Bankrupt real-estate magnate Michael R. Mastro still living large

Most people struggling through bankruptcy don't enjoy the kind of life Michael R. Mastro has led since he was pushed into that insolvent state last summer.

There was the vacation in Italy in September, the same month the Seattle real-estate magnate filed court papers revealing he was hundreds of millions in the hole.

And subsequent holidays in Paris, New York and Palm Springs. And ski trips to Switzerland and Jackson Hole, Wyo.

Mastro and his wife, Linda, have enjoyed the trappings of the good life at home, too, according to credit-card and checking-account statements subpoenaed and made public by the court-appointed trustee in the bankruptcy case.

There's a $2,914.52 American Express charge at Canlis, the pricey Seattle restaurant, from November. And payments totaling more than $8,000 a month on a Rolls-Royce and a Bentley.

So how is Mastro paying for all this? That's become a central question as his bankruptcy proceeding — one of Western's Washington largest, most complex and most adversarial ever — enters its second year.

Trustee James Rigby smells a rat. He's responsible for finding and liquidating Mastro's assets, then distributing the proceeds to his creditors.

Over the past year he has become Mastro's nemesis, filing lawsuits to undo deals he contends Mastro concocted to put some assets out of most creditors' reach.

Rigby looks at the Mastros' lifestyle in bankruptcy and suspects more of the same: that Mastro is hiding assets that rightfully belong to the banks and the individual investors — most local, many Italian American like Mastro, many elderly — who entrusted him with millions.

The Mastros' lifestyle remains lavish by most standards, admits James Frush, one of Mastro's lawyers — "but that's not a crime."

The money his client is spending doesn't come from Swiss bank accounts, Frush said. It's money from friends, his wife's separate assets, and hundreds of thousands he has earned as a real-estate consultant since entering bankruptcy — income to which his creditors have no claim.

"They're trying to paint Mike as the Great Satan," Frush said. "He's not."

Rigby — who gets a percentage of whatever he recovers — and his lawyers are the real bad guys, Frush charges: They're pursuing a "scorched-earth" campaign against Mastro not for creditors' benefit, but to line their own pockets.

After the legal and other administrative fees are deducted, he predicted, Mastro's unsecured creditors — the ones whose debts didn't have property as collateral — will end up with what they've got now: nothing.

As far as the bankruptcy case is concerned, Frush said, "Mike has no money."

Rigby remains skeptical. "Lots of circumstances in this case are very suspicious," the trustee said.

A legal morass

Mastro, now 85, made a fortune over four decades buying, developing and selling real estate and financing similar ventures by others.

But he borrowed heavily for his enterprises. After the real-estate market collapsed in 2008, Mastro's properties couldn't generate enough revenue to cover his debt payments. And the real-estate investors and developers who owed him money couldn't pay him back.

A year ago this month, three of Mastro's bank lenders filed a court petition to force him into bankruptcy. Mastro resisted at first, then agreed to liquidate.

He reported liabilities exceeding $570 million. Among his unsecured creditors: about 200 investors Mastro called "Friends & Family," mostly Western Washington residents who had invested a total of more than $100 million with him in return for pledges of interest payments of 8 percent or more.

Now, a year later, the Mastro bankruptcy proceeding is a legal morass.

The court docket topped 1,400 filings earlier this month. The case has spawned 11 related lawsuits by Rigby and others against Mastro, his family members and business associates.

A few issues have been decided. In May, Rigby lost a bid for two enormous diamond rings, valued at $1.4 million. Bankruptcy Judge Samuel Steiner ruled they were Linda Mastro's separate property.

After several lawsuits challenged Mastro's right to have his massive debts wiped away by the bankruptcy judge, Mastro agreed in April not to pursue it.

That means his creditors can seek repayment even after his assets are dispersed and the complex case is concluded. His post-bankruptcy earnings could be at risk.

However, for the most part, Rigby, Mastro and other parties in the case have settled into what amounts to legal trench warfare. Any resolution probably is four or five years away, the trustee said.

While the attorneys joust, Rigby has overseen the dismantling of Mastro's far-flung real-estate empire. "Half a billion [dollars] has collapsed down to almost nothing," he said. "It's pretty amazing."

Mastro's vast holdings included subdivisions in Snohomish, Pierce and Thurston counties, shopping-mall projects in Vancouver and Walla Walla, office buildings in Seattle, Bellevue and Kirkland, and apartment projects in Seattle, Bellevue, Redmond and SeaTac.

In most cases Rigby and his team concluded Mastro had no equity in those properties — that they were worth less than what Mastro owed.

Most have gone back to the banks holding the mortgages.

Rigby has managed to generate some cash. Earlier this year he sold a Kirkland condo that Mastro owned free and clear, adding $107,000 to the pot from which creditors could be repaid. He has arranged with several banks to sell properties on their behalf in return for a fee or small share of the proceeds.

He also obtained a judgment for $362,000 against Mastro's son, Michael K. Mastro, after Steiner ruled that father had illegally transferred that amount to son soon after entering bankruptcy.

An arrangement recently submitted to the judge would satisfy some of that award by selling 10,000 one-ounce silver coins. They were found in April in a basement wall behind a furnace vent in the younger Mastro's home when sheriff's deputies showed up to seize property to enforce the judgment, court papers say.

But all those sums pale in comparison to the $333 million in claims that unsecured creditors have filed against the elder Mastro.

Rigby said his lawsuits against Mastro and others offer the best hope of generating any meaningful payouts. One seeks possession of Mastro's 7,000-square-foot Medina waterfront mansion, purchased in 2006 for $15 million cash, and a house in Clyde Hill.

Mastro contends the homes now rightfully belong to business associates who loaned him money in late 2008 and early 2009 and took the houses as collateral. Rigby argues those loans were shams, designed to defraud other creditors.

Rigby also has sued real-estate financier and longtime Mastro friend Thomas Hazelrigg III and several others, seeking up to $54 million the trustee contends they owed Mastro.

Mastro deemed those debts uncollectable. Rigby accuses Hazelrigg, too, of hiding assets. The defendants say the suit lacks factual foundation; their motions to dismiss it could be decided Friday.

But even if he hits home runs with all of his lawsuits, Rigby said, Mastro's unsecured creditors won't get more than a fraction of their investment back.

That's better than nothing, he added.

Under bankruptcy rules, Rigby's dozen attorneys and the accountant and real-estate consultant he has retained will be compensated first when any proceeds are distributed.

Frush said that's what's really motivating the lawsuits — the lawyers, essentially working on contingency, want to get paid.

Rigby won't say what his legal bills come to so far, only that they are "a lot." Frush estimates they top $2 million.

Mastro could put a halt to most of the mounting legal bills, Rigby said, "by turning over property the bankruptcy estate [creditors] is entitled to. These are bills incurred by his obstreperousness."

"He got pinched"

As Rigby, Mastro and others slug it out in court, Mastro's "Friends & Family" investors wait.

One Eastside investor, who stands to lose more than $200,000, said his standard of living hasn't suffered: His Mastro investment accounted for less than 20 percent of his total portfolio.

"I still to this day don't hate Mike Mastro," said the investor, who spoke only on condition his name not be published. "I think he got pinched [by the real-estate downturn]. The guy's not a thief."

But Constance Roberts, of Seattle, said her life since last summer "has been a horrible struggle."

She and her late husband, Craig, a racehorse trainer, had $180,000 in their Mastro account. Without it, Roberts said, "I'm just trying to hang onto my house from month to month."

At 79, she's taken a part-time job in fan education at Emerald Downs to help make ends meet.

Rigby said he's heard plenty of similar stories. Meanwhile, "Mr. Mastro is still living in his fancy house. He's still driving his Rolls."

Asked about Mastro's creditors' difficulties, Frush said that "it troubles Mike greatly that he's let people down."

But Mastro has suffered too, he added: "The people who have had their lifestyle and standard of living diminished the most are the Mastros."

The European vacations and expensive restaurants and shopping trips? "Mike loves his wife," Frush said. "He's trying to keep her happy in a difficult situation."

In an April court filing, Mastro wrote that he intended to "spend the rest of my life, if necessary, trying to repay all my creditors."

That's still Mastro's desire, Frush said. "Is that realistic? I don't know."

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