By JAMES FINK
jfink@bizjournals.com | 716-541-1611

The future of downtown's historic but mothballed Statler Towers is murkier following a contentious court hearing that saw a number of surprise developments.

U.S. Bankruptcy Court Judge Carl Bucki, the trustee overseeing the fate of the 18-story landmark, began legal actions to start a possible abandonment of the former hotel-turned-office building. The potential buyer was given a 10-day extension to complete due diligence and secure $5.2 million sought in public-sector funds to cover immediate repairs.

At the same time, the City of Buffalo's legal representative said if all else fails, the city may be willing to take over ownership of the building.

Meanwhile, the attorney representing the mortgage holder strongly urged that the due diligence period end and the property be sold or abandoned.

At the end of the 90-minute hearing Dec. 9, few left the courtroom happy with the turn of events in the legal tug-of-war concerning the Statler's fate. Bucki set a Dec. 21 hearing to consider the abandonment recommendation, which was made by Garry Graber, counsel to court-appointed trustee Morris Horwitz.

Potentially, Bucki could declare the Statler abandoned by the end of the month or by early January - a move that would revert the structure back to the United Kingdom-based bankruptcy estate of BSC Buffalo Development LLC, run by British investor Bashar Issa. Such a move would leave the Statler mothballed and facing an uncertain future.

"All this helps, but my patience is running thin," said James Eagan.

He and Mark Croce are principals in Statler City LLC, which offered to buy the Delaware Avenue building, but only if $5.2 million in public-sector support is there. Croce declined comment but Statler City attorney Robert Knoer said he remains optimistic a resolution can be worked out between all parties.

"There are a lot of different moving parts and pieces," Knoer said.

From Statler City's perspective, at issue is securing public dollars for emergency repairs. Gov. David Paterson expressed support last month but his tenure in the governor's mansion ends Dec. 31.

Knoer said the request and Statler City's development plan continue to be "analyzed" on the state and local levels.

"Everyone has a role to play and it is not always in the public," Knoer said.

Brendan Mehaffy, Buffalo's economic development chief, said the 10-day due-diligence extension set by Bucki is helpful, but it is a "very tight" time frame.

"It's all coming down to real estate economics," Mehaffy said.

Croce and Eagan are planning an incremental redevelopment of the Statler beginning with the grand mezzanine and lobby, which will house a planned catering and restaurant operation along with a retail component. Knoer said those plans represent a potential private-sector investment of $3 million. They offered to buy the Statler for $200,000 and also pay $500,000 in owed back taxes. In addition, they offered to put into escrow taxes that have accumulated during due diligence.

Here's the catch: They say they need public-sector dollars to underwrite the emergency repairs to Statler Towers.

If the building is abandoned and faces demolition, sources have estimated those costs at $15 million to $20 million, with Buffalo being responsible for that bill.

Croce and Eagan's bid, which emerged this summer, came after a previous bid of $1.3 million by another group was declared in default when it failed to close on the deal last winter.

Croce's and Eagan's due-diligence period initially expired Nov. 15 and a closing was expected shortly after. It was extended to Dec. 1 and then to Dec. 9 by Bucki. The extension was set to expire at 5 p.m. that day.

Knoer is seeking a 90-day extension of the due-diligence period while his clients attempt to secure public-sector dollars. Bucki, thus far, has been reluctant to approve the full extension period.

The latest moves angered attorney Raymond Fink, who represents Mohmoud al Issa, Bashar Issa's father, who alleges he holds a $4 million mortgage on the property. Fink has been pushing for the deal to either close or see the Statler abandoned.

"We simply don't have any basics for extending the due-diligence period," Fink said. "It's fiction. Let's be honest about this thing. There's no due diligence that needs to be done. It's all about financing."

Graber disputed that.

"The trustee is not happy, by any means, with the way things have gone," he said. "Nobody's engaging in any fiction. It's not as if anybody is chomping at the bit for this property."

The delays coupled with harsh winter weather have forced Graber and Horwitz to start formal abandonment proceedings.

"It's too bad that the deal hasn't come together," Graber said. "We already had one sale fall through and not materialize. I'd love to see the building saved by whatever means, but at some point in time, we've got to bring this bankruptcy to close. We don't feel like we had any other choice."

Bucki placed the Statler in involuntary Chapter 11 protection in April 2009 as Bashar Issa and BSC Development faced legal and financial problems in Buffalo and Manchester, England. He bought the building in 2006 and currently is believed to be living in Dubai.

Bucki, after a potential sale of the Statler to local interests failed, ordered the building closed and in January ordered the 16 remaining tenants out. The Statler was boarded up and has become an eyesore in downtown Buffalo - this despite its deep architectural significance and local history.

City of Buffalo attorney John Heffron called the possible abandonment a "worst-case scenario." He suggested the building's ownership be shifted to Buffalo.

"One of the worst things that can happen is to allow the trustee to abandon the building, then it goes back to the original debtor (Bashar Issa's BSC Buffalo Development LLC) and that only heightens the building's downward spiral," Heffron said.