Oheka Castle lender can bid up to $61 million in debt for property at auction, judge rules

A lender can use up to $61 million in debt it is owed by the owner of Oheka Castle as part of a bid next week to purchase the prestigious but financially troubled mansion and catering emporium, a federal bankruptcy judge ruled Thursday.

Justice Louis A. Scarcella, at the end of a two-hour hearing at the Central Islip federal courthouse, rejected the contention of lawyers for Kahn Property Owner LLC, which owns the castle, that lender 135 W. Gate Drive LLC — the castle's largest secured creditor — had tried to improperly meddle with the auction, scheduled for Tuesday.

The lender emerged as the first entity known to have shown an interest in bidding for the property, which includes a hotel and has hosted high-profile weddings for a slew of celebrities.

Gary Melius, who controls Kahn Property Owner, had announced last month the Gold Coast castle was going up for auction to help settle millions of dollars' worth of debt.

Last year, Kahn Property Owner filed for federal Chapter 11 bankruptcy protection to hold off a foreclosure sale of the property. Melius bought the property, in Huntington's Cold Spring Hills neighborhood, in 1984 and is also the castle operator.

Scarcella said Thursday that Melius' attorney, Joseph S. Maniscalco, of Wantagh, had failed to demonstrate that 135 W. Gate had engaged in misconduct regarding its bid or tried to "chill" potential competing bids.

"Where's the evidence?" the judge asked Maniscalco at one point during the proceedings. Later, Scarcella added that the lender has a "statutory right" to use any funds it believes it is owed as part of a so-called "credit bid."

Outside court, Maniscalco did not dispute the ruling. 

"It is what it is," he said. "He's the judge. He's a real smart guy."

Melius did not appear in court and could not be reached for comment.

Lawyers for 135 W. Gate declined to comment.

The lender seeks to use up to $61 million in debt as part of its bid. Maniscalco disputed that amount, saying the lender and its attorneys were attempting to inflate their bid by adding millions of dollars in legal fees and interest.

Lawyers for Oheka had wanted the court to consider a lesser dollar figure — about $48.4 million, the amount of the loans purchased by the lender in 2023.

Maniscalco added that the lender had invested in the purchase of a neighboring golf course in an attempt to interfere with the castle's bankruptcy proceedings. "I'm sorry, I see it as clear as day," he said.

Steven Smith, an attorney for the lender, called that allegation "unbelievably offensive" in court.

According to court filings, under bankruptcy law a secured creditor is automatically deemed a qualified bidder and has the right to attend and participate at an auction “and to credit bid up to the full amount of its allowed claim, including any interest calculated through the auction date.”

Among the issues discussed Thursday was whether the lender could add nearly $2 million in legal fees as part of its auction bid. Maniscalco said it shouldn't be allowed.

However, Scarcella allowed the lender to bid at least $59 million and up to $61 million. But he cautioned the additional $2 million could be deducted later if the legal fees are disallowed in a future proceeding.

Leslie Berkoff, a lawyer for the lender, said in court her client understood the risk. "If we bid $59 million or we bid $61 million, if we are short, we will pull in cash" to make up the difference, she said.

The judge noted it all could be a moot point if 135 W. Gate is the only bidder. The lender would win by default, he said.

Scarcella had begun the hearing by scolding Maniscalco for submitting a filing late Wednesday afternoon, two days too late. Maniscalco apologized to the judge.

The castle was built by financier Otto Kahn between 1914 and 1919 as a summer home. It was later used as a retreat for New York City sanitation workers, was a maritime radio training school and a military academy. After Melius purchased the castle, he renovated it, transforming it into a destination hotel and catering hall. 

Concierge Auctions will oversee the sale of Oheka on Tuesday at an auction held virtually and in person in Manhattan.