KIHEI - Maui Oceanfront Inn will be in court this morning trying to overturn a foreclosure action filed against it in February by its California lender.
Since then, the lender, La Jolla Bank, has been closed by federal regulators.
Carroll Davis, the owner of the hotel, said in a telephone interview that he is current on his two loan agreements, although he has been unable to get receipts for payments of $600,000 that were made to the bank.
Like just about every other hotel in the state, Maui Oceanfront Inn saw its receipts drop in late 2008, following the bankruptcy of Lehman Brothers and the other catastrophes on Wall Street. Davis, who operates the hotel through his Western Apartment Supply & Maintenance Co., went to La Jolla in November 2008 to ask for a modification of his loans in order to lower his monthly payments. "I knew those people for 27 years," he said, although at some point during the complicated course of his loan rearrangements new owners came in.
The bank was ready to grant forbearance, but Maui Oceanfront is on leased land, with less than 25 years to run, and the bank wanted a 55-year lease first. Davis has been attempting for years to extend his lease, but first the state Department of Land and Natural Resources wanted some ancient encroachments and other zoning matters cleaned up.
The 73-room hotel, which also houses Sarento's on the Beach, was built in the 1970s and Davis inherited some headaches when he bought it in 2001.
By early 2009, it was obvious the lease wasn't going to be extended soon enough, so Davis and La Jolla began a new negotiation. By Sept. 1, they had come to an agreement that would reduce monthly payments from about $100,000 to $60,000 for a year, catch up on all property taxes and lease payments and generally put the hotel on a footing where its business receipts would cover its expenses.
The total amount was $12.2 million, plus a $300,000 line of credit.
On Sept. 9, the Office of Thrift Supervision, which oversees community banks, issued a cease and desist order against La Jolla, telling it not to modify real estate loans larger than $3 million without OTS approval. Adrian Rosehill, one of Davis' lawyers, said Western was not told about that. Western went ahead and completed signing the many documents involved in the renegotiation, authorized La Jolla to make payments on some of its debts and signed off on an agreement to allow Sarento's to make its monthly rent and common area maintenance payments directly to La Jolla.
Meanwhile, a memorandum opposing La Jolla's request to the 2nd Circuit Court to appoint a receiver says La Jolla took $400,000 from a Western certificate of deposit, used some to bring the notes current and, probably, some to pay other creditors, although repeated requests for an accounting have not been answered.
Western continued to meet its obligations under the new agreement, Davis said, and so did Sarento's. He said he was stunned to have the hotel foreclosed on early in February. At the time, he said he thought the problem - or part of it - was that all the management of La Jolla had left, and the remaining clerical staff didn't know about his renegotiation.
San Diego was surprised three weeks later when La Jolla, the third-largest bank in San Diego County, was closed. The bank had been reporting profits in 2009.
With $3.6 billion in assets, La Jolla was about three-quarters the size of Hawaii's Central Pacific Bank. It was heavily involved in lending on real estate developments.
The Federal Deposit Insurance Corp. sold what was left to another bank, but it said it expects to come up $900 million short.
Davis said he now believes that what happened was that the government regulators supervising the bank simply defaulted all the creditors, current or not.
An OTS report said the bank board had ignored a warning from its audit committee that suggested "potential self-dealing and other misconduct by certain of the savings bank's officers." No charges have been brought against the bankers.
Besides trying to show 2nd Circuit Judge Shackley Raffetto today that he didn't do anything to trigger a default, Davis will argue against appointment of a receiver, which, Western argues, will just add expenses without protecting any creditor assets and may "also raise apprehension in present hotel employees about the security of their employment."
In February 2009, Western retained Packard Hospitality Group to manage the hotel, and it says business has picked up and is running about 6 percent ahead of projections so far this year.
* Harry Eagar can be reached at firstname.lastname@example.org.