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ClubSpecialists Intl. LLC v. Keeneland Association, Inc.

United States District Court, E.D. Kentucky, Central Division

May 1, 2018

CLUBSPECIALISTS INTL., LLC, Plaintiff,
v.
KEENELAND ASSOCIATION, INC., Defendant, and KEENELAND HOSPITALITY, LLC, Intervenor Defendant.

          OPINION AND ORDER

          KAREN K. CALDWELL, CHIEF JUDGE

         This matter is before the Court on cross-motions for summary judgment filed by Plaintiff ClubSpecialists Intl., LLC and Defendant and Intervenor Defendant Keeneland Association, Inc. and Keeneland Hospitality, LLC, respectively. For the reasons set forth below, the Court denies ClubSpecialists motion for summary judgment and grants in part and denies in part Keeneland's motion for summary judgment.

         I. Background

         The following is an account of the undisputed facts in this case. This dispute arises from the Phase 2 Agreement entered into by ClubSpecialists and Keeneland Association in December 2014. Under that agreement, ClubSpecialists was to oversee eleven key transition initiatives relating to the changeover of Keeneland's food and beverage business from a third-party provider to an in-house operation. The agreement was for a three year period and ClubSpecialists was to be paid, on a monthly basis, a varying percentage of annual gross revenues from Keeneland's food, beverage, and merchandise sales. After the agreement was executed, Keeneland Association organized a separate subsidiary company, Keeneland Hospitality, to operate the food, beverage, and merchandise business.

         The Phase 2 Agreement provided that Keeneland could terminate the agreement for cause through two procedures. With thirty-days written notice, and an opportunity to cure, Keeneland could terminate the agreement based on “[a] determination by Keeneland that ClubSpecialists (A) has breached any material term or condition of this Agreement; and/or (B) is engaging or has engaged in willful misconduct or conduct which reasonably is perceived by Keeneland to be detrimental to the business or reputation of Keeneland Association.” Alternatively, Keeneland could terminate the agreement immediately “for any act of fraud, embezzlement, theft, or personal dishonesty by ClubSpecialists.” (DE 1-1, at 6.)

         On June 30, 2016, Keeneland informed ClubSpecialists that it was terminating their relationship based on “eighteen (18) months of missed goals, objectives, and initiatives . . . which constitute a breach of material terms of our agreement.” (DE 83-5, at 2.) Keeneland further stated that it intended to pay ClubSpecialists under the agreement for an additional thirty days. ClubSpecialists responded to the termination letter, informing Keeneland that it had failed to specify any act which constituted cause for termination and demanding that Keeneland provide such information and thirty days for ClubSpecialists to cure the alleged breach. As a result, counsel for Keeneland sent ClubSpecialists a letter on September 2, 2016 which purported to give ClubSpecialists thirty days to offer a cure.

         Instead of offering a cure, ClubSpecialists initiated this lawsuit, alleging breach of contract and breach of the duty of good faith and fair dealing. (DE 1.) Keeneland Hospitality moved to intervene in this action and filed a counterclaim against ClubSpecialists alleging breach of contract, based on the allegations contained in the termination letter. (DE 15.) Keeneland Association moved for judgment on the pleadings, contending that its termination fell within its rights under the agreement. The Court, however, found ClubSpecialists had stated plausible claims and denied Keeneland's motion. (DE 32).

         During the course of discovery, Keeneland learned that ClubSpecialists had made two payments to Keeneland Hospitality's Director of Hospitality, Bryan O'Shields. ClubSpecialists had recommended that Keeneland Hospitality create the position and had assisted Keeneland in the search that ultimately resulted in O'Shields hiring. Kevin Stark, a ClubSpecialists principal, made the first payment to O'Shields in December 2015, a check for $10, 000. That payment was understood by both O'Shields and Stark to be in appreciation of O'Shields's work at Keeneland Hospitality. In May 2016, ClubSpecialists made a second payment to O'Shields. This payment was prompted by O'Shields, who had asked for a loan to cover funeral expenses for a family member who had died unexpectedly. Stark and Jim Riscigno, another ClubSpecialists principal, discussed the payment via email, proposing that O'Shields could pay them back over a year or, if they decided to again pay O'Shields a yearly bonus, they could subtract the loan from that amount. Ultimately, O'Shields was never asked to repay the loan and ClubSpecialists declared the payment as a “business expense” on its taxes. O'Shields was never a ClubSpecialists employee, and ClubSpecialists did not inform Keeneland Hospitality of this payments until discovery in this matter commenced. O'Shields resigned as Director of Hospitality in July 2016.

         ClubSpecialists and Keeneland Hospitality have filed amended complaints and counterclaims. ClubSpecialists added a third count seeking indemnification from Keeneland Association for Keeneland Hospitality's counterclaims. (DE 49). In addition to its original breach of contract claim, Keeneland Hospitality has alleged a second breach of contract claim against ClubSpecialists, and a breach of the duty of good faith and fair dealing, based on the secret payments to O'Shields. Keeneland Hospitality also asserts claims for tortious interference with its business relationship, aiding and abetting breach of fiduciary duty, and fraudulent omission. (DE 78.) The parties have filed cross-motions for summary judgment. Briefing on these motions has been completed and this matter is now ripe for review.

         II. Standard of Review

         A moving party is entitled to summary judgment pursuant to Federal Rule of Civil Procedure 56 “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In order to defeat a summary judgment motion, “[t]he nonmoving party must provide more than a scintilla of evidence, ” or, in other words, “sufficient evidence to permit a reasonable jury to find in that party's favor.” Van Gorder v. Grand Trunk W. R.R., Inc., 509 F.3d 265, 268 (6th Cir. 2007) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986)). Thus, the “mere existence of some alleged factual dispute between the parties” will not defeat summary judgment; “the requirement is that there be no genuine issue of material fact.” Anderson, 477 at 247-48. Summary judgment must be entered if, “after adequate opportunity for discovery, ” a party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Tolton v. American Biodyne, Inc., 48 F.3d 937, 940 (6th Cir. 1995) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (internal quotations omitted)).

         III. Analysis

         A. ClubSpecialists's breach of contract and breach of good faith and fair dealing claims

         As the Court found in its prior opinion, the Phase 2 Agreement required that Keeneland provide ClubSpecialists written notice of contractual deficiencies and a thirty-day period to cure those alleged breach. (DE 32, at 7.) ClubSpecialists claims that Keeneland breached the agreement by failing to provide the required notice and opportunity to cure. Keeneland argues that it is entitled to summary judgment under the first breach rule based on ClubSpecialists secret payments to O'Shields.

         1. The first breach rule

         When sitting in diversity, federal courts must apply the law of the state. Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). It is well established under Kentucky law that “a party who commits the first breach of a contract is deprived of the right to complaint of a subsequent breach by the other party.” Williamson v. Ingram, 49 S.W.2d 1005, 1006 (Ky. 1932); see also Dalton v. Mullins, 293 S.W.2d 470, 476 (Ky. 1956) (“[H]e who first breaches a contract must bear the liability for its nonperformance. Thus no benefits should be obtained by the party who is guilty of the first breach.”); see also Amalgamated Indus. v. Tressa, Inc., 69 Fed.Appx. 255 (6th Cir. 2003). This rule originated as one of equity, but applies even at law. West Ky. Coal Co. v. Nourse, 320 S.W.2d 311, 315 (Ky. 1959) (citing Williamson v. Ingram, 243 Ky. 749 (1932)). For the first breach rule to apply, the breach must be “material or substantial.” Pinson Drilling, Inc. v. Williams, No. 2013-CA-001599-MR, 2014 WL 4177424, at *2 (Ky. Ct. App. Aug. 22, 2014) (citing Dalton, 293 S.W.2d 470 and Fay E. Sams Money Purchase Pension v. Jansen, 3 S.W.3d 753 (Ky. Ct. App. 1999)).

         ClubSpecialists claims that Kentucky's first breach rule is inapplicable to this case. It argues that the rule applies only where there is a direct connection between the first breach and the other party's later breach. Under that interpretation of the rule, it cannot be invoked where the later-breaching party lacked knowledge of the first breach. Generally, in cases where Kentucky higher courts have applied the rule, there has been a direct connection between the first breach and the subsequent breach. See Hall v. Rowe, 439 S.W.3d 182 (Ky. App. 2014) (coal lessor claimed lessee breached by failing to provide payments and documentation); Webb v. Welcome Wagon, Inc., 255 S.W.2d 459 (Ky. 1953) (company that breached contract could not enforce noncompetition agreement against employee); see also Amalgamated Indus., 69 Fed.Appx. at 259-60 (discussing the first breach rule where the first material breach led to the subsequent breach). No. court, however, has held that the rule is limited to those cases. Thus, it is an issue of first impression whether the first breach rule applies in Kentucky where the party invoking the rule was ignorant of the first breach. Accordingly, in the absence of explicit authority, the Court is “guided by applicable principles of state law and by relevant decisions of other jurisdictions.” Arms v. State Farm Fire & Cas. Co., 731 F.3d 1245, 1249 (6th Cir. 1984) (citing Winston Corp. v. Cont'l Cas. Co., 508 F.2d 1298, 1304 (6th Cir.)).

         Looking first to the applicable principles of state law, the Court notes that Kentucky's first breach rule does not explicitly limit its applicability to instances where the invoking party knew of the first breach. On its face, the rule contains no causal requirement. It simply states that “no benefits should be obtained by the party who is guilty of the first breach.” Dalton, 293 S.W.2d at 476. Additionally, the Kentucky Court of Appeals has held that a party's “motivation is not relevant unless they were the first to breach the contract.” Fay E. Sams, 3 S.W.3d at 759. In that case, the court assumed that the defendants breached the contract by giving prextual reasons for termination, but still found that the defendants could not be held liable based on the plaintiffs earlier breach. Id. This suggests that first breach rule in Kentucky operates as a form of the “clean hands” doctrine, barring all claims brought by the first breaching party regardless of ...


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