Lender Faces Trial in Slum Case : Courts: A ruling barring the city from suing Highland Federal Bank is overturned. The firm is accused of racketeering and fraud involving substandard buildings.


A savings and loan firm accused of operating a network of slum buildings in Los Angeles will have to face trial on racketeering, fraud and other charges, a state appeals court has ruled.

Highland Federal Bank was a principal defendant in a landmark 1989 suit filed by the city attorney and public interest lawyers, contending that slum conditions in several inner-city buildings had been created by sham ownerships and fraudulent loans.

The 2nd District Court of Appeal ruling reverses a 1991 lower court decision that Highland was subject to federal regulations, which preempted the city from suing under state law.


“This is not a situation where the state seeks to regulate the conduct of all federal associations in California,” according to the appeal court ruling, which was issued Tuesday and made public Thursday by City Atty. James K. Hahn. “Rather, the state merely seeks to protect its own interest in public safety and welfare against the wrongful contact of an entity . . . which just happens to be a federal association.”

Highland Federal attorney Michael D. Berk said the savings and loan would appeal. “We disagree with the ruling,” he said.

The ruling dramatically alters a case in which the city and lawyers representing the tenants in 11 buildings tried to move beyond conventional complaints against slum owners for substandard conditions. They sought to attack those they claimed made the money and secretly controlled the properties.

Hahn said Highland Federal was at the heart of “a conspiracy by a bunch of greedy financial institutions and other individuals that have deprived tenants in this city of decent living conditions.” The varied building owners, he maintained at a press conference outside a Highland branch in Atwater, were “fronts for Highland. Highland was really the owner.”

Allegations of conspiracy between slum owners and their lender was what set this suit apart. “Highland was at the core of the conspiracy,” said Barry Litt, a tenants’ attorney. “Reviving Highland revives the central thrust of the case.”

Berk said the thrift, its president, Ben Karmelich, and vice president, Betty Pratt, “vigorously deny these allegations.” All are named in the suit.

The Highland Park-based savings and loan had financed loans on eight of the 11 buildings listed in the lawsuit. The listed owner at one of the 11 buildings, at 504 S. Bonnie Brae St. in the Westlake area, was Teluce Black, a dog reportedly owned by a convicted slumlord. According to city regulators, Highland lent Teluce--a Labrador retriever--$200,000.

Another owner was Vijaynand Sharma, who fled the country and a 20-month jail term after he was convicted in the largest criminal case ever brought by the city against a landlord. He remains a fugitive.

In addition to ruling that the city and tenants could sue Highland, the appeal court also reversed a ruling that the savings and loan could not be tried for racketeering. In 1991, Superior Court Judge Barnet Cooperman said the plaintiffs had failed to show that the defendants had engaged in racketeering, or a scheme to defraud, as defined under the 1970 federal law known as the Racketeer Influenced and Corrupt Organizations Act, or RICO.

Other major defendants in the suit, which originally named 137 individuals or companies, have already settled. Inglewood financier Alexander Spitzer, who controlled A & B Loan Co., settled with the city attorney in 1989 after agreeing to follow strict lending rules. And last June, 40 other principals agreed to obey a number of restrictions imposed by the city and to pay tenants $1.7 million.

Litt, representing tenants in the class-action portion of the case, said “thousands” lived in the buildings--located in some of the city’s poorest neighborhoods and inhabited largely by immigrants during the 1980s. “How many we’ll be able to locate we don’t know. We are already in touch with over 500.” He will seek “millions of dollars” in rent refunds, emotional distress claims and punitive damages from Highland, he added.

Hahn said the city will seek more than $1 million in civil penalties and “injunctive relief, to make Highland change the way they do business.”

According to Deputy City Atty. Richard Bobb, who supervises housing enforcement, the slum lenders named in the suit controlled properties by “recording false deeds, putting properties in the name of straw buyers and making loans contrary to federal law. They inflated appraisals and loaned more on the properties than the properties were worth.”

Slum conditions followed, he said. “When you encumber a piece of property for more than it’s worth, all the rental income has to go to pay the loan and there’s no money left to maintain the properties.”

The suit evolved out of frustrating efforts to enforce building, safety and fire regulations at the slum properties, Hahn said. “Over and over again as we tried to hold owners responsible, we would find the owners had changed. The only thing that hadn’t changed was that Highland Federal continued to be the funding mechanism of these buildings.”

Highland did not create slums but was instead one of the few institutions willing to finance inner-city properties, Berk said. “This is their so-called reward for doing that--attempting to tar them with difficult conditions.” If the appellate ruling stands, he said, “It’s going to seriously impact the willingness of any lender to become involved in inner-city properties.”

Hahn said conditions in the 11 buildings have improved and since 1991 have met code requirements. Berk said that as far as he knew, Highland Federal was no longer financially involved in any of the properties.