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Hyatt Franchising, LLC v. Shen Zhen New World I, LLC

United States District Court, N.D. Illinois, Eastern Division

April 19, 2017

HYATT FRANCHISING, L.L.C., Petitioner,
v.
SHEN ZHEN NEW WORLD I, LLC, et al. Respondents.

          MEMORANDUM OPINION AND ORDER

          Virginia M. Kendall United States District Court Judge

         Plaintiff Hyatt granted Defendant Shen Zhen a franchise to convert a hotel into a Hyatt Regency®. After Shen Zhen breached the terms of the Franchise Agreement, Hyatt terminated the Agreement and submitted a demand for arbitration. Hyatt filed this action to confirm the resulting Final Award in Hyatt's favor from that arbitration and Shen Zhen moved to vacate the same. For the following reasons, Hyatt's Motion to Confirm the Arbitration Award (Dkt. 1) is granted and Shen Zhen's Motion to Vacate the Award (Dkt. 33) is denied.[1]

         BACKGROUND

         Hyatt is a limited liability company with its principal place of business in Chicago, Illinois. (Dkt. 19 at ¶ 2.) Shen Zhen New World I, LLC (Shen Zhen) is a California limited liability company with its principal place of business in California, and Shen Zhen New World Investment (USA) Inc., is its corporate parent.

         Hyatt and its Affiliates are engaged in the business of operating and granting franchises to establish and operate hotels. (Id.) On September 24, 2012, Hyatt entered into a written Hyatt Hotel Franchise Agreement (the “Franchise Agreement”) with Shen Zhen New World I, LLC pursuant to which Hyatt granted Shen Zhen a franchise to convert the hotel located at 333 South Figueroa Street, in Los Angeles, California into, and later operate it as, a Hyatt Regency® hotel. (Dkt. 6 at ¶ 7.) Shen Zhen's parent, Shen Zhen New World Investment (USA) Inc., executed a Guaranty and Assumption of Obligations, under which it agreed, among other things, to be liable for any breach of, and bound by, each and every provision in the Franchise Agreement, including, and without limitation, the arbitration agreement.

         The arbitration clause in the Franchise Agreement states that “[a]ll matters relating to arbitration will be governed by the Federal Arbitration Act (9 U.S.C. Sections 1 et seq.) and not by any state arbitration law.” (Franchise Agreement, § 14.1.) The parties also consented to jurisdiction “in the state or federal court of general jurisdiction closest to Hyatt's then current principal business address, and Franchisee (and each owner) irrevocably submits to the jurisdiction of those courts and waives any objection Franchisee (or the Owner) might have to either the jurisdiction of or venue in those courts.” (Franchise Agreement, § 14.3.)

         On August 31, 2014, Hyatt terminated the Franchise Agreement after several breaches by Shen Zhen and on December 23, 2014, Hyatt filed a Demand for Arbitration with the Chicago, Illinois office of the American Arbitration Association. (Dkt. 6 at ¶ 10.)

         The Arbitration and Interim Award

         The parties participated in an in-person evidentiary arbitration hearing, in Chicago, on February 15-18, February 22-26, and March 14-16, 2016. (Dkt. 6 at ¶¶ 16, 18.) After post-hearing briefing, the Arbitrator issued a 51-page Interim Award that found in favor of Hyatt and against Shen Zhen and its parent company, jointly and severally, and awarded Hyatt $7, 727, 646. Id. Additionally, because the Franchise Agreement provided that the “non-prevailing party” in any arbitration proceeding “must reimburse the prevailing party for all of the prevailing party's costs and expenses … including reasonable accounting, attorneys', arbitrators' and related fees” (Franchise Agreement § 14.4), the Interim Award gave Hyatt twenty (20) days from the date on which the Interim Award was served to submit a request for fees and costs. On August 24, 2016, the Arbitrator issued a Final Award, incorporating the Interim Award, and also awarding Hyatt $1, 324, 546.36 in attorneys' fees and costs along with post-award interest at 0.56% per annum.

         During the negotiation of the Franchise Agreement and Property Improvement Plan (PIP), Shen Zhen was represented by Lynn Cadwalader, a transactional attorney who at the time worked for the law firm Holland & Knight. On August 10, 2015, Cadwalader moved from the corporate group at Holland & Knight to DLA Piper. (Ex. DD, Arbitrator's Order No. 8 at 3.) At the arbitration, Hyatt was represented by two attorneys from the litigation department of DLA Piper. (Id.) Based on Cadwalader's previous representation of Shen Zhen and her move to DLA, Shen Zhen moved to disqualify DLA from representing Hyatt during the Arbitration, and the Arbitrator denied the motion based on a finding that DLA had implemented a sufficient ethical screen to prevent conflicts which would warrant disqualification. (Arbitrator's Order No. 4.) Next, Shen Zhen moved to subpoena Cadwalader before the hearing in order to determine whether she was conflicted during the negotiation of the Franchise Agreement. (Id.) The Arbitrator denied this request as well, ruling that any evidence Cadwalader might provide would not be material to his interpretation of the Franchise Agreement. (Id.) After the hearings were complete, Shen Zhen again moved to subpoena Cadwalader and the Arbitrator again denied Shen Zhen's motion on the grounds that it “did not present any new evidence that would justify reopening discovery in [the] matter.” (Id. at 5.)

         During the Arbitration, Hyatt argued that it had been authorized to terminate the Franchise Agreement in accordance with Sections 15.1(a), 15.1(c), and 15.2(m) of the Franchise Agreement, all contained within the Default and Termination portion of the Agreement, Article XV. (Id. at 3.) Section 15.1 of the Franchise Agreement enumerates Hyatt's ability to terminate the contract after giving Shen Zhen “Opportunity to Cure.” (Ex. 1-1, Franchise Agreement at 41.)

● Section 15.1(a) of the Franchise Agreement provides Hyatt the right to terminate if Shen Zhen fails to pay Hyatt any fees or other money due under the Franchise Agreement, and fails to do so within 10 days' notice of such failure.
● Section 15.1(c) provides Hyatt the right to terminate if Shen Zhen defaults with respect to its renovation obligations set forth in the PIP on or before the completion deadline, and does not cure the failure within 30 days of the default.

         Section 15.2 of the Franchise Agreement allows Hyatt to terminate the Agreement, without providing Shen Zhen the opportunity to cure, upon delivery of written notice that one of fourteen default scenarios. (Id., § 15.2(a)-(n).)

‚óŹ Section 15.2(m) permits Hyatt to terminate the Franchise Agreement without notice if Shen Zhen fails three times in twelve months to comply with any provision of the Franchise Agreement (assuming Shen Zhen ...

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