NY Appeals Court Pauses Arbitration in $60M Hotel Mismanagement Dispute

A New York appellate court recently upheld a decision to stay arbitration in a $60 million dispute between Provenance Hotel Partners Fund I LLC and GCKC Provenance LLC, two co-owners of eight hotels across the United States. The conflict centers on allegations of mismanagement and financial losses under hotel management agreements (HMAs). Provenance claims that a third-party operator, Pyramid Global Hospitality, failed to fulfill its fiduciary duties, leading to substantial financial setbacks for the properties.

The dispute began after Provenance transferred its ownership interests in the hotels to GenProv Holdco LLC in December 2022. Provenance later filed a lawsuit accusing Gencom, its co-owner, of refusing to sue Pyramid for mismanagement despite acknowledging the operator’s underperformance. Gencom’s refusal to act allegedly stemmed from conflicts of interest and bad faith.

The Charges

Provenance alleges that Pyramid’s management resulted in significant losses, transforming once-thriving properties in cities like Nashville and Portland into “anemic” operations. According to the complaint, Pyramid failed to prudently manage revenues and expenses, causing GenProv Holdco to suffer $60 million in damages. Despite discussions between Provenance and Gencom about addressing Pyramid’s failings, Provenance claims Gencom declined to pursue legal action, exacerbating the company’s losses.

The lawsuit also raises questions about the scope and applicability of the arbitration clause in the co-ownership agreement. Although the agreement includes an arbitration provision, Provenance argued that key claims fall within a carveout, leaving the court to decide the threshold issue of arbitrability.

The Appellate Decision

The appellate court agreed with the lower court’s decision, finding that the arbitration clause did not clearly and unmistakably delegate the question of arbitrability to an arbitrator. The court emphasized that the parties’ agreement lacked specific language selecting the American Arbitration Association (AAA) or its rules, which might have otherwise resolved this ambiguity.

Further, the court noted that the balance of equities and potential irreparable harm did not favor either party, justifying a pause in arbitration until the court could address the underlying issues.

The Potential Damages

Should Provenance prevail, the financial stakes are considerable. Beyond the $60 million in alleged losses, the case could shape the accountability of hotel operators under management agreements. Provenance contends that Pyramid’s failure to act in good faith and mitigate costs violated the terms of the HMAs. Economic damages, including lost revenue and diminished market share, may form the basis of any award.

What’s Next?

With the arbitration on hold, the case returns to the New York Supreme Court to resolve whether key claims fall within the arbitration agreement’s carveout. The outcome will likely influence the approach to resolving disputes over hotel management and ownership agreements, particularly where arbitration provisions are unclear or contested.

Law Firms Involved

Provenance Hotel Partners is represented by Pryor Cashman LLP, while GCKC Provenance is defended by Latham & Watkins LLP.

The case is titled Provenance Hotel Partners Fund I LLC et al. v. GCKC Provenance LLC et al., Index No. 653017/2024, in the New York Supreme Court, Appellate Division, First Department.