No single development project in Santa Barbara’s recent past has aroused such widespread community enmity as the architecturally acclaimed Chapala One, the four stories of luxury condos that recently shot up along the banks of Mission Creek by Chapala and Gutierrez streets. It was Chapala One, after all, that inspired the 2009 ballot initiative to reduce the maximum building heights allowed in downtown Santa Barbara from 60 to 40 feet. Affordable-housing advocates and smart-growthers reviled it as too big and too expensive. Traditional slow-growthers regarded the development as an oversized assault upon the city’s sacrosanct skyline and historic character. Chapala One remains one of the few issues on which the two warring camps could find agreement. Both have taken grim “I told you so” satisfaction in the massive cost overruns that in part explain why the 43 condos remain unsold and vacant since the project’s official ribbon-cutting ceremony two years ago.

Chapala One building
Paul Wellman (file)

The project, it turns out, was all but conceived in the spirit of strife and discord between developer Don Hughes and builder Mark Melchiori, which overflowed this week into the courtroom of Judge Denise de Bellefeuille, who will be presiding over a jury trial that threatens to take two months. As usual, the bone of contention involves time and money ­— lots of both.

In 2004, Melchiori, president of a successful marquee construction firm that bears his family name, submitted a bid to Don Hughes and Bill Levy — then partners in the Chapala One corporation — stating the job could be done for $18.3 million and by March 30, 2007. When former mayor Marty Blum presided over the project’s ribbon-cutting ceremony in July 2008, Chapala One was way overdue. It also weighed in at $36 million, twice as much as the initial estimate.

Melchiori is claiming in court that Don Hughes stiffed him to the tune of $6.8 million. At various other times, Melchiori has claimed figures as high as $8.9 million and as low as $5.7 million. In opening arguments, Melchiori’s attorney Kristine Mollenkopf — whose mother works for Melchiori as a senior vice president — claimed Hughes contracted to have Melchiori do work for which he had “absolutely no intention of paying him.” That, she said, is “fraud.” She also claimed that Hughes vowed to destroy Melchiori Construction — which did the recent restoration of the Granada Theatre, among other projects — and conspired with his own employees and agents for Washington Capital, the second lending company brought in to see the project to fruition, to systematically shortchange Melchiori of money he had coming.

The picture of Don Hughes conjured by Mollenkopf is that of a moody, impulsive, hot-headed, petty dictator whose own employees threatened to mutiny when he repeatedly ignored their best professional advice. Part of the problem, Mollenkopf charged, was that the plans upon which Melchiori based his initial estimates were woefully incomplete. Even worse were the constant changes Hughes insisted be made to his project. “Mr. Hughes was going to do what Mr. Hughes was going to do,” she said. He ordered ceilings raised after they’d already been installed. He ordered the location of doorways moved after the doors had already been hung. In his haste and impetuosity, Hughes, she claimed, repeatedly bypassed slower but more cost-effective methods of accomplishing such changes. From 2007, she said he approved 84 such orders. These entitled Melchiori and his many subcontractors to tack on an additional 15 percent. But, she said, “They allowed Mr. Hughes to walk around the site, waving his arms and demand that they raise the ceiling or change the doors.”

Hughes sought to minimize the additional cost, Mollenkopf claimed, by unilaterally reducing the 15 percent to which Melchiori was entitled to just 10 percent without ever notifying or consulting him first.

Hughes has countersued, claiming that Melchiori, in fact, owes him $2 million. Through his attorney, John Rydell, Hughes conceded that he had made major changes to the development project, but insisted they cost $3 million at most. He noted that by the time he began making the first of the 84 work change orders outlined by Mollenkopf, Melchiori had already blown his deadline. As of March 30, 2007, Rydell said, carpenters were still hammering away at huge sheets of plywood that would later emerge as the structure’s exterior. To make his point, he provided the jurors with a quick slide show.

To the extent Melchiori wasn’t paid, Rydell argued, it was because he refused to abide by certain basic conditions of his contract. For example, Rydell said, the contract entitled Hughes to a computerized audit of all the expenses incurred by Melchiori. But for 18 months, Rydell claimed, Melchiori refused to turn over the data required. Ultimately, Rydell said it took a court order to compel Melchiori to comply. But just one day before Melchiori was supposed to turn over his computer records, Rydell recounted, Melchiori experienced a massive computer crash. There were no back-up files. Rydell acknowledged that Melchiori had offered him ready access to the actual records — written on paper — but dismissed that approach as overwhelming and unworkable, pointing to the 48 legal boxes of such documents stored in the back of the courtroom. Likewise, Rydell charged that Melchiori had stiffed many of the subcontractors for whom Hughes and his lender had paid Melchiori more than $3 million. He also suggested that there was little or no documentation to substantiate the hourly claims Melchiori filed on behalf of his employees. Melchiori’s attorney, Mollenkopf, dismissed many of these allegations as “red herrings,” stating that Hughes never raised any of these issues until after the litigation commenced.

While the jury attempts to process what promises to be a very complicated and sprawling dispute, the property itself remains vacant. The lender has settled with all the subcontractors that had sued Melchiori to clear the property’s title so it can be sold.

In a separate but related matter, Hughes’s former partner Bill Levy — and Levy’s attorney, Patrick O’Hara — were sanctioned by Judge DeBellefeuille for $3,000 when they unsuccessfully sought to block Chicago Title Company’s efforts to determine whether Levy was as bankrupt and impoverished as he had claimed. Chicago Title sued both Levy and Hughes, arguing that they had signed a contract to cover any legal costs should liens be placed on the property, as occurred when the subcontractors sued. Levy argued that as of 2006, he was no longer involved with Chapala One and that besides he was bankrupt. But Chicago Title found evidence suggesting that Levy had leased a beach front property for $240,000 with a lease to buy it over time for $10 million. The title company sought to explore the extent to which Levy was using his sister and wife’s family to hide assets. Levy tried to block those efforts, claiming the title company’s behavior was oppressive and legally irrelevant. Judge DeBellefeuille rejected Levy’s arguments. By law, unsuccessful efforts to block such inquiries are subject to legal sanction.


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