Creditors aim to force One Madison Park into bankruptcy over $12M in unpaid loans

By David Jones | June 11, 2010 03:30PM

Barry Slotnick and One Madison Park

The developers of One Madison Park have been hit by a potentially serious new legal maneuver, as three creditors, including a Queens-contractor, filed a petition to throw the building into involuntary bankruptcy, citing $11.6 million in unpaid loans and mechanic’s liens.

Kraus High Tech Home Automation, based in Long Island City, Queens, filed a petition in U.S. Bankruptcy Court in Delaware that would force building sponsor Slazer Enterprises Owner LLC, into Chapter 7 bankruptcy. Under Chapter 7 bankruptcy, the court liquidates assets rather reorganizes them as is done under Chapter 11.

“We’re owed money by debtors,” said Kraus’ attorney Barry Slotnick in a phone interview with The Real Deal. “We figured before it all goes south we might as well go to a court that will protect our interests as creditor.”

According to the filing, the supplier of high-end home theater and security systems has a mechanics lien against the property for $927,752. Company president Stephen Kraus has a claim of $6.5 million, while Mitchell Kraus and Barbara Kraus, a Manhattan-based couple who are not executives of the company, each have claims of $2.1 million against Slazer.

The three were named as defendants in the iStar Financial foreclosure suit against Slazer, which claimed that they may hold an interest in a condo apartment. Slotnick confirmed that the Kraus’ did loan money to the One Madison sponsor, but would not comment on whether they were promised apartments in return, which is the case for several other local investors.

Legal sources say the move is a radical, but potentially brilliant step by the contractor, as the condo has already been placed into receivership by a state Supreme Court judge.

Under federal law, a group of three creditors can join together to force a debtor into involuntary bankruptcy. Under bankruptcy, all of One Madison’s creditors, who are owed hundreds of millions of dollars, would have to be worked out in bankruptcy court. The move improves the contractor’s chances of getting paid.

“Three creditors got together and said if we wait for that receiver to pay us, we’re going to get the short end of the stick,” said Barry LePatner, a prominent Manhattan attorney who specializes in real estate construction. “Everybody’s looking for a financial edge to secure their obligation.”

Ben Thypin, senior market analyst at Real Capital Analytics, said he’s never seen a group of creditors go after a condo developer in bankruptcy once the project went into receivership.

“Having them hire Barry Slotnick like this makes me think this is a pretty bold and proactive move,” said Thypin. “It seems to make me think they have no other choice.”

Slotnick, in a letter to Judge James Yates today, argued that the bankruptcy filing should halt the foreclosure case and move everything to The Bankruptcy Court, citing the multi-million dollar fraud case at the Salander O’Reilly Galleries, where Lawrence Salander was sued by multiple investors who claims they sold single pieces of art to multiple investors.

Under the current financial structure at One Madison, iStar gets first preference on all proceeds. It is not immediately known why Slotnick, best known for representing subway shooter Bernard Goetz in the famed 1984 subway shooting, took on this case.

Attorney Stephen Meister, who is representing Slazer Enterprises, said the developer is mulling over the impact the filing would have on its case against iStar.

“We are reviewing our options and trying to determine whether The Bankruptcy Court would be a good venue to adjudicate all claims,” Meister said.

Matthew Parrott, attorney for iStar, was not immediately available for comment. A spokesperson for state Attorney General Andrew Cuomo, whose office regulates condos; Jonathan Newman, the court appointed receiver; and the lead developer Ira Shapiro, were not immediately available for comment.