Daniel F. Benavides, Detra Shaw-Wilder, Ken Hartmann, and Doug Wolfe
Daniel F. Benavides, Detra Shaw-Wilder, Ken Hartmann, and Doug Wolfe (J. Albert Diaz)

Case: Setai Owners v. General Hotel Management and GHM (South Beach)

Case no: 18610/VRO/AGF/RD

Description: Breach of contract, breach of fiduciary duty

Filing Date: March 31, 2013

Arbitration tribunal: International Chamber of Commerce arbitrators Gerald Aksen, New York, president; Joseph Matthew, Colson Hicks Eidson, Coral Gables; Richard Neville, Chicago

Plaintiffs attorneys: William Brewer III, James Renard, Jack Ternan and Jeremy Camp, Bickel & Brewer, Dallas

Defense attorneys: Daniel Benavides, Kenneth Hartmann, Detra Shaw-Wilder and Douglas Wolfe, Kozyak, Tropin & Throckmorton, Coral Gables; Lawrence Schaner, Julie Carpenter and David Handzo, Jenner & Block, Chicago and Washington

Arbitration award: $12.7 million for the defendant

Details: GHM was hired as the property manager of the 88-unit condo-hotel in one of two towers under development beginning in 2000. The second Tower Building was a 163-unit residential tower. GHM was devoted to the marketing and design of the property and brand during the 2000-2005 development phase.

Setai Owners LLC was the owner, and Lehman Brothers Holdings Inc. was the primary investor.

The Setai Resort & Residences opened in 2005, and from then on a company controlled by Lehman was sole managing member of the ownership group.

The 77 units owned by Lehman were not selling, and GHM’s long-term management agreement was perceived as a obstacle for prospective buyers who would prefer to own and manage the hotel.

Lehman also disagreed with GHM’s management and repeatedly demanded staff cuts and more occupancy. Disputes escalated until 2 a.m. on March 31, 2012, when an armed security force was sent into Setai to forcibly evict GHM. That same day, Lehman filed a demand for arbitration, claiming breaches of contract and fiduciary duty.

The defendants filed a counterclaim in state court, but Setai Owners had it removed to federal court because one of the GHM entities was a British Virgin Islands company, making it subject to international arbitration.

Plaintiffs case: The owner asserted a host of operational and financial acts and omissions against GHM that constituted breaches of provisions in the management agreement, the tribunal noted in its June 30 final award report. Lehman claimed the alleged deficiencies supported its conclusion that GHM didn’t operate the property in accordance with world-class, five-star international hotel standards and failed on its promise to maximize occupancy and efficiently control costs.

Defense case: GHM claimed wrongful termination of a long-term contract. It was not given a notice of default. GHM claimed $35 million in lost revenue, defamation, libel and tortious interference.

GHM cited a 2006 “heavy-handed” attempt to force a renegotiation of the agreement through a notice of default that had no basis and ultimately failed.

“In reality, owner wanted to terminate the (agreement) because it considered the agreement onerous and an impediment to claimant’s plan to sell the hotel,” GHM said. “Lehman paid scant attention to the negotiations of the (agreement) because it intended to sell all of the condominium units before or shortly after the hotel opened and believed it would have no subsequent relationship with the hotel.”

Outcome: The tribunal found no breach of contract by GHM and concluded GHM had no fiduciary duty to the plaintiffs.

The tribunal found the evidence for Lehman’s deficient-performance claims didn’t exist. For example, GHM was accused of “self-dealing” because it encouraged management trainees to defer 20 percent of the salaries, paying them lump sum bonuses as a way of getting them to complete one- and two-year stints.

“Offering a training program and creating incentives to stay with GHM after training is neither unusual nor ‘self-dealing’ for a hotel operator whose capital is its operating procedures and skilled personnel,” the tribunal said.

Setai Owners was found liable for breach of contract. The tribunal rejected GHM’s other claims and confined a $7.5 million award to the breach finding. In addition, GHM was awarded about $1 million in interest and its full $4.2 million request for legal fees.

“The tribunal finds that this amount, given the hotly contested nature of this case, is without doubt reasonable. One need only note the claimant requested costs of $12 million—an amount that is three times the number GHM is seeking.”

Comments: “Lehman threw as many breaches of contract and fiduciary duties at us as possible trying to make something stick. We were exonerated on all counts. Now the award is collecting interest at $1,000 a day,” Benavides said.

Post-arbitration: Benavides will seek to affirm the award in federal court, then remand the case to Miami-Dade Circuit Court to decide additional tort claims against the parties involved in the hotel takeover. These include Setai Owners, Trevi Luxury Hospitality Group Inc. and SMB Management LLC.