On Sept. 15, developer Kent Swig filed an affidavit with the Manhattan Supreme Court in which he claimed, “I cannot, out of my personal proceeds, satisfy a money judgment of $32,432,288.87 without being subject to extreme financial hardship. I do not have access to $28 million in cash or liquid assets and, if the Judgment is enforced against me at this time, I will likely have to file for personal bankruptcy protection. This will entail severe financial consequences not only for me, but also for my family, my business, and my employees.”
The affidavit was filed in an effort to forestall a court order that Mr. Swig repay $32.4 million in debt and interest to his creditor, Square Mile Structured Debt, which helped finance Mr. Swig’s Sheffield conversion project (to some tenants’ delight, Fortress Investment Group recently took control of the project). Mr. Swig has since appealed. And now he’s claiming this.
Which raises the question … how is it possible that Mr. Swig, principal in his family’s vast, 9 million-square-foot, California-based real estate company, a principal in four other real estate companies, and the husband of developer Harry Macklowe’s daughter Liz (herself the likely heiress to a real estate fortune), could go personally bankrupt?
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We are talking about a man who owns a duplex at 740 Park Avenue, the gilded den of hyper-exclusivity that inspired the book 740 Park: The Story of the World’s Richest Apartment Building, by Michael Gross. The most recent apartment sales at 740 Park—to David Winn in 2008 and Vera Wang in 2007—were valued at $32 million and $23.1 million, respectively.
So what gives?
“Technically speaking, you don’t have to be insolvent,” explained Daniel Austin, a professor at Northeastern School of Law and a bankruptcy expert.
“He may have personal obligations that simply exceed what he can pay, and that’s one motivation,” said Charles Mooney, a law professor and bankruptcy expert at the University of Pennsylvania. “Or he could be quite solvent. His assets could be worth more than his liabilities; but if he isn’t liquid enough to have the cash to meet what’s coming due, then Chapter 11 would call a halt to all the payments in principal and interest and give him some time to try to sell some properties. Basically, it’s a way to get some breathing room and sort things out.”
O.K., FAIR ENOUGH. MR. Swig’s real estate, while immensely valuable, is kind of hard to turn into cash quickly. The automatic 100-day stay would allow him to do that, if that really were his intentions, and if he really couldn’t find a cash infusion from one of his wealthy relatives or colleagues.
Another advantage to filing for Chapter 11: It could allow Mr. Swig to diminish the burden of the very debt obligations that got him into this mess. According to Mr. Austin, if Mr. Swig were to file for Chapter 11 bankruptcy, his debt could be recalculated to allow for the depreciation of value in his assets. “If a secured creditor is owed $100,000, but the asset is only worth $80,000, in a Chapter 11, you can reduce the secured debt to $80,000 and the other $20,000 you can treat as unsecured debt,” Mr. Austin said.
And Chapter 11 is not very kind to holders of unsecured debt. “If you’re an unsecured creditor and the bankruptcy plan only calls for you to be paid 10 cents on the dollar, that means you will only pay 10 cents on the dollar and the rest of the debt will be extinguished.”
If you think it a tad unfair that our legal system has been constructed so as to allow wealthy individuals who gambled in real estate to shield their assets in LLCs, trusts and other illiquid forms from the claims of creditors, while Joe Schmo gets his house foreclosed on, well, you’re not the only one.
“That’s why, more than 10 years ago, they had a blue ribbon commission put together to revise the U.S. bankruptcy code,” said John Pottow, a professor of law at the University of Michigan. The panel came up with a bunch of proposals, including capping exemptions from bankruptcy.
The result: “It was soundly rejected by your and my elected representatives.”
Which means that Mr. Swig may well declare bankruptcy, endure some beatings in the press, pay off a portion of his debt, and emerge the same very, very rich man.
Mr. Swig wouldn’t comment for this story, but to play devil’s advocate, it is also possible, albeit unlikely, that he really could end up enduring “extreme financial hardship,” losing his assets, working at McDonald’s and living in a shelter in Queens like some sort of Trading Places character incarnate.
Then again, his definition of “extreme financial hardship” is probably a little bit different from that.
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