Montebello Sues Developer Over Affordable Housing Funds

FBI also looking into city’s use of HUD funding.

By Elizabeth Hsing-Huei Chou, EGP Staff Writer

Officials of cash-strapped Montebello have filed a lawsuit against a Walnut-based developer they claim defrauded the city out of $1.3 million in federal dollars meant for affordable housing.

The city was ordered to pay back $1.3 million to the U.S. Department of Housing and Urban Development after it failed to follow through on an affordable housing project it had informed HUD was complete, even thought the project had yet to get underway.

Montebello’s lawsuit, filed June 30 against developer Danny C. Ku of Ku & Associate, seeks to recover $1.3 million in HOME funds loaned to him to help develop a 62-unit mixed-use project on 112 and 114 South Sixth Street.

The project was never built, and now the city is accusing Ku of enriching himself and others by inflating the value of a piece of property on West Whittier Blvd that was used to secure the loan.

The lawsuit also argues that since the city council never formally approved the contract, it is entitled to the money it paid to Ku to develop the project.

But it is not clear in the lawsuit why the city released the money to Ku in the first place. A June 25, 2008 city council resolution required staff to get the council’s approval before executing the loan, but the loan agreement was never voted on by the city council.

The funds were nevertheless given to Ku after a February 2009 loan agreement was signed by Ku, then City Administrator Richard Torres, City Clerk Robert King, and Matt Gorman, a city attorney representing Alvarez-Glasman and Colvin Law Firm.

Ku says he is unable to provide any comments at this time to “clear his name” because he has yet to receive the lawsuit.

While the lawsuit only names Ku’s company specifically, the lawsuit also points to other unknown defendants who could be identified later as also being responsible for damages to the city.

Meanwhile, the FBI has also begun looking into potential criminal misuse of the federal funds and investigators have subpoenaed city documents related to its HUD funding.

The funds loaned to Ku’s development company were meant to offset any loss in profits resulting from the developer’s deal with the city to turn ten of the project’s mixed-use units into very low to low-income housing.

To get the loan, Ku was required to offer the city security in the form of a similarly valued asset in case he failed to make good on the loan.

According to the lawsuit, the property used to secure the $1.3 million loan was located at 501 West Whittier Blvd.
The city believes Ku agreed on July 28, 2008 to purchase the security property from Dimas and Ana Cobian for $1.442 million.

Six months later on January 23, 2009, there was another agreement to raise the purchase price to $1.6 million, according to the lawsuit.

But an audit performed by the city in Feb. 2011 put the actual property value at $1.1 million at the time of purchase.

The lawsuit does not state if the city sought an independent appraisal of the property before officials signed off on the loan agreement that allowed the funds to be released to Ku.

Ku would not have been eligible for the loan if the Whittier Blvd property had been valued lower than the amount of the HOME funds loan, according to the lawsuit.

Montebello’s suit alleges that by raising the purchase price, Ku misrepresented the value of the property and caused commission and brokerage fees to become “bloated.” Officials claim these fees served as “kickbacks” for those involved.

The city also alleges Ku owns Confidence Realty Inc, one of the two real estate brokerage firms that received a commission through the purchase of the Whittier Blvd property.

Confidence received a $42,000 commission, while Iren Veneziano, Inc., the other broker, received an $84,000 commission. Montebello Development Two, LLC, the development company set up to develop the project, and also owned by Ku, got $116,000.

The city also claims that if Torres had known the value of the property was “artificially” inflated, he would not have executed the loan agreement.

Councilman Frank Gomez called the lawsuit “pretty straightforward.”

He told EGP “Mr. Ku needs to repay the loan” because there was no deal since the [former] city council never signed off on it.

Councilwoman Christina Cortez has been quoted as calling the lawsuit “frivolous,” a claim Gomez says just puts the city in a “difficult position moving forward.”

Gomez said the city’s legal team has fully briefed the council on the issue, and he is confident the city is on “strong ground.”

“Mind you, this came into being by a previous city council and the majority of the current city council has worked quite diligently in remedying the errors of the previous city council, and we are going to continue to do that,” he said.

“We’re going to work with whatever investigations are either ongoing or [come up] in the future.”

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July 7, 2011  Copyright © 2012 Eastern Group Publications, Inc.

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