Recent bankruptcies by four entities controlled by Austin real estate investor Nate Paul are either ploys to keep his operations afloat as long as possible, or they're reluctant moves to prevent an unscrupulous creditor from wresting control of a handful of his valuable properties.
Those were the dueling narratives unfurled in federal bankruptcy court on Jan. 12, where the company that owns Paul's loan, an affiliate of real estate firm Stonelake Capital Partners, sought permission to foreclose on the properties and Paul fought against it.
Federal bankruptcy Judge Tony Davis denied the motion from the Stonelake affiliate but also warned Paul and his attorneys that they are "running out of ramp" to file a plan outlining an exit strategy from the Chapter 11 bankruptcies.
"You're on the clock, and the clock's ticking," Davis said. "I'm going to deny the motion, but that plan better well be pretty well defined" by a Feb. 2 deadline.
Paul, who operates World Class Holdings, is in default on the loan, which originally was for $22.9 million but has a current balance of about $19.2 million, counting fees and interest, according to court documents. Combined, the properties he purchased with the loan in fall 2018 were valued at $42.5 million to nearly $60 million, according to court testimony.
The properties that were the subjects of Monday's court proceeding don't include the former 3M corporate campus in Northwest Austin. A Paul-controlled entity that owns that 156-acre tract, which is valued at more than $100 million, filed a separate bankruptcy last week, just hours before a scheduled foreclosure auction.
In addition, Davis told the attorneys for Paul's creditors at the start of the hearing that they were not to bring up an August search of Paul's downtown headquarters by the FBI and the U.S. Department of Treasury. Federal authorities have declined to comment on the reason for the search.
"He's being investigated; is that why we should convict him here?" the judge said. "Unless you have proof of something, let's not even get into it."
The proceedings Monday involved Paul-controlled entities called 900 Cesar Chavez LLC, 905 Cesar Chavez LLC, 5th and Red River LLC and 7400 South Congress LLC.
The 5th and Red River property was once the site of Carmelo's Italian restaurant. The Cesar Chavez properties are undeveloped parcels east of Interstate 35, and the South Congress properties also are unimproved, according to court documents.
Lawyers for the Stonelake affiliate, which purchased the loan covering the four entities in September just as the original lender was initiating foreclosure proceedings, questioned Paul as to why seemingly little has been done to develop the properties since he bought them. Stonelake, founded in Austin in 2007, is a real estate private equity firm with offices in Austin, Dallas and Houston.
"Is it your testimony that in Austin, Texas, since you acquired these properties (more than a year ago), the market didn't want development?" asked Jonathan Pelayo, an attorney representing the Stonelake affiliate.
Pelayo also quizzed Paul about the fate of $250,000 in earnest money paid to World Class last May for a possible sale of unimproved tracts held by one of the entities, 7400 South Congress LLC.
The possible sale, a $10 million deal with Rastegar Property, has yet to be finalized. Rastegar Property CEO Ari Rastegar formerly worked for Paul in New York, and both men have said they consider each other friends.
Paul responded that the money went to World Class since neither 7400 South Congress LLC nor any of the three other entities had separate bank accounts at the time. He said he isn't certain what happened to it, but said it likely was earmarked for use by 7400 South Congress.
"We believe this (possible sale) is still in discussion," Paul testified.
Pelayo referred to a recent deposition by Paul in which he was asked if the $250,000 "was gone, and you told me that you don't know what the word 'gone' means."
"That's correct," Paul responded.
But Paul's attorney also had some pointed questions, attempting to demonstrate that Stonelake Capital Partners was reluctant to work with Paul to settle his debts and instead hoped to acquire his properties at a steep discount by foreclosing on them.
"In purchasing the notes, Stonelake wanted to be able to get control of the properties if it was able to foreclose, correct?" Mark Taylor, an attorney for Paul, asked Stonelake managing partner John Kiltz.
"That was one of the business plans, yes," Kiltz responded.
Kiltz also testified that Stonelake initially disguised its purchase of the note by using an affiliate named ATX Lender 5 LLC for the transaction.
"We did not want to give any indication that we were involved in the affairs of World Class Capital," he said.
Later in the hearing, Taylor told the judge that "a well-developed plan" to emerge from bankruptcy would be filed before the Feb. 2 deadline.
Taylor said Paul's attorneys are "working closely" with him to "make sure the court's expectations are met."
In a brief interview after the ruling, Pelayo said he thinks "the elements of a bad faith (bankruptcy) case are absolutely satisfied, and that's why we filed what we did."
"It would be astonishing if they don't file a plan (to emerge from bankruptcy)," he said. "Whether it gets confirmed is a different question."
