Effort to Purge Contempt Order : Ashkenazy Attempting to Raise $1.4 Million
Severyn Ashkenazy, the Los Angeles hotel owner and real estate developer, is trying to raise more than $1.4 million in order to erase a Superior Court contempt order pending against him and his companies, court records show.
The contempt order springs from a protracted and intensely fought lawsuit that pits one of Ashkenazy’s companies against a Miami-based financial institution, CenTrust Savings Bank, over ownership of Santa Barbara’s El Escorial Hotel.
In an interview this week, Ashkenazy sounded confident that he will raise the money, even though he hasn’t done so in the 2 1/2 months since the order was signed by Santa Barbara Superior Court Judge William L. Gordon.
Judge Gordon has accused Ashkenazy of improperly diverting $1.43 million from El Escorial to his other hotel properties in the Los Angeles area in 1984 and 1985. It is these funds that Ashkenazy must replace in order to purge the contempt order.
Sentencing in the case has been delayed while attorneys have argued over where the money should come from and what should be used as collateral.
At one point, court documents show, two of Ashkenazy’s close business associates, Robert Goldberg and Nathan Kates, said they were willing to pledge their assets as security for the money. Earlier this week, Ashkenazy said in an interview that he was planning to sell a 25% interest in an import company that he owns but stated a couple of hours later that the plan has been shelved.
On Tuesday, Ashkenazy business executive Gary Nielsen said that $1 million in cash has already been raised through the sale of “miscellaneous assets.” The Ashkenazy companies will pay the remaining amount at a rate of $50,000 a month, Nielsen said, with four valuable paintings from the Ashkenazy family collection being used as security.
Ashkenazy’s money problems are symptomatic of the cracks that have appeared in his privately held empire in the past four months. Since last November, four Ashkenazy companies have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Ashkenazy has also said in interviews with The Times that his companies are delinquent on loans of more than $100 million.
But the lawsuit in Santa Barbara provides a more detailed look at some of the troubles facing the Polish-born businessman and his brother, Arnold, whose real estate and hotel operations range from the luxurious L’Ermitage Hotel in Beverly Hills to a ranch in Ventura County.
Glimpse of Art Collection
The court documents show that the Ashkenazy brothers have personally guaranteed hotel loans of more than $107 million, most of which are in default. Eleven Ashkenazy properties are encumbered by more than $5 million in claims, including mostly federal tax liens, the records show.
The suit also provides a first-hand glimpse at the valuable Ashkenazy art collection, which includes thousands of paintings that hang in his luxury hotels in Beverly Hills and West Hollywood. Some of the most valuable works were acquired by Ashkenazy’s family in Poland before World War II.
Also cited in Judge Gordon’s contempt order were Nielsen and two of Ashkenazy’s companies--Ashkenazy Enterprises and Ashkenazy Property Management. Nielsen is executive vice president of Ashkenazy Enterprises, the family holding company that Ashkhenazy co-owns with Arnold.
Both Ashkenazy and Nielsen strongly deny that they have done anything wrong, saying in court declarations that they “didn’t understand” the agreement that prevented them from transferring the funds to the other hotel operations.
But Judge Gordon was extremely critical of their actions, saying during one court hearing that the diversion of funds was “a breach of fiduciary duty” and “could be regarded in some circles as embezzlement.”
The harshness of Judge Gordon’s comments stunned Ashkenazy and Nielsen, who said in interviews that they feel the suggestion of embezzlement is absurd. They point out that CenTrust Savings received a full accounting of the transactions. “I think the judge was angry and just wanted to embarrass us,” Nielsen said in an interview.
Judge Gordon had installed Ashkenazy Property Management as operator of the hotel while the suit was pending, even though CenTrust still owned the property and was to receive the profits.
According to a management agreement between the two firms that predated the lawsuit, CenTrust was to receive all “excess funds . . . of the gross revenues after deductions of management fees and operating expenses.”
Instead, the Ashkenazy company began channeling those funds from El Escorial into Ashkenazy’s Los Angeles-area hotel operations, Judge Gordon said. This was disguised as “investments” in Ashkenazy Enterprises, the judge noted, who called the accounting treatment “a fraud on the court.”
The lawsuit dates back to early 1983, when Ashkenazy Enterprises sued a subsidiary of CenTrust Savings Bank (then known as Dade Savings & Loan) claiming the financial institution had reneged on its pledge to sell the hotel for $16.5 million.
Ashkenazy Enterprises won the suit last year after a 2 1/2-week trial, on the grounds that it did indeed have a valid contract to buy the hotel. But the case is still pending because CenTrust Savings has appealed the verdict. So has Ashkenazy Enterprises, which says the court-ordered sales price--$21.2 million--is $1.75 million too high.
Little Respect for Each Other
CenTrust is headed by real estate developer David L. Paul, who acquired majority ownership of the savings and loan in 1983 for $32 million when the financial institution was still known as Dade Savings.
Those close to the case say Ashkenazy and Paul have little respect for each other, a situation that has helped thwart an out-of-court settlement. Paul, in a court declaration, called El Escorial “one of CenTrust’s largest non-performing investments and . . . the subject of continuing regulatory scrutiny.”
Ashkenazy says Paul played a major role in getting the judge to issue a contempt order based on a management agreement that was no longer valid because it was written prior to the lawsuit.
“This is just one of the many attacks by David Paul, and that one worked,” Ashkenazy said in an interview. “They caught us when we were cash short. It could not have happened at a worse time.” Paul declined to comment on the case.
Ashkenazy believes that he could make as much as $10 million--money that he says would help solve the bankruptcy problems of his other companies--by buying El Escorial and then selling it for $31 million.
(El Escorial is named for a monastery-turned-palace built in the 16th Century near Madrid. The palace, now a tourist attraction, got its name because it was located near an escorial , or slag heap.)
Audit Requested
One part of the suit, which has grown to 10 volumes of material, is an extensive financial review of the Ashkenazys and their companies. The audit was requested by CenTrust after S&L; officials became concerned last fall about news reports of the worsening financial condition of the Ashkenazy companies, said a source close to the case who asked not to be identified.
The financial report says the Ashkenazys and their companies are worth nearly $35 million if market values are used for their real estate properties but have a negative net worth of $30.6 million if generally accepted accounting principles are used.
The difference is that generally accepted accounting principles list the value of the asset at cost, not at the market value, which is often higher because values have appreciated. The report puts the market value of the Ashkenazy holdings at $224 million and the cost at $147 million. Also included in the lawsuit is an inventory of the Ashkenazy art collection, which is valued at more than $14 million.
The value of the art has become germane because four pieces, including a Renoir and a Picasso, are being used as the collateral in connection with the contempt order. Those art works, owned by the Ashkenazy family, have a combined value of more than $500,000, Nielsen said.
Court records show that several of the Ashkenazy paintings are worth more than $100,000 and one--a Van Gogh known as “The Vicarage by Moonlight”--is worth $1.2 million. Most the art--more than $11 million worth--hangs in Ashkenazy’s most elegant hotels, including Le Mondrian and Le Bel Age in West Hollywood and L’Ermitage.
