negotiated for the PIP work not completed. (Id.) Some of the PIP work that defendants represented was completed on the PIP Reconciliation was not completed or was rejected by the franchisors as unacceptable. (Id. at ¶¶ 47-48.) As a result, plaintiffs expended at least $1.8 million to complete the PIP work. (Id. at ¶ 49.)

Second, defendants agreed to submit an insurance claim with respect to water damage sustained at the Williamsburg Crowne Plaza within ten days of closing. (SAC ¶ 50.) If defendants' insurance company rejected the claim, defendants were to pay plaintiffs a "Purchase Price Casualty Credit" within ten business days. (Id. at ¶ 51.) Defendants' insurance claim was rejected by the insurer but defendants failed to pay the Purchase Price Casualty Credit. (Id. at ¶¶ 52-53.) Plaintiffs originally estimated that it would cost $90,000 to repair the water damage, but a current estimate places the repair cost at $100,127. (Id. at ¶ 54.)

Third, defendants were to pay any and all sales tax as a result of the transaction and the sale of any personal property, according to the Purchase Agreement. (SAC ¶ 55.) Defendants failed to pay sales taxes to Washington and Colorado. Plaintiffs have paid $62,207.91 in sales tax, including penalties and interest, in connection with the Renton Holiday Inn Select, $55,458.84 in connection with Kent Hawthorn Suites, $50,578.79 in connection with the Lynnwood Courtyard by Marriott, and $54,912.58 in connection with the Pueblo Marriott - Convention Center. (Id. at ¶ 57.)

Fourth, defendants concealed material structural defects in the San Diego Hotel. Plaintiffs conducted due diligence prior to the purchase of the San Diego Hotel and identified certain defects, such as an uneven floor in the lobby. (SAC ¶ 60.) On July 20, 2006, Brian Martin ("Martin") of Trinity wrote to defendants' Hunter Oliver ("Oliver") and requested any engineering reports in connection with the lobby floor problems at the San Diego Hotel. (Id. at ¶ 60.) That same day, Oliver responded that plaintiffs already had copies of the "LandAmerica Reports" and that he was "not aware of any specific reports that address the floor." (Id.) The "LandAmerica Reports" referred to by Oliver is the April 19, 2006 "Draft Property Condition Report" prepared by Land America Assessment Corporation ("LAC Report"). (Id. at ¶ 61.) But, the LAC Report did not identify any issues regarding the floor at the San Diego Hotel. (Id.)

Following closing, plaintiffs discovered Oliver's representation that there were no reports regarding the floor of the San Diego Hotel was false and that defendants deliberately concealed significant structural problems. (Id. at ¶ 62.) E-mails between Mark Lane ("Lane") of Sunstone Hotel Properties, Inc., and colleagues at defendants, from June 8 to June 20, 2006, stated that significant structural repairs were necessary under the ballroom and possibly the restaurant of the San Diego Hotel. (Id.) Lane was sent a letter, dated June 27, 2005, from Robert L. Nowak, president of the structural engineering firm Nowak Wiseman, which identified structural items that needed to be repaired at the San Diego Hotel. (Id. at ¶ 63.) Martin was assured by Oliver, who was then Vice President of Acquisitions for Sunstone Hotel Investments, Inc., on at least two occasions prior to closing that any flooring issues at the San Diego Hotel had been repaired. (Id. at ¶ 65.) On February 16, 2007, plaintiffs received a report they commissioned from EBI Consulting, which found structural problems at the San Diego Hotel and recommended costly repairs. (Id. at ¶ 67.) Plaintiffs estimate they have incurred more than one million dollars in repairs to the floors at the San Diego Hotel and will spend another $350,000 to complete the work. (Id. at ¶ 69.) Consequently, plaintiffs have experienced business interruptions as a result of the repairs that have cost approximately $225,292 and will incur an additional $60,000 in future business interruptions. (Id.)

Plaintiffs' SAC alleges claims for "breach of the duty" of good faith and fair dealing, breach of contract, and fraud.

III. SUMMARY OF PARTIES' CONTENTIONS

A. Defendants' Motion to Dismiss

Defendants move to dismiss plaintiffs' claims for breach of the implied covenant of good faith and fair dealing and for fraud. First, defendants contend that the claim for the breach of the implied covenant fails as a matter of law because it duplicates the breach of contract claim. Second, defendants argue that the fraud claim fails because plaintiffs did not reasonably rely on any of defendants' representations and that certain allegations do not meet the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure ("Rule 9(b)").

1. Plaintiffs' Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

Plaintiffs allege that defendants breached the implied covenant of good faith and fair dealing by failing to complete certain PIP work at the purchased hotels. (Defs.' Mot. to Dismiss at 2.) PIP work is work that is required by hotel franchisors to be completed when a hotel is sold before a franchisor will issue a new franchise agreement to the buyer. (Id. at 2-3.) The Purchase Agreement states that defendants would start the PIP work and that the parties would negotiate a credit for the PIP work that remained incomplete at closing. (Id.; see also Declaration of Amy J. Laurendeau filed in Support of Defs.' Mot. to Dismiss ("Laurendeau Decl."), Ex. A §§ 6.7.6.2 - 6.7.6.4.) Plaintiffs allege that defendants claimed to have completed certain PIP work that was, in fact, not completed at the time of closing or was rejected by the franchisors because the work failed to comply with brand standard. (Defs.' Mot. to Dismiss at 3.) Consequently, defendants' failure to abide by the Agreement constitutes a breach of the implied covenant of good faith and fair dealing. (Id.)

Plaintiffs' claim for a breach of the implied covenant of good faith and fair dealing is a reiteration of plaintiffs' breach of contract claim and attempts to make a tort claim out of a contract dispute. (Defs.' Mot. to Dismiss at 3 citing Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 1395, 272 Cal. Rptr. 387 (1990) ("If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged act, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated."); see also Guz v. Bechtel Nat'l, Inc., 24 Cal. 4th 317, 326-27, 100 Cal. Rptr. 2d 352 (2002).) To assert a breach of the implied covenant of good faith and fair dealing, plaintiffs must show that defendants' conduct "demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act." (Defs.' Mot. to Dismiss at 4 quoting Careau & Co., 222 Cal. App. 3d. at 1395.) Plaintiffs must plead facts showing bad faith. (Defs.' Mot. to Dismiss at 4 citing Hougue v. City of Holtville, 2008 U.S. Dist. LEXIS 35258 at *11 (S.D. Cal. Apr. 30, 2008) (court dismissed a plaintiff's claim for breach of good faith where plaintiff failed to allege that the defendant was "prompted by a 'conscious and deliberate act, which unfairly frustrate[d]' the purposes of the parties' written contract") (quoting Careau & Co., 222 Cal. App. 3d at 1395).)

Here, plaintiffs allege that defendants breached the implied covenant of good faith and fair dealing by "'fail[ing] to comply with the duty complete [sic] the Outstanding PIP Work that they identified has [sic] having been completed because the improvements were either not made or not performed in conformity with the properties' brand standards as required by the Purchase Agreement.'" (Defs.' Mot. to Dismiss at 3 quoting SAC ¶ 73 (Brackets in original.).) This claim is subsumed within plaintiffs' breach of contract claim, which is based on defendants' failure to "complete PIP items that they said were completed or failed to perform the PIP work in conformity with the properties' brand standards as required by the Purchase Agreement." (Id. at 3-4 quoting SAC ¶ 79.)

2. Plaintiffs' Fraud Claim

Plaintiffs' claim for fraud rests on two assertions: (1) undisclosed reports relating to alleged structural defects at the San Diego Hotel; and, (2) failure to complete PIP work. To establish a claim for fraud, plaintiffs must prove: "'(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or "scienter"); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.'" (Defs.' Mot. to Dismiss at 4-5, quoting Engala v. Permanente Med. Group, Inc., 15 Cal. 4th 951, 974, 64 Cal. Rptr. 2d 843 (1997) (quoting Lazar v. Superior Court, 12 Cal. 4th 631, 638, 49 Cal. Rptr. 2d 377 (1996)).)

a. Plaintiffs' Structural Defect Fraud Allegations

Plaintiffs allege one concrete misrepresentation in the SAC. (Defs.' Mot. to Dismiss at 5.) Specifically, plaintiffs allege that the floor in the lobby of the San Diego Hotel was uneven and they asked Oliver (defendants' then Director of Acquisitions) whether defendants had any engineering reports in connection with the lobby floor. (Id.) Plaintiffs allege that Oliver stated that plaintiffs "already had copies of the 'LandAmerica Reports,' and that he was 'not aware of any specific reports that address the floor.'" (Id. quoting SAC ¶ 60.)

Plaintiffs assert that Oliver's statement was a "patent misrepresentation" because defendants' other employees were aware of the structural issues under the ballroom and a different employee, Lane, then a project manager, received the June 27, 2005 letter from Mr. Nowak the previous year. (Defs.' Mot. to Dismiss at 5.) Plaintiffs do not allege that Oliver was aware of any engineering reports addressing the lobby floor besides the LAC Report. (Id. at 6.) Plaintiffs do not allege that Oliver was a participant in the e-mail correspondence or a recipient of Mr. Nowak's letter. (Id.) Therefore, plaintiffs do not state a misrepresentation of any kind, much less the sort of intentional misrepresentation necessary for a claim for fraud. (Id.) Further, Oliver never denied the existence of reports concerning flooring issues at the San Diego Hotel, only that he was "not aware" of any reports. (Id.)

Plaintiffs could not have reasonably relied on Oliver's representations because plaintiffs identified defects in the hotel floor through their own due diligence. (Id.) Plaintiffs had actual notice of possible structural issues concerning the flooring at the San Diego Hotel, which they contracted to purchase on an "as-is" basis. (Id.; see also Laurendeau Decl., Ex. A ¶ 11.1.) Plaintiffs do not contend that defendants discouraged them from conducting their own inspection of the San Diego Hotel, and, in fact, plaintiffs did conduct such an inspection prior to closing and negotiated extensions of the inspection periods with defendants. (Id.)

While an "as-is" clause does not confer general immunity on the seller for fraud, the buyer is charged with knowledge of anything that is visible to, or observable by, him. (Defs.' Mot. to Dismiss at 7, citing Lingsch v. Savage, 213 Cal. App. 2d 729, 740-42, 29 Cal. Rptr. 201 (1963).) Courts have noted that an "asis" provision serves as a red flag warning to buyers that the goods or property to be sold might not be in perfect condition or of ideal quality. (Id. citing Shapiro v. Hu, 188 Cal. App. 3d 324, 333, 233 Cal. Rptr. 470 (1986).) In practice, when commercial parties use an "as-is" clause, it raises the "observable" standard. (Id.) Plaintiffs conducted inspections with trained professionals and identified matters of concern. Where a buyer inspects the property, the buyer will be "conclusively presumed to have acquired all of the information which would be disclosed to him if his inquiry should be pursued with ordinary diligence." (Defs.' Mot. to Dismiss at 7, quoting Gifford v. Roberts, 81 Cal. App. 2d 712, 718, 184 P.2d 942 (1947) (citing Carpenter v. Hamilton, 18 Cal. App. 2d 67, 71, 62 P.2d 1376 (1936)).) Plaintiffs do not allege that the structural defects would not have been discovered through a reasonably diligent investigation. (Id.)

Lastly, to establish a claim for fraud, the alleged misrepresentation must have been of a material fact. (Defs.' Mot. to Dismiss at 8, citing Chalas v. Andersen, 192 Cal. App. 2d 452, 456, 13 Cal. Rptr. 257 (1961) ("'to make out a case of actionable fraud it must appear that the alleged false representation was of a material fact; and to be material it must be such that the contract would not have been entered into without it'") (quoting Crow v. Kenworthy, 30 Cal. App. 2d 313, 315, 86 P.2d 154 (1939)).) Plaintiffs were aware of the patent conditions that caused them concern about structural features of the San Diego Hotel, ...


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