Mastro rings belong to creditors, judge rules

Two giant diamond rings claimed by the wife of bankrupt developer Michael Mastro rightfully belong to his numerous creditors, not to her, a judge ruled Tuesday.

By Eric Pryne

Seattle Times business reporter - 9/27/2011

The Mastro diamonds — wherever they are — rightfully belong to the creditors of bankrupt former real-estate magnate Michael R. Mastro and not his wife, Linda, a federal bankruptcy judge ruled Tuesday.

Backed by her husband, Linda Mastro had argued that the rings, valued at $1.4 million, were her separate property. But Judge Marc Barreca ruled they are community property, "more like investment assets than property that might be gifted from one spouse to another."

The whereabouts of the rings, sporting 27.8- and 15.93-carat diamonds, are unknown. So are the whereabouts of 86-year-old Michael and 61-year-old Linda Mastro, who disappeared this summer when Barreca ordered them to turn over the rings to a jeweler for safekeeping until the judge determined the rightful owner.

Warrants for their arrest were issued July 29.

It wasn't immediately clear how Tuesday's ruling might alter other legal proceedings. But Michael Mastro has been the subject of a federal criminal investigation for more than 18 months.

And, under federal law, concealing assets that rightfully belong to creditors in a bankruptcy case is a crime punishable by up to five years in prison.

Mastro, a longtime Seattle real-estate developer and lender, was pushed into what probably is Washington's largest bankruptcy in July 2009. His debts to unsecured creditors have been estimated at $325 million.

In a broad, 67-page opinion, Barreca also ruled Tuesday that a Monaco businessman has no claim to any of the proceeds from the sale of the Mastros' Medina waterfront mansion.

James Rigby, the court-appointed trustee in Mastro's complex bankruptcy, sold the home last year, netting $8.36 million. Hendrik Dorssers, a Mastro associate from Monaco, argued he deserved $1.2 million of that, plus interest, because Mastro had put the house up as collateral in February 2009 for a loan Dorssers made to him in late 2008.

But Barreca called the 2009 transaction a sham, writing that it "reeks of an attempt to hinder, delay or defraud Mastro's creditors by attempting to give the appearance that the Mastro residence was encumbered although it really was not."

About $2.5 million of the proceeds from Rigby's sale of the mansion had been set aside pending the ruling. If the ruling stands, that money will go to the unsecured creditors and to pay Rigby's legal and other administrative expenses.

John Tollefsen, Dorssers' lawyer, said he is considering an appeal. Dorssers is a victim of "guilt by association," he said, "and the Mastros going missing certainly didn't help."

Dorssers invested all his retirement money with Mastro, Tollefson said. "He's broke. He has nothing."

Rigby could not be reached for comment. Gaye Bush, one of his attorneys, said that, overall, Barreca's opinion is "a very positive ruling for creditors."

It stems from a lawsuit Rigby filed two years ago, charging that Mastro and others, anticipating bankruptcy, had engaged in illegal transactions aimed at putting several valuable assets — including the mansion and rings — out of creditors' reach.

Mastro settled on the eve of trial this spring, agreeing to accept a court-ordered judgment that he owes creditors $7.1 million stemming from those transactions. But the trustee's claims against Linda Mastro, Dorssers and others went to trial.

Bankruptcy Judge Samuel Steiner, since deceased, ruled last year that the rings were Linda Mastro's separate property. But Barreca set aside that ruling in June, agreeing with Rigby that new information had come to light.

That's when he ordered the Mastros to turn over the rings for safekeeping.

In his opinion Tuesday, Barreca wrote that information from Linda Mastro that helped shape Steiner's ruling "ultimately proved to be false."

For instance, she initially said Mastro gave her one ring before their marriage, but later admitted it had been purchased years later.

"Generally, this court found Linda to be a witness lacking veracity as her testimony was often transparently vague, contradictory and self-serving," Barreca wrote.

Her lawyer did not return a call seeking comment.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com