Judge Curbs Spending by Slum Landlord Schaefer
Millionaire slum landlord Michael Schaefer lost control of his finances Thursday when a San Diego bankruptcy judge ordered that a trustee be appointed to keep him from spending money that should go to former Los Angeles tenants and others to whom Schaefer owes millions of dollars.
“It’s a grand slam victory for tenants in this case who have been waiting for seven years,” said Brian M. Monkarsh, who represented renters in a class-action lawsuit against Schaefer in Superior Court in Los Angeles. “This means that Mr. Schaefer will no longer have the ability to make monthly gifts of $10,000 to his sons.”
In what is believed to be the largest award in a landlord-tenant suit in California, a jury in 1986 awarded the tenants $1.83 million in damages. The jurors found that Schaefer had allowed his Mid-Wilshire district apartment building to become overrun with rats, cockroaches and violence. The tenants have yet to receive a penny of the money.
To avoid or delay paying the tenants, Schaefer, a former San Diego city councilman who has a residence in La Jolla, filed for protection in San Diego under Chapter 11 of the U.S. Bankruptcy Code in July, 1987. But he has continued to spend freely.
U.S. Bankruptcy Judge Louise Decarl Malugen said Schaefer has made many “improper” expenditures since July, including purchases of art objects, foreign travel, family loans, charitable and political contributions, and “fairly lavish presents to his children.”
She ordered Schaefer to immediately stop making $10,000 monthly payments to his teen-age sons and noted that he had spent $390 for a skateboard and clothing for the birthday of one of his sons. “These are not the types of expenditures that are permitted to Chapter 11 debtors,” she said.
“This debtor has absolutely no motive to act in the interest of his creditors,” Malugen said. “When that lack of motive is present, a trustee is appointed.”
Malugen told Schaefer, who sat quietly through most of the hourlong hearing, that he may spend money only for “ordinary living expenses,” such as food, housing payments and transportation. He rose once to say that he always travels coach class, but his lawyer, Jack F. Fitzmaurice, told him to sit down and be quiet.
Bennett L. Silverman, another lawyer representing the tenants, said he was concerned that Schaefer might transfer assets out of his estate in the five or six days it normally takes to appoint a trustee, and asked that Schaefer be ordered to spend no money at all.
Malugen denied the request, but added, “I intend to call (a trustee) as soon as I leave here.”
Outside the courtroom, Fitzmaurice told Schaefer not to talk to reporters and the two quickly left the federal courthouse.
The trustee will take over control of all of Schaefer’s assets and will have the authority to approve all expenditures from his estate. The trustee will also be able to draw up a plan to pay off the tenants and other creditors.
However, lawyers said Thursday that it is impossible to predict how long it might be before the creditors are paid. One of the creditors is the city of Los Angeles, which is seeking $77,000 in fines levied against Schaefer for code violations at the 61-unit apartment building he once owned at 757 S. Berendo St. in the Mid-Wilshire district as well as a building he owned on Grand Avenue.
The Los Angeles city attorney’s office joined with the law firm of Gibson, Dunn & Crutcher in asking that a trustee be appointed.
Gibson, Dunn & Crutcher represented the tenants of the Berendo Street building at the lengthy and rancorous trial that resulted in the $1.83-million verdict.
The firm took the case on a pro bono, or free-of-charge, basis, but is seeking $684,100 in attorney’s fees from Schaefer that would be added to the $1.83 million awarded the tenants. California law allows lawyers who win pro bono cases to request that their fees be paid by the losing party. The trial judge turned down the law firm’s request, but the matter is on appeal.
Malugen on Thursday denied a motion by Schaefer’s lawyer to bar the firm from seeking the fees from his estate and put off a ruling until the state court appeal is settled.
The suit over the Berendo Street building was originally filed in 1982 on behalf of all tenants who had lived there during an eight-month period in 1981. They charged that Schaefer, who bought the building in 1977, had allowed it to deteriorate into a filthy, violent place.
One tenant described cockroaches so big “they looked like mice.” Rats reportedly crawled over sleeping children and raw sewage once flowed down a hallway.
While the lawsuit was pending and even after the jury verdict, there was a “massive effort by Schaefer to deplete his estate and place his assets beyond the reach of his . . . creditors,” the tenants’ lawyers charged in documents filed with the court.
He gave away most of his assets either to members of his family or to “entities under his control,” they alleged.
From 1981 to 1986, Schaefer’s reported assets dropped nearly $4.5 million, to $2.5 million, they said. In 1985, he set up a $1-million trust for each of his two sons. He later testified that he had done so because the tenants have “the power to destroy my ability to provide for my children’s education in the future . . . that’s their future, no matter what you do to me.”
He also conveyed assets to his mother and sister and used some of the money on an ill-fated campaign for the Republican nomination for a U.S. Senate seat in Maryland.
Shortly after the 1986 judgment, Schaefer transferred $20,000 in securities to an account established for the National Center for Drunk Driving Control, a charitable organization based in Maryland. He later asked that the organization return the money, and said in a letter that the contribution was “simply a matter of taking some assets out of my name so that the $1.8-million judgment . . . would not reach everything I had.”
