Huntington Way Assocs. v. RRI Assocs.

1

Huntington Way Associates, LLC v. RRI Associates LLC, et al.,

C. A. No. 2022-0761-LWW

Court of Chancery of Delaware

June 30, 2023

Date Submitted: March 16, 2023

Richard L. Renck, Esquire, Mackenzie M. Wrobel, Esquire Tracey E. Timlin, Esquire, Duane Morris LLP.

Richard D. Heins, Esquire, Tiffany Geyer Lydon, Esquire Ashby & Geddes, P.A.

Lori W. Will Vice Chancellor.

Dear Counsel:

I write regarding the cross-motions for summary judgment pending in this action. The plaintiff's motion seeks confirmation of an arbitration award; the defendants' motion asks that the award should be vacated. For the reasons explained below the plaintiff's cross-motion is granted and the defendants' cross-motion is denied.

I. BACKGROUND

Plaintiff Huntington Way Associates, LLC, as successor in interest to Whippoorwill Farm Associates, LLC, f/k/a Kingfish RRI LLC ("Kingfish"), is a member of nominal defendant WRRH LLC (the "Company"). The Company operates the Red Roof Inn brand of hotels.^[1] Defendants RRI Associates LLC and WB-US Enterprises, Inc. (together, the "Westmont Members") are affiliates of Westmont Hospitality Group ("Westmont")-one of the world's largest privately held hospitality businesses.^[2] WB-US Enterprises, Inc. is the Company's Managing Member.

A. The LLC Agreement

On January 1, 2011, the parties and non-party Madison Ave II LLC entered into an Amended and Restated Limited Liability Company Agreement of WRRH LLC (the "LLC Agreement").^[3] The LLC Agreement sets out the rights and obligations of the Company's members. It provides Kingfish with several put options exercisable upon the occurrence (or non-occurrence) of specific events.^[4]

The "First Put Option" grants Kingfish "the right to deliver to the Westmont Members a notice stating that [Kingfish] exercises its right to sell fifty percent (50%) of the aggregate Original Interests of [Kingfish] to the Westmont Members."^[5] If Kingfish were to timely deliver the put notice, the "Westmont Members w[ould] be required to purchase" and Kingfish would be "required to sell" these interests.^[6]

An appraisal process to determine the Company's fair market value for purposes of the First Put Option is detailed in Exhibit A to the LLC Agreement.^[7]The process begins with each side appointing a "Qualified Appraiser" to prepare a valuation of the Company. If the higher valuation were more than 115% of the lower, a third Qualified Appraiser would be appointed and instructed to "fairly and impartially determine the [fair market value] of the Company" within the other two valuations.^[8] The third Qualified Appraiser's valuation would be deemed the final and binding fair market value of the Company.

The LLC Agreement also addresses the Managing Member's duties and obligations. The Managing Member is to "act in the best interests of the Company" and not take "any action with respect to the Investments or the Company (whether directly or indirectly) which is intended to favor it, its Affiliate's or any other Person's interests over the interests of the Members."^[9] The LLC Agreement further provides that "whenever a potential conflict of interest exists or arises between the Managing Member on one hand, and the Company or any Member . . . on the other hand," the resolution must be "fair and reasonable to the Company" and not favor the Managing Member or Westmont Members.^[10]

In addition, the LLC Agreement addresses the resolution of "[a]ny dispute, controversy or claim between the Members arising from or in connection with" the contract.^[11] Any such dispute would be "submitted to, and finally determined by, arbitration in accordance with the dispute resolution procedures" set forth in Schedule 10.14 to the LLC Agreement.^[12] Schedule 10.14 specifies that the arbitration would be conducted by the American Arbitration Association in accordance with the AAA Commercial Rules (the "AAA Rules").^[13]

B. The Disputes

On December 3, 2019, Kingfish delivered to the Westmont Members its notice exercising the First Put Option pursuant to Section 10.18 of the LLC Agreement.^[14] Kingfish appointed FTI Consulting as its Qualified Appraiser. The Westmont Members appointed Ernst &Young.^[15] After several extensions of the appraisal process, the Westmont Members ceased communication with Kingfish.^[16]Kingfish contends that doing so breached the Westmont Members' obligation to engage in the appraisal process and close on their acquisition of the interests.^[17]This dispute is referred to in the parties' papers as the "First Put Option Claims."

Separately, Kingfish accused the Managing Member of misusing corporate assets solely to benefit its Westmont affiliates.^[18] The Managing Member purportedly caused its wholly owned subsidiary to guarantee hundreds of millions of dollars in loans to the Managing Member's Westmont affiliates for projects unrelated to the Company or the Red Roof Inn business.^[19] This dispute is referred to as the "Wrongful Guarantee Claims."

C. The Arbitration

On October 23, 2020, Kingfish filed a Demand for Arbitration with the AAA in connection with the First Put Option Claims and Wrongful Guarantee Claims.^[20] The arbitral panel (the "Tribunal") was constituted soon after. Its Chair was an attorney who serves as a Senior International Arbitration Advisor at a major law firm.^[21] The other two members of the panel are both experienced arbitrators and lawyers by training.^[22]

The parties engaged in a three-day hearing before the Tribunal on October 25 to 26 and December 3, 2021.^[23] The hearing included testimony on the issues of liability, damages, and valuation-including testimony from FTI and Ernst &Young. The tribunal served as the third Qualified Appraiser for purposes of completing the appraisal process detailed in the LLC Agreement.^[24] At the conclusion of the hearing, the parties were invited to provide additional expert submissions and post-hearing briefs, which were submitted in January and February 2022.^[25] Proceedings were closed in July.^[26]

D. The Final Award

On August 5, 2022, the Tribunal issued its Final Award in a 91-page decision.^[27] It found the Westmont Members liable on the First Put Option Claims and the Wrongful Guarantee Claims.

With respect to the First Put Option Claims, the Tribunal concluded that the Westmont Members "breached the [LLC] Agreement by failing to perform their obligations [with] respect to the First Put Option process set out at Section 10.18."^[28] In so doing, the Tribunal considered and rejected the Westmont Members' argument that Kingfish was not entitled to relief because it violated the required appraisal process.^[29] The Tribunal similarly considered and rejected the Westmont Members' argument that the COVID-19 pandemic frustrated the LLC Agreement and excused their non-performance.^[30]

The Tribunal went on to determine the Company's fair market value to calculate the amount Kingfish was owed for the First Put Option Claims.^[31] Acting as the third Qualified Appraiser, the Tribunal reiterated its duty to "fairly and impartially determine the FMV of the Company," subject to the LLC Agreement's requirement that "the [t]hird Qualified Appraiser's determination [be] between the determinations of the other two Qualified Appraisers."^[32] The Tribunal evaluated the arguments and evidence on the Company's fair market value, adopting certain aspects of each appraisal.^[33] The Tribunal concluded that the Company's fair market value was $316,274,185.^[34] It then applied the formula in Section 10.18 of the LLC Agreement to calculate the amount the Westmont Members were obligated to pay Kingfish.^[35] The Tribunal determined that amount was $24,155,495.^[36]

With respect to the Wrongful Guarantee Claims, the Tribunal found that the Westmont Members "breached the [LLC] Agreement by using the Company and its assets to guarantee loan obligations relating to projects in which the Westmont Members had interests wholly independent of the Company and which created financial risk to the Company."^[37] In doing so, it rejected the Westmont Members' argument that the loan guarantees fell within the Managing Member's discretion.^[38]The Tribunal also rejected the Westmont Members' argument that the loan guarantees provided a benefit to the Company, calling it "wholly inadequate to justify their self-serving conduct."^[39] The Tribunal ordered the Westmont Members to "either terminate all guarantees in violation of the [LLC] Agreement or provide collateral or surety in favor of [Kingfish] at the amount currently owed on each of the guaranteed loans."^[40] The Tribunal determined that an award of pre- and post-judgment interest to Kingfish was appropriate.^[41] Finally, the Tribunal awarded Kingfish 75% of its fees and costs associated with the arbitration.^[42]

E. The Litigation

On August 22, 2022, the Westmont Members filed a placeholder

"Preliminary Memorandum" in the United States District Court for the Southern District of Ohio.^[43] The Preliminary Memorandum stated that the Westmont Members were challenging the Tribunal's valuation of the Company in connection with the First Put Option and the award of interest, fees, and costs.^[44]

Four days later, on August 26, Kingfish filed a Verified Complaint to Confirm Arbitration Award in this court.^[45] The Westmont Members subsequently moved to dismiss, or alternatively to stay, this proceeding in favor of the first-filed Ohio action.^[46] The parties filed cross-motions for summary judgment.^[47] The motions were argued on December 14 and taken under advisement at that time.^[48] The parties subsequently informed me that the Ohio action had been stayed pending the resolution of this action.^[49] The Ohio court's decision rendered the motion...