Plan to Reorganize Bankrupt Grant Hotel Opposed by City

SAN DIEGO â€”  Unwilling to accept the likelihood that its $6-million loan to the bankrupt U.S. Grant Hotel will be wiped out under terms of a debt reorganization plan put forth last month by the hotel owners, the city of San Diego has decided to oppose the plan.

Assistant City Atty. Curtis Fitzpatrick said the decision was made by the City Council during a closed-door session Monday and relayed to other parties in the bankruptcy action this week. Filed Nov. 12 in U.S. Bankruptcy Court here, the reorganization plan has received the approval of the hotel’s principal lender, Home Federal Savings, and its limited-partner investors.

“The mayor and the City Council feel that to the extent we put $6 million into the project, which presumably was secured by a note and deed of trust, that seems to have gone by the board because of the proposed reorganization,� Fitzpatrick said.

City Councilman Bob Filner said the council’s decision to oppose the plan was a way of “protecting the taxpayers’ money . . . . There are various strategies the city can take and we felt the plan as put forward was not the best way.�

Home Federal spokeswoman Monica Wiley said the city’s opposition cames as an “eleventh-hour surprise� to Home Federal executives and others who have been working out a plan that would both satisfy creditors and keep the financially troubled downtown landmark open.

“Everyone was assuming the city supported the reorganization,� Wiley said.

“The city’s opposition puts in jeopardy the plan, which is to everyone’s benefit--to Home Federal, the limited partners and to downtown in keeping redevelopment going,� Home Federal attorney Victor Vilaplana said Wednesday.

The crux of the city’s quarrel with the plan is its dispute with Home Federal over whose hotel loan should have better security. The city has sued Home Fed alleging that the city’s $6-million third mortgage should, for a variety of reasons, be made senior to Home Federal’s $32-million second mortgage.

That’s an important issue because the debt-laden hotel may be worth as little as $28 million at a foreclosure auction, according to a disclosure statement filed by the hotel owners at bankruptcy court. Since the city’s loan is currently junior to a $4.8-million first mortgage held by the Joseph Drown Foundation and to Home Fed’s second mortgage, the city stands a poor chance of being paid off in a sale unless it improves its standing.

Bankruptcy Filed

The owners of the U.S. Grant, a limited partnership headed by Sybedon Corp. of New York, filed for protection under Chapter 11 of the federal Bankruptcy Code on Feb. 22, two days before Home Federal was scheduled to foreclose on the 78-year-old hotel.

Because of its high debt and lower-than-expected occupancy, the Grant experienced severe financial problems after reopening in December, 1985, after a four-year, $40-million renovation.

Wiley said it was Home Fed’s “understanding that the issue (of which loan had priority) would be settled separately so that we could get on with the reorganization and establish some stability in the operation of the hotel.�

As part of the reorganization plan, Home Fed offered to put up an irrevocable letter of credit covering the full amount of the city’s loan in the event the city wins its lawsuit against the S&L.; The city council, however, did not feel the letter of credit was “a sufficient amount of protection,� Fitzpatrick said. He declined to elaborate.

Loan by City

The city made the $6-million loan in 1984 to the hotel’s then-owner Christopher Sickels . About $4.8 million of those funds were provided by the federal government in the form of an Urban Development Action Grant to promote inner city redevelopment. The city provided $1.2 million of the funds. The loan has accrued interest totaling more than $1 million since, but cash payments not due to the city until next year.

The reorganization plan comes up for a hearing before U.S. Bankruptcy Judge Louise Malugen Tuesday. The reorganization plan must be agreed to by all parties by Feb. 28, according to a stipulation signed by Home Federal and the debtors.

In agreeing to the plan, Home Federal agreed to advance the hotel $3.3 million to pay off back debts as well as meet any operating shortfalls through 1991. In exchange, the hotel’s limited partner investors agreed to drop Home Federal from a lawsuit brought against it, Sybedon, Prudential-Bache Securities, and several related parties.