Dykstra Bankruptcy: Ex-Met Gives His Side of Story

An attorney for baseball legend and investor Lenny Dykstra has filed a motion refuting claims made against him by the U.S. Trustee's office of federal bankruptcy court, prior to a Tuesday hearing which threatens to turn the ex-New York Met's Chapter 11 reorganization into a Chapter 7 liquidation.

Dykstra was accused of "dishonest conduct" by the Trustee's office, which said Friday that the former slugger claimed his $24 million mansion, pictured below, was insured when it in fact was not. Dykstra filed bankruptcy in July, one day before his home was to be auctioned off in foreclosure.

Lenny Dykstra's $24 million mansion in Sherwood Country Club.
Lenny Dykstra's $24 million mansion in Sherwood Country Club.

But according to the motion from Dykstra's attorney, the home is insured after all, and Dykstra didn't commit fraud when he signed a legal document that turned out to be incorrect.

Index Investors sought the hearing to try to void Dykstra's bankruptcy. As CNBC first reported last month, Index's Jeff Smith loaned Dykstra approximately $900,000 last year but was never repaid.

Dykstra put his Sherwood Country Club mansion up as collateral, and Smith moved to foreclose on it in March. Dykstra filed for bankruptcy July 7, one day before the scheduled foreclosure auction, and he's since filed a lawsuit against Index, claiming he's the victim of unlawfully high interest rates and fees.

But Index claims Dykstra has lied to the court. On July 14, he signed court documents indicating the mansion was insured, when the insurance had expired that day. Index argues such "dishonesty" means his reorganization should be handed over to a court appointee, or, even worse, be converted to a Chapter 7, or dismissed altogether. The U.S. Trustee's office agrees, filing a motion supporting Smith.

Dykstra's attorney, Jon Hayes, says there is insurance. JPMorgan Chase , which owns the first mortgage to the home, purchased insurance as of July 31, though Dykstra's bookkeeper says she has not been able to get paperwork from Chase to prove this (Dykstra also plans to sue Chase for mortgage fraud).

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Dykstra's attorney argues that "other than the confusion over the insurance," there's no evidence Dykstra can't handle managing his own Chapter 11.

"While the gap in insurance happened on Mr. Dykstra's watch and is his ultimate responsibility, it is a stretch to say that he deliberately mislead the UST (U.S. Trustee)," Hayes says. "Mr. Dykstra should have been more careful to confirm that there was insurance but that does not lead to a finding of fraud, dishonest, incompetence or gross mismanagement. "

The judge will weigh in on Tuesday.

In an interview last month, Dykstra told CNBC the home is worth $25 million. But his own court papers say it's currently worth $18.5 million to $20 million.

"He has been actively seeking a buyer for the property and actually entered into a purchase agreement to buy it for $23 million," the filing says, but "the buyer subsequently withdrew before the contingencies could be met".

The filing also reveals that Dykstra's wife, Terri, has filed for divorce, and the family law court has already ordered him to turn over his entire $5,700 monthly pension from Major League Baseball to his wife.

"Since the order was entered he has not received a cent from MLB, but, in any event, has not had any income since this case was filed." Finally, we are told that Lenny Dykstra "owes no taxes".