Scumlords settle

Pub date March 29, 2011
WriterSarah Phelan

Five years after the Guardian’s award-winning, three-part series about how representatives for the Lembi family allegedly engaged in illegal and unethical tactics intended to force protected renters from their homes (“The Scumlords,” March 2006), City Attorney Dennis Herrera has concluded contentious negotiations to reach a multimillion dollar settlement with CitiApartments and other Lembi-controlled corporations.

The two sides have agreed on a settlement worth anywhere between $1 million and $10 million to the city, depending on the crumbling real estate empire’s future worth and whether the Lembi family decides to “forever cease property management operations within the City and County of San Francisco — permanently and irrevocably,” as the City Attorney’s Office put it.

That agreement and an injunction barring the landlords from future harassment of tenants was scheduled for submission to San Francisco Superior Court on March 29 and still must be approved by a judge, although that is usually pro forma in cases like this in which both sides have agreed to the terms.

In its lawsuit, the city alleged that the defendants “employed a business model that systematically and unlawfully dispossessed long-term residential tenants of their rent-controlled apartments, leaving defendants free to make significant unpermitted renovations and to re-rent those newly renovated units at dramatically increased market rates.

“Ostensibly, this illegal business model enabled Lembi family interests to aggressively outbid competing investors for perhaps hundreds of residential properties throughout San Francisco,” the complaint continued, further alleging that the defendants’ business entities were organized and operated in such a way that they were “the alter egos of defendants Frank Lembi, Walter Lembi, and David Raynal.”

The defendants disputed those claims, the injunction notes, “by reaching a settlement and agreeing to injunctive terms and payment of civil penalties, defendants are not admitting any wrongdoing or making any admission of liability.”

But the City Attorney’s Office said that this is “the most exhaustively detailed settlement in memory, and the strongest possible agreement to protect the public interest.” And Herrera told us that the settlement reflects “the pervasiveness of the conduct” the city looked at, regarding tenant treatment and the litigation process.

“So, it was necessary to get as tough and detailed an injunction as possible to ensure that tenants will be protected going forward, and in terms of trying to extract a maximum dollar settlement,” Herrera told us. “For us, their conduct is the most important thing, but the financial penalties are not insignificant. This ensures they do business under strict circumstances, play by the rules, and do not present a threat to tenants. But if they want to leave, obviously, there’s a dollar amount connected to that.”

The lowest possible settlement, $1 million, requires the Lembi companies to quickly get out of the rental business in San Francisco. The settlement comes almost five years after Herrera first filed suit against CitiApartments — and 18 months after former CitiApartments’ tenants sued the Lembi empire (see “SF vs. Frank Lembi,” 10/6/2009), following a financial crash that involved banks foreclosing on dozens of the group’s properties (see “Triumph of tenacity,” 6/1/2010).

The City Attorney’s litigation included evidence from tenants and other witnesses identified by former Guardian reporter G.W. Schultz, and Herrera credited the Guardian with originating the case. CitiStop, a coalition of labor and tenants groups, also referred tenants and helped the case, and almost 300 tenants and witnesses came forward after the city’s 2006 filing.

The City Attorney’s Office noted that Herrera amended his original complaint three times to fully capture the Lembi family’s “byzantine array of business entities, trusts, and partnerships within the scope of the lawsuit,” fighting through corporate stall tactics that were the subject of fines issued by the courts.

Even after their unscrupulous tactics were exposed, the Lembis continued to be celebrated by business groups such as the San Francisco Apartment Association, although city officials told us “real estate observers had long speculated that the Lembi family’s unlawful business model was ultimately unsustainable. And the severe economic downturn that began in late 2008 appears to have been cataclysmic for the aspiring real estate empire.”