And other lessons of the Queen Mary auction

ILLUSTRATION by JOE MCGARRY

The Queen Mary may yet be the object of a bidding war when her lease rights are put up for auction on August 14, but the winning offer may be less a reflection on the value of the old boat than the judgment of Long Beach City Attorney Robert Shannon and the lax oversight of the city council.

Shannon, who has been overseeing Long Beach’s interests during the city icon’s humiliating two-and-a-half-year trip through bankruptcy, had to feel particularly relieved when three financial groups submitted last-minute applications—barely beating a 5 p.m. deadline on August 3—to join original bidder O&S Holdings in this Tuesday’s auction.

The day before, a committee representing the Queen Mary’s creditors was so terrified by the prospect that O&S Holdings’ $41 million offer would be the only bid that it filed a motion in bankruptcy court to delay the auction for two weeks, hoping the extra time would produce other bidders. The judge turned them down.

Shannon didn’t join the creditors’ motion out of concern the city might somehow be left with nothing. “We are reluctant to do anything that would let O&S off the hook,” he explained that day. “From our perspective, $41 million is a very positive offer.”

Shannon’s concern that O&S Holdings might want to get off the hook and his spin on the $41 million show how far expectations have fallen since April, when the Press-Telegram joined city officials in predicting there would be “no shortage of interested parties,” whose enthusiasm might translate into a “summer-long bidding war.”

Shannon now acknowledges that $41 million would not be enough to pay off all creditors. The new offers—between $43 million and $44 million—weren’t much better and of course were contingent on validation of the applicants’ qualifications.

“It’s true that $41 million is not $49 million,” said Shannon, “but it still gives the city back substantially most of the money it feels it is owed.”

Shannon’s mention of $49 million was a reference to a series of proposals put forth in May and June by Save the Queen, a development consortium bankrolled by the multi-billion-dollar investment firm Carlyle Group. The offers, which eventually grew into packages valued in the mid-$50 millions, would have made an auction unnecessary.

Terms included:
• $45 million for the 57 years remaining on the lease to operate the Queen Mary and develop 50 acres of surrounding property
• $4.1 million up front to cover the city’s subordinated bankruptcy claim against the previous leaseholder—that is, money that the city was to have received after all other creditors were paid
• $5 million to begin repairs to the ship
• Resolution of all current and potential lawsuits against the previous leaseholder and the city by limited-liability corporations Bandero and Cheng Cheng USA, which have been claiming they were defrauded of development rights by that former leaseholder’s chief, Joseph Prevratil
• A multi-million-dollar payoff to Prevratil that would resolve the eight years remaining on the sublease he holds to operate the Queen Mary on a day-to-day basis through the not-for-profit RMS Foundation.

Inexplicably, Shannon repeatedly rejected those proposals. Finally, the Carlyle Group withdrew its support from Save the Queen, ending negotiations. Throughout the back-and-forth, Shannon never held a closed-session meeting with the members of the city council to let them know such options even existed.

Why?

It is frequently suggested that O&S Holdings may have allies among Long Beach’s private-enterprise powerbrokers. One widespread rumor says Roy E. Hearrean, a developer who is a former Harbor commissioner and current member of the World Trade Center board, is assisting O&S holdings through the bidding process. Neither Hearrean nor O&S Holdings executives Paul Orfalea and Gary Safady responded to multiple interview requests to confirm or deny such a relationship.

Another theory holds that Shannon and perhaps others in City Hall are determined that Prevratil not emerge with the multi-million-dollar settlement he stood to get with Save the Queen’s offer. Shannon denies this and would not speak further of Prevratil on the record.

Meanwhile, members of the former Save the Queen group—Orange County developer Jeffrey S. Klein, PBR (primary developer of Euro Disney), and noted resort developer Hix Rubenstein—submitted a new bid backed by three new institutional developers. Klein identified them as iStar, Babcock & Brown, and Garrison Investments.

But unlike the earlier Save the Queen proposals that were rejected by Shannon, this one does not include the global settlement of outside litigation by Bandero and Cheng Cheng USA or the potential that Prevratil may sue if unhappy with his settlement. This new group doesn’t have to address those issues because the bankruptcy court does not require it.

Nonetheless, the outcome of the upcoming auction will be compared to the checklist of benefits included in the Save the Queen offer, and the results—good or bad—laid on the Shannon’s desk.

On the other hand, city councilmembers weren’t exactly banging on Shannon’s door to get updates on the Queen Mary as she was dragged through bankruptcy during the 40th anniversary of her arrival in Long Beach. Apparently, councilmembers didn’t even discuss the topic much among themselves.

“You’d think the fate of the city’s icon—this monumental asset that should help all of Long Beach—would be a major focus among the council,” says a top aide to one councilmember, speaking on the condition of anonymity. “But it’s never come up among them in any conversations I’ve heard, whether in meetings or around the watercooler.”

Councilmembers finally got a look at what had been happening—depending on one’s perspective, either under their noses or behind their backs—during a July 24 closed session with Shannon. The meeting was prompted in part by a July 18 story in The District (“Going Once . . . Why Have City Officials Passed on a Great Deal for the Queen Mary?”), which itemized proposals from the Carlyle-backed group.

By all accounts, the revelations not only snapped councilmembers out of their trance but riled them up, too.

“We heard a lot of things we hadn’t been told before,” said Eighth District Councilwoman Rae Gabelich, who wouldn’t reveal more—adding only, “It got pretty crazy in there.”

As details trickled out of the meeting from other sources, however, several mentioned a confrontation between Shannon and Second District Councilwoman Suja Lowenthal. Previously, Lowenthal had been Shannon’s most vocal supporter—of the tactics of his negotiating team and of the quality of information he had relayed to the council. “I’m not dissatisfied at all,” she had said.

As things came to light, that changed, resulting in an exchange that escalated to the point that Mayor Bob Foster finally intervened and requested that Shannon apologize to Lowenthal.

“We had a healthy discussion,” said the ultra-sedate Lowenthal with a chuckle. “You know me—I’m always very diplomatic.”

Shannon, an excitable man who tends to raise his voice in meetings when agitated, likewise downplayed the confrontation—but didn’t give an inch. “There was disagreement—based on your article—and I objected to any suggestion that the council was not kept in the loop,” he said. “The fact is, the council was very definitely kept in the loop.”

Lowenthal said her point related to the basic relationship between the council and the city attorney, all of whom are publicly-elected officials.

“I look at Mr. Shannon as the city council’s legal counsel, and I look to him to consider us his client,” she said, explaining that such an arrangement existed when she worked in the office of publicly-elected Los Angeles City Attorney James Hahn in the 1990s. “But when I said that to Mr. Shannon, it made for some healthy discussion.”

If this qualifies as a wake-up call—or a class in city government—it’s just sad that everybody needed one.

Tags: bidding war, Long Beach, Queen Mary, redevelopment