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Chelsea Grand, LLC v. New York Hotel and Motel Trades Council, Afl-Cio

United States District Court, S.D. New York

September 29, 2014



PAUL A. CROTTY, District Judge.

Chelsea Grand, LLC owns a Four Points by Sheraton hotel on West 25th Street in Manhattan ("Chelsea Grand"). The New York Hotel and Motel Trades Union Council, AFL-CIO ("Union") is a labor union which represents hotel workers. The Union maintains that because of a hotel management contract Chelsea Grand had with Interstate Hotels & Resorts ("Interstate"), Chelsea Grand became bound to certain provisions of pre-existing agreements between Interstate and the Union. The Interstate-Union agreement provided for resolution of any and all disputes by the "Office of Impartial Chairman, " which served as the hotel industry's arbitrator. Interstate and the Union appeared before the Impartial Chairman's Office which held, in a series of rulings, that Chelsea Grand was bound by the card check and neutrality provision of the agreements between Interstate and the Union, and that Chelsea Grand was in violation of those provisions (the "Award"). Accordingly, the Office of the Impartial Chairman imposed a substantial penalty which continued until there was acceptance. The penalty imposed essentially equaled the daily receipts of the Chelsea Grand.

On March 23, 2007, Chelsea Grand commenced a New York Civil Practice Law and Rules Article 75 proceeding in New York Supreme Court challenging the validity of the arbitral proceeding. Chelsea Grand asked that the Award be set aside because:

(1) fraud or misconduct existed;
(2) the procedures of Article 75 of the C.P.L.R. were not followed;
(3) no valid agreement to arbitrate existed; and
(4) the agreement to arbitrate was not complied with.

The Union removed the State action to federal court asserting that the parties had a labor dispute under L.M.R.A. § 301, 29 U.S.C. § 185. The Union seeks enforcement of the Award by the Office of Impartial Chairman.

Chelsea Grand asserts that it cannot be bound by Interstate's agreement with the Union because Interstate lacked the authority to sign any union contract on behalf of Chelsea Grand. Further, Chelsea Grand asserts that Interstate did not supervise the hotel employees; rather, a Chelsea Grand affiliate, StarPerfect Management Inc. ("StarPerfect"), was responsible for that task.

While Chelsea Grand's legal strategy is to minimize Interstate's role at Four Points by Sheraton, there is no doubt that Interstate's appointment as the managing agent of the hotel was critical to Chelsea Grand's obtaining the Four Points by Sheraton franchise, along with the very valuable access to Sheraton's worldwide reservation system. When Chelsea Grand refinanced the hotel with Merrill Lynch, it listed Interstate as the managing agent. That, too, was critical to the success of the refinancing. Finally, Interstate provided critical hotel management services at the hotel's Front Desk or Front Office. Chelsea Grand attempts to emphasize its role in managing the housekeeping staff ( i.e., making the beds), but making beds is not what makes the hotel a success. Rather, it is the reservation system, the financing, and the management of the Front Office/Front Desk functions that are critical to success.

Ultimately, the case hinges on the following questions: (1) was Interstate bound by the Card Count/Neutrality Clause in the 2001 Industry Wide Agreement; (2) if so, did Interstate bind Chelsea Grand to the 2001 Industry Wide Agreement as a Joint Employer; or (3) did Interstate have the authority to bind Chelsea Grand to the 2001 Industry Wide Agreement as its agent.

The Court determines that Interstate was bound by the Card Count/Neutrality Clause of the 2001 Industry Wide Agreement. Since Interstate was already bound, it could bind Chelsea Grand to the same agreement, either as a joint employer (and the Court determines that Interstate and Chelsea Grand were joint employers) or as Chelsea Grand's agent (and the Court finds that Interstate was Chelsea Grand's disclosed agent with apparent authority to bind Chelsea Grand).


I. The New York Hotel Industry

Major hotels in New York City, particularly in Manhattan, generally belong to the Hotel Association of New York City ("HANYC"). HANYC has two classes of membership: general and collective bargaining. Members of the collective bargaining class are members of a multi-employer bargaining unit which bargains with the Union on behalf of some 27, 000 hotel employees. These hotels are either members of the multi-employer bargaining unit; but if not, then they sign "me too" agreements that bind them to the terms of the multi-employer bargaining unit agreement. "Me too" agreements frequently contain individually bargained modifications tailored to the specific needs or interests of individual hotels and managers.

The collective bargaining agreement at issue - the Industry Wide Agreement ("IWA") - dates to 1990, but has been renewed every five or six years to reflect new wage rates, benefits and other terms and conditions of employment. Prior versions of the IWA included a card check and neutrality clause ("Card Check/Neutrality Clause"), which obligated hotel owners and managers to provide the Union access to employees, to permit the Union to organize employees through a card check process, and to remain neutral throughout the union organizing process. The IWA also included an arbitration clause, which provided that the Office of Impartial Chairman would resolve any and all disputes of any kind arising out of the agreement.

HANYC and the Union entered into a Memorandum of Understanding ("MOU"), which modified the terms of the existing IWA ("2001 IWA"). The MOU was to become effective on June 1, 2001. On June 23, 2000, Kane Kessler, labor counsel to HANYC, wrote to the hotels and managers covered by the agreement to explain the changes in the IWA. The 2000 MOU added an "accretion" clause ("Accretion Clause") to the agreement which provided: "A Hotel that becomes the owner or manager of a hotel in New York City will be required to apply the IWA to that property on the basis of the legal doctrine of accretion. If a court, agency or arbitrator determines that accretion cannot be applied, the Union retains its existing right to apply the Neutrality Agreement to that Property." Where accretion is inappropriate, the Union may go straight to a card count method without a formal determination against accretion.[1]

Upon receipt of this Memorandum, on July 24, 2000, Interstate's Senior Vice President and General Counsel wrote to HANYC's labor counsel concerning the modifications to the IWA. Referring directly to the Accretion Clause in the MOU, Interstate's general counsel asked:

Based on the way you describe the accretion clause, it appears that if a manager of a hotel that is subject to the City wide agreement becomes the manager of another hotel in New York City, ' that new hotel will be bound by the City wide agreement on the basis of the legal doctrine of accretion. Please let me know whether my understanding about this provision is correct.

HANYC affirmed this understanding.

At the time of the June, 2000 memorandum and July 24, 2000 inquiry, Interstate was the manager of two hotels, the Park Central Hotel and the Roosevelt Hotel, which were members of the multi-employer bargaining unit represented by HANYC. Further, Interstate received the MOU as a member of the collective bargaining unit.

II. The Lam Group's Creation of the Chelsea Grand Hotel

Chelsea Grand is owned by the Lam Group, a closely held family enterprise headed by John Lam. Mr. Lam emigrated to the United States and promptly made the most of his opportunities here. He ran a small purse sewing enterprise in Hong Kong before emigrating. Upon arrival in the United States, he opened his own garment factory in New York. He worked hard at this, as did the members of his family. After several years, he had opened a number of factories which employed a large number of employees, many of whom were represented by the garment workers union.

Sensing an imminent decline in the garment industry, Mr. Lam decided to pursue a new venture in the hotel industry. He was not exactly a novice in this new field. He had experience as owner of a Holiday Inn Hotel at the Philadelphia airport. He also had experience as the owner of a Best Western Hotel here in New York City.

Mr. Lam believed that the future success for this new venture, which was to be located in Manhattan, was best achieved by affiliating with better known and higher quality hotel chains. As a result, he sought a franchise agreement with Sheraton Hotels. The Sheraton Hotels, owned by Starwood, had a reputation for quality and would provide access to a world class reservation system. Sheraton would not enter into a franchise agreement with Chelsea Grand. Instead, Sheraton/Starwood required Mr. Lam to obtain a managing agent as a condition of the franchise, and the franchise agreement specifically identified Interstate. And so, Mr. Lam retained Interstate as the Managing Agent for the new hotel; by doing so, he was able to obtain the Four Points Sheraton franchise he sought for his new hotel.

III. Chelsea Grand's Relationship with Interstate

In February 2003, Chelsea Grand, as owner, entered into a Hotel Management Agreement with Interstate (the "HMA"), as operator for a Sheraton Four Points Hotel to be located on West 25th Street in the Chelsea section of Manhattan. The agreement vested management in Interstate as follows:

Article III is entitled "General Services by Operator" and provides, in part, that Interstate would ...

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