UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT...

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA

MIAMI DIVISION www.flsb.uscourts.gov

In re: GEORGE A. KASTANES and CASE NO. 12-10274-RBR TERESA D. KASTANES, Chapter 7 Debtors. / THE POLICE & FIRE RETIREMENT SYSTEM OF THE CITY OF DETROIT, Plaintiff,

v.

GEORGE A. KASTANES and Adv. Pro. No. 12-_____-RBR TERESA D. KASTANES,

Defendants.

/

COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT PURSUANT TO 11 U.S.C. § 523

Plaintiff, The Police & Fire Retirement System of the City of Detroit (the “Retirement

System”), creditors in the above captioned proceedings under Chapter 7 of Title 11, United

States Code (the “Bankruptcy Code”), sues George A. Kastanes (“G. Kastanes”) and Teresa D.

Kastanes (“T. Kastanes”) collectively the “Debtors”, and seeks a determination pursuant to

Section 523(c) of the Bankruptcy Code that certain debts owed by the Debtors to the Retirement

System are not dischargeable pursuant to Sections 523(a)(2), (4) and (6) of the Bankruptcy Code.

Case 12-01297-RBR Doc 1 Filed 04/09/12 Page 1 of 192

JURISDICTION AND VENUE

1. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (I).

2. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

1334, and Administrative Order 2012-25 of the United States District Court, Southern District of

Florida.

3. Venue is proper in this Court pursuant to 28 U.S.C. § 1409 as this adversary

proceeding arises under Title 11, United States Code, or arises in or relates to the Chapter 7

bankruptcy proceeding before this Court styled In re George A. Kastanes and Teresa D.

Kastanes, Case No. 12-10274-BKC-RBR (the “Main Case”), which is pending before the

Honorable Judge Raymond B. Ray of the United States Bankruptcy Court, Southern District of

Florida, Fort Lauderdale Division (the “Court”).

PARTIES

4. Plaintiff, the Retirement System, is a municipal employee retirement system,

pension plan and trust created by the Charter of the City of Detroit to provide retirement,

disability, and survivor benefits to eligible employees of the City of Detroit Police Department

and Fire Department and their beneficiaries, as authorized by the Michigan Constitution and the

Home Rule Act, doing business in Wayne County, Michigan.

5. G. Kastanes is an individual that filed a voluntary petition for relief under Chapter

7 of the Bankruptcy Code on January 5, 2012 (the “Petition Date”). As of the Petition Date, the

Debtor was residing at 1201 S. Ocean Dr. # 2206N, Hollywood, FL 33019.

6. T. Kastanes is an individual that filed a voluntary petition for relief under Chapter

7 of the Bankruptcy Code on the Petition Date. As of the Petition Date, the Debtor was residing

at 1201 S. Ocean Dr. # 2206N, Hollywood, FL 33019. T. Kastanes and G. Kastanes shall be


collectively referred to herein as the “Defendants”, and are included as Michigan Defendants in

the Michigan case as defined hereinbelow.

THE DEFENDANTS’ ALTER EGOS AND CO-CONSPIRATORS

7. As further detailed herein, the Defendants’ perpetrated their fraud against the

Retirement System using alter ego shell companies and co-conspirators, all transacting business

in Wayne County, Michigan, including the following:

a. Paramount Limited, LLC, is a Michigan limited liability company

(“Paramount Limited”), whose officer, upon information and belief, is Abner

McWhorter.

b. Paramount Land Holdings, LLC is a Michigan limited liability company

(“Paramount Land-MI”), and is the sole owner of Paramount Limited, whose officer,

upon information and belief, is Abner McWhorter.

c. Paramount Land Holdings, LLC is a South Carolina limited liability

company (“Paramount Land-SC”), which is wholly owned by Paramount Limited, whose

initial officers were Sharon McWhorter and George Kastanes.

d. Paramount Servicing, LLC, is a South Carolina limited liability company

which is wholly owned by Paramount Limited.

e. McWhorter Properties, LLC is a Michigan limited liability company

(“McWhorter Properties”), whose officers, upon information and belief, are Sharon

McWhorter and Abner McWhorter.

f. McWhorter Development Co. is a Michigan Corporation (“McWhorter

Development”), whose officers, upon information and belief, are Sharon McWhorter and

Abner McWhorter.


g. AM Management Consulting, LLC is a Michigan limited liability

company (“AM Management”) which is owned by Abner McWhorter.

h. Interstate Investment Group, LLC, is a South Carolina limited liability

company (“Interstate”), wholly owned by Defendant George Kastanes.

i. LMA Investment Group LLC is a Delaware limited liability company

(“LMA”) operating in Wyoming as LMA Investment Group Inc., whose officer, upon

information and belief, is Lindsey Anderson (Haygood), daughter to Defendant Teresa

Kastanes.

j. Pegasus Investments, LLC, is a Nevada limited liability company

authorized to transact business in Florida as Pegasus Investments SC LLC (“Pegasus”),

whose sole owner is Teresa Kastanes.

k. GIGO, LLC is a Wyoming limited liability company and a South Carolina

limited liability company (“GIGO”), whose officer, upon information and belief is Joni

Mayle, former legal assistant to Defendant George Kastanes and James Odell Barnes.

l. Carolina Trading Group, LLC is a South Carolina limited liability

company (“Carolina Trading Group”), whose officer is, upon information and belief,

Defendant Teresa Kastanes.

m. SMJ Corridor Development Company is a Michigan limited partnership

(“SMJ”) owned by Sharon McWhorter.

n. Southern Servicing, LLC (“Southern Servicing”) is a South Carolina

limited liability company, and upon information and belief, Defendant Teresa Kastanes is

an officer.

o. PSPRPW, LLC is a South Carolina limited liability company.


p. Fielding Properties, LLC a/k/a DMB Capital Management, LLC

(“Fielding/DMB”) is a South Carolina limited liability company.

q. Lexigon, LLC (“Lexigon”) is a South Carolina limited liability company.

r. L. Black Properties, LLC (“L. Black”) is a South Carolina limited liability

company.

s. National Financial Solutions, LLC (“National Financial”) is a South

Carolina limited liability company.

t. Real Property Holdings, LLC (“Real Property Holdings”) is a South

Carolina limited liability company.

u. B L Homes, LLC (“B L Homes”) is a South Carolina limited liability

company.

v. Harcal, LLC (“Harcal”) is a South Carolina limited liability company.

w. ALA, LLC (“ALA”) is a South Carolina limited liability company, whose

officer, upon information and belief, is Ashley Kastanes, daughter of Defendant George

Kastanes.

x. Stonecrest Investments, LLC (“Stonecrest”) is a South Carolina limited

liability company.

y. TDK Aviation, LLC (“TDK”) is a South Carolina limited liability

company, whose officers, upon information and belief, are Defendants Teresa Kastanes

and George Kastanes.

z. Gilbert Title & Service, LLC (“Gilbert Title”) is a South Carolina limited

liability company, whose officer, upon information and belief, is Defendant Teresa

Kastanes.


aa. Abner McWhorter III (“A. McWhorter”) was an individual residing in

Wayne County, Michigan. A. McWhorter became deceased on August 25, 2011. A.

McWhorter’s personal representative opened an estate in Wayne County Probate Court

bearing case number 2011-770979-DE (the “McWhorter Estate”). Where applicable

throughout this Complaint, the term A. McWhorter shall include the McWhorter Estate.

bb. Sharon McWhorter (“S. McWhorter”) is the mother of A. McWhorter,

officer of McWhorter Development, officer of McWhorter Properties, owner of SMJ, and

was the Chairperson of Paramount Land – MI, and Paramount Land-SC at the time of the

initial Loan presentation to the Retirement System.

cc. TAK Houses, LLC (“TAK”) is a Michigan limited liability company and a

South Carolina limited liability company, whose owner and operator, upon information

and belief, is Alex Kastanes, Defendant George Kastanes’ son.

8. The entities described hereinabove were owned and/or controlled by G. Kastanes,

T. Kastanes, A. McWhorter, and/or S. McWhorter at all times material to this Complaint, or

were otherwise used by these individuals as part of the fraudulent scheme detailed herein and

perpetrated against the Retirement System.

9. A diagram depicting the ownership and interrelationships of the above entities

and individuals as alter egos and co-conspirators described hereinabove is attached hereto as

Exhibit 1, and are collectively referred to herein, inclusive of Defendants T. Kastanes and G.

Kastanes herein, as the “Michigan Defendants”, as captioned in the Wayne County, Michigan

case, bearing case number 2011-006035-CR (the “Michigan case”).


THE RETIREMENT SYSTEM LOAN AND ITS BREACH

10. On March 14, 2007, the Wall Street Journal published an article entitled

Foreclosure Rise Brings Business to One Investor (the “WSJ Article”). A copy of the WSJ

Article is attached hereto as Exhibit 2. The WSJ Article described the business practices of a

Mr. James Odell Barnes (“Mr. Barnes”), detailing Mr. Barnes’s enterprise of purchasing

foreclosed homes in bulk, then selling them to low-income individuals with insufficient credit

ratings to purchase homes through more traditional means. The WSJ Article identifies G.

Kastanes as Mr. Barnes’s attorney in connection with this business, and further identities T.

Kastanes as a person also involved with the business.

11. G. Kastanes met A. McWhorter after the publication of the WSJ Article, and

subsequently entered into an arrangement in the nature of a partnership for the purpose of

creating, continuing and expanding a business similar to that described in the WSJ Article.

12. On June 14, 2007, S. McWhorter, Chairperson of Paramount Land Holdings, and

A. McWhorter, President of Paramount Land Holdings, on behalf of themselves, Paramount

Land-MI and Paramount Limited, presented the Retirement System with a request for the

Retirement System to invest in a company to be formed to purchase distressed mortgage loans

for resale in the secondary market. See the attached Term Sheet, attached hereto as Exhibit 3.1

13. The Retirement System declined to be an investor, but agreed to loan up to

$10,000,000.00 to Paramount Limited, and $9,965,778 was ultimately borrowed pursuant to that

loan agreement (the “Loan” and the “Loan Proceeds”).

14. The Loan is memorialized in documentation (the “Loan Documents”) executed

and delivered in Wayne County, Michigan. The Loan Documents are governed by, and are to be

1 This Court should note that the Term Sheet demonstrates that G. Kastanes is stated to the be the Real Estate Counsel for the Michigan Defendants and that attorney Glenn D. Oliver is the General Counsel.


construed in accordance with, the laws of the State of Michigan. True and correct copies of the

Loan Documents are attached hereto as Exhibit 4.

15. The Loan Documents were executed on or around January 24, 2008, and the Loan

was closed on or around January 29, 2008.

16. The Loan was disbursed in four installments (the “Draws”). Copies of the letters

through which each of the Draws were requested are attached hereto as Exhibit 5 (the “Draw

Requests”).

17. Each Draw Request contains representations regarding the intended use of the

funds, and the use of funds subject to prior Draws.

18. Each Draw Request also contained a certification that the Loan was being used in

accordance with the Loan Documents, which the Retirement System now knows to have been

false certifications.

19. Payments were not made on the Loan as required by the Loan Documents, and the

full amount of the Draws remains outstanding and unpaid, including any and all costs permitted

to be paid to the Retirement System pursuant to the Loan Documents, along with the Costs

Order.

20. Nonetheless, on July 23, 2009, A. McWhorter made a presentation to the

Retirement System representing Paramount’s operations to be thriving and successful, and

requested an additional $8,000,000.00 loan for use with the Paramount operations (the “Second

Loan”).

21. Based upon these representations, the Retirement System authorized due diligence

to determine whether it would have an interest in making the Second Loan.2

2 This Court should note that Defendants G. Kastanes and T. Kastanes provided via e-mail a bulk of the information and documentation necessary for the Retirement System business advisor to review during the due diligence period.


22. On June 17, 2010, the Retirement System received results of the Second Loan due

diligence review, and learned that there were numerous substantial breaches of the terms of the

Loan Documents for the first Loan. Accordingly, the Retirement System declined the request for

the Second Loan.

23. On September 23, 2010, the Retirement System issued a Notice of Default,

providing thirty (30) days to cure the defaults. A true and correct copy of the default notice is

attached as Exhibit 6.

24. The defaults were not cured, and on February 15, 2011, the Retirement System

accelerated the Loan through the issuance of the Default Notice. A copy of the letter to A.

McWhorter, contact person for the Michigan Defendants at that time, providing notice of the

failure to cure, is attached hereto as Exhibit 7.

25. On February 15, 2011, the Retirement System delivered a proposal to the

Michigan Defendants whereby the Retirement System would forbear from proceeding to sue

Defendants if they were willing to cooperate with establishment of a voluntary receivership as

described in the forbearance agreement (the “Forbearance Agreement”), a copy of which is

attached as Exhibit 8.

26. On February 16, 2011, A. McWhorter signed the Forbearance Agreement on

behalf of the Defendants and the Michigan Defendants.

27. By the terms of the Forbearance Agreement, in addition to anything else stated

therein, the Defendants herein and the Michigan Defendants:

a. acknowledged the existing Default and acceleration of the Loan; and b. agreed to cease and desist from further acquisition of properties and/or the

conduct of their business, and/or the transfer of any assets; and c. agreed to provide the Retirement System with full cooperation so that a

voluntary receiver could step in to manage all transactions, assets and obligations of the Defendants herein and the Michigan Defendants.


28. Despite initial cooperation, Defendants herein and the Michigan Defendants have

not complied with the Forbearance Agreement.

29. The Loan Documents were breached by the Defendants herein and the Michigan

Defendants and are in default for numerous reasons, including but not limited to:

a. Failure to make payment or use the Loan as approved; b. Failure to timely provide compliant quarterly or annual financial

statements; c. Failure to provide evidence of required insurance; d. Failure to pay all taxes imposed or assessed; e. Failure to maintain all licenses necessary to the conduct of the business; f. Failure to permit the Retirement System to visit and inspect its operations,

books of account and to discuss its affairs with their independent public accountants;

g. Improper disbursements and loans to third parties, and related and affiliated parties, including consultants and various of the Michigan Defendants;

h. Payment of consulting fees which were not contemplated or permitted, which were denied by Defendants, and were not disclosed in the Draw Requests;

i. Submission of Draw Requests misrepresenting the use of the Loan; j. Failure to provide quarterly written summaries; k. Failure to pay city water charges for the properties; l. Failure to provide the Retirement System with notice of, and ability to

participate in certain of the Michigan Defendants' membership meetings; m. Failure to obtain the Retirement System's consent for the establishment

and/or use of the various and numerous Defendant entities, in their operations;

n. Submission of false documentation, information, representations and warranties to the Retirement System as well as State of Michigan in their license applications;

o. Failure to remove tax and water liens from the properties; p. Failure to obtain the Retirement System's consent when required; q. Failure to comply with applicable laws, ordinances, regulations or

requirements of governmental authorities relating to the business; r. Failure to notify the Retirement System of judgments, contempt

proceedings and other disputes, and litigation; s. Failure to promptly respond to the Retirement System's inquiries and/or

requests; t. Failure to notify the Retirement System of facts causing representations

and warranties in the Loan Documents to be false; u. Making investments in securities not authorized by the Loan Documents;


v. Incurring debt guaranty obligations and failing to notify the Retirement System of guaranty obligations;

w. Such other failures and/or breaches that may become known through discovery.

30. By their own admissions in statements and documents presented since the first

Loan closing, the Defendants herein and the Michigan Defendants never intended to, and had no

ability to comply with the terms of the Loan Documents as and when they were executed.

31. The Defendants herein and Michigan Defendants acknowledged and agreed that

an Event of Default has occurred under the Loan Documents. See Exhibit 8, the Forbearance

Agreement.

32. Contrary to the representations and presentations to the Retirement System,

and/or the Loan Documents, the Michigan Defendants, including the Defendants herein, were in

the business of purchasing foreclosed residential real property from banks, mortgage companies

and wholesalers in bulk, for resale through individual property sales to third parties who are

primarily individuals.

33. The Michigan Defendants and the Defendants herein have acquired over 2500

properties in 30 states using approximately one-half of the Loan Proceeds, i.e., approximately

$5,000,000.00.

34. Nearly all sales by Defendants herein and/or Michigan Defendants are by land

contract where purchasers are required to sign a land contract, promissory note and mortgage;

none of which are recorded in the land records.

35. The Defendants herein and the Michigan Defendants also purchased

approximately ninety (90) mortgage notes in early 2009.


36. Interest began to accrue on the Loan at the Default Rate of 18% per annum

commencing the day following the issuance of the Loan, due to defaults, which existed since the

Loan closing.

37. The Loan Documents require the Defendants herein and the Michigan Defendants

to pay all of the Retirement System's costs and fees associated with the Loan, the Second Loan

request, and any litigation to enforce the Loan Documents.

38. As of March 31, 2012, the Retirement System is owed $16,079,842, plus costs

and fees in excess of $250,000, as well as costs and fees pursuant to the Loan Documents, and

Default Interest thereafter until paid in full.

39. The total indebtedness due from the Michigan Defendants, including the

Defendants herein, to the Retirement System as of the Petition Date was in excess of

$15,373,212.

THE ROLE OF G. KASTANES AND T. KASTANES

40. G. Kastanes and T. Kastanes participated with A. McWhorter and S. McWhorter

in securing, managing, spending, investing and/or receiving the Loan Proceeds. The Michigan

Defendants include corporate entities which were used by G. Kastanes, T. Kastanes and their co-

conspirators as a shield to transfer assets amongst themselves in order to conceal and cover the

trail of Loan Proceeds and to frustrate the ability of the Retirement System and the Receiver to

trace, locate and recover improperly diverted funds. See Exhibit 9, an E-Mail from Defendant

G. Kastanes where he states the Defendants’ intent to “create confusion and dissension for

anyone looking for us” as part of an “asset protection intent”.

41. Upon information and belief, G. Kastanes and T. Kastanes were aware of,

consented to, directed and/or orchestrated the fraudulent actions of A. McWhorter, S.


McWhorter and the Michigan Defendants as further described herein, and therefore the Michigan

Defendants and the Defendants (G. Kastanes and T. Kastanes) are jointly and severally liable for

the total debt owed to the Retirement System as further described herein.

42. In addition to creating and using the corporate Michigan Defendants, i.e. the

Holding Companies, as mere instrumentalities for their fraudulent scheme to maximize their

benefit from the Loan and defraud the Retirement System, the Defendants have not adhered to

corporate formalities required by law with respect to the Holding Companies, and such failure is

not justified or reasonable under the totality of the circumstances.

43. Specifically the Defendants have been the primary operations principals for all the

Michigan Defendants at the Michigan and South Carolina offices.

44. G. Kastanes and/or T. Kastanes and/or their companies/corporate Michigan

entities employ the persons operating the Michigan office.

45. G. Kastanes’s son, Alex Kastanes, serves as the Michigan notary on many

documents, including closing documents for the sale of properties in Michigan and elsewhere.

46. G. Kastanes and T. Kastanes established the Holding Companies with the intent to

defraud creditors and commit fraudulent conveyances. See Exhibit 9.

47. Defendant T. Kastanes is the sole member of Southern Servicing, which assumed

the servicing obligations of Interstate on August 31, 2010 under that certain Management

Agreement between Interstate and Paramount Land Holdings, LLC (the "Management

Agreement", dated January 3, 2008), and a separate Management Agreement between Interstate

and Southern Servicing dated September 28, 2010 ("Defendants' New Management

Agreement"). A copy of the Management Agreement, Assignment and Defendants' New

Management Agreement are attached as Exhibit 10.


48. Defendant G. Kastanes has expressed to the Michigan Court that his wife,

Defendant Teresa Kastanes and another individual, Jackie Mitchell, own Southern Servicing.

See transcript from the Show Cause Hearing for Contempt, September 30, 2011, pg. 12, lines 2-

9, attached hereto as Exhibit 11. In addition, he mentions that they may have brought in another

lady. Id. at lines 7-8.

49. Defendants failed to notify Plaintiff of the changes to their servicing arrangements

despite ongoing interaction between the Michigan Defendants, including Defendants herein, and

Plaintiff during all of 2010 and the first quarter of 2011.

50. Upon information and belief, the Assignment to Southern Servicing and

Defendants' New Management Agreement were another effort by the G. Kastanes, T. Kastanes,

A. McWhorter and S. McWhorter, to the extent they were aware of the changes in servicers, to

conceal the true nature of the revenues generated by the Defendants herein and the Michigan

Defendants' properties acquired with the Loan.

THE DEFENDANTS’ FRAUD AND MISREPRESENTATIONS

A. Consulting Fees

51. Prior to their presentation to the Retirement System, the Defendants and Michigan

Defendants were required to respond to the Retirement System's questionnaire, certifying

numerous matters.

52. Among other matters, on June 13, 2007, Defendants (through A. McWhorter)

certified that Paramount has "no consulting fees, finder's fees, commissions and/or similar

payments to be paid in the event the Retirement System makes the proposed investment." ( the

"Certification Letter"). The Certification Letter is attached as Exhibit 12.


53. Almost immediately following the first funding of the Loan, the Defendants and

Michigan Defendants started paying monthly consulting fees to third parties, clearly evidencing

their false certification.

B. Draw Requests

54. The Draw Requests were submitted to induce the Retirement System to fund the

Loan and have proven to be false in many respects.

55. The Draw Requests represent that in excess of $8,000,000 of the Loan was used

to purchase properties.

56. In fact, only approximately $5,000,000 of the Loan was used to purchase

properties.

57. The Draw Requests represent that Loan funds drawn would be used for payment

of property insurance, advertising and marketing, and title work totaling $611,000.

58. In fact, the Defendants did not use those funds for property insurance, advertising

and marketing and/or title work as represented.

59. The Draw Requests represent that a majority of the properties purchased with the

Loan proceeds were sold and the funds returned to the Retirement System as revenues.

60. In fact, it is now claimed that only approximately 600 properties have been sold

out of over 2500 properties purchased - clearly not a majority, as the Defendants herein and the

Michigan Defendants have asserted.

61. The Draw Requests represent a gross profit of just under $3,000,000 in less than 6

months of operations.

62. In fact, financial statements reveal that the Defendants herein and Michigan

Defendants were operating at a loss in the amount of around $1.2 Million.


63. The Defendants herein and Michigan Defendants falsely represented and certified

that all requirements of the Loan Documents for wiring funds had been or would be met, and that

the Loan was used in accordance with the Loan Documents.

64. The Draw Requests were utter fabrication intended solely to induce the

Retirement System to fund the Loan.

65. The Defendants herein and Michigan Defendants misrepresented the true facts in

order to appear credit worthy and eligible for the Loan and each Draw upon the Loan.

C. Loan Documentation and Submissions

66. The Loan Documents include numerous representations, covenants and

agreements with which Defendants herein and the Michigan Defendants have not complied.

67. Despite the requirement in the Loan Documents, Defendants herein and the

Michigan Defendants later admitted that they never intended to maintain property insurance on

the properties they purchased.

68. Despite claims that the Michigan Defendants and the Defendants herein were

current in the payment of taxes, the records of the City of Detroit and the County of Wayne,

along with other cities and counties in which Defendants have properties, reveal very substantial

delinquencies.

69. Defendants made direct and indirect misrepresentations to the State of Michigan

OFIR (Office of Financial & Insurance Regulation) in the mortgage broker/lender license

applications filed. These applications were never processed completely due to the inadequate

supporting documentation, and no mortgage broker/lender licenses were issued to any of the

Michigan Defendants nor to the Defendants herein.


70. The State of Michigan OFIR has recently issued a cease and desist order in

relation to Paramount Land Holdings’ violations of the Mortgage Brokers, Lenders, and

Servicers Licensing Act, MCL 445.1651 et seq. See Exhibit 13, a copy of the Order to Cease

and Desist and Notice of Opportunity for Hearing dated February 9, 2012.

71. Defendants herein and the Michigan Defendants have repeatedly represented that

they were in good financial standing and their operations were thriving.

72. Defendants herein and the Michigan Defendants submitted financial statements to

the Retirement System which did not comply with Loan Document requirements and overstate

income by many millions of dollars.

73. In addition to those specified herein, the documentation and information provided

by the Defendants herein and the Michigan Defendants since 2007 demonstrate many more

material false representations relating to the Defendants herein and the Michigan Defendants'

operations, financial status, use of funds, compliance with laws, and other matters; too numerous

to list in this Complaint.

D. The Defendants Operations Were Effectively a Ponzi Scheme

74. As a result of their fraudulent statements and actions, Defendants herein, along

with the Michigan Defendants, secured the Loan and utilized the Loan to conduct operations not

permitted by the Loan Documents or by law.

75. Since Loan closing, the Michigan Defendants, along with Defendants herein,

made 9 quarterly payments of interest on the Loan, for a total of $2,066,317 ("Interest

Payments").


76. The Michigan Defendants and Defendants herein used the Retirement System's

Loan to make the Interest Payments to the Retirement System, which was confirmed by A.

McWhorter at a Retirement System meeting on March 17, 2011.

77. The Michigan Defendants and Defendants herein have never provided a full

accounting of the use of the Loan proceeds and/or the revenues of their operations since January,

2008.

78. The Defendants herein have worked in concert with the Michigan Defendants to

conceal the true nature of their operations and the “Paramount Ponzi Scheme.”

E. Fraud in the Inducement

79. Misrepresentations by the Michigan Defendants and the Defendants herein were

made to induce the Retirement System to make the Loan and fund the Loan pursuant to the Draw

Requests.

80. Since the Loan closing, in addition to Draw Requests, the Defendants herein and

Michigan Defendants made numerous misrepresentations intended to induce the Retirement

System to make the Second Loan and permit them to continue to conspire and operate their

Ponzi Scheme without interference.

81. Defendant Paramount Limited has clear contractual privity with the Retirement

System by virtue of the Loan Documents.

82. G. Kastanes and T. Kastanes, together with the web of people and entities that

comprise the Michigan Defendants, collectively own the Loan Collateral acquired with the Loan

proceeds.


83. Defendants herein have acted in concert with the Michigan Defendants in

utilizing Loan proceeds and perpetuating the Paramount Ponzi Scheme, such that the Retirement

System has privity with all of the Michigan Defendants, including Defendants herein.

84. The fraudulent acts of the Michigan Defendants and the Defendants herein have

clearly harmed the Retirement System.

THE MICHIGAN PROCEEDINGS

85. On or about May 19, 2011, the Retirement System filed its Verified Complaint

Seeking Appointment of Receiver and Other Relief in the Circuit Court for the County of

Wayne, State of Michigan, before the Hon. John H. Gillis, Jr. (the “Michigan Court”), under

Case No. 11-006035-CR, (the “Michigan Proceedings”). The Retirement System’s Verified

Complaint was last amended on November 15, 2011, through the filing of a Second Amended

and Restated Verified Complaint Seeking Appointment of Receiver and Other Relief (the

“Second Amended Verified Complaint”), which is attached hereto as Exhibit 14. All allegations

of the Second Amended Verified Complaint are incorporated by reference as though fully set

forth herein.

86. The Second Amended Verified Complaint named G. Kastanes, T. Kastanes, and

all of the Michigan Defendants as defendants. The Second Amended Verified Complaint set

forth, in 288 numbered paragraphs, the factual allegations supporting the Retirement System’s

claims for: (1) Breach of Contract (Count I); (2) Fraud and Misrepresentation (Count II); (3)

Fraudulent Conveyances (Count III); (4) Civil Conspiracy (Count IV); (5) Request for

Appointment of a Receiver (Count V); and (6) Claim and Delivery (Count VI).

87. On June 3, 2011, the Retirement System filed an Emergency Motion for the

Appointment of Receiver.


88. The Michigan Court granted the Retirement System’s Motion for appointment of

a receiver by Order entered on June 6, 2011. A true copy of the Michigan Court’s June 6, 2011

Order Appointing Alternate Receiver and Enjoining Defendants from Damaging, Destroying or

Otherwise Impairing any Property, Including Records and Documents, together with a true copy

of the Michigan Court’s November 14, 2011 Order Allowing Plaintiff’s Second Amended and

Restated Verified Complaint and Amending the Receiver Order, are attached hereto as

Composite Exhibit 15 (together, the “Receiver Order”).

89. Pursuant to the Receiver Order, the Receiver was to, inter alia, manage and

administer certain real estate holdings and assets of the Defendants and the Michigan

Defendants. Also pursuant to the Receiver Order, the Defendants and the Michigan Defendants

were specifically enjoined from interfering with the Receiver’s discharge of his duties.

90. Immediately following its entry and despite the explicit prohibitions set forth in

the Receiver Order, the Defendants and the Michigan Defendants interfered with the Receiver’s

discharge of his duties. Specifically, the Defendants shredded computer files and records, and

were not providing the documentation and information required by the Receiver Order.

91. As a result, on or about July 20, 2011, the Retirement System filed a motion

seeking to find the Debtors in contempt of court for failing to comply with the Receiver Order.

92. On July 22, 2011, the Michigan Court issued its order to show cause (“Show

Cause Order”) in connection therewith. A true copy of the Show Cause Order is attached hereto

as Exhibit 16.

93. After three days of a show cause hearing, on November 14, 2011, the Michigan

Court entered its Order of Contempt – Kastanes Defendants (the “Contempt Order”), holding the


Debtors in contempt of court for violating the Receiver Order and the Show Cause Order. A true

copy of the Contempt Order is attached hereto as Exhibit 17.

94. At the same time, the Michigan Court entered its Order Assessing Costs and

Expenses Against the Kastanes Defendants (“Cost Order”) based on a motion filed by the

Retirement System on October 14, 2011. A true copy of the Cost Order is attached hereto as

Exhibit 18. The amount of $255,915.86 was due on December 31, 2011. This amount is still

due and owing to the Retirement System.

COUNT I

DETERMINATION OF NON-DISCHARGEABLITY OF DEBT PURSUANT TO 11 U.S.C. § 523(a)(2)

95. The allegations set forth hereinabove at paragraphs 1-94 are incorporated by

reference as if fully restated and realleged herein.

96. Section 523(a)(2)(A) of the Bankruptcy Code provides in relevant part that:

A discharge under . . . this title does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit . . . obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition.

97. The Defendants, together with their alter egos and co-conspirators, i.e. the

Michigan Defendants, obtained the Loan and the Loan Proceeds by representing to the

Retirement System the purpose of the Loan, the intended disposition of the Loan Proceeds, and

the intended structure of the corporate entities that would control the Loan Proceeds.

98. These representations were false when made because the Defendants, together

with their alter egos and co-conspirators, i.e. the Michigan Defendants, diverted the money

obtained from the Retirement System into the unauthorized Holding Companies, corporate

entities identified on Exhibit 1, and failed to use those funds for the purposes approved by the

Retirement System.


99. At all times, the Retirement System relied on the representations and agreements

by the Michigan Defendants and the Defendants herein to be truthful and legitimate.

100. At the time Michigan Defendants and the Defendants herein made each of the

material representations to the Retirement System, Defendants knew the representations were

false, and they made the representations intentionally, negligently and/or recklessly, without any

knowledge of their truth and as a positive assertion.

101. Defendants herein, along with the Michigan Defendants, made the representations

to the Retirement System with the intention that the Retirement System would rely upon the

representations, grant the Loan, fund the Loan and entertain the proposal of a Second Loan, and

permit Defendants to continue their unlawful and improper business operations and Ponzi

Scheme.

102. The Retirement System did rely and act upon the representations made by

Defendants, believing them to be true, and as a result has suffered harm.

103. The Retirement System has not been paid in accordance with the Loan

Documents, Defendants herein and the Michigan Defendants have operated in violation of the

law, caused fines for failure to obtain a mortgage license, failure to pay state of Michigan taxes,

failure to pay utilities and water bills, failure to pay real property taxes, triggering penalties and

interest, all of which have a negative impact on the value of the Loan Collateral and the

Retirement System's ability to collect the Loan.

104. Upon information and belief, all Defendants had actual knowledge and/or

knowledge must be imputed to each Defendant due to their participation in the Defendants' Ponzi

Scheme, conspiracy and illegal operations.


105. To the extent Defendants claim lack of actual knowledge as to any aspect of the

fraud perpetrated upon the Retirement System by Defendants, knowledge must be imputed to

Defendants due to their participation in the fraudulent act, the conspiracy and the Paramount

Ponzi Scheme.

106. As a direct and proximate result of Defendants' fraud and misrepresentations, the

Retirement System has been damaged in an amount not less than $16,079,842, plus costs and

expenses pursuant to the Loan Documents and the Costs Order.

WHEREFORE, the Retirement System requests that this Court:

(a) Determine that the Retirement System’s claims against the Defendants are non-dischargeable under 11 U.S.C. § 523(a)(2)(A) of the Bankruptcy Code;

(b) Liquidate the Retirement System’s claim and enter a judgment in its favor and against the Defendants in an amount not less than $16,079,842, plus the Costs Order, and any and all expenses pursuant to the Loan Documents, as of the Petition Date; and

(c) Grant such other relief as this Court deems just and appropriate.

COUNT II

(NONDISCHARGEABLITY OF DEBT PURSUANT TO 11 U.S.C. § 523(a)(4))



108. Section 523(a)(4) of the Bankruptcy Code states in relevant part:

A discharge under . . . this title does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

109. The funds which the Defendants herein and the Michigan Defendants collectively

obtained through the Loan were the property of Paramount Limited, and those funds were to be

used solely by Paramount Limited for the purposes set forth in the Loan Documents, unless

otherwise approved by the Retirement System.


110. The Defendants herein and the Michigan Defendants collectively wrongfully

asserted dominion over the Loan Proceeds by transferring them to the Defendants’ alter egos and

co-conspirators, either directly or by purchasing properties in the names of such entities,

including the Holding Companies.

111. The diversion of the Loan Proceeds by the Defendants herein and the Michigan

Defendants was inconsistent with and violated the intended ownership and disposition of the

funds pursuant to the Loan Documents.

112. Therefore, the Defendants fraudulently misappropriated the Retirement System’s

property when such property had been entrusted to the Defendants’ alter egos and co-

conspirators.

113. The Defendants fraudulently took and carried away the Retirement System’s

property, i.e., the Loan Proceeds, with the intent to convert it to their own use or deprive the

Retirement System of the same.

114. As a direct and proximate result of the Defendants’ felonious taking and carrying

away of the Loan Proceeds, the Defendants have suffered and continue to suffer damages in an

amount not less than $16,079,842, plus costs and expenses pursuant to the Loan Documents and

the Costs Order.

115. The Defendants’ conduct as alleged herein constitutes actual fraud, embezzlement

and/or larceny.

WHEREFORE the Retirement System requests that this Court:

(a) Determine that the Retirement System’s claims against the Defendants are non-dischargeable under 11 U.S.C. § 523(a)(4) of the Bankruptcy Code;




COUNT III

(NONDISCHARGEABLITY OF DEBT PURSUANT TO 11 U.S.C. § 523(a)(6))



117. Section 523(a)(6) of the Bankruptcy Code states in relevant part:

A discharge under . . . this title does not discharge an individual debtor from any debt . . . for willful and malicious injury by the Debtor to another entity or to the property of another entity.

118. The Retirement System is an “entity” as such term is defined in 11 U.S.C. §

101(15).

119. The Defendants’ conduct as alleged herein constitutes willful and malicious

conduct which was intended to, and resulted in, injury to the Retirement System.

120. The Defendants wrongfully intended to cause injury and harm to the Retirement

System when they converted, stole and/or embezzled the Retirement System’s property in direct

contravention of the Loan Documents, and/or knew or reasonably should have known that such

conduct was reasonable certain to cause a specific injury to the Retirement System.

121. The Retirement System has sustained damages as the proximate cause of the

Defendants’ willful and malicious conduct toward the Retirement System and its property, in an

amount not less than $16,079,842, plus costs and expenses pursuant to the Loan Documents and

the Costs Order.

WHEREFORE the Retirement System requests that this Court:

(a) Determine that the Retirement System’s claims against the Defendants are non-dischargeable under 11 U.S.C. § 523(a)(6) of the Bankruptcy Code;




Respectfully Submitted this 9th day of April, 2012.

GENOVESE JOBLOVE & BATTISTA, P.A. Counsel for The Retirement System 100 Southeast Second Street, 44th Floor Miami, FL 33131 Tel.: (305) 349-2300 Fax : (305) 349-2310 /s/ Paul J. Battista____ Paul J. Battista, Esq. Florida Bar No. 884162 Michael L. Schuster, Esq. Florida Bar No. 57119 Michael A. Friedman, Esq. Florida Bar No. 71828 Omar K. Bradford Florida Bar No. 90444

-AND-

RACINE & ASSOCIATES Marie T. Racine, Esq. (P38184) Jennifer A. Cupples, Esq. (P73145) Counsel for the Retirement System (Admitted PHV) 1001 Woodward Avenue, Suite 1100 Detroit, MI 48226 Tel: (313) 961-8930








































































































































































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