Century Operating Associates Files Fraud Complaint Against Newly Established Public Entity Morgans Hotel Group, Ian Schrager and Others

The defendants include Morgans Hotel Group, LLC (formerly Ian Schrager Hotels, LLC); Morgans Hotel Group, Co.; NorthStar Hospitality LLC; NorthStar Capital Investment Corp.; NorthStar Partnership, L.P.; MHG Associates, L.P.; RSA Associates, L.P.; and individuals Ian Schrager, Edward Scheetz and David Hamamoto.

The complaint alleges breach of contract, breach of fiduciary duty and fraudulent conveyance of assets by the defendants, which sought to deprive Century "of millions of dollars to which it was lawfully entitled." The complaint was filed March 23 in the Supreme Court of the State of New York, County of New York, by Century attorneys Steven G. Storch and Lita Beth Wright of Storch Amini & Munves, P.C.

In February 1998, Century sold its interest in the Royalton Hotel to Schrager Hotels and also contributed its interest in the Paramount Hotel. Both properties are located in New York. Although Century acquired a membership interest in Schrager Hotels, it had no voting power in Schrager Hotels, which was solely controlled by NorthStar, MHG and their officers Schrager, Scheetz and Hamamoto. As a member, Century was entitled to certain proceeds from ordinary cash flow as well as any Capital Event, defined as an "event not occurring in the ordinary course of business, pursuant to which (Schrager Hotels) or its subsidiary ... receive any consideration with respect to its assets or the disposition thereof, whether in connection with any recapitalization or restructuring of equity in, or debt of, the Company ..."

In February 2006 Morgans Hotel Group (previously Schrager Hotels) went public with an IPO, which Century claims is a Capital Event, yet Morgans failed to pay Century any net capital proceeds, even though the other entities received "substantial proceeds." According to the complaint, a minimum of $291 million went to Northstar Hospitality and its affiliates, $69 million to Schrager and entities he controlled (i.e., MHG and RSA), and $17.8 million each to Scheetz and Hamamoto, while Century received nothing for its interest.

The complaint alleges that the defendants fraudulently transferred assets without consideration to a newly formed public entity, thereby leaving Morgans Hotel Group, LLC, without the capital required to meet its obligations to Century. Additionally, under its agreement with Century, Morgans, LLC, was to be audited yearly and the results reported to members. The defendants have refused to provide such materials to Century, thereby preventing it from knowing the amounts owed to it.

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