Jerrys Self-Storage, a four-story facility in New Windsor, N.Y., is at the center of an alleged Ponzi scheme and financial losses that triggered a personal Chapter 7 bankruptcy filing in 2009 by owner Jerry Sabini. In a move to recoup millions of dollars for Sabinis lenders, a court-appointed bankruptcy trustee has filed suit against 10 contractors that helped build his storage facility, even though their involvement in the project was legal and they are not accused of wrongdoing.

In the middle of the controversy is FKF 3, a fund started by three local businessmen, that lent Sabini $5 million at 14 percent interest in 2007 and later financed an additional $1 million to complete the project. The bankruptcy complaint alleges that the additional $1 million loan bypassed Sabini and instead paid vendors directly, even though the fund did not take any collateral. The trustee argues the vendor payments were improper and those contractors should repay the money.

In exchange for making the vendor payments, the creators of the FKF 3 fundBurton Dorfman, John Magee and Mitchell Kleinallegedly assumed 80 percent ownership of the self-storage business independent of FKF 3. Once construction was complete, FKF 3 refinanced the original $5 million loan, but the money it received allegedly went for personal use, including $90,000 to a charity tennis tournament connected to Klein, an unreported amount to the Kennedy Funding Invitational, and $2.8 million to Magees brother and companies connected to Magee. Those money transfers are reportedly being investigated by the trustee.

Magee now owns 80 percent of the self-storage business, according to the source.

As many as 100 lenders supposedly provided money to FKF 3. One of them, Daniel Moriarty, complained FKF 3 should own the self-storage facility and not Magee, since the lenders money was used to gain control of the business.

FKF 3 went into bankruptcy in 2010, reportedly owing $60 million to its lenders.

Sabinis stake in the business will be up for public auction next month as part of his 2009 bankruptcy case. Jerrys Self-Storage is reportedly losing $60,000 per month, meaning Sabinis 20 percent share must absorb $12,000 in monthly losses. The minimum bid for Sabinis share is set at $7,500.

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