Saturday, March 15, 2008

Hotel horror story is consumer fraud, not common-law fraud

Onyx Acceptance Corp. v. Trump Hotel & Casino Resorts, Inc., 2008 WL 649024 (N.J. Super. A.D.)

Onyx is an auto finance company that buys loan contracts from car dealerships and securitizes them. It depends on personal relationships with car dealers for business. This lawsuit stemmed from a disastrous holiday party Onyx threw for its most valued customers at the Trump Taj Mahal Casino Resort in Atlantic City. The party, to reward the three dealerships in New Jersey and Pennsylvania which referred the most business to Onyx in fall 2001, was planned for December 1, 2001. Onyx had held a similar event at Bally’s the previous year, which had been a great success and had resulted in additional business. Onyx initially contacted Bally’s again, but Bally’s wouldn’t guarantee rooms on that night. Onyx chose Trump because Trump promised that, as a “huge hotel,” it could meet Onyx’s room availability needs. Trump’s representative told Onyx’s representative that their party was a “small event” that Trump “could easily take care of.” Trump’s representative said that Onyx’s rooms “were guaranteed.”

Onyx and Trump entered into a written contract providing that “all accommodations will be held on a definite basis.” Onyx signed and prepaid Trump for a banquet and 60 hotel rooms, which cost about $29,000. Trump issued a “DEFINITE BOOKING SHEET” to Onyx.

Unfortunately, Trump significantly overbooked the hotel that night. One day before the party, Trump realized that it was overbooked. Staff “pre-walked” twenty casino guests to another hotel to try to stave off the impending crisis, but there were still significantly more reservations than rooms. Trump never contacted Onyx about the potential problem. Indeed, two Onyx decisionmakers arrived early on December 1 and checked in, but weren’t informed about the problem. As other Onyx employees and guests began arriving, they were told there were no rooms available and that the hotel was “sold out.” Finally, hours later, the Onyx representative who’d arranged the party got a call from one of Onyx’s account representatives, who was in the lobby trying to check in. She immediately went down with her paperwork and advised the staff that Onyx had “pre-registered, prepaid rooms” connected with its party.

The staff apologized but said there was nothing they could do. The Onyx employee pointed out that Onyx had prepaid nearly $30,000, to which the response was “ma’am, we have people who spent $30,000 a hand.” (Of course, those people were most likely offered complimentary rooms, not refused rooms for which they’d paid.)

They continued to argue as guests continued to arrive. Trump didn’t explain why the prepaid rooms were unavailable, and during an hour-long argument the front desk didn’t offer any alternatives or solutions. Guests were arriving all that time, wanting to check in and shower before the party, which had been supposed to start at 7 pm. Some went up to the banquet, while others stayed in the lobby. It was “a complete nightmare, chaos.” Onyx’s guests were “upset, unhappy, frustrated, angry, even furious, and they wondered how the situation was going to be rectified whether they were going to be given rooms, or whether they should just go home. Guests who had been assigned rooms were asked to permit other guests to use their rooms to shower and dress for the evening, and Onyx employees doubled and tripled up in rooms, giving up their rooms for their invited guests to use.” All the while, other guests were arriving and receiving rooms, though Trump maintained that they had checked in earlier and were just picking up keys.

After an hour of argument, Onyx’s representative called her superior, who came down and spent at least another hour arguing with the front desk. Eventually he had a “lengthy discussion” with the general manager. After that, Trump booked Onyx guests at other hotels in the area. Six were booked at the Trump Plaza in Atlantic City, 20 at a Days Inn, and one at a hotel in Brigantine. These lacked the amenities of the Trump, and some of Onyx’s guests were upset at the divergence between what they’d been promised and what they got. Trump finally offered free transportation, another night at the Trump for free, and complimentary buffet coupons. However, this happened only after Trump first proposed that guests pay for their own taxis and submit receipts to the hotel for reimbursement. And the free transportation was “substandard”; one guest was driven around for 45 minutes, until 2 am, because the driver didn’t know where to go.

The banquet was a failure, because Onyx’s staff had been so consumed with fixing the room problem. The main topic of conversation at the banquet was the royal screw-up that had occurred. Onyx employees testified that business dropped off significantly after the party particularly, though not exclusively, from dealers who attended it. “[O]ne dealer stated that the fiasco at Trump was a topic of conversation among dealers, including those who did not attend. Dealers who attended the party testified that they took transactions away from Onyx as a result. However, these dealers could not identify with specificity the deals that they sent to other lenders, or the exact number of deals diverted.” Moreover, some of their testimony seemed to have been solicited, even exaggerated, by Onyx for purposes of litigation.

Onyx sued for breach of contract, common-law fraud, and violation of the New Jersey Consumer Fraud Act (CFA). It won summary judgment on its breach of contract claim and a directed verdict on its CFA claim, with trebled damages based on the amount it prepaid for the banquet and rooms. The judge granted a directed verdict to Trump on Onyx’s claims for common-law fraud, punitive damages, and lost profits. The judge further ruled that Onyx’s claims for lost profits had been frivolous and granted Trump fees.

Among other things, the court of appeals reversed the award of fees to Trump. There was no evidence that the lost profits claim was made or pressed in bad faith. Onyx overreached in trying to claim lost profits from all dealers, including those who didn’t attend the party. But the claim was made in (misguided) sincerity.

What did Trump have to say for itself? According to Trump, “‘guaranteed’ meant only that Trump may not cancel the reservation until 7 a.m. of the day after arrival.” Trump promised to hold “only ‘the reservation, not the room.’” Nor did Trump’s references to a “block” of “guaranteed” rooms mean that the rooms would be preassigned. As the court pointed out, “Trump’s Orwellian definitions of these words … were not shared with Onyx.” Trump’s representative never suggested that Onyx’s rooms could be given to other people. Nor did Trump tell its guests about its practice of overbooking by about 10%, which it does because there’s a historical no-show rate of 20-25%. Trump didn’t exclude guaranteed rooms or blocks of rooms reserved for prepaid groups from its overbooking policy. If the hotel is overbooked, it didn’t “discriminate on who doesn’t get a room ... [W]hether they’re cash paying or somebody who is a casino guest, if we don’t have a room, we don’t have a room.”

Onyx’s expert on the hospitality industry testified that “guaranteed” means that a hotel has taken a room out of inventory, and the room is not subject to the hotel’s overbooking policy. He stated that, in 37 years in the industry, he’d never seen a group “so misrepresented and lied to.”

Trump argued that the trial court shouldn’t have found a CFA violation as a matter of law. But the court of appeals agreed that any reasonable person would conclude that Trump falsely represented a room guarantee. The guarantee was material, as Onyx proved by rejecting Bally’s because it wouldn’t offer a guarantee.

Trump proposed that its private definition of “guarantee” meant that there was no misrepresentation. It also argued that, at the time it made the contract, it believed that rooms would be available. Finally, it maintained that it made good-faith attempts to correct the problem.

The court readily concluded that Trump’s reservation/room distinction “defies any commonsense understanding of the term guaranteed.” It’s the customer’s reasonable expectations that define the scope of the CFA, not the seller’s “unreasonable definitions of commonplace terms.” The problem is not Trump’s failure to disclose its definition of “guaranteed,” or its failure to disclose its overbooking policy. Those only mattered because of its affirmative representations that the rooms were “guaranteed.” Though a breach of contract isn’t per se unfair or unconscionable under the CFA, substantial aggravating circumstances, as here, can justify applying the CFA and trebling damages.

Likewise, Trump’s lack of knowledge, at the time of contracting, that it would be unable to perform was irrelevant. Under the CFA, intent to deceive, and even knowledge of falsity, are irrelevant. Moreover, at the time it contracted, Trump knew that the rooms it called guaranteed were not really guaranteed at all; in a case of overbooking, Onyx’s guests could be kicked to the curb. Nor were Trump’s after-the-fact efforts to correct the problem it caused sufficient to avoid CFA liability, even assuming they were in good faith.

The court of appeals agreed with the trial court, however, that Onyx’s common-law fraud claim failed for lack of intent. Though Trump used an unreasonable, undisclosed definition of “guaranteed,” that wasn’t enough to establish intent. (Intent to what? Trump clearly intended that Onyx, in particular, rely on the “guarantee” claim, since it knew Onyx’s specific requirements.) Trump didn’t know that it would be unable to provide the rooms, and there was no evidence that it intended not to provide the rooms, or that it knew there was a reasonable or substantial likelihood that it wouldn’t be able to. It even tried to avoid the problem on November 31. There was no evidence that Trump routinely dishonored reservations, and overbooking is a recognized and accepted practice in the industry.

Comment: So here’s the upshot—a consistent practice of “Orwellian,” undisclosed private definitions of terms, which the defendant must have known would deceive customers, isn’t actionable as common-law fraud because the harm it always threatens doesn’t materialize for most consumers. This is why state consumer protection law covers more than the common law, and it’s why full First Amendment protection for commercial speech would wreak havoc with consumer protection law.

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