Nightingale Negotiating Settlement In Case Of Missing CrowdStreet Millions

Investors who put tens of millions of dollars combined into two real estate crowdfunding campaigns sponsored by Nightingale Properties — a New York developer accused of misappropriating those funds — could be close to seeing some of their money returned in a settlement agreement.

The revelation came in a Thursday morning status update hearing in the Chapter 11 bankruptcy cases of the entities formed to raise the investor dollars.

The attorney who is representing the entities, which raised more than $50M combined from individual investors, told a judge in the U.S. Bankruptcy Court for the District of Delaware that the parties were “making progress” on a possible settlement between Nightingale and its CEO, Elie Schwartz, and the independent manager running the bankrupt entities, Anna Phillips.

"The debtors have been negotiating with Mr. Schwartz and Nightingale as well as the [debtor-in-possession] lender CrowdStreet regarding the appropriate resolution of these cases,” Baker Hostetler partner Jorian Rose said during the status update hearing. “While I don't believe we're in a position to make any announcements this morning, and nothing's been agreed to ... the debtors do believe that they've been making progress in their negotiations to the extent we are able to reach a deal about the resolution of these cases.”

Rose said any agreement would “form the basis” of a court-approved plan for the entities to emerge from bankruptcy, which could be filed with the court in the next month or so.

“To the extent that we are not successful, the debtors would intend to file a plan that allows all the claims to flow into a liquidating trust,” Rose said. “We’re hoping for the former, but the latter is also something we’re preparing for.”

Rose didn't reveal any details of a potential settlement to Judge Craig Goldblatt during the conference Thursday, which was broadcast on Zoom.

Nightingale launched the crowdfunding campaigns on CrowdStreet last year, first raising $45M from retail investors to buy the massive Atlanta Financial Center complex from Sumitomo Corporation of America for $182M — a price that would have represented a $78M loss.

Months later, Nightingale returned to the platform to raise equity to renovate a Miami Beach office building it already owned. It raised $8.8M toward that effort. Investors paid a minimum of $25K each to invest in the campaigns, but neither deal closed.

In June, CrowdStreet told investors the firm couldn't account for where the funds were located — they had gone directly into LLCs controlled by Schwartz, rather than being placed in escrow — and accused Nightingale of misappropriating the funds. Phillips was appointed as independent manager to take control of the LLCs and pushed both entities into bankruptcy with the intent of recovering as much of the missing millions as possible.

Eli Johnson, who put $25K into the failed Atlanta fund, told Bisnow Thursday he hasn't heard anything further since Phillips gave investors an update last month. At the time, Phillips told investors that her team received a proposed settlement offer from Schwartz through his lawyers, which she saw as “not acceptable because the terms are not fair, and it’s also unactionable.”

"We want to make sure that any offer that comes through predicated on future performance has sufficient and credible third-party documentation and disclosure," Phillips said during the August investor update.

It was also during that webinar with investors that Phillips said the Department of Justice and the Securities and Exchange Commission were investigating Nightingale. 

Nightingale's troubles extend far beyond its alleged misappropriation of CrowdStreet investor funds. Multiple large office buildings it owns in New York and Philadelphia have been foreclosed on, and the lender on a Brooklyn building Schwartz's firm paid $84M to acquire took over the property at an auction last month, The Real Deal reported.

Johnson said he doubted he and the other investors would get all their capital back in a potential settlement and said he has not been consulted by anyone from Phillips' team about a potential settlement. Phillips has said Schwartz funneled the majority of CrowdStreet investor cash to accounts he controlled, and millions more went to third-party entities without apparent ties to the deals.

"If all the money is sitting there in an account, there would not be an issue," Johnson said. "The chance of getting one check for the full amount seems like a slim chance."