(L to R) Abbey Kaplan, Kluger, Kaplan, Silverman, Katzen & Levine shareholder; Michael Bild and Richard Sarafan, Genovese Joblove & Battista. Courtesy photos

A bitter seven-year legal battle between the family that co-developed Miami Beach's Z Ocean Hotel and an investor who arrived after the project was finished and in financial straits ended in favor of the investor.

South Beach Resort Development LLC completed the 80-unit Z Ocean hotel-condominium at 14th Street and Collins Avenue in 2006. Units are individually owned but subject to short-term stays by owners who rent them in a building designated for transient rather than residential use. Owners can rent units on their own or through the onsite Crowne Plaza South Beach.

The litigation focused on whether the seller of South Beach Resort Development misrepresented company financial reports to induce the investor to buy a two-thirds stake.

Miami-Dade Circuit Judge William Thomas found fraudulent inducement in the sale and sided with the investor on other claims against and by the co-developers.

Before the investor bought into South Beach Resort Development, he was given an inaccurate balance sheet that made it seem like the condo-hotel was profitable. The co-developers vouched for the accuracy and truthfulness of the balance sheet.

"The truth, however, as revealed only after the filing of the 2007 tax return in 2009, was that South Beach Resort Development was a terribly struggling company on the verge of insolvency, with negative equity," Thomas concluded.

He issued his findings of fact and conclusions of law Jan. 13 after a four-day bench trial last October. A damages award is pending.

An attorney for the winning side saw this as justice finally served.

"This was a hard-fought complicated case," said Richard Sarafan of Genovese Joblove & Battista in Miami. The judge "found my clients were clearly the victims of fraud, and this ruling does substantial justice between the parties."

Sarafan worked on the case with Genovese Joblove attorney Michael Bild.

The attorney for the losing side said an appeal is being considered.

"While we have great respect for Judge Thomas, we believe in this instance he misapplied the controlling law and also ruled inconsistent with the uncontroverted evidence presented at trial," said Abbey Kaplan, founding member of Kluger, Kaplan, Silverman, Katzen & Levine in Miami.

 

What Happened? 

When South Beach Resort Development formed in the early 2000s to develop the project, it was led by Ronald Molko, who owned half of the limited liability company, and the Grabarnick family, who divvied up the other half. The Grabarnicks are Philip Gene Grabarnick, wife Pauline Grabarnick and son Garett Grabarnick.

By 2008, South Beach Resort Development was behind on a loan, owing $17 million, prompting it to look for investors, according to Thomas' findings.

Negotiations ensued with buyer and investor So. Beach Hotel LLC, managed by New York investor Louis Taic. Its accountants found poor record keeping by South Beach Resort Development, Thomas wrote.

Gene Grabarnick came up with the solution after investor's accountants found missing records of putting together a balance sheet outlining Z Ocean finances and personally guaranteed the document's accuracy. It showed nearly $31.4 million in assets.

So. Beach Hotel bought two-thirds of South Beach Resort Development and hotel manager De Soleil Management LLC in 2008 and became managing member.

But the 2007 tax return for South Beach Resort Development filed in 2009 showed a much different financial picture than the balance sheet.

Among the discrepancies: Total assets were listed as $12.3 million, equity was a negative $7.2 million versus the balance sheet listing of nearly $11 million and liabilities were underestimated by $400,000, Thomas concluded.

The balance sheet also wrongfully listed two accounts receivable due to South Beach Resort Development totaling $3.14 million, but these funds weren't real assets, Thomas added.

The issues came down to the accuracy of the balance sheet and whether the Grabarnicks knew about discrepancies, the judge found. He concluded the buyer relied on South Beach Resort's misrepresentations.

"Such reliance was expected and intended. Gene Grabarnick proposed attaching the balance sheet to the Grabarnick agreement for that very purpose, knowing" that the deal wouldn't close otherwise, Thomas wrote. "Additionally, the Grabarnick agreement expressly confirms that the representations were being made by the Grabarnicks 'as a material inducement to buyer."

Kaplan took issue with the conclusion of fraud in the inducement by Pauline and Garett Grabarnick because neither had any contact with the buyer before the deal closed.

"There was absolutely no evidence whatsoever that either one of them made any statement to the plaintiff that could be considered a misrepresentation … that took place prior to the execution of the contract, no evidence whatsoever," Kaplan said. Pauline Grabarnick "wasn't even present at the closing. Her signature was on the contract, but before that no contact at all. No statements to the plaintiff. The same thing for the son, Garett Grabarnick."

Other Issues

Thomas sided with Taic's company on other issues as well.

One was over the legitimacy of two promissory notes totaling $500,000 made to GG Investment Realty Inc., a now-defunct company affiliated with Garett Grabarnick. So. Beach Hotel arranged to have South Beach Resort Development and De Soleil Management issue the notes as part of the acquisition with repayment to come from available cash flow.

GG Investment initiated the litigation in 2012 against South Beach Resort Development and De Soleil Management seeking payment of the notes.

Thomas concluded the promissory notes were tainted by fraud and GG Investment failed to show there was cash flow available for payment.

Another question was whether the new majority stakeholder could make capital calls from the other South Beach Resort Development members, namely the Grabarnicks. It issued 11 capital calls for over $2 million, but the Grabarnicks argued So. Beach Hotel must seek other sources first. Meanwhile, So. Beach Hotel paid the Grabarnicks' share as a loan, according to Thomas.

"It is undisputed that the Grabarnicks paid nothing towards these capital calls nor the loans, thereby breaching the amended operating agreement," Thomas wrote.

Thomas also upheld So. Beach Hotel's sale of the Grabarnicks' interest with a $100,000 credit bid in 2013. The Grabarnicks claimed the sale was invalid and commercially unreasonable.

"At the time of the sale, South Beach Resort Development's outstanding liabilities far outstripped the value of its assets," Thomas said. "In other words, the Grabarnicks' minority membership interest in an underwater company in foreclosure was essentially worthless at the time of sale."

South Beach Resort Development owns the 13 unsold Z Ocean Hotel units, the ground-floor retail and garage and manages the hotel.