Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Franchisee guarantor found liable for breach of agreement with Ramada Worldwide, (Jan 3, 2025)

By Thomas K. Lauletta, J.D.

The franchisee unilaterally terminated the agreement after a fire at the hotel.

The U.S. District Court in Newark, New Jersey held that the individual guarantor signing on behalf of defendant franchisee Keys Hospitality was liable for the breach of the franchise agreement with Ramada Worldwide. Accordingly, as per the franchise agreement the guarantor was responsible for recurring fees, liquidated damages, and prejudgment interest. However, the court reserved judgment on the amount of the recurring fees and the attorney fees pending submission by Ramada of supplemental information relating to the amounts of these fees (Ramada Worldwide Inc. v. Keys Hospitality, LLC, No. 2:18-cv-03993-JXN-JSA (D.N.J. Dec. 31, 2024)).

The instant suit arose from a franchise agreement between Ramada Worldwide (“RWI”) and Keys Hospitality, on June 23, 2014. Under the franchise agreement, Keys Hospitality was required to operate a 250-room Ramada® guest-lodging facility located in Williamsburg, Virginia. Bruce L. Armstrong signed the agreement on behalf of Key Hospitality, and on the same date executed a Guaranty that committed Armstrong to make any unpaid payments on behalf of Keys Hospitality if Keys Hospitality defaulted under the Franchise agreement. The Guaranty also committed Armstrong to pay costs, including reasonable attorney fees, that RWI might incur in enforcing the Guaranty or the franchise agreement.

Under the agreement, Keys Hospitality was required to make periodic payments to RWI for royalties, service assessments, taxes, interest, reservation system user fees, and other fees (collectively, the "Recurring Fees"). In the event of an early termination of the franchise agreement by Keys Hospitality, Keys Hospitality was required to pay liquidated damages to RWI. If litigation was necessary to enforce the terms of the franchise agreement or collect amounts owed under it, the non-prevailing party would pay all costs and expenses, including reasonable attorneys' fees incurred by the prevailing party.

Under a Development Incentive Note, RWI on September 22, 2016, issued Keys Hospitality a check for $225,000. When Keys Hospitality shortly thereafter filed for bankruptcy, RWI stopped payment on the check.

As a result of a fire at the Keys Hospitality facility on November 18, 2016, the facility was unable to be operated as a Ramada® Inn “due to electrical issues and the fire marshal requirements.” During the time that the facility was closed, RWI issued an Acknowledgement of Temporary Closing pursuant to the franchise agreement for the period from November 18, 2016 through January 15, 2017 for renovations. After RWI granted Keys Hospitality several extensions for the closing of the facility, Keys Hospitality allegedly chose to unilaterally terminate the franchise agreement.

In March 2018 and July 2019, RWI filed complaints against Keys Hospitality and Armstrong for summary judgment for breach of the franchise agreement and Armstrong’s personal guaranty. The instant action is a consolidation of the two suits against Armstrong as guarantor. Armstrong opposed the motion.

Breach of contract claim. Armstrong did not dispute the validity of the Guaranty Agreement or otherwise challenge the amounts of RWI’s damages computed under the agreement. However, Armstrong argued that RWI was not entitled to a summary judgment because RWI breached the agreement and the development incentive note before Keys Hospitality’s alleged unilateral termination, under the three affirmative defenses noted below.

Development incentive loan (“DIN”). Armstrong argued that RWI breached the franchise agreement first when it canceled payment on the $225,000.00 DIN check to Keys Hospitality. The court rejected this argument, finding that Armstrong’s contention was not supported by the language of the franchise agreement or his previous sworn testimony.

Casualty and condemnation section of franchise agreement. Armstrong also argued that RWI was not entitled to liquidated damages because it terminated the franchise agreement prior to a time period allowed for Keys Hospitality to choose to terminate the franchise agreement within 60 days after a casualty under Section 11.31 (Casualty and Condemnation of the franchise agreement). The court concluded that Armstrong provided no evidence that Keys Hospitality elected to terminate the franchise agreement within the 60 day period allowed under the agreement.

Special stipulation in franchise agreement. Armstrong further argued that a “special stipulation” in the franchise agreement allowed Keys Hospitality to terminate the agreement within three years without penalty. The court stated that no portion of the agreement allowed Keys Hospitality to terminate the agreement as contended by Armstrong.

Rejecting the three affirmative defenses to RWI’s complaint, the court held that Keys Hospitality defaulted on the Franchise agreement and Armstrong’s breach of Guaranty.

Judgment for damages. The court determined that Armstrong was liable under the franchise agreement and Guaranty for outstanding Recurring Fees, liquidated damages, prejudgment interest, attorneys’ fees and costs.

Recurring fees. RWI sought $121,828.18 inclusive of interest. Although the court found that the unambiguous language of the franchise agreement indicated that RWI was entitled to the Recurring Fees (royalties, marketing fees, taxes, interest, and relicense fees), the court found that it was unclear from invoices submitted by RWI whether all of the outstanding amounts constituted Recurring Fees and what constituted finance charges. The court therefore directed RWI to submit supplemental documentation supporting the requested Recurring Fees.

Liquidated damages. RWI sought $500,000 in liquidated damages for Keys Hospitality’s premature termination of the franchise agreement. This amount was computed as $2,000.00 multiplied by the 250 rooms at the facility. The court concluded that this amount was a good faith forecast of the loss reasonably foreseen to result from such an early termination.

Prejudgment interests. The court determined that RWI was entitled to prejudgment interest on its state law claims of $682,286.86, computed as 1.5 percent per month, beginning from June 4, 2017, through December 30, 2024, the date of the instant decision.

Attorney fees and costs. As the prevailing party in this case, the court stated that RWI was entitled to collect reasonable attorney fees and costs. However, the court noted that RWI did not provide “any bills or invoices to support” for its claimed fees and costs. The court allowed RWI leave to document such attorney fees and costs.

Court action. The court granted RWI’s motion for summary judgment against Armstrong and held that RWI was entitled to $500,000.00 in liquidated damages and $682,286.86 in prejudgment interest on the liquidated damages award. The Court reserved the decision on amounts of Recurring Fees and attorney fees due pending receipt and review of supplemental submissions provided by RWI.

The Case is No. 2:18-cv-03993-JXN-JSA.

Judge: Neals, J.

Attorneys: Justin Michael Vogel (Connell Foley LLP) for Ramada Worldwide Inc. Michael A. Orozco (Price Meese Shulman & D'Arminio, P.C.) for Bruce L. Armstrong.

Companies: Ramada Worldwide Inc.; Keys Hospitality, LLC

Cases: FranchisingDistribution NewJerseyNews