HotelsAB Green, LLC v. Reignwood Europe Holdings SARL

MEMORANDUM OF LAW in Support re: 22 MOTION to Dismiss Complaint. . Document

S.D.N.Y.January 30, 2018

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x HOTELSAB GREEN, LLC, Plaintiff, -against- REIGNWOOD EUROPE HOLDINGS SARL, Defendant. : : : : : : : : : : : : Civil Action No. 1:17-cv-08776-JGK - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT REIGNWOOD EUROPE HOLDINGS SARL’S MOTION TO DISMISS DLA PIPER LLP (US) Christopher M. Strongosky Robert C. Santoro 1251 Avenue of the Americas New York, New York 10020-1104 (212) 335-4500 christopher.strongosky@dlapiper.com robert.santoro@dlapiper.com Of Counsel: Matthew Klepper (admitted pro hac vice) Eric Roberts (admitted pro hac vice) 444 West Lake Street, Suite 900 Chicago, Illinois 60606-0089 (312) 368-4000 matthew.klepper@dlapiper.com eric.roberts@dlapiper.com Attorneys for Reignwood Europe Holdings SARL Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 1 of 25 TABLE OF CONTENTS Page -i- I. INTRODUCTION ............................................................................................................. 1 II. SUMMARY OF ALLEGATIONS .................................................................................... 2 III. ARGUMENT ..................................................................................................................... 5 A. Standard for motion to dismiss under Rule 12(b)(6) ............................................. 5 B. HotelsAB’s alleged damages were not caused by defendant’s conduct ................ 6 C. HotelsAB does not (and cannot) allege that it complied with its fundamental representation and warranty under the LOI ...................................... 8 D. The damages sought by HotelsAB cannot be recovered for the alleged breaches................................................................................................................ 10 1. A breach of the LOI, an “agreement to agree,” cannot give rise to a claim for a “loss of business.”.................................................................. 10 2. As a matter of law, the alleged “loss of business” based on the new private membership venture planned for the repositioned Property is too speculative to support a breach of contract claim .......................... 15 3. HotelsAB cannot recover from Reignwood Europe the $5,000,000 deposit that AB Green retained when it terminated the PSA................... 17 IV. CONCLUSION ................................................................................................................ 18 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 2 of 25 TABLE OF AUTHORITIES Page(s) -i- 180 Water St. Assocs., L.P. v. Lehman Bros. Holdings, 776 N.Y.S.2d 278 (1st Dep’t 2004) ...................................................................................12 24/7 Records, Inc. v. Sony Music Entm’t, Inc., 566 F. Supp. 2d 305 (S.D.N.Y. Jul 18, 2008) ....................................................................18 Am. Lecithin Co. v. Rebmann, 2017 WL 4402535 (S.D.N.Y. Sept. 30, 2017) .............................................................5, 6, 9 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .............................................................................................................5 Bear Stearns Inv. Prod., Inc. v. Hitachi Auto. Prod. (USA), Inc., 401 B.R. 598 (S.D.N.Y. Mar. 4, 2009) ..............................................................................15 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................................................................5 Betty, Inc. v. PepsiCo, Inc., 2017 WL 4311037 (S.D.N.Y. Sept. 26, 2017) .....................................................................5 Carruthers v. Flaum, 365 F. Supp. 2d 448 (S.D.N.Y. Mar. 31, 2005) .................................................................17 Cody v. Darden Restaurants, 2012 WL 6863922 (E.D.N.Y. Oct. 11, 2012) ......................................................................7 Cody v. Darden Restaurants, 2013 WL 170367 (E.D.N.Y. Jan. 11, 2013) ........................................................................7 Cody v. Darden Restaurants, 561 F. App’x 25 (2d Cir. 2014) ...........................................................................................7 Collins & Aikman Prod. Co. v. Bldg. Sys., Inc., 58 F.3d 16 (2d Cir. 1995).....................................................................................................7 Comfort Inn Oceanside v. Hertz Corp., 2011 WL 5238658 (E.D.N.Y. Nov. 1, 2011) .......................................................................9 CreditSights, Inc. v. Ciassullo, 2008 WL 4185737 (S.D.N.Y. Sept. 5, 2008) .......................................................................9 Diesel Props SRL v. Greystone Bus. Credit II LLC, 2009 WL 2514033 (S.D.N.Y. Aug. 18, 2009) .....................................................................6 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 3 of 25 TABLE OF AUTHORITIES Page(s) -ii- Diesel Props SRL v. Greystone Bus. Credit II LLC, 631 F.3d 42 (2d Cir. 2011)...................................................................................................6 El-Nahal v. FA Mgmt., Inc., 5 N.Y.S.3d 201 (2d Dep’t 2015) ..........................................................................................6 Gas Nat., Inc. v. Iberdrola, S.A., 33 F. Supp. 3d 373 (S.D.N.Y. Jul 17, 2014) ......................................................................12 Goodstein Const. Corp. v. City of New York, 80 N.Y.2d 366 (1992) ..................................................................................................10, 11 Grayson v. Ressler & Ressler, 271 F. Supp. 3d 501 (S.D.N.Y. Sept. 18, 2017) ..................................................................2 Harte v. Ocwen Fin. Corp., 2016 WL 3647687 (E.D.N.Y. July 1, 2016) ........................................................................8 Hudson Specialty Ins. Co. v. New Jersey Transit Corp., 2015 WL 3542548 (S.D.N.Y. June 5, 2015) ...................................................................7, 8 ICBC (London) PLC v. Blacksands Pac. Grp., Inc., 2015 WL 5710947 (S.D.N.Y. Sept. 29, 2015) ...................................................................12 ICBC (London) PLC v. Blacksands Pac. Grp., Inc., 662 F. App’x 19 (2d Cir. 2016) .........................................................................................12 Jasper & Black, LLC v. Carolina Pad Co., LLC, 2012 WL 413869 (S.D.N.Y. Feb. 9, 2012) ..........................................................................8 John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001)...............................................................................................7, 8 Karetsos v. Cheung, 670 F. Supp. 111 (S.D.N.Y. Sept. 28, 1987) .....................................................................16 Kenford Co. v. Erie Cty., 67 N.Y.2d 257 (1986) ........................................................................................................16 L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419 (2d Cir. 2011)...........................................................................................6, 10 Learning Annex Holdings, LLC v. Whitney Educ. Grp., Inc., 765 F. Supp. 2d 403 (S.D.N.Y. Jun. 26, 2011) ..................................................................14 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 4 of 25 TABLE OF AUTHORITIES Page(s) -iii- MacArthur Const. Corp. v. Coleman, 457 N.Y.S.2d 530 (1st Dep’t 1983) ...................................................................................16 Montero v. City of Yonkers, 224 F. Supp. 3d 257 (S.D.N.Y. 2016)..................................................................................2 Nat’l Mkt. Share, Inc. v. Sterling Nat’l Bank, 392 F.3d 520 (2d Cir. 2004).................................................................................................6 Pot Luck, LLC v. Freeman, 2010 WL 908475 (S.D.N.Y. Mar. 8, 2010) .......................................................................17 Rao v. Verde, 635 N.Y.S.2d 660 (2d Dep’t 1995) ....................................................................................12 R.H. Damon & Co., Inc. v. Softkey Software Prods., Inc., 811 F. Supp. 986 (S.D.N.Y. Feb. 4, 1993) ..........................................................................9 Robin Bay Assocs., LLC v. Merrill Lynch & Co., 2008 WL 2275902 (S.D.N.Y. June 3, 2008) ...............................................................10, 17 Safka Holdings LLC v. iPlay, Inc., 42 F. Supp. 3d 488 (S.D.N.Y. May 20, 2013) ...................................................................10 Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39 (1997) ............................................................................................................7 Spencer Trask Software & Info. Servs. LLC v. RPost Int’l Ltd., 383 F. Supp. 2d 428 (S.D.N.Y. 2003)..........................................................................12, 14 Transformacon, Inc. v. Vista Equity Partners, Inc., 2015 WL 4461789 (S.D.N.Y. July 21, 2015) ....................................................................10 United States v. U.S. Currency in the Sum of $660,200.00, 423 F. Supp. 2d 14 (E.D.N.Y. Apr. 6, 2006) .....................................................................14 United States v. U.S. Currency in the Sum of $660,200.00, 242 F. App’x 750 (2d Cir. 2007) .......................................................................................14 Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008)...............................................................................................11 We Shall Overcome Found. v. Richmond Org. Inc., 221 F. Supp. 3d 396 (S.D.N.Y. Nov. 21, 2016) ...................................................................6 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 5 of 25 TABLE OF AUTHORITIES Page(s) -iv- Worldwide Servs., Ltd. v. Bombardier Aerospace Corp., 2015 WL 5671724 (S.D.N.Y. Sept. 22, 2015) .................................................11, 12, 14, 15 Yenrab, Inc. v. 794 Linden Realty, LLC, 892 N.Y.S.2d 105 (2d Dep’t 2009) ....................................................................................10 Zink v. Mark Goodson Prods., Inc., 689 N.Y.S.2d 87 (1st Dep’t 1999) .....................................................................................16 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 6 of 25 I. INTRODUCTION This is a case between prospective business partners that follows a familiar pattern. Two parties (plaintiff HotelsAB Green, LLC, or “HotelsAB,” and defendant Reignwood Europe Holdings SARL, or “Reignwood Europe”) agree to go into business together but never quite do. HotelsAB blames Reignwood Europe for getting cold feet, and has filed this suit seeking millions of dollars in hypothetical profits that the venture supposedly would have earned if only Reignwood Europe—as the investor—had put up the funds. The goal was to negotiate and establish a joint venture that would take ownership of, renovate, reposition, and then operate the property formerly known as the Standard High Line Hotel (the “Property”) in New York City, including by implementing a brand new “private club” concept at the Property. (¶¶ 1–3. 1 ) HotelsAB and Reignwood Europe outlined this goal to pursue the joint venture in a September 16, 2016 Letter Agreement (the “LOI,” Ex. B to the Complaint). The LOI does not, itself, constitute a definitive joint venture agreement. That was to come later, but it never did. HotelsAB asserts that the failure to reach a definitive joint venture agreement with Reignwood Europe “made it impossible to consummate the [Property purchase].” (¶ 58.) True to form, HotelsAB wants Reignwood Europe to pay the millions of dollars HotelsAB assumes it would have earned had the joint venture been a success. Five flaws plague HotelsAB’s claim for breach of the LOI. First, the reason that HotelsAB never secured a definitive joint venture agreement with Reignwood Europe was because HotelsAB failed to pursue the binding arbitration process set forth in the LOI. HotelsAB is, therefore, the proximate and intervening cause of its own failure to consummate the purchase of the Property. Second, Reignwood Europe entered the LOI because HotelsAB represented and 1 All citations to a paragraph number (“¶”) are to the Complaint unless otherwise stated. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 7 of 25 - 2 - warranted that it would be able to manage the Property. HotelsAB’s Complaint demonstrates that this representation to Reignwood Europe was not true. Third, the LOI was a preliminary “agreement to agree” and, as a matter of law, such agreements cannot serve as a basis to claim damages to a business that never came into being. Fourth, the new private club venture that was at the core of the LOI was little more than a concept. So even if the LOI could give rise to a claim for lost profits (it cannot), those lost profits are entirely too speculative in this case. And fifth, HotelsAB’s remaining damages (a loss of its own investment) arise from commitments that HotelsAB made before Reignwood Europe ever signed the LOI. Such losses cannot be recovered from Reignwood Europe. As set forth more fully below, each of these flaws requires the Court to dismiss the Complaint in whole or in part. II. SUMMARY OF ALLEGATIONS2 In August 2016, HotelsAB and its owner André Balazs had in place an agreement to buy the Property from AB Green Gansevoort, LLC (“AB Green”): the August 16, 2016 Purchase and Sale Agreement (“PSA,” Ex. A to the Complaint). (¶ 12.) Mr. Balazs stood on both sides of the PSA as an owner of or investor in both HotelsAB and AB Green. (See PSA § 31.) The goal of transferring the Property to HotelsAB was to achieve Mr. Balazs’s “vision” of “re-positioning the [Property] to include a private membership club.” (¶¶ 3, 14.) Within two business days after 2 As required, this recitation accepts the well-pleaded factual allegations of the Complaint. See Montero v. City of Yonkers, 224 F. Supp. 3d 257, 264 (S.D.N.Y. Dec. 20, 2016). It also draws on “documents that are referenced in the complaint,” e.g., the LOI. See Grayson v. Ressler & Ressler, 271 F. Supp. 3d 501, 501, 15-cv-8740, 2017 WL 4180018 (S.D.N.Y. Sept. 18, 2017). Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 8 of 25 - 3 - entering the PSA (i.e., by August 19), HotelsAB wired AB Green a nonrefundable $5,000,000 deposit. (PSA § 3(a)(i).) This initial deposit would be forfeited unless HotelsAB submitted an additional $10,000,000 deposit by September 29, 2016, (id. § 3(a)(ii)), and subsequently closed on the purchase of the Property. HotelsAB needed cash and therefore courted Reignwood Europe “to raise the capital required to close on the acquisition of the Property.” (¶ 15.) On September 16, 2016, HotelsAB, Mr. Balazs, and Reignwood Europe outlined in the LOI an investment by Reignwood Europe (or an affiliate) “in connection with [HotelsAB’s] acquisition of the Property.” (¶ 18 (quoting LOI).) The LOI sketched out how the parties would form a joint venture, and Reignwood Europe would make a substantial capital infusion of 90% of that joint venture’s equity. (¶ 18; LOI § 6.) This investment was expressly conditioned on HotelsAB and Mr. Balazs managing the Property. (LOI § 5; id. at pp. 9–10.) HotelsAB represented and warranted that it was “not barred from managing or operating the Property pursuant to the noncompete agreement currently in effect between” Mr. Balazs and the Property’s then-current management company. (Id. at p. 10.) HotelsAB implicitly acknowledges that this representation was problematic (see ¶ 65), yet makes no effort to address how HotelsAB or Mr. Balazs could follow through and satisfy this fundamental condition. The LOI set out a process for forming a joint venture into which each of Reignwood Europe and Mr. Balazs would contribute equity, and to which HotelsAB would assign its rights and obligations under the PSA. (LOI §§ 2, 7, 8.) A “definitive joint venture agreement” was “critical to enabling the closing to occur.” (¶ 46.) Without a joint venture agreement, it would be “impossible to consummate the acquisition” of the Property. (¶ 58.) The parties established October 13, 2016, as the target date for executing the joint venture agreement. (LOI § 7.) At any time after October 13, either party had “the right to submit . . . disagreement over the form of the Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 9 of 25 - 4 - [joint venture agreement] to arbitration.” (Id. § 9.) Arbitration was the required process to settle disputes and determine the final terms of the agreement, 3 after which the arbitrator was specifically empowered to “order the parties to enter into the JVA reflecting the same.” (Id.) The dispute resolution provision also enabled a New York court to order specific performance of the arbitration award. (Id.) The parties did not execute a joint venture agreement by October 13, 2016, but HotelsAB also did not initiate arbitration. After a short delay, Reignwood Europe circulated the initial draft of the joint venture agreement in the second week of November 2016. (¶ 49.) HotelsAB objected that the draft contained “material departure[s]” from the “intended terms expressly agreed upon by the parties in the [LOI].” (¶ 50.) After the parties’ attempts to iron out disagreements failed, HotelsAB “instituted the stipulated arbitration . . . on or about December 9, 2016.” (¶ 54.) HotelsAB says that Reignwood Europe refused to cooperate with the arbitration. (¶ 56.) Yet rather than pursue the arbitration, obtain a default order against Reignwood Europe, and obtain an order of specific performance from the New York courts (all as called for by the LOI), HotelsAB allowed the arbitration to lapse (¶ 57). HotelsAB charges Reignwood Europe with the failure to form the joint venture because Reignwood Europe failed to “cooperate in good faith to negotiate and . . . execute and deliver a definite joint venture agreement.” (¶¶ 20, 47, 58.) But it was HotelsAB who failed to pursue the agreed-upon arbitration and award confirmation process that would resolve any differences and allow the parties to enter into a definite joint venture agreement. 3 Section 16 of the LOI specifically provided that “any action or proceeding arising out of this letter agreement (other than as required above to be arbitrated) shall [be resolved in the state or federal courts sitting in New York].” (LOI § 16 (emphasis added).) Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 10 of 25 - 5 - There was never any joint venture. HotelsAB therefore remained at all times obligated to fulfill the obligations of the PSA. 4 Among these obligations, HotelsAB promised to assume a mortgage and other loans encumbering the Property, as well as to assume the existing liquor license or to obtain a new one. (¶ 13.) HotelsAB failed to satisfy these conditions to closing and, on April 10, 2017, AB Green terminated the PSA. (¶ 67.) HotelsAB charges Reignwood Europe with the fault for HotelsAB’s inability to secure a liquor license or assume the loans. (¶¶ 5–6.) All told, HotelsAB seeks to hold Reignwood Europe responsible for AB Green’s termination of the PSA and retention of the $5,000,000 deposit that preceded the LOI with Reignwood Europe. (¶ 6.) HotelsAB also supposedly lost the “lucrative business opportunity to proceed with the acquisition of the [Property] and private membership club project.” (Id.) III. ARGUMENT A. Standard for motion to dismiss under Rule 12(b)(6). At the pleading stage, HotelsAB’s Complaint “‘must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.’” Am. Lecithin Co. v. Rebmann, No. 12-cv-929, 2017 WL 4402535, at *12 (S.D.N.Y. Sept. 30, 2017) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “This standard demands more than a sheer possibility that a defendant has acted unlawfully.” Id. (quotation omitted). Rather, the well- pleaded factual allegations (and not just labels and conclusions) “‘must be enough to raise a right to relief above the speculative level;’” if the plaintiff fails to nudge the “‘claims across the line from conceivable to plausible, the complaint must be dismissed.’” Betty, Inc. v. PepsiCo, Inc., No. 16-cv-4215, 2017 WL 4311037, at *5 (S.D.N.Y. Sept. 26, 2017) (quoting Bell Atl. Corp. v. 4 The anticipation had been that HotelsAB would assign its rights and obligations under the PSA to the joint venture. (LOI § 2.) Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 11 of 25 - 6 - Twombly, 550 U.S. 544, 555, 570 (2007)). To measure the Complaint, the Court may consider “‘the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiff’s inferences unreasonable.’” Am. Lecithin Co., 2017 WL 4402535, at *12 (quoting L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir. 2011)). The Complaint asserts a single count—breach of contract. (¶¶ 69–73.) “The essential elements of a cause of action to recover damages for breach of contract are [1] the existence of a contract, [2] the plaintiff’s performance pursuant to the contract, [3] the defendant’s breach of its contractual obligations, and [4] damages resulting from the breach.” El-Nahal v. FA Mgmt., Inc., 5 N.Y.S.3d 201, 201 (2d Dep’t 2015); see also We Shall Overcome Found. v. Richmond Org. Inc., 221 F. Supp. 3d 396, 412 (S.D.N.Y. Nov. 21, 2016). This motion focuses on HotelsAB’s inability to allege the second and fourth elements of a claim for breach of contract. B. HotelsAB’s alleged damages were not caused by defendant’s conduct. “Causation is an essential element of damages in a breach of contract action; and, as in a tort, a plaintiff must prove that a defendant’s breach directly and proximately caused his or her damages.” Nat’l Mkt. Share, Inc. v. Sterling Nat’l Bank, 392 F.3d 520, 525 (2d Cir. 2004) (holding damages properly denied where the plaintiff was an intervening cause of the damages); Diesel Props SRL v. Greystone Bus. Credit II LLC, No. 07-cv-9580, 2009 WL 2514033, at *11– 12 (S.D.N.Y. Aug. 18, 2009) (same), aff’d in relevant part, 631 F.3d 42, 53 (2d Cir. 2011). HotelsAB admits in the Complaint that it (and not Reignwood Europe) is the intervening, “but- for” cause of the failure to consummate the joint venture. That is, even if it is accepted as true that Reignwood Europe failed to negotiate and execute the terms of a joint venture agreement in good faith, HotelsAB failed to avail itself of the compulsory arbitration procedure set forth in the LOI to arrive at an enforceable definitive joint venture agreement. (See LOI § 9; see also ¶ 57.) Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 12 of 25 - 7 - HotelsAB’s failure to complete the arbitration process defeats its current claim against Reignwood Europe. Without question, public policy strongly favors arbitration as a method of dispute resolution. See, e.g., Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 49 (1997); Collins & Aikman Prod. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 19 (2d Cir. 1995). Arbitration conserves “the time and resources of the courts and the contracting parties.” Smith Barney, 91 N.Y.2d at 49. Federal policy so strongly favors arbitration that “‘any doubts concerning the scope of arbitrable issues’” must be resolved “in favor of arbitration.” Hudson Specialty Ins. Co. v. New Jersey Transit Corp., No. 15-cv-89, 2015 WL 3542548, at *3 (S.D.N.Y. June 5, 2015) (quoting Collins & Aikman, 58 F.3d at 19); see also John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 59 (2d Cir. 2001) (ambiguities interpreted in favor of arbitration). In fact, courts have compelled arbitration pursuant to a contract provision even when parties had failed to follow conditions precedent in an arbitration clause. See, e.g., Cody v. Darden Restaurants, No. 12-cv- 0484, 2012 WL 6863922, at *3 (E.D.N.Y. Oct. 11, 2012) (compelling arbitration “regardless of whether [plaintiff] or the defendants pursued the prerequisite steps that would normally lead up to arbitration under the terms of the [agreement]), report and recommendation adopted, 2013 WL 170367, and aff’d, 561 F. App’x 25 (2d Cir. 2014). HotelsAB cannot deny the obvious application of the arbitration provision to this dispute after itself initiating an arbitration for the purpose of getting to a final joint venture agreement. The LOI’s arbitration clause empowered the arbitrator to “order the parties to enter into” a final agreement and enabled the prevailing party to enter this order “as judgment in any court in New York County” even over the objections or non-participation of the counterparty. (LOI § 9.) In other words, the arbitration would have resolved the exact problem that HotelsAB alleges happened here. Had HotelsAB pursued that arbitration and obtained the definitive joint venture Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 13 of 25 - 8 - agreement it needed to consummate the transaction, it would have obviated any litigation (i.e., this litigation) concerning Reignwood Europe’s alleged failure to negotiate in good faith as to the joint venture agreement. But as HotelsAB admits, it abandoned the arbitration process. (¶ 57.) HotelsAB, therefore, is at least the intervening cause (if not the sole cause) for any damages resulting from the lack of a joint venture agreement, which is the crux of this dispute. As a post hoc justification for failing to see the process through and obtain a definitive joint venture agreement, HotelsAB suggests that the arbitration was “moot.” But, as set forth above and in Section 9 of the LOI, HotelsAB had the ability to compel compliance. It chose not to, and that failure is on HotelsAB not Reignwood Europe. The events flowing from the alleged failure to negotiate in good faith (i.e., it became “impossible to consummate the acquisition” (¶ 58)) actually flow instead from the voluntary abandonment of the arbitration process. HotelsAB’s breach-of-contract claim against Reignwood Europe fails in its entirety for this reason. See Hudson Specialty Ins. Co., 2015 WL 3542548, at *3; John Hancock Life Ins. Co., 254 F.3d at 59. C. HotelsAB does not (and cannot) allege that it complied with its fundamental representation and warranty under the LOI. A plaintiff’s failure to plead “due performance” results in the dismissal of a breach-of- contract claim. See Jasper & Black, LLC v. Carolina Pad Co., LLC, No. 10-cv-3562, 2012 WL 413869, at *9 (S.D.N.Y. Feb. 9, 2012). While HotelsAB alleges in a conclusory way that it “complied with its obligations under the Letter Agreement” (¶ 70), this is not enough. The Complaint must set forth “all facts that [the plaintiff] believes are necessary, under Iqbal, to state a plausible claim for relief.” Id. As in Jasper & Black, HotelsAB “has failed to adequately allege its own due performance of the [LOI]” and “its breach of contract claim as currently asserted . . . fails.” Id.; see also Harte v. Ocwen Fin. Corp., 13-cv-5410, 2016 WL 3647687, at *5 (E.D.N.Y. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 14 of 25 - 9 - July 1, 2016) (dismissing breach of contract claim despite “general availments” of performance because documents referenced in the pleading contradicted the plaintiff’s allegation of due performance); CreditSights, Inc. v. Ciassullo, No. 05-cv-9345, 2008 WL 4185737, at *11 (S.D.N.Y. Sept. 5, 2008) (dismissing claim after finding that the terms of the alleged contract prohibited certain of the plaintiff’s actions evidenced by other documents considered on the motion to dismiss); R.H. Damon & Co., Inc. v. Softkey Software Prods., Inc., 811 F. Supp. 986, 991 (S.D.N.Y. Feb. 4, 1993) (dismissing claim where the plaintiff alleged certain facts supporting performance, but failed to address other performance owed). More specifically, HotelsAB has not alleged that it and Mr. Balazs could manage the Property. HotelsAB’s ability and willingness to manage the Property was a key condition for Reignwood Europe’s investment. (LOI pp. 9–10 (contemplating a 25-year management agreement on behalf of HotelsAB that was “non-terminable” other than, in relevant part, “upon a change of control of HotelsAB or the death or permanent disability of Andre Balazs”).) Reignwood Europe therefore extracted an express representation and warranty that HotelsAB was “not barred from managing or operating the [Property] pursuant to the noncompete agreement currently in effect between AB” and the existing manager of the Property. (Id. p. 10.) HotelsAB flags in the Complaint that concerns with this core representation caused HotelsAB to be in breach of the LOI. (¶ 65.) Based on the “full factual picture” presented by the Complaint, Am. Lecithin Co., 2017 WL 4402535, at *12, and not just its self-serving and conclusory allegations, HotelsAB has failed to plead a plausible right to relief, rather than just a conceivable one. If HotelsAB cannot allege that it and Mr. Balazs could fulfill their promise to manage the Property after acquisition then this case can and should be dismissed now with prejudice. See Comfort Inn Oceanside v. Hertz Corp., No. 11-cv-1534, 2011 WL 5238658, at *5 (E.D.N.Y. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 15 of 25 - 10 - Nov. 1, 2011) (a plaintiff that “does not allege its own performance because it cannot do so” cannot state a viable claim.) (quotation omitted). D. The damages sought by HotelsAB cannot be recovered for the alleged breaches. The Complaint requests several forms of damages, ranging from recovery of HotelsAB’s down payment on the Property up to and including HotelsAB’s theoretical lost profits had the parties’ joint venture been successful. (¶¶ 72–73.) Although the Complaint should be dismissed in its entirety for the reasons stated above, there are independent reasons to dismiss or strike specific items of damages requested in the Complaint. See Safka Holdings LLC v. iPlay, Inc., 42 F. Supp. 3d 488, 493 (S.D.N.Y. May 20, 2013) (striking claim for lost profits, and other damages theories, despite the prima facie adequacy of the remaining breach-of-contract allegations) (citing Yenrab, Inc. v. 794 Linden Realty, LLC, 892 N.Y.S.2d 105 (2d Dep’t 2009)); see also Transformacon, Inc. v. Vista Equity Partners, Inc., No. 15-cv-3371, 2015 WL 4461789, at *8 (S.D.N.Y. July 21, 2015) (granting motion to dismiss only as to claim for lost profits); Robin Bay Assocs., LLC v. Merrill Lynch & Co., No. 07-cv-376, 2008 WL 2275902, at *8 (S.D.N.Y. June 3, 2008) (granting Rule 12 motion “with regard to Plaintiff’s claim for lost profits”). 1. A breach of the LOI, an “agreement to agree,” cannot give rise to a claim for a “loss of business.” HotelsAB seeks damages that include, in part, the “lost . . . lucrative business opportunity” to achieve Mr. Balazs’ vision of repositioning the Property with a “private membership club project.” (¶¶ 6, 72.) The loss of a business opportunity—by which HotelsAB can only mean the profits from that business—is not a basis for damages here because the LOI is a prototypical “agreement to agree.” Lost profits damages are not available for breach of an agreement to agree. Goodstein Const. Corp. v. City of New York, 80 N.Y.2d 366, 373 (1992) (reversing Appellate Division and dismissing lost profits claim); L-7 Designs, 647 F.3d at 430 Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 16 of 25 - 11 - (noting that lost profit damages would not be available on remand). This is because the hallmark of an agreement to agree is the obligation to negotiate the terms of a further agreement in good faith, and a party’s alleged failure to bargain in good faith is not a but-for cause of [a plaintiff’s] lost profits, since even with the best faith on both sides the deal might not have been closed [and] attributing [a plaintiff’s] lost profits to [a defendant’s] bad faith may be speculative at best . . . [A]n award based on the expectation interest would give the injured party the “benefit of the bargain” that was not reached. Goodstein, 80 N.Y.2d at 373 (quotations omitted) (emphasis in the original). The rule in Goodstein is applied to agreements, like the LOI, that serve as “‘preliminary contracts where the parties agree on certain major terms, but leave other terms open for further negotiation.’” Worldwide Servs., Ltd. v. Bombardier Aerospace Corp., No. 14-cv-7343, 2015 WL 5671724, at *9 (S.D.N.Y. Sept. 22, 2015) (quoting Vacold LLC v. Cerami, 545 F.3d 114, 124 (2d Cir. 2008)). 5 Such agreements “‘do not commit the parties to their ultimate contractual objective,’ but rather ‘bind the parties to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed framework.’” Id. (emphasis added). Courts look at five factors to determine the nature of an agreement to agree: (1) the parties’ intent to be bound, (2) the existence of open terms, (3) the context of negotiations, (4) partial performance, and (5) the necessity and industry custom of putting such an agreement in final form. Id. at *10, 16. The language of the agreement is the most important factor in determining the parties’ intent, id. at *9, and the aim is to “avoid trapping parties in surprise contractual obligations that they 5 The court in Worldwide Services referred to these agreements as “Type II” agreements to distinguish them from “Type I” agreements in which the parties had already agreed on all points, but contemplated executing a more formal document at a later date. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 17 of 25 - 12 - never intended,” Gas Nat., Inc. v. Iberdrola, S.A., 33 F. Supp. 3d 373, 379 (S.D.N.Y. Jul. 17, 2014) (quotation omitted). 6 Here, the balance of the five factors weighs against a finding that the LOI can or should serve as a final, enforceable expression of the parties’ agreement with respect to forming the joint venture to purchase and operate the Property. HotelsAB cannot reasonably dispute that this is true, as even it has alleged that a further “definitive” agreement (i.e., the final joint venture agreement) was “critical” to proceeding (¶ 46) and the failure to execute a definitive agreement made it “impossible to consummate the acquisition” (¶ 58). As for the first factor, an intent to be finally and formally bound is absent here because the LOI repeatedly and expressly refers to the future execution and delivery of a definitive agreement. Worldwide Servs., 2015 WL 5671724, at *11–12; Spencer Trask Software & Info. Servs. LLC v. RPost Int’l Ltd., 383 F. Supp. 2d 428, 442 (S.D.N.Y. 2003) (finding that “reference[s] to execution [of the ultimate] agreements” shows an intent not to be finally bound by the terms of the preliminary one). For example, HotelsAB’s obligation to assign the PSA to the joint venture would not arise unless and until the joint venture agreement had been “executed 6 Further cases applying the rationale in Goodstein to dismiss claims for damages include Rao v. Verde, 635 N.Y.S.2d 660, 661 (2d Dep’t 1995); 180 Water St. Assocs., L.P. v. Lehman Bros. Holdings, 776 N.Y.S.2d 278, 279 (1st Dep’t 2004) (holding that plaintiff adequately alleged breach of an agreement to agree but limiting “plaintiff’s measure of damages [to] out- of-pocket loss”); ICBC (London) PLC v. Blacksands Pac. Grp., Inc., No. 15-cv-0070, 2015 WL 5710947, at *9 (S.D.N.Y. Sept. 29, 2015), aff’d, 662 F. App’x 19 (2d Cir. 2016) (finding that “lost profits [were] not available as a remedy for this claim” because “recovery is limited to out-of-pocket costs incurred in partial performance of good faith negotiation”). Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 18 of 25 - 13 - by the parties.” (LOI § 2.) The agreement also committed the parties “to negotiate and . . . execute and deliver a definitive joint venture agreement.” (Id. § 7.) But perhaps the clearest example of this is that the LOI contemplated lengthy, complicated, and potentially difficult negotiations by establishing a binding arbitration process to “order the parties to enter into” one of potentially competing drafts of a joint venture agreement. (Id. § 9.) These are clear indicia that the parties did not intend the LOI to be the final, binding agreement between them with respect to the Property investment. As for the second factor, the LOI left open key terms for further negotiation. In fact, it is not possible to determine from the LOI who would make the investment. The LOI leaves this to further negotiation and discussion by defining the “Investor” to be Reignwood Europe or one or more of its affiliates. (Id. p. 2.) The LOI also expressly left open “the specific structure and complete terms of Investor’s investment with [Mr. Balazs] and in the” Property. (Id. § 6.) Even the details of the all-important “private club” were sketchy at best, with the financing for and “cost of performing the capital improvements and other renovation work necessary to effectuate [the conversion]” still “subject to agreement of the parties.” 7 (Id. § 4.) Finally, various of the so- 7 The parties had also “discussed a preliminary strategy to include in the private club concept a possible combination of the club at the Property with similar private clubs to be developed at [Balazs’s other hotels] and possible other assets to be purchased or leased or already owned in whole or in part by” the parties. (LOI § 4.) But these discussions were at such a high level that absolutely no details were agreed upon. The LOI noted that “[t]hese initial additional club locations might be purchased, leased, or controlled through a structure that would require them to pay a license fee to a private club ownership venture to be formed by Buyer and Investor or their respective affiliates” but provided no additional details. Id. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 19 of 25 - 14 - called “material” terms to be negotiated and agreed in the definitive agreement (id. § 8) contain aspirational rather than binding commitments. (See id. p. 7 (using “to be defined in the JVA”) and p. 12 (“agreed to in the JVA”).) The context of the parties’ negotiations (factor three) likewise demonstrates that the LOI was not intended to represent the binding agreement. As set forth in the Complaint, for several months following the execution of the LOI, the parties exchanged various proposals for the definitive agreement. (See Compl. ¶¶ 49–53.) When these negotiations stalled, HotelsAB took steps to initiate (but not complete) the arbitration process that was inserted into the LOI as a safety valve if negotiations grew too difficult or complex. (Id. ¶ 54.) The length, intensity, and effort put into these negotiations again demonstrates that the LOI did not contain the ultimate contract. See Worldwide Servs., 2015 WL 5671724, at *17 (citing the length of the negotiations and number of draft agreements exchanged); Learning Annex Holdings, LLC v. Whitney Educ. Grp., Inc., 765 F. Supp. 2d 403, 415 (S.D.N.Y. Jan. 26, 2011) (citing “several months of discussions and negotiations”); Spencer Trask, 383 F. Supp. 2d at 444 (citing “points of disagreement” during ongoing negotiations and finding no “agreement to all terms”). The fourth factor—performance of the terms of the LOI—is not material here. See United States v. U.S. Currency in the Sum of $660,200.00, 423 F. Supp. 2d 14, 28 (E.D.N.Y. Apr. 6, 2006), aff’d, 242 F. App’x 750 (2d Cir. 2007) (noting that this factor “appears to have had the least sway with courts”). Reignwood Europe funded the $10,000,000 for the additional deposit under the PSA, but this was a result precipitated by outside forces (the PSA that HotelsAB negotiated) that could have rendered the entire attempt to form the joint venture a nullity. In fact, the need to put terms around the $10,000,000 deposit explains why the parties took the interim Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 20 of 25 - 15 - step of entering into the LOI, pending the negotiation and execution of the final joint venture agreement. Finally, as to the fifth factor, the need for a final written expression—beyond the LOI—is clear from both the LOI and the Complaint. “‘[N]egotiating numerous contract drafts after reaching a preliminary agreement on some terms has been held by the Second Circuit as strong evidence that the parties intended to remain unbound pending the execution of formal documentation.’” Worldwide Servs., 2015 WL 5671724, at *15 (quoting Bear Stearns Inv. Prod., Inc. v. Hitachi Auto. Prod. (USA), Inc., 401 B.R. 598, 619 (S.D.N.Y. Mar. 4, 2009)). In light of the foregoing, the Court should deem the LOI an “agreement to agree.” The consequence of such a finding would be to bar HotelsAB’s claims based on “loss of business” damages. Such claims should be dismissed or stricken. 2. As a matter of law, the alleged “loss of business” based on the new private membership venture planned for the repositioned Property is too speculative to support a breach of contract claim. The planned joint venture between Mr. Balazs and Reignwood Europe revolved around the new private membership club concept that Mr. Balazs wanted to implement at the Property. Mr. Balazs owned a stake in the Property prior to the PSA. As set forth in the Complaint, Mr. Balazs needed to enter the PSA and obtain Reignwood Europe’s investment to achieve his “vision of re-positioning the [Property] to include a private membership club.” (¶ 3.) As set forth above, this new concept was in its infancy, with the financing for and “cost of performing the capital improvements and other renovation work necessary to effectuate [the conversion]” still “subject to agreement of the parties.” (LOI § 4.) Thus, even if the LOI were not an agreement to agree, the damages HotelsAB seeks for the loss of “lucrative business” owing to the private membership club are too speculative to be recovered as a matter of law. Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 21 of 25 - 16 - “The law in New York is well settled that ‘[a] party may not recover damages for lost profits unless they were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty.’” Zink v. Mark Goodson Prods., Inc., 689 N.Y.S.2d 87, 87 (1st Dep’t 1999) (citation omitted). “The damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” Kenford Co. v. Erie Cty., 67 N.Y.2d 257, 261 (1986). “[W]hen a new business venture is involved, ‘a stricter standard is imposed for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty.’” Zink, 689 N.Y.S.2d at 87 (quoting Kenford, 67 N.Y.2d at 261). HotelsAB cannot overcome these hurdles. The claim for loss of business (which is just another way of saying lost profits) would require (1) assuming that the joint venture was formed; (2) assuming that the parties agreed how much to spend and how to finance a still-forming concept for the private club; and (3) presuming that the club would be built, launched, and run successfully within a reasonable period for investment returns. On top of these suppositions, HotelsAB would then need to show, with a degree of reasonable certainty, the quantum of revenue of this brand-new concept in one of the most competitive business environments in the world. 8 8 The final paragraph of the Complaint throws in “reputational damages.” But there is absolutely nothing in the Complaint to establish what HotelsAB’s reputation is or how it was damaged. This reference should be stricken. See, e.g., Karetsos v. Cheung, 670 F. Supp. 111, 115 (S.D.N.Y. Sept. 28, 1987) (precluding recovery for damage to plaintiff’s reputation); MacArthur Const. Corp. v. Coleman, 457 N.Y.S.2d 530, 531 (1st Dep’t 1983) (holding that Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 22 of 25 - 17 - In similar circumstances, “New York courts have dismissed claims for lost profits [on a motion to dismiss] where the pleadings suggest that an award of lost profits would require an unreasonable level of speculation.” Robin Bay Assocs., 2008 WL 2275902, at *7 (dismissing lost profits claim where “[plaintiff] was unable to advance the project past the initial stages of business development” and “the court would have to assume that [plaintiff] obtained the necessary funding to purchase the land, secured the proper zoning and casino licenses, completed construction of the casino, and operated a profitable business for 5 years thereafter.”); see also Carruthers v. Flaum, 365 F. Supp. 2d 448, 470 (S.D.N.Y. Mar. 31, 2005) (dismissing lost profits claim that was “predictive of a wholly new business enterprise, with no track record of accomplishment.”); Pot Luck, LLC v. Freeman, No. 06-cv-10195, 2010 WL 908475, at *3 (S.D.N.Y. Mar. 8, 2010) (dismissing lost profits claim where “calculating a measure of lost profit opportunities under the [allegedly breached agreement], with any degree of reasonable certainty, would be impossible.”). HotelsAB’s claim for lost profits is no stronger than any of the claims dismissed in Robin Bay, Carruthers, or Pot Luck. Thus, not only is the type of agreement in the LOI not sufficient to support a claim for lost profits, but the supposed lost profits are themselves too speculative to recover. This is an independent reason to strike the claim for lost profits. 3. HotelsAB cannot recover from Reignwood Europe the $5,000,000 deposit that AB Green retained when it terminated the PSA. HotelsAB’s last quantum of damages—recovery of the $5,000,000 deposit—is likewise unrecoverable as a matter of law. HotelsAB admits that it “entered into the PSA . . . and agreed to purchase the Property” on “August 16, 2016.” (¶ 12.) “The principal terms of the PSA injury to plaintiff’s reputation in the industry not actionable). Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 23 of 25 - 18 - included . . . a nonrefundable initial deposit of $5,000,000.” (¶ 13.) By the time HotelsAB and Reignwood Europe entered into the LOI on September 16, 2016 (¶ 16), HotelsAB’s nonrefundable deposit was already subject to forfeiture. The eventual fact of the forfeiture cannot, therefore, be charged to Reignwood Europe. The problem with this type of “retroactive” recovery is illustrated in the court’s decision in 24/7 Records, Inc. v. Sony Music Entm’t, Inc., 566 F. Supp. 2d 305 (S.D.N.Y. Jul. 18, 2008). The plaintiff in that case was a new record company that had entered into a distribution agreement with the defendant two months after the plaintiff’s formation. Id. at 310. Alleging breach of the distribution agreement, the plaintiff sought as one element of damages to recoup investors’ initial capital contributions. Id. at 319. The court denied the claim, reasoning that: The company was not created for the purpose of performing the agreement. . . . The LLC obviously spent money on making records, but those expenditures were not made in reliance on the agreement, or for the purpose of performance of the agreement. 24/7 is unable to show with reasonable certainty that the total amount invested in the enterprise was made in reliance on the agreement on which it sues. Id. Here, like in 24/7 Records, HotelsAB committed the $5,000,000 deposit to AB Green well before entering the LOI with Reignwood Europe. The deposit was not an expenditure HotelsAB incurred in reliance on the LOI. Thus, as in 24/7 Records, HotelsAB’s attempt to backcharge the $5,000,000 deposit to Reignwood Europe is wholly without merit. The Court should dismiss or strike the claim for damages for these reasons. IV. CONCLUSION Wherefore, Reignwood Europe respectfully requests that the Court enter an order granting this motion, dismissing or striking those portions of the Complaint set forth in the Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 24 of 25 - 19 - foregoing sections with prejudice, and granting such additional relief as the Court deems reasonable and just. DATED: January 30, 2018 New York, New York DLA PIPER LLP (US) By: /s/ Christopher Strongosky Christopher M. Strongosky Robert C. Santoro 1251 Avenue of the Americas New York, New York 10020-1104 (212) 335-4500 christopher.strongosky@dlapiper.com robert.santoro@dlapiper.com Of Counsel: Matthew Klepper (admitted pro hac vice) Eric Roberts (admitted pro hac vice) 444 West Lake Street, Suite 900 Chicago, Illinois 60606-0089 (312) 368-4000 matthew.klepper@dlapiper.com eric.roberts@dlapiper.com Attorneys for: Reignwood Europe Holdings SARL Case 1:17-cv-08776-JGK Document 23 Filed 01/30/18 Page 25 of 25