L.A. Landlords Sue Arbitration Group, Accuse It of Fraud

A multimillion-dollar fraud and racketeering suit filed in federal court in Los Angeles accuses an arbitration service and a group of lawyers and businessmen of an elaborate scheme to manufacture financial disputes and use their control over the arbitration service to extract money from adversaries.

The 95-page complaint, filed this week by three Los Angeles-area landlords, claims the Southern California Arbitration Assn. of Palm Desert and 20 other defendants have taken part in a conspiracy to defraud the landlords and other parties who have been dragged before the association.

According to the complaint, the lawsuit was triggered by a lengthy report in The Times in January that detailed connections between the arbitration group and winners of two eye-popping awards granted by its arbitrators.

Gregg A. Martin, a lawyer for the landlords, said the case highlights the lack of regulation of arbitration services and arbitrators, who can set up shop without having a license or legal training.

“In some respects, the judiciary and legislature have abdicated responsibility for oversight [of] these types of entities,” Martin said.

Defendants in the suit include Loren Huweiler, president of the arbitration group, and two men described in the complaint as agents of the service and organizers of the scheme: Cyril Chern, a Los Angeles lawyer, arbitrator and architect; and Steve Holgate, a Palm Desert businessman.

Chern could not be reached Thursday, and Huweiler and Holgate declined comment.

The Southern California Arbitration Assn. was established in November 1995, listing among its directors a deceased businessman and a woman claiming she had no idea what the arbitration group did.

According to the suit and an accompanying legal memorandum, the defendants used this “thoroughly corrupt arbitration association” to advance two schemes: the one aimed at fleecing the landlords and another involving land purchases in Indio.

The three landlords, owners of office buildings in Santa Monica, Woodland Hills and Arcadia, were approached in 1995 and 1996 to provide long-term leases to Omni Medical Centers, a new firm involved in the treatment of alcohol abuse. Chern and several other defendants were officers of Omni, the complaint states.

In each instance, Omni negotiated a substantial allowance for tenant improvements to be funded by the landlord and sought a clause in the lease providing that any disputes be resolved by the arbitration group.

While obtaining a total of more than $300,000 for tenant improvements, Omni never opened for business at one of the locations and opened only briefly at the other two but failed to pay rent, the complaint says.

When the landlords sought the rent, Omni began asserting “bogus and frivolous breach of contract claims” and demanded arbitration before the arbitration group, the lawsuit says.

The landlords--Topanga & Victory Partners, Vivorx Inc. and Sebastiano Sterpa--did not begin comparing notes “until Jan. 19, 1997, when an article appeared in the Los Angeles Times outlining some of the facts alleged herein,” the complaint says. Since then, the landlords have refused to go forward with the arbitrations.

The lawsuit seeks an aggregate of $880,000 in compensatory damages, mostly for tenant improvements and unpaid rent. The complaint also seeks $5 million in punitive damages for each of the landlords.

The Times article revealed the plight of a fourth Omni landlord in Long Beach, ordered to pay Omni an arbitration award of $582,000. The dispute arose when the landlord asked Omni for a receipt from contractors for $36,000 in tenant improvements Omni wanted reimbursed. Omni refused to provide a receipt and demanded arbitration before the SCAA, as provided by its lease.

The arbitrator was a longtime associate of Holgate’s, and Holgate--a business associate of Omni Vice President Chern--served as clerk of the arbitration.

In a separate case detailed in the article, a real estate firm headed by Holgate won a $558,000 award in a dispute with an elderly woman over property in Indio worth $75,000. The arbitrator in that case was the sister-in-law of one of Chern’s business partners. Citing these ties, a Los Angeles Superior Court judge later vacated that award.

Among the defendants in the lawsuit is also Dr. Thomas Ciesla, Omni’s former medical director who told The Times he was recruited for the job by Chern.

Ciesla, a psychiatrist at St. John’s Hospital & Health Center in Santa Monica, said in a phone interview that he considered the venture an honest attempt to treat alcohol abuse that failed for lack of enough business.

“If that was a fraud, I’ve got to be the biggest chump on the face of the Earth,” said Ciesla, who is also president of the California Psychiatric Assn. Ciesla said he is also unaware of Omni’s fights with all four of its landlords and didn’t know there was an Arcadia branch.

Getting sued “is bad news,” Ciesla said after a Times reporter informed him of the suit. “I needed that like I need a hole in the head.”

Others named in the suit include the Los Angeles law firm of Bottum & Feliton and Paul Schrieffer, a Bottum & Feliton lawyer who served as legal counsel to Omni. Schrieffer said he hadn’t seen the suit and could not comment.

Another defendant is attorney Nicholas J. Toghia, who was described in the complaint as an officer of Omni. “This is shocking,” Toghia said. “I don’t know what to say.”