City Charges 2 Loan Firms With Slum Housing Fraud

Two lending institutions have been secretly controlling Los Angeles’ worst slum buildings for nearly a decade through improper lending practices involving dozens of shell companies and front men, the city attorney claimed in a massive lawsuit Tuesday.

The scheme, based on falsely inflated property values, has resulted in hundreds of thousands of dollars in rents being siphoned into lenders’ coffers instead of paying for court-ordered building repairs, the suit alleges.

The elaborate arrangement of financial and ownership transactions has thwarted slum cleanup campaigns by turning efforts to prosecute slumlords into costly and time-consuming court battles, City Atty. James K. Hahn said at a press conference Tuesday.

The 95-page suit was filed in Los Angeles Superior Court by the city, the Legal Aid Foundation of Los Angeles and a private law firm, Litt & Stormer. The plaintiffs charge Highland Federal Savings & Loan, A & B Loan Co. and 138 other defendants with racketeering, fraud and other civil violations in connection with the financing and ownership of 11 slum buildings.

Most of the buildings are in the inner-city’s poorest neighborhoods and are inhabited by recent immigrants.

Standing outside one of the buildings, in Hollywood, Hahn said: “In this lawsuit, we seek to hold responsible those lenders that, through irresponsible and often fraudulent conduct, have reaped enormous profits off the backs of the city’s poor and underprivileged.”

In essence, the suit claims that the two institutions--along with a West Side real estate consultant named William Leyton, who has ties to both--have systematically driven up the paper value of the slum buildings. They have done this by frequently changing owners in order to generate new, bigger loans and to increase mortgage payments.

The lenders are thus able to siphon off tenants’ rent to ever-higher payments and fees on the new loans, leaving no money to maintain the buildings, the suit contends. The plaintiffs allege that the owners of record are in many cases simply managing the buildings for the real owners, the lenders.

Ben Karmelich, president of the Highland Park-based Highland Federal, denied the allegations in an interview Tuesday. He is also named personally as a defendant and accused of facilitating “numerous transfers” of ownership to “uncreditworthy” buyers and shell corporations “solely for the purpose of taking out large loans in an attempt to inflate the value of the property, thereby falsely inflating Highland’s assets.”

“All these allegations are untrue. . . . We wouldn’t do anything wrong,” Karmelich said. “The lawyers tell me to deny everything and to say everything is not true, and to say that we are an honest, moral company.”

Representatives of A & B Loan, an Inglewood-based company that has financed seven of the 11 slum buildings, according to the lawsuit, did not return a reporter’s calls. Alexander Spitzer and Larry Blumenstein, identified as co-owners of A & B Loan, also are charged personally in the lawsuit.

Leyton is a convicted slumlord who has owned or financed eight of the 11 slum buildings, some of them held in shell companies, according to the suit. He did not return a reporter’s calls.

New Legal Approach

The suit does not lay out in detail the personal relationships among the 140 defendants. Rather it seeks to break new legal ground by proving through extensive study of public records that the lenders are in fact the true owners controlling the property.

The huge suit is expected to result in years of court procedures. If successful, it could not only turn around the slum conditions in the 11 buildings but also prevent lenders from making unwise loans to unqualified buyers.

The suit is the outgrowth of years of frustration by deputy city attorneys, Legal Aid Foundation attorneys, and private attorneys who have repeatedly brought slumlords into court only to find that the properties had been suddenly transferred to new owners. The process then starts all over again, with new, time-consuming building inspections and new lawsuits.

It also marks the first time that the city attorney has joined forces with outside counsel to pursue slumlords, officials said. Deputy City Atty. Stephanie Sautner, who supervises the city’s slum task force, said she joined forces with Legal Aid attorney Deborah Dentler two years ago when each found the other investigating the lending institutions.

Attorney Barrett S. Litt, whose firm has represented tenants in several major slum-related lawsuits, is also a plaintiff in the case.

Based on Public Records

The suit does not contend that all the 140 defendants know each other, or that they are involved in a single conspiracy. The plaintiffs said the basis for the suit is more than 1,000 public records showing questionable transfers of property that they contend indicate that the lenders are in fact controlling the owners of record.

Among the 15 laws the majority of the defendants are accused of breaking is the federal Civil Racketeer Influenced and Corrupt Organizations Act.

In the suit, defendants are divided into three categories: lenders, “lender-related defendants” that include alleged shell corporations set up to hold slum properties for brief periods and the owners of record.

The owners of record include some of the city’s most notorious slumlords, among them fugitive Vijaynand Sharma, who fled the country last year after being sentenced to 20 months in jail for code violations at five of the buildings named in the suit. Another is Neil Bleuler, who has been convicted of 85 counts of code violations arising from slum conditions at several buildings.

“While the predatory lenders were reaping the profits,” plaintiff Litt said, “the tenants languished in buildings which lacked heat or hot water, had broken doors and windows, leaked because of roof and plumbing defects, were riddled with rodents and vermin, were plagued by criminal elements, and had innumerable other slum-related problems.”

Among the questionable practices, the suit charges, are that the lenders repeatedly have loaned money to clearly unqualified buyers, and failed to call in the notes when the buyers went bankrupt or stopped making mortgage payments.

“Our lawsuit also alleges that these practices were for the purpose of the lender showing falsely inflated assets and performing loans for their books,” Hahn said.

“Our evidence will show many instances of fraud and insider dealing in transfers that were designed to falsely inflate the value of property and subvert criminal prosecutions . . . These are exactly the kinds of practices that S&Ls; have gotten into trouble for across the country.”

The 11 buildings have been transferred more than 100 times since 1981, when the city attorney’s slum task force began keeping a target list of the worst of the worst slums in town.

The buildings have been the subject of more than 50 criminal prosecutions by the city attorney for such slum violations as rats, lack of heating and running water, and fire danger. Some of the buildings have undergone court-ordered repairs. Others remain classified as uninhabitable, although tenants live in them.

Highland Federal is a lender to six of the 11 buildings, while A & B is a lender to seven. Since 1981, the two have represented about 25% of the buildings on the task force, Sautner said.

Changed Hands Often

One building, the 167-unit Cameo Hotel at 504 South Bonnie Brae St., has changed hands six times in four years. One owner turned out to be a dog, the suit claims. During that time, loans on the property increased from $405,000 to a current $2.6 million--”all as a result of repeated loans granted to uncreditworthy owners which drove up the paper value of the property,” the city attorney’s office said.

Contending that the defendants conspired to breach the right of tenants to live in habitable apartments with functioning utilities, the three plaintiffs are seeking civil damages and an injunction that would prevent similar lending practices in the future.

The suit seeks, among other damages, more than $1 million in civil penalties for violations of the California Business and Professions Code.

The tenants are seeking punitive damages for more than 1,500 tenants, including $100 per day for each tenant who lived without water, electricity or other utilities that are required by law.

Attorneys stressed that the lawsuit is not intended to make all lenders responsible for properties upon which they hold mortgages, which could lead to increased mortgage financing difficulties in poor areas of the city. The lawsuit targets the lenders in the suit, because the attorneys believe they conspired with the owners of record to reap profits from tenants, plaintiffs said.

Contributing to this story was Times Staff Writer Douglas Frantz

SLUM BUILDINGS

These are the 11 slum buildings listed in the city’s lawsuit:

2616 Idell St.

1917 S. Central Ave.

4020 S. San Pedro St.

5426 Virginia Ave.

807 S. Fedora Ave.

504 S. Bonnie Brae St.

526 S. Union Ave.

1616 W. 11th St.

1000 Echo Park Ave.

553 Ceres Ave.

823 S. Bonnie Brae Ave.