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Chelsea Grand, LLC v. Interstate Hotels & Resorts, Inc.

United States District Court, S.D. New York

March 30, 2017

CHELSEA GRAND, LLC, Plaintiff,
v.
INTERSTATE HOTELS & RESORTS, INC., and INTERSTATE MANAGEMENT COMPANY, Defendants.

          OPINION & ORDER

          HONORABLE PAUL A. CROTTY, United States District Judge.

         Defendants Interstate Hotels and Resorts ("IHR") and Interstate Management Company ("IMC") ("together Interstate"), [1] move to dismiss Chelsea Grand, LLC's ("Chelsea") Third Amended Complaint ("TAC"), for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6). The TAC alleges three causes of action: (1) Breach of the Hotel Management Agreement ("HMA") signed by Chelsea and Interstate in February, 2003; (2) Intentional Breach of Fiduciary Duty; and (3) Negligent Breach of Fiduciary Duty. The Court has previously determined that Interstate did not promise to operate the Chelsea as a non-union hotel; and that Chelsea and Interstate had an arms-length relationship, not a fiduciary one. Chelsea is not free to relitigate these issues. Accordingly, the defendants' motion to dismiss is granted.

         The TAC is based on events that occurred more than a decade ago, and which were the subject of prior litigation between Chelsea, and the New York Hotel and Motel Trade Council, AFL-CIO ("Hotel Workers Union"). After a two week, non-jury trial, in which Interstate also participated, this Court confirmed an arbitral award by the Impartial Chairman of a joint union- employer entity in favor of the Hotel Workers Union ("Chelsea I"), Chelsea Grand, LLC v. New York Hotel and Motel Trades Council, AFL-CIO, 07 Civ. 2614 (PAC), 2014 WL 4813028 at *3, (S.D.N.Y. September 29, 2014). On appeal, the Second Circuit modified and affirmed the judgment of the District Court, Chelsea Grand, LLC v. New York Hotel and Motel Trades Council, AFL-CIO, 629 F.App'x. 152, (2d Cir. 2015).

         To summarize, in Chelsea I, the Courts found that Chelsea was bound to certain obligations with respect to the union recognition process for employees at Chelsea's hotel (card check and neutrality), [2] even though Chelsea did not want to be unionized, and never signed any agreement with the Hotel Workers Union. Chelsea's current complaint blames Interstate for this situation. Further, Chelsea argues that wages for the Hotel Workers Union members are higher than Chelsea wished to pay; and the higher wages would raise operating costs; which in turn decreases profits and reduces the value of Chelsea, thereby causing Chelsea damage, [3]

         Facts Established in Prior Litigation

         A. Chelsea

         Chelsea is owned by the Lam group, a closely held family enterprise, headed by John Lam, Mr. Lam previously worked in the garment industry, but he decided to build a hotel in New York City. Mr. Lam sought an affiliation with a better known and higher quality hotel chain. Sheraton Hotels would not grant him a franchise, however, and instead insisted that Chelsea obtain a managing agent to operate the hotel. In February 2003, Chelsea entered into the HMA with Interstate to operate Chelsea's hotel, the Sheraton Four Points Flotel, on West 25th Street in Manhattan. Chelsea's franchise agreement with Sheraton specifically refers to Interstate. Interstate also helped Chelsea refinance the hotel with Merrill Lynch. There is no doubt that Interstate was and is a skilled and well-regarded hotel manager/operator, which had numerous contacts in New York with the Hotel Workers Union as of February, 2003 when the HMA was executed.

         B. Union Agreements with Hotel Association of New York City

         Major hotels in New York are usually members of the Hotel Association of New York City ("HANYC"), a multi-employer entity, which collectively bargains on behalf of its members with the Hotel Workers Union. The parties' collective bargaining agreement-the Industry Wide Agreement ("IWA")-dates to 1990 and sets forth wages, benefits, as well as other terms and conditions of employment. It also provides for card check and neutrality.

         In 2000, the parties entered into a Memorandum of Understanding ("MOU") which became effective on June 1, 2001, modifying the terms of the existing IWA ("the 2001 IWA"). The MOU added an accretion clause which provided, that if a signatory became the owner or manager of another hotel in New York, it would be required to apply the IWA to that property on the basis of accretion. In other words, if a manager of a hotel that is subject to the IWA takes on management of another hotel in New York City, such new hotel will be bound by the IWA, based on the doctrine of accretion.

         As of 2000, Interstate managed two hotels in New York which were members of HANYC, and covered by the Industry Wide Agreement. Thus, Interstate was bound by those provisions as of the date it executed the HMA with Chelsea.

         On January 15, 2004, the Hotel Workers Union and Interstate[4] signed a Memorandum of Agreement ("MOA") which provided that the accretion and Card Count/Neutrality provision of the 2000 MOU would be applied to any hotels which were owned, operated or managed by Interstate on July 1, 2001. None of these arrangements were secret, indeed, they were well known in New York City's hotel industry.

         The net result of these agreements, all of which were subject to arbitration, was that Chelsea was bound by the Card Count/Neutrality provision as part of the union recognition process. The arbitration award so held; and that decision was confirmed by the District Court, and the Second Circuit affirmed.

         Current Dispute

         The gravamen of Chelsea's TAC is that it did not want a union; that its agent (Interstate) was well aware of Chelsea's position; and Interstate had both a contractual and fiduciary duty to not enter into such an agreement. The HMA (at paragraph 16.1), states specifically that Chelsea "desires to ... operate ... as a non-union hotel." Further, Chelsea never signed a union contract or an agreement to recognize the union. Chelsea alleges that the hotel was unionized because of Interstate's breach of contract (Count 1), and its intentional and/or negligent breach of fiduciary duty (Counts 2 and 3). Chelsea was forced to pay higher employee wages, which increased its operating costs, diminished profits and caused a diminution in value. Chelsea seeks damages in the amount of $30, 000, 000.

         Interstate now moves to dismiss the complaint because the issues raised by the TAC were all resolved against Chelsea in the earlier litigation with the Hotel Workers Union. Specifically, defendants rely on two cases: Blonder-Tongue Labs., Inc. v. Univ. of Illinois Foundation, 402 U.S. 313 (1971), and Parklane Hosiery Company. Inc. v. Shore, 439 U.S. 322 (1979). In Blonder-Tongue, the Court overruled its prior ruling that a determination of ...


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