Multi-billion dollar private-equity fund targets local appraisers in lawsuits

$7.5B Lone Star fund files first of possibly dozens of suits in Manhattan alleging fraud

New York /
May.May 01, 2012 06:30 PM

An affiliate of a $7.5 billion Loan Star private equity fund that bought up distressed debt with a face value of $55 billion in the United States and Germany, including in New York City, during the downturn is filing lawsuits claiming appraisers during the boom acted fraudulently and negligently in conducting valuations on residential properties.

The affiliate of the Dallas-based Lone Star VI, known as LSF6 Mercury REO Investments, has filed at least three suits in New York State Supreme Court this year, including the most recent one this past Friday, a review of state court records show. It was not immediately clear why they were filed now.

As The Real Deal reported last week, private equity firms are quietly snapping up distressed debt on small, multi-family properties in New York. These new lawsuits are evidence that private equity firms, such as Lone Star, are buying debt trying to maximize value from their investments through strategies other than just selling mortgages or properties. Lone Star has invested more than $33 billion through 10 funds in a variety of assets over the past 17 years, its website says.

The new suits allege that in those three cases, three different appraisal firms acted negligently, fraudulently and breached contracts, among other claims when they provided valuations for properties in New York and New Jersey during the boom.

In one example, Crossland Appraisal Services, based in Bensonhurst, Brooklyn, and its employee at the time, appraiser Fernando Medina, allegedly overvalued 70 Cabot Lane, a single-family home in West Westbury, a city in Nassau County, in February 2006.

According to the complaint, lender CIT Group refinanced the home that Crossland appraised at $525,000, but the home should have been appraised at just $455,000.

“Upon information and belief, Medina inflated the fair market value of the [residential] property by using, among other things, comparables that were the best in the area as opposed to comparables that were reflective of the [residential] property,” the complaint says.

Joseph Belluck, a partner at law firm Belluck & Fox, which filed the three cases, said there were others, and he planned to file between 50 and 100 such cases over appraisals in the region — including in New York City — in the coming months. While some legal professionals questioned targeting individual appraisers, Belluck said the allegations in the three filed cases have merit.

“We feel there was a wrong here,” he said. “We feel the appraisals were not done in a proper way, and that resulted in lending that should not have been undertaken in some circumstances. There has been a lot of focus on the lending activity but I don’t think there has been a lot of attention focused on the role of appraisers.”

A spokesperson for Lone Star declined to comment. Crossland and Medina did not respond to requests for comment.

(Data from PropertyShark.com conflicts with the complaint. It says the owner did not refinance the property at that time, but instead purchased it in March 2006, for a price of $525,000. Belluck did not immediately respond to a request for comment on this point.)

Terrence Oved, a partner with the law firm Oved & Oved, who was not involved in the litigation, said Lone Star may have a difficult time establishing their claims, “particularly since the action complained of occurred over six years ago — which is beyond New York’s statute of limitations for breach of contract claims.”

The cases appear to be a way for Lone Star to try to generate revenue from distressed loans, said Matthew Parrott, a partner at law firm Katten Muchin Rosenman, who was not involved in the case.

“The underlying real estate asset no longer provides sufficient value to repay the loan and here you have a potential additional source of recovery,” he said.


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