On the surface, a lawsuit filed by the Sycuan Tribal Development Corp. against San Diego-based American Property Management LLC, and the subsequent countersuit against the tribe are about which entity breached a management contract for the historic U.S. Grant Hotel, which the tribe owns.
The development corporation hired American Property Management in December 2003, when it purchased the storied hotel, and fired the firm 14 months later.
On another level, the trial, which began in San Diego Superior Court on Jan. 4 after attempts to settle the suits filed last spring failed, could sully the reputations of both the tribe and American Property Management, with early testimony stating gross mismanagement on the part of the property manager and that some tribal members had turned the hotel into a “party central.”
The tribe owns and operates the Sycuan Resort & Casino, as well as the Singing Hills Country Club & Resort, and partnered with JMI Realty and Kimpton Hotels to build the Hotel Solamar in Downtown San Diego. American Property Management owns and operates some 43 hotels across the country, including the Radisson Harbor View in Little Italy and the Holiday Inn Mission Bay SeaWorld.
The challenge for Anthony Dain, of Procopio Cory Hargreaves & Savitch, LLP, which represents the development corporation, an entity of the Sycuan Band of the Kumeyaay Nation, will be to prove to the jury that American Property Management was fired for cause. Sycuan’s suit seeks $2.8 million in damages.
The challenge facing Joel R. Wohlfeil, a partner in Boudreau Albert & Wohlfeil, LLP, which is representing American Property Management, is to convince the jury that the reasons given by Sycuan for the firing were designed to cover up ulterior motives. According to court documents, the management company is seeking $10.8 million from the tribe. Half of that sum it says it is owed as payment for the remainder of its 10-year contract and half is being sought for alleged damages.
From a real estate investment standpoint, the storied 271-room hotel, built in 1910 by the son of Ulysses S. Grant to honor his Civil War hero-turned-president father, is considered a prize. Its potential to increase in value follows an overall trend of escalating values of the county’s hotels due to their ability to raise room rates within the last few years.
Once considered the grande dame of Downtown, the Grant, which has seen its ups and downs, has become quite expensive for the Sycuan development corporation. Originally estimated to cost $20 million to renovate, the tab soon rose to $28 million, then $32 million, then $48 million, according to court testimony. It now stands at $52 million. Part of the reason for the cost hikes is the need to update infrastructure, including plumbing, heating and cooling and safety equipment, hotel executives have said.
The goal of the project is to meet the standards of the Luxury Collection of Starwood Hotels & Resorts Worldwide, Inc.
To that end, renovation will include refurbishing and restoring some of the hotel’s more luxurious fixtures, such as white Italian marble staircases and the purchase of fine art and custom d & #233;cor for guest rooms and common areas.
Setting A Cap
According to court testimony by tribal Chairman Danny Tucker, the development corporation had set a cap of $100 million on the project, which was to include the hotel’s $52 million price tag.
Michael Gallegos, the president and founder of American Property Management, who originally planned to purchase the hotel under his company’s name, said he turned the deal over to Sycuan with the understanding that American Property Management would manage it. Wyndam Hotels was the Grant’s last owner.
In opening statements to the jury, Dain said that Gallegos initially told the tribe’s development corporation that the cost for renovation would be about $10 million, and that construction could be done in phases while the hotel was open and operating. That estimate, Dain said, showed a lack of expertise on the part of American Property Management.
However, as Wohlfeil explained in his opening remarks, the tribe, rather than take Gallegos’ word for it, had ordered an independent analysis of the renovation, which set the construction tab at $20 million.
American Property Management served as the hotel’s manager from the time of acquisition until February 2004, two months after it was closed to complete construction. Tucker anticipates a fall opening.
However, the crux of the complaint filed against American Property Management, according to Dain’s opening remarks to the jury, is threefold. Gallegos, he alleged, made two unauthorized transfers of money from one hotel bank account to another. He also alleged that the management firm withheld funds deducted from employees’ paychecks for dental insurance and did not pay those premiums in a timely manner. Another problem, he said, was that Gallegos hired several of his relatives to staff the property, some of whom, Dain alleges, were not qualified. The job performance of some of the Gallegos family members prompted an anonymous letter of complaint to the tribe’s development corporation, he added.
Wohlfeil admitted that there were two bank transfers, saying that one was made for $200,000 and another for $5,000. They showed up in the manager’s monthly reports to the development corporation. However, he added, the money was used to pay bills, including property and hotel room taxes, which were overdue and could have resulted in penalties of about $10,000 or more.
Wohlfeil also said that Gallegos made the transfers by mistake, not knowing that he wasn’t authorized to do so. All of the hotel’s funds and revenues had been accounted for, he said, including the dental insurance payments.
On the witness stand, Mike Rookus, the general manager of the Sycuan Resort & Casino, who’d been asked by Tucker to look into management at the Grant, said he hired an independent company to perform an audit, but it could not find any evidence to the contrary. Concerning the hiring of Gallegos’ relatives and complaints that they took up temporary residence in the hotel and ate meals at the hotel, Wohlfeil said that the seven family members, including John Gallegos, Michael Gallegos’ brother, who had served as the hotel’s general manager, were all highly qualified and that their living and dining arrangements were permitted in accordance with the management contract.
“It was at the discretion and control of the manager,” he said, adding that recruiting hotel executives and other personnel from outside San Diego often requires giving them temporary accommodations, and this case was no exception.
Wohlfeil said that in order to “plug holes” in the hotel’s executive roster after Sycuan purchased it, Gallegos hired family members he knew he could trust to do a good job.
Gallegos said that he’d received approval from Tucker before bringing them on board. Additionally, he said that they were also trusted to handle a series of incidents of misconduct of tribal members who stayed at the hotel as guests , incidents that went unreported to the police.
In court, Tucker acknowledged two of those incidents involved a relative who was in a fight that led to property damage. Those incidents were reported to police, and the damages were paid for, according to testimony.
In court, Wohlfeil also referred to a memo that a tribal council executive sent to other tribe members, calling the hotel “party central” and saying such incidents had to stop.
Following his opening day statements and cross-examination, Wohlfeil said he intended to show throughout the trial how the pattern of incidents and tribal politics, not poor performance, led to the firing of American Property Management. The trial is expected to last from two to three weeks.
Dain doubts a settlement might yet be reached.
“They’re just too far apart,” he said.