Garden Grove Effort to Cite Lenders for Slum Violations Hits Snag

After six years of battling landlords over substandard housing in the Buena Clinton section of Garden Grove, city attorneys thought they had come up with an effective plan to force repairs in the 39-acre neighborhood.

They decided to file misdemeanor building code violations against the lenders who financed purchases of the often-ramshackle apartments because, in their view, the lenders also had ownership interests in the properties.

It was a move that could have ramifications for lending practices and city building code enforcement procedures statewide.

But the plan, hatched last spring, may be backfiring.

A Municipal Court judge has ruled against the city in the first such case to come to trial, and lawyers for the lenders claim that the cases threaten to curtail much-needed mortgage and building refurbishing loans in an area that Orange County health officials call the county’s worst slum. An estimated 5,000 poor, predominantly Latino residents live in the blighted apartments between Clinton and Buena streets along the city’s border with Santa Ana.

Others Disagree

Officials in neighboring Santa Ana also disagree with Garden Grove’s approach, claiming that there is no way to hold a lender responsible for what a building owner should do.

And some lawyers believe the city is misusing its powers. Prosecutors “never really intended to go the entire nine yards,” said Jean Claire Wilcox, a Santa Ana lawyer who represented a lender dismissed from a building code case. “They just wanted to use us to put pressure on the borrower.”

The novel concept of holding lenders responsible for repairing substandard buildings is based on the definition of “owner” in the city’s building code and on standard deed of trust provisions that give lenders the authority to prevent borrowers from letting properties deteriorate.

An owner, under the Garden Grove building ordinance, is any person or entity that has a “legal or equitable interest” in a building or parcel. The ordinance is the same uniform building code used throughout most of the state, said Garden Grove City Atty. Eric Lauterer.

“The responsibility to repair these apartments falls on the owner of the property, and lenders are owners by definition,” Lauterer claims.

But the city’s efforts were dampened by an Oct. 16 Municipal Court ruling that California Federal Savings & Loan Assn. was not an “owner” of two Buena Clinton apartment complexes under any definition in the code.

Prosecution to Continue

The city has not decided yet if it will appeal. But Lauterer said his office will continue to prosecute lenders because the court’s decision is not binding on other judges as an appellate court decision would be. Both sides point out that no appellate court decision on the issue exists.

And neither the City Council nor other city officials are reconsidering their assault on lenders. “We’re notifying anyone who has anything to do with (substandard) property,” said Michael Fenderson, an assistant city manager.

“One of the problems is that landlords are having a hard time getting loans because Garden Grove is holding the banks criminally liable as owners,” said George W. Fulton Jr. of Orange, an attorney for Cal Fed.

And Fullerton Savings & Loan Assn. President Carl W. Gregory said he believes his S&L; “did refuse a loan because of what Garden Grove is doing.”

Prosecuting lenders in Buena Clinton is leading to redlining--an illegal refusal to lend in specific neighborhoods--claimed Santa Ana lawyer Jean Claire Wilcox, who represented Sea Air Federal Credit Union of Seal Beach. She said the credit union was charged with building code violations even though the loan that gave it a lien on the building was made for repairs the city had demanded. The charges were later dismissed.

Garden Grove’s decision to include lenders as criminal defendants in building code cases may, in fact, give lenders the legal right to “redline” the area, said Newport Beach lawyer Michael V. York, who represents two private investors who have been charged with code violations because they hold a third trust deed on a Buena Clinton property.

‘Over-Eager Bureaucrat’

“That shouldn’t happen,” said Leonard Shane, chairman of Mercury Savings & Loan Assn., which also is fighting criminal charges over building code violations. “Some over-eager bureaucrat cannot be allowed to destroy the fabric of the community.”

He said he thought the city had changed its stance after lenders put pressure on city politicians. “I thought these people (city prosecutors) were brought under control,” Shane said.

Fenderson acknowledged that some loans may be lost because of the city’s prosecutions but said that “buildings are still being sold and people are still getting loans, so far.”

Santa Ana officials also had considered prosecuting lenders for building code violations but rejected the idea, City Atty. Edward J. Cooper said.

“The lender’s interest is only financial, a security interest,” he said. “The owner is responsible for the condition of the property.”

The dilapidated housing in Garden Grove’s Buena Clinton barrio has long been the subject of litigation, according to Lauterer and attorney C. Thomas Drosman, who was retained by the city in August, 1984, to handle housing code prosecutions in Buena Clinton.

The problem the city faces, Drosman said, is that many landlords who do not have enough equity in the property to fight the city either go into bankruptcy or sell to others, forcing the city to begin enforcement procedures anew.

“So what you have is nobody actively going down there and fixing the property,” Drosman said. “We want to make sure we have somebody to go out there and fix the property.”

The city decided to look to lenders as defendants because they fit under the code’s definition of “owner” and because their deeds of trust gave them ownership interests in the buildings.

Measures Allowed

Trust deeds, for instance, allow lenders to take a variety of measures to stop borrowers from “wasting” property--allowing or contributing to its deterioration, Drosman said.

Garden Grove first began sending lenders notices to make repairs on building code violations about a year ago.

Last spring, as the time to make repairs expired and the same violations still existed, banks, savings and loans and other lenders were charged with violating building codes. At first, Drosman said, the lenders helped prosecutors by pressuring landlords to repair dilapidated buildings. But lately, some lenders have decided to test their liability.

The city has not pursued lenders vigorously, he said, pointing out that until the Cal Fed case, lenders had been routinely dismissed from proceedings after they put pressure on landlords to make repairs and after they admitted that the city had probable cause to charge them with building code violations.

Do Not Agree

Fullerton S&L;, which will be going to trial this month, is one of several Buena Clinton-area lenders who do not want to agree that the city had probable cause to charge them with building code violations. By agreeing, they fear, they will set a precedent that will allow future prosecutions, said Carl L. Kane, a Fullerton S&L; attorney.

“We’re at loggerheads,” he said. “When we won’t stipulate to probable cause, we have to go to trial. So it all comes down to defining who is an owner.”

Gregory, Fullerton S&L;’s president, claims the city has “stretched the law considerably. While we understand and sympathize with the city and do whatever we can to help, we do not consider ourselves criminals for making loans,” he said.

He pointed out that lenders are not able to apply the kind of pressure Garden Grove thinks they can. Lenders, for instance, have very little power to prevent borrowers from letting buildings deteriorate because prior court cases have precluded them from taking possession to make repairs, he said.

In the Cal Fed case, West Orange County Municipal Judge Michael Beecher found that an institutional lender and holder of a trust deed is not an “owner” for purposes of criminal liability under the building code.

Beecher found that the City Council never intended to make lenders liable when it adopted the code, that lenders could not have foreseen the possibility of being charged in such cases and that lenders lack power to repair property unless they can lawfully take possession.