The battle against special servicers is heating up. Just last week we reported that the New York State Department of Financial Services was investigating three of the largest special servicers – LNR Partners, CWCapital Asset Management and C III Asset Management – over allegations of conflicts of interest and double dealing. Days later, several junior bondholders filed a billion dollar lawsuit against CWCapital.
The suit, filed July 3rd in New York County (Manhattan) state court, alleges that CWCapital conspired with others to take control Stuyvesant Town and Peter Cooper Village, known as Stuy Town. Built in 1946, the 110 building Stuy Town development is one of the largest residential complexes in New York and home to tens of thousands of residents. The project was sold in 2006 for $5.4 billion. Just a few years later the new owners defaulted.
According to the complaint, Stuy Town was purchased in 2006 at a price of $5.4 billion. As is typical in these deals, there were 12 levels of debt. The more junior the debt, the riskier and higher the interest rates. To keep things straight, there was a detailed Intercreditor Agreement between the senior and junior creditors.
The plaintiffs, all junior lien holders, say that CWCapital’s actions resulted in a billion dollar windfall at the their expense. As a special servicer, CWCapital is obligated to work on behalf of the creditors. Recently, lien holders, property owners and now regulators have become concerned that some special servicers are using their clout and power to “double deal” and acquire the property for themselves while still collecting huge fees as special servicer.
[Editor’s note: Although we are not involved in the Stuy Town litigation, we represent dozens of property owners in several claims against CWCapital and LNR Partners.]
The junior lenders who filed suit against CWCapital say the project is worth $5 billion. They say that after the borrower defaulted, CWCapital conspired with the senior lien holders and orchestrated a deed in lieu of foreclosure to further CWCapital’s own interests.
Assuming the allegations in the complaint are accurate, how did CWCapital engineer a billion dollar windfall?
The junior creditors say that CWCapital conspired to have the deed in lieu of foreclosure executed on a “flawed premise” that amounts owed to the senior lien holders exceeded the value of the property. They say that CWCapital claimed that $4.4 billion was owed on the mortgage. In actuality, however, the junior creditors say that the true amount was $3.4 billion, a discrepancy of approximately $1 billion.
How is that possible? They say CWCapital applied a default interest rate of 9.4% beginning in June of 2010 even though a court ordered a much lower rate of just 0.3%.
The intrigue continues. The junior lien holders say that days before the deed in lieu of foreclosure was executed, CWCapital “attempted to engineer a rigged UCC auction” meant to cut off the rights of the junior lien holders. They further claim that CWCapital “fixed” the auction.
How can a special servicer fix an auction? In this case, by insisting that every potential bidder, except for a bidder controlled by CWCapital, pay off the grossly inflated $4.4 billion loan. CWCapital, however, allowed the bidder it controlled to “credit bid” meaning they did not have come with any cash to win the auction.
Is this normal? Based on our investigation, yes.
Is it illegal? While special servicers who rig auctions might not break any laws, we believe they can still be held legally accountable for conflicts of interest and for defrauding both lien holders and borrowers.
The duty of a special servicer is to collect all the money that is due the lien holders. The default provisions of most commercial loans give servicers many tools to preserve the asset and including the right to sell the property if necessary. If the borrowers can’t cure the default, the special servicer usually forecloses and sells the property. Then the goal becomes getting the highest possible price. This insures the lien holders are fully paid and any excess monies can then flow to the borrowers who purchased the property.
A conflict occurs, however, if the servicer also has an interest in the entity that ultimately purchases the property. At that point the servicer has an incentive to acquire the property for the lowest possible price.
When a special servicer begins to act for itself, both the borrower and lien holders suffer. Borrowers suffer if the special servicer engineers the default in such a way that the borrower can never cure the default. Although the special servicer’s primary duty is to the lienholders, those lienholders are not well served if borrower has the ability to cure but is prevented from doing so.
Lienholders are also hurt when a special servicer “fixes” an auction such that it acquires the property for a discount. That usually means there isn’t enough money to fully pay the lien holders.
The law firm of Mahany & Ertl is interested in speaking with individuals with inside working knowledge of special servicers involved in CMBS transactions. We also are interested in representing additional investors with claims against these entities. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). Inquiries are kept confidential.