Petra funds creditor not happy with examiner's report, seeks documents

By Caroline Salls

Pittsburgh, June 1 - Petra Fund REIT Corp. and Petra Offshore Fund, LP's creditor KBS Preferred Holding I, LLC has asked the U.S. Bankruptcy Court for the Southern District of New York to review the report submitted by the funds' examiner and decide whether a further investigation is warranted, according to a Tuesday court filing.

"KBS believes that significant critical documentation necessary to prepare the report was never reviewed by the examiner," the creditor said in its response filed Tuesday.

In his preliminary report, examiner Jack F. Williams acknowledged that the funds did not comply with their obligation to provide the documents he needed to conduct the court-ordered examination.

Examination points

As previously reported, the examiner was charged with investigating:

• Any and all transfers from the Petra funds to affiliate entities, insiders and third parties from Sept. 1, 2008 to Oct. 20, 2010;

• Any and all transfers to warehouse lenders JPMorgan Chase and Royal Bank of Scotland in the 90 days before the funds filed for bankruptcy;

• The circumstances related to the payoff of the funds' Millennium Partners loan, including the sources of funds used to pay the loan; and

• The conduct tied to discovery requests included in KBS' examination motion.

However, KBS said Tuesday that the examiner presented little substantive analysis in his report, which was unsealed by the court in May.

Unanswered questions

"The report appears to primarily be simply a reconciliation of certain of debtors' own financial records," KBS said in its response to the report.

"While KBS appreciates that the examiner was severely limited by both time and monetary restraints, KBS believes the report does not adequately answer the matters raised by this court's order.

"The report lists millions of dollars transferred to insiders, affiliate entities (under common ownership) and third parties since September 1, 2008, but provides no real probative analysis of the propriety of the transfers."

Specifically, KBS said the report does not give a meaningful analysis of the purpose of transfers, identify the ultimate beneficiaries or evaluate the legal basis for the transfers in question.

In addition, the creditor said the schedules attached to the report seem to have been prepared "by simply accepting the debtors' own records without any review of internal source documents which might bear on the propriety of the underlying transactions."

KBS said Williams' report also does not include an explanation as to what, if any, inquiry he made about how the funds failed to disclose a number of key transactions in their statement of financial affairs.

KBS said the funds listed no repossessions, foreclosures or returns in the year before they filed for bankruptcy and listed only their warehouse lenders as having received transfers in the two years before the filing.

The creditor said the funds also "failed entirely to schedule a $50 million debt allegedly owed to Petra CDO."

Documents needed

"It is clear that the examiner either did not have the requisite documents and/or the requisite time to perform an investigation of the transfers and the Millennium payoff," KBS said in the filing.

"This manipulation of its document production is consistent with the debtors' continued strategy to delay and obstruct production of documents and conceal important information from creditors."

As a result, KBS is asking the court to order the funds to turn over the documents they provided to the examiner as well as any other documents the creditor needs to conduct its own examination in the areas where the report is lacking.

Petra Fund REIT and Petra Offshore are New York-based real estate investment trusts. The companies filed for bankruptcy on Oct. 20, 2010. The Chapter 11 case number is 10-15500.

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