Palm House Hotel at 160 Royal Palm Way in Palm Beach. Credit: Google

A bankruptcy judge has rejected the proposed sale of the Palm House Hotel to a former owner who claimed a $37.3 million secured interest in the unfinished hotel-condominium in tony Palm Beach.

A dispute between the owner and a key creditor KK-PB Financial LLC, which is managed by Wellington developer Glenn Straub, has jammed up the proceedings on a property tainted by civil allegations of EB-5 investment visa fraud.

The owner and debtor, 160 Royal Palm LLC, filed for Chapter 11 bankruptcy protection last August, putting the Palm House Hotel in line for auction. KK-PB Financial wants to place a credit bid, saying it holds a senior mortgage on the property where a 79-unit development was planned.

Straub bought the property at auction for $10 million in 2009 and sold his membership interest in the company in 2013.

KK-PB Financial maintains 160 Royal Palm defaulted on the $27.5 million mortgage issued with the 2013 sale and now claims a security interest of $37.3 million. The stalking horse bid for the bankruptcy auction is $32 million.

KK-PB asked U.S. Bankruptcy Judge Erik Kimball to estimate its secured claim to get a credit from the auction.

160 Royal Palm's court-appointed manager Cary Glickstein, a former Delray Beach mayor, responded by asking the court to limit KK-PB's ability to credit bid.

The push to limit KK-PB's recovery is to make sure the EB-5 investors get as much payout from the sale as possible, said Philip Landau, a Boca Raton attorney who filed 160 Royal Palm's bankruptcy petition.

Instead of battling it out in court, 160 Royal Palm and KK-PB considered a settlement and asset purchase agreement. KK-PB would have bought the Palm House Hotel for $10.26 million, breaking down to $5.12 million in cash and $5.14 million in credit, according to the proposal filed Jan. 25 by 160 Royal Palm.

The company said it planned to use the cash to pay, among other things, the claims of EB-5 investors. But Kimball on Feb. 11 denied 160 Royal Palm's motion.

The dispute resumed over how much, if anything, KK-PB can take away as credit. The auction has been delayed several times since Nov. 16 and is now scheduled for March 8.

The stalking horse bid by an affiliate of New York-based developer and fund manager Related Cos. LP was approved by Kimball last October.

Landau said 160 Royal Palm pursued the settlement because KK-PB's claim for a first-priority secured mortgage would wipe out any recovery by the EB-5 investors.

According to the proposed settlement, KK-PB's claim against the property is $39.6 million.

“If the mortgage holds up, then the only part that gets paid off is KK-PB's,” said Landau, founding partner of Shraiberg, Landau & Page. “The EB-5 investors would get nothing out of that.”

KK-PB's attorney, Salazar Law partner Luis Salazar in Coral Gables, declined comment on Kimball's denial of the settlement and asset purchase agreement.

Investors from China, Iran and Turkey collectively put at least $40 million into the project, according to their civil lawsuit.

The lawsuit alleged the Palm House Hotel, which sits on 1.4 acres at 160 Royal Palm Way, was used in a scheme to siphon funds from foreign EB-5 investors putting money into redevelopment.

The EB-5 program gives foreigners a path to obtaining green cards in exchange for putting at least $500,000 in a U.S. project that creates at least 10 jobs. EB-5 fraud claims are doubly damaging to investors who generally lose their money as well as a chance at legal residency.

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