Following Fraud Suit, City Admits Fault, But Has Not Released Public Documents

Thursday, February 15, 2018, 8:20 am
By: 
Alice Dreger

Following settlement of a federal whistleblower lawsuit, the City of East Lansing has now published a public notice admitting its failure to follow conflict-of-interest rules of the U.S. Department of Housing and Urban Development (HUD). But the City Manager and City Clerk’s office are continuing to withhold public documents related to the suit, having claimed the documents are exempt from public scrutiny.

Last month, ELi broke the news of the case having been settled in November. The City Council’s vote to settle the suit happened without letting the public know, with Council only making the vote public after ELi brought news of the settlement.

The nature of the lawsuit:

The suit had been filed by the United States and East Lansing property owner Phil Bellfy. The suit was a Qui Tam, often called a "Whistleblower" suit, in which private citizens join with the federal government to sue over alleged fraud against the government.

At the heart of this case was the City’s use of about $135,000 in HUD Community Block Development Grant (CDBG) funds to rebuild a retaining wall and sidewalk along the east side of the private property owned by City Attorney Tom Yeadon and his partners.

In legal matters related to the retaining wall reconstruction, Yeadon acted as City Attorney, advising Council on a vote over easements, without disclosing that he was co-owner of Woodland Pass Equity Company, the company entering into the agreement with the City (see below; annotation added).

This conflict of interest was a matter of open controversy in 2012. Bellfy subsequently assembled extensive documents about the matter, and persuaded the Department of Justice to join him in the Qui Tam suit.

In the lawsuit filing, the government of the United States (represented by the Department of Justice) and Bellfy alleged that the “City of East Lansing, and the McGinty/Hitch Law Firm [Yeadon’s firm], and others, were well aware that the retaining wall and sidewalk, while within the City’s Right of Way, were privately owned and, as a consequence, that replacing the retaining wall fell well outside of the ‘Eligible Activities’ provisions of the CDBG, thus perpetuating a fraud on the taxpayers of East Lansing, Michigan, and the United States Government.”

The United States and Bellfy further alleged that “the beneficiaries of the unlawful funding were not the general citizens of the City of East Lansing, but the private owners of properties and companies, and, in this case, it should be considered a kickback to the City of East Lansing’s City Attorneys, and others, when the law-firm’s property was enhanced with HUD-CDBG funding procured by the City of East Lansing.”

The City settled the case in November 2017, paying Bellfy and his attorney $20,000. The United States released the complaint against the City, but reserved the right to come back with actions against other defendants in the case, potentially including Yeadon and his partners.

City publishes notice of failure to acknowledge conflict of interest:

The February 7, 2018, issue of the Lansing City Pulse contains a “Conflict of Interest Disclosure” from the City relating to this matter. The federal rule cited in the public notice states that “any person who is an employee, agent, consultant, officer, or elected official or appointed official” of a CBDG grant recipient cannot participate in decision-making about the funded activity or have a financial interest in the matter. 

The published notice (shown below) states, “The City of East Lansing hereby provides notice of a conflict of interest in the use of Community Development Block Grant (CDBG) funds from the U.S. Department of Housing and Urban Development…..The fact that a portion of the project was adjacent to the city attorney’s office was not identified in the City’s grant application.”

The notice goes on to say that “The City has now modified its annual CDBG application process to identify possible future conflicts of interest and to ensure the timely disclosure.”

The City won’t release HUD’s response to its post-settlement communication:

As part of the settlement, City Manager George Lahanas was required to send HUD’s general counsel a conflict of interest disclosure and a request for an exception to the rule against conflicts of interest.

He did so in late November, telling HUD in his statement that the City “inadvertently” failed to make the conflict of interest disclosure earlier; that “there was no significant financial benefit that arose to the property owners including the City attorneys from the project”; that the cost of the project “would have been cost prohibitive to the property owner”; and that it was a reasonable use of CDGB funds, which are meant to help low- and moderate-income people, because low- and moderate-income people might use that sidewalk.

Below: City Manager George Lahanas (left) and City Attorney Tom Yeadon.

On January 8, ELi ordered under the Freedom of Information Act (FOIA) a copy of HUD’s response(s) to Lahanas’s statement. We were told by the City Clerk on January 18 that “the City is not in possession of the records” requested.

Knowing from a source that this was not true, we challenged the response.

On January 22, Clerk Jennifer Shuster wrote to say, “Any documents that would fulfill this request are in the possession of the attorney who handled this matter for the City and are not public records, as that term is defined in the Act.” She added the communications “are exempt from disclosure as privileged attorney-client communications.”

The City has consequently claimed that HUD’s response to Lahanas were (a) not in the City’s possession, although they were in the possession of the City’s hired attorney, Richard Hillman of Foster Swift, and (b) are covered by attorney-client privilege, even though HUD is not the client of Hillman.

The appeals process on a City of East Lansing FOIA denial requires that the appeal be made either to City Manager George Lahanas or via the courts. Ten days ago, ELi filed an appeal to Lahanas, with a copy to City Council, noting the initial misrepresentation (that the City did not have the documents) and the subsequent misrepresentation (that communications from HUD to the City of East Lansing are covered by attorney-client privilege).

Lahanas has not responded to the substance of the appeal, saying only that he expects to respond by February 20. ELi has also filed a FOIA request for the same documents via HUD, which has indicated our request is now in their FOIA queue.