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Checking in on high-profile hotel lawsuits
August 1 2011

The details of three high-profile lawsuits involving members of the hospitality industry are shocking, revealing and entertaining—and their outcomes could be of utmost importance.

By Jason Q. Freed
Contributing Editor, Tech Impact Report

REPORT FROM THE U.S.Three high-profile lawsuits involving members of the hospitality industry are open and attorneys are taking depositions. Here is an update and analysis on each.

Case: M Waikiki v. Marriott Hotel Services and Ian Schrager
Filed: 26 May
Status: Open; deposition deadline 18 October 2013
Summary: The owner of Edition Waikiki claims in a lawsuit that Marriott International and partner Ian Schrager haven’t put enough resources toward the launch of the Edition brand and backed out of promises to help the hotel succeed.

Commentary: With the lawsuit, M Waikiki, the owner of the 353-room oceanfront hotel, is seeking to remove Marriott from management. Disputes between a hotel owner and a brand are fairly common, said Jim Butler, attorney with Jeffer, Mangels, Butler & Mitchell, but usually disagreements enter arbitration out of the public eye. The fact that a suit was filed “represents a real rupture in the agreement,” Butler said.

“In this case, the owner says he was pursued aggressively and that Bill Marriott made personal promises about the success of the hotel and the brand,” Butler said, while cautioning that the public has only heard M Waikiki’s side of the story. “Marriott gave them some rosy projections.”

M Waikiki claims in the lawsuit that Edition Waikiki is performing at 37% of its competitive set, a staggeringly low number for a new hotel that has been completely renovated. Poor performance could be attributed to the economic downturn, but with relation to the hotel’s comp set, new hotels tend to outperform.

Butler said scale of a brand is “extremely important” because travelers become familiar with brands they see more often. Brands also imply a quality control program and a points program, he said. With only two Edition properties open since the brand was launched four years ago, the size of the brand lends no assistance to the marketing.

Also, M Waikiki claims in its initial lawsuit that two high-profile hotel names—Marriott and Ian Schrager—were to provide personal involvement and guidance to the hotel but failed to do so. The onus will be on the plaintiff to prove Schrager’s initial promise of involvement.

“We believe that promises made in connection with the launch of Edition were broken, leaving our client with significant damages which have been further compounded by Marriott's inability to effectively manage this property,” William A. Brewer III, partner at Bickel & Brewer and lead counsel for M Waikiki, said in a statement to HotelNewsNow.com.

Butler said M Waikiki can’t simply point to the slow pipeline growth as proof the brand is responsible for poor performance at this single hotel.

“There were a lot of people who thought they had projects virtually done or committed,” he said. “But when Lehman Brothers filed bankruptcy nothing gone done and we’ve been in a gridlock on new development ever since … No one can guarantee hotels in a pipeline will open.”

Butler said in the past he has negotiated and written management contracts with termination agreements that declare if there is material change in the strength of brand, usually based on a percentage of decline in number of hotels operating under the brand, the franchisee has the right to terminate the contract.

“Certainly (the management company) can resist that. But, especially in a new brand, I would want all kinds of provisions and would be very specific about all kinds of support,” he said.

Case: Host Hotels & Resorts v. Molinaro Koger, Scioto Partners and Dearborn Hotel
Filed: 3 June
Status: Open; pretrial hearing set for 15 June, 2012
Summary: Host Hotels & Resorts filed a lawsuit against brokerage firm Molinaro Koger, accusing president Rob Koger and the firm of fraud in misrepresenting sales it handled for Host. Host alleges that Molinaro Koger set up companies led by internal employees to buy three hotels from Host and resell them for a profit. In one case, the initial buyer of one Host hotel was actually dead, the lawsuit states.

Commentary: Molinaro Koger, a hospitality brokerage firm that has brokered more than US$1.1 billion in hotel transactions in the past two years, has served as exclusive broker for Host Hotels & Resorts, the largest hotel real-estate investment trust in the U.S., since 2001.

Lawsuits involving real-estate sellers and brokers are common in the residential industry, Butler said, but the high profiles of the two organizations involved make this an unusual case.

Although the statements in the initial lawsuit must be taken with the consideration that they are only allegations, Butler said they must be taken seriously. Oftentimes, he said, lawsuits will be an initial step into depositions and investigations. But, in this case, it appears the plaintiffs have done their homework.

“These are serious allegations,” Butler said. “A lot of facts were put into the complaint, such as who called who and who did what. You have very specific, detailed, factual allegations—it’s not fishing.”

For example, in two separate incidents, the lawsuit claims Molinaro Koger set up companies led by internal employees to purchase hotels at prices lower than what was being offered on the market. In turn, Molinaro Koger is accused of flipping those hotels on the same day, through affiliated third-parties, at profits in the millions. Host paid brokerage fees to Molinaro Koger in both instances.

In a separate incident, Host claims that Molinaro Koger, acting as a brokerage firm on the sale of tranches of subordinate debt notes, flipped the debt notes through an unnecessary third party before selling them to Host in order to collect brokerage fees.

Days after the lawsuit was filed, Molinaro Koger released a statement saying they were “taken aback” by the lawsuit and said Host had knowledge of the transactions and the parties involved.

"This whole event seems like the plot of a John Grisham novel, where we are the victims. I am puzzled and disappointed by Host’s baseless accusations,” president Rob Koger said. “Among the various false accusations is the suggestion that Host had no knowledge of the transactions of which they now complain because it is belied by the fact that senior management at Host had complete knowledge of the transactions. That their suit professes ignorance of Scioto Partners and falsely alleges some affiliation between Scioto and Molinaro Koger is inexplicable.”

In addition, Molinaro Koger claimed a series of crimes had been committed against the company, including pretexting the company’s accounts to illegally obtain financial records from the firm’s banks, breaking and entering Molinaro Koger’s office and stealing files and sending false and malicious correspondence to MK’s clients. 

Case: Family Suites Resorts v. Viacom International d/b/a MTV Networks
Filed: 1 June 2010
Status: Open; answer filed and deposition deadline 2 September, 2012
Summary: Family Suites, which operates a Nickelodeon-themed hotel in Orlando, Florida, is suing Nickelodeon’s parent company Viacom claiming licensing rights were breached when Viacom entered into an agreement with Marriott to franchise the Nickelodeon brand.

Commentary: A motion to dismiss filed by defendant Viacom was denied in early June, meaning the Family Suites Resorts v. Viacom International case will proceed. The agreement between Nickelodeon and Marriott to partner on a Nickelodeon-themed venture was announced in May 2007, and Family Suites, by way of Bickel & Brewer law firm, claim Viacom breached its contract by licensing the Nickelodeon cable brand to a rival hotel chain. At the time of the filing, a Nickelodeon spokesperson said, “Their claims are without merit.”

“Plaintiffs would not have invested over US$168 million to purchase, remodel, retheme and operate the hotel as a Nickelodeon hotel if they had known that Viacom would frustrate the purpose of the license agreement by offering, promoting and producing similar Nickelodeon-themed experiences at other hotels nationwide,” the complaint stated.

Family Suites initially entered into the license agreement in 2003, under which Viacom granted the hotel operator the exclusive right to operate a Holiday Inn hotel in Orlando as the Nickelodeon-themed resort, the company claims. The hotel was renovated and opened in May 2005.

Butler said cases involving intellectual property aren’t common in the hotel industry but are important. He pointed to the high-profile Starwood Hotels & Resorts Worldwide v. Hilton Worldwide case—accusing Hilton and at least two of its employees of pilfering massive amounts of electronic files after being recruited—that was settled earlier this year.

“This is an industry that relies on intellectual property—that’s what brands are,” Butler said.
Butler said the license agreement between Viacom and Family Suites will most likely spell out in black and white the preciseness of the exclusivity.

In an answer filed last week, Viacom admits factual claims about the license agreement between itself and Family Suites, and also admits the partnership with Marriott, but denies any breach in contract. Viacom asked that the court dismiss all claims against them.

COMMENTS   Show All
toneill6
9/3/2011 5:00:00 PM
Great presentation. The second case clears up a mystery for me. I was engaged as the hotel expert to review the Detroit Riverside Hotel debtor's plan and opine in court as to its viability. It was earlier this year and I gave testimony and conducted litigation support. I was engaged by the lender's attorney who did prevail. At the time, I reviewed all the area hotel sales including the 300-room Ritz Carlton Dearborn at $3.8 million and $12,667 per key. The sale price was so spectacularly low, I actually visited and toured the hotel which is next to Ford's HQ. It is now the Henry, following renovations - and is a fabulous hotel. While the Detroit market is about the worse in the US and beyond- a STR HOST report, I ordered revealed that the leading hotels (that participated in HOST) in downtown Detroit, as a composite, failed to have any profit BEFORE debt service in 2008. Despite the poor market conditions, I was mystified by the low sale per room ($12.7K) for a Ritz Carlton. Despite the poor market conditions, it did not appear to be arm’s length. That was my conclusion. I did not know the detail and seller motivations at the time but I am shocked with this revelation as it is as presented a breach in basic 101 real estate salesperson code of conduct requirements. The sale price was certainly a red flag, which should have got more attention at the time of the sale. Thomas O'Neill.
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