RULING: Court Orders New Election : New Board Election Ordered by Court for Fabulous Inns

Fabulous Inns of America, locked in a two-year battle between two management factions, must hold a new board election to determine who will control the small but profitable Mission Valley hotel company, an appellate court has ruled.

The 4th District Court of Appeal, in a 60-page opinion filed late Monday, invalidated the results of a special shareholders meeting held by an ousted management group that tried to regain control of Fabulous Inns two years ago.

As a result of the ruling, current management--led by a former dissident shareholder--will remain in control, at least until a trial court determines the number of shares the ousted group owns. Management contends that many of those shares were improperly acquired years ago.

If no settlement between the two factions is reached, the trial process could take another four or five months, attorneys involved in the case said Tuesday. A new election would be held after the trial.

Current management said that the appellate ruling was a “tremendous victory,” but an attorney for the prior management described the lengthy opinion as a “mixed bag.”

The ruling granted victories to each side by upholding some lower court rulings and reversing or modifying others.

The ruling prohibits six former directors--including ousted Chairman Henry Maxwell and former President Walter Palmer--from serving as directors if, together, they would constitute a majority of the company’s board. Superior Court Judge G. Dennis Adams had previously ruled that the directors be barred for only four years.

The appellate court decision--written by Justice Howard B. Weiner and agreed to by Judges Daniel Kremer and Edward Butler--rejected the arguments of current management that it received an unfair trial in the lower court. It also denied management’s contention that special mediator C. Hugh Friedman--who conducted 10 weeks of hearings into the case in 1984 and 1985--was biased against them because he was an attorney and director for an advertising agency once owned by Palmer.

No ruling was made by the appellate court judges on the validity of the ousted group’s stock, which current management--led by former dissident shareholder and now Chairman Jeffrey Krinsk, and President David Yardley-- claimed was obtained improperly more than 15 years ago.

However, the court remanded the issue of who controls some of the stock back to the trial court, where, they suggested, there may be “other, more appropriate economic sanctions which could be imposed,” other than stripping away the stock.

The appeal court decision also criticizes former management for “gross improprieties” and “flagrant dishonesty.”

“I think the opinion is a tremendous victory for incumbent management,” said attorney Bill Lerach. “The court has specifically condemned (the ousted group’s) conduct. It’s a clear signal to the lower court to invalidate a significant number of shares.”

Attorney John Wertz, representing the ousted group, disagreed with Lerach’s interpretation, and called the decision a “mixed bag.”

“Their claims of a tremendous victory are rejected by the Court of Appeal,” said Wertz, adding that only a “small percentage” of his clients’ stock is in question. The court ruled in his favor, said Wertz, when it denied current management’s claims of bias by the lower court.

The Krinsk/Yardley faction was elected in May, 1984, after protesting that prior management had engaged in “self-dealing” business activities that were profitable for the executives but costly for the company.

Two months later, the ousted group held a special shareholders meeting and re-elected itself. The Krinsk/Yardley group said the special meeting was invalid, and the issue went to court.

Judge Adams--after 10 weeks of hearings, 3,000 pages of trial transcripts and 400 exhibits--ruled that the meeting was properly held and that the reelected group should be seated. The appeal court reversed Adams’ ruling by invalidating the results of that meeting.

The court ruling wryly noted the open hostilities between the two factions and gently chastised them for rejecting “any effort at arms control.”

Current management was described by the court as “self-righteous ideologues,” while the Palmer/Maxwell faction was described as “self-dealing executives.”

“When left with choosing between (the two) . . . we opt for the former,” the court ruled.