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BRAD BERTON Staff Reporter

A Los Angeles Superior Court judge has confirmed an arbitration panel’s decision awarding $85 million in damages to the original developer of Santa Monica’s Shutters At The Beach hotel.

Judge David Yaffe’s Feb. 13 ruling in favor of L.A. developer Sam Stein and against Phoenix-based contractor Gosnell Builders Corp. and bonding company Fireman’s Fund Insurance Co. concludes one of the longest-running and costliest construction defect litigation matters in California history.

However, the six-year-old dispute may not be over yet even after 261 days of hearings and more than 10,000 court exhibits.

Both Gosnell and Fireman’s Fund say the arbitration panel’s awards which will exceed $90 million with accrued interest are erroneous and plan to appeal to the state’s Court of Appeal.

Stein had claimed that much of Gosnell’s late-1980s/early-1990s work on the beachfront development, originally dubbed Santa Monica Beach Hotel, was defective and had to be redone.

He also claimed that Fireman’s Fund refused to honor its obligations to fund the completion after the contractor stopped work. Fireman’s Fund had issued the performance bond guaranteeing funding of up to $24.8 million to complete the project.

Gosnell has consistently maintained that its work on the 198-room luxury hotel project was done properly and inspected on a daily basis. The building company also claims Stein attempted to “finance the project with contractor funds” by allowing work to proceed and then withholding payment and ultimately issuing more than 1,000 change orders.

The arbitration panel ultimately sided with the developer.

As a result of “pervasive defects in construction” and “material breach of many contractual obligations,” the developer “found itself in bankruptcy caused primarily by the deplorable conduct of the contractor,” according to an excerpt of the panel’s summary decision.

The Shutters finally opened in 1993 after Beverly Hills hoteliers Thomas and Mark Slatkin purchased the near-finished property under Bankruptcy Court supervision.

Dozens of lienholders are still awaiting payment in connection with the development including construction lender Tokai Bank, which has bankruptcy court claims exceeding $70 million.

The attorneys representing Stein and his Santa Monica Beach Hotel Ltd. (SMBH) partnership, Lee Colton and Robert Mann of Colton Mann Partnership in Century City, said the grounds for appealing a Superior Court’s confirmation of a binding arbitration matter are “extremely narrow.”

They are limited to misconduct or failure to disclose conflicts of interest by the arbitrators, or complex jurisdictional issues, the attorneys added.

However, Gosnell Vice President/Project Planning Ric Williams said the arbitration process handled by two attorneys affiliated with the American Arbitration Association’s local office in the Wilshire Center district was flawed. He did not elaborate on specific objections.

Attorney Marilyn Klinger with Sedgwick Detert Moran & Arnold in San Francisco, Fireman’s Fund’s latest counsel in the dispute with Stein, said her client is “is considering all options including appeal.”

She added that Fireman’s Fund believes the arbitration panel “erred both substantively and procedurally,” but also declined to identify specific objections to the decision.

The arbitration process began back in 1991, after Stein stopped paying Gosnell and retained another contractor to complete the hotel’s construction.

As far as SMBH/Stein attorneys Colton and Mann have been able to determine, the case has become the longest-running construction arbitration matter handled by the American Arbitration Association in California history.

The award in SMBH’s favor amounted to just under $47 million, while the award in favor of SMBH against Fireman’s Fund amounted to nearly $38 million, according to attorneys Colton and Mann.

Including interest from the actual award dates, the combined awards now exceed $90 million. That total represents the largest-ever construction defect award in California history, as far as Colton and Mann have been able to determine.

But the attorneys also noted that 70-year-old Stein, who invested $24 million of his own funds into the project, isn’t likely to see even $20 million.

That’s because Gosnell actually gets a credit of $24.8 million against the surety bond-related Fireman’s Fund award, and creditors of the SMBH bankruptcy estate and Stein’s personal bankruptcy estate primarily Tokai Bank will also receive some of the award.

That assumes Fireman’s Fund and Gosnell eventually exhaust their appeal remedies and pay up.

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