Santa Monica’s largest luxury co-op building is in the midst of major upheaval, with a court-appointed receiver assuming control of Ocean Towers Housing Corporation. The Los Angeles Superior Court order instructs the independent mediator to immediately hold an election for a new board of directors to head the 317-unit building.
The move by Judge Lisa Hart Cole follows years of turmoil between the co-op’s current board and shareholders, resulting in mounting legal fees at 201 Ocean Avenue. Shareholder Michael Reach’s lawsuit claims board member John Spahi and CEO Joseph Orlando have brought the homeowners association (HOA) to the brink of insolvency through mismanagement and “gross abuses of loyalty and trust.”
“In the last four years, they have looted several million dollars from HOA solely for their own benefit, to fund their scheme to use HOA to defraud secured lenders and misappropriate HOA units for themselves, and to fund the numerous lawsuit and settlements or damages awards arising therefrom,” said Reach’s motion asking for a court-appointed receiver. Reach claims financial documents contain errors and inconsistencies that cloud the true financial situation at the ocean-view complex.
While popular in New York City, co-ops like Ocean Towers are relatively rare in Southern California. Under the corporate structure, shareholders have proprietary lease and a specified number of shares. When a shareholder finances the purchase of a unit, the bank also gets a security interest in the lease and the shares. In addition to loan payments to lenders, shareholders pay fees to cover corporate expenses, including property taxes, maintenance, insurance and management.
In appointing Stephen J. Donell, Cole found “property is in danger of being lost, removed or materially injured” under the current leadership. Last week, Donell took exclusive possession and control of the corporation, including all assets, bank accounts, and other documents.
The receivership could be devastating to shareholders, according to Spahi and his lawyers, who warn current negotiations to refinance the building are now in jeopardy. Spahi argues the receivership also automatically triggers a default under current loans, resulting in skyrocketing interest rates. He disputes the allegations in the underlying lawsuit.
“Nobody is looking out for the benefit of the shareholders,” Spahi said. “These are attorneys enriching themselves on the backs of the shareholders.”
In a July 9 hearing on the matter, Spahi and Orlando offered to step down in order to avoid receivership.
In dismissing their offer, Judge Cole pointed to a report by a special litigation committee that found Spahi sold family members and various entities condominiums priced millions of dollars below market value. Spahi then allegedly rented out the units for thousands of dollars a month, pocketing the profits while the co-op footed his legal bills.
“Lawsuits ... have been filed and legal fees...have been paid out of OTHC funds for your client based upon conduct that has been determined by an independent, impartial body has been a breach of their fiduciary duty and basically fraud,” Cole said, according to the court transcript. “That’s financial mismanagement no matter how you look at it.”
Spahi said the SLC report was one-sided and hearsay, claiming the cash flow problem is caused by legal fees from the lawsuit itself. In court, Spahi’s lawyer, David Rosen, disagreed with how dire the situation had become in recent years.
“There is a cash flow problem caused by attorney’s fees,” Rosen said. “There’s not insolvency. There are half a billion dollars...inequity in this corporation. It is far from insolvent.”
Spahi plans to file a writ in hopes of reversing Judge Cole’s decision.
