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How Not To Do Business

City vs. The Fish House
By Rick Outzen

The title of the Pensacola News Journal’s (PNJ) article on Tuesday, Nov. 26 could have easily been “Mayor Accuses Fish House of Cheating City Out of Millions.” It wasn’t, but that is how some interpreted the article about the default notice sent on behalf of Mayor Ashton Hayward to Collier Merrill, co-owner of the restaurant.

But PNJ readers didn’t know what Merrill knew—that the notice was a negotiation ploy by the city, unsupported factually or legally, according to his attorney. They also didn’t know that the notice itself was leaked, Merrill believed, to the media to hurt his business.

The notice demanded that Seville Harbour, Inc. (owned by Ray Russenberger) and Merrill Land LLC (owned by Burney, Collier and Will Merrill) pay as additional rent payments five percent of The Fish House and Atlas Oyster House’s gross sales since April 2000, plus interest—an amount that could total well over $5 million.

Seville Harbour, Inc. has the ground lease for Pitt Slip, the name given to the three parcels owned by the city that include the anchorage between the Port of Pensacola and Bartram Park. Merrill Land LLC bought in April 2000 the building on the property from Seville Harbour for $1.3 million and subleased the parcel upon which it was built.

The default notice stated that the two companies had 90 days to pay up or the city would terminate the master lease, which would shut down the two restaurants on Feb. 13, 2014.

The impact of the article on The Fish House was immediate. Merrill tried to prepare his staff for any questions from customers.

“I had a meeting with the managers the next morning at 9:30 after the written article came out,” he said. “As much as you can say everything is fine, a few were a little hesitant. They were getting calls from other restaurants; one guy was offered a job.”

Jean Pierre N’Dione, the general manager of the two restaurants, said that the holiday business has been slower than prior years. He’s also dealt with questions from customers.

“The day of the article, a couple came in and said they were here to get a meal before the restaurant closed,” said N’Dione. “They were thinking we were going to be shut down in a few days. It was difficult to say if they were jokingly saying that or if they really believed it.”

The restaurant’s party and catering businesses have also been hurt by the city’s threat.

“We’ve definitely lost business,” said Merrill. “Over Thanksgiving weekend, there were brides in town booking their parties for next October. They didn’t want to take the chance that we might not be in business next year. People are now hesitant to book their Christmas parties with us.”

Why would the mayor’s office resort to such strong-arm tactics? Many would expect a default notice to be sent by Mayor Hayward only after his negotiations with Seville Harbour and Merrill Land had hit an impasse, especially when the notice is a public record that could hurt two landmark restaurants.

However, there had been no negotiations with the city, though Russenberger’s attorney asked for the leases to be combined in 2009. The leases were properly renewed in July 2011, and the mayor had never sent them any written proposals for the properties.

Merrill told the IN that he had only two meetings with the Hayward administration on the lease—one in 2011 with City Attorney Jim Messer and then Chief of Staff John Asmar, the other this past September with City Administrator Colleen Castille. Neither time did the city officials bring up anything about the restaurants owing millions in back rent. Never did the city ask for five percent of his restaurants’ sales.

“We have been waiting for the city to get back to us,” said Merrill. “We had no idea this was an issue or the mayor’s position on the leases.”

Pensacola Landmark

For many, The Fish House is an iconic Pensacola landmark.

The restaurant has hosted presidents, governors, senators, congressmen and other celebrities. During the 2008 presidential election, John McCain, Rudy Giuliani and Fred Thompson held campaign fundraisers there. This past election cycle, GOP presidential hopeful Mitt Romney, with McCain, actor Jon Voight and Mayor Hayward, held a rally on The Fish House deck, pictures of which appeared in the Washington Post and New York Times.

Chef and co-owner Jim Shirley has served his famous Grits a Ya Ya for dignitaries in Washington, D.C. and New York City. Pensacola native, former congressman and author Joe Scarborough has hosted his MSNBC show “Morning Joe” several times from the restaurant.

Three reality shows have been filmed there.  The Travel Channel aired an episode of “Bizarre Foods” that featured The Fish House’s grouper throats. “American Pickers” also filmed an episode from The Fish House, which featured the Merrill brothers trading some of their memorabilia for a model of the USS Atlanta. This past August, Chef Emeril Lagasse showcased The Fish House as part of his show “Emeril’s Florida” on the Food Network.

The Fish House and Atlas Oyster House have made Pitt Slip a destination for many visiting our area, serving an estimated 500,000 customers a year. They also are part of what was one of the city’s first public-private development projects.

In the 1980s, the Pensacola City Council wanted a marina built on Pitt Slip, the inlet across from the town’s historic district and outside the gates of the Port of Pensacola. Three parcels were combined—the water area for the docks (Parcel 1), the area along Barracks Street that the city leased from the state (Parcel 1A) and the lot south of the marina (Parcel III).

The intent was to lease to a developer the parcels for 30 years with a renewal option for an additional 30 years. When the original lease was executed in 1985, the city learned that its lease for Parcel 1A with the state only had 27 years remaining. The city had to amend the original lease to adjust its end date. The state required that it be renewed for five successive five-year periods.

The history of the development was filled with ownership changes and business failures. The project never was as successful as the council had hoped until Russenberger and the Merrills got involved.

In January 1998, Chef Jim Shirley rented the space formerly used by the closed Beef & Ale House in the Seville Harbour building on Parcel 1A. He opened the Fish House with Brian Spencer and Dr. Roger Orth as his investors. By the spring, Merrill brothers stepped in as investors in The Fish House, forming Great Southern Restaurant Group of Pensacola, Inc. that put about $2 million into the restaurant, according to Merrill. Spencer and Orth focused on Jackson’s, a restaurant they were opening on Palafox.

“At the time, my brothers and I had invested in several businesses downtown,” said Merrill. “We bought the Bass building on the corner of Palafox and Gregory and were the landlord to Jim Shirley and the Screaming Coyote. We bought Seville Tower on the corner of Palafox and Government streets, which is where my grandfather had his offices in the 1940s.”

He said, “We wanted to move downtown. At the time, our offices were near the mall at Madison Park. Though not a lot was going on downtown, we loved it and saw the potential.”

In 2000, Merrill learned Russenberger was looking to sell the Seville Harbour building. Merrill Land LLC, the brothers’ real estate development company, bought it for $1.3 million and agreed to sublease the ground lease for parcel 1A upon which it was built at the same terms of the master lease. The purchase and sublease were both recorded with the clerk of courts.

Great Southern Restaurant Group went from renting from Seville Harbour, Inc. to renting from Merrill Land LLC.

“Merrill Land got a loan to buy the building, on which it is still making payments,” said Merrill. “It’s like any business. It rents out spaces. We charge rent and hope that those collections are enough to cover our mortgage, lease payment to Russenberger for the ground lease, utilities, repairs and maintenance. At the end of the day, we hope to make a profit like any landlord does.”

Merrill admitted he has been surprised by how much he has come to like the restaurant business. He enjoys the positive feedback he receives from customers and is proud of the role The Fish House plays in the community.

“Maria Goldberg, our marketing director, and I get together once a week,” said Merrill. “We go over all the requests for donations from charities, and there’s always a stack of them. We try to help every one of them, from the high school booster clubs to the NICU at Sacred Heart.”

The Fish House caters events for charities, hosts parties and donates appetizers and the services of its chefs for other fundraising events.  He said, “We’ve tried to be good citizens by giving back to the community, trying to get downtown going and helping to promote Pensacola.”

Legal Battle

The default notification from the city asserted that it was entitled to five percent of the gross sales of the restaurants because Merrill Land had been partially assigned the master lease when it bought the Seville Harbour building. The city claimed Great Southern Restaurant Group was a subsidiary or business combination of Merrill Land and therefore should have paid rent based on its gross sales.

Attorney Bruce Partington responded on Nov. 27 on behalf of Seville Harbour and Merrill Land LLC.

First, he made it clear that the leases had been properly renewed. According to Partington, the renewals required nothing more than delivery of a written notice. The letter exercising the renewals was sent July 21, 2011 by Leo Cyr on the behalf of Seville Harbour.

Seville Harbour never partially assigned its lease to Merrill Land.

“Seville Harbour retains multiple rights and duties with respect to the property sub-leased to Merrill Land,” said Partington. “The fundamental concept of an assignment is that the assignor’s entire interest is transferred to the assignee which did not occur here.”

He pointed out that the city had refused in 2000 to approve any assignment to Merrill Land, which is why the transaction was done as a sublease. He asserted that the city’s new position of the relationship between the two companies being an assignment was “irreconcilable and fundamentally inconsistent” with its position 13 years ago.

He pointed out the two restaurants are not owned by Merrill Land. The owner, Great Southern Restaurant Group, “is not, and has never been, a ‘subsidiary or business combination’ of Merrill Land.”

“Merrill Land has no ownership or other interest in Great Southern Restaurant Group, nor does Merrill Land receive any portion of the revenues from the operation of the restaurants on the property.”

Partington believed that the city’s position is without merit and based on “two dubious propositions which are unsupported factually or legally.”

He expressed Merrill’s concerns about how the daily newspaper got wind of the letter one day after the certified letter was received.

“It is extremely troubling that Seville Harbour’s multiple attempts over several years to meet with representatives of the city to discuss the lease were ignored,” wrote Partington, “and then, after years without a response, receive a notice of default, which was then leaked by the city to the media for dramatic effect.”

He put the city on notice that it was responsible for any damage that the leak may have caused Great Southern Restaurant Group.

The Leak

Merrill admitted that when he first received the letter from Daniel he was not that concerned. He was surprised the attorney brought up gross sales, but believed that the restaurants were on solid legal ground.

He said, “I wasn’t really worried about it. I don’t even think I told my brothers about it because I knew it was baseless.”

He sent the letter to Stephen Moorhead, Russenberger’s attorney, to review. Then on the afternoon of Thursday, Nov. 21, Merrill received a call from the PNJ saying that they had heard about a letter sent to him saying The Fish House owed the city millions of dollars. The reporter would not tell him how they got that information, but he admitted they had not yet seen the letter.

Merrill called City Administrator Colleen Castille, who denied any responsibility for the leak. “Colleen, I don’t think you understand the severity of this. This is going to be a front-page story and I’m going to lose business immediately.”

A meeting was set up for the following morning between the daily newspaper, Castille and Merrill. He hoped that the City Administrator, whom he had given the details of the leases in September, would say the letter was wrong. That did not happen.

According to Merrill, she said the letter was a negotiating tool.

“I said that’s fine if you want to sit down at the negotiation table. We’ve been wanting to do it for years,” Merrill recalls what he told Castille at the meeting.

“But to say something that bad about my business is just wrong. I told the City Administrator that to send out a totally baseless letter with inaccurate facts to hurt my business is almost criminal.”

The IN asked the city for an interview with Castille for this article. The city’s communications director, Tamara Fountain, replied the following week, “Colleen has decided not to do any further interviews.”

The city did not offer for anyone else to explain the mayor’s decision to send the default notice or talk about the negotiations and did not give the paper permission to talk to its attorney Nix Daniel.

Who does Merrill think leaked the letter?

“Obviously it had to come from the city. It was either someone with the city or they gave the information to someone who then leaked it to the News Journal,” he said. “The last thing I wanted was this inaccurate letter to come out, because it’s hard to get that genie back in the bottle. I knew people were going to think The Fish House owes the city millions and the city was going to shut us down.”

Merrill said that the city knows the letter is totally inaccurate. “We’ve paid every bit of rent we owe. We’ve shared our financial information. I’m shocked that the mayor’s office would use this tactic. We sat down with Colleen, explained all the details of the leases and we thought it was all good—until we got the default notice.”

He said for the city to send out a default notice demanding millions of dollars without any discussion is unconscionable. “We properly and legally renewed our leases in July 2011. We got a letter from the city attorney that our attorney responded to almost immediately. We received nothing in writing until two years later and it’s a baseless default notification about something that the city has never mentioned to us was even an issue.”

Merrill asked, “What kind of message does this to send to businesses looking to invest in Pensacola and possibly partner with the city?”

Editor’s notes:  •Collier Merrill owns a five percent interest in the Independent News. Ray Russenberger owns 2.5 percent of the paper. Neither has, or has ever had, any control over the paper’s editorial coverage.

•At the time of print, the mayor and his attorneys had scheduled a meeting for Monday Dec. 9 to discuss Pitt Slip with Ray Russenberger, Collier Merrill and their attorneys.

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Don’t Forget The Airport

Mayor Hayward has been in a dispute with The Fish House over the food services contract at the Pensacola International Airport.

Hayward recommended to the city council at its Sept. 26 regular meeting the 10-year concession contract should be awarded to OHM Concessions—which included Chick-fil-A, Einstein Bros. Bagels, Surf City Squeeze and Corona Beach House. Collier Merrill’s The Fish House had joined forces with Bagelheads, Varona’s, and Pensacola Bay Brewery to offer a more local option that had placed second to OHM during the selection process.

The issue was tabled at the meeting when Merrill, the other local business owners, their employees and citizens spoke out in favor of their proposal. Since then, Mayor Hayward has pulled the item off the council’s agenda twice.

Those familiar with council politics say the mayor simply doesn’t have the votes to win approval for OHM. Did the mayor’s office leak the default notice to the daily newspaper to tarnish the image of Merrill and The Fish House to gain the one or two votes needed to bring Chick-fil-A to the airport?

“I certainly hope not,” said Merrill, “because I would hate to see them use those tactics (the notification of default and subsequent leak to the media) to win on a completely separate issue and to punish my 250 employees and my family.”

The next week in his “Upwords” newsletter Hayward criticized Merrill and the others who spoke out at the council meeting claiming they “ambushed” the council.

“It is a terrible idea to disregard our objective business processes in response to a few influential people politically strong-arming our elected officials,” said the mayor.

Merrill was dumbfounded by the mayor’s comments.

“I spoke before the city council because City Administrator Colleen Castille said that was what I should do,” he said. “She said she was going to let the Airport Director, Greg Donovan, stand on his own. We could make our argument and then we let the council make the decision.”

After the newsletter, he met with Castille and City Attorney Jim Messer and asked for explanation of the mayor’s comments.

“I asked Colleen, didn’t I do what you told me do?” he told the IN. “Basically she told me that she didn’t think we would be that organized.”

On Tuesday, Oct. 15 at his first “Mornings with the Mayor” session, Hayward bristled when asked about his “ambush” comment.

“That’s what I called it,” said Hayward, “It was an ambush.”

The IN asked how so, especially since Merrill had been instructed by the City Administrator to make his case at the council meeting.

“They did, but in my opinion I said it was an ambush,” said the mayor.

Mayor Hayward said of the upcoming council vote on the issue, “We will see what happens. They might win. If they do, we will move on. We’re going to support them and we’re going to say let’s make Pensacola a better place. I’m a big boy. Sometimes you win ’em; sometimes you lose ’em.”

When the council agenda for its Oct. 24 meeting was released, the food services contract was on it. The following Sunday, Hayward supporter Bob Kerrigan wrote a viewpoint in favor of OHM getting the contract. Ads appeared in the daily newspaper supporting the mayor’s proposal. A website was set up for Hayward supporters to send emails to council members.

Then at the council’s agenda review meeting, City Administrator Castille, on the mayor’s behalf, unexpectedly pulled it off the agenda. The mayor appeared no longer willing to lose on the issue.

The airport food services recommendation was not on any of the council’s agenda. On Dec. 2, Merrill received an email from the city that stated the issue would not come up in December either.

“Please be advised that the Airport Director will not be bringing the Food and Beverage concession lease agreement to the Pensacola City Council during its December, 2013 meeting,” wrote Airport Administration & Contracts Manager Michael Laven. “Both the Director and the Mayor will be out of the country on business. We believe that the scheduling of this concession will take place in January or February of 2014.”

Stay tuned.

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History of Pitt Slip, Pre-Fish House
Source: Pensapedia.com

Pitt Slip is named for B. R. Pitt, whose mill was located on the site at the turn of the 20th century.

Development attempts
In the early 1970s, the Historic Pensacola Preservation Board drafted a master plan for the Historic Seville area that included a marina-type development at the Pitt Slip site. In 1977, the 3.5-acre parcel fronting Pitt’s Slip was condemned by the City of Pensacola, which entered into purchase negotiations with its owners, Capital Realty Holding.

On July 26, 1979, the Pensacola City Council voted to seek an Economic Development Administration grant to develop the land as a public marina complex. Two years later, the city council named the CRA serve as “master developer” for the project, in coordination with the Preservation Board.

A proposal presented by the Harbour Corporation—made up of Cooper Yates, F. A. Baird, Jr., John S. Carr, Dick Baker and Buzz Ritchie—that included a restaurant, retail shops, office space and a 98-slip marina was given tentative approval by the Preservation Board on July 14, 1981, although the city nixed its request for an exclusive 99-year lease of the property.

Later that year the city opened the project to other bids, sparking a complaint by Yates, who said he had met informally with city manager Steve Garmen and city planners in creating their proposal and had been “assured back then that we were the only people that were even interested.” Three of the Harbour principals — Baker, Carr and Ritchie—splintered off and submitted their own proposal.

The $3.4 million plan from Harbour Corporation was selected by the city council in early 1982. The selection sparked complaints that the CRA’s evaluation process did not give weight to the city’s projected financial return to the city and mistakenly equated “open space” with “public accessibility.”

It also gave credence to rumors that Harbour Corp.’s selection had been influenced by State Sen. W. D. Childers, who allegedly told city officials he would secure funding for other city projects if Yates was awarded the project. Childers and several councilmen denied all allegations of political pressure.

A question of clear title emerged, as land accreted by tidal action was not included in the property condemned by the city, so a portion of land was still owned by Capital Realty Holding. The city ultimately settled with Capital Realty for $475,000.

On Sept. 27, 1983, Baird and Yates announced they wanted to end their development agreement, saying the city had failed to deliver marketable title “within a reasonable time” as stated in the contract.

Space & financing issues
Harbour Corp. changed hands to James R. Tanck and New Orleans developer Bernard Mason, who presented a revised proposal that added an antique carousel, an amphitheater, a railroad half-roundhouse attraction and a hotel. This plan required a much larger footprint, extending into Bartram Park and using a Port of Pensacola spoil site as parking for the hotel. When the U.S. Army Corps of Engineers forbade the latter, Harbour scaled back its plan.

The City Council gave approval to the project on Sept. 17, 1984. However, the developers had trouble securing retail commitments. When construction had not begun on Feb. 8, 1985, the city’s lease with Harbour Corp. was terminated.

Seville Harbour
In 1985, the City of Pensacola hired Orlando-based Florida Sun International, which had recently built the marina at Port Royal, to develop a simplified plan called “Harbour Village at Pitt Slip.” The first phase, budgeted at $2.5 million, included a $1 million, 106-slip marina with a floating pontoon dock system and two 10,000-square-foot buildings.

Later phases were planned to add three more buildings along the southern portion of the property, but this never reached fruition. The complex was renamed “Seville Harbour.”

The land in the Seville Harbour block was rezoned by the Pensacola City Council on June 24, 1999 to allow residential construction. Developers Ray Russenberger, John Carr and Doug Halford planned to build upscale condominiums on the site, but the project fell through.

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Big Legal Question

The city of Pensacola has attempted to go after a percentage of the gross sales of The Fish House and Atlas Oyster House by claiming that its owner, Great Southern Restaurant Group, is a subsidiary or business combination of Merrill Land LLC, the company that subleases the land and is the landlord for the restaurants.

If that claim is held up in court, the city would be entitled to five percent of the restaurants’ gross sales, but only as far back as 2007 due to the statute of limitations on the lease.

Collier Merrill asked his real estate attorney Steve Shell to analyze whether Great Southern Restaurant Group could be considered a subsidiary or business combination of Merrill Land LLC.

He concluded that it could not.

The Merriam-Webster Online Dictionary defines a subsidiary as “a company that is owned or controlled by another company.” Florida law states “subsidiary means, as to any corporation, any other corporation of which it owns, directly or indirectly through one or more subsidiaries, a majority of the voting shares.” Black’s Law Dictionary defines a subsidiary corporation as “a corporation in which a parent corporation has a controlling share.”

None of these definitions would qualify Great Southern Restaurant Group to ever be considered a subsidiary of Merrill Land. The fact that the two companies have some of the same shareholders does not create a subsidiary relationship. Great Southern Restaurant, Inc. is not—by any definition—a subsidiary of Merrill Land LLC.

The term “business combination” is not defined in dictionaries or Florida statutes, and provided somewhat of a challenge for the law firm. According to the attorney, the term is most often used as an accounting term to refer to “a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred as ‘true mergers’ or ‘mergers of equals’ also are business combinations,” according to the Financial Accounting Standards Board.

According to Shell, the two companies are not a business combination because “neither company has nor is seeking to acquire control of the other, despite the presence of partial identity of ownership.” The two entities have very dissimilar purposes. Great Southern Restaurant Group owns and operates a chain of restaurants. Merrill Land LLC operates in the real estate industry.

“None of the definitions located in the course of performing research for this memorandum came to the conclusion that Great Southern Restaurant Group, Inc. is a subsidiary or business combination of Merrill Land LLC,” concluded Steve Shell. “While the two companies may be characterized as affiliates, the lease does not contemplate the payment of a percentage of gross sales and/or rents by affiliates, only subsidiaries or business combinations.”

 

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Document Trail
As part of the investigation into the Independent News’ cover story, “How NOT To Do Business: City vs. The Fish House,” we gathered the letters and contracts regarding the Pitt Slip leases. Some of these documents have never be published or given to the media. Read Rick’s Blog.