Settlement Reached Over Sinking Homes : Monterey Hills: More than two dozen insurance companies and Los Angeles will pay $62.5 million to the residents of the condominium community.

More than 700 homeowners who bought city-funded townhouses in Monterey Hills--only to watch their investments literally sink into the earth beneath them--reached a $62.5-million settlement Tuesday with Los Angeles and more than two dozen insurance companies.

Officials said that it was one of the largest settlements ever to involve the city.

So complex was the battle over the hillside homes--a village of 18 condominiums and townhouses where floors sloped, walls cracked, swimming pools tilted and at least one building had to be condemned--that it took more than two hours to read the settlement terms into the court record.

It took nearly three years of arbitration hearings to settle the lawsuit filed six years ago against the city, contractors, soil engineers and others. Some hearings were held in the grand ballroom of the Bonaventure Hotel because there was not a courtroom big enough. As many as 100 lawyers argued the emotional case about homes built on soil that turned to mush.

“Homeowners who were very long-suffering deserve a lot of credit because they stuck with a process that was sometimes difficult to understand,” said Jim Wood, board chairman of the city’s Community Redevelopment Agency, which directed the development. “Monterey Hills is a successful community. It is a very livable community. This settlement will make it more livable.”

After years of argument, tears and finger-pointing, the case ended without an assessment of blame. Instead, 25 insurance companies have agreed to pay most of the $62.5 million settlement, with the city paying about $3 million.

Had it gone to trial in Los Angeles County Superior Court, hundreds of millions of dollars in legal fees and years of court time probably would have been spent to reach a settlement, officials agreed.

Essentially, several lawyers said, everyone cut their losses.

“Yesterday, the homeowners had a lawsuit,” said retired appellate court Justice John Trotter of the Judicial Arbitration & Mediation Service, an Orange County firm that arbitrates lawsuits. “Today, they have something.”

About half of the settlement will be used to repair the damage to about 700 units tucked into the hillside four miles east of downtown. Another $27.4 million is to be divided among the 770 homeowners who sued--an average of $20,000 apiece after legal fees, said attorney David A. McVey, who represented one of seven homeowner associations.

For residents such as 39-year-old Gordon Anderson, who bought his two-bedroom condominium unit nine years ago with his life’s savings and gifts from his family, the money hardly covers the years of fear and uncertainty that he and his neighbors endured since they bought in a development funded by $114.3 million in city bonds.

It was envisioned in 1971 as a community of nice homes minutes from downtown, with a portion to be set aside for low- and moderate-income people. So pleasant were the tree-lined hills and meandering roadways that notables such as Police Chief Daryl F. Gates and Councilman Richard Alatorre settled there.

People stood in line to buy units offered at 5% down and an interest rate five points under the market price.

Soon after moving in, they found the fire doors would not close and walls were cracking. Pillars holding up some of the buildings had begun to crumble.

Soil experts determined that the landfill on which the homes were built was not properly prepared. The soil had not been properly compacted, and clay that should have been removed absorbed too much water, causing the homes to settle unevenly.

One building was condemned and its residents forced to find housing elsewhere. Those who wanted to sell could not. Some let their investments lapse into foreclosure.

“They couldn’t sell. They couldn’t move on. They were housebound,” McVey said. “As far as righting the wrong, the settlement is half a loaf. It won’t make them financially whole. But we hope there will be enough money to make the structures safe and stable.”

Wood, of the CRA, said he was confident that the homes could be repaired. The soil has stopped sinking, he said, and the market value of the units will rise again once the cloud of litigation is lifted.

The settlement must be ratified by the homeowners and given final approval in Superior Court at a hearing scheduled Dec. 14. A hearing officer must be appointed to determine how the money will be divided among the homeowners, already a matter of dispute.

If the settlement is accepted, further lawsuits on the matter would be banned, officials said.

Although several homeowners were less than thrilled with the terms, they predicted that the agreement would be approved.