Bankruptcy judge Erik P. Kimball. Photo: AM Holt

The owner of an unfinished hotel-condominium won its push to stop wealthy Wellington developer Glenn Straub from reserving most or all the proceeds from the Palm Beach property’s sale in a bankruptcy auction.

After filing for Chapter 11 bankruptcy protection last August, the Palm House Hotel’s owner, 160 Royal Palm LLC, asked to auction the salmon-colored, 82,648-square-foot building at the center of civil and criminal allegations of EB-5 investment visa fraud.

Straub’s KK-PB Financial LLC argued it has a $39 million secured interest in the property where the stalking-horse auction bid is set at $32 million.

The two sides have been fighting about KK-PB’s ability to credit bid in the auction tied to its secured interest, which could severely limit the cash proceeds available for distribution to others.

U.S. Bankruptcy Judge Erik Kimball in West Palm Beach ruled from the bench Friday that KK-PB can’t credit bid any amount in the auction. A written order had not been posted by late Monday.

KK-PB Financial maintains 160 Royal Palm defaulted on its mortgage and asked the court to set how much it could credit bid on the development.

For its part, 160 Royal Palm pushed the court to limit KK-PB Financial’s ability to credit bid to allow some recovery by the EB-5 investors.

KK-PB attorney Luis Salazar of Salazar Law in Coral Gables declined to say how his client plans to proceed, including whether KK-PB will lay claim to auction revenue.

But Philip Landau, the Boca Raton attorney representing 160 Royal Palm, said the judge went beyond the credit bidding question to bar a KK-PB claim to auction proceeds.

“My view of it is the judge delivered a knockout punch on Friday. They’re done,” said Landau, a founding partner of Shraiberg, Landau & Page. ”Even though this was an estimation hearing, he (Kimball) was deciding their claim amount for all purposes throughout the rest of the bankruptcy case.”

A statement from Salazar appears to leave the door open for another hearing on a KK-PB claim.

“As to the claims of fraudulent transfer, Mr. Straub did not present valuation and insolvency experts at this estimation proceeding but intends to do so at the final hearing on this matter. Once the court hears from our experts, we believe we will prevail and have a fully allowed claim in this case,” Salazar said.

A motion by 160 Royal Palm filed last October asked Kimball to limit KK-PB Financial’s credit bid and linked Straub and KK-PB to the alleged EB-5 fraud scheme.

Kimball decided there wasn’t enough evidence presented by 160 Royal Palm for him to conclude Straub was involved, Salazar said.

“Straub’s primary goal at this stage of this dispute was to refute the completely unfounded allegations that he was in any way involved with the fraudulent EB-5 investor scheme. We were completely successful in that effort, with the court finding that the receiver and his team did not present evidence supporting those allegations,” Salazar said.

At the same time, Landau said Kimball left an open question on Straub’s role. Landau touted the ruling as a success for the foreign investors in terms of their potential recovery.

After several delays, the auction is scheduled for March 8 and bids are due by 5 p.m. March 4.

The stalking-horse bid serving as the minimum offer was submitted by RREF II Palm House LLC, an affiliate of New York-based developer and fund manager Related Cos. LP.

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Bankruptcy Judge Rejects Sale of Palm House Hotel to Creditor

Palm Beach Condo-Hotel Tied to $40 Million EB-5 Fraud Heads to Auction