DOJ files suit to keep Mastro from leaving bankruptcy

An office of the U.S. Justice Department filed suit against bankrupt Seattle real-estate magnate Michael R. Mastro on Wednesday, saying he has concealed or transferred property to keep it from creditors and made false statements under oath.

The lawsuit alleges, among other things, that last June, weeks before he was forced into bankruptcy, Mastro transferred IOUs he held with a face value of more than $56 million to a business associate — without receiving anything in return.

The suit was filed in bankruptcy court by the United States Trustee, a Justice Department division whose duties include protecting the integrity of the bankruptcy system. It seeks to block U.S. Bankruptcy Court from issuing an order relieving Mastro of his obligation to repay his debts — the reason most people file for bankruptcy protection.

Such a "discharge" usually is granted automatically, but Mastro's moves to "hinder, delay or defraud" creditors mean he isn't entitled to it, the suit says.

James Frush, one of Mastro's lawyers, did not return calls late Wednesday. Thomas Buford, the attorney who filed the lawsuit for the U.S. Trustee, said he could not comment.

Mastro, a prolific real-estate developer and lender in Seattle for 40 years, was forced into bankruptcy last summer by three of his banks. His probably is the largest bankruptcy in Western Washington history: Creditors have filed claims against him totaling more than $570 million.

The court has appointed a trustee, James Rigby, to liquidate Mastro's assets and distribute the proceeds to his creditors.

The lawsuit repeats allegations, first made by Rigby in previous lawsuits, that before entering bankruptcy Mastro engineered a series of transactions aimed at putting several valuable assets — jewelry, a Rolls-Royce and houses in Medina, Clyde Hill and The Highlands neighborhood in Shoreline — out of reach of most of his creditors.

Mastro has denied those charges and maintains the transactions were legitimate.

But the new lawsuit also contains some additional allegations, including the transfer of notes receivable, or IOUs. It says Mastro transferred them last June 24 to associate John Mastandrea, and then did not disclose the transaction in detailed statements of his financial affairs that he filed last fall with the bankruptcy court.

Mastro testified in October that the notes were for transactions that were "under water, [and] had no value as far as I was concerned."

Mastro's most recent financial statement valued his household goods at $15,000, but the lawsuit says they are worth more than $200,000.

The statements don't disclose a wine collection valued at more than $20,000, or a chandelier worth more than $50,000, the suit says.

Mastro also transferred at least $340,000 to corporations controlled by his son without receiving anything in return during the weeks after the three banks filed the bankruptcy petition and he didn't disclose those moves either, according to the lawsuit.

Mastro testified in October that the payments were to reimburse his son's companies for advances Mastro used to pay expenses such as payroll and insurance.

The suit says Mastro falsely testified under oath that the financial statements were accurate and included all his assets.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

This story was initially published March 3, 2010, and was corrected March 5, 2010. It originally said The Highlands neighborhood was in Seattle; the neighborhood actually is in Shoreline.