Milwaukee landlord flipped properties to himself, sticking it to creditors, lawsuit says

An Ozaukee County man should lose control of five west side Milwaukee buildings because he masterminded a $6 million financial fraud while letting his buildings fall into disrepair, the City of Milwaukee says in a new receivership lawsuit.

The landlord, James M. Crosbie, through a "complex chronology of events ... committed fraud to the detriment of many other parties and remains the owner of residential rental properties to the detriment of tenants, neighbors and the city," the suit served on Crosbie this week argues.

According to the suit, three apartments buildings and Crosbie's suburban home were foreclosed on in 2010. When the properties were auctioned off at sheriff's sales in 2014, new limited liability companies owned or controlled by Crosbie bought the now debt-free properties at a discount. Meanwhile millions of dollars in debt became uncollectable because they remained in the virtually defunct LLCs that originally owned the properties.

Today, the buildings are doing well financially — the city suit said they are making a profit of about $240,000 annually.

Michael Heller, Crosbie's attorney, did not dispute several of the factual allegations in the lawsuit but said his client's actions were legal and did not constitute any wrongdoing.

"This is simply how business works," Heller said.

The lawsuit is "another example of gross overreaching by the city attorneys office," he said, comparing it to the city's repeated calls for criminal investigations to be launched against the landlord Nicholas Rezny, who is also a Heller client. 

No agency has said it is investigating Rezny and Heller said he does not believe any probes have been launched. In January, a Milwaukee County Circuit judge ruled in a lawsuit that Rezny committed civil securities fraud, misrepresentation and improperly used $50,000 of a client's cash to pay an unrelated personal debt.

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The Crosbie case revolves around the landlord's limited liability companies that own apartment buildings at 2904 W. Wisconsin Ave.; 2929 W. Wisconsin Ave.; 2625 W. Juneau Ave.; 2635 W. Juneau Ave.; and 2848 W. Wells St. A separate LLC owned his Town of Grafton home near Lake Michigan, which is assessed at $574,200. The buildings contain 175 rental units.

Through a complex scheme, ownership of the properties went from one group of LLCs controlled by the 58-year-old Crosbie to a second, the suit states.

"Consequently, Crosbie still owns those five apartment buildings assessed at over $3.8 million through other LLCs and appears to earn net profits of at least $240,000 per year while dozens of creditors, including the state of Wisconsin, the city, banks, public utilities, private contractors and insurance companies" cannot collect on judgments,  Heather Hough, an assistant city attorney, wrote in a brief urging Milwaukee County Circuit Judge William Pocan to place five Crosbie buildings into receivership. 

The suit charges that when three of the buildings and the Grafton house went into foreclosure and were ultimately sold at sheriff's sales in 2014, new LLCs owned by Crosbie purchased the properties at a discount. In addition, the debts owed by the LLCs, including the mortgages, remained with the corporate entities and did not follow the properties to the new LLCs, the suit says.

"Although the winning sheriff's sale bidders for the Grafton house and buildings 1, 2, and 3 appeared to be third parties, they were actually entities controlled by Crosbie," Hough wrote in the suit. 

Trail of debt, liens

Crosbie owes lenders "at least $5.2 million as a result of the fraudulent transfer of buildings 1, 2 and 3" at the sheriff's sales, the suit charged.

In addition, Hough wrote, there were nearly $800,000 worth of liens by the state, lenders, contractors and a utility "extinguished by the fraudulent transfer" of the buildings. The city had $22,298 in liens for building code violations on the properties, the suit says.

All told Crosbie or his various LLCs have been hit with more than $55,000 in Municipal Court fines for building code violations, the suit says. City building inspectors have issued more than 600 order and enforcement actions against various entities owned or controlled by Crosbie.

In addition, three of the buildings in the lawsuit combined owe more than $418,000 in overdue property taxes dating back to 2015, the suit states.

"Crosbie's failure to maintain (the properties) in compliance with the municipal building code, failure to correct disorderly or criminal behavior at (the properties) and use of limited liability companies for fraudulent purposes ... is a public nuisance," Hough wrote in asking that a receiver be named to manage the properties and collect the rents.

The lawsuit does not allege any criminal wrongdoing.

Heller said the properties are well-managed and well-maintained and that Crosbie works with building inspectors and police to correct any problems or issues.

In the past two years, the city has succeeded in having properties of at least two slumlords — Mohammad Choudry and Elijah Mohammad Rashaed — placed into receivership.

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Last week, the city filed an action against notorious landlord Timothy Brophy Jr. and his partner, Heidi Wachowiak, seeking to make the couple personally liable for more than $150,000 in debts incurred by one of their LLCs that owns a condemned property.

RELATED:City asks court to hold Tim Brophy and partner liable for debts at a condemned property

Company owners frequently use LLCs in order to keep their identities secret and to protect their personal assets from liabilities incurred by their companies. The Journal Sentinel in 2016 reported on how some unscrupulous landlords and slumlords used confusing arrays of LLCs to dodge payment of debts, taxes and fines incurred for building code violations. 

Heller rejected the claims by the city, saying that sales of the properties were above board and legal.

"It's my understanding he had some failed real estate business deals," Heller said, explaining that the Crosbie buildings were foreclosed on after the real estate market crashed. By the time the properties were auctioned off at the sheriff's sale, Crosbie had a new business partner, whom Heller declined to name. The new partner infused cash into the operation.

Crosbie and the partner formed new LLCs that purchased the west side properties that were being sold at the sheriff's sales.

"This is the entire premise of having an LLC," Heller said. "If your venture fails, you have a chance to pick yourself up off the ground and start over."

John Wirth, a receivership attorney not involved in the case, said he was unsure whether any laws were broken.

"It all kinds of smells ...  but it might not be fraud," Wirth said. "Calling this a fraud is an interesting legal theory."