Brooklyn developers Toby Moskovits and Michael Lichtenstein have been stripped of control of the bankrupt Williamsburg Hotel after a federal judge found they might have committed fraud and could not be trusted.
In scathing remarks, bankruptcy judge Robert Drain said that “the evidence is clear and convincing one cannot trust the debtor’s principals to deal like fiduciaries.”
Last week, Drain put an independent trustee in control of the 147-room hotel for the bankruptcy process. Moskovits and Lichtenstein still own the property, which is a key piece of their real estate portfolio. But they have been removed from oversight of its operations.
In an unusual step, Drain also warned Lichtenstein not to dig himself into a deeper hole.
“Mr. Lichtenstein did not make a good impression. He comes across as a very volatile person who is prepared to take stances that if one would just step back and think about them, don’t make a lot of sense,” said Drain. “And I do have some concern that he’ll do something really stupid here.”
“[Lichtenstein] comes across as a very volatile person … I have some concern that he’ll do something really stupid.” Judge Robert Drain
Reached for comment, Lichtenstein did not address the judge’s critique but noted the hotel’s owners had put substantial equity into it.
“Throughout this process, we have worked closely with our excellent team as we brought the Williamsburg Hotel to the amazing success it is today. We achieved this result in one of the most difficult periods for the hospitality industry,” said Lichtenstein in an email. “Ownership looks forward to restructuring and paying off all creditors and wrapping up this bankruptcy process in the near future.”
Facing foreclosure from lender Benefit Street Partners, Moskovits brought her trendy hotel at 96 Wythe Avenue to Drain’s White Plains bankruptcy court in 2021. The case has been a bloodbath.
Benefit Street’s lawyers argued that Moskovits’ group siphoned money out of the hotel. Moskovits and Lichtenstein denied the charges and shot back that their lenders, which also include Fortress Investment Group, were predatory. Fortress is also trying to foreclose.
“I guess Fortress and Benefit Street are in a competition on who is the biggest asshole lender in New York City, so I think Benefit Street might even take — might win that one, but we’ll see,” said Lichtenstein in a deposition.
But a federal administrator of the bankruptcy process found the lenders have reason to worry. The U.S. trustee alleged that money was moving in and out of the hotel without the court’s approval.
In October, Drain denied the trustee’s motion to convert the case to a Chapter 7 liquidation. He did, however, appoint an independent examiner to look into transactions by the debtor.
After analyzing 50 bank accounts, conducting 11 interviews and reviewing over 10,000 pages of documents, the examiner released a report in February.
“The investigation uncovered evidence of a complex scheme to divert and siphon substantial amounts of money from the debtor,” it said.
Click to view
The examiner determined that all of the hotel’s revenue had gone to another entity, the hotel manager, and was then moved to different accounts. At least $12.5 million was sent to entities owned directly or indirectly by the principals, according to the report.
The examiner also said Moskovits and Lichtenstein obstructed the investigation by refusing to answer questions and interfering with third-party subpoenas.
Among the examiner’s most damning claims was that the debtor entity did not pay taxes for up to four years. About $24.5 million was deposited into the debtor’s bank accounts from 2017 to 2020, but the debtor did not file tax returns for 2017, 2018 or 2019, and submitted an unsigned return for 2020.
About $68.2 million was deposited into the manager’s bank accounts during those years but “have not been reported to any taxing authority,” according to the report.
Click to view
Moskovits and Lichtenstein’s legal team disputed the examiner’s report.
The examiner “has misused his position as a court-appointed examiner and has instead acted as a passionate advocate for the Benefit Street Partners’ claims and positions,” Lichtenstein said in a filed response.
Lichtenstein called the alleged $12.5 million transfer a “practical impossibility.” Any cash transferred from the debtor’s income went to paying expenses and payroll of the debtor, he claimed. He explained the missing tax returns by saying the debtor company had no taxable income in the pre-bankruptcy period.
In March and April’s deposition hearings, the tension was palpable.
“You will not like most of my answers because you are representing a lying, thieving entity who is trying to steal my building away from me,” Lichtenstein told the lender’s lawyer.
The Williamsburg Hotel is among dozens of Brooklyn properties steered to Drain’s suburban courtroom over a decade. As in many of the other cases, the debtor tapped Florida bankruptcy specialist David Goldwasser as the restructuring officer.
Some legal scholars consider Drain — who has presided over huge bankruptcies such as Sears Holdings and Purdue Pharmaceuticals — friendly to debtors. But that was not evident at the recent Williamsburg Hotel hearing.
The record “shows a series of serious and I believe willful failure to disclose and appropriation of assets that are — that should not have been undertaken by the fiduciary” said Drain at the hearing. “At times, some of those actions also appear to me to rise to the level of fraud.”
Drain also sided with Benefit Street’s allegation that the hotel’s owners misused government aid — PPP money and an Economic Injury Disaster Loan.
“Very shortly after the PPP loan was received, more than half of the proceeds did not go to pay payroll of people that were working at the hotel, but again went for insider purposes,” said Drain. “It’s dishonest to the government.”
Liechtenstein said all proceeds were used lawfully.
“With regards to the PPP, we respectfully disagree with the Court’s statements,” he said in an email. “The management company took a PPP loan and used it for purposes intended by the program — to keep its team employed through the Covid challenges.”
Drain cited many reasons to appoint the trustee, including the debtor’s creation of “documents after the fact to increase their leverage or to make their legal position stronger.”
The judge, however, reiterated to the trustee that the hotel is not “in liquidation mode,” and the trustee should focus on operating it. (Rooms were available over the weekend starting at $280 per night.) The bankruptcy is still ongoing, but the chances of Moskovits and Lichtenstein regaining control of the business appear slim.
Moskovits’ Heritage Equity Partners became a prominent developer in Williamsburg after the Great Recession. But they ran into trouble with creditors just before the pandemic shut down the city’s hospitality industry. Some sought to foreclose on Heritage projects, pointing to missed payments. In turn, Moskovits and Lichteinstein put properties into bankruptcy to shield them from foreclosure.
Like other New York developers who have run into legal issues, Moskovits has turned her attention to Miami. Her firm recently bought a site in the Edgewater neighborhood with plans to build an 18-story rental.
Benefit Street’s attorneys did not return a request for comment, nor did Douglas Spelfogel, the attorney for Moskovitz and Lichtenstein’s debtor entity.