City Can’t Sue Thrift in Slum Case : Courts: Decision to dismiss charges against Highland is seen as blow to landmark civil racketeering suit against owners of 11 buildings.

In a ruling that dealt a severe setback to a landmark civil racketeering suit against slumlords and their lenders, a Superior Court judge said Wednesday that a Los Angeles federal savings and loan cannot be sued by the Los Angeles city attorney for its lending practices on slum properties.

Judge Barnet M. Cooperman granted a motion by the principal defendant, Highland Federal Savings & Loan, to be dismissed from the lawsuit, brought nearly two years ago by the city and two public-interest law firms against slum owners and their lenders. He also dismissed allegations of racketeering against property owners and loan brokers.

Highland Federal, a 22-year-old savings and loan based in Highland Park, was one of 142 defendants in a March, 1989, suit that alleged fraud, conspiracy and racketeering in connection with their ownership roles in 11 slum buildings.

The lending institution had financed loans on eight of the 11 buildings, and was the best known of the defendants.

Cooperman said the federal Office of Thrift Supervision regulates Highland’s lending activities and preempts any local entity from filing suit. “It may be that Highland has violated federal law that governs it,” he said, “but if such is the case . . . that relief must be sought under federal law.”

“It is a big victory for Highland Federal bank,” said Michael D. Berk, attorney for the thrift. “The case against Highland was improper from the very concept.”

Stephanie Sautner, head of the city attorney’s slum task force, said her office probably will appeal, arguing that the decision “says local authorities can’t touch a federal savings and loan, no matter what they do. We feel strongly a savings and loan cannot commit acts that severely impact the public health and safety of the poor people that live in the city and then hide behind federal regulations.”

Cooperman also said the plaintiffs had failed to show that the defendants had engaged in racketeering activity, as defined under the 1970 federal law known as the Racketeer Influenced and Corrupt Organizations Act, or RICO.

The allegations of conspiracy between owners and lenders were part of what made this suit different from other suits against slumlords. Cooperman said the city attorney, along with the Legal Aid Foundation of Los Angeles and the private law firm, Litt & Stormer, had failed to support the contentions.

After rejecting the racketeering allegations, the judge left open the possibility that the case could proceed against individual property owners and other state-regulated lenders, if the plaintiffs amended their complaint in 30 days.

Berk said, “I think it makes it a garden-variety civil lawsuit against the owners of the property, which is what it should have been in the first place.”

But Ben Margolis, an attorney for Litt & Stormer, contended that many lenders are not federally regulated and may still be liable to suits for helping slumlords. “We think we are establishing the basic principle we set out to establish,” he said.

Barbara Jones, staff attorney for Legal Aid, said, “We were very disappointed.” She believed that “the federal government is not enforcing federal laws regarding savings and loan institutions.”

A spokesman in the Office of Thrift Supervision in San Francisco would not discuss Highland, saying regulatory matters regarding individual savings and loans are not made public.

Sautner said the city attorney’s office did not dispute the federal regulatory authority. “We felt Highland’s acts fell far outside the scope of any normal lending activity, and that would be the basis of our appeal,” Sautner said.

The suit had alleged that the condition of the 11 slum buildings, mostly inhabited by recent immigrants in the city’s poorest neighborhoods, was an outgrowth of frequent transfers of ownership, often by front men and shell corporations. These transfers falsely inflated the property values, and as a result, the suit said, hundreds of thousands of dollars in rents were spent on ever-escalating mortgages instead of repairs.

The city attorney’s office believed that the lenders, through their loan practices, had so much control over the properties that they were de facto owners and should be held accountable for living conditions in them, according to Sautner. She said the suit resulted from unsuccessful city efforts over a decade to make the owners of the buildings comply with health, safety and building codes.

One slum property, at 807 South Fedora St., had 10 owners on record between 1981 and 1989, and that during seven of those years, Highland had “increased the amounts of its loans 500%,” according to the suit. It was also claimed that Highland lent money to a corporation headed by Teluce Black, alleged to be a black dog owned by a slumlord.

Some defendants, including Alexander Spitzer, an Inglewood financier, and nine lending companies controlled by him, settled with the city attorney in 1989 by agreeing to follow guidelines in future loans.

Spitzer and two of his lending firms also filed for bankruptcy protection from creditors.

BACKGROUND

On March 28, 1989, the Los Angeles city attorney, the Legal Aid Foundation and a private law firm filed an unprecedented suit alleging that the tenants of 11 local slum dwellings had been the victims of a racketeering conspiracy by two lending institutions and dozens of middlemen and dummy corporations. Among the 142 defendants were Highland Federal Savings & Loan, A & B Loan Co. and 137 “shell” corporations that allegedly conspired to siphon funds out of slum buildings while refusing to make repairs.