Lenexa Hotel, LP v. Holiday Hospitality Franchising, Inc. et al

Filing 18

MEMORANDUM AND ORDER overruling 7 Motion to Dismiss for Failure to State a Claim. Signed by Chief Judge Kathryn H. Vratil on 9/3/2013. (kao)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
LENEXA HOTEL, LP,

)
)
Plaintiff,
)
)
v.
)
)
HOLIDAY HOSPITALITY
)
FRANCHISING, INC.,
)
)
Defendant.
)
____________________________________)

CIVIL ACTION
No. 12-2775-KHV

MEMORANDUM AND ORDER
Lenexa Hotel, LP brings suit against Holiday Hospitality Franchising, Inc. for breach of contract,
breach of the implied duty of good faith and fair dealing and for a declaration that it has complied with
its contractual obligations or is excused from doing so based on defendant’s actions. Plaintiff alleges
that defendant breached both express and implied obligations imposed under the parties’ License
Agreement. Through this License Agreement, plaintiff obtained the rights to convert a hotel which it
owns and operates to a Crowne Plaza branded hotel, and to operate it as part of the Crowne Plaza
franchise system.
This matter is before the Court on Holiday Hospitality Franchising Inc.’s Motion To Dismiss
Plaintiff’s First Amended Complaint For Failure To State A Claim (Doc. #7) filed February 1, 2013.
Defendant seeks dismissal because (1) plaintiff fails to identify any specific provision under the License
Agreement which defendant has purportedly breached; (2) plaintiff consequently cannot assert a claim
for breach of the implied duty of good faith and fair dealing; and (3) the facts alleged do not give rise
to a case or controversy and therefore this Court cannot grant declaratory relief. For the following
reasons, the Court overrules defendant’s motion.

Legal Standards

In ruling on a motion to dismiss under Rule 12(b)(6), Fed. R. Civ. P., the Court assumes as true
all well-pleaded factual allegations and determines whether they plausibly give rise to an entitlement
of relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). To survive a motion to dismiss, a complaint must
contain sufficient factual matter to state a claim which is plausible – and not merely conceivable – on
its face. Id. at 679-80; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In determining whether
a complaint states a plausible claim for relief, the Court draws on its judicial experience and common
sense. Iqbal, 556 U.S. at 679.
The Court need not accept as true those allegations which state only legal conclusions. See id.;
Hall v. Bellmon, 935 F.3d 1106, 1110 (10th Cir. 1991). Plaintiff bears the burden of framing its
complaint with enough factual matter to suggest that it is entitled to relief; it is not enough to make
threadbare recitals of a cause of action accompanied by conclusory statements. Twombly, 550 U.S. at
556. Plaintiff makes a facially plausible claim when it pleads factual content from which the Court can
reasonably infer that defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 678. Plaintiff
must show more than a sheer possibility that defendant has acted unlawfully – it is not enough to plead
facts that are “merely consistent with” defendant’s liability. Id. (quoting Twombly, 550 U.S. at 557).
A pleading which offers labels and conclusions, a formulaic recitation of the elements of a cause of
action, or naked assertions devoid of further factual enhancement will not stand. Iqbal, 556 U.S. at 678.
Similarly, where the well-pleaded facts do not permit the Court to infer more than the mere possibility
of misconduct, the complaint has alleged – but has not “shown” – that the pleader is entitled to relief.
Id. at 679. The degree of specificity necessary to establish plausibility and fair notice depends on
context, because what constitutes fair notice under Rule 8(a)(2), Fed. R. Civ. P., depends on the type

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of case. Robbins v. Oklahoma, 519 F.3d 1242, 1248 (10th Cir. 2008) (quoting Phillips v. Cnty. of
Allegheny, 515 F.3d 224, 232-33 (3d Cir. 2008)).
Factual Background
The first amended complaint alleges the following facts:
Plaintiff is a Kansas limited partnership owned by Ventura Hotel Corporation and Stephen J.
Craig. Craig owns 100 per cent of Ventura Hotel Corporation. For more than 25 years, Craig has
owned companies that have owned and operated more than 100 hotels in 25 states. He was Executive
Vice President of Brock Hotel Corporation when it owned and managed 76 Holiday Inns in 23 states.
One of the entities in which Craig was an executive acquired the hotel which is the subject of this action
(“the Hotel”) from Holiday Inns, Inc. in 1980. The Hotel was then a 112-room Holiday Inn. In 1984
it was converted to a 297-room Holidome Indoor Recreation Center. In 2003 it was converted to a
Radisson and remained as such until its ultimate conversion to the Crowne Plaza brand. The Hotel has
257 guest rooms and offers upscale amenities including a health and fitness center, indoor pool,
restaurant, bar, business center and meeting and banquet space.
Holiday Hospitality Franchising, Inc. (“HHFI”) is a Delaware corporation with its principal place

of business in Atlanta, Georgia. It is one of the largest hotel groups in the world, operating 4,500 hotels
worldwide with more than 650,000 rooms.

Of its nine brands, the three major brands are

InterContinental (luxury), Crowne Plaza (upscale), and Holiday Inn (midscale). Defendant holds itself
out as a world-leading hotel franchisor able to drive demand through a number of different channels,
including Priority Club rewards, sales and marketing professionals, internet sites and global call centers.
In its United States business operations, defendant uses the trade name “InterContinental Hotels Group.”
In metropolitan Kansas City, defendant has one upscale and two luxury hotels. In addition to the Hotel,

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defendant has the InterContinental Hotel on the Country Club Plaza and another Crowne Plaza in
downtown Kansas City, Missouri.
In early 2007, plaintiff contemplated converting the Hotel to another brand. Craig and William
Stuckeman, another executive for plaintiff, began discussions with defendant through Keith Biumi,
defendant’s Regional Vice President for Upscale Franchising and Business Development. Because such
a conversion is an expensive proposition, Craig insisted upon assurances that defendant would generate
sufficient demand for the Hotel to justify spending millions of dollars in conversion costs and paying
hundreds of thousands of dollars in annual royalties. Craig understood that the Hotel’s location would
require regional and national marketing to attract out-of-town business travelers and groups. To that
end, Craig had extensive conversations and communications with defendant’s representatives about
defendant’s abilities. Defendant repeatedly represented that its reservation system, supported through
the web, call centers around the world and the travel agent booking system, was designed to market the
Hotel as one of only three HHFI upscale or luxury hotels in the Kansas City metropolitan area.
Defendant further represented that its marketing and internet experts would develop a plan to drive room
revenue and attract out-of-town business travelers and groups to the Hotel, and that its Priority Club
rewards program, world-class revenue systems, sales force of thousands and marketing system fund
would generate demand.
During the parties’ 2007 negotiations, defendant represented to plaintiff that a hotel located in
downtown Kansas City was converting from a Radisson to a Crowne Plaza, and that another hotel on
the Country Club Plaza was converting and was flagged as defendant’s luxury brand, the
InterContinental Hotel. Biumi represented that Crowne Plaza, through its director Mike FitzMaurice,
would coordinate efforts between the Hotel and the Crowne Plaza downtown and would collectively

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enhance the HHFI upscale and luxury brands in the Kansas City area. In August of 2007, Stuckeman
made it clear that the key issue for plaintiff was whether defendant could demonstrate the ability to
generate corporate transient and group demand for the Hotel. He pointed out to Biumi that a Holiday
Inn was opening on I-435 (about seven miles from the Hotel). Biumi responded by email, pointing out
differences between the Holiday Inn and Crowne Plaza brands and marketing and explaining why a
midscale Holiday Inn would not prevent a Crowne Plaza from drawing out-of-town business travelers.
Talks between the parties stalled. In February of 2008, Biumi encouraged Craig and Stuckeman
to submit plaintiff’s conversion application because defendant had received an application from another
party to build a new hotel as a Crowne Plaza in Olathe, Kansas. Based on this representation and on
defendant’s representations that it could effectively market the Hotel as an upscale Kansas City
metropolitan area hotel and drive demand, plaintiff moved forward with the conversion process. Later
that month, Stuckeman wrote to Biumi and asked if the Hotel could be called “Crowne Plaza Kansas
City South.” Biumi referred the question to FitzMaurice as the person best able to determine what
search was most common, but he continued to acknowledge in other communications defendant’s
obligation and ability to effectively market the Hotel.
As negotiations continued, Biumi and FitzMaurice made representations about the various means
defendant would employ to drive demand to the Hotel, including maximizing the Hotel’s internet
presence, getting the Hotel to the forefront of travel sites and search engines and using defendant’s
central reservations system for the Crowne Plaza brand. Based on these representations, plaintiff agreed
to a Property Improvement Plan (“PIP”),1 committed to paying royalties to defendant which were

1

Defendant created the original PIP on March 7, 2007, and a revised version on March
24, 2008. Plaintiff completed the renovations required to open the Hotel and has continued to
(continued...)
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significantly higher than those paid to Radisson, submitted its application and committed to converting
the Hotel to a Crowne Plaza. On its application, plaintiff listed its primary reason for purchasing the
Crowne Plaza license as defendant’s “ability to drive corporate transient and group business and loyalty
program.”
Defendant gave plaintiff a Uniform Franchise Offering Circular (“UFOC”)2, which includes
financial performance representations and reinforces the representations Craig and Stuckeman had given
about defendant’s ability to drive demand to the Hotel. Ultimately, on May 13, 2008, plaintiff executed
the Crowne Plaza Conversion License Agreement (“the License Agreement”), which focuses on
plaintiff’s access to “the System” which defendant operates and licenses to “provide a distinctive, high
quality hotel service to the public under the name ‘Crowne Plaza.’”3 Doc. #8-1 at ¶ 1. The License
Agreement defines “the System” as follows:
The System is composed of all elements which are designed to identify Crowne Plaza
hotels to the consuming public or are designed to be associated with those hotels or to
contribute to such identification or association and all elements which identify or reflect
the quality standards and business practices of such hotels, all as specified in this License
or as designated from time to time by [defendant]. The System at present includes, but
is not limited to, the principal trade and/or service marks Crowne Plaza,® Crowne
Plaza® Suites and Crowne Plaza® Resort (as appropriate to the specific hotel operation
1

(...continued)
renovate. Defendant has changed the requirements of the PIP over time and asserts that plaintiff has
not completed those requirements. Plaintiff has substantially complied with its PIP obligations.
Defendant’s failures in marketing and reservations have frustrated plaintiff’s ability to allocate money
to capital improvements, however, as plaintiff has had to allocate resources to meet working capital
demands that it would have used for capital improvements.
2

The UFOC (known as the “Franchise Disclosure Document” since 2007) is provided
to prospective purchasers of franchises and governs disclosure of essential information in the sale of
a franchise. It is mandated and regulated by the Federal Trade Commission. See 16 C.F.R. Part 436.
3

Defendant attached a copy of the License Agreement (Doc. #8-1) to its motion, and the
parties agree that the Court may properly consider its terms in ruling on this motion. See Doc. #8 at
1 n.1; Plaintiff’s Memorandum In Opposition To Defendant’s Motion To Dismiss (Doc. #10) at 2 n.1.
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to which it pertains), Holidex® and the other Marks, . . . and intellectual property rights
made available to licensees of the System by reason of a license; all rights to domain
names and other identifications or elements used in electronic commerce as may be
designated from time to time by [defendant] in accordance with [defendant]’s
specifications to be part of the System; access to a reservation service operated in
accordance with specifications established by [defendant] from time to time; distribution
of advertising, publicity and other marketing programs and materials; the furnishing of
training programs and materials; confidential or proprietary information standards,
specifications and policies for construction, furnishing, operation, appearance and
service of the Hotel, and other requirements as stated or referred to in this License and
from time to time in [defendant]’s Standards Manual (the “Manual”) or in other
communications to [plaintiff]; and programs for inspecting the Hotel, measuring and
assessing service, quality and consumer opinion and consulting with [plaintiff].
[Defendant] may add elements to the System or modify, alter or delete elements of the
System in its sole discretion from time to time.
Id. at ¶ 1.B.
The License Agreement assigns certain responsibilities to each of the parties. For example,
during the term of the agreement defendant is to “afford [plaintiff] access to reservation service for the
Hotel on terms consistent with this License.” Doc. #8-1 ¶ 4.B. Plaintiff is obligated to pay a “Services
Contribution” equal to 3% of gross revenue, and in turn defendant is to use those funds for marketing,
reservations and related activities.4 Id. ¶¶ 3.C.(1)(b), 4.G. Because marketing is defendant’s obligation,
the License Agreement precludes plaintiff from engaging in local and regional marketing programs
without defendant’s permission. Id. ¶ 4.H. Based on the License Agreement representations about the
System, plaintiff believed that defendant would design and provide a marketing program tailored to fit
and drive demand to the Hotel.
On May 6, 2009, the Hotel opened as a Crowne Plaza. Almost immediately, plaintiff became

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Plaintiff must also pay a number of other fees, including a 5% royalty of hotel room
gross revenue; $11.91 monthly Technology Fee for each guest room; all fees due for travel agent
commissions; and $3.00 per room monthly fee for mandatory participation in the Crowne Plaza Hotel
Marketing Association.
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aware of problems with how defendant was marketing the Hotel. Defendant did not evaluate the Kansas
City market or associate the Hotel with key words that would identify it as an upscale Kansas City
metropolitan hotel located in south Kansas City near Corporate Woods and the Sprint campus. Instead,
defendant set up the Hotel in internet marketing channels as a Lenexa and/or Overland Park hotel. Two
major failings on defendant’s part have plagued the Hotel: (1) the Hotel has not been visible on the
internet in searches for Kansas City hotels; and (2) defendant’s Central Reservation Office has failed
to find and recommend the Hotel to potential customers, even those calling a line said to be dedicated
as a Crowne Plaza reservation line. The complaint provides five pages of detailed allegations as to how
defendant’s marketing efforts with respect to the internet are deficient and how defendant’s call centers
send almost no business to the Hotel, and it describes plaintiff’s investigative efforts and
communications with defendant to try to obtain better marketing and reservation service.
As a result of defendant’s reservation system and marketing failures, the Hotel has performed
worse as a Crowne Plaza than as a Radisson or Holiday Inn. Plaintiff believes that by revenue, it is one
of defendant’s worst performing hotels in the Kansas City market. Defendant’s UFOC listed averages
for occupancy percentage, average daily rate and revenue per room available for 53 other Crowne Plaza
Hotels in suburban markets, and in 2009, 2010 and 2011, the Hotel has not approached any of those
averages. The greatest lag is in revenue per room available, where the average is $70.43 and the highest
figure the Hotel achieved is $32.75.
Defendant re-launched its Holiday Inn brand family in 2007, spending more than a billion dollars
to promote the brand. Plaintiff has conducted test calls to defendant’s Crowne Plaza reservation system
asking for a Crowne Plaza hotel in Kansas City, only to be referred to Holiday Inn hotels. Defendant’s
emphasis on Holiday Inns has compounded the Hotel’s revenue problems.

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Analysis
Defendant asserts that plaintiff’s breach of contract claim fails because plaintiff has not identified
any specific provision under the License Agreement which defendant has purportedly breached. And
because plaintiff has not stated a claim for breach of contract, defendant asserts that plaintiff cannot
assert a viable claim for breach of the implied duty of good faith and fair dealing. Finally, defendant
argues that plaintiff’s declaratory relief claim must be dismissed because the complaint fails to allege
facts that give rise to a case or controversy.
I.

Breach Of Contract
Defendant argues that the amended complaint fails to state a claim for breach of contract because

it does not identify specific contractual provisions which defendant allegedly breached.
The amended complaint identifies the Crowne Plaza franchise System for which the License
Agreement explicitly provides defendant the right to “modify, alter or delete elements . . . in its sole
discretion from time to time.” The amended complaint does not cite any specific provision which
creates an affirmative obligation on defendant’s part. In support of its argument, defendant relies on a
single case, American Casual Dining, L.P. v. Moe’s Southwest Grill, L.L.C., 426 F. Supp. 2d 1356
(N.D. Ga. 2006).5 There, plaintiff franchisee brought suit against its franchisor after its initial
investment expenses exceeded the estimates contained in the UFOC. Plaintiff alleged that defendant
had represented that the maximum initial investment for three franchise restaurants was $814,500, but

5

Defendant asserts that Georgia law governs plaintiff’s claims because the License
Agreement provides that it is to be governed by and construed under the laws of the State of Georgia.
Memorandum In Support Of Holiday Hospitality Franchising Inc.’s Motion To Dismiss Plaintiff’s
First Amended Complaint For Failure To State A Claim (Doc. #8) filed Feb. 1, 2013 at 4-5. Plaintiff
agrees. Plaintiff’s Memorandum In Opposition To Defendant’s Motion To Dismiss (Doc. #10) filed
February 22, 2013 at 12.
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that plaintiff had spent more than $1,430,000. Plaintiff asserted a number of claims arising out of the
parties’ franchise agreement and related documents, including breach of contract. Defendant moved to
dismiss all of plaintiff’s claims. With respect to the breach of contract claim, defendant argued that
plaintiff failed to state a claim because the complaint did not identify any contractual provision that
defendant allegedly breached. The complaint alleged that defendant breached its contractual obligations
in the following ways: (1) failing to perfect and make available a system of opening and operating
Moe’s Southwest Grill restaurants; (2) failing to use its skill, experience, knowledge and expertise to
provide a reasonable and accurate statement of the initial investment expenses and food and labor
costs; and (3) failing to use its skill, experience, knowledge and expertise to assist plaintiff in
developing, opening and operating an economically viable restaurant franchise. Id. at 1368.
In its breach of contract count, plaintiff’s complaint cited only the introductory paragraphs of
the parties’ franchise agreement, which referred to defendant’s development of “the Moe’s System,”
and stated that defendant “has acquired knowledge and experience in the composition, distribution,
advertising and sale of food products by restaurants using the Moe’s system.” Id. at 1369. The district
court concluded that the representations in the franchise agreement introduction did not obligate
defendant to act in any specific way on behalf of plaintiff, and that elsewhere in the agreement defendant
expressly disclaimed a duty to assist plaintiff in developing and operating an economically viable
restaurant. Accordingly, the district court granted defendant’s motion to dismiss without prejudice and
with permission for plaintiff to amend its complaint.
Defendant contends that here, because plaintiff cites no specific provision of the License
Agreement which creates any affirmative obligation which defendant has breached, the Court should
adopt the result of American Casual Dining. Although defendant acknowledges that the License

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Agreement “does set forth various affirmative obligations” on its part, defendant asserts that it has no
obligation to plaintiff with respect to its reservation system because the License Agreement makes it
clear that defendant “enjoys absolute and total discretion with regard to its control” over the reservation
system. Memorandum In Support Of Holiday Hospitality Franchising Inc.’s Motion To Dismiss
Plaintiff’s First Amended Complaint For Failure To State A Claim (Doc. #8) filed Feb. 1, 2013 at 7-8.
Defendant’s argument overreaches. While the License Agreement indeed grants discretion to
defendant, that same Agreement also grants plaintiff a license to use the System which includes
marketing programs and many other services in addition to reservations. The License Agreement
obligates plaintiff to pay several monthly fees, many of which are specifically tied to defendant’s
marketing association, and obligates defendant to afford plaintiff access to reservation service for the
Hotel which is paid for in part by plaintiff’s mandatory Services Contribution fee. Doc. #8-1 ¶ 3.C.
Defendant is effectively arguing that under the License Agreement, it has no legal obligations to plaintiff
with respect to reservations or marketing. Plaintiff’s amended complaint alleges otherwise. It lists a
number of obligations that defendant has under the License Agreement and alleges that defendant has
breached those obligations by failing to provide reservation, marketing and advertising services, and not
permitting plaintiff to use the System for which plaintiff provides consideration. Viewing the
allegations in the light most favorable to plaintiff, the Court cannot conclude as a matter of law that the
License Agreement on its face imposes no marketing or reservations obligations on defendant.
Therefore, defendant is not entitled to dismissal of Count I.
II.

Implied Duty Claim
Defendant offers a single argument in favor of its motion to dismiss Count II: that plaintiff

cannot state a claim for breach of the implied duty of good faith and fair dealing because Georgia law

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does not allow such claims unless plaintiff sets forth facts showing breach of an actual term of the
agreement. By rejecting defendant’s motion to dismiss with respect to Count I, the Court has concluded
that the amended complaint sufficiently alleges breach of contract. Accordingly, defendant’s motion
is likewise overruled with respect to Count II.
III.

Declaratory Judgment Claim
Defendant seeks dismissal of plaintiff’s claim for declaratory relief, arguing that plaintiff has not

alleged facts which sufficiently demonstrate a case or controversy and that considering the claim would
serve no useful purpose. Defendant concedes that a court’s decision on whether to grant declaratory
relief is discretionary.
The Tenth Circuit Court of Appeals has articulated five factors for district courts to evaluate
when determining whether to decline jurisdiction over a declaratory judgment action: (1) whether a
declaratory judgment would settle the controversy; (2) whether it would serve a useful purpose in
clarifying the legal relations at issue; (3) whether the declaratory remedy is being used merely for the
purpose of procedural fencing or to provide an arena for a race to res judicata; (4) whether use of
declaratory action would encroach upon state court jurisdiction; and (5) whether an alternative remedy
would be better or more effective. State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir.
1994). As demonstrated by the cases which defendant cites, these factors are often applied where
declaratory relief is the only relief which plaintiff requests, the parties are in a race to the courthouse
and/or the parties have filed cases in both federal and state courts. E.g., UBS Fin. Servs., Inc. v.
Ingraham, No. 09-2502-KHV, 2010 WL 6754383, at *1 (D. Kan. April 8, 2010) (employer filed federal
court action seeking declaration its employees did not sexually harass defendant, where defendant had
filed state court action alleging such); Buchanan v. Greene, No. 97-2569-KHV, 1998 WL 184448, at

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*1 (D. Kan. March 12, 1998) (actuaries filed action seeking declaration they did not negligently or
fraudulently provide accounting services to insolvent insurance company; receiver filed separate
negligence and fraud suit against actuaries).
Plaintiff’s amended complaint demonstrates a case or controversy between the parties. See n.1,
supra. Defendant has not filed its own action, nor does it represent that it intends to do so. The
declaratory judgment count is but one part of plaintiff’s suit, and it arises out of the same set of operative
facts as Counts I and II. Defendant has raised no compelling reason for the Court to dismiss Count III.
IT IS THEREFORE ORDERED that Holiday Hospitality Franchising Inc.’s Motion To
Dismiss Plaintiff’s First Amended Complaint For Failure To State A Claim (Doc. #7) filed February 1,
2013, be and hereby is OVERRULED.
Dated this 3rd day of September, 2013 at Kansas City, Kansas.
s/ Kathryn H. Vratil
KATHRYN H. VRATIL
United States District Judge

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