JDS Fourth Avenue, LLC filed for Chapter 11 bankruptcy on June 1, 2021, as a serious legal battle proceeds over its Park Slope condo project in New York City.
The company owns 51% of the Park Slope project at 613 Baltic Street in Brooklyn. The remaining membership interest is controlled by Largo 613 Baltic Street Partners, LLC.
The 43-unit Park Slope condo development has been the subject of litigation since 2018, when Tona Construction & Management, LLC sued JDS Fourth Avenue. The December 21, 2018, lawsuit claims that the company entered a joint venture to use Tona Construction as the Park Slope project’s construction manager, but later reneged on the agreement in order to use JDS’ inhouse management arm — JDS Construction — to serve as the project’s manager at an “inflated cost.”
JDS Fourth Avenue is owned by real estate developer Michael Stern, who runs it as an affiliate company of the larger JDS Development, which has a strong presence in luxury residential construction in both New York and South Florida.
Despite the company’s bankruptcy filing, it isn’t yet a death knell for its operations. Chapter 11 bankruptcy is known as reorganization bankruptcy, and allows for a company to remain in possession of a number of its assets and control its business operations while developing a structured plan to repay its debts.
With only 12 total listed creditors, JDS Fourth Avenue’s bankruptcy documentation noted between $1 million–$10 million in assets alongside between $1–$10 million in liabilities.
Additionally, the filing details only $518,176.09 in specific debts spread between four creditors — all for consulting or legal services — with liabilities owed to other creditors listed as “unknown.” However, the ongoing litigation between JDS Fourth Avenue and construction management company Tona Construction, LLC could make JDS Fourth Avenue liable for over $70 million in damages.
Multiple lawsuits accuse Michael Stern of using JDS Fourth Avenue for personal gain
Though its listed debts seem quite manageable for the company to restructure, the possibility of over $70 million in debts places a significant amount of pressure on JDS Fourth Avenue with regards to its case with Tona Construction — which was recently removed from the New York State Supreme Court to bankruptcy court.
The lawsuit accuses JDS Fourth Avenue and owner Michael Stern of a number of breaches of contract, as well as fraud — making the incendiary claim that “Stern appears to be using his control of the entire Fourth Avenue property development to line his own pockets.”
After entering into a joint venture to develop the Park Slope project with JDS Fourth Avenue, Tona Construction claims that it became concerned at the lack of financial transparency that the venture operated with.
Moreover, as soon as the property’s purchase was closed, Tona Construction claims “it soon became apparent that Stern did not view the Joint Venture as a partnership,” adding that “Stern sought to control all aspects of the Joint Venture, to Tonacchio’s detriment, and to the financial benefit of himself and his affiliated entities.”
The lawsuit goes into detail over practices used by Stern to avoid the agreements of the joint venture: “Stern repeatedly set up meetings only to cancel at the last minute. Stern avoided Tonacchio’s phone calls. And when meetings were finally kept, Stern made Tonacchio wait for up to an hour to be seen and only brought his phone with him to the meeting.
The filing also claims Tona Construction was not installed as construction manager as per the contract, with JDS Fourth Avenue instead transferring $7.6 million to its affiliated management company — JDS Construction — to provide management services for the project.
Additionally, the lawsuit claims that Michael Stern forged the signatures of Tona Construction owner Domenick Tonnachio in order to obtain a construction loan in May 2016.
“On information and belief, as a result of Stern’s mismanagement and intentional misconduct, the Fourth Avenue Development has not been a success,” the filing continued. “On information and belief, [Tona Construction] will not receive a full return of its investment, much less any profit.”
In total, the case with Tona Construction could result in damages of at least $60 million, with the possibility of additional distributable funds owed to the company. Tona Construction claims that it has been paid only $3.3 million out of $14 million owed distributable funds stemming from the capital invested in the implementation of the joint venture — adding this amount to the previously claimed damages would push the total owed to the company up to $70,055,000.
A July 8, 2020, lawsuit filed by other Park Slope project owner Largo 613 Baltic — a company owned by Nissim Ben-Nun and Nicholas E. Werner — reinforces many of the accusations made by Tona Construction.
In speaking about the Park Slope project, Largo 613 Baltic’s suit said of Michael Stern: “Not satisfied with lucrative construction and development-related fees in addition
to what would have been a likely considerable, legitimate, percentage of profits of the substantially sold-off luxury condominium development, Stern resolved to convert revenues and profits owed to his investors and business partners for his own selfish benefit.”
The suit continued by adding that Stern’s actions are planned and systematic, saying that “Stern undertook such actions knowingly and intentionally and, apparently, never planned to honor his contractual and fiduciary relationships with his business partners.”
According to data from the US Census Bureau, construction businesses in the last 10 years went bankrupt at nearly 1.5 times the rate of companies in other industries.
Construction bankruptcies can have significant impact on all parties
Though construction on the Park Slope project has wrapped up, JDS Fourth Avenue’s bankruptcy can still have a significant impact on the financial state of all involved parties — particularly Tona Construction. While JDS Fourth Avenue claims less than $10 million in assets, it could be on the hook for upwards of $70 million in damages.
In fact, Tona Construction’s lawsuit mentions that there was concern about available funds even prior to the bankruptcy, claiming that “the Joint Venture has only been a ‘resounding success’ to Stern and his affiliates because he has used his control of the Joint Venture to plunder its assets for the benefit of himself and his affiliates.”
This is a common occurrence, as well — according to data from the US Census Bureau, construction businesses in the last 10 years went bankrupt at nearly 1.5 times the rate of companies in other industries. As Levelset’s Nate Budde notes, this is a big problem for other people involved in the project, as ”The moment that someone files for bankruptcy protection, their assets, receivables, contractual rights, and more are frozen in the bankruptcy proceeding.”
JDS Fourth Avenue contends in court documents that it has already paid Tona Construction and the Park Slope’s project’s other partners, a wrinkle that may further complicate the process of distributing capital.
According to Tona Construction, the different companies operated by Stern for the project “have no existence of their own, but rather are mere instrumentalities, agents and alter egos of Stern,” with Tona Construction concluding that Stern’s companies “had little to no capital.”
The project’s partners do have the opportunity to secure their claims even amidst JDS Fourth Avenue’s Chapter 11 proceedings. Bankruptcy code doesn’t stop a creditor who performed work prior to a bankruptcy filing from perfecting or maintaining a mechanics lien during the automatic stay of the process, meaning that the involved parties could secure their claims in the meantime.