Surf Lodge owners slap King & Grove hotels with $4.8 million suit

The saga of the Surf Lodge has generated countless recent headlines, between its hundreds of municipal code citations and a sale to a technology entrepreneur earlier this year. But now, the former owners are blaming a minority investor that allegedly opened a competing restaurant for some of the property’s financial strife.

The former owners have accused King & Grove hotels, the Manhattan-based boutique chain, of mismanaging and misappropriating funds from the Montauk hotspot before launching a rival hotel-restaurant called Ruschmeyer’s.

Edgemere Montauk, which owns the Surf Lodge, is seeking $4.8 million, according to a lawsuit filed Wednesday in New York State Supreme Court in Manhattan. The lawsuit alleges breach of contract, breach of fiduciary duty, unfair competition and misappropriation.

Edgemere is led by investors Steven Kamali, Jamie Mulholland, Jayma Cardoso and Robert McKinley. King & Grove was founded by Morgans Hotel Group’s Ed Scheetz and Benjamin Pundole in 2010.

In 2007, Edgemere launched the Surf Hotel, with a restaurant and nightclub aimed at a young, fashionable clientele. Later that year, Mulholland met Scheetz, then an executive at Morgans, and invited him to invest in Edgemere as a minority investor.

In its first year, the hotel earned $3.1 million in revenues, but suffered a net loss of $127,000, mainly due to startup expenses. By the summer of 2009, however, the hotel turned a profit, reporting net earnings of $260,000 on revenue of $2.9 million; and by 2010, earnings of $360,000 on revenue of $3.15 million.

In March 2011, King & Grove entered a deal to manage the Surf Lodge. However, soon afterwards, King & Grove acquired a small, family-owned property across the lake called the Second House Tavern, renamed it Ruschmeyer’s, and rebranded the concept to mimic the Surf Lodge, the suit alleges.

Edgemere claims that King & Grove focused most of its attention on the new property, and used some of the Surf Lodge’s staff there. Scheetz allegedly misrepresented himself as the owner of the Surf Lodge trademark and, on occasion, the property itself, and Surf Hotel guests were allegedly referred to Ruschmeyer’s.

By 2011, the Surf Lodge’s profits began to fall: that year, revenue came in $500,000 short of budget estimates. The firm also incurred more than $100,000 in legal costs for 640 citations from the town of Montauk for operating an illegal food cart on the property.

The owners wound up losing $314,000 in 2011 and had to raise $198,000 for a mortgage payment after funds were depleted from the property’s bank account, the suit claims.

Edgemere sold the hotel in April 2012 to one of its minority investors, Michael Walrath.

According to press reports, Pundole quit King & Grove in June amid claims that Scheetz and investor Joseph Chetrit would not turn over partial control of the company to him.

King & Grove officials were not immediately available for comment. Lawyers at Pryor Cashman, which is representing Edgemere, did not return calls.