He Owes Millions to Former Tenants : Judge Ties Up Slumlord’s Funds

Millionaire slumlord Michael Schaefer lost control of his finances Thursday when a bankruptcy judge ordered that a trustee be appointed to keep Schaefer 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 attorney Brian M. Monkarsh, who represented renters in a class action suit against Schaefer in Los Angeles Superior Court. “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 awarded the tenants $1.83 million in damages at a trial in the spring of 1986. The jurors found that Schaefer had allowed his filthy mid-Wilshire 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, who has a residence in La Jolla, filed for protection in San Diego under Chapter 11 of the Bankruptcy Code in July, 1987, but has continued to spend freely.

U.S. Bankruptcy Judge Louise D. Malugen said Schaefer has made numerous “improper” expenditures since last July, including purchases of art objects, foreign travel, family loans and 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.

“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. When that lack of motive is present, a trustee is appointed.”

Malugen told Schaefer, who sat quietly throughout most of the hourlong hearing, that he may spend money only for “ordinary living expenses,” such as food, housing and transportation.

Bennett L. Silverman, another lawyer who represented 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 court, attorneys told Schaefer not to talk to reporters.

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 creditor 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 area, 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.