A Mendocino County tribe’s scheme to secure millions of dollars in public funds to demolish the historic Palace Hotel is at the center of politically charged strife engulfing the leadership of a state agency.
Newly obtained internal documents show that inside dissent has forced top executives of the state Department of Toxic Substances Control to engage in “damage control.” The conflict raises questions about how agency staff manage a special $500 million, four-year state program to assist tribes, non-profits, and poor communities to recycle contaminated sites into productive uses.
Specifically, the handling of Guidiville Rancheria’s unorthodox bid for $5.3 million—an award favored by some administrators before a state oversight agency questioned the need—is under scrutiny.
Internal agency documents obtained under the California Public Records Act show the Guidiville controversy has pitted some staff attorneys and lower-level agency managers, concerned about the political blowback from tribal representatives, against a top division chief, who, after review, worried the multi-million award may not “even be legal.”
Diane Barclay, the DTSC’s Northern California Division Chief, wrote in a May 8 memo to staff legal counsel that she feared the Guidiville Rancheria may have been used as a “mule” by investors seeking to fund the demolition of Ukiah’s 55,000-square-foot brick landmark and help finance their plans to construct a new hotel and retail complex under the guise of ground contamination issues.
The internal documents confirm that state officials rejected Guidiville's appeal of a decision not to award any public funds for the Palace's demolition. However, the fate of the tribe's quest to secure additional public money for further investigation of possible contamination from an old underground tank found at the Palace site remains unclear.
“There is no money being awarded for demolition. What remains under review is a possible state grant for further investigative work at the site,” said Allison Wescott, deputy director of the state agency’s Office of Communications.
The agency’s Equitable Community Revitalization Grant program leadership initially considered awarding Guidiville the $5.3 million in taxpayer money but backed off after senior staff at the North Coast Regional Water Quality Control Board, the assigned state oversight agency for the Palace site, raised questions about the level of work the tribe and its backers claimed was needed.
Senior water board staff in the Santa Rosa office, which oversees water quality projects in this region, said the board has never required building demolition to probe possible ground contamination and would not do so in the case of the Palace.
As a result, the tribe’s application stalled in March after higher-ranking agency officials further scrutinized its funding request amid mounting concerns that it did not meet the specific intents of the special program.
In her May 8 memo, DTSC Division Chief Barclay told the agency’s Assistant Chief Counsel Christopher Kane that awarding the millions of dollars Guidiville sought is a “non-starter and probably not even legal according to what we are supposed to be using this money for.”
“I will go to the mat on this one,” vowed Barclay.
Barclay told Kane that she had the backing of DTSC Chief Meredith Williams, who said decisions are “based on the science of human and ecological health risk, not politics.”
“The tribe factor is political,” declared Barclay.
The documents show that less than half an hour later, Kane responded to Barclay and expressed his concern about a significant “PR issue” and the potential legal implications of the situation.
Kane worried that the staff's earlier sending of an initial award letter to the tribe might create a “detrimental reliance case against us.”
According to the internal documents, Kane told Barclay, “I tend to agree that this was probably an overly developer-friendly call in the first place, and I am also in agreement that we should under no circumstances give them the demolition costs.”
Kane, however, said, “I do imagine even telling the tribe ‘not yet’ as opposed to no, is likely to rile them up enough to complain to someone.”
“Again, as the right call, this is fine by me, but I wanted to make sure exec staff was prepared to hear about it!” concluded Kane.
According to Wescott, on May 29, a draft letter from Barclay to tribal Chairman Donald Duncan finally informing the tribe that the special state funding would not be awarded and asking the tribe to work with the state Water Board to obtain an investigative grant from conventional state programs was prepared but never delivered.
That may happen as soon as this week, according to Wescott.
Dennis Crean, a local advocate of structurally preserving the Palace and recycling landmark into new commercial and residential uses, said, “We are finally getting a glimpse behind the curtain at the state level regarding the Guidiville Tribe’s controversial grant application.”
“The idea that the Palace is a toxic waste site has always seemed incredulous, and state officials should have taken a hard look from the beginning. Instead, they’ve been trying to slip through a giveaway of our tax money. Fortunately, the truth is finally coming to light,” said Crean.
As it is, the Palace’s fate remains unclear.
City staff has issued a demolition permit, but neither the current owner, Jitu Ishwar, nor the Guidiville group, the proposed buyers, have taken further action. It has been nearly eight months since the City Council declared the aging and unprotected structure a public safety hazard. City officials are repeating a pattern set in 2011 when the Palace, already in steady decline, made the same declaration.
The internal state documents provide an up-close look at a heated controversy about the role of public financing of private development that embroils Ishwar, the city of Ukiah, the Guidiville Rancheria, and a group of local investors who have yet to offer any public explanation of development plans.
Ishwar and his attorney, Stephen Johnson, have repeatedly refused to publicly respond to questions, as does Guidiville tribal consultant Michael Derry or attorney Attila Panczel, who represents local investors led by downtown restauranteur Matt Talbert. The other partners remain publicly unnamed, although they are local cannabis entrepreneurs.
City Manager Sage Sangiacomo and his deputy Shannon Riley insist the Palace is a private property transaction and that the city has no role other than protecting “public safety.” City Council members follow Sangiacomo, Riley, and City Attorney David Rapport, in resisting requests that they place the Palace issues on a council agenda for public discussion.
An exasperated Crean demanded, “Why all the secrecy and run-around from nearly everyone with power over the fate of our city’s most historic landmark?”
Crean asked, “Have we heard a peep from the owner or the supposed buyers about their plans? They’ve presented no real evidence that they’re committed to anything other than using public money to level Ukiah’s history.”
City Council members are also facing criticism from Crean and other Palace supporters.
“The council has not held any public discussions, even as they have had many discussions behind closed doors. The city staff has maneuvered to bypass a public hearing about demolition,” said Crean. He also noted that staff had abandoned city demands for a structural analysis of the building. “And they’re not even requiring the owner to salvage anything from the Palace, against the requirements of the city’s laws,” he said.
Local and state historic preservation advocates question the local push to demolish the 19th-century landmark listed on the National Register of Historic Places. While in an advanced state of decay, they believe the Palace could still be recycled into new commercial uses as an investor envisioned in 2022. Another investor with ties to acclaimed preservation projects in the region is also vying for Palace ownership if the Guidiville group plans collapse.
Last November, the city of Ukiah sidestepped public review of the proposed demolition by declaring the Palace a public safety hazard because of its deteriorated condition. Then, last month, staff issued a demolition permit to the current owner, Ishwar, without a City Council hearing.
Sidebar/Background
Guidiville Rancheria is no stranger to public controversies.
The Palace Hotel debacle isn’t the first time the Guidiville Rancheria or its tribal advisors have been the center of controversies with government agencies.
Tribal consultant Michael Derry, a Ukiah resident and a promoter of Guidiville’s plan to buy the landmark Palace Hotel, demolish it, and build a new hotel-retail complex downtown, has been at the center of activities to expand the tribe’s financial base for at least two decades.
In 2004, Derry was a principal adviser when Guidiville and investment partners made headlines when they proposed building a billion-dollar casino at Point Molate overlooking San Francisco Bay. The casino plan collapsed amid intense public scrutiny, but years later, the tribe, its casino backers, and the city of Richmond are still engaged in a costly legal struggle to determine a final outcome.
As part of a 2022 settlement, Guidiville, and its partner Upstream Point Molate LLC obtained four developable parcels at Point Molate for a token of $400. They were given five years to sell the potentially valuable parcels and split the proceeds with the city of Richmond.
In late November 2023, however, a state Court of Appeal ruled that the environmental impact report for any proposed development at the former Naval storage depot was flawed, a big boost for shoreline public park development proponents. Guidiville and Upstream are now negotiating with Richmond and the East Bay Park District to sell the lots for park development.
Derry and Guidiville, in 2017, also figured in a high-profile East Coast racketeering case that federal prosecutors said stretched the limits of tribal sovereignty claims and centered on payday lending practices.
Derry would later testify in the trial that he and tribal representatives were duped by Philadelphia financier Charles Hallinan, known as the “godfather of payday lending.” Hallinan was convicted of racketeering by a federal jury and sentenced to 14 years in prison for conspiring to collect hundreds of millions of dollars in illegal high-interest loans issued to thousands of people. Hallinan, 77, appealed his conviction to the U.S. Supreme Court, which declined to review it in 2020.
A year earlier, in 2019, a U.S. federal court appellate ruling outlined Guidiville’s role in the high-profile East Coast case. It described Guidiville's contracts with a Hallinan and associates as a “sham.” Federal prosecutors labeled it a “rent-a-tribe” scheme involving Guidiville and other tribes who claimed sovereignty from state usury laws.
According to a statement of facts issued by the U.S. Court of Appeals for the Third District in Philadelphia, the Guidiville contracts with Hallinan and later an associate of his called for Guidiville to receive $20,000 monthly payments from 2010 to 2012 for allowing the use of the tribal name to circumvent state laws.
The court statement details how a $200 computer was sent to Guidiville’s Ukiah office to “create the illusion” that someone on tribal land was approving the loans. In fact, according to the court decision, no hardware or software had been placed on the computer that would have enabled its interface with the lender’s computers.
“Guidiville did nothing other than to permit its name to appear on the loan documents,” according to the court. In return, Guidiville was “paid approximately $20,000 each month.”
Derry testified during financier Hallinan’s federal racketeering trial that he had been told by a Hallinan lawyer that “payday lending was a low-risk way to raise money,” and that he could be introduced to a person with the most experience of anyone in the industry, “the godfather of online lending.” That person was Hallinan, according to the court document.
The court document discloses that in January 2011, the late Guidiville tribal chairwoman Marlene Sanchez and Hallinan signed a letter of intent to create a payday lending partnership with Hallinan.
A problem quickly developed when Guidiville placed a 36 percent interest cap on all loans. Hallinan’s attorney told Guidiville the rate cap was a “deal killer which would require us to immediately move on to another tribe.”
According to the court document, the tribe agreed to amend its ordinance to eliminate the rate cap.
However, the successful federal racketeering prosecution did not end Guidiville’s ties to payday lending.
Last October, federal class-action civil lawsuits were filed in Indiana and Virginia against Derry and the tribe’s LoanSmith.com online loan operation based in Ukiah. The suits alleged that Derry and other non-natives were the principal beneficiaries, not the tribe, which enjoyed sovereign immunity. Court records show, however, that the lawsuits were dismissed three months later because of jurisdictional issues.
Derry and his attorney, Patrick Daugherty, did not respond to repeated requests for comment.
More great reporting from Mike Geniella.