Atmosphere Hospitality Management, LLC v. Shiba Investments, Inc. et al
Filing
290
ORDER denying 214 Motion for Disqualify; denying 262 Motion for Attorney Fees. Signed by U.S. District Judge Karen E. Schreier on 1/29/2016. (JLS)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
ATMOSPHERE HOSPITALITY
MANAGEMENT, LLC,
Plaintiff,
vs.
5:13-CV-05040-KES
ORDER DENYING DEFENDANTS’
MOTION TO DISQUALIFY EXPERT
WITNESS AND DENYING PLAINTIFF’S
MOTION FOR ATTORNEYS’ FEES
SHIBA INVESTMENTS, INC.,
KARIM MERALI, and ZELJKA
CURTULLO,
Defendants.
Defendants, Shiba Investments, Inc., Karim Merali, and Zeljka Curtullo,
move the court to disqualify Kevin Hanley as an expert witness for plaintiff,
Atmosphere Hospitality Management, LLC. Docket 214. Atmosphere resists the
motion. Additionally, Atmosphere moves the court for an award of attorneys’
fees. Docket 262. Defendants resist the motion. The court denies both motions.
BACKGROUND
Atmosphere brought this action against Shiba and Merali to resolve
issues related to a licensing contract and management contract between the
parties.1 The agreements enabled Shiba to operate a hotel in Rapid City, South
Dakota, that it owns under Atmosphere’s brand name, “Adoba,” and gave
Curtullo was added as a defendant after Atmosphere was given leave to
amend its complaint. See Docket 37.
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management of the hotel to Atmosphere. This litigation began in 2013 after
defendants terminated both agreements.
I.
Defendants’ Motion to Disqualify Kevin Hanley as an Expert
Defendants move to disqualify Kevin Hanley, Atmosphere’s expert
witness. Hanley has worked in the hotel industry since 1979. During that time,
he has served primarily in corporate governance and managerial positions for
several hospitality companies. Much of Hanley’s recent work experience
pertains to hotel financing, ownership, and real estate ventures. On October
17, 2014, after Hanley had been designated as Atmosphere’s expert witness,
Hanley was deposed by defendants.
During Hanley’s deposition, he was asked about the scope of his
employment with Atmosphere. He testified that the “general purpose” of his
role as an expert was to analyze four documents: the proffered licensing
agreement, the licensing agreement the parties ultimately signed, the proffered
property management agreement, and the property management agreement the
parties ultimately signed. Docket 216-1 at 4. More specifically, Hanley was
hired to opine whether the terms and conditions used in those four documents
were consistent with the terms and conditions that were typically used in
similar contracts in the hotel industry. Id. Hanley’s report concluded that the
terms and conditions of the two proffered agreements were generally consistent
with the standards in the hotel industry while the terms and conditions of the
two executed agreements were not. Docket 231-3 at 4.
2
Attached to Hanley’s report were copies of six hotel license agreements.
Those agreements were created by Courtyard by Marriot, Wyndham Hotels,
Comfort Inn, Doubletree by Hilton, Red Lion Hotels, and AmericInn Hotels.
Hanley testified that those contracts were “included to reflect a sampling of
what would be perceived as generally consistent with industry standards.”
Docket 216-1 at 5. Also informing Hanley’s analysis was his “own experience
over more than 30 years in reading franchise agreements and license
agreements . . . including the many agreements that [he has] been a party to
[him]self.” Id. at 7.
Hanley testified that he compared the proffered and executed versions of
the parties’ contracts to the generally accepted standards in the hotel industry.
Id. at 6. Hanley was then asked why his report did not explain where the
parties’ contracts differed from the six sample contracts that were appended to
his report. He explained that such a task “was not within the scope of [his]
employment.” Id. at 7. But when asked whether he nonetheless compared the
parties’ contracts to the industry standards, Hanley reaffirmed that “[he] did
compare them.” Id.
Hanley was also asked a series of questions concerning the reasons why
someone would want to enter into a franchise arrangement. For example,
Hanley was asked whether “an attribute of a franchise [would] be a higher
chance of success than a sole proprietor,” whether “an attribute of a franchise
[would] be selling power through name recognition of a known brand,” and
whether “an attribute of a franchise [would] be customer leads generated
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through a systematic website or call center,” among other things. Id. at 8. To
these questions, Hanley generally responded that “[i]t may be.” Id. Hanley
explained that each could be a potential benefit of associating with a franchise
but “whether it is or not [an actual benefit] would remain to be seen.” Id. at 6.
When asked whether any of those potential benefits were also attributes of the
Adoba franchise, Hanley responded that he was “not familiar enough with all
facets of the Adoba franchise system to be able to attest to that.” Id. at 8. But
Hanley explained that his understanding was that this was the first Adoba
hotel in existence “[a]nd so many of the attributes that [defense counsel]
described a moment ago I would not expect to be present in a franchise system
that had [only] one or a few hotels.” Id. at 8-9.
Hanley was also asked if he understood that the Adoba hotel was not
actually part of a “franchise” in the legal sense. Hanley replied that he was not
an attorney and could not address such semantic differences or their legal
significance. Id. at 9. But when asked why he compared the parties’ licensing
agreement to a franchise agreement when the Adoba hotel is not part of a
franchise, Hanley testified that “the word ‘franchise’ and ‘license agreement’ is
often used interchangeably in the hotel sector, based on my experience.” Id. He
explained that “[t]here may or may not be subtleties beneath that, but industry
participants often use the terms interchangeably.” Id. at 5.
LEGAL STANDARD
Defendants contend that state law governs the admission of expert
opinion evidence in this case. Docket 215 at 5 (“The court’s discretion is [sic] in
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determining the admissibility of expert witnesses is governed by long-standing
South Dakota law.”). It does not. Unrein v. Timesavers, Inc., 394 F.3d 1008,
1011 (8th Cir. 2005) (“Since the admissibility of expert testimony in diversity
cases is governed by federal law, we must focus on whether the proposed
testimony meets the federal standard of admissibility.”) (internal citation
omitted). Rather, Federal Rule of Evidence 702 provides the governing
standard. Id.
Under Rule 702, the trial court acts as a “gatekeeper” by screening a
party’s proffered expert testimony for its reliability and relevance. Daubert v.
Merrel Dow Pharms., Inc., 509 U.S. 579, 589 (1993); Kumho Tire Co., Ltd. v.
Carmichael, 526 U.S. 137, 152 (1999) (“The objective of [the gatekeeping]
requirement is to ensure the reliability and relevancy of expert testimony.”).
Rule 702 provides:
A witness who is qualified as an expert by knowledge, skill,
experience, training, or education may testify in the form of an
opinion or otherwise if:
(a)
the expert's scientific, technical, or other specialized
knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue;
(b)
the testimony is based on sufficient facts or data;
(c)
the testimony is the product of reliable principles and
methods; and
(d)
the expert has reliably applied the principles and
methods to the facts of the case.
Fed. R. Evid. 702. “Rule 702 reflects an attempt to liberalize the rules
governing the admission of expert testimony.” Lauzon v. Senco Prods., Inc., 270
5
F.3d 681, 686 (8th Cir. 2001) (quoting Weisgram v. Marley Co., 169 F.3d 514,
523 (8th Cir. 1999)). “The rule clearly ‘is one of admissibility rather than
exclusion.’ ” Id. (quoting Arcoren v. United States, 929 F.2d 1235, 1239 (8th
Cir. 1991)). Thus, “[t]he exclusion of an expert’s opinion is proper only if it is
‘so fundamentally unsupported that it can offer no assistance to the jury[.]’ ”
Wood v. Minn. Mining & Mfg. Co., 112 F.3d 306, 309 (8th Cir. 1997) (quoting
Hose v. Chicago Nw. Transp. Co., 70 F.3d 968, 974 (8th Cir. 1995)).
The Eighth Circuit has determined that a district court should apply a
three-part test when screening expert testimony under Rule 702.
First, evidence based on scientific, technical, or other specialized
knowledge must be useful to the finder of fact in deciding the
ultimate issue of fact. This is the basic rule of relevancy. Second,
the proposed witness must be qualified to assist the finder of fact.
Third, the proposed evidence must be reliable or trustworthy in an
evidentiary sense, so that, if the finder of fact accepts it as true, it
provides the assistance the finder of fact requires.
Lauzon, 270 F.3d at 686 (internal citations and quotations omitted). With
respect to relevancy, expert testimony will be relevant and helpful to the jury if
it concerns matters beyond the general knowledge of average individuals. See
United States v. Shedlock, 62 F.3d 214, 219 (8th Cir. 1995). With respect to an
expert's qualifications, Rule 702 recognizes five bases for qualifying an expert,
which include “knowledge, skill, experience, training, or education.” Fed. R.
Evid. 702. Significantly, “[g]aps in an expert witness's qualifications or
knowledge generally go to the weight of the witness's testimony, not its
admissibility.” Robinson v. GEICO Gen. Ins. Co., 447 F.3d 1096, 1100 (8th Cir.
2006). Finally, with respect to reliability, “[a]s a general rule, the factual basis
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of an expert opinion goes to the credibility of the testimony, not the
admissibility, and it is up to the opposing party to examine the factual basis for
the opinion in cross-examination.” Bonner v. ISP Techs., Inc., 259 F.3d 924,
929 (8th Cir. 2001) (internal quotations omitted).
District courts have discretion in determining whether to admit expert
witness testimony under Rule 702. See In re Air Crash at Little Rock Ark., on
June 1, 1999, 291 F.3d 503, 509 (8th Cir. 2002). “That standard applies as
much to the trial court’s decisions about how to determine reliability as to its
ultimate conclusion.” Kumho Tire Co., 526 U.S. at 152. Nonetheless, the
proponent of expert testimony must prove its admissibility by a preponderance
of the evidence. Daubert, 509 U.S. at 592 n.10.
DISCUSSION
Defendants argue that Hanley’s testimony could not assist the trier of
fact. More specifically, they argue that Hanley’s methodology is so unreliable as
to render his conclusions about the standards in the hotel industry equally
unreliable. According to defendants, Hanley only reviewed a small sampling of
contracts from large, nationally recognized hotel franchises in order to discern
standards in the hotel industry even though the Adoba hotel is not part of such
a franchise. Additionally, defendants argue that Hanley never compared the
parties’ contracts to those used by the nationally recognized hotel franchises
despite such a comparison being central to his employment as an expert.
Finally, although defendants do not directly assert that Hanley is unqualified to
render an expert opinion, they take issue with the fact that he could not testify
7
with certainty whether the parties’ relationship bore the indicia of a traditional
hotel franchise arrangement.
Turning to the three-step analysis identified by the Eighth Circuit, the
court finds that Hanley’s testimony would satisfy the relevancy requirement.
Based on his experience in the hotel industry, Hanley was hired by Atmosphere
to review the proffered and executed versions of the parties’ contracts and to
opine whether the terms and conditions in those agreements conformed to
industry standards. One of Atmosphere’s causes of action is for breach of
contract. Whether defendants breached the terms of the property management
agreement or licensing agreement is a question of fact. Moe v. John Deere Co.,
516 N.W.2d 332, 335 (S.D. 1994). Hanley’s testimony could assist the trier of
fact to determine whether defendants breached a provision of those
agreements. Additionally, the property management agreement and the
licensing agreement both contain clauses that indicate that the terms that are
undefined in the agreements will have the meanings commonly ascribed to
them in the hotel industry. Docket 219-1 at 1 (licensing agreement); Docket
219-2 at 12 (property management agreement). And to the extent the contracts
are ambiguous, parol evidence describing how the similar terms are used in the
hotel industry is admissible to construe the agreements. Mash v. Cutler, 488
N.W.2d 642, 647 (S.D. 1992) (“In construing a contract where ambiguities
exist, established trade customs and usages may ordinarily be considered.”).
Thus, Hanley’s testimony would be also be relevant to the determination of
8
what those undefined terms mean or how ambiguities in the contracts could be
interpreted.2
The court also finds that Hanley is qualified to testify as an expert. He
has worked in the hotel industry for over thirty-five years and has personal
experience reviewing and negotiating numerous hotel franchise/licensing
agreements. Although defendants take issue with Hanley’s responses to their
questions about the attributes of a hotel franchise arrangement, that is not the
basis for Hanley’s designation as an expert. Specifically, Hanley was not
employed by Atmosphere to analyze the relationship between Atmosphere and
defendants to determine if that relationship was factually analogous to a
typical hotel franchise relationship. Rather, Hanley was asked to review the
parties’ contracts to determine if the terms and conditions of those contracts
were similar to the terms and conditions that typically appeared in hotel
franchise agreements. Contrarily, defendants’ questions were more closely
aimed at testing Hanley’s knowledge of the economic or strategic motivations
for entering a franchise agreement rather than testing his experience,
knowledge, or familiarity with how hotel franchise agreements are typically
worded. Additionally, defendants have provided no authority that Hanley’s
Atmosphere also suggests that Hanley’s testimony would be relevant in
the event that Atmosphere succeeds on its fraud in the inducement claim and
pursues the remedy of rescission. According to Atmosphere, Hanley could
testify concerning the reasonable value of Atmosphere’s services and
intellectual property. Atmosphere has not identified any portion of Hanley’s
report or his testimony that suggests he could competently testify to those
areas. Because the court has already determined Hanley’s testimony hotel
industry terminology would meet the relevancy requirement, the court need not
resolve Hanley’s qualifications on those other issues at this time.
2
9
responses to those questions, i.e., that whether something was truly a “benefit”
of a franchise agreement depended on the specific circumstances of the
arrangement, were inaccurate. Similarly, defendants have not offered any
evidence to undermine Hanley’s assertion that the phrases “franchise
agreement” and “license agreement” are used interchangeably by individuals in
the hotel industry. But even if defendants had presented contrary evidence,
such evidence would only go to the weight the jury may give his opinion rather
than its admissibility. Lastly, the fact that Hanley could not testify to the legal
significance of being a franchisor-franchisee is not a basis for disqualifying him
as an expert. In sum, the court is satisfied that Hanley has sufficient
specialized knowledge within the hotel industry to assist the trier of fact.
Finally, the court also finds that Hanley’s testimony bears the indicia of
reliability necessary to assist the trier of fact. Hanley testified that his years of
experience in the hotel industry, his experience reviewing and negotiating
franchise agreements, and his review of several other materials, provided him
with the means to determine whether a given contract does or does not
conform to standards in the hotel industry. The Supreme Court in Kumho Tire
observed that “ . . . the relevant reliability concerns may focus upon personal
knowledge or experience.” Kumho Tire, 526 U.S. at 150; see also Cedar Hill
Hardware & Const. Supply, Inc. v. Ins. Corp. of Hanover, 563 F.3d 329, 343 (8th
Cir. 2009) (observing that an expert’s “exhaustive experience in the insurance
industry” was a basis for his testimony concerning “industry-standard context”
concerning practices in the insurance industry). Therefore, Hanley’s hands-on,
10
personal experience with the standards employed in hotel franchise agreements
adds reliability to his testimony concerning that very topic.
Defendants’ arguments concerning the unreliability of Hanley’s
methodology are not supported by the record. First, defendants assert that
Hanley testified that he relied on only the six franchise agreements appended
to his report as determinative of the relevant industry standards. But Hanley
did not make such a statement. Rather, he explained that he relied on “[his]
own experience over more than 30 years in reading franchise agreements and
license agreements between not only those companies that those [six]
documents reflect, but other agreements by other brand companies, including
the many agreements that [he has] been a party to [him]self.” Docket 216-1 at
7. In other words, it was not Hanley’s reading of those six documents alone
that allowed him to discern what the industry standards were. Instead, it was
also his professional experience working with those very standards.
Second, defendants argue that Hanley testified that the six franchise
agreements appended to his report were, in fact, the relevant industry
standards. But Hanley did not make such a statement. Rather, he explained
that those six documents were intended to “reflect a sampling of what would be
perceived as generally consistent with industry standards.” Id. at 5. Thus,
Hanley testified that those documents were examples of agreements that were
generally consistent with the industry standards, but not that they represented
what the industry standards were in every case.
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Finally, defendants contend that Hanley testified that he never performed
a certain comparison of the parties’ agreements. On this point, Hanley’s
testimony is as follows:
Q:
Well, you set forth a summary of conclusions where you
compared the two contracts, the executed versus the
proffered. But I see nothing where you compared the
proffered and your [six] franchise agreements, which I’m
supposed to take as industry standards. Why don’t I see
that?
A:
I did not prepare that summary.
Q:
Why not?
A:
It was not within the scope of my assignment.
Q:
If your job was to determine if the proffered agreements met
industry standards, wouldn’t you compare them side by side
and make an analysis?
A:
I did not.
Q:
But that was your scope of work[,] to determine whether
these documents met industry standards. And you didn’t
compare them?
A:
I did compare them.
Id. at 6-7. The problem with defendants’ argument is two-fold. Initially, it relies
on the faulty assumption that those six sample agreements were the industry
standards. But Hanley testified that they were merely samples or examples of
what is typically contained in a hotel franchise agreement, not that a contract
had to be consistent with (and only with) those six documents to conform to
the industry standards. Next, that first faulty assumption was folded into
another: that because Hanley’s report did not detail how the parties’
agreements compared to the six sample agreements, that Hanley did not
12
actually compare the parties’ agreements to the industry standards at all. But
that conclusion is rebuffed by Hanley’s response that he “did compare them.”
See also Docket 231-10 at 11 (“I called forward differences between the
proffered and the executed agreements and compared those to generally
accepted industry standards.”). Thus, defendants’ arguments do not
undermine the reliability of Hanley’s proffered testimony.
Based upon Rule 702 and the factors identified by the Eighth Circuit,
the court finds that Hanley’s proffered testimony is relevant, reliable, and
would be useful to the jury. Therefore, defendants’ motion to disqualify Hanley
from serving as an expert is denied.
II.
Atmosphere’s Motion for Attorneys’ Fees
On July 29, 2015, the court entered an order dismissing defendants’
third-party complaint and counterclaims as appropriate sanctions for
defendants’ repeated discovery violations. Atmosphere requests an award of
attorneys’ fees for the dismissal of those claims.3 According to Atmosphere, it is
the prevailing party with respect to those claims and the parties’ contractual
agreements contemplate the payment of such fees under these circumstances.
LEGAL STANDARD
In diversity proceedings, state law governing the provision of attorneys’
fees is generally considered “substantive” and thus controlling for purposes of
the Erie doctrine. Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786, 796 (8th Cir.
This request for attorneys’ fees is separate from the attorneys’ fees that
the court awarded to Atmosphere for pursuing its motion to compel, Docket
173 (awarding $8,357.00), and the court’s award of attorneys’ fees following the
court’s order for sanctions. Docket 258 (awarding $4,422.32).
3
13
2005); see also Lamb Eng’g & Const. Co. v. Neb. Pub. Power Dist., 103 F.3d
1422, 1434 (8th Cir. 1997). “South Dakota generally follows the ‘American
Rule’ on attorney’s fees, under which each party usually bears the cost of their
own attorneys.” Hewitt v. Felderman, 841 N.W.2d 258, 264 (S.D. 2013). “There
are two exceptions to this rule: ‘first[,] when a contractual agreement between
the parties entitles the prevailing party to attorney fees, and second[,] when an
award of attorney fees is authorized by statute.’ ” Eagle Ridge Estates
Homeowners Ass’n, Inc. v. Anderson, 827 N.W.2d 859, 867 (S.D. 2013)
(alterations in original). Even if attorneys’ fees are recoverable, the award of
such fees must always be reasonable in light of the services rendered. Id.
DISCUSSION
Atmosphere argues that it is entitled to attorneys’ fees under the
“contractual agreement” exception to the American Rule. Because there are two
contracts at issue, the court begins its analysis with the licensing agreement.
Section 18 of the licensing agreement provides:
In any arbitration or other legal proceedings required to interpret
or enforce this Agreement or to resolve any dispute related to this
Agreement, the prevailing party shall be entitled to recover all
costs, expenses, expert-witness fees, and attorneys’ fees related
thereto except for certain costs and expenses of arbitration as
specifically provided below.
Docket 219-1 at 18. This section therefore entitles the “prevailing party” of any
legal proceeding required to resolve any dispute related to the agreement to
their attorneys’ fees. The language of the clause is broadly worded and would
apply to the attorneys’ fees Atmosphere paid to defend itself against
14
defendants’ claims, provided that Atmosphere is a prevailing party. Defendants
acknowledge that this section “clearly sets out the right by a party to that
agreement to recover costs and fees in the event of a dispute or litigation.”
Docket 273 at 5. But this section’s repeated use of “this Agreement” establishes
that the clause’s reach is limited to those disputes that arise under the
licensing agreement itself and not the property management agreement.
Because defendants’ causes of action sought to establish defendants’ rights
and Atmosphere’s liability under the licensing agreement as well as the
property management agreement, the court must also look to the property
management agreement.
Atmosphere acknowledges that the property management agreement
does not contain a provision like § 18 of the licensing agreement. Atmosphere
argues, however, that several sections of the property management agreement
establish Atmosphere’s right to collect attorneys’ fees under that agreement as
well.
Atmosphere asserts that its attorneys’ fees are recoverable as “operating
expenses” under the property management agreement. Section 2.02 obligates
defendants to pay operating expenses. Docket 219-2 at 3 (“All amounts
requested by Atmosphere to pay Operating Expenses . . . or other agreed-upon
expenditures shall be remitted by [Shiba] to Atmosphere within five days of
Atmosphere’s request therefor.”). The phrase “operating expenses” is not itself
defined, but §§ 1.02, 1.03, 2.05, 2.06, 2.08, 2.11, 2.14, 3.01, and 3.04 all
designate certain expenditures as operating expenses. The closest of those
15
provisions to arguably cover the payment of Atmosphere’s attorneys’ fees as
operating expenses is § 2.08. That section provides:
Atmosphere is authorized to engage such legal counsel and
accounting services as are reasonably necessary for the operating
and maintenance of the Property, including without limitation the
acquisition and maintenance of Licenses for the service of alcoholic
beverages. The costs and expenses of such services shall be
charged as Operating Expenses.
Id. at 5. Atmosphere argues that the attorneys’ fees it paid to defend itself
against defendants’ claims were “reasonably necessary for the operat[ion] and
maintenance” of the hotel and are therefore operating expenses which
defendants must pay. The court disagrees. First, a natural reading of this
section does not give Atmosphere a blank check for attorneys’ fees as long as it
litigates some issue tangentially related to the parties’ rights and obligations
under the property management agreement. Rather, to be recoverable under
§ 2.08, the attorneys’ fees must be expended for a purpose that benefits the
operation of the hotel such as the legal fees necessary to acquire a license for
the sale of alcoholic beverages on the property, for ensuring compliance with
state and local real estate or taxation requirements, and so on. Second,
Atmosphere’s reading would give it the right to collect attorneys’ fees regardless
of which party prevailed. Under that view, Atmosphere would still be entitled to
its attorneys’ fees even if it were Atmosphere’s claims that were dismissed.
Finally, Atmosphere’s equation of attorneys’ fees with operating expenses could
give defendants the right to refuse payment. The amount of attorneys’ fees
currently requested by Atmosphere is approximately $101,414.00. Although it
is not clear from Atmosphere’s request what fees were paid in relation to the
16
property management agreement itself, recital H provides that any expenses
over $50,000 need to be approved by defendants. Id. at 2. For these reasons,
Atmosphere’s generalized equation of attorneys’ fees with operating expenses is
not supported by the language of the agreement.
Next, Atmosphere relies on provisions of the property management
agreement that relate to insurance coverage and indemnification. Atmosphere
argues that defendants agreed to provide indemnification in the form of
attorneys’ fees. Section 3.02 pertains to certain situations wherein defendants
agreed to indemnify Atmosphere. That section provides in part that:
Provided that Atmosphere has purchased insurance coverage
providing the duty to defend and indemnify and only the limits of
coverage available under said policies, [Shiba] shall indemnify,
defend, and hold harmless Atmosphere, its subsidiaries, and its
affiliates and their respective officers, directors, agents, and
employees, from and against any and all claims, liabilities, losses,
damages, costs, and expenses of any kind or character, including
without limitation court costs, reasonable attorneys' fees, expert
witness' fees, interest, fines, and penalties, arising from or related
to the management, operation, or maintenance of the Property[.]
Id. at 9. Although this section does discuss the payment of attorneys’ fees, the
first sentence explains that defendants’ duty to indemnify Atmosphere or pay
for such fees becomes operable only if “Atmosphere has purchased insurance
coverage providing the duty to defend and indemnify[.]” If such a policy exists,
Atmosphere has not brought it to the court’s attention.
Atmosphere also relies on § 3.04 that blends together Atmosphere’s
indemnification and operating expenses theories. That section provides:
Provided that allegations are not based on fraud or gross
negligence and that there is insurance in place covering the same,
all costs and expenses, including without limitation reasonable
17
attorneys' fees, of any legal proceedings that are instituted against
the Property, Atmosphere, or both related to the operation,
management, or maintenance of the Property, including without
limitation any employment-related claims of any nature, shall be
charged as Operating Expenses; provided, however, that
Atmosphere shall be responsible for said cost to the extent the
same is/are based on allegations of fraud or gross negligence of
any of Atmosphere's employees, corporate-office personnel in the
management, operation, or maintenance of the Property.
Id. at 9-10. This section, like § 3.02, has as a prerequisite “insurance in place
covering the same[.]” Again, there is no evidence that Atmosphere has such a
policy applicable to this litigation. And like § 2.08, the expenditure of attorneys’
fees must have been “related to the operation, management, or maintenance of
the Property[.]” While Atmosphere was arguably sued for mismanagement of
the hotel, that does not obviate the need for insurance coverage or the fact that
this provision is more naturally read to apply to events like guest slip-and-falls
or suits by employees. Regardless, the court concludes that Atmosphere is not
entitled to recover its attorneys’ fees under §§ 3.02 or 3.04. Thus, Atmosphere
has not shown that it has a right to recover its attorneys’ fees under any
provision of the property management agreement.
Although Atmosphere has not identified a right to recover its attorneys’
fees under the property management agreement, it may be able to recover at
least some of its fees under the licensing agreement. As discussed above,
Atmosphere currently seeks an award of attorneys’ fees totaling approximately
$101,414.00. Although it is not clear from the billing records submitted by
Atmosphere how those fees are split (assuming they can be) between the two
18
agreements, Atmosphere would still need to be a “prevailing party” for it to
recover any of its attorneys’ fees pursuant to the licensing agreement.
The licensing agreement does not define when a party becomes a
“prevailing party” for purposes of collecting attorneys’ fees under § 18. In
Northwest Airlines, Inc. v. Flight Trails, 3 F.3d 292 (8th Cir. 1993), the Eighth
Circuit addressed a similar scenario. There, the parties’ contract stated that
“ ‘[i]f Seller or Purchaser pursues any remedy to which it is entitled pursuant to
this Section 9.01, the prevailing party shall be entitled to all reasonable costs
and expenses incurred thereby, including attorneys’ fees.’ ” Id. at 297
(alteration in original). The Eighth Circuit applied the law of Minnesota. Id.
Thus, the law of South Dakota provides the rule of decision in this case.4
In Crisman v. Determan Chiropractic, Inc., 687 N.W.2d 507 (S.D. 2004),
the South Dakota Supreme Court addressed a contract with language similar
to § 18 of the licensing agreement. In Crisman, the parties’ agreement provided
that “[i]n the event that any legal action or arbitration is filed in connection
with this agreement, the prevailing party shall be entitled to all costs and
reasonable attorney fees in any such action relating to this agreement.” Id. at
512. With no additional definition provided by the agreement, the South
Dakota Supreme Court held that “[t]he prevailing party is the party in whose
Atmosphere argues that the definition of “prevailing party” used by the
Eighth Circuit in Rogers Grp., Inc. v. City of Fayetteville, Ark., 683 F.3d 903 (8th
Cir. 2012) controls. That case involved a claim for attorneys’ fees under a
federal statute, § 1988, which provided for the payment of attorneys’ fees to the
“prevailing party” in certain civil rights disputes. Id. at 908-09. In Rogers, the
Eighth Circuit interpreted federal law, not a private contract, and no such
statute is applicable here.
4
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favor the decision or verdict is or should be rendered and judgment entered.’ ”
Id. at 513 (quoting City of Aberdeen v. Lutgen, 273 N.W.2d 183, 185 (S.D.
1979)). “The term ‘judgment’ refers to a judgment which is final rather than
interlocutory.” Riede v. Phillips, 277 N.W.2d 720, 722 (S.D. 1979).
First, Atmosphere has not achieved prevailing party status at this time
because there has been no final adjudication of this litigation. See Noble for
Drenker v. Shaver, 583 N.W.2d 643, 649 (S.D. 1998) (“At this time there is no
prevailing party in this case. There are still issues to be decided[.]”). Second,
Atmosphere is not the prevailing party with respect to defendants’ third-party
complaint and counterclaims because the court dismissed those claims on
procedural grounds rather than on their merits. See Ridley v. Lawrence Cty.
Comm’n, 619 N.W.2d 254, 259 (S.D. 2000) (rejecting a party’s argument that it
was the prevailing party because “[t]he petitioners’ case was dismissed not on
its merits, but for failure to pursue the proper procedure.”). In fact, in the
court’s order denying defendants’ motion for reconsideration, the court plainly
stated: “The court’s earlier dismissal of defendants’ claims was not related to
any determination that the claims were meritless.” Docket 288 at 30. Because
Atmosphere is not the prevailing party with respect to those claims, it is not
entitled to attorneys’ fees.
CONCLUSION
The court concludes that Hanley’s proffered testimony is relevant,
reliable, and would be useful to the jury. Therefore, he will not be disqualified
as an expert. The court also finds that Atmosphere is not entitled to attorneys’
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fees for the court’s dismissal of defendants’ third-party complaint and
counterclaims. Thus, it is
ORDERED that defendants’ motion to disqualify Kevin Hanley as an
expert witness (Docket 214) is denied.
IT IS FURTHER ORDERED that Atmosphere’s motion for attorneys’ fees
(Docket 262) is denied.
Dated January 29, 2016.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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