Petra funds U.S. Trustee ordered to appoint examiner at KBS' request

By Caroline Salls

Pittsburgh, April 7 - Petra Fund REIT Corp. and Petra Offshore Fund, LP lender KBS Preferred Holding I, LLC's motion for appointment of an examiner was approved Thursday by the U.S. Bankruptcy Court for the Southern District of New York.

As previously reported, KBS asked the court to appoint an examiner in connection with discovery delays related to a default lawsuit judgment.

KBS said it entered into a $50 million loan agreement with Petra REIT on Oct. 26, 2007. Petra Offshore guaranteed the loan.

The lender said the Petra funds defaulted on their loan and guaranty obligations, and KBS subsequently filed a motion for summary judgment against the funds.

According to the motion, the Petra funds have tried to delay the proceedings from the outset of the lawsuit.

Specifically, KBS said the funds filed a declaratory judgment lawsuit against the lender in June 2009 in response to the default suit and argued that they should be excused from paying the KBS debt "based on the doctrine of impossibility" because they lacked the funds to repay the debt.

However, a final $65.92 million judgment was entered against the Petra funds in June 2010.

KBS said it began to investigate the Petra funds' assets after the judgment was ordered and discovered "a number of questionable transactions and transfers."

The lender said it then requested post-judgment discovery from the funds, but they refused to produce documents, citing alleged confidentiality concerns.

"Immediately upon realizing that it was not going to be able to delay the matter any longer, the debtors filed for bankruptcy," KBS said in the motion.

Examination points

KBS asked the court to appoint an examiner to investigate the following:

• Disposal of the Petra funds' unencumbered interest in multi-million dollar real estate assets. As of August 2008, KBS said the funds' interest in notes and/or mortgages in real estate projects totaled $136.02 million.

The lender said it believes these assets are now either encumbered or were transferred out of the funds' portfolio;

• The Petra funds' transfer, since 2007, of millions of dollars worth of assets to affiliated parties; and

• The transfer in 2007 of interest in loans securing millions of dollars worth of real property to non-debtor affiliates.

KBS said it believes the Petra funds' actions "purposefully and voluntarily impoverished the debtors, to the detriment of their creditors."

In addition, the lender said appointment of an examiner is necessary to investigate possible fraud, dishonesty, incompetence, misconduct, mismanagement and irregularity regarding the funds' preferential payments to some creditors over others, resulting in the depletion of millions of dollars worth of assets.

In Thursday's order, judge Shelley C. Chapman said the scope of the examination will be decided by the court at a later date.

The examiner's preliminary report is due on May 10.

Petra Fund REIT and Petra Offshore are New York-based real estate investment trusts. The companies filed for bankruptcy on Oct. 20. The Chapter 11 case number is 10-15500.

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