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Government Guarantee Fund of Republic of Finland v. Hyatt Corp.

September 12, 1996

GOVERNMENT GUARANTEE FUND OF THE REPUBLIC OF FINLAND; SAASTOPANKKIEN KESKUS-OSAKE-PANKKI (SKOPBANK); 35 ACRES ASSOCIATES; 12 ACRES ASSOCIATES; BENEFORI OY

v.

HYATT CORPORATION,

APPELLANT



On Appeal from the District Court of the Virgin Islands Division of St. Thomas and St. John

(D.C. Civil Action No. 95-cv-00049)

BEFORE: GREENBERG and ALITO, Circuit Judges, and DEBEVOISE, District Judge *fn

GREENBERG, Circuit Judge.

Argued August 16, 1996

(Filed: September 12, 1996)

OPINION OF THE COURT

I. INTRODUCTION

Hyatt Corporation is the manager of a resort hotel on St. John in the U.S. Virgin Islands. Hyatt's management powers arise from agreements executed in March 1990 among Hyatt, Great Cruz Bay Development Co., Inc. ("Great Cruz"), the owner of the hotel, and Great Cruz's lender, Saastopankkien Keskus-Osake-Pankki ("Skopbank"). *fn1 After Skopbank foreclosed on the property in 1991, 35 Acres Associates purchased the hotel pursuant to a judicial sale. Immediately thereafter, 35 Acres purported to terminate Hyatt's management of the hotel, propelling the parties into this acrimonious litigation. The district court, on cross-motions for summary judgment, entered an order granting 35 Acres' motion for partial summary judgment on April 10, 1996, thus terminating Hyatt's presence at the hotel, and ordering the parties to "work together to effect a smooth transition in the management and operation of the Hotel." The court certified its order as a final judgment pursuant to Fed. R. Civ. P. 54(b) on May 3, 1996.

Hyatt now appeals from the district court's grant of partial summary judgment to 35 Acres. The parties agree that this appeal focuses only on issues concerning 35 Acres' power to terminate Hyatt's agency and 35 Acres' right of possession of the hotel and related property together with issues relating to the transition of the management of the hotel. *fn2 The district court had subject matter jurisdiction under either 28 U.S.C. Section(s) 1332(a)(2) (action between citizens of a state and citizens or subjects of a foreign state) or 28 U.S.C. Section(s) 1332(a)(3) (action between citizens of different states in which citizens or subjects of a foreign state are additional parties). The amount in controversy exceeds $50,000, exclusive of interest and costs. We have jurisdiction over the appeal pursuant to 28 U.S.C. 1291 and exercise plenary review over the grant of partial summary judgment and abuse of discretion review over the court's transition order.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Factual Background

In view of the procedural posture of the case we present the facts in a light most favorable to Hyatt. From June 1988 through March 1990 Skopbank, a Finnish corporation, loaned Great Cruz and St. John Virgin Grand Villas Associates approximately $120 million for the construction and operation of the property which became known as the "Hyatt Regency St. John at the Virgin Grand Resort." In 1989 representatives of Great Cruz approached Hyatt to enlist its assistance in addressing operational and financial problems of the resort. Great Cruz sought a professional, experienced, and financially able hotel company with a strong global brand identity and a proven ability in the Caribbean to attract business, so that the resort's value and profitability could be maximized.

Specifically, Great Cruz proposed that the resort bear the "Hyatt" and "Hyatt Regency" registered trademarks and trade names; that the resort join the "Hyatt" chain and participate in Hyatt's comprehensive and proprietary chain-wide programs and services (including, without limitation, Hyatt's global reservations system; worldwide marketing, public relations, and advertising services; employee training programs; and home office and regional sales office convention, business, and promotion services); and that Hyatt manage the resort. Great Cruz particularly sought the use of the prestigious "Hyatt" name and Hyatt's commitment to use its expertise to ensure the success of the resort. With the encouragement of Skopbank, Great Cruz was looking for a company to maximize the economic potential of the resort.

Hyatt was reticent to commit the "Hyatt" and "Hyatt Regency" names to the resort because of the resort's historically poor performance, its financial structure, and the fact that the quality and consistency of service, facilities, and amenities provided by Great Cruz fell far below Hyatt's quality standards. Thus, Hyatt believed that there was substantial economic and reputational risk in allowing the resort to be known as a "Hyatt Regency." During the negotiations leading to the execution of the agreements, Hyatt informed Great Cruz that the "Hyatt" and "Hyatt Regency" trademarks, service marks, and trade names were worth billions of dollars to Hyatt's owners and represented decades of time, effort, and financial risk. Hyatt's reputation as a premier resort manager was nowhere higher than in the Caribbean, where it had established itself as the predominant chain. Moreover, Hyatt informed Great Cruz that, even with Hyatt's special knowledge of resort-building and its established relationships with customers and vendors, it would take three to five years from the opening of the resort under the Hyatt name to stabilize its operations and to begin to realize the full potential of the location so that Hyatt could derive the level of financial benefits justifying its participation. Hyatt informed Great Cruz that it only would consider establishing the resort as a "Hyatt Regency" if Great Cruz agreed to conditions that would ensure Hyatt both the power to control the resort's business and an adequate share in the resort's long-term profits that Hyatt believed its contributions could generate.

Hyatt informed Great Cruz during these negotiations that it would not permit the hotel to be known as a "Hyatt" or "Hyatt Regency" or agree to the inclusion of the resort in its worldwide chain unless it also was given powers to protect its contributions to the resort. Hyatt decided that it was absolutely necessary for it to have the power to control the quality of the resort facility as well as the quality of services provided by the hotel by assuming managerial and operational responsibilities for the resort. Hyatt, Great Cruz, and Skopbank therefore agreed to structure their contracts deliberately and carefully to accomplish those objectives to protect Hyatt.

During the negotiations among Hyatt, Great Cruz, and Skopbank, Hyatt analyzed the resort's highly-leveraged financial structure and other issues associated with the resort's financial situation. With such considerations in mind, Hyatt informed Great Cruz that it was willing to consider a financial structure whereby Hyatt invested time and effort and not seek a substantial portion of its normal management fees in exchange for an interest in the enterprise affording it a return on its investment, to be taken in the form of a long-term profit participation. Thus, Hyatt explains that, in order "to protect the investments and property it would contribute as part of its undertaking to build the business of the Resort, [it] required an interest in the profits of the `Hyatt Regency St. John.'" Br. at 15. Accordingly, Hyatt demanded and Great Cruz consented to a formula under which Hyatt potentially would receive a significant return on its investment. Although, in Hyatt's assessment, the formula contained a low front-end fixed management fee, it also included a substantial back-end share of profits that the parties specifically designed to reflect Hyatt's "capital investment in the property," id., which included Hyatt's contribution of the difference between its typical market rate front-end fees and the fees applicable in this case.

Further, to protect its interests, Hyatt negotiated for and obtained a 30-year term for the management agreement between it and Great Cruz which the parties agreed could not be terminated except in strict compliance with its express termination provisions. Hyatt explains that, given its substantial "capital investments" in the hotel and the time required to reap a return on its investments, it was not willing to assume the risk that Great Cruz (or a subsequent owner) could revoke and terminate the agreement for reasons, or on grounds, other than those set forth in the contracts. Id. Hyatt informed Great Cruz that it deemed its participation in the enterprise as the clear equivalent of a cash equity investment, and Great Cruz assented to Hyatt's approach to, and view of, the transaction.

In order to protect the proprietary nature of its management methods and to avoid confusion with respect to its trademarks and trade names, Hyatt also insisted on the power to restrict the owner's right to transfer the management agreement to successors or assigns. Thus, to secure the performance of duties owed to Hyatt, section 15.2 of the management agreement gave it the right and power to block the owner's assignment to any assignee "`engaged in the management or operation . . . of a chain (that is, five [5] or more locations) of hotels or resorts.'" Br. at 18. Further, Hyatt agreed to add the resort to its worldwide hotel chain and agreed to provide its comprehensive and proprietary chain services to the resort. Many of the services that Hyatt thus committed to contribute involved confidential, proprietary, and trade secret information.

The parties eventually reached an understanding and on March 9, 1990, Great Cruz, Skopbank, and Hyatt executed a series of agreements that allow Hyatt to manage and operate the hotel. The documents included a management agreement signed by Hyatt and Great Cruz giving Hyatt complete control over the operation of the hotel for a term of 30 years, essentially limiting the owner's right to terminate the agreement to poor performance by Hyatt. (Management Agreement at Section(s) 2, 4.5; app. 1809, 1836). In return for managing the hotel, Hyatt would receive a base fee of 1.5 percent of gross revenue, as well as an incentive fee structured on positive cash flow. Id. at 1829. A letter agreement signed by Great Cruz and Hyatt directed Hyatt to pay Skopbank any sums due to Great Cruz under the management agreement. Id. at 113.

Hyatt sets forth in its brief that in order "to secure its property interests and investments in the business it was to create as well as to secure the performance of certain duties owed to [it]," br. at 21-22, Great Cruz warranted and guaranteed Hyatt's continuous right to manage the resort for the duration of the term of the management agreement. Specifically, Hyatt notes that section 7.5 of the agreement provides that "this Agreement shall not be subject to forfeiture or termination except in accordance with the provisions hereof," id. at 22; see app. at 1795, and that "Hyatt shall be entitled to operate the Hotel for the Term, and Owner shall, at no expense to Hyatt, undertake and prosecute all appropriate actions, judicial or otherwise, required to assure such right of operation to Hyatt." Br. at 22; see app. at 1860-61.

In addition, a subordination, non-disturbance, and attornment agreement set forth the rights of the parties should Skopbank foreclose its mortgage to Great Cruz. This agreement included a warrant by Skopbank that the management agreement would remain undisturbed by any foreclosure or default and would continue in full force and effect as long as Hyatt was not in default. (Subordination Agreement at Section(s) 2, 3; app. at 548).

In 1991, Skopbank filed a foreclosure action in the District Court of the Virgin Islands (Civ. No. 91-355) as a result of Great Cruz's default on the mortgages. In 1992, during the pendency of the foreclosure suit, the Government Guarantee Fund of the Republic of Finland ("GGF") obtained a controlling interest in Skopbank as part of the Finnish government's bailout of the bank.

On February 21, 1995, the district court entered a consent judgment and put the hotel up for judicial sale. On March 20, 1995, 35 Acres Associates, a Virgin Islands general partnership consisting of two Finnish corporations, purchased the hotel. On March 21, 1995, counsel for 35 Acres wrote to Hyatt, stating that "GGF, Skopbank and 35 Acres Associates consider the Management Agreement between Hyatt Corporation ('Hyatt') and Great Cruz Bay Development Company, Inc. as void, terminated and/or expired." Br. at 23; app. at 1401-02. On June 8, 1995, 35 Acres wrote again, advising Hyatt that it was in wrongful possession, and demanding that it surrender possession of the hotel:

The Hotel belongs to 35 Acres, not Hyatt. Hyatt is trespassing on the property. 35 Acres again demands that Hyatt immediately surrender possession of the Hotel and all associated real and personal property and accounts and cooperate in an orderly transfer to 35 Acres. We will have a transition team available on short notice. App. at 1407.

Hyatt, however, did not surrender possession of the hotel.

B. Procedural History

GGF and Skopbank filed suit against Hyatt (Civil No. 1995-49) on March 16, 1995, seeking a declaratory judgment finding Hyatt in breach of the management agreements and alleging various claims in tort and contract. GGF and Skopbank, of course, sought, inter alia, a judgment declaring the management agreement terminated and thus giving it possession of the hotel. On November 8, 1995, GGF and Skopbank filed an amended complaint adding additional entities as plaintiffs, including 35 Acres. On April 25, 1995, Hyatt sued 35 Acres (Civil No. 1995-68), and thereafter filed two amended complaints. The second amended complaint, dated June 21, 1995, sought a judgment declaring the rights of the various parties under the management agreements, recovery for civil conspiracy, and punitive, compensatory, and consequential damages. On June 21, 1995, the district court consolidated the two cases for trial.

At a hearing on November 17, 1995, the court took under advisement 35 Acres' motion to dismiss the second amended complaint in the Hyatt suit (Civil No. 1995-68) and denied without prejudice Hyatt's motion to strike and dismiss the GGF parties' *fn3 first amended complaint in the GGF suit (Civil No. 1995-49). See Government Guarantee Fund v. Hyatt Corp., 166 F.R.D. 321, 323 (D.V.I. 1996). Hyatt renewed its motion to strike and dismiss on December 22, 1995.

On January 8, 1996, the district court granted 35 Acres' motion to dismiss the second amended complaint in the Hyatt suit. See Government Guarantee Fund v. Hyatt Corp., 1996 WL 165008, at *6 (D.V.I. Jan. 8, 1996). On January 3, 1996, 35 Acres moved for partial summary judgment against Hyatt in the GGF suit, arguing that it was entitled to possession of the hotel as a matter of law. On January 23, 1996, Hyatt moved to amend the court's order of January 8, 1996, to permit the filing of a third amended complaint in its suit.

On March 6, 1996, the district court held a hearing on the consolidated cases. Ruling from the bench, the court granted 35 Acres' motion for partial summary judgment, in effect granting it possession of the hotel. The court directed the parties to work together on transferring management of the hotel. App. at 2157. The court denied without prejudice Hyatt's motion to dismiss the first amended complaint in the GGF suit (Civil No. 1995-49). In the Hyatt suit (Civil No. 1995-68) the court denied Hyatt's motion to amend the court's order of January 8, 1996, and its motion to be permitted to file a third amended complaint. The court issued a written order implementing its March 6, 1996 rulings on April 10, 1996. The order stated that "[b]oth parties shall work together to effect a smooth transition in the management and operation of the Hotel," app. at 2199, and allowed Hyatt 10 days from the entry of the order to answer the first amended complaint in the GGF suit (Civil No. 1995-49) and assert any defenses and compulsory counterclaims thereto. Id. at 2199-2200. The court further ordered the Hyatt case (Civil No. 1995-68) closed and that all other pleadings filed thereafter should contain only the caption of the GGF suit (Civil No. 1995-49). Id. at 2200.

The court issued an opinion and order on April 10, 1996, explaining its rulings from the bench on March 6, 1996. See Government Guarantee Fund v. Hyatt Corp., 166 F.R.D. 321. In the opinion the district court noted first that "35 Acres seeks a determination that its agency relationship with Hyatt has been terminated as a matter of law, and Hyatt must leave the premises," id., at 326, and then concluded that:

Applying the controlling law to the undisputed facts of this case establishes that the Management Agreement created a revocable agency that ended once 35 Acres gave notice of its termination. As terminated agent, Hyatt must leave the premises and surrender control of the Hotel to 35 Acres, its rightful owner. Id., at 327.

Hyatt's challenge to this conclusion is at the heart of its appeal.

On April 12, 1996, 35 Acres filed a motion for entry of an order seeking the transition of management provided for in the district court's grant of partial summary judgment. On May 3, 1996, the district court entered such an order and certified the order of April 10, 1996, and the order of May 3, 1996, effectuating the order of April 10, 1996, as final judgments pursuant to Fed. R. Civ. P. 54(b). On May 6, 1996, Hyatt filed a notice of appeal from the district court's May 3, 1996 Rule 54(b) order which included an appeal from the April 10, 1996 order. Hyatt also filed an emergency motion in the district court to stay enforcement of the judgment without bond or, in the alternative, for a hearing to set the amount of the supersedeas bond pursuant to Fed. R. Civ. P. 62.

Following oral argument on May 9, 1996, the district court denied Hyatt's emergency motion for a stay. See Government Guarantee Fund v. Hyatt Corp., 1996 WL 308865, at *1 (D.V.I. May 15, 1996). The court thereafter entered a written order denying the motion and providing that Hyatt must comply with the order of May 3, 1996, by May 14, 1996.

On May 13, 1996, Hyatt filed an emergency motion in this court to stay enforcement of the district court's judgment pending appeal. A single judge of this court granted the motion on a temporary basis until a panel could consider the matter. On May 20, 1996, we granted Hyatt's motion to stay enforcement of the judgment pending appeal and accelerated the parties' briefing schedule. We also directed that following completion of the briefing the case be listed before the earliest available panel. Finally, we remanded the case to the district court to fix the amount of the supersedeas bond pursuant to Fed. R. App. P. 8(a), while retaining jurisdiction over the appeal.

On May 29, 1996, the district court held a hearing on the remand and required Hyatt to post two bonds, one in the amount of $2 million (to be posted by June 4, 1996), and the other in the amount of $11 million (to be posted by July 30, 1996), for a total bond obligation of $13 million. The district court also held that this court's stay "should not allow Hyatt to reopen the Hotel over the objections of 35 Acres Associates." On June 3, 1996, Hyatt filed a motion in this court to set aside or modify the district court's order setting the amount of the supersedeas bonds. On July 3, 1996, we granted Hyatt's motion, but only "to the extent" that we vacated "so much of the order of May 31, 1996, which precluded Hyatt from reopening the hotel over the objection of 35 Acres Associates." We denied the motion to modify the order with respect to the bonds. We understand that Hyatt has posted the bonds. We, however, are uncertain as to whether the hotel is open.

The parties agree that this appeal focuses only on 35 Acres' power to terminate the agency and its right to possession of the hotel and related property, as well as transition matters, irrespective of the ultimate result of the remaining litigation. Thus, we do not consider whether 35 Acres wrongfully terminated Hyatt's management rights. We now address the merits of Hyatt's appeal.

III. DISCUSSION

A. Burdens of ...


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