Herrera settles CitiApartments litigation with tough injunctions, up to $10 million penalty

88-page settlement, Court approved order comprise ‘toughest, most detailed injunction to protect tenants in San Francisco history’

SAN FRANCISCO (March 30, 2011) — City Attorney Dennis Herrera today announced the settlement of a contentious four-and-a-half-year legal battle with CitiApartments and its complex web of corporate and individual affiliates with an unprecedented injunction to protect San Francisco tenants, and penalties that could reach as high as $10 million over the next five years, depending on the defendants’ financial condition. San Francisco Superior Court Judge John E. Munter approved the injunction late yesterday, which is part of the 88-page settlement agreement.

Herrera sued the once high-flying rental property behemoth in Aug. 2006 for a stunning array of unlawful business and tenant harassment practices, which often harrowingly dispossessed long-term residents of their rent-controlled apartments. The coerced vacancies freed the landlord to make significant — and almost uniformly unpermitted — renovations to units, and then re-rent them to new tenants at dramatically increased market rates. The illegal business model appears to have enabled CitiApartments, Skyline Realty and other entities under the sway of real estate family patriarch Frank Lembi to aggressively outbid competitors for residential properties throughout San Francisco for several years — before lawsuits and a sharp economic downturn forced the aspiring empire into bankruptcies, foreclosures and receiverships.

“After a years-long legal battle over shocking anti-tenant and anti-competitive practices, we’ve secured the toughest, most detailed injunction to protect tenants in San Francisco history,” said Herrera. “This injunction allows us to aggressively police CitiApartments and its affiliates, now and in the future. It financially punishes the offenders to the extent their assets allow, while assuring additional penalties against their future income. It sends a strong message to would-be mimics of the dire consequences for similar lawlessness, and our resolve to pursue and punish it. But the success of this case doesn’t belong to the City Attorney’s Office alone. It belongs, too, to the San Francisco Department of Building Inspection and the Building Inspection Commission. Perhaps most important, it belongs to all the tenants, activists and journalists who helped provide us with the ammunition necessary to take on the Lembi real estate empire from the start. I’m especially grateful to all the community advocates from ‘CitiStop’ for their tireless efforts.”

Case background
Herrera’s litigation included extensive evidence gathered through the City Attorney’s Office’s own investigation as well as from the nearly 300 tenants and witnesses who contacted Herrera’s office in the weeks after he filed suit. The City’s case was additionally aided by tenants and witnesses identified in an award-winning investigative series that the San Francisco Bay Guardian published in March 2006, and by the aggressive community outreach efforts of a coalition called “CitiStop.” That coalition was supported by the San Francisco Tenants Union, the Housing Rights Committee of San Francisco, the San Francisco Labor Council, the Harvey Milk LGBT Democratic Club, the Alice B. Toklas LGBT Democratic Club, the San Francisco Peoples Organization, SEIU Local 790 and St. Peter’s Housing Committee, which is now known as Causa Justa.

With the City Attorney’s financial investigation ongoing throughout the course of the litigation, and the years-long discovery battle unfolding, Herrera was forced to amend the City’s complaint three times to fully capture within the scope of the case the Lembi family’s byzantine array of business entities, trusts and partnerships. In fact, in his Third Amended Complaint, Herrera successfully petitioned to include Frank Lembi, Walter Lembi (now deceased) and Lembi nephew David Raynal as individual defendants.

The long-held belief among some real estate observers that the Lembis’ unlawful business model was unsustainable was ultimately confirmed by problems that included mounting lawsuits and 2008’s severe economic decline, which appears to have been particularly cataclysmic. After nearly four years of legal delay tactics, which included the Lembi defendants’ midcourse change in legal counsel, the City’s tenacious discovery battle over financial and other records finally culminated last year in some $50,000 in court ordered sanctions against CitiApartments affiliates for non-compliance. Judge Munter’s uncharacteristically harsh order at the time affirmed that the City Attorney’s Office had “engaged in substantial, indeed Herculean, efforts to resolve the instant discovery disputes,” adding: “In this Court’s opinion, plaintiffs’ discovery requests have been repeatedly met with obfuscation, delay and meritless objections made by the Corporate Entity Defendants in an effort to avoid providing appropriate discovery.” The sanctions strongly signaled the limits of judicial patience, and proved to be a key turning point in the case.

The settlement’s financial terms

The total dollar value of assessed penalties is largely contingent on the defendants’ financial condition moving forward. The agreement’s maximum dollar value could reach $10 million over the next five years (not counting additional penalties and damages that would accrue for injunctive violations). It could alternatively be as low as $2 million over the next ten years (plus interest on the outstanding balance of $1.6 million, and also not counting penalties and damages). Not by accident, the settlement includes a financial incentive that could reduce total penalties to the defendants to approximately one million dollars, with interest. That unprecedented stipulated provision would require all entities controlled by the defendants, now and in the future, to forever cease property management operations within the City and County of San Francisco — permanently and irrevocably.

The defendants made an initial payment for civil penalties in the amount of $400,000 on March 29, 2011. The corporate entity defendants must additionally pay civil penalties of $1,600,000, for which payment could be in full, or in installments of no less than $13,500 per month (together with interest on the balance outstanding of the $1,600,000 due). The permanent and irrevocable “leave-and-never-come-back” option would require installment payments totaling no less than $324,000, plus interest, after two years.

Net proceeds from any sale or refinancing among the defendants or their interests within five years will entitle the City to 20 percent of those proceeds up to a total of $8,000,000. Any failure to report a sale or refinancing would entitle the City to liquidated damages of $25,000, in addition to a 20 percent of the net proceeds. Any material misrepresentation or omission regarding defendants’ interests will be a violation and entitle the City to additional liquidated damages in the amount equal to 50 percent of each asset defendants failed to disclose. Any violation of the injunctive terms will subject the defendants to civil penalties between $2,500 and $6,000 for each violation, and attorneys’ fees and costs to enforce.

The settlement’s injunctive terms

Given the City’s unfortunate history with the defendants’ business practices, and their penchant for obfuscatory corporate structure, the City Attorney’s Office meticulously negotiated tough, thorough, and enforceable injunctive terms. Those provisions are fully comprised in settlement documents on the City Attorney’s Web site, including a five-year injunction, which must — by court order — be posted in a prominent and public place on each floor of each property owned, managed, operated or maintained by the defendants or their future entities. Failure to abide by the injunctive terms would invoke additional penalties and fees. These are the summarized highlights:

  • Notification Requirements. All defendants’ current and future entities must notify the San Francisco City Attorney’s Office of any sale, acquisition or transfer within thirty days. The City Attorney must also be informed of newly created business entities under the defendants’ majority control.
    Tenant protections. Numerous anti-harassment provisions-including and in some respects exceeding Prop M provisions that a California appellate court invalidated as a matter of law-are imposed in the injunction by stipulation. Thus, defendants’ current and future entities are prohibited from entering units without notice; preventing or interfering with the entry of guests or caregivers; requesting information about tenants’ immigration status; retaliating through legal or administrative processes; or threatening to evict or evicting a tenant without lawful justification. The defendants must respond to all tenants’ requests for repairs within 72 hours, and establish protocols for changing locks and providing keys, including adequate notice; and provide all buildings with a residential caretaker.
  • Buyout and relocation protocols. The injunction establishes enforceable protocols to protect tenants in proposing buyouts and relocations, including requiring written communications and the right of tenants to be on a “No Contact” list. The defendants may not use buy-out monies to apply to damage, past due rent, or other charges, and households will retain rights to rescind agreements up to and including the date of the tenants’ receipt of the buy-out amount.
  • Remodeling and construction protections, code violations. The injunction establishes enforceable protocols to protect tenants from harassment or disruption for remodeling or construction, including providing tenants advance notice. It restricts non-emergency construction or remodeling work to the hours of 7:00 a.m. to 8:00 p.m., and requires that all permits be obtained, all appropriate codes adhered to, and a strict regimen set to address all code violations, now and in the future.

The case is City and County of San Francisco and People of the State of California v. Skyline Realty, Inc. et al., San Francisco Superior Court Case No. CGC 06-455-241, filed Aug. 16, 2006.

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