Ownership dispute shadows the Water Works Restaurant

After 30 years of failed restoration efforts, the Fairmount Water Works finally seemed cursed no more after the 2006 opening of an upscale restaurant that helps preserve both a national historic landmark and the city's most breathtaking view of Philadelphia's iconic Boathouse Row.

Now the taxpayer-financed Water Works Restaurant & Lounge and its politically connected owner, Michael Karloutsos, are entangled in a lawsuit in which an allegedly spurned business partner contends profits are being "siphoned away" and asks a city judge to place the business in the hands of a court-appointed authority.

That possibility appears remote - Common Pleas Court Judge Mark Bernstein is scheduled to hear arguments on the receivership request Monday - but the dispute nonetheless puts a dark cloud over the restaurant for the second time in a year.

In April 2010, Karloutsos' brother-in-law, Leonidas Agorastos, pleaded guilty in federal court in Philadelphia to stealing hundreds of thousands of dollars by inflating the restaurant's bills from food and service companies. He and his wife owned a vending company that handled billing for the restaurant.

Agorastos is serving a 33-month prison sentence at the Moshannon Valley Correctional Institution in Philipsburg, Pa., and was ordered to pay back more than $400,000 to the restaurant.

More troubling these days is the lawsuit filed by Vincent D'Ambrosio, Karloutsos' former close friend and a onetime employee of the Gilbane construction company.

D'Ambrosio says that with his real estate and engineering background, he conceived of the restaurant with Karloutsos, but that Karloutsos shut him out of a 10 percent ownership interest and owes him a $200,000 consulting fee.

D'Ambrosio and his lawyer, Peter Leyh, declined to comment.

Karloutsos said in an interview that D'Ambrosio had walked away from the deal - and never invested a dime. "He has about as much rights to the Water Works as I do to Le Bec-Fin," Karloutsos said, referring to the Walnut Street institution, in which he has no involvement.

The company that formally owns Karloutsos' restaurant, which sits at the foot of the Philadelphia Museum of Art, is Thea at the Water Works. Most of the $3.2 million project was financed with a $2.1 million taxpayer loan from the Philadelphia Industrial Development Corp., a quasi-governmental agency that handles much of the city's economic-development funding.

Thea, as part of its lease with the city, also agreed to pay monthly rent totaling at least $120,000 annually and to pay 3 percent of its gross annual receipts into the city's general fund beginning May 1, 2009. Fairmount Park Director Mark Focht said that money had not yet been paid because the city was negotiating changes to the lease. Although the restaurant has set that money aside, he said, city officials don't know how much they will receive when the changes are agreed to, likely this summer.

With Karloutsos as the main proprietor - he worked on the 2002 Illinois gubernatorial campaign of former Philadelphia schools chief Paul Vallas - Water Works fast grew popular in political circles. Sen. Bob Casey and Mayor Nutter have held fund-raisers there. In 2008, it was the site of the Pennsylvania primary party for Barack Obama, then competing against Hillary Clinton for the Democratic presidential nomination.

But Karloutsos is not Water Works' sole owner.

To secure the $2.1 million loan, he and his wife put up their Bella Vista home as collateral - and Karloutsos persuaded his parents, his wife's parents, and two sisters-in-law to do the same.

According to court documents, Karloutsos and his wife own more than 62 percent of the company, the rest divided among his relatives. They include his father, a prominent Greek Orthodox priest in New York who, like his son, also frequently lends support to political candidates.

While Karloutsos had no restaurant experience before launching Water Works, his grandfather once ran a New York diner.

Recognizing the family involvement, D'Ambrosio's lawsuit names 13 defendants, most of them Karloutsos' relatives.

In the case, D'Ambrosio said that although he and Karloutsos had an initial agreement to be 50-50 partners, D'Ambrosio later settled for a 10 percent stake since he was "not in a financial position to guarantee the PIDC loan."

Some city documents identify D'Ambrosio as connected to the Water Works project - including the proposal to open the restaurant that resulted in the Fairmount Park Commission's decision to award Thea the lease. In that proposal, D'Ambrosio was listed as part of the "ownership team," as was a New York company named Arista, whose principals are the backers of another popular Philadelphia restaurant, Estia in Center City.

In the end, Karloutsos said, neither Arista nor D'Ambrosio invested money in Water Works. Also, the lawsuit does not refer to the existence of any written documents that mention any ownership stake of D'Ambrosio's.

The lawsuit says the eventual concession agreement identifies both D'Ambrosio and Karloutsos as Thea's "controlling parties." Consequently, D'Ambrosio contends he is due profits dating to Water Works' opening nearly five years ago - and for the coming 20 years that the restaurant, under the concession agreement, has the authority to operate there.

"What he wants now is to make a penny off of my work and my sacrifice," Karloutsos said, chalking the suit up to "total bitterness" by D'Ambrosio.

In the suit's most recent filings, D'Ambrosio notes the brother-in-law's embezzlement scheme, new homes in Wynnewood and Penn Valley recently purchased by Karloutsos and a sister-in-law, and tax documents that show Water Works operating at a loss. "It appears that defendants are siphoning away profits from the restaurant for their own use and profit," the suit says in requesting the appointment of a receiver.

Phil Goldsmith, who once led the Fairmount Park Commission and was the city's managing director when Thea received a lease to build and operate Water Works, said controversy at the 19th-century complex - site of the nation's first water-pumping station - was nothing new.

In 2002, for instance, a New Year's Day fire destroyed the Engine House as a new restaurant was preparing to open.

"This might just be the ghost reappearing a little bit," Goldsmith said. Whatever the outcome, he said, the Water Works remains "important to the history of the city, and one of the great vistas of all time."