Two former chief executives of a hotel chain that collapsed into insolvency last year agreed to settle a class-action lawsuit that alleged they misled investors about hotel leases they claimed to have closed but never did.

Brian Ferdinand, the founder and former chairman and CEO of LuxUrban Hotels, and Shanoop Kothari, the company's former chief financial officer and CEO, agreed to pay $3M to settle allegations of fraud, according to filings in the U.S. District Court for the Southern District of New York.

The Miami-based hotel chain filed for bankruptcy last year and abruptly ceased operations, leaving some hotel guests stranded and some of its buildings in hazardous conditions, according to court filings by the Department of Justice, which accused the hotel's management of “gross negligence.”

Pending court approval, the cash to cover the settlement will come out of LuxUrban's directors and officers liability insurance, which public companies often take out to shield their top personnel from legal claims such as fraud.

Lawyers for the class-action plaintiffs, led by private investor Ross Marchetti and distressed investment company zCap Equity Fund LLC, and Ferdinand and Kothari didn’t respond to requests for comment.

LuxUrban took over hotels that had shuttered during the pandemic via master lease agreements with their owners and went public in 2022, when it had more than 1,000 hotel rooms across four cities.

But the company ran into trouble after short seller research and reporting by Bisnow revealed that LuxUrban had misrepresented its assets in Securities and Exchange Commission filings, where it claimed to have signed leases at four hotels but had not completed the deals.

Investors kicked off the class-action suit in February 2024, alleging that the incomplete leases amounted to fraud. Ferdinand and Kothari were co-CEOs at the time. The following month, Ferdinand — who was the company's largest shareholder — relinquished the title but stayed on as executive chairman of the board. Kothari was named sole CEO as well as acting CFO.

In June 2024, Kothari was terminated as CEO and replaced by hotel industry veteran Robert Arigo. Six months later, several board members resigned, and Ferdinand was installed as interim CEO. Last June, Ferdinand exited the board and his CEO post.

The following month, U.S. District Judge Paul Engelmayer ruled that the class action could proceed to discovery, denying LuxUrban’s attempt to get the lawsuit dismissed and saying it was “virtually inconceivable” that Ferdinand and Kothari were unaware the leases hadn’t been completed.

LuxUrban filed for Chapter 11 bankruptcy in September. But the case accelerated after reporting that the company had continued to take bookings and payments for rooms in shuttered hotels the week after filing.

After a motion by attorneys with the Department of Justice's U.S. Trustee office, which monitors bankruptcy proceedings, an independent trustee was appointed and the case was converted to Chapter 7 liquidation in late October.

The filing prompted the company to be removed from the class-action process and left Ferdinand and Kothari as the sole defendants. It’s unclear how the company's unsecured creditors, whose claims exceed $91M, will get paid.

Ferdinand filed for personal bankruptcy in January, claiming more than $98M in liabilities — including $19M to Wyndham related to a failed LuxUrban licensing deal — but less than $4.5M in assets.