Mastro's 'Friends & Family' investors to get little or no money back

Bankrupt Seattle real-estate developer Michael R. Mastro's "Friends & Family" investors got some bad — but not unexpected — news Thursday.

At best, they're likely to get only a small fraction of their investment back, the court-appointed trustee charged with overseeing the liquidation of Mastro's assets said in a status report.

"The collapse is so fundamental that there are few assets for unsecured creditors," James Rigby wrote.

According to papers Mastro has filed with U.S. Bankruptcy Court, he has no equity in 64 of the 72 properties he owns or controls, Rigby said. Mastro's total equity in the other eight properties is just $4 million — and other creditors may have priority claims on some of that.

Mastro's 40-year real-estate career came to an crashing end this summer when three banks forced him into bankruptcy. Last month he reported nearly $587 million in debts, including more than $100 million to about 200 individual investors he called "Friends & Family."

They loaned him money in return for pledges of interest payments of 8 percent a year or more. Now, as "unsecured" creditors, they will be the last ones paid when Mastro's assets are sold.

In interviews in recent weeks, a number of Friends & Family investors have said they expect the worst.

In his report, Rigby attributed the demise of Mastro's highly leveraged empire in part to the collapse in real-estate values that left him owing more to banks than his properties were worth.

However, he added, "Mastro's state of insolvency did not arrive overnight."

The developer spent at least a year before the bankruptcy filing giving his banks second-, third-, and even fourth-place claims on many of his properties, as well as signing over to his lenders IOUs he held, mostly from other developers, Rigby wrote.

If Mastro had entered bankruptcy a year earlier, the trustee added, there probably would have been more for the Friends & Family, but "Mastro did not agree to terminate his business until his cash flow was consumed."

Mastro's real-estate holdings were mostly in Western Washington. They 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 West Seattle, Bellevue, Redmond and SeaTac.

In his report Rigby also wrote that:

• He has had more than a dozen offers to buy individual Mastro properties, generally for less than Mastro owes the primary lender.

• Mastro apparently has no debt on a few lower-value properties — including a condo in Kirkland and a duplex in Everett — that could be sold to provide some money for Friends & Family.

• He may oppose Mastro's "bankruptcy discharge" — a court order prohibiting creditors from pursuing him post-bankruptcy. That order now is scheduled to be issued Nov. 16.

• Mastro has told him he no longer has five of the seven rings with large diamonds that are the subject of a lawsuit by the trustee.

Mastro transferred the seven rings, his waterfront Medina home and his Rolls-Royce to an entity controlled by a Belize trust within the past year. Rigby's lawsuit charges he did it to keep them from creditors.

But Mastro's lawyer has said the five rings were listed in error, Rigby wrote.

Some Friends & Family investors are seeking to replace Rigby as trustee with Brian Ward, an attorney and real-estate agent.

Rigby spent much of his report explaining and defending decisions criticized by Ward's backers.

An election may be held Oct. 28

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