Embattled Los Angeles developer Shangri-La Industries has filed for Chapter 11 bankruptcy protection on state-funded motel conversion projects to house the homeless in Redlands, Thousand Oaks and two other California communities.
The court filing Monday, April 29, at the U.S. Bankruptcy Court in San Jose affects three conversion projects — at the former Good Nite Inn in Redlands, the former Quality Inn & Suites in Thousand Oaks and the former Sanborn Inn in Salinas — funded under California’s Homekey program.
The fourth, at a former Motel 6 in San Ysidro, was funded under the state Community Care Expansion program, said Brian Sun, the attorney representing Shangri-La. That program funds the acquisition, construction and/or rehabilitation of adult and senior care facilities to serve people who receive Social Security and other government aid and are at risk of or experiencing homelessness.
Shangri-La had upgraded or was planning to upgrade each of the motels to house homeless individuals.
Officials respond
Although aware of Shangri-La’s bankruptcy filing, city officials could not immediately say how it might impact their respective Homekey projects.
“We are aware of the bankruptcy and the city will be meeting with our attorneys to discuss next steps. We have no further comment,” Redlands spokesperson Carl Baker said in an email on Wednesday.
Alexandra South, a spokesperson for Thousand Oaks, said in an email that speculating on the impact of Shangri-La’s filing would be premature.
“As these matters are in litigation, the city has no further comment regarding the status of the various matters,” South said.
Salinas Mayor Kimbley Craig said in an email that the city is considering its options regarding the fate of the project at the former Sanborn Inn. As for two other motels in the city Shangri-La also was contracted to upgrade — the former Salinas Inn and the former Good Nite Inn — they were recently purchased by lending companies at recent foreclosure sales, she said.
“The city is working with those lenders, as well as the state, toward completion of those projects for use as permanent supportive housing,” Craig said.
Problems surface in 2023
Gov. Gavin Newsom launched Project Homekey in June 2020 to protect unhoused individuals from the threat of the coronavirus pandemic. The state has allocated more than $3 billion to cities and counties to purchase motels, hotels, vacant apartment buildings and other properties to provide permanent housing for the homeless.
Problems began surfacing for Shangri-La last year, when a Southern California News Group investigation revealed that lenders and contractors were complaining about not being paid for completed work at the former Good Nite Inn in Redlands, now Step Up in Redlands, and the former All Star Lodge in San Bernardino, now Step Up in San Bernardino.
It later was revealed that dozens of mechanic’s liens totaling millions of dollars have been filed over the past year at recorders’ offices in San Bernardino, Ventura and Monterey counties, the site of other Homekey projects in which Shangri-La was involved.
At the San Bernardino County Recorder’s Office alone, more than $2 million in liens had been filed in 2023 by contractors and suppliers not paid for work completed at the Redlands and San Bernardino motels.
Shangri-La’s failure to pay resulted in more than a dozen lawsuits against the developer by contractors and lenders.
Agreement terminated
On April 16, the Redlands City Council terminated its Homekey agreement with Shangri-La amid allegations by the state Department of Housing and Community Development that the developer misappropriated $114 million in Homekey funds.
Redlands Assistant City Manager Chris Boatman told the council that the city would continue to provide $510,000 annually as an operating subsidy to house the homeless at Step Up in Redlands, which he said is now housing 132 formerly homeless residents.
Boatman said the city’s termination of its agreement with Shangri-La now gives the city full control to ensure that money is spent appropriately and toward operational expenses.
State lawsuit
In a 321-page lawsuit filed in January in Los Angeles Superior Court, the state Housing and Community Development Department alleged Shangri-La breached its obligations under terms of its agreements with the Homekey program.
After obtaining state funding, Shangri-La, according to the state’s lawsuit, granted and recorded deeds of trust to secure loans from third-party lenders without first obtaining the state’s written authorization, as required under the Homekey agreements. Shangri-La then defaulted on the loans, causing the lenders to begin the foreclosure process.
Sun said the bankruptcy filings are part of the developer’s plan to restructure and finish its commitments on the various Homekey projects.
“We will issue a statement soon after some preliminary restructuring and financing components are put into place,” Sun said on Wednesday, May 1.
Buying time
Adam Stein-Sapir, a bankruptcy expert at the New York City-based Pioneer Funding Group, said the bankruptcy will pause any state court litigation and collections actions by creditors and/or lenders, which will give Shangri-La breathing room to get its financial affairs in order.
“They will try to recover as much of the stolen funds as possible. If they are very successful, they may be able to cure defaults and emerge from bankruptcy in a timely fashion,” Stein-Sapir said. “However, if there really is a multimillion-dollar hole in their balance sheet, they may have no choice but to sell the properties to repay the lenders.”
He said the developer’s filing was essentially “bare bones” and included no financial information. Therefore, Shangri-La is required to file supplementary financial information within 45 days from the day of the filing.
“Even though they are in bankruptcy, they will do their best to operate the facilities and complete construction on the unfinished sites,” Stein-Sapir said. “However, this will likely require the consent of their lenders, whoever they are. At the very least, they should be able to continue operating the in-use facilities.”
Cody Holmes, former chief financial officer for Los Angeles developer Shangri-La Industries, and his ex-girlfriend, Madeline Witt, have been sued by Shangri-La, which alleges Holmes embezzled millions of dollars from the company, some of which was earmarked for state-funded motel conversion projects to house the homeless, and used the money to finance a luxurious lifestyle for himself and Witt. (Photo courtesy of Brian A. Sun)
Former CFO under fire
Shangri-La has accused its former chief financial officer, Cody Holmes, of embezzling millions of dollars in company money to live a lavish lifestyle, which put the developer’s state-funded projects in jeopardy, including those listed in its Chapter 11 filing.
In a lawsuit filed against Holmes and his ex-girlfriend, Madeline Witt, in February seeking $40 million in damages, Shangri-La alleged Holmes engaged in bank fraud and check kiting in 2022 and 2023 with Shangri-La’s lenders, banks and brokers. He allegedly transferred vast sums of company cash and property to bank accounts and shell companies he controlled and to Witt, according to the lawsuit.
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Holmes used the money to host extravagant parties, cover $46,000 a month in rent at a leased home in Beverly Hills, travel regularly on private jets, lease exotic cars — including a 2021 Bentley Bentayga and a Ferrari Portofino — and even $12,000 to cover a student loan payment, the lawsuit alleges.
He also purchased high-dollar luxury items for himself and Witt, including two Birken handbags valued at nearly $128,000, Chanel and Louis Vuitton handbags valued at more than $14,000, a $127,000 Riviera diamond necklace, a $35,000 Audemars Piguet diamond watch, and 20 VIP passes for the 2023 Coachella Music and Arts Festival valued at more than $53,000, according to the suit.
“The duration, nature and amount of the fraud illustrate a stunning lack of financial controls at Shangri-La,” Stein-Sapir said.
In a statement Wednesday, Holmes’ Los Angeles attorney, Ramin Azadegan, said: “We will be addressing the baseless, defamatory claims made against Cody Holmes and Madeline Witt in court. The complaint filed by Shangri-La Industries CEO Andrew “Andy” Meyers is a desperate, dishonest attempt by Mr. Meyers to dodge responsibility for his company’s current legal challenges.”