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Gordon & Rees Multi-Office Team Wins Unanimous Defense Verdict for National Motel Chain

On Jan. 10, a collaboration across Gordon & Rees offices resulted in a unanimous defense verdict for our client in a federal jury trial in Los Angeles. The client, one of the largest motel chains in the world, was accused of fraud in a real estate transaction with a successful Santa Barbara-based real estate investment and construction firm.  Gordon & Rees partner Calvin E. Davis of the Los Angeles office and senior counsel Brandi J. McKay of the Dallas office led the trial team, with assistance from senior counsel Aaron P. Rudin of Los Angeles and associate Christopher S. Norcross of Dallas.

Our client operated two motels in Wilmington, N.C., and New Philadelphia, Ohio, subject to two long-term leases beginning in the 1970s.  The plaintiff was the owner of the properties and the landlord under the leases.  Our client decided it wanted to exit these markets and entered into negotiations for an early termination of the leases, negotiations that took about two years.  The early termination agreements were ultimately signed, shortening the terms of the leases to four months during which the parties cooperated in the attempts of the plaintiff to sell the properties. Importantly, the early termination agreements contained an “as is” clause regarding the condition of the properties. The “as is” clause was significant because, without it, the leases required our client to maintain the properties in “first class condition.”  The plaintiff later contended that, in the negotiations leading up to the early termination agreements, representatives of our client explicitly promised that the properties were in good condition and indicated that hundreds of thousands of dollars had been spent “refreshing” one of the properties within the past few years.  It contended it only signed the early termination agreements based on these promises. Our client denied making any misrepresentations.

After unsuccessful efforts to sell the properties, the plaintiff took them back and began to manage them as independent motels.  It claimed to be horrified by the condition of the motels upon taking over, stating they had major structural issues; the HVAC systems were broken; and the guest rooms were shabbily maintained. The plaintiff filed an action in federal court in Los Angeles asserting breach of contract, fraud, negligent misrepresentation, waste and negligence.

After completing initial discovery, Gordon & Rees made a motion for partial summary judgment to dispose of the breach of contract and related claims based on the “as is” clause in the early termination agreements.  U.S. District Judge Margaret Morrow of the Central District of California granted the motion, holding that the language in the agreements combined with the negotiations leading up to the execution of the agreements made it obvious that the expectation of the parties was that the plaintiff would receive the properties back in their present condition.  This, along with corresponding motions in limine, prevented the jury from ever hearing the term “first class condition” during the trial.

The trial focused on the plaintiff’s claims that our client had misrepresented the condition of the properties through specific statements and half-truths.  The plaintiff’s damages included extensive repairs to the properties and significant lost revenues as a result (totaling close to $1 million) and a demand for punitive damages based on intentional fraud.  The plaintiff flew in witnesses from all over the country to attest to the poor condition of the properties and to the alleged prevalence of criminal activity (including housekeepers), and prominently featured photographs of the conditions at the properties.

The defense case focused on the fact that the plaintiff’s principal is a highly sophisticated and experienced real estate developer who owns a multibranch bank in the Ventura and Santa Barbara areas.  Our client invited him to inspect the properties prior to signing the “as is” agreements so that he could satisfy himself about the condition of the motels, but he never did so.  In addition, the defense argued that attempting to hide the conditions of the property from the plaintiff – both public properties the plaintiff owned – made no sense.  The principal was substantially impeached on cross-examination demonstrating that his recollection of the alleged fraudulent representations was fuzzy at best and that his testimony at trial varied substantially from his deposition testimony.  For example, he testified at trial about discussions with a representative of our client who he could not recall speaking with at the time of his deposition. 

The credibility of the plaintiff’s damages expert also was undermined based on a lack of qualifications.  Although he had a substantial background in the hotel field, he had no experience in the areas of financial analysis and, in fact, did not have a college degree.  In addition, his opinion was based in substantial part on information the plaintiff provided that he did not verify.  For example, he relied on the allegations in the plaintiff’s complaint. 

After just two hours of deliberations, the jury returned a unanimous defense verdict on all counts in favor of our client.  Based on the earlier victory on summary judgment for the breach of contract claim, our client is entitled to recover its attorneys’ fees as well.  Gordon & Rees’s client is thrilled with the result. 

The trial team would also like to thank paralegal Randall Stubblefield (LA), case assistant Sandi Grossman (Dallas), and legal secretaries Veronica Jamaica (Dallas) and Sandy Halvorsen (LA) for their assistance.

Calvin E. Davis
Christopher S. Norcross
Aaron P. Rudin