Kristen Grind over at the Puget Sound Business Journal had another great article about the unfolding mess with local developer Mike Mastro: Rival banks battle over Mastro bankruptcy
A legal battle between rival creditor banks over developer Michael Mastro Sr.’s real estate holdings is breaking out in federal bankruptcy court — a dispute that affects creditors’ ability to recoup their loans and sheds light on the extensive amount of property Mastro had amassed in the years before his financial trouble began.
Cascade Bank, Sterling Savings Bank, Golf Savings Bank and Washington Trust Bank, together owed more than $40 million by Mastro, have asked the court for permission to pursue their claims against him outside the bankruptcy proceeding. That would allow them to pluck their properties out of bankruptcy, foreclose on them and sell the properties to possibly recoup some of their losses.
But other creditors that are petitioning to force Mastro into involuntary Chapter 7 bankruptcy argue that a single proceeding would put all creditors, including individuals, on equal footing.
The banks — Columbia State Bank, Venture Bank and First Sound Bank — filed to put Mastro into liquidation in July, and Mastro has challenged the move. Until the court decides on whether Mastro can be forced into involuntary bankruptcy and whether some creditors can opt out, all legal proceedings are frozen.
The article also includes a list of some of Mastro’s multi-million dollar debts on various major projects around the area. One notable exclusion from the list was Northshore Townhomes, an 86-unit townhome complex in Kenmore featured on these pages last month. Mastro’s company owes $24 million to HomeStreet bank on that project.
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Yikes what a mess. It will be interesting to watch and see how these losses effect each local bank’s position with the FDIC.
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So far on the Petition to put him into Chapter seven 29 creditors have lined up. Thats not including private money from likes of Fisher Broadcasting and such. Going to be interesting.
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I’m guessing the only effect on the secured creditors of whether or not Mastro goes Chapter-7 vs a private settlement is one of the timing of eventual repossession. Time is money, but minus that substantial expense, the result would end up the same.
I would also speculate that, as usual with recent developer bankruptcies, most of the junior lien-holders an unsecured creditors will be largely wiped-out in any effect. So they may be petitioning for Chapter 7 as a tactic to negotiate some small kickback settlement from the secured creditor committee to buy them off in exchange for a promise to let things proceed more quickly out of court.
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Indy, you can have a lot of different things happen in bankruptcy. Back in the 80s, Shoreline Savings lost its security interest in most of the properties held by two related debtors as a result of “equitable subordination” claims, and that probably contributed to, if not caused, their failure. Any defects in the security instruments could also cause a bank to lose out, and that’s far more likely than equitable subordination.
As I mentioned before, I’ve not really looked at this particular case, but I wouldn’t be surprised to see it become a Chapter 11 reorganization at the request of the debtor. Back in the 80s this type of thing was somewhat common, and at least some of the developers managed to eventually pay 100% on claims, including interest.
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Not a great article, but I thought this was the best part: “There appears to be a lot of cross-collateralization where lenders may have a junior position on a lot of different properties,” said John Kaplan, a partner at Seattle law firm Perkins Coie LLP, who represents two creditors to Mastro.”
That’s what will create a lot of interesting alliances, and possibly give a trustee or the Chapter 11 Debtor-in-possession if it gets to that, an argument that they should deal with the properties, rather than let the properties simply be foreclosed.
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OK, I’m going to put this out there because I personally believe we are in for some rude awakenings about Real Estate leverage.
In the past you could have investors with strong cash positions come in and clean up messes. There are people who are investing today in grand strategies of picking up bargains. There are several groups who think now is the time for deals.
I don’t see any deals.
There was an article in the Sunday paper about people buying condos in Florida for $30K, cash, in bulk. A California group came up to Seattle and bought warehouse space for cash. A mixed use building in down town just sold with a big down payment. It’s all about cash flow, or getting a buyer to make things right again.
I don’t see a buyer here except for the bank.
Let’s go further down that road to Jillyanne’s question about why banks are buying property at auction. I think banks have an obligation to buy properties they made loans on. There is going to be a point when the investors who bought the Notes are going to ask why the bank told them the Note was worth $100K two years ago and this year it’s only worth $40K.
This may be a long way for a blog comment to go, but I think at some point the investors with the cash are going to say there are other things to do with cash. Real Estate is getting less liquid all the time. The rental potential is getting to be more questionable. I don’t see the safe haven aspects.
So, bottom line is I don’t see where the money for this kind of default will come from.
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Sounds like great evidence for establishing debtors prisons. What is the difference between this guy and Casey Serin, the young irresponsible and horribly wrong house ‘flipper’ / gambler now bankrupt and detitute (except larger numbers)? Looks like the taxpayers will be bailing these turds out in way or another forever. Debtors prisons, a concept whose time has come. Bailouts a thing hopefully, in the past…
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By 3rd Generation @ 7:
That’s extremely over the top, if not just downright stupid.
First, such a concept would reduce our economy to the level of Afghanistan’s.
Second, to expect a developer to come through completely undamaged in what is probably the worst economy in at least 50 years is expecting way too much.
Third, as I mentioned, it’s entirely possible that this entity will in the end pay out 100% on claims, with interest. The bankruptcy allows that. And even if that doesn’t happen, the bankruptcy was filed by creditors because they think it’s a better procedure.
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By Kary L. Krismer @ 8:
I don’t know Mr Mastro incredibly well, but he seems to be a man of character. If I had to guess, I would pick this option of the final outcome. Remember his Assets were valued at at more than his debts.
If there is a debtors prison, there should be a stupid lenders prison right next to it.
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RE: David Losh @ 6 – You don’t see deals because you are not involved.
RE: Kary L. Krismer @ 8 – Kary if you have access to the LegalDB still the case is #09-16841-SJS As I am watching it myself with my attorney would be interesting to read your opinion and outs for Mastro.
RE: Rack @ 9 – Mastro has done full spectrum of the business after leaving the banking business. He did great on note purchases, lien assignments, default judgements etc… Very smart guy and a man of his word. But he does have some great properties that are left for the pickins where he owes nothing. When there is blood in the water, its time to learn to swim.
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Its been a while since my banking days, but I would bet on a chapter 11. There are significant assets here, along with ongoing cash flow. The problem is an imbalance that can often be restructured to produce a better long term outcome for all involved. One problem I’ve seen in the past is parties using the opportunity as a power grab, but given the current economic climate I’d bet most would be happy just to keep the payments rolling in. Banks and many private lenders aren’t in a strong position to take back properties they don’t want in the first place.
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By Rack @ 9:
One thing I learned doing bankruptcy law is that water seeks its own level. In this case, it means that an unscrupulous or unethical debtor most likely has been dealing with unscrupulous or unethical lenders.
I’m not intending to make any comments about Mastro or his lenders by saying that.
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Sorry, I don’t see it. Maybe you can give me some insight here.
Cash flow means some one will pay rent. The mortgages are more than the over all rents or else there would be cash flow. I would take it this is the same as many portfolios. Some thing may do well from a cash basis, but once floated to cover deficiencies they are the same carp.
Some creditors want the cream out of the bankruptcy package, but that only leaves more carp on the market for another investor to absorb.
No, I think the judge will divvy up the whole mess and have every body take some lumps. Some of the later lenders will get less or nothing, but no one will come out whole.
Going forward, and especially with all the individuals who defaulted, it seems unlikely to me that people will line up to pay rents in a mess. For the units that sold those people will take a beating. Again going forward the price point will suffer.
I just don’t see the upside.
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RE: Rack @ 9 – Mastro has done full spectrum of the business after leaving the banking business. He did great on note purchases, lien assignments, default judgements etc… Very smart guy and a man of his word. But he does have some great properties that are left for the pickins where he owes nothing. When there is blood in the water, its time to learn to swim.
Indeed, I’d worry once he starts to liquidate his houses, until then, I think things will come out all right.
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By Kary L. Krismer @ 8:
Especially for the lenders playing with other people’s money. That includes all board of directors members in most of the banks for example.
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Does anyone know which property in West Seattle he owns?
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By WestSideBilly @ 16:
I dont know about west seattle, but I know of one just south in burien.
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