NorwoodThis is the fourth chapter in a five-chapter story. Click here to see the rest of the series.

New York City housing officials were just as puzzled—and frustrated—as the personal-injury lawyers about Palazzolo’s role in the properties. For the agency, it was an even bigger headache, since it had to figure out how to address Palazzolo’s sprawling and increasingly troubled real estate operation.

When Palazzolo first popped up on the radar of the Department of Housing Preservation and Development in the 1990s, he was just another small landlord, a hands-on owner trying to turn a profit with a handful of buildings. He’d had some problems with heat and hot water complaints from tenants, but he seemed cooperative and responded to orders to fix things up.

It wasn’t until late 2003, says Harold Shultz, the agency’s former top code enforcement troubleshooter, that the scope of Palazzolo’s influence in scores of ailing residential apartment houses became clearer. The first alert came from leaders of the Northwest Bronx Community and Clergy Coalition, an assembly of citizen activist groups formed in the 1970s during the years of owner abandonment and bank redlining. Organizers from the coalition kept stumbling across Palazzolo’s name as they talked to tenants trying to cope with devastating conditions in their homes. Even more startling, after they began organizing meetings in the buildings, the owner—a company named Palazzolo Holding II Corporation—filed a lawsuit accusing them of interfering with the company’s financing.

To better understand what they were up against, the organizers turned to the city housing agency, where they met with Shultz and others. An old hand at dealing with crafty landlords, Shultz says he’d never seen a real estate operation like Palazzolo’s. On the one hand, there were the ownership and management corporations, each listing different individuals as controlling officers, almost all of them based at the same headquarters in Westchester County. On the other, there were the massive mortgages for those same properties in which Palazzolo had declared himself president of the corporations that owned the buildings.

Shultz and Commissioner Jerilyn Perine took advantage of a new law that allowed them to do their own corporate veil piercing. In March 2004, they sent a lengthy subpoena to Palazzolo demanding records for 101 large residential properties in which they believed Palazzolo had an interest. The subpoena asked for information on 97 corporations and 31 individuals whose names were listed as either owners or managers, along with anything that might shed light on how things actually worked inside Palazzolo Plaza: stock and incorporation certificates, tax returns, management contracts, partnership agreements, stock pledges and any checks made out to, or endorsed by, Palazzolo or his family.

Two weeks later, an attorney for Palazzolo named Lawrence Gottlieb responded to the subpoena. They would supply records, the lawyer wrote, proving “that Mr. Palazzolo does not maintain ownership, management and/or control” of the properties and corporations. The housing agency eventually received a large box from the landlord’s attorney. Among other records, it included a thick stack of documents titled “Pledge Agreement” or “Irrevocable Proxy Agreement.”

They made for interesting reading. Obtained for this article under a Freedom of Information Law request, the pledge agreements show that in exchange for unspecified loans (the amounts were redacted by Palazzolo’s attorney as “proprietary” information) Palazzolo had the power to exercise control of all the corporations that owned the ailing buildings.

For instance, the proxy agreements gave Palazzolo voting rights that allowed him to vote all shares at meetings of the corporation. Dated December 2003, they were retroactive to whenever stockholders became owners of their shares. The proxy agreements also appointed Palazzolo “director, president and secretary” of the corporation.

In an accompanying letter, Palazzolo’s lawyer claimed that the pledges were never exercised and were later canceled. But they still indicate far-reaching influence in all the properties.

Housing officials who examined the documents were amazed. The real estate operation was organized like a McDonald’s franchise: Palazzolo was in control of major financing decisions, while corporation officers acted like local franchisees, handling management of the individual buildings.

Further detail of Palazzolo’s novel management system was provided months later when one of Palazzolo’s associates, Stephen Tobia, testified during a hearing in the lawsuit brought against the community groups.

Tobia, whose own corporations were listed as the plaintiffs in the case, acknowledged that Palazzolo helped with purchasing supplies and obtaining financing for the properties. Mortgage payments were made from a pool into which individual building owners contributed. “Who had control of that account?” Tobia was asked. “Frank Palazzolo,” he replied. Pressed as to what Palazzolo’s actual role was in the properties, Tobia hedged. “He is not a manager in the respect of the everyday workings of it,” he said. “He told the bank he would oversee, if necessary, in a managerial, you know, capacity, if needed.”

A courtroom accounting

A much clearer description of that technique was presented a few years later when Palazzolo himself took the witness stand to tell his story in a different case.

The occasion was another lawsuit alleging that a baby had suffered brain damage from flaking lead paint in yet another ailing apartment house covered under one of Palazzolo’s massive mortgages. Tenant Atara James said she had complained repeatedly to the managers of 422 East 178th Street about peeling paint, holes in the walls and leaks in her apartment. Getting no response, she withheld her rent, only to be sued by the landlord for nonpayment. In Housing Court, the matter was settled when representatives of the Loran Realty V Corp. agreed to make the needed repairs. But it was an empty promise, a court ruling indicates. Building owners ignored that order as well as another from the city’s department of health to fix things up, a judge later found. A contractor from the city was dispatched to make the repairs.

But the damage was already done. James’ daughter, Kayla, was diagnosed in November 2001 with an elevated level of lead in her blood. A lawsuit was filed in 2002 against the landlord, but James and her lawyer were quickly informed by the owner’s attorney that they too were out of luck: Loran V was uninsured and mortgaged for more than the value of the property. Even if they were able to prove liability, there was “no possibility of recovery.”