Brooklyn developers Toby Moskovits and Michael Lichtenstein have been stripped of control of the bankrupt Williamsburg hotel after a federal judge finds they may have committed fraud and cannot be trusted .
In scathing remarks, Bankruptcy Judge Robert Drain said “the evidence is clear and compelling, the debtor’s principals cannot be trusted to act as trustees”.
Drain last week handed over control of the 147-room hotel to an independent trustee for the bankruptcy process. Moskovits and Lichtenstein still own the property, which is a key part of their property portfolio. But they were removed from oversight of its operations.
In an unusual move, after appointing the administrator, Drain warned Lichtenstein not to sink into a deeper hole.
“Mr. Lichtenstein hasn’t made a good impression. He presents himself as a very unstable person who is willing to take positions that if you just step back and think about it, it doesn’t have any effect. a lot of sense,” Drain said. “And I’m afraid he’s doing something really stupid here.”
“[Lichtenstein] comes across as a very unstable person… I’m afraid he’s doing something really stupid. Judge Robert Drain
Called for comment, Lichtenstein did not respond to the judge’s criticism but noted that the owners of the hotel had invested substantial capital in it.
“Throughout this process, we have worked closely with our great team to bring the Williamsburg Hotel to the incredible success it enjoys today. We have achieved this result in one of the most challenging for the hospitality industry,” Lichtenstein said in an email. “The property looks forward to restructuring and repaying all creditors and concluding this bankruptcy process in the near future.”
Facing foreclosure from lender Benefit Street Partners, Moskovits took his trendy 96 Wythe Avenue hotel to White Plains de Drain bankruptcy court in 2021. The case was a bloodbath.
Benefit Street lawyers argued that Moskovits’ group misappropriated money from the hotel. Moskovits and Lichtenstein denied the charges and countered that their lenders, which also include Fortress Investment Group, were predatory. Fortress also tries to grab.
“I guess Fortress and Benefit Street are competing to see who the biggest asshole lender in New York is, so I think Benefit Street might even take — might win that one, but we’ll see,” Lichtenstein said in a post. deposition.
But a federal administrator of the bankruptcy process found lenders had reason to be concerned. The US trustee alleged that money was flowing in and out of the hotel without court approval.
In October, Drain denied the trustee’s motion to convert the case to a Chapter 7 liquidation. It did, however, appoint an independent reviewer to review the debtor’s transactions.
After analyzing 50 bank accounts, conducting 11 interviews and reviewing more than 10,000 pages of documents, the examiner released a report in February.
“The investigation revealed evidence of a complex scheme to embezzle and siphon off substantial sums of money from the debtor,” he said.
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The examiner determined that all of the hotel’s revenue went to another entity, the hotel manager, and was then transferred to different accounts. At least $12.5 million was sent to entities directly or indirectly owned by the principals, according to the report.
The examiner also said that Moskovits and Lichtenstein obstructed the investigation by refusing to answer questions and interfering with third party subpoenas.
Among the examiner’s most damning assertions was that the debtor entity had not paid taxes for up to four years. About $24.5 million was deposited in the debtor’s bank accounts from 2017 to 2020, but the debtor did not file tax returns for 2017, 2018 or 2019 and submitted an unsigned return for 2020.
About $68.2 million was deposited in the director’s bank accounts during those years, but “has not been reported to any tax authority,” according to the report.
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Moskovits and Lichtenstein’s legal team challenged the examiner’s report.
The reviewer “abused his position as a court-appointed reviewer and instead acted as a passionate defender of the claims and positions of Benefit Street Partners,” Lichtenstein said in a filed response.
Lichtenstein called the purported $12.5 million transfer a “practical impossibility.” Any money transferred from the debtor’s income was used to pay the debtor’s expenses and payroll, he claimed. He explained the missing tax returns by saying that the debtor company had no taxable income during the pre-bankruptcy period.
At the March and April deposition hearings, the tension was palpable.
“You won’t like most of my answers because you represent a lying, thieving entity trying to steal my building,” Lichtenstein told the lender’s attorney.
The Williamsburg Hotel is among dozens of Brooklyn properties headed to suburban Drain courtroom for a decade. As in many other cases, the debtor brought in Florida bankruptcy specialist David Goldwasser as restructuring agent.
Some legal scholars consider Drain — which has presided over huge bankruptcies such as Sears Holdings and Purdue Pharmaceuticals — friendly to debtors. But that wasn’t evident at the recent hearing at the Williamsburg Hotel.
The filing “shows a series of serious and, I believe, willful breaches of disclosure and appropriation of assets that are — that should not have been undertaken by the trustee,” Drain said at the hearing. . “Sometimes some of these actions seem to me to rise to the level of fraud as well.”
Drain also sided with Benefit Street’s allegation that the hotel owners misused government assistance – PPP money and an economic disaster loan.
“Very soon after receiving the PPP loan, more than half of the proceeds were not used to pay the payroll of the people who worked at the hotel, but again for insider purposes,” said Drain. “It’s dishonest to the government.”
Liechtenstein said all profits were used legally.
“With respect to the PPP, we respectfully disagree with the Court’s statements,” he said in an email. “The management company took out a PPP loan and used it for the purposes intended by the program – to keep its team employed during the challenges of Covid.”
Drain cited numerous reasons for appointing the trustee, including the debtor’s creation of “after-the-fact documents to increase his influence or to strengthen his legal position.”
The judge, however, reiterated to the trustee that the hotel was not “in liquidation mode” and that the trustee should concentrate on its operation. (Rooms were available on weekends from $280 a night.) Bankruptcy is still pending, but the chances of Moskovits and Lichtenstein regaining control of the business appear slim.
Heritage Equity Partners of Moskovits became a leading developer in Williamsburg after the Great Recession. But they got into trouble with creditors just before the pandemic shut down the city’s hospitality industry. Some have sought to seize on heritage projects, pointing to missed payments. In turn, Moskovits and Lichteinstein bankrupted properties to protect them from seizure.
Like other New York developers who have encountered legal problems, Moskovits has turned its attention to Miami. His company recently purchased a site in the Edgewater neighborhood with plans to build an 18-story rental.
Attorneys for Benefit Street did not return a request for comment, nor did Douglas Spelfogel, the debtor entity attorney for Moskovitz and Lichtenstein.