The Fate of Fabulous Inns Rests With Appeal Court

Does the statute of limitations ever run out when stock is allegedly garnered improperly?

Do these potentially improper acts taint all of the corporation’s stock for years to come?

Should managers who secured those shares be banned from holding directorship or executive positions, even though they hold a majority of the company’s stock?

If one apple is rotten, should the entire barrel be discarded?

Those weighty questions now rest with a three-judge panel of the state’s 4th District Court of Appeal. Their decision, expected sometime in the next 90 days, will decide the fate of Fabulous Inns of America and may finally settle the expensive and complicated two-year war for corporate control that has engulfed the small but profitable hotel company in Mission Valley.

Attorneys for both the incumbent managers and the executives they ousted in 1983 and 1984 argued their cases in a two-hour appellate court hearing Monday.

Toward the end of the procedure, Justice Howard B. Weiner suggested that “searching out the underlying facts in this case is hard.” Indeed, Weiner and his two colleagues--Daniel Kremer and Edward Butler--frequently interrupted the lawyers’ arguments to ask what the attorneys actually wanted the judges to do.

The queries acknowledged that the jurists suspect there was wrongdoing at Fabulous Inns--allegedly acquiring stock improperly and self-dealing dating back to 1969. “Why should people go back into control (when) they have a certified record of improprieties?” Weiner asked at the hearing.

However, the justices suggested that they are uncertain what the remedy should be.

“When push comes to shove, what do you want from this court?” Weiner asked. He maintained that there was, at the minimum, an “error” in a corporate filing years ago by company executives, but opined that “the question is: What are we to do about it?”

Bill Lerach, attorney for the current management, said he wants the stock in question to be either invalidated or held in a constructive trust; a permanent ban on the ousted managers serving as directors; invalidation of a July, 1984, meeting, at which the ousted group voted itself back into power, and the lifting of an injunction that limits corporate expenditures to routine business expenses.

Gary Elster, attorney for the former control group, argued that his side seeks to restore a May, 1985, order by Superior Court Judge G. Dennis Adams, which calls for the ousted executives to regain control of the company.

Both sides presented their strongest arguments, summarizing a more than $1-million legal battle that has included:

A tumultuous shareholders’ meeting that changed the composition of the board in favor of dissident shareholders, and a subsequent meeting called by the ousted group to regain their positions. Current management protested the validity of that meeting, and the ousted group--led by former President Walter L. Palmer and former Chairman Henry Maxwell--sued to regain control.

Court appointment of local attorney C. Hugh Friedman as a special mediator. Friedman refereed 10 weeks of tension-packed testimony that produced 3,000 pages of trial transcripts and 400 exhibits.

Friedman’s findings that there were improper business self-dealings by members of the former management, but that the disputed meeting was valid and a new election of corporate officers and executives should be held.

Adams’ ruling, which reversed part of Friedman’s finding and called for the ousted directors to be re-seated.

The appellate court process, which kept current management in control by reversing Adams’ order but leaving in place an injunction that limits corporate expenditures to daily business expenses.

The three justices will render a decision within 90 days, attorneys in the case said.

Some compromise solution seems likely, sources familiar with the case believe.

As it has throughout the corporate control battle, animosity between the two factions ran high in the court hearing Monday.

Lerach said the ousted managers had a 15-year history of “repeated self-dealing,” and defended actions by his clients--who include company Chairman Jeffrey Krinsk and President David Yardley--by asserting that there is “nothing wrong with a corporation being cleansed from within.”

Krinsk was a dissident shareholder who, after his election to the board in 1982, called for a special investigation into the alleged self-dealings. Yardley, then an attorney with Lerach’s law firm, conducted the investigation.