Detroit water dept. fraud unit launches commercial suit

Christine Ferretti
The Detroit News

Detroit — A prominent Detroit landowner and entities linked to him are being sued as part of a crackdown on illegal and unauthorized accounts by the water department’s new fraud unit.

The unit has identified more than $600,000 in illegal and under-billed water usage for commercial customers, according to Detroit’s Water and Sewerage Department.

Landowner Dennis Kefallinos has been sued over water bills at several sites, including the Michigan Building at 220 Bagley.

Among them is Dennis Kefallinos and more than a dozen entities linked to the Greektown landowner. City officials say they believe Kefallinos owes more than $382,000 in unpaid water bills for properties that include the historic Michigan Theatre and vacant Roosevelt Hotel in Corktown.

The lawsuit filed late Wednesday in Wayne County Circuit Court is the first filed by DWSD’s fraud unit since it launched as a summer pilot program targeting the city’s largest commercial offenders.

“When we don’t collect bad debts from any customer, we are forced in the following year to raise the rates to account for the loss,” DWSD Director Gary Brown said.

He noted that commercial delinquencies hurt residential customers — about 40 percent of whom are living below the poverty line.

“It’s inherently unfair for business people to ask Detroit residents to foot their share of their bills,” Brown said. “We’re not going to tolerate it. We’re going to use every tool at our disposal, including filing civil lawsuits, to collect so that we can keep rates as affordable as possible for our customers.”

The water department hired a team of five investigators in August to operate the fraud unit full time, Brown said.

The June pilot program alone netted the department nearly $58,000 in revenue, according to figures provided to The Detroit News under the Freedom of Information Act.

Types of water fraud being evaluated by the new unit include tampering with meters or shutoff valves, straight piping into service lines without a meter and connecting to the city’s water main without a permit. Others are under-billed accounts that won’t grant DWSD access to change out meters.

DWSD said penalties range from water shutoff to civil action on unpaid usage, which can be recouped from up to six years back, said DWSD spokesman Bryan Peckinpaugh.

Unpaid bills also are alleged on the Fairmont site in Detroit. The fraud unit has five investigators, said department director Gary Brown.

A misdemeanor criminal charge, Brown added, would be another avenue that’s an “absolute last resort.”

DWSD has some commercial accounts that owe debts in the $25,000 range. But Brown said the balance allegedly owed by Kefallinos and the associated companies is “not typical.”

Brown said DWSD attorneys sent letters to the Kefallinos entities in March, informing them of irregularities in the accounts and that the department needed to examine meters to determine whether they were broken or if there was water theft. The legal team, he said, never got a response.

After reviewing the lawsuit, Kefallinos’ attorney, Ben Gonek, said Friday he had “no comment at this time.”

The lawsuit identifies about 20 properties and 13 entities linked to Kefallinos that are operating out of two different addresses, including the Russell Industrial Center at 1600 Clay. The complex of studios and shops has been plagued with safety and code violations and was shut down this spring by the city. The property is among dozens owned by entities associated with Kefallinos that are in need of repair or vacant.

Kefallinos previously told The News he has ownership in a “lot of empty buildings” that he’s “working slowly to open.”

The lawsuit also contends DWSD requested payment for the delinquent water and sewer charges through billings and additional mailings, but they have “failed and refused to pay.”

Among the other properties with delinquent bills are the old Fairmont Creamery Co. building on East Milwaukee, shuttered Cesar Chavez Middle School and empty Perlex building on East Grand Boulevard.

This isn’t the first time Keffalinos has been associated with a business targeted over allegations of unpaid water bills.

The Detroit News reported a decade ago he had ties to an entity that the water department alleged was among its biggest offenders.

Brown said the fraud unit was formed to determine how much money DWSD is losing each year from unapproved water usage among its commercial customers.

“We know that we have unauthorized water usage,” he said. “We’re now sending out investigators to find out why.”

Retired Detroit police officer Sidney Bogan is heading up the unit. The staff, Bogan said, does background investigations on properties, including looking at real estate investors who are selling homes without paying taxes and water bills.

“If they are taking water illegally, it drives rates up,” Bogan said. “Trying to recover that revenue that’s due DWSD is what our primary mission is.”

Bogan said accounts with large meters and arrearages are priority targets, but the department also wants to go after “ghost accounts” that nobody knows exist.

In some cases, Brown said, the problem has been billing errors on DWSD’s end. Individuals leave and don’t notify the city that they want the water cut off, resulting in a vacant property with water still flowing.

Other times, he said, it’s illegal or unauthorized use and “we’re trying to determine now how large of a problem it is and how many resources we need to put on it.”

The fraud unit identified a collective $116,000 in delinquent water bills during its pilot from a handful of commercial properties with repeated compliance issues.

Customers first are encouraged to make payment arrangements. Between June and the end of August, a handful have done so, according to records provided to The News.

One property, owned by Galapagos Art Space of New York, owed more than $9,000 for water bills as of June.

Water department records show nearly $11,200 was paid on Aug. 31, after the pilot began.

Galapagos founder Robert Elmes and partners bought nine mostly empty buildings in Highland Park and Detroit several years ago, including a 128,000-square-foot building on 18th Street.

Elmes said he’d been unaware of the delinquent water bills at that Detroit site, noting they had been mailed to a former partner in New York City no longer affiliated with the company. Elmes said he learned of the issue after a notice was left on the building.

“We thought we were up to date,” he said, adding there’s no longer a tenant at the property. “It was an error on our side, and we were happy to fix it once we saw it.”

Morrell Estates LLC owed nearly $7,000 for a 20-unit apartment complex in southwest Detroit.

Sharon Stroud of Southfield-based Nest Finder became the property manager in May and said she learned the prior manager hadn’t paid the water bill and other utilities in more than a year.

Stroud met with the water department and got on a payment plan for the building that’s in need of repair and currently has only four tenants.

She paid $2,643 in June, $615 in August and $479 in September. The property owner, who lives out of the country, hadn’t been aware of the delinquencies.

“He was under the impression that the building was 100 percent occupied,” Stroud said.