Officials point to health dept. failures in pulling lease on airport restaurant

By Emilie Rusch, Journal staff | Monday, January 12, 2009

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The restaurant that closed Dec. 31 at Rapid City Regional Airport operated with an expired state food-service license for six months in 2007, according to documents included in the lawsuit over the space.

It is just one in a laundry list of issues city airport officials used last summer to justify denying a lease extension to Hospitality Systems Inc., the owner and operator of Darlene's at the Airport. That action triggered the company's lawsuit against the city of Rapid City.

Darlene's was ordered to close in January 2008 for failing to reapply for a food-service license from the South Dakota Department of Health. The state-issued licenses expire every year on June 30.

Clark Hepper, head of the department's Office of Health Protection, said there is nothing the state can do about a food establishment operating without a valid license until a closure order is issued. At that point, it becomes a Class 2 misdemeanor to continue operation.

In the case of Darlene's, co-owner James Anderson called the day he was served with the closure order, seeking to fix the problem, Hepper said.

"Immediately the next day, he had overnighted a new application fee," Hepper said. "They immediately addressed it once we had contact with them."

In pre-trial filings, city attorney Jason Green argued that the closure order and Hospitality System's failure to notify the airport were the most severe of the problems airport officials had with the restaurant's operations.

"Most troubling is the receipt of a closure notice from the South Dakota Department of Health and the apparent failure of HSI to operate with a valid license," Green wrote in an August brief. Green declined to elaborate this week, saying he would rather let the litigation play out in court.

The lawsuit, which was filed in July, centers on whether the city of Rapid City, operating through the airport board, violated its contract with Hospitality Systems by not extending the restaurant's lease.

The original contract, signed in 1988, gave Hospitality Systems a 20-year lease with the right to two five-year extensions, provided all lease conditions were met.

Anderson and co-owner J.P. Duniphan applied for the first five-year extension, but the airport board declared them ineligible in June, saying the restaurant had failed to meet all of the terms of the lease.

The contract then went out for bid, which was awarded to Air Host, a Memphis-based company that specializes in food and concessions at intermediate-size airports. The new grab-and-go restaurant moved in late Dec. 31.

Hepper said about 3,500 eating establishments are licensed in the state every year. Of those, about 600 fail to renew their licenses after the first notice.

"It's not typical for a restaurant to operate without a license, but it does happen, on occasion," Hepper said.

Hepper's office usually sends out at least two renewal notices before issuing a closure order. It is rare to get to the point of ordering a restaurant to close, he said.

Duniphan said the six-month lag time, during which two notices went unanswered, was just an honest mistake by Anderson, her brother.

"He just assumed he paid for it. He put it in a stack of stuff. It was just an oversight," Duniphan said. "It was unfortunate, but I think that's human error."

Problem areas in addition to the closure order were laid out in an April 30 letter to Anderson from then-airport director Mason Short. In the letter, Short outlined all of the reasons why the airport board would consider not extending the restaurant's lease.

According to the original lease agreement, the board had the authority to block the five-year extensions due to the "lessee's failure to keep or perform any of the terms, covenants, conditions, or provisions of this lease."

Many issues mentioned in Short's letter related to the handling of finances, including having no "responsible cash management program," inventory control and point-of-sale system, and two instances in 2007 in which the restaurant had improperly paid rent.

Rent was based on the restaurant's gross receipts, and according to the letter, on two occasions, gross receipts were improperly calculated, resulting in overpayment one month and underpayment the next.

The letter also said Hospitality Systems had failed to properly maintain restaurant equipment, including the exhaust system, carpeting and chairs and had used handwritten signs.

Duniphan and Anderson responded May 22 by outlining the improvements they had made since receiving Short's letter.

"Hospitality Systems is making all of the improvements, replacements, or repairs and much more than what was requested and will maintain the facility in a clean, customer-service friendly, professional manner at all times," their attorney, James Nelson, wrote in the letter.

Among the changes were retaining an accounting service, repainting the restaurant and lounge, ordering new carpeting, cleaning and repairing all chairs and removing all handwritten signs, according to the letter.

Also in May, Duniphan said she and Anderson decided she would take a more hands-on role at the restaurant and become general manager.

"He and I felt that I could take care of those matters that they mentioned," Duniphan said last week. "And we did. Every single one of them."

One month later, though, the airport board found Hospitality Systems ineligible to apply for a lease extension, according to minutes from the June 16, 2008, meeting.

Contention in pre-trial motions has focused on the timing of the lease violations in relation to the extension request, according to court documents.

Hospitality Systems has argued that the violations had been fixed before they applied for an extension and therefore shouldn't be relevant.

The city believes any violation any time during the 20 years qualified as reason for denial.

Violations

Here are some of the potential lease violations airport officials considered when ultimately deciding not to extend the lease of Hospitality Systems Inc., owner and operator of Darlene’s at the Airport. Hospitality Systems has disputed some of the claims.

• Receipt of a closure order from the South Dakota Department of Health for operating without a valid food service license for six months.
• Failing to notify airport officials of closure order.
• No responsible cash management program.
• No inventory control procedures.
• No segregation of duties procedures.
• No detailed point-of-sale system.
• No reporting of lottery machine sales.
• Lessee admitting to “problems” with the IRS at the Oct. 8, 2007, board meeting.
• Derogatory comments made by lessee at the July 12, 2004, board meeting.
• Failing to properly maintain airport-supplied equipment, including the nacho cheese heater.
• Improperly calculating gross receipts on two occasions in 2007, resulting in overpayment of rent one month and underpayment the next.
• Failing to maintain hood for the exhaust system.
• Failing to replace restaurant carpeting and chairs in a timely matter.
• Failing to improve restaurant decor.
• Using handwritten signs at Destinations Dakota.

Source: April 30 letter from then-airport director Mason Short to James Anderson, co-owner of Hospitality Systems Inc., as included in court documents

Contact Emilie Rusch at 394-8453 or emilie.rusch@rapidcityjournal.com.

Click here to see the May 22 response from Hospitality Systems describing the changes the owners had made to bring Darlene’s at the Airport into compliance with the lease agreement.

Click here to see the April 30 letter then-airport director Mason Short sent to Hospitality Systems Inc. outlining all the potential lease violations city airport officials would consider when determining the restaurant’s eligibility for a lease extension.