Travelodge Hotels, Inc. v. Durga, LLC

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TRAVELODGE HOTELS, INC., a Delaware Corporation, Plaintiff, v. DURGA, LLC, a Michigan Limited Liability Company; and SASIKALA VEMULAPALLI, An individual, Defendants.

Civil Action No. 15-8412 (CCC)

United States District Court, D. New Jersey

September 30, 2024

NOT FOR PUBLICATION

OPINION

CLAIRE C. CECCHI, U.S.D.J.

I. INTRODUCTION

This matter comes before the Court by way of Plaintiff Travelodge Hotels, Inc.'s (“Plaintiff”) complaint (ECF No. 1) against Defendants Durga, LLC (“Durga”) and Sasikala Vemulapalli (together “Defendants”). Plaintiff seeks, among other things, damages arising out of Defendants' alleged breach of a franchise agreement and guaranty executed by the parties. See generally ECF No. 1. Defendants filed an answer challenging Plaintiff's assertions, alleging they were fraudulently induced into entering the franchise agreement and guaranty, and are excused from performance given Plaintiff's own alleged material breaches. See generally ECF No. 11.

The Court held a two-day bench trial in this matter on February 1 and 2, 2024. ECF Nos. 154-55. The parties briefed the relevant issues before trial and provided initial proposed findings (ECF No. 145-46, 150), then submitted post-trial briefing and proposed findings of fact and conclusions of law.

ECF Nos. 158-1 (“Pl. Br.”), 158-2 (“PFOF”), 159-1 (“DFOF”), 159-2 (“Def. Br.”), 160. Thereafter, the parties filed responsive briefs to each other's post-trial submissions. See ECF Nos. 161 (“Pl. Reply”), 162 (“Def. Reply”).

This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). The Court derives its conclusions of fact from the evidence admitted and witness testimony provided at trial, along with those facts stipulated to in the Final Pretrial Order (ECF No. 138, hereinafter “FPTO”); see also NXIVM Corp. v. Sutton, No. 06-cv-1051, 2019 WL 4010859, at *2 (D.N.J. Aug. 26, 2019) (deriving Rule 52(a) conclusions of fact, in part, from the parties stipulated facts in the final pretrial order). The Court had the opportunity to evaluate the evidence and the credibility of all the witnesses, observe their demeanor as they testified, and consider the extent to which their testimony has been supported or contradicted by other credible evidence. The Court finds Plaintiff's witnesses, Kendra Mallet and Robert Spence, to be credible. On the other hand, the Court finds Defendants' witnesses, Sid Syed and Vijayakumar Vemulapalli (“Kumar”),^[1]lacked credibility. These findings are based upon the level of detail and consistency of the witnesses' testimony regarding the events and the witnesses' demeanor while testifying.

While the Court has reviewed the entirety of the record, the Court includes references only to the evidence most pertinent to its analysis. For the reasons set forth below, the Court will enter judgment in Plaintiff's favor.

II. CONCLUSIONS OF FACT^[2]

a. The Parties

This action arises out of a set of agreements entered into by Plaintiff and Defendants concerning the operation of a 129-room guest lodging facility located at 11171 Dowlin Drive, Sharonville, Ohio 45241 (hereinafter, the “Facility”). FPTO at 2-3. Plaintiff, a corporation organized and existing under the laws of the State of Delaware, with a principal place of business in Parsippany, New Jersey, is one of the nation's largest guest lodging facility franchisors. Id. at 2. Plaintiff does not own or operate any hotels but, instead, operates a guest lodging facility franchise system comprised of federally registered trade names, service marks, and logos. Id. Defendant Durga is a limited liability company organized and existing under the laws of the State of Michigan, with a principal place of business in Cincinnati, Ohio. Id. Defendant Vemulapalli is Durga's sole member and is a citizen of Cincinnati, Ohio. Id.

b. Execution of the Franchise Agreement and Guaranty

The parties' relationship formed in early 2013 when Kumar, Durga's authorized agent and Defendant Vemulapalli's husband, began expressing interest in purchasing the Facility. DFOF at 4; ECF Nos. 154-55 (Trial Transcript, “Trial Tr.”) at 289:14-25, 290:1-2. Kumar began purchasing hotel properties sometime around 2011 and, by early 2013, had funds to invest following his sale of another hotel. DFOF at 4; Trial Tr. at 284:21-23, 289:11-290:19. Kumar's employee Albert Bashir introduced him to Sid Syed, a then-employee at the Facility, who in turn introduced Kumar to the Facility's prior owner, Mohammad Jilani. Trial Tr. at 289:14-25. Kumar offered Mr. Jilani $800,000 for the Facility, an offer Mr. Jilani accepted. Trial Tr. at 290:7-19.

It was at that time that Kumar began interacting with representatives from Plaintiff's parent company, Wyndham Hotel Group LLC (“Wyndham”). Trial Tr. at 290:21-23, 299:9-16. At trial, Kumar testified to verbal conversations he purportedly had with Wyndham representatives, including an individual named Steve Kleinknecht. Trial Tr. at 290:24-291:6. Kumar asserts Mr. Kleinknecht promised that, if Durga signed a franchise agreement to operate the Facility as a Travelodge, Wyndham would thereafter give Durga a superior “flag” (i.e., brand) to operate at the Facility, such as a Days Inn or Ramada. Trial Tr. at 301:24-302:4. Kumar was aware of the Facility's physical condition, of its poor reputation in the community, and that a crime had previously occurred on the property. Trial Tr. at 242:3-10, 355:1-4, 356:7-12. Kumar testified that, given this history, it was Mr. Kleinknecht's recommendation to change the Facility's brand in order for it to be profitable. Trial Tr. at 302:19-24. As a result of these conversations, Kumar testified to his understanding that receipt of a superior Wyndham flag was a guaranteed promise. Trial Tr. at 323:8-19; DFOF at 5.

Durga purchased and took possession of the Facility on October 23, 2013. Trial Tr. at 102:15-18. Plaintiff was a part of neither the sale nor negotiations for Durga's purchase of the Facility. Trial Tr. at 95:16-21. Around this time, in September 2013, Plaintiff provided Durga with a Franchise Disclosure Document (“FDD”), which “relates information about the Travelodge as well as the franchise agreements.” Trial Tr. at 96:10-15, 97:24-25; Trial Exhibit (“Tr. Ex.”) 10; see also Tr. Ex. 11. The FDD provided to Durga was specific to the Travelodge brand. Trial Tr. at 96:16-24. Durga was then provided with a “punch list” (“PIP”), which “describes what a site would have to do to be in compliance . . . with the Travelodge brand's standards.” Trial Tr. at 98:12-15; Tr. Ex. 7. The PIP, identifying necessary physical improvements, was generated on October 21, 2013, following an inspection of the Facility. Trial Tr. at 98:25-99:2, 167:5-8.

The parties then engaged in negotiations over terms of a franchise agreement. Trial Tr. at 99:10-13, 114:2-5, 188:1-3. On November 5, 2013, Plaintiff sent Durga a proposed franchise agreement for franchising of the Travelodge brand. Tr. Ex. 12; Trial Tr. at 99:14-23. A revised draft franchise agreement was sent to Durga via email on November 20, 2013. Tr. Ex. 23. In the same correspondence, Plaintiff sent Durga a letter agreement (“Flip Letter”) acknowledging Durga's interest in other Wyndham brands and providing for a future opportunity to apply for conversion to a Days Inn franchise. Tr. Ex. 3; Trial Tr. at 100:2-24. Upon receipt, Durga signed the Flip Letter. Tr. Ex. 3. While the letter itself is dated November 20, 2013, its execution date is backdated to October 23, 2013. Id. Durga signed the PIP on November 25, 2013. Tr. Ex. 7; Trial Tr. at 99:3-6. Defendants executed the final franchise agreement (“Franchise Agreement”) and a guaranty (“Guaranty”) on November 27, 2013. Tr. Ex. 1. The Franchise Agreement's effective date was also backdated to October 23, 2013. Id. With Defendant Vemulapalli's authorization, Kumar signed the Franchise Agreement on behalf of Durga and the Guaranty on behalf of Defendant Vemulapalli. FPTO at 3-4; Trial Tr. at 319:15-22

c. Terms of the Parties' Agreements

The Franchise Agreement authorized Durga to operate the Facility as a 129-room Travelodge hotel for a fifteen-year term. FPTO at 2-3; Tr. Ex. 1 at § 5. Various provisions of the Franchise Agreement required Durga to make periodic payments to Plaintiff for, among other things, royalties, system assessment fees, taxes, and interest (together, “Recurring Fees”). FPTO at 3; Tr. Ex. 1 at §§ 7, 18.4; id. at Schedule C; see also PFOF at 2-3 (detailing terms of the relevant fee provisions). Durga was also required to assume all obligations, including financial obligations, of the Facility's predecessor franchisee. Tr. Ex. 1 at Schedule D; Trial Tr. at 191:13-192:6. The Franchise Agreement also permitted interest at a rate of 1.5% per month on all past due amounts payable to Plaintiff under the agreement. Tr. Ex. 1 at § 7.3. Because many of the Recurring Fees were predicated on gross room revenue, Durga was required to maintain accurate financial information and submit monthly revenue reports to Plaintiff. Tr. Ex. 1 at § 3.6. In turn, among other things, Plaintiff was required to provide Durga with access to its reservation system, which Durga was required to use, along with needed software maintenance and support. Tr. Ex. 1 at § 4.2; see also Tr. Ex. 8. Plaintiff was permitted to restrict Durga's access to the reservation system in the event of a default under the Franchise Agreement or failure to pay required fees. Tr. Ex. 1 at § 11.4.

Section 11.2 of the Franchise Agreement permitted Plaintiff to terminate the agreement if Durga (i) discontinued operation of the Facility as a Travelodge, or (ii) lost possession or right to possession of the Facility. Tr. Ex. 1 at § 11.2...