Holiday Inn Franchising, Inc. v. Hotel Associates, Inc.

Ark.App. 147, 382 S.W.3d 6 (2011).

Buddy House was in the construction business. For decades, he collaborated on projects with Holiday Inn Franchising, Inc. Their relationship was characterized by good faithmany projects were undertaken without written contracts. At Holiday Inn's request, House inspected a hotel in Wichita Falls, Texas, to estimate the cost of getting it into shape. Holiday Inn wanted House to renovate the hotel and operate it as a Holiday Inn. House estimated that recovering the cost of renovation would take him more than ten years, so he asked for a franchise term longer than Holiday Inn's usual ten years. Holiday Inn refused but said that if he ran the hotel "appropriately," the term would be extended at the end of ten years.

House bought the hotel, renovated it, and operated it as Hotel Associates, Inc. (HAI), generating substantial profits. He refused offers to sell it for as much as $15 million.

Before the ten years had passed, Greg Aden, a Holiday Inn executive, developed a plan to license a different local hotel as a Holiday Inn instead of renewing House's franchise license. Aden stood to earn a commission from licensing the other hotel. No one informed House of Aden's plan. When the time came, HAI applied for an extension of its franchise, and Holiday Inn asked for major renovations. HAI spent $3 million to comply with this request. Holiday Inn did not renew the term for HAI, however, and granted a franchise to the other hotel instead. HAI sold its hotel for $5 million and filed a suit against Holiday Inn, asserting fraud. The court awarded HAI compensatory and punitive damages. Holiday Inn appealed.

IN THE WORDS OF THE COURT ...

Raymond R. ABRAMSON, Judge.

* * * *

Generally, a mere failure to volunteer information does not constitute fraud. But silence can amount to actionable fraud in some circumstances where the parties have a relation of trust or confidence, where there is inequality of condition and knowledge, or where there are other attendant circumstances. [Emphasis added.]

In this case, substantial evidence supports the existence of a duty on Holiday Inn's part to disclose the Aden [plan] to HAI. Buddy House had a long-term relationship with Holiday Inn characterized by honesty, trust, and the free flow of pertinent information.

He testified that [Holiday Inn's] assurances at the onset of licensure [the granting of the license] led him to believe that he would be relicensed after ten years if the hotel was operated appropriately. Yet, despite Holiday Inn's having provided such an assurance to House, it failed to apprise House of an internal business plan * * * that advocated licensure of another facility instead of the renewal of his license. A duty of disclosure may exist where information is peculiarly within the knowledge of one party and is of such a nature that the other party is justified in assuming its nonexistence. Given House's history with Holiday Inn and the assurance he received, we are convinced he was justified in assuming that no obstacles had arisen that jeopardized his relicensure. [Emphasis added.]

Holiday Inn asserts that it would have provided Buddy House with the Aden [plan] if he had asked for it. But, Holiday Inn cannot satisfactorily explain why House should have been charged with the responsibility of inquiring about a plan that he did not know existed. Moreover, several Holiday Inn personnel testified that Buddy House in fact should have been provided with the Aden plan. Aden himself stated that * * * House should have been given the plan. * * * In light of these circumstances, we see no ground for reversal on this aspect of HAI's cause of action for fraud.*

• What is the issue in this franchise-termination dispute case?
• What is the rule of law in this franchise-termination dispute case?

Other legal considerations to include in your brief analysis:

1. What is one indication that Buddy House had ran the Holiday Inn hotel franchise "appropriately"?
2. Why should House and HAI have been advised of Holiday Inn's plan to grant a franchise to a different hotel in their territory?

*Apply the law of franchises as well as fraud.

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