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Detroit landlord sued for 'predatory contracts' received $120K in PPP loans

Are PPP dollars — funds meant to promote stability during a pandemic — helping to subsidize housing chaos?
Posted: 5:40 PM, Jan 18, 2021
Updated: 2021-01-18 18:28:15-05
Alita Crowley outside her home in Detroit in December 2020.

A Detroit landlord currently being sued for "predatory" practices that have created chaos within the city’s housing market, received over $120,000 from the federal government’s Paycheck Protection Program (PPP) this spring. The assistance, coupled with subsequent eviction filings, highlights a unique scenario: funds aiming to alleviate the economic uncertainty of the pandemic may, in fact, be subsidizing behaviors that amplify the tumult of COVID-19.

A 7 Action News audit of PPP recipients in Michigan found that Detroit Property Exchange (DPX), a rental and land contract business created by property owner Michael Kelly and investigated last year by 7 Action News, received $120,767 this past May.

In the months that followed LLCs associated with DPX filed a number of eviction actions. A review by 7 Action News found that there are at least 54 DPX-associated cases being heard this month and next in 36th District Court. At least two dozen of these filing, according to attorneys and housing advocates, are illegal and replicate the practices alleged in the pending lawsuits.

"There’s something profoundly wrong with a predatory company taking federal funds so they can continue their predatory activities," said attorney Gerard Mantese, whose firm Mantese-Honigman filed a suit against Kelly in federal court in November 2018. "It just seems perverse."

Mantese's suit — which is one of two currently pending cases against Kelly — alleges that DPX lures unassuming and vulnerable Detroiters into a "real estate bait and switch" where Kelly treats occupants as both home buyers and tenants depending on how it serves him best. A strategy he says violates the Truth in Lending Act and the Home Ownership Equity Protection Act.

"Defendant sold plaintiffs and the class members home-ownership but evicted them as tenants," the complaint — which was filed with Michigan Legal Services — stated, noting that DPX has a ratio of 1.49 "evictions" for every property in their portfolio.

The other suit was filed by the city of Detroit last February following a 7 Action News investigation into Kelly’s problematic business practices. The city suit alleges that Kelly engages in an "invest and neglect" business model that has created unstable and unsafe living conditions for Detroiters. It also latches on to the idea of Kelly manipulating the categorization of a property in order to get an outcome in his favor.

"One of the central allegations in the complaint that the city has brought against Mr. Kelly is that he switches back and forth regarding his properties as land contracts when it suits him, to regarding them as rental agreements or leases when that suits him," said top city attorney Lawrence Garcia, who noted he was not shocked to hear Kelly received the federal loan or that he was continuing to engage in the very practices the two suits were calling out.

"No surprises here, opportunism and cynical behavior is what we know to be the personality of Michael Kelly. And it’s the reason that we sued," said Garcia.

7 Action News reached out to Kelly, and his attorney, to find out how he’s using the PPP funds, we have not heard back. When the station has reported on Kelly and the suits against him in the past, the property owner denied taking advantage of Detroit residents. In a brief interview with 7 Action News outside the Midtown offices of DPX in Nov. 2019, Kelly stressed that he was helping thousands experience the American dream.

"We provide homeownership to a lot of people," Kelly said, adding that his companies put people in "really good homes" for "really good deals."

The $669-billion business loan program — PPP — was created last spring to help small businesses stay afloat during the pandemic. Under the rules, if a business spends 60 percent of its loan on payroll it will be forgiven. In DPX's application, they said they have 14 employees.

For housing advocates, however, even if DPX used the funds strictly for their intended purpose — payroll — questions remain.

"We can presume — if being fair — that he’s going to use that money to pay his employees. But what is he paying those employees to do?" asked Joe McGuire, a staff attorney with the Detroit Justice Center.

“Is he paying them to file eviction cases against tenants in the middle of a pandemic?" he continued. "Is he paying employees to trick Detroit residents into moving into homes, which have major condition issues that are not apparent? Is he using that money to pay employees to write misleading agreements?"

This question of misleading agreements is one of the main complaints regarding Kelly's business practices.

"He will tell the city of Detroit when he doesn’t want to be a landlord that these are land contracts. But then he’ll tell the homeowners that they’re mere tenants when he wants to evict them quickly as tenants," said Mantese.

According to the attorney — and his suit — to get out of requirements of the city's rental ordinance Kelly treats individuals as land-contract purchasers. This way responsibilities like maintenance — as well as taxes — fall on the occupant. When a person falls behind on payments, however — something that becomes inevitable given the state of many the properties, which he picks up cheap at the yearly Wayne County Tax Auction — they get treated as a tenant.

In Michigan, tenants get only a week's notice before an eviction can be filed with the courts. A land contract forfeiture on the other hand requires two weeks. Additionally, if a judgment is ruled against the defendant, a tenant has only 10 days to pay what is owed. A land contract forfeiture action gives a buyer 90 days — or 180 days if 50 percent of the purchase price has already been paid by the time the case goes to court.

"It's a big difference," said McGuire, who used to work at Michigan Legal Services when it filed the suit against Kelly with Mantese.

And despite the two suits calling out this behavior, Kelly is still engaging in the practice. Now, during the pandemic. And now with funds from taxpayers.

Of the 54 upcoming, Kelly-associated cases that will be heard at 36th District Court in January and February, 25 were filed as tenant cases for non-payment of rent. This comes despite that fact that when 7 Action News checked the addresses against a list the city of Detroit required Kelly to submit — categorizing his properties — following our investigation, the property owner classified them as "Lease With Option to Purchase."

"They want all the benefits of selling on a land contract but when it comes time to evict the person they want that super quick, non-payment of rent eviction that’s really built for tenants, not buyers," said McGuire.

This is the case with Alita Crowley.

Since 2017 the Detroiter was under the impression she was buying her towering, brick duplex in Grandmont Rosedale. DPX put the taxes in her name. They filed a Quit Claim Deed with the Wayne County Register of Deeds — signed by Kelly — that indicated she was the new owner. And like a mortgage, her monthly payment receipts had a loan number scrawled across the top.

Yet despite these signifiers of homeownership, Crowley received a notice that she is due in court on Jan. 25 for non-payment of rent.

"I’m not a tenant. I’m not a renter. I’m a homebuyer," Crowley said on a windy day last month, almost laughing at the absurdity of the situation.

"I’m responsible for every single thing that goes on in this house," she continued, explaining that as part of her "lease with option to purchase" she took on all the responsibilities of maintenance in the home, which tax records show a Kelly LLC picked up at the 2010 Wayne County tax auction for $4,000. Crowley had agreed to purchase it via a "rent to own" contract for $25,500.

"Since I’ve been here I’ve put a roof on the house, I’ve installed a furnace, and just recently through God’s grace, Wayne Metro helped me get plumbing and things up and running," Crowley continued, explaining that it was these very expenses that had her fall behind on her monthly payments.

According to Crowley sewage began flooding her basement last spring. While in a rental situation this issue would fall on a landlord because she was a homebuyer the responsibility — and payment — fell on her.

"I could not stay within the home that way, so I used what I had and that was the money I had on deck," she said.

The Detroiter is due in court next week. She plans to bring all her paperwork to show she is in fact not a renter. She is also now working with United Community Housing Coalition (UCHC) a local non-profit that helps vulnerable homeowners and renters.

"Catching these 54 meant that we’re going to really stress trying to get attorneys on at least every one of the 25 that are these purchase cases," said Ted Phillips the director of UCHC, who acknowledged that while Crowley and others like her will get the legal help they need, catching such cases can be hard, especially since Detroit does not have "right to counsel" for landlord-tenant cases right now.

"It's unusual. Usually they’re going to get away with it," he said.

Having worked in the housing sector for decades Phillips is familiar with Kelly. He's also a bit jaded; not surprised that despite litigation, the property owner is continuing with practices that have been called out.

"The problem is there’s no serious punishment for this. It’s as if he innocently gave the wrong notice," said Phillips. "When Kelly files the wrong case and gets away with it 8 times out of 10 or 9 times out of 10, you know, that’s the way the system works and it sucks. But until there are some penalties for doing stuff like that, it’s going to go on."

And while the two pending suits aim to rectify this, Phillips points out this has not always been the case.

While the city has made public declarations of holding Kelly accountable for years, historically they have privately backtracked. Kelly, and entities associated with him, were sued by the city in 2017, 2018 and 2019 for unpaid property taxes — all three years, the complaints were dismissed.

In 2017, the suit was dismissed because of a noticing issue, according to someone familiar with the case. But in 2018 and 2019, the complaints were dismissed because Kelly agreed to sell the city property for development.

In October 2018, in anticipation of the Fiat Chrysler expansion, the city released Kelly and associated entities from a series of blight tickets and 18 pending lawsuits over unpaid property taxes in exchange for 38 properties around FCA’s east side plant, and 23 properties that the Eastern Market Corporation was interested in for development purpose. 7 Action News tallied up the debts owed on the dismissed 2018 suits. The total was more than $800,000.

In spring 2019, once the FCA deal had been announced, the city went back to Kelly. The self-described speculator owned three parcels — amounting to less than 0.3 acres — that the automaker wanted for an employee parking lot. In exchange for the parcels — land Kelly bought via tax liens for a total of $130 in 1999 — the city agreed to release him, and his associated entities, from over 800 blight tickets and the 2019 property tax suits totaling $1.3 million.

In short: Between 2018 and 2019 Kelly, in exchange for land, has seen over $2 million in penalties, fines, and fees disappear.

The city continues to defend the dismissal of the suits, stating that they needed the parcels in order to complete the FCA deal and create nearly 5,000 new jobs. They do not see it as giving Kelly a pass.

"The fact that Mr. Kelly has escaped consequences in the past is — you have to regard that as a freak coincidence when it comes to the land around the Chrysler development, the FCA development," said Garcia. "He held land that we needed. And he was able to get better than market price because he knew that we needed the land that he held. I don’t think that’s going to happen again to the same degree that going to allow him to escape the same kinds of consequences."

The city's suit is heading towards the discovery phase, according to Garcia. Mantese is pushing for class-action status on his suit this month.

For Crowley the hope is just to make it through her hearing next week and continue back on the path towards homeownership.

"I was born and raised here, I intend to stay here," she said, explaining that ownership allows one to lay down foundations, which is especially important, she said, in a city that's changing as rapidly as Detroit.

"It’s yours and then you can pass it down to your grandchildren, children, whoever," she said, before adding: "But, I need a stake in Detroit."