More problems surface for owners of L.A.'s Broadway Garment Mart.

The controversial effort to convert the big downtown L.A. building once housing May Co.'s flagship local store into a garment manufacturing facility took another strange twist recently. The property's second trust deed holder took title through foreclosure -- and subsequently filed for bankruptcy protection.

American Financial Services, the second deed holder, took title to the 1.1 million-square-foot facility on March 18 by foreclosing on a $22.3 million note.

The foreclosure came after the previous owner of the building at 8th Street and Broadway, known for the last several years as the Broadway Trade Center garment mart, itself had filed for Chapter 11 bankruptcy protection last August. That previous owner was a partnership known as Broadway Trade Center.

Then the American Financial-affiliated firm that now owns the historic building placed it under Chapter 11 protection on March 29 because it faced a $16 million-plus claim from the property's first trust deed lender, Brea-based Union Federal Bank.

Union Federal's attorneys, Eric Dean and Steve Gubner of law firm Lewis D'Amato Brisbois & Bisbaard, filed a motion calling the bankruptcy a "classic bad faith case" aimed at stalling Union's own pending foreclosure action against the new owner.

U.S. Bankruptcy Judge Lisa Hill Fenning denied that motion, but required the new American Financial-affiliated owner -- the Broadway Garment Mart -- to continue making $60,000 monthly payments to Union Federal. She also requested that Broadway Garment Mart confirm a reorganization plan by July 22.

Broadway Garment Mart attorney Steve Linkon said his client hopes to renegotiate Union Federal's loan down to what the property is currently worth -- $6 million to $8 million, according to preliminary estimates from the mart's appraiser.

Meanwhile, a pending ruling on the use of the property may significantly affect its future value. The conditional use permit allowing garment manufacturing on the nine-floor facility's four upper floors expired in September 1992, and the city denied its extension.

Linkon said the Broadway Garment Mart partnership has reapplied for a conditional use permit allowing garment manufacturing on floors three through nine. The first two floors house an indoor swap meet.

He said he expects a favorable response under Mayor Richard Riordan's "business friendly" administration and plans to proceed with the reorganization confirmation under the assumption. He said the city's decision will likely come after July 22.

Michael Kogan, attorney for Broadway Trade Center, the previous owner group, said its principals are discussing various scenarios under which they would become partners in the property with Broadway Garment Mart, the current owner.

Most of the partners of both firms are Iranian immigrants, with some of the Broadway Garment Mart partners related by marriage to some of the Broadway Trade Center partners, he added. Linkon said any partnership between the two groups is highly unlikely.

As of press time, Union Bank's attorneys weren't available for comment.

The 1906-vintage property's history over the last decade is chock full of political scandal and financial strife.

During t he mid-1980s, a partnership of Palace Development Group and Double RB Associates tried to market the old May Co. building and the adjacent Eastern Columbia building as the $200 million Palace Square "international design resource center," to open in the summer of 1987. The partners had said they'd inked $100 million worth of leases, and were expecting commitments for 750,000 feet of space.

But the project fell through, and the partnership known as Broadway Trade Center acquired the May Co. building in 1988 for $25.3 million. That development group, headed by Belfor Shalomi and Amanollah Simantob, received a conditional use permit from the city to allow garment manufacturing on the nine-story building's four upper floors. It also reportedly spent at least $5 million improving the property for that purpose.

According to bankruptcy documents, the group leased enough space to garment manufacturers and lower-floor "flea market" tenants to generate $170,000 in monthly income during 1988.

But as the group sough approval for garment manufacturing -- enlisting the help of former city Councilman Art Snyder -- the facility ran into political and financial snags in the early 1990s.

Owners of buildings in downtown's "core" garment district to the south -- including current Community Redevelopment Agency Commissioner Stanley Hirsch -- complained that garment manufacturing at the Broadway Trade Center didn't fit plans for commercial and residential development in the neighborhood.

The City Council approved the conversion, but then-Mayor Tom Bradley vetoed the approval -- and there weren't enough votes to override the veto.

The partnership applied to extend the manufacturing conditional use permit for the upper floors, but the extension from the September 1992 expiration was not granted. Garment manufacturing has continued at the property while that decision is on appeal.

Faced with rising vacancies and falling rental revenues as the recession dug in during the early 1990s, the group defaulted on both the Union Federal and American Financial notes and filed for Chapter 11 protection last August, Kogan noted.

An independent property manager was installed last October, and Broadway Trade Center offered a reorganization plan in December, bankruptcy documents show. After creditors rejected the reorganization plan, second trust deed holder American Financial requested that Judge Fenning lift the "stay" preventing it from proceeding with its foreclosure action, Linkon explained.

American Financial, headed by Shahram Afshani and Parvaneh Partielli, took title to the property through the March 18 foreclosure sale subject to the defaulted Union Federal loan, he added.

But if Union Federal had reacted sooner and requested that Judge Fenning lift a similar stay preventing Union's foreclosure -- and then completed its own foreclosure before American Financial -- then American Financial's subordinate claim "would have been wiped out" by Union's foreclosure, Linkon noted.

Judge Fenning could allow Union Federal to proceed with a foreclosure sale in August, and Broadway Garment Mart will endeavor to get its recently filed reorganization plan confirmed by July, Linkon continued.

He added that the property is currently generating a net operating income of about $20,000 monthly -- based on gross monthly rental revenues of about $170,000 -- and could probably service no more than about $3 million worth of debt.