Rigby v. Mastro (In re Mastro)

Decision Date15 November 2011
Docket NumberAdversary No. 09–01439–MLB.,Bankruptcy No. 09–16841 (CH. 7).
PartiesIn re Michael R. MASTRO, Debtor.James F. Rigby, Jr., Trustee, solely in his capacity as Chapter 7 trustee of the bankruptcy estate of Michael R. Mastro, Plaintiff, v. Michael R. Mastro and Linda A. Mastro, and their marital community; Michael K. Mastro and Jane Doe Mastro, and their marital community; LCY, LLC, a Delaware limited liability corporation; LCY, LLC–Series Home; LCY, LLC–Series Jewelry; LCY, LLC–Series Automobiles; The LCY Trust; Compass Trust Corporation, a purported Belizean entity; Compass S.A.; Mastro Revocable Living Trust; Mastro Irrevocable Trust; Concept Dorssers, a purported Monaco company; Hendrik J. Dorssers; and Avatar Income Fund I LLC, a Delaware limited liability company, Defendants.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Western District of Washington

OPINION TEXT STARTS HERE

Aimee S. Willig, Christine M. Tobin–Presser, Gayle E. Bush, Katriana L. Samiljan, Bush Strout & Kornfeld LLP, Janet D. McEachern, Spencer Hall, W. Scott Zanzig, Hall Zanzig Claflin McEachern PLLC, Seattle, WA, for Plaintiff.

Michael E. Gossler, Montgomery Purdue Blankinship & Austin, Donald A. Bailey, Floyd G. Short, Jordan Connors, Susman Godfrey LLP, Seattle, WA, John J. Tollefsen, Tollefsen Law Office PC, Lynnwood, WA, for Defendants.

LCY LLC, Danielson Harrigan Leyh & Tollefson LLP, Seattle, WA, pro se.LCY LLC–Series Jewelry, Danielson Harrigan Leyh & Tollefson LLP, Seattle, WA, pro se.LCY LLC–Series Automobiles, Danielson Harrigan Leyh & Tollefson LLP, Seattle, WA, pro se.Compass Trust Corporation, Vigal & Simon Inc, Seattle, WA, pro se.Compass SA, Vigal & Simon Inc, Seattle, WA, pro se.

MEMORANDUM OPINION FOLLOWING TRIAL1

MARC BARRECA, Bankruptcy Judge.

PROCEDURAL HISTORY

On July 10, 2009, several banks commenced an involuntary Chapter 7 bankruptcy against the debtor, Michael R. Mastro (Mastro). On August 21, 2009, the Bankruptcy Court (the Court) entered an Order for Relief and Judgment Granting Petition for Involuntary Chapter 7 Petition, and James F. Rigby, Jr. was appointed as Chapter 7 Trustee (the Trustee) for the Mastro estate. The present adversary proceeding was commenced by the Trustee on September 29, 2009. This matter was tried to the Court without a jury on designated days between April 19, 2011 and July 1, 2011.2

At the beginning of trial, the Guardian Ad Litem for defendant Mastro moved for entry of a stipulated default judgment against Mastro in the amount demanded by the Trustee. Mastro and his attorney joined in the motion. The Court postponed ruling on the motion while the parties discussed entry of a stipulated judgment against Mastro. On April 25, 2011, the Court entered a Stipulated Judgment Against Michael R. Mastro and His Marital Community (the Stipulated Judgment).

FACTS 3
Parties

Plaintiff Trustee brought this action solely in his capacity as Trustee for the Mastro estate.

Mastro and several of his family members are defendants in this proceeding. Defendant Linda A. Mastro (Linda) is Mastro's wife. Defendant Michael K. Mastro (Michael K) is Mastro's son, and defendant Robin Mastro (Robin) is Michael K's wife. Defendant Mastro Revocable Living Trust is a trust formed pursuant to the Mastro Revocable Living Trust Agreement dated October 2, 2002 between Mastro and Linda as grantors, and Mastro as trustee. Defendant Mastro Irrevocable Trust is a trust formed pursuant to the Mastro Irrevocable Trust Agreement dated August 21, 2008 between Mastro and Linda as grantors, and Mastro and Michael K as co-trustees.

Defendant LCY, LLC is a Delaware limited liability company and defendants LCY, LLC—Series Home, LCY, LLC—Series Jewelry, and LCY, LLC—Series Automobiles are Delaware series limited liability companies (collectively the LCY LLC Entities). Defendant LCY Trust is a trust formed pursuant to The LCY Trust declaration dated October 10, 2008, and is the sole member of the LCY LLC Entities.

Defendants Compass Trust Corporation and Compass, S.A. (the Compass Entities) purport to be entities located in Belize. Compass Trust Corporation was the trustee of The LCY Trust. Compass S.A. was the protector of The LCY Trust.

Defendant Hendrik J. Dorssers is a married person who resides primarily in Monaco. Hendrik J. Dorssers is the sole owner of a Monaco proprietorship named Concept Dorssers.

Defendant Avatar Income Fund I LLC (Avatar) is a Delaware limited liability company with its principal place of business in Seattle, Washington.

Refusals to Testify Based on Assertions of Fifth Amendment Rights

Mastro refused to testify and produce documents regarding his financial condition during the time period from December 1, 2007 to the present, and refused to testify and produce documents regarding the transactions at issue in this adversary proceeding. Mastro based his refusal to testify and produce documents on his Fifth Amendment right against self-incrimination.

Similarly, Thomas R. Hazelrigg, III (“ Hazelrigg III ”), a close friend and associate of Mastro, refused to testify and produce documents regarding the transactions at issue in this adversary proceeding based on his Fifth Amendment right against self-incrimination.

Mastro's Business Background

Mastro has been in the business of developing real estate since 1967. According to his 2008 Financial Report, Mastro developed and constructed in excess of $2 billion of real estate projects during the previous four decades, consisting primarily of multi-family housing, commercial buildings, and single family residential lot plat projects.

Mastro also was heavily involved in “hard money” lending. Hard money loans are loans too risky to meet the criteria of a bank or other conventional lender, typically involving loan fees and interest rates substantially higher than those charged by conventional lenders. Mastro primarily made hard money loans to cash-strapped real estate developers. The secondary financing Mastro provided was typically collateralized with second or third deeds of trust on the developer's real estate project.

Mastro's development operations and hard money lending generated negative cash flows. He depended on borrowed money and property sales to keep his operations afloat. He had two principal sources of financing. One source was short-term loans from banks, and the other was loans from investors known as Friends and Family. The Friends and Family loans were payable on demand. Financing illiquid real estate projects and property with short term loans created very high levels of risk for Mastro in the event of a downturn in the real estate market, since the likelihood of these loans being called, or not being extended or renewed, increased significantly.

Mastro's Financial Problems and Insolvency

By early 2008, the real estate market began to decline both nationally and in the Pacific Northwest. The decline in the real estate market severely impacted Mastro's business. By August 2008, the real estate market for single family homes and condominiums in the Pacific Northwest had been in a significant and prolonged state of decline. Moreover, Mastro's hard money borrowers—mostly real estate developers-were unable to pay, and Mastro's second and third collateral positions declined significantly in value. Mastro was unable to comply with all the demands that lenders were making for payment or additional collateral on his maturing bank debt.

As set forth above, Mastro's business operations generated negative cash flow, requiring Mastro to borrow money from lenders and Friends and Family or to sell off assets with sufficient equity after paying off secured lenders to provide cash to his business. During the second half of 2008, Mastro was experiencing a negative cash flow on his operations in the amount of approximately $2.5 million per month, excluding repayments required on demand notes held by Friends and Family and excluding development costs relating to on-going projects that could not be funded through construction loans. Sales of completed projects had generally ceased, leaving insufficient funds to cover the operational losses.

Many of Mastro's hard money loans had become worthless by August 2008, or were severely impacted. For instance, in August 2008 Mastro had in excess of $25 million in cash losses on five loans related to Hazelrigg III. Not a single payment was made on these five loans in 2008. In August 2008, Mastro's projected receipts on hard money loans totaled less than $50,000 per month compared to Mastro's obligation to pay more than $900,000 in interest per month to lenders from whom Mastro borrowed funds to enable him to make the hard money loans.

Throughout 2008, Mastro owed approximately $100 million to Friends and Family investors. All the Friends and Family obligations were payable on demand. During the period June through September, 2008, Mastro's repayments on the Friends and Family obligations (net of any funds received) averaged approximately $680,000 a month. On or about September 30, 2008, Mastro attempted to alleviate the concerns of Friends and Family investors by sending them a letter that stated, inter alia, “Our organization is strong and healthy, in no small part because of the relationship we value so greatly with lenders including you, our friends and family. I hope this report has eased any concerns you may have.” This letter was followed by a letter dated October 10, 2008, in which Mastro wrote that he found it necessary to “rescind our long-standing policy of re-paying any Friends and Family loan, in any amount, immediately upon demand.”

Mastro's financial records were kept on a cash basis. However, his financial statements were not prepared in accordance with generally accepted accounting principles and were not audited or reviewed by independent accountants. The asset values shown in Mastro's financial statements were not based on the acquisition cost of the properties. Instead, the asset values were based...

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