Obscure court ruling ensnares property owner; owner may have to personally cover loan shortfall.

VAN NUYS - In 1988, Dr. Robert Shlens bought a 91-unit apartment building here for $4.5 million, with $1 million down.

Eight people were murdered in or near the property in the next five years, and the apartment market went south in the 1990s, according to papers filed in Los Angeles Superior Court.

Unable to make the monthly payments out of the building's cash flow, Shlens, an orthopedic surgeon at St. Vincent Medical Center near downtown Los Angeles, stopped making mortgage payments in July 1993.

As is customary in real estate circles, when he bought the building in 1988, Shlens inked documents with loan originator Western Bank that he thought limited his liability to the property itself - i.e., the only collateral on the loan was the building and land at 6710-40 Hayvenhurst, in effect making the mortgage a non-recourse loan.

But today, Shlens is on the losing end of litigation brought by former Drexel Burnham Lambert bankers, who bought 49 percent of the Western Bank-originated loan out of federal receivership, and who won a nearly $4 million summary judgment against Shlens last year. The matter is pending before the state court of appeal.

But as it stands, the former Drexel bankers have the legal right to seek the money straight out of Shlens' personal assets, unless Shlens wins on appeal.

"They could run me out of town on a rail," Shlens said of the former Drexel bankers, who include Mitchell Clarfield, of the Brentwood-based Carbon Mesa Advisers, a real estate firm. Shlens added, "It's an unbelievable turn of events."

Grueling odyssey

The doctor's odyssey through the world of law, street gangs, real estate, investment bankers, an obscure federal court ruling in 1942 and the federal Resolution Trust Corp. began in 1987, when he was casting about for an investment property.

Shlens said he thought the Hayvenhurst property was a sound investment.

"It was blue-collar housing for families, which there is always a need for," recalled Shlens. "It was nice, clean-looking, had pools, a lot of two-bedroom units, car ports - a lot of bells and whistles at a good price."

Armed with a $3.5 million loan from Western Bank, on Jan. 22, 1988 Shlens paid $4.5 million for the Hayvenhurst property - an apartment complex the bank had appraised at $4.76 million.

Western Bank "packaged" the loan and transferred it to Western Federal Savings & Loan - a transfer Shlens contends he didn't know about at the time.

"I dealt with Western bank, no one else," he asserted.

In 1993, however, Western Federal ended in receivership, taken over by the RTC.

Problems on-site

While Western Federal was having its problems, Shlens was having problems with the Hayvenhurst site, according to papers filed with the court.

Drug dealings went down on the street outside the building, and eight murders in or near the building occurred in a five-year period, reported Shlens in court papers, which include newspaper accounts.

"There was a gang operating in an alley next to the building," said Shlens. "They were dealing drugs in the alley. Our guards were afraid of them, because they (the guards) only had guns, but the gang guys had machine guns."

At various points in the 1990s, Shlens resorted to armed guards, 24-hour patrols and guards dogs. He also intensified relations with the Van Nuys branch of the Los Angeles Police Department, according to court papers.

Too, the real estate market, particularly for apartment buildings, sagged in the 1990s, due to a weakened economy, high vacancy rates, and soft rents.

(Today, the property might have a "comp" value of about $25,000 to $30,000 a unit, or about $2.3 million to $2.7 million, although the exact value would depend on many other factors. The RTC appraised the complex at between $2 million and $2.3 million in 1994.)

In 1993, Shlens sought to renegotiate the mortgage, and in July 1993 he stopped making timely payments on the loan then held by Western Federal, according to court papers.

In March 1994, Shlens transferred the apartments to a limited partnership, and declared Chapter 11 bankruptcy on the partnership. Following the seizure of Western Federal in August 1994, the loan became U.S. property, owned by the RTC.

The RTC petitioned the bankruptcy court and won relief from the bankruptcy's "automatic stay" in September 1994. In short, Shlens was denied the shield of bankruptcy.

Then, Carbon Mesa Advisers bought a loan pool from the RTC, which included the Shlens loan. Under terms of the transaction, Carbon Mesa owns 49 percent of each of the 88 loans in the pool - but because the RTC holds onto 51 percent, the loans are still considered federal property, in terms of law.

By Clarfield's analysis, Shlens owed him and the RTC nearly the full amount of the loan, accumulating interest, fees - and there was no legally valid exculpatory provision.

Decision appealed

Last year, Clarfield's Carbon Mesa sought judicial foreclosure against Shlens, and in June it won summary judgment - meaning Shlens had to pay up on the loan and accumulating interest and fees, unless he wins on appeal.

At the heart of the argument between Clarfield and Shlens is the exculpatory agreement that Shlens signed in 1988 - an agreement that may or may not hold water, under federal law.

The exculpatory provision - if valid - would make the Western Bank loan into a nonrecourse loan. There is no dispute that the agreement exists. The dispute is about whether it is valid.

Those loan documents, including references to the exculpatory provision, were presented to City National Bank, which acted as the escrow company on the loan, on Jan. 21, 1988.

However, in 1942, the U.S. Supreme Court issued the D'Oench, Duhme & Co. vs. FDIC ruling.

It held that federal policy protects public funds (at risk to insure deposits in federal institutions), and so any agreements shielding defaulting borrowers' assets from foreclosing lenders must be clearly articulated, approved by the lenders' board or senior loan committee, and clearly filed in records, so that bank examiners are easily aware of such agreements. There can be no legally valid "secret" agreements.

Up to code?

Clarfield's lawyers argued before Superior Court that the Shlens loan was made by Western Federal, and that Western Bank only acted as a broker, or packager.

Western Bank records may or may not meet federal codes, but Clarfield's lawyers said the exculpatory provision was not approved by actual lender Western Federal's board, and thus the exculpatory provision was not valid under the D'Oench, Duhme ruling.

Clarfield said of the Shlens exculpatory provision, "This is just a piece of paper signed by Shlens, and put into the bank records. The Western Bank officer just agreed so he wouldn't lose his commission on the loan."

Said Shlens, "They got me because I had the exculpatory agreement with Western Bank, not Western Federal. But I got the loan from Western Bank. I don't understand it."