Washington State has its own Bernie Madoff – sort of. His name is Michael R. Mastro. He was a real estate developer and hard money lender who made his fortune during the real estate boom in the nineties and early 2000s. And when real estate tanked in 2008, he assured his investors everything was fine – all while he was working behind the scenes to hide assets from creditors. This wasn’t exactly a Ponzi scheme, but also not too far off.
Here’s what happened:
When ordinary people finance real property, they pay a down payment, sign a promissory note, and are then liable to repay the loan. If the borrower can’t pay, the lender forecloses. If the property is worth less than the debt, the deficiency is forgiven (in most cases).
When companies finance real property, banks usually require a personal guaranty from one or more shareholders. Mastro’s companies borrowed a lot of money from banks, which required personal guaranties from Mastro. The banks accepted his guaranties presumably based on all the wealth he had – homes in Medina, Clyde Hill and the Highlands, to name a few things. On paper, it looked like he had the wealth to back up his personal pledges.
Mastro also borrowed money from numerous friends and family members.
When things turned sour, Mastro had the option of filing bankruptcy. But he didn't. Instead, when the market tanked, he quietly moved his assets away from creditors’ reach – or so he thought – presumably thinking that if he owned nothing, there was nothing creditors could take from him.
Here’s what he did to stymy his creditors:
First, he formed an irrevocable trust in Belize. He and his wife, Linda, were the primary trust beneficiaries. The trust then formed a series of limited liability companies.
Second, Mastro transferred the bulk of his and his wife’s assets into the trust, which in turn transferred them into the limited liability companies.
Their Medina residence went into one company, their Rolls Royce went into another company, and jewelry – several rings with diamonds ranging from 10 to 27 carats – went into another company. A Belize shell company – with Mike Mastro at the helm – controlled the trust.
By doing this, he thought his assets would be outside creditors’ reach.
Not so, as illustrated by what happened.
First, Mastro told his lenders simply to hang on for the ride. A few miffed creditors responded by filing an involuntary bankruptcy petition – essentially forcing him into bankruptcy.
Once in bankruptcy, the court had the power to review the transactions and “undo” the questionable ones, which is exactly what happened. (see attached PDF for the court order)
The basic rule is that anyone may move assets out of creditors’ reach (like putting them into a trust or a limited liability company) so long as there are enough assets left to satisfy creditors. But, if the move results in more debt than assets, they are deemed presumptively “fraudulent” and can be undone.
That is what happened to Mike and Linda Mastro. They moved things after their financial troubles began. Had they moved things beforehand, the transactions may well have withstood court scrutiny. On the other hand, without any assets in their name, it is hard to imagine that anyone would have been willing to lend to them.
So where are Michael and Linda Mastro now? When the court ordered them to turn over the jewelry (and some other valuables, including gold bars) they disappeared. So far, fleeing the jurisdiction has been the Mastros’ most effective asset protection plan yet.