applying New York lawSummary of this case from Stralia Mar. S.A. v. Praxis Energy Agents DMCC
03 Civ. 8258 (SAS)
April 20, 2004
Courtland L. Reichman, Esq., Charmaine D. Williams, Esq., Dwight J. Davis, Esq., Douglas L. Friedman, Esq., Stephen J. Cirami, Esq., KING SPALDING LLP, New York, For Plaintiffs
Lee W. Stremba, Esq., JENKENS GILCHRIST PARKER CHAPIN LLP, New York, Jonathan Solish, Esq., Glenn Plattner, Esq., JENKENS GILCHRIST LLP, California, For Defendants
OPINION AND ORDER
Plaintiffs Century Pacific, Inc. and Becker Enterprises, Inc. filed this action against defendants Hilton Hotels Corporation, Doubletree Corporation, (collectively "Hilton/Doubletree"), and Red Lion, Inc. claiming violations of the New York Franchise Sales Act and common law fraud, negligent misrepresentation, and fraudulent omission. The claims arise from the circumstances surrounding the Red Lion hotel franchise agreements plaintiffs entered into with defendants in 2001. Plaintiffs allege that they were victims of a "bait and switch" strategy through which defendants induced plaintiffs to sign long — term franchise agreements by misrepresenting Hilton/Doubletree's plans to retain the Red Lion hotel chain. Plaintiffs claim that at the time of their franchise negotiations with defendants, defendants had, in fact, already decided to sell Red Lion to a smaller, less — profitable hotel chain. Plaintiffs further allege that defendants pursued the franchise agreements with plaintiffs in order to increase Hilton/Doubletree's profits in the planned resale of Red Lion. Defendants move to dismiss on the grounds that the New York Franchise Sales Act does not apply to the franchise agreements and that plaintiffs cannot state viable claims for fraud, negligent misrepresentation, or fraudulent omission. For the following reasons, defendants' motion to dismiss is granted in part and denied in part.
Plaintiffs allege the following facts, all of which are deemed true for the purposes of this motion.
A. The Parties
Plaintiffs Century Pacific, a Texas corporation, and Becker Enterprises, a Nevada corporation, entered into franchise agreements with defendants and converted hotels they operated in Colorado into Red Lion franchises in early 2001. See Complaint ¶¶ 4-5, 22.
Defendant Hilton Hotels is a Delaware corporation with a principal place of business in Beverly Hills, California. Id. ¶ 6. Hilton develops, owns, manages, or franchises approximately 2,000 hotels and resort and vacation properties around the world. The Hilton family of hotels includes defendant Doubletree Hotels, a Delaware corporation and wholly owned subsidiary of Hilton, as well as Embassy Suites Hotels, Hampton Inn, Homewood Suites, and Hilton Garden Inn. Id. ¶¶ 7, 14.
Defendant Red Lion is a Delaware corporation with a main office in Spokane, Washington. Id. ¶ 8. Red Lion was acquired by Doubletree in 1996 and by Hilton in 1999. Id. ¶¶ 15-16. Hilton sold Red Lion to WestCoast Hospitality Corporation ("WestCoast") in early 2002. Id. ¶ 36. Jurisdiction is premised on diversity of citizenship. Id. ¶ 13.
B. The Red Lion Chain
Red Lion was founded in 1959 and is best known for its hotel operations in the Northwest and Western U.S. Id. ¶ 15. For Hilton/Doubletree, Red Lion represented a less well — known brand name and was acquired only as part of a larger acquisition by Hilton in 1999 of the Promus Hotel Corporation which included more valuable brands like Embassy Suites and Hampton Inn. Id. ¶¶ 15-16. Hilton/Doubletree initially intended to eliminate the Red Lion brand and began closing down and converting Red Lion hotels after the acquisition. Id. ¶¶ 17-18. Sometime in 2000, Hilton/Doubletree secretly decided instead to actively market the Red Lion brand, build up its value, and then sell it within a very short time frame. Id. ¶ 19. Publicly, however, Hilton/Doubletree represented that they were working to reinvigorate and expand the Red Lion brand; Hilton/Doubletree converted several of their hotels to Red Lions and aggressively campaigned to sell Red Lion franchises to other existing hotels. Id. ¶¶ 19-20, 28. Their strategy was apparently to lock in as many long — term franchise agreements as possible in order to increase the purchase price of Red Lion. Id. ¶ 21.
1. Franchise Negotiations and Agreements
Plaintiffs were among those existing hotel operators who were targeted by defendants' marketing campaign. Between Fall of 2000 and February 2001, plaintiffs received Uniform Franchise Offering Circulars ("UFOCs") and negotiated with defendants before entering into Red Lion franchise agreements. Id. ¶ 22. Defendants persuaded plaintiffs to become Red Lion franchisees by promoting the value of the "Hilton" name and the benefits of being part of the Hilton family of hotels. Id. ¶ 23. These benefits included: access to Hilton's world — wide reservation and group sales systems, cross — selling with sister brands, participation in Hilton's group purchasing program, and future participation in the Hilton HHonors program. Id.
Officers and employees of Hilton/Doubletree and Red Lion, including Tom Murray and Manfred Gerling, repeatedly assured plaintiffs that Red Lion was an important and growing part of the Hilton group. Id. ¶ 24. These officers and employees specifically told plaintiffs that Hilton/Doubletree had long — term plans to own and grow Red Lion. Murray represented to plaintiffs that he was given "repeated assurances from his seniors that Red Lion is an important part of the Hilton family." Id. Plaintiffs also received express assurances from Gerling that "we told you before, [Red Lion] is not for sale" and that "Red Lion would have 200 franchises within five years." Id. None of defendants' sales and marketing materials, oral statements, or correspondence conveyed to plaintiffs that Hilton/Doubletree had a current intent or desire to sell the Red Lion brand. Id. ¶ 25. Instead, those statements and materials all indicated that the Hilton connection was the most important attraction to prospective franchisees. Id. ¶ 31.
Plaintiffs relied on those oral and written statements and entered into franchise agreements with defendants on the basis of Hilton/Doubletree's representations as to their intent to keep and grow Red Lion and the benefits Red Lion franchisees would reap as members of the Hilton family. Id. ¶¶ 27,32-33.
Plaintiff Becker Enterprises executed a franchise agreement with Red Lion on January 26, 2001 and plaintiff Century Pacific executed an agreement on February 13, 2001. Id. ¶ 22.
To meet the terms of those agreements and become Red Lion franchisees, plaintiffs spent considerable time and money on converting their existing hotels into Red Lion hotels and on associated renovations, employee training, and advertising. Id. ¶ 29. Plaintiffs also agreed to pay substantial royalty fees to become part of the Hilton family. Id. ¶ 30. Plaintiffs believed these expenses would be offset by the increased business they would receive as Hilton — affiliated hotels. Id. ¶¶ 33, 37.
2. Sale of Red Lion
Plaintiffs first became aware of Hilton/Doubletree's plans to sell Red Lion on October 19, 2001, when Hilton and WestCoast issued a press release announcing an intended sale to WestCoast. Id. ¶ 35. WestCoast acquired Red Lion on or about January 2, 2002 for approximately $50 million. Id. ¶ 36.
WestCoast is a small, regional hotel chain with less than ten hotels in five states. Id. ¶ 38. WestCoast does not offer the kind of benefits or resources that Hilton offered to Red Lion franchisees. Id. WestCoast's lack of name brand recognition and franchisee benefits has negatively affected plaintiffs' business. Id. Plaintiffs would not have signed franchise agreements with defendants had they known that Red Lion would become affiliated with WestCoast instead of Hilton. Id.
Contrary to their statements and other representations to plaintiffs, defendants knew at the time they were negotiating and executing the franchise agreements that Hilton/Doubletree did not intend to retain the Red Lion brand. Id. ¶¶ 27,39. Plaintiffs relied to their detriment on defendants' misrepresentations and failure to disclose their intent to sell Red Lion. Id. ¶¶ 40-41. Since the sale of Red Lion to WestCoast, plaintiffs have been and continue to be harmed by decreased bookings, loss of walk — ins and regular clientele, and an overall lower value of their franchise hotels because of the brand and name change. Id.
II. LEGAL STANDARD
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss should be granted only if `"it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief."' Weixel v. Board of Educ. of New York, 287 F.3d 138, 145 (2d Cir. 2002) (quoting Conley v. Gibson, 355 U.S. 41,45-46 (1957)). The task of the court in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Levitt v. Bear Stearns Co., Inc., 340 F.3d 94, 101 (2d Cir. 2003) (quotation marks and citations omitted). When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor. See Chambers v. Time Warner Inc., 282 F.3d 147, 152 (2d Cir. 2002).
A. Claims Under the New York Franchise Sales Act
Plaintiffs bring their first and second causes of action under the New York Franchise Sales Act, N.Y. Gen. Bus. Law § 680 et seq ("the Act"). First, plaintiffs claim that defendants violated § 683(2)(n) of the Act which requires that the offeror of a franchise provide prospective franchisees an offering prospectus that includes: "A statement of any past or present practice or of any intent of the franchisor to sell, assign, or discount to a third party any note, contract, or other obligation of the franchisee or subfranchisor in whole or in part." N.Y. Gen. Bus. Law § 683(2)(n) (2004). Plaintiffs argue that defendants violated this provision by failing to include, in the UFOC they issued to plaintiffs, a statement of Hilton/Doubletree's present intent to sell the Red Lion franchise. See Complaint ¶ 47. Second, plaintiffs allege that defendants' failure to disclose a present intent to sell Red Lion also violated the antifraud section of the Act which deems it unlawful for a person "in connection with the offer, sale, or purchase of any franchise, to directly or indirectly . . . (b) [m]ake any untrue statement of a material fact or omit to state a material fact. . . ." N.Y. Gen. Bus. Law § 687(2)(b) (2004).
Plaintiffs invoke the Act on the basis of the choice of law provision in their franchise agreements which specifies New York law as controlling in any contract, tort, or other dispute between the parties. See Franchise License Agreement, Red Lion Inn Suites Pagosa Springs ("Franchise Agreement") ¶ 16(b) (attached as Exhibit 1 to the Affirmation of Tom McKeirnan, Vice President and General Counsel for WestCoast (as parent company of Red Lion), in Support of Defendants' Motion to Dismiss). The choice of law provision reads as follows:
Plaintiffs have not alleged a breach of contract and their Complaint does not quote or incorporate the franchise agreements executed with defendants. Defendants, however, have provided the two agreements attached an affidavit filed with their motion to dismiss. The agreements are thus properly before the Court under Rule 10(c) of the Federal Rules of Civil Procedure. Because the provisions of the agreements relevant to this discussion are identical, references to "Franchise Agreement" refer to both agreements.
We each agree that the State of New York has a deep and well developed history of business decisional law. For this reason, we each agree that except to the extent governed by the United States Trademark Act of 1946 (Lanham Act; 15 U.S.C. ¶ 1050 et seq.), as amended, this Agreement, all relations between us, and any and all disputes between us, whether sounding in contract, tort, or otherwise, are to be exclusively construed in accordance with and/or governed by (as applicable) the laws of the State of New York without recourse to New York (or any other) choice of law conflicts of law principles. If, however, any provision of this Agreement would not be enforceable under the laws of New York, and if the Hotel is located outside of New York and the provision would be enforceable under the laws of the state in which the Hotel is located, then the provision in question (and only that provision) will be interpreted and construed under the laws of that state. Nothing in this section is intended to invoke the application of any franchise, business opportunity, antitrust, "implied covenant," unfair competition, fiduciary or any other doctrine of law of the State of New York or any other state which would not otherwise apply absent this Paragraph 16b.
Franchise Agreement ¶ 16(b). The same section of the agreements also includes a New York forum selection provision. See id,
Defendants argue that notwithstanding the New York choice of law provision, plaintiffs cannot invoke the Act because it regulates only franchise offers and sales made in New York or franchises located in New York. Under the Act, "[a]n offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state." N.Y. Gen. Bus. Law § 681(12)(a) (2004). Defendants further argue that the last sentence of the choice of law provision in the franchise agreements expressly "carves out" any New York franchise law that would not otherwise apply to the transaction. This sentence provides: "Nothing in this section is intended to invoke the application of any franchise, business opportunity, antitrust, `implied covenant,' unfair competition, fiduciary or any other doctrine of law of the State of New York or any other state which would not otherwise apply absent this Paragraph 16b." Franchise Agreement ¶ 16(b).
Plaintiffs do not allege that the franchise offers or sales were actually made in New York but respond that the New York choice of law provision alone is sufficient to invoke the Act. Plaintiffs also argue that the "carve out" clause of the choice of law provision should not bar their claims because it is ambiguous and should be construed against defendants or, alternatively, because it should be deemed void against public policy for allowing defendants to circumvent the protections of the chosen state law.
A choice of law provision may provide for extraterritorial application of the New York Franchise Sales Act in certain cases. See, e.g., Schwartz v. Pillsbury, Inc., 969 F.2d 840, 847 (9th Cir. 1992); Mon — Shore Management, Inc. v. Family Media, Inc., 584 F. Supp. 186, 193 (S.D.N.Y. 1984). The provision in plaintiffs' contract, however, unambiguously bars extension of the Act to their franchises.
"Under New York law, a written contract is to be interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed." Cruden v. Bank of New York, 957 F.2d 961, 976 (2d Cir. 1992); see also Paine Webber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) ("In interpreting a contract, `[w]ords and phrases are given their plain meaning.'" (citations omitted)). Similarly, "[a] court may neither rewrite, under the guise of interpretation, a term of the contract when the term is clear and unambiguous, nor redraft a contract to accord with its instinct for the dispensation of equity upon the facts of a given case." Cruden, 957 F.2d at 976 (citations omitted).
Accordingly, the carve out clause in plaintiffs' agreements, providing that "[n]othing in this [choice of law] section is intended to invoke the application of any franchise [law] . . . of the State of New York . . . which would not otherwise apply . . .," Franchise Agreement ¶ 16, must be read to preclude the application of New York franchise regulations like the Franchise Sales Act that "[are] applicable only to specific transactions solicited or accepted in New York, or affecting New York." Mon — Shore, 584 F. Supp. at 191.
This finding is also consistent with the cases plaintiffs cite in which courts have held that the Act can reach non — New York franchises through a choice of law provision. In each of those cases, the court applied the Act specifically because the choice of law language in the franchise agreement provided that the franchise "shall be deemed to have been made in New York." See Mon — Shore, 584 F. Supp. at 193; Schwartz, 969 F.2d at 847; McGowan v. Pillsbury Co., 723 F. Supp. 530, 536 (W.D. Wash. 1989). Plaintiffs' agreements have no such clause and instead expressly qualify the scope of New York law that will apply in any dispute.
Plaintiffs' alternative argument, that the carve out provision should be held void as against public policy, must also fail because it is based on the mistaken assumption that the New York Franchise Sales Act was intended to apply to and proscribe waiver clauses in any agreement that invokes New York law. As discussed above, however, the Act "does not apply to commerce that takes place `wholly outside' of New York," Mon — Shore, 584 F. Supp. at 190, unless the contract terms express this intent by providing for a constructive offer and/or sale in New York.
In sum, because the primary objective in interpreting a contract "is to give effect to the intent of the parties as revealed by the language they chose to use," Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992), the unambiguous carve out of New York franchise law from the parties' choice of law provision must be honored by dismissing plaintiffs' claims under the Act.
B. Common Law Fraud Claim
Plaintiffs' third cause of action asserts that defendants committed common law fraud by knowingly making material misrepresentations and false statements about Hilton/Doubletree's plans for Red Lion. Defendants argue that the claim is not viable because plaintiffs cannot claim reasonable reliance on defendants' oral statements about their plans for Red Lion. Specifically, defendants contend that any oral statements to plaintiffs: (1) were contradicted by express provisions in the franchise agreements giving defendants the right to transfer Red Lion; (2) were canceled by the integration clause of the agreements; and/or (3) amounted to non — actionable "puffing" or "trade talk." Plaintiffs respond that because fraud lies in the specific misrepresentations of fact, their claims that defendants misrepresented their present intent to retain Red Lion survive challenges based on contract terms or the rule that promissory statements are generally not actionable.
To recover for common law fraud in New York, plaintiffs must demonstrate: (1) a misrepresentation of material fact made with knowledge of falsity; (2) justifiable reliance on such misrepresentation; and (3) resulting harm. See Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996). Plaintiffs claim that they decided to enter into franchise agreements with defendants in reliance on, among other things, oral assurances by officers and employees, including Tom Murray and Manfred Gerling, that "[Red Lion] is not for sale" and that Hilton/Doubletree had long — term plans to grow Red Lion as a Hilton subsidiary. Plaintiffs' ability to show reliance is precluded neither by the contract terms defendants cite nor by the "puffing" doctrine. First, the terms of the franchise agreement granting defendants an express right to transfer Red Lion do not contradict or supersede oral statements by defendants about their present intent to retain Red Lion. Plaintiffs could have reasonably relied on defendants' statements that Hilton/Doubletree had no existing plans to transfer Red Lion while also agreeing to and appreciating defendants' right to transfer Red Lion at any time.
Second, the merger or integration clause of paragraph 16(d) of plaintiffs' franchise agreements does not bar admission of defendants' previous oral statements in support of plaintiffs' fraud claims. Under New York law, a general merger clause precludes neither an action for fraud in the inducement nor parol evidence concerning fraudulent representations. See Lee v. Goldstrom, 522 N.Y.S.2d 917, 918 (2d Dep't 1987). A court should only bar such evidence where the merger clause contains a provision that specifically contradicts a claimed oral representation. See Bibeault v. Advanced Health Corp., No. 97 Civ. 6026, 2002 WL 24305, *3-4 (S.D.N.Y. Jan. 8, 2002) (citing Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320-321 (1959)). The only specific language in the otherwise boilerplate general merger clause of plaintiffs' franchise agreements provides that plaintiffs "agree that no claims, representations or warranties of earnings, sales, profits, success or failure of the Hotel have been made to you." Franchise Agreement ¶ 16(d). The subject of defendants' alleged misrepresentations — Hilton/Doubletree's present intent to retain Red Lion — is not enumerated in the merger clause. Accordingly, the clause does not bar admission of parol evidence to support plaintiffs' claims.
Under the merger clause, the parties agreed:
that this Agreement and its attachments will be construed together and will supersede and cancel any prior and/or contemporaneous discussions or writings (whether described as representations, inducements, promises, agreements or by any other term) between us. We each agree that we placed, and will place, no reliance on any such discussions or writings. You agree that no claims, representations or warranties of earnings, sales, profits, success or failure of the Hotel have been made to you. This Agreement and its attachments is the entire agreement between us and contains all of the terms, conditions, rights and obligations between us with respect to the Hotel and any other aspect of the relationship between us.
Franchise Agreement ¶ 16(d).
Finally, defendants' representations about their present intent to retain Red Lion cannot be summarily dismissed as nonactionable "puffing." New York law recognizes that:
[w]hile [m]ere promissory statements as to what will be done in the future are not actionable, . . . it is settled that, if a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of material existing fact upon which an action for recision [based on fraudulent inducement] may be predicated.Stewart v. Jackson Nash, 976 F.2d 86, 89 (2d Cir. 1992) (quoting Sabo v. Delman, 3 N.Y.2d 155, 160 (1957) (emphasis added)). See also Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) ("The failure to fulfill a promise to perform future acts is not ground for a fraud action unless there existed an intent not to perform at the time the promise was made." (emphasis added)).
Plaintiffs have adequately alleged that defendants knew, at the time they were negotiating with plaintiffs, that Hilton/Doubletree was actually planning to sell the subsidiary shortly after closing franchise deals with plaintiffs and others. Accordingly, because plaintiffs may be able to show that defendants' oral promises about their long — term plans to grow Red Lion were made with an intent not to perform, their common law fraud claim may proceed.
C. Negligent Misrepresentation Claim
Plaintiffs' fourth cause of action alleges that defendants negligently or recklessly disregarded the falsity of their oral and written statements about Hilton/Doubletree's intent to continue to hold and promote Red Lion and thereby breached a duty not to make misrepresentations to plaintiffs. Defendants argue for dismissal of the claim on the ground that there was no special relationship between the parties and therefore no duty owed by defendants to plaintiffs. Defendants further contend that the alleged misrepresentations are not actionable because they were promissory rather than factual in nature. Plaintiffs respond that a special relationship and corresponding duty existed because of defendants' superior knowledge and awareness that plaintiffs would rely on their misrepresentations. Plaintiffs also reiterate their claim that defendants' misrepresentations were factual because they involved defendants' present intent.
Under New York law, a claim of negligent misrepresentation must satisfy the following five elements:
(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment.Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000). Defendants contest plaintiffs' ability to meet the first and fifth elements.
First, in order to determine the existence of a special relationship and duty in the context of a negligent misrepresentation claim, the Second Circuit has held that New York law requires a fact finder to consider the following three factors: "whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose." Suez Equity Investors, L.P. v. Toronto — Dominion Bank, 250 F.3d 87, 103 (2d Cir. 2001) (quotation marks and citation omitted). In Kimmell v. Schaefer, 89 N.Y.2d 257 (1996), the New York Court of Appeals explained that "[i]n the commercial context, a duty to speak with care exists when the relationship of the parties, arising out of contract or otherwise, [is] such that in morals and good conscience the one has the right to rely upon the other for information." 89 N.Y.2d at 263 (quotation marks and citation omitted).
In general, a simple commercial relationship, such as that between a buyer and seller or franchisor and franchisee, does not constitute the kind of "special relationship" necessary to support a negligent misrepresentation claim. See Dimon, Inc. v. Folium, Inc., 48 F. Supp.2d 359, 373 (S.D.N.Y. 1999). A commercial relationship may become a special relationship, however, where "the parties . . . enjoy a relationship of trust and reliance `closer . . . than that of the ordinary buyer and seller.'" Polycast Tech. Corp. v. Uniroyal, Inc., No. 87 Civ. 3297, 1988 WL 96586, at *10 (S.D.N.Y. Aug. 31, 1988) (citations omitted). Courts have found a special relationship and duty, for example, where defendants sought to induce plaintiffs into a business transaction by making certain statements or providing specific information with the intent that plaintiffs rely on those statements or information. See Kimmell, 89 N.Y.2d at 264-65; Suez Equity Investors, 250 F.3d at 103; New York Islanders Hockey Club, LLP v. Comerica Bank — Texas, 71 F. Supp.2d 108, 119 (E.D.N.Y. 1999).
Plaintiffs here have adequately pled a similar fact pattern; their allegations that defendants made numerous false statements about their plans for Red Lion with the specific intent of earning plaintiffs' trust and reliance require a denial of defendants' motion to dismiss this claim. Although it is not clear that defendants' superior knowledge about their own business plans constitutes the kind of unique expertise enumerated in the Suez Equity Investors test, the absence of this factor is not fatal at this stage. Courts in this circuit have held that a determination of whether a special relationship exists is highly fact — specific and "generally not susceptible to resolution at the pleadings stage." Nasik Breeding Research Farm Ltd. v. Merck Co., 165 F. Supp.2d 514, 536 (S.D.N.Y. 2001).
Defendants' second argument, that plaintiffs cannot state a claim for negligent misrepresentation because they cannot meet the fifth element of showing that they "reasonably relied" on defendants' statements, also falls short. As previously discussed in the fraud analysis, plaintiffs' allegations of misrepresentation are based not on defendants' failure to fulfill promises about future conduct but on defendants' intent at the time they made the statements about Hilton/Doubletree's plans to retain Red Lion. Accordingly, because plaintiffs have pled that defendants made those promises with a present intent not to perform them, their claim of negligent misrepresentation survives along with their fraud claim. See Murray v. Xerox Corp., 811 F.2d 118, 121-22 (2d Cir. 1987).
D. Fraudulent Omission Claim
Finally, plaintiffs' fifth cause of action alleges that defendants had a duty to disclose to plaintiffs their present plans to sell the Red Lion subsidiary but instead withheld the information with the intent to defraud plaintiffs. Plaintiffs claim that they relied on and were harmed by this fraudulent omission. Defendants contend that this omission is nonactionable because the law imposes no duty on a franchisor to disclose to a franchisee the possibility or probability of such a sale. Plaintiffs argue that defendants' duty to disclose arose both from its superior knowledge and from the disclosure provisions of the New York Franchise Sales Act.
New York law recognizes fraudulent omission as a permutation of the common law action for fraud. See, e.g., Callahan v. Callahan, 514 N.Y.S.2d 819, 821 (3d Dep't 1987) ("nondisclosure is tantamount to an affirmative representation where a party to a transaction is duty — bound to disclose certain pertinent information."). An omission is actionable only in the context of a duty to disclose, "but a fiduciary duty is not the sine qua non of fraudulent omissions." United States v. Autuori, 212 F.3d 105, 119 (2d Cir. 2000). The Second Circuit has held that
New York recognizes a duty by a party to a business transaction to speak in three situations: first, where the party has made a partial or ambiguous statement, on the theory that once a party has undertaken to mention a relevant fact to the other party it cannot give only half of the truth; second, when the parties stand in a fiduciary or confidential relationship with each other; and third, where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge.Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citations and internal quotations omitted). The court in Brass also noted "a tendency in New York to apply the rule of `superior knowledge' in an array of contexts in which silence would at one time have escaped criticism." Id. at 151.
Plaintiffs' claim of fraudulent omission is actionable under either the first or third contexts described by Brass as requiring disclosure. Assuming plaintiffs' allegations are true, plaintiffs specifically questioned defendants during negotiations about Hilton/Doubletree's plans to hold or sell Red Lion, and defendants responded not only with enthusiastic guarantees of their commitment to the Red Lion brand but with specific assurances that they were not planning to sell. These statements thus triggered, under the first Brass scenario, a duty to disclose related or corrective information. Similarly, the third Brass scenario is relevant if, as alleged, defendants actually had plans to put Red Lion on the market after sealing the franchise deals and knew that plaintiffs' decision to enter into the agreements was based, at least in part, on an understanding that defendants had no present plans to divest or sell Red Lion. Plaintiffs have thus stated a viable claim of fraudulent omission under New York common law.
Defendants cite a series of cases involving the sale by General Foods of its Burger Chef line of franchises in support of the rule that a franchisor has no duty to disclose a pending sale to a franchisee. These cases are unavailing, however, because they involve plaintiffs who were existing franchisees claiming that they should have been made privy to the franchisor's business plans. See, e.g., Vaughn v. General Foods Corporation, 797 F.2d 1403, 1414 (7th Cir. 1986) (describing a fourteen — year arms — length relationship between plaintiff franchisee and defendant franchisor).
In sum, after considering all of defendants' arguments in support of their motion to dismiss, their motion is granted as to plaintiffs' claims under the New York Franchise Sales Act and denied as to plaintiffs' claims of common law fraud, negligent misrepresentation, and fraudulent omission.
The Clerk of the Court is directed to close this motion [docket #8]. A conference is scheduled for April 27, 2004 at 4:30.