Slum Sleuths : Tenacious Investigators Worked Long Hours to Uncover Alleged Housing Scam

Los Angeles Fire Department Inspector David Castaneda was asking a lot of coy questions, letting his eyes wander across desktops and snapping Polaroid pictures of the hired help, who were not smiling.

From a back room in the cramped Wilshire Boulevard office of T.H.I.S. Corp., a man emerged, grabbed Castaneda’s elbow and shoved him outside, slamming the inspector’s arm against the door. Castaneda, dressed in uniform, managed to get a shot of him, too.

His heart pounding, Castaneda stared at the door that had been locked behind him.

“Why are they throwing me out of the office?” he remembers thinking. “Why am I not supposed to be in there? I don’t even know who that guy is?”

Castaneda, 34, was not there that day back in October, 1985, to check for smoke detectors or frayed wiring. A frustrated member of the city’s slum housing task force, he had broadened his duties to investigate how a number of Los Angeles slumlords were managing to evade city enforcement efforts.

The information he uncovered in hundreds of public records and in his sleuthing helped lead last week to a novel racketeering lawsuit against two lending institutions accused of secretly controlling Los Angeles’ worst slum buildings.

The investigation was more a labor of obsession than expertise. There were no teams of specialized investigators assigned to the case, only several people with no real knowledge of the byzantine banking industry or the mind-numbing world of property transactions.

On their own time and between other assignments, they pursued an investigation that the city attorney’s office is calling the most significant breakthrough yet in Los Angeles’ continuing efforts to provide livable housing for its poor.

Filed by the city attorney’s office, the Legal Aid Foundation of Los Angeles and a private law firm, the lawsuit alleges that Highland Federal Savings & Loan Assn. and A & B Loan Co. used front men and shell corporations--including T.H.I.S.--to inflate the value of 11 slum properties through frequent transfers of ownership.

Hundreds of thousands of dollars in rents were diverted to the lenders to cover the escalating mortgages, the suit says, instead of being used to maintain 408 units in the buildings, most of which are inhabited by recent immigrants in the city’s poorest neighborhoods.

Loans on one run-down building alone ballooned from $405,000 to $2.6 million as it changed owners six times in four years. One owner turned out to be a dog, according to the complaint, which seeks civil damages and an injunction to stop such practices in the future.

Highland Federal has denied any wrongdoing, while A & B Loan Co. has yet to comment on the allegations.

The investigation was largely the work of Castaneda, a 14-year veteran who began as a firefighter; Deputy City Atty. Stephanie Sautner, who wishes she had paid more attention in her property law class, and Legal Aid lawyer Deborah Dentler, who had to scrounge documents because the foundation could not afford the $320 she needed to make her own copies.

Sautner is a former New York City police officer who heads the city attorney’s slum housing task force, perhaps the most innovative in the nation, which has successfully prosecuted several notorious slumlords.

Changes of Owners

She says the inquiry began after a number of slum buildings kept changing owners just before the city was prepared to move against them.

“Our own egos were so great,” she says, “that we thought they would do anything to avoid being prosecuted by us.” Instead, Sautner says she would later learn, the lenders allegedly were interested in boosting property values so they could reap more money on the mortgages.

Fire inspector Castaneda had become “crazy with frustration,” Sautner says. He volunteered to spend his mornings at the county recorder’s office studying documents on the rat- and crime-infested buildings that were changing hands.

“Something smelled fishy and I wanted to know what it was,” he says, “Why can’t we hook these people?”

After staring at microfilm for days, he says he found “too many common denominators” among the buildings, including two institutions that had made loans on the property, Highland Federal and A & B Loan. He says he also noticed that some companies involved in the transactions had different names but were using the same addresses.

“I thought I was uncovering something,” he says, “and I couldn’t let up.”

Orders to Go Ahead

At the task force’s weekly Wednesday meetings, he would report his findings to Sautner, who instructed him to press ahead. She briefed City Atty. James K. Hahn.

“We thought we knew the complete picture about the way slumlords were operating,” Hahn said. “But then we were learning that there was another level. That made us very angry.”

Next, Castaneda embarked on some amateur detective work, tracking down people and corporations listed as owners of the dilapidated buildings. He went to T.H.I.S. Corp., but got nothing except a rude goodby.

At one address, he says, there was no building. Another was nothing more than a post office box inside a copying shop; the box number, he says, was listed in property records as a “suite.”

Castaneda says he traced one purported building owner to a stationery store. He figured the guy probably owned the business. He was a delivery boy.

And then there was the man who lived in one of the slum buildings and did not know he owned it--on paper.

“You are the owner,” Castaneda says he informed the man.

“No I’m not,” he responded.

“Isn’t this your signature?”

“Yes, but I never signed that.”

Castaneda said he made a note to himself that the document had been notarized by the same person whose name appeared on other property transactions.

Eyes and Ears

For help, Castaneda had plenty of eyes and ears. He often turned to the tenants, who, among other things, jotted down license plate numbers and provided him with detailed descriptions of the rent collectors.

Not everyone appreciated Castaneda’s efforts. Nasty letters started coming in to the Fire Department from a lawyer and Highland Federal’s president, accusing the inspector of harassment.

Castaneda says he was questioned by his bosses, who “told me to continue on so long as I don’t violate anybody’s rights.”

The high turnover of slum building ownership also had caught the attention of the nonprofit Legal Aid Foundation, which has represented scores of tenants in disputes with slumlords.

In examining 10 years worth of property records for one building at her kitchen table, Legal Aid’s Dentler discovered that it had passed through nearly 20 different owners. She, like deputy city attorney Sautner, had come to believe that “there was a bigger picture but nobody knew what it was.”

One thing that particularly puzzled them was why dummy corporations and people with seemingly risky credit histories were getting loans to buy properties.

With both Legal Aid and the city attorney’s office strapped for resources, the two women decided to pursue the mushrooming case together, forming a team that Dentler compared to television’s “Cagney & Lacey.”

Working as a Team

“We come from completely different backgrounds,” Dentler says. “Stephanie was a cop, a working-class kid, hard-bitten. I’m a typical bleeding heart liberal from an affluent background. We are not best friends by any means, but we are a good work team. We would pull each other out of the depths of despair.”

Among other things, they divided up the properties that needed to be studied. They also took turns sitting through a civil trial that, in a stroke of good timing, would prove to be one of the major turning points in the investigation.

They had been tipped to the trial by television reporter Jim Forbes, who for years has been investigating the financial ties of slumlords for KCBS-TV. The case involved two important figures: a Los Angeles slumlord, who had owned some of the buildings under investigation, and Highland Federal.

Testimony in the trial disclosed that the bank had knowingly approved a false loan application submitted by slumlord Joseph Fitzpatrick in the name of his Spanish-speaking maid.

Highland President Ben Karmelich approved the $217,669 loan on the property, which was not a slum building, and then authorized Fitzpatrick to cash the check. Karmelich testified that he had sanctioned the transaction because Fitzpatrick was a credit-worthy customer who was good for the money. The maid lost her bid to get the building, but the neophyte investigators had more leads.

“It was exactly like the scenario we had cooked up in our minds,” Dentler says. “An illiterate Spanish-speaking maid who had never had a dime and found herself on the title of an apartment building for the benefit of a group of financiers. We knew we were on the right track.”

Testimony also surfaced in the trial that Highland Federal had issued a slum-property loan to one Teluce Black--purportedly the name of Fitzpatrick’s dog.

Plan for Action

By now, the city attorney’s office and Legal Aid had agreed that a class-action lawsuit should be prepared--targeting the financial institutions--on behalf of the city and the tenants whose rents had bankrolled the alleged scam.

But for the tenants to recover money, yet another player would have to be brought into play because neither the city attorney’s office nor the federally funded Legal Aid Foundation can sue for money damages.

Dentler said she tried to recruit a half dozen major law firms. Their initial response, she says, was, “we’re opposed to slumlords. Let’s go get ‘em.” But when the conversation turned to suing the lenders, Dentler recalls, “they got cold feet,” concerned that the case would lead to laws harmful to their banking clients.

More disappointment was to follow. Dentler had finally managed to corral the huge law firm of Finley, Kumble in the summer of 1987, only to see it go under within weeks.

“I was just blown away,” she recalls. “I thought I had it made.”

Eventually, Dentler persuaded Litt & Stormer to handle the case, a major commitment of time and resources for the relatively small firm. “It was not the megafirm I had fantasized about,” Dentler says, but it had sued slumlords before and knew racketeering law.

Last Tuesday in Los Angeles Superior Court, roughly three years of laborious and often boring work came together in the 95-page lawsuit that, itself, took more than three months for Litt & Stormer to draft. In a sense, the controversy is only beginning. By all accounts, the case will take years to plod through the courts.

On the day the suit was filed, Castaneda gave himself a private pat on the back as he sat in his shoe-box office on the 9th Floor of City Hall East.

“I kinda feel pleased,” says the inspector, who has moved on to other assignments. “that my efforts did not fall by the wayside . . . I feel for those tenants. They don’t deserve to live like that.”