Walter v. Holiday Inns, Inc.

985 F.2d 1232 (1993)

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Nature of the Case

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Facts

In August 1978, Ps purchased a tract of land with the intent of developing a hotel and casino complex at a marina in Atlantic City. Ps entered into a 50-50 Partnership Agreement with D. Both parties agreed to make an initial capital contribution of $2 million each to the partnership business. The partners successfully obtained a $75 million loan for the project from Midlantic National Bank, which later advanced an additional $20 million to the partnership. Construction commenced in early 1980 and proceeded at a rapid pace. The partners agreed to advance in equal shares additional capital to the casino on an as-needed basis to cover project development (pre-opening) or operating (post-opening) cash shortfalls. If one partner was unable to meet its share, the other could advance the funds and then serve a written 'cash call' letter on the non-contributing partner. A failure to comply with a strict timetable for repayment of the cash call would result in a dilution of the non-contributing partner's interest in the casino, with the degree of dilution linked to the total amount of the cash call. The conditions for relief from dilution because of failure to meet a project development cash call were more formidable than those for an operating cash call. The day-to-day operations were turned over to Harrah's, Inc., a subsidiary of D. The more important management and financing decisions remained with the partnership's Executive Committee, which was composed of two D executives and two of the Ps. The Executive Committee's decision-making power included completion of the project, the creation of long-term debt, and the creation of short-term debt for working capital in excess of $2 million. The complex opened its doors to the public on November 22, 1980, before all of the construction was completed. Ps were presented with financial projections for the casino that showed a large cash flow problem. Two separate cash call letters were issued demanding equity contributions to the project. The first sought $18.8 million and the second for $15.7 million. Ps decided to pass relying on D's pessimistic predictions about the financial prospects. D advanced its own funds to cover the shortfalls, and Ps' partnership interest was diluted pursuant to the formula specified in the prior agreements. The dire financial situation presented at the January 1981 Executive Committee Meeting precipitated Ps' efforts to sell their interest in the casino to outside investors. They approached D and others. D agreed to acquire plaintiffs' 49% interest in the partnership for payments to plaintiffs of $1.75 million per year for twenty years (a present value of $ 10.9 million). In July 1983, Ps sold their remaining 1% interest to d for an additional $1.8 million. Amazingly, after the 1981 buy-out, the casino became a profitable enterprise. In a newspaper article, Donald Trump, the owner of another casino, suggested that D had taken advantage of Ps in connection with the 1981 buy-out. Ps sued D in 1985. Ps claimed that D failed to provide them with certain information that they needed to negotiate the buy-out transaction from an equal position with D. Ps assert that D had designed a 'cash call strategy' to force the buy-out on terms unfavorable to Ps. Eventually, a trial was held in September 1991. D moved for judgment as a matter of law on all claims. The motion was granted with respect to the claims for breach of fiduciary duty, rescission, and punitive damages. It held that Ps had failed to prove that the alleged misstatements and omissions would have been material to their decision to sell their partnership interest or that they would have relied on the non-disclosed information. The jury found for D on every remaining issue. Ps appealed.