Admirers and critics alike consider Michael Harrah, the Newport Beach real-estate developer who owns Original Mike’s Restaurant, one of Southern California’s most daring, colorful entrepreneurs. Harrah bought The Orange County Register headquarters in 2014 and this year attempted to lure Jeff Bezos’ $5 billion Amazon plant to Santa Ana. The 6-foot-6, thrill-seeking, white-bearded, Whittier native who would have you believe he’s worth north of $300 million and brags of owning “45 world-class corporations” is trying to erect Orange County’s largest edifice, the 493-foot-high One Broadway Plaza.
Though Harrah presents himself as a visionary, he must not have foreseen an oncoming courthouse mess. According to advancing lawsuits, including one filed by former bartender Lahna Beasley, the businessman not only tolerated alleged rampant sexual harassment by Jose Orozco, a busboy he named Original Mike’s manager, but he also operated “a fraud” to mask his corporate liabilities, dodged IRS taxes with fake revenue reports and even shortchanged customers by lamely pouring rotgut liquor into expensive brand bottles.
“Harrah was Orozco’s boss and made the decision to retain a sexual predator despite 10 different sex-harassment claims,” Beasley attorneys Jeffrey Spencer and Bradley C. Gage advised Superior Court Judge William D. Claster. “Why does Harrah retain a sex harasser? Harrah needs Orozco to help illegally siphon $30,000 to $40,000 per month to cheat the government, undercapitalize the restaurant and create inequitable results for aggrieved parties.”
Just as in the One Broadway Plaza battle that’s drawn vocal community opposition for nearly two decades, Harrah is not known for retreat. On the eve of a scheduled 2015 trial over the Orozco matter, he placed his OM Restaurant Management LLC (OMRM) into Chapter 11 bankruptcy, apparently presuming that move would leave Beasley without a cash-rich target and, thus, kill the case. Spencer and Gage weren’t amused. They filed an amended complaint arguing that the seven-entity corporate maze tied to the restaurant’s finances can’t block his personal liability.
According to the filing, an “indifferent” Harrah allowed Orozco to hug and kiss female bartenders “thousands of times” over a period of years as well as trample state pay and work-break regulations. It also accuses the manager of repeatedly fondling those employees’ breasts and buttocks. In a January Weekly news report, Harrah labeled the claims imaginary (see Jeanette Duran’s “Lawsuit Continues Over Alleged Sexual Harassment by Original Mike’s Manager,” Jan. 3). He said, “I don’t believe the accusations are true.”
Claster, who has divided the case into two stages, will let a jury decide who is right. Phase two, which is to focus on the alleged employment-law violations, will likely happen later this year. Phase one, which ended in recent weeks, was aimed at unsorting Harrah’s corporate characters at the restaurant—SAS Investments LP, Original Mike Enterprises LLC, Michael F. Harrah Trust, Cactus Financial Inc., 100 South Main Street LLC, OMRM and Caribou Industries Inc.—to determine if the paper empire constitutes a single enterprise. Spencer and Gage argued Harrah used the entities as “a personal piggy bank” that shouldn’t allow him to reap profits but dodge liabilities.
“Harrah set up numerous undercapitalized LLCs to avoid responsibility for acts of wrongdoing at his restaurant,” they wrote. “Alter ego [legal theory] applies here because the companies were interrelated, creating a single corporate enterprise designed to avoid liability and create an inequitable result. Unless Harrah is found personally liable for the acts of his wholly owned, undercapitalized entities, he will use bad-faith bankruptcy filings as a way to avoid his debts.”
After taking testimony, the judge derided the real-estate developer’s maneuvering. “This court is not in a position to opine on whether the bankruptcy filing amounted to bad faith from a bankruptcy-law standpoint,” Claster ruled in late February. “However, what is clear is that the decision to file bankruptcy at that time was to prevent the trial from going forward. Put another way, even though nothing about OMRM’s financial picture had changed, it filed for bankruptcy simply because it could—given as a paper loss.”
That was the least of the judicial blows to Harrah, who filed a $30 million bankruptcy claim in 1990 and emerged wilier about shielding assets.
More than a decade ago, Harrah spent $825,000 on the restaurant’s long-condemned historic property, guaranteed a $5 million construction loan and worked to lure a major food-service chain—Claim Jumper, California Pizza Kitchen and Mimi’s—to the location. But suitors at the time shunned deals because the property sat dead-center in a high-crime area.
Having built an unoccupied restaurant, Harrah decided to create Original Mike’s and, at least in the minds of Spencer and Gage, concocted a devious ploy. He directed one of his businesses, 100 South Main Street LLC, to charge OMRM nearly double what an expert said should have been the market rate of no more than $2.50 per square foot.
“Inflating rent at the restaurant increased rents at surrounding properties Harrah owned, lining his personal pockets with ‘gold’ as part of his ‘master plan’ to develop Santa Ana and his building at One Broadway Plaza,” the attorneys told the judge. “Increasing rent by $2 per square foot results in $1,200,000 in extra rent [at One Broadway Plaza] per month, or $24 million per year. In 10 years, that’s $240 million.”
Claster is suspicious, too. “The amount of rent being charged [for Original Mike’s] is significant in that it appears to be the reason the restaurant consistently was losing money,” he declared. “For 2014 and 2015, the restaurant lost $218,130 and $353,098, respectively. If the restaurant had been charged fair-market rent, or about half of what it actually was charged, then it would have saved at least $360,000 annually, thereby turning each year’s loss into a profit. . . . What is clear is that the high rent being charged by one Harrah entity worked to the detriment—at least on paper—of another Harrah entity.”
Summer Young-Agriesti, one of the businessman’s lawyers, argued the rent was fair and claimed Beasley hasn’t met “her heavy burden to overcome the presumption” of corporate separateness. “The plaintiff did not prove a sham financial setup produced by undercapitalization worked as an ‘injustice’ to her,” Young-Agriesti asserted. “Harrah has never held himself out as being personally responsible for OMRM’s debt or expense.”
The judge took a different view in phase one. It appears Harrah, who has bought at least 71 office properties in the Santa Ana area during the past 22 years, can be liable if a jury sides with the female bartenders and awards damages. A trial date for phase two has not been set, but a status conference will take place on April 6.