Fabulous Inns Control Fight Nears End

After years of well-publicized infighting, the battle for management control at Fabulous Inns of America is nearing an end. Sort of.

Local attorney C. Hugh Friedman, serving as a court-appointed special master, or mediator, is weighing 10 weeks of testimony by more than 20 witnesses and will decide within a month who will control the small but now-profitable, publicly held Mission Valley hotel.

Friedman’s decision, however, likely will be appealed by whichever side loses.

The issues in the case seem clear, although each side disagrees as to what those issues should be.

The current management--led by former dissident shareholder Jeffrey Krinsk and former independent legal investigator David Yardley, now chairman and president, respectively--took over at a stormy shareholders meeting in May.

They have in the past accused the ousted management--most notably former chairman Henry Maxwell and former president Walter Palmer--of conflicts of interest and self-dealings.

At the hearings, Krinsk and Yardley’s attorneys argued that the ousted management and several other Fabulous Inns investors had over the years illegally obtained stock.

Nearly all of the stock belonging to Maxwell, Palmer and five other major shareholders should be invalidated, according to a 262-page post-trial summary filed by the current management’s attorneys, William S. Lerach, James D. Baskin III and Jeffrey L. Mason.

Maxwell and Palmer’s attorneys have not addressed the illegal stock allegations.

Instead, the 20-page summary filed by lawyers John R. Wertz and Gary S. Elster argues that a special shareholders’ meeting held July 20 legally elected a new board of directors. Krinsk and Yardley, they claim, should be thrown out of office because investors representing 55% of Fabulous Inns’ outstanding common shares of stock voted at that meeting to elect a new board.

If the shares are illegal, as the current management insists they are, then the vote last July 20 is invalid. If the validity of the old shares isn’t addressed, as the ousted management insists it shouldn’t be, then the special meeting means the old management will be reinstated.

The heated--and, because of months’ worth of legal fees, expensive--corporate fisticuffs would be an otherwise meaningless squabble if the company was not potentially very profitable.

But it is. Its 1.7 acres of prime Mission Valley land house 178 hotel rooms and several meeting rooms. And, in 1984, Fabulous Inns’ pretax income will approach $680,000, compared to a pretax loss last year of $154,000. Revenue will exceed $2 million, an increase of about 36%, according to Krinsk.

Now, after years of accusations by the various factions, months of open verbal warfare and weeks of courtroom battles, the issue is in the hands of a third party to decide.

Friedman said he was “performing a judicial function” and declined to comment on the specifics of the complicated case.

In addition to the issues of stock ownership and the validity of the special July 20 shareholders’ meeting, Friedman will decide two other important issues.

First, if the 360,000 shares of Fabulous Inns common stock that Maxwell pledged as collateral for a $1.45-million note he owed the company should be “legended” with a clause that says his stock’s validity is uncertain. When Maxwell tried to pay the note in November, the Krinsk-Yardley faction refused to return the stock without that legend.

(Maxwell owed the money as part of his 1983 resignation agreement to buy back Fabulous Inns’ 57% share in an unprofitable Palm Springs time-share condominium project that was developed by a firm personally owned by Maxwell.)

Second, Friedman will decide whether the losing party is prohibited from holding officer or director positions in the future at Fabulous Inns.

The current management faction includes Krinsk, Yardley, director F. Joseph Letson, and investor Frank E. Ferreira. The other faction includes Maxwell, Palmer, former director Ernest M. Stanley and investor Richard A. Tuthill.

Both factions expressed confidence that they would prevail.

Fabulous Inns, said Wertz, grew “under our clients’ leadership. There has never been an acknowledgement by Maxwell or anybody else of . . . self-dealing.”

He said that if there were any securities violations they were only “technical” ones that “don’t warrant the cancellation of the stock issued or taking away voting rights.”

Wertz called the Krinsk-Yardley faction’s allegations of self-dealings a “witch hunt,” and maintained that when those two were elected to the board of directors by dissident shareholders it was “like letting the fox in the chicken coop.”

Krinsk and Yardley--both are lawyers--believe that the 10 weeks of hearings produced “unparalleled proof, not allegations of the story of how these guys acquired control of the company illegally. There are few instances where you’ll find a corporation cleaning itself up like this.”

The Securities and Exchange Commission has been notified of the alleged illegal stock acquisition and self-dealings, said Yardley.

No matter which side is victorious, the other faction likely will appeal, each side conceded.

If the old Maxwell-Palmer management team wins, “the door should be opened, (Krinsk and Yardley) should leave and we should assume the offices,” said Wertz. “If they appeal, we will be in the offices while the appeal occurs.”

Krinsk and Yardley don’t necessarily share that view.

“The status quo would prevail pending appeal,” Yardley maintained.

Although Yardley said he expects the other side to appeal if it loses, he wondered, “How long can they chase this? Because nobody is going to say it’s OK to come back in and do the same things they did before.”

If the current management succeeds, Fabulous Inns’ expansion plans--which include primarily acquisitions--will “boom as soon as this thing is over,” said Krinsk.

Krinsk and Yardley are under a court injunction that limits Fabulous Inns from spending any funds outside the normal course of business.

There is at least one other wrinkle to a final disposition of the case.

Superior Court Judge G. Dennis Adams does not necessarily have to abide by Friedman’s ruling, although sources close to the case expect that he will.