Some Fear They Will Lose Their Homes : Thousands Bilked in Sales of Solar Heating Systems

Thousands of California homeowners have been defrauded of millions of dollars in the last two years by sellers of solar heating equipment who used unkept promises of rebates, tax credits, vacations and lower energy bills to close the sales, The Times has learned.

According to court records and investigators for the Contractors State License Board and the state attorney general’s office, homeowners in many cases were tricked into signing second trust deeds on their homes as the collateral to finance the solar heating packages, which had price tags, including financing costs, of $10,000 or more.

Some victims--on welfare or retired on fixed incomes--cannot make the payments on the solar equipment and fear that they will lose their homes if the banks and finance companies holding the deeds try to foreclose, state investigators said.

“Sales were made to a lot of poor people who are having difficulty making the payments--people who didn’t know their homes were held as security,” said John C. Porter, a supervising deputy attorney general in San Francisco, who is prosecuting two solar heating firms and investigating 10 others. So far, the state has persuaded the lenders not to foreclose.

Larry McNeely, chief special investigator for the contractors’ board in Sacramento, which supervises California’s 1,500 solar heating companies, and state prosecutors agree that the scope of the fraud is enormous.

“Thousands of Californians have, in fact, been victimized through deceptive and false statements given to them by certain solar contractors,” McNeely said. Given the cost of the solar packages, he said, consumer losses “are in the millions of dollars at this point.”

McNeely said his “victim count” is based on an examination of business records--seized under search warrants--from companies selling solar heating systems throughout California. On the basis of these records, further staff investigation and discovery of evidence in court, he said, it is possible to begin to estimate the magnitude and pattern of the deceptive sales.

The homeowner victims appear to be concentrated in Los Angeles, Orange and Riverside counties, along with residents of small towns and farm communities in the Central Valley and in Santa Clara County to the north.

They range from poor Latinos in the Santa Ana area, many of whom could not read the contracts they were signing, to upper-middle-class families in Northridge, according to sworn court declarations, investigators and interviews with the victims.

In many cases, said state investigators, prosecutors and victims interviewed by The Times, the solar heating equipment does not even work and is sitting idle on rooftops. But because many of the solar companies have gone bankrupt or have simply disappeared, many homeowners cannot recoup their losses through court actions.

The targets of investigations by the state attorney general, the Contractors State License Board and local prosecutors are certain companies that make and sell solar heating equipment, their sales people and the financial institutions that underwrote the deals.

McNeely said he and his staff of 91 investigators statewide receive about 10 homeowner complaints a day about deceptive solar heating sales operations, and he called that only a fraction of the potential fraud stemming from solar heating sales in 1984 and 1985.

‘Hurt the Good Guys’

Sue deWitt, executive director of the California Solar Energy Industries Assn., which has about 300 members statewide, said a few dishonest firms “have hurt the good guys.”

DeWitt said the industry saw the problem developing two years ago, pinpointed it for McNeely, and, she charged, “he didn’t do anything.”

Home improvement scams are nothing new to California.

In the last decade, unscrupulous salesmen have duped homeowners into signing over their homes as collateral to finance heating and air conditioning systems, home siding, room additions and home insulation. A new pitch for home water purification systems already is the target of a state attorney general’s lawsuit.

“But this is the worst,” McNeely said of the solar heating fraud cases, in terms of the numbers of consumers he believes have been defrauded and the amount of money involved.

Two Major Cases

Two of the biggest cases already brought into court by the state attorney general on behalf of the contractors’ board involve two Orange County companies:

- Mission Viejo Solar of Orange County, now shut down, headed by former star football receiver Tom Fears, who played on the Los Angeles Rams between 1948 and 1956.

Eleven consumer complaints already have been filed against the firm and 23 more will be lodged by the end of this month, said Lupe Martinez, a deputy attorney general in Los Angeles who is handling the cases.

The Mission Viejo case, Martinez said, involves low-income Latinos in the Santa Ana area who unknowingly signed second trust deeds on their homes to finance the cost of a solar system.

“The investment in their home is all they had,” he said.

Operation Shut Down

Mission Viejo Solar, which sold $6,550 solar heating packages primarily in Orange County, was moving into southern Los Angeles County when the state obtained a temporary restraining order last Oct. 9 which, in effect, shut down its operations. The state attorney general’s office asked for the restraining order based on a complaint filed the previous day in Orange County Superior Court in Santa Ana.

The complaint charged Mission Viejo Solar and a number of individuals with violating the state’s Business and Professions Code by engaging in “unlawful, unfair or fraudulent business practices.” It also charged that a number of financial institutions “stand in the same legal shoes” with the defendants in violating the state’s Unruh (Truth-in-Lending) Act.

Mission Viejo Solar owner Fears contends that a salesman, Harold C. Maridon, 44, of Irvine, used the firm’s contractor’s license to employ a Latino sales crew and to make numerous solar heating sales without Fears’ permission.

“I never saw one of those people” Maridon sold, Fears said in a telephone interview from his San Juan Capistrano home. “We were just the installation company.”

Maridon was arrested last July on nine felony counts of using a contractor’s license with intent to defraud, and 11 felony counts of grand theft stemming from Mission Viejo sales of solar units. He posted $100,000 bail. His attorney, Gil May of Laguna Niguel, refused to return telephone calls from a Times reporter.

58 Consumer Complaints

- Home-Guard Contractors Inc. of Anaheim, which has had 58 consumer complaints filed against it, according to documents filed in West Orange County Municipal Court.

Home-Guard sold solar systems for about $10,000, including interest and finance charges, in Los Angeles, Orange, San Diego, Riverside and San Bernardino counties and in some Northern California communities.

In moving in February to intervene on behalf of an estimated 35 homeowners facing possible foreclosures by the firm, the state attorney general’s office noted in a court motion that Home-Guard had been the target of an investigation last May by the Riverside County district attorney’s office.

At the time, the Riverside prosecutor had filed an action against Home-Guard alleging unfair or fraudulent business practices and false and misleading advertising. The prosecutor’s action, the motion said, “resulted in a confession of judgment,” a court order that approximates an injunction halting the firm from engaging in certain sales practices. Without admitting any guilt, Home-Guard paid a $140,000 fine last July.

Seize Documents

Currently, civil and criminal investigations are being conducted into Home-Guard by the state contractors’ board, the state attorney general’s office and the Orange County district attorney’s office. Last February, at the request of the Orange County district attorney, the contractors’ board used a search warrant to seize 40 boxes of Home-Guard documents as part of a continuing investigation of the firm.

Home-Guard’s attorney, Steven A. Silverstein of Santa Ana, said his client has broken no laws.

“Home-Guard’s procedures, representations and policies are totally, completely legal,” Silverstein said. “Customers got what they paid for. Sales people, like everyone, do things wrong, but we don’t indict a company for that.”

Additionally, Sunar of Lodi, which has produced and sold solar equipment, and Fresno-based Solar Resources of California, a seller and distributor of solar energy equipment, are defending themselves in cases brought against them by the state attorney general in Sacramento and Fresno.

Neither Sunar President Gary Ross nor Sunar attorney Robert Mazzera of Stockton could be reached for comment. Solar Resources could not be located and an industry source said the firm is no longer in business.

Firms Under Scrutiny

Other solar heating companies that have come under state government investigation include Liberty Solar and Mundial Solar, both of Los Angeles and both out of business; Statewide Solar of Sacramento, also out of business, and Azizi Enterprises of Anaheim, out of business.

Several finance companies and banks also are the focus of state investigations and several have been charged by the state attorney general’s office with various violations of federal and state truth-in-lending laws and of engaging in unlawful, unfair or fraudulent business practices. They include:

- Finance America Thrift Corp., based in Allentown, Pa., a defendant in the Mission Viejo case and, until recently, a wholly-owned subsidiary of Bank of America, the nation’s second largest bank.

Investigators and court records indicate that Finance America, sold by San Francisco-based Bank of America last November to Chrysler Corp. for $405 million, was among the most active of the financial institutions in California in acquiring second trust deeds in connection with solar heating sales. Finance America was one of Mission Viejo’s primary lending agents, according to state investigators.

Holds Numerous Deeds

Contractors’ board investigator McNeely said that, according to interviews with victims and based on seized records of solar firms, Finance America undoubtedly holds “thousands” of second trust deeds generated by solar heating sales.

“Those (second trust deed) contracts were purchased by Finance America in good faith without any knowledge of any impropriety,” said Robert Heath, a public relations official for Chrysler Financial Corp., a subsidiary of Chrysler Corp.

In the Solar Resources of California case, state prosecutor Porter said that Finance America and Western Financial Savings Bank of the City of Orange, which does business mainly in Orange County, had “most” of the home lien contracts stemming from Solar Resources’ sales.

Wrote Deputy Atty. Gen. Porter in a memorandum of points and authorities filed in Fresno Superior Court last October:

”. . . Finance America and Western Financial knew or should have known of the fraudulent character of the sales made. Too many people complained and asked for cancellation of their contracts and explained the grounds for their dissatisfaction for the finance companies to claim ignorance.”

Refuses to Comment

Dean Crites, an attorney for Finance America, now called Chrysler First, declined to talk about the charge. “I couldn’t comment on that because we are contesting it and we consider that to be subject to proof in the lawsuit,” he said.

Western Financial counsel Regan Kelly said that he, too, could not specifically address Porter’s statement because “we have not responded to the lawsuit.”

Generally, he said, Western Financial, also a defendant in the Mission Viejo case, is “not in violation of California law” and has told state prosecutors that it would not foreclose on anyone.

- Central Bank of Walnut Creek.

The bank has not been charged in any court actions but is under review by investigators given its prominent position in terms of second trust deed paper it is holding from solar sales, McNeely said.

In the Lancaster area alone, the bank is holding “at least” 60 second trust deeds, according to Joe B. Morgan, executive director of Whittier-based Public Interest Inc., a nonprofit law firm.

Class-Action Lawsuit

Morgan said his organization, through its Public Interest Legal Clinic subsidiary, is getting together a class-action lawsuit on behalf of Lancaster homeowners who claim that they were victimized by solar energy firms, including Sun West, a company that apparently has gone out of business.

Additionally, according to the state’s intervention motion in the Home-Guard case, Central Bank has been a financing agent for Home-Guard’s solar equipment sales.

Central’s chief counsel, Robert Heggen, denied any wrongdoing. “We check with the (Contractors State) License Board to determine if solar companies are in good standing or whether there are any outstanding complaints,” he said.

He added that no one in the state contractors’ license or the attorney general’s offices “has made us aware that we are under scrutiny.”

Other banks or financial institutions named in the state’s case against Mission Viejo include American Independent Bank of Gardena; Palm Pacific Service Group of Los Alamitos, and Security Pacific Finance Corp., a subsidiary of Security Pacific National Bank. American Independent chief executive Robert C. Littlejohn said his bank’s exposure to the financing of solar heating contracts was “insignificant” and that “we’re cooperating with the attorney general.” A Security Pacific spokesperson said a lien connected with a Mission Viejo sale was written off and no move will be made to foreclose. Attempts to reach a principal of Palm Pacific were unsuccessful.

How Sales Pitch Worked

According to court documents and interviews with investigators, here is how the solar heating sales operations worked:

Homeowners were contacted through direct mail, telephone or door-to-door solicitation. Sales pitches, either in the home or at a seminar, were replete with tempting promises that translated into a pitch that the consumer could acquire an expensive solar heating system for practically nothing.

The sales objective was to swiftly sell solar heating systems ranging in price to $10,000 or more, including financing costs. Typically, the systems consist of one or more roof panels through which sun-heated water passes to an insulated storage tank used in conjunction with a home’s water system or a room radiator.

Among the basic misrepresentations made by salesmen, as described by investigators and court documents, were:

- Energy prices would continue to spiral upward for the foreseeable future and homeowners would save a bundle on solar heat in contrast to gas heating. This was called “a scare tactic” by investigators, who said that claims of 300% energy cost increases were being made in dramatic contrast to much lower government forecasts at the time. In fact, since then, oil and natural gas prices have plummeted.

Tax Credit Rebates

- Federal and state tax credits would translate into big rebates for the consumer.

In fact, tax credits do not necessarily produce cash rebates. To qualify for a tax credit, a consumer must have sufficient tax liability. Retired people on low fixed incomes and individuals on welfare who bought solar systems who were promised big tax breaks would not get them.

What is more, Congress let the federal solar tax credit expire at the end of 1985 and California’s credit will end this year unless extended by the Legislature.

- Free vacations.

Several of the firms under investigation offered free vacations to Hawaii and elsewhere as an inducement to sign a contract. But, investigators said, a contract’s fine print invariably demanded that at least one of the parties signing a solar heating contract pay the costs of his or her own trip. As it usually turned out, they said, out-of-pocket costs for one person turned out to be so expensive that nothing was actually saved on a second party’s “free trip.”

Just how the poor were manipulated is dramatically illustrated in the sworn declaration of Lois Darlene James, a resident of the Central Valley community of Farmersville, filed in Fresno County Superior Court last October as part of the state’s case against Solar Resources of California and United Standard Management Corp. of Phoenix, which manufactured solar equipment and produced sales materials:

James said she told a Solar Resources saleswoman in November, 1984, that, “I had very little income because I only worked three months a year as a farm worker and lived on welfare the rest of the time.

“I did not think I could afford the (solar) unit but she assured me I would get enough money back from the government to cover the payments. As it later turned out, I was not entitled to any government rebate because my income was too low.”

Like other victims, James said in the declaration that she unwittingly signed over a second trust deed on her house to Finance America’s Livermore office to underwrite the $13,431.60 total cost of the system, which she had to pay off at $159 a month for seven years.

A Phoenix attorney representing United Standard, Richard Brandes, said he did not believe that his client was guilty of any wrongdoing, adding that “any problem customers may have had in California may be attributable to local companies” that sold the equipment.

In many instances, state investigators said, sales subterfuge is achieved through what is known in the home improvement field as a “Freddie the Folder” technique. Under this ruse, sales people utilize sleight-of-hand so that the second trust deed document is folded under another piece of paper so that the customer does not know what he is signing. Another common violation in the cases under investigation, underscored in the James declaration, was violation of both federal and state consumer protection laws that mandate a three-day cooling-off period. Under the laws, a consumer has three days to think about what he has signed--and can call off the sale if he changes his mind.

But, according to state investigators and court documents, most of the firms that have come under state scrutiny broke the law by having contractors at the consumer’s house literally within hours after the sale. Then, if the homeowner complained, solar equipment installers invariably waved a purchase contract in the buyer’s face and threatened the homeowner with a lawsuit if the buyer continued to protest.