GALVESTON — An old battle between various owners and the operator of Galveston’s fabled Flagship Hotel took a neck-snapping post-Ike twist with a recent court filing.
For years, various landlords, including the city, have tried to evict the hotel’s operator, accusing the company of letting the property on pilings over the Gulf of Mexico fall into disrepair.
But Daniel Yeh, head of The Flagship Hotel Ltd., fought hard to protect lease agreements that gave him control of the hotel until 2031.
The most recent legal battles pitted Yeh’s firm against Houston-based Landry’s Restaurants Inc., which in 2004 paid the city $500,000 for the 40-year-old hotel.
Landry’s said it planned to spend $15 million transforming the property at 25th Street and the seawall into an entertainment plaza with amusement rides, including a roller coaster, and wanted Yeh out of the way.
Hurricane Ike turned the fight on its head.
Flagship Hotel Ltd. now wants out of the lease.
Landry’s Restaurants now wants the operator to stay put and pay rent until the end of 2009, according to court documents.
Landry’s Restaurants and affiliated companies filed a lawsuit Dec. 31 in Galveston’s 405th District Court, asserting the hotel operator breached its lease by failing to keep enough insurance on the property, which was badly damaged by the hurricane.
Flagship Hotel Ltd. had only $3 million in windstorm insurance through the state-created Texas Windstorm Insurance Association, according to the lawsuit. It had no coverage beyond that amount for various types of water damage or storm casualties, according to the lawsuit.
The lease required Flagship Hotel Ltd. to have $10 million in insurance coverage, according to the lawsuit. Storm damage to the Flagship could be more than $7 million, according to the lawsuit.
But attorneys for the Flagship Hotel contend the lease never called for $10 million in insurance.
Flagship Hotel Ltd., which took over the island icon in 1990, had the maximum amount of windstorm insurance allowed by the state association, said J. Michael Fieglein, its attorney.
Landry’s knew how much insurance the Flagship had and never complained until after the storm, Fieglein said.
“The Flagship did not breach its contract,” Fieglein said.
Most of the damage was to the pier, for which Landry’s is responsible, he said.
In 2004, Landry’s and Yeh reached settlement under which Landry’s, led by island native Tilman Fertitta, would take over the property by the end of this year.
The lease, amended by the settlement agreement, could be terminated in several ways, including “in the event of a casualty loss of the pier resulting in closure of the pier by a governmental entity.”
Two days after the storm, the city ordered the Flagship closed because its structural integrity was in question.
That order triggered the lease termination provision, prompting Flagship Hotel Ltd. to give notice, Fieglein said. Under the settlement, Landry’s would pay a $3 million termination fee, Fieglein said.
But the recent lawsuit asserts the early termination provision doesn’t apply because the amended lease stipulates closure because of disaster would constitute an early termination provided it occurred before Dec. 1, 2007.
Landry’s wants the court to declare the lease still to be in effect and the termination fee not due before Dec. 1, 2009, according to the lawsuit.
Much has changed — hurricane notwithstanding — since Landry’s and Flagship Hotel Ltd. reached the settlement in 2004.
Yeh, 55, was sentenced in September to 30 months in prison for filing a false claim with the Federal Emergency Management Agency’s short-term lodging program after hurricanes Katrina and Rita, which struck the Gulf Coast in 2005. Yeh’s wife, Belinda, is filling in for her husband.
When Landry’s bought the Flagship, the island’s real estate market was on fire, and developers were flocking to the waterfront. The market has cooled considerably. Credit markets are tight and Fertitta is in the middle of a $1.3 billion deal to take Landry’s private.
Whether Landry’s, which saw substantial damage to its island and Kemah properties, intends to move forward with the Flagship project any time soon is unclear. Fertitta could not be reached for comment Thursday.
The city built the once-grand Flagship Hotel in the 1960s as a show of confidence after Hurricane Carla.
