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Originally published October 1, 2011 at 10:00 PM | Page modified October 26, 2012 at 1:00 PM

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Judge details how Mastro's debt-reliant empire deteriorated

A judge's findings describe how developer Michael R. Mastro's wheeling and dealing went bad a year before he was forced into Chapter 7 in one of the region's biggest bankruptcies.

By Seattle Times business staff

Judge's ruling

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Aw heck, it's easier than that: greed entitlement lies, deception And... MORE
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Why — and how — did Michael R. Mastro's empire collapse?

Now there's an official, court-sanctioned chronology and analysis of the longtime Seattle real-estate magnate's demise, which ultimately led to his bankruptcy in 2009.

It's part of a ruling U.S. Bankruptcy Judge Marc Barreca issued this past week, which concluded, among other things, that the giant Mastro diamonds rightfully belong to Mastro's many creditors.

Mastro and his wife, Linda, of course, are on the lam, evading warrants for their arrest. They disappeared this summer after failing to comply with Barreca's order that they turn over the diamonds until he determined their rightful owner.

Mastro's bankruptcy is among the largest in Western Washington history. James Rigby, the court-appointed trustee, has estimated Mastro's debts to unsecured creditors at $325 million and acknowledged those creditors are unlikely to get back more than a few pennies on the dollar.

How did it happen? Much of Barreca's explanation of Mastro's fall is taken directly from Rigby's previous court filings.

Here's an abbreviated version:

Mastro, who got into real estate in 1967, had two lines of business: developing and lending.

He developed office, retail and apartment projects and single-family plats — perhaps $2 billion worth over 40 years.

He also made high-risk, high-interest "hard-money" loans to other developers strapped for cash, usually taking second or third positions on their projects as collateral.

That meant lots of money was going out. To bring money in, Mastro sold his own projects.

But, mostly, he borrowed — from banks, and from individual investors he called "Friends & Family." Mastro paid them above-market interest, and pledged to return their investments in full on demand.

It all seemed to work — until the market tanked.

Demand for real estate fell sharply. Property values plummeted. Sales ground to a halt. Credit dried up.

All this affected not only Mastro's projects, but also those of his hard-money borrowers. They couldn't pay him back, and the collateral he held in their projects was worth little or nothing.

In August 2008 Mastro's projected receipts from those loans totaled less than $50,000 a month — a fraction of the $900,000 a month in interest he was obligated to pay lenders who had provided him the money he used to make the hard-money loans.

And those lenders were clamoring for repayment, or more collateral to secure Mastro's short-term loans.

By the second half of 2008 — a year before he was pushed into bankruptcy — Mastro's negative cash flow was about $2.5 million a month. The didn't include project-development costs he had to pay out of pocket because he couldn't get construction loans.

And he owed about $100 million to the Friends & Family — again, payable on demand. From June through September of 2008 his repayments to them were averaging about $680,000 a month.

In October of that year he rescinded the repayment-on-demand policy.

Mastro's financial statement at the end of 2008 showed his net worth still was more than $125 million. But his financial statements were unreliable — they weren't prepared following generally accepted accounting principles and weren't reviewed by independent accountants.

Most of Mastro's assets were properties whose reported values in his financial statement were based on outdated appraisals, or Mastro's own estimates.

After three of his banks pushed him into bankruptcy less than a year later, in August 2009, he estimated his net worth was negative, by nearly $200 million.

Mastro was insolvent — unable to pay his debts as they came due — at least a year before entering bankruptcy, Barreca concluded.

That's an important finding from a legal perspective. During that year Mastro engaged in a host of transactions — moving valuable assets, including the infamous diamonds, into trusts and limited liability corporations — in what Rigby maintained was an illegal scheme to hide the assets from creditors.

In his ruling, Barreca agreed. A finding that Mastro already was insolvent at the time of those transactions provides part of the legal foundation for that conclusion.

— Eric Pryne,

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