UPDATED: Jan. 26, 11:56 a.m.: Pershing Square Capital Management and Winthrop Realty Trust are suing CWCapital for $500 million, claiming they got bilked out of a fat profit when the special servicer foreclosed on Stuyvesant Town-Peter Cooper Village and then sold it for $5.3 billion. The suit is the latest in a number of legal challenges alleging foul play in the run-up to the blockbuster December deal CWCapital struck with the Blackstone Group and Ivanhoe Cambridge.
Understanding the lawsuit requires a quick dive into the complex debt structure that existed under the apartment complex’s old ownership.
When Tishman Speyer and BlackRock bought Stuy Town in 2006, they financed the $5.4 billion deal with a heavy load of senior and mezzanine debt. In 2010, they defaulted on their obligations and in June of that year, a federal judge green-lighted foreclosure.
If a borrower defaults, the mezzanine lenders typically get first shot at taking over the property. This means that once foreclosure was imminent, the mezzanine loans secured by Stuy Town suddenly became very attractive – or so it seemed.
In August 2010, Bill Ackman’s Pershing Square – a hedge fund known for its real estate opportunism – bought the mezzanine debt in partnership with Winthrop for an undisclosed amount. Their plan appeared to be to foreclose on Stuy Town, auction it off, repay the senior lenders with the sale proceeds, and enjoy the remaining spoils.
But CWCapital, the special servicer representing the senior lenders, ruined those plans. The firm won a court injunction mandating that Pershing and Winthrop would have to pay off the $3.6 billion in outstanding senior debt before it could even begin auctioning off the property. In other words: instead of selling the property and using some of those funds to pay off the senior lenders, Pershing Square and Winthrop would have to pay off the debt first.
In essence, this meant Pershing and Winthrop couldn’t foreclose and were faced with the threat of seeing their mezzanine stake wiped out altogether. Under pressure, the suit filed in New York State Supreme Court Jan. 24 alleges, they decided to sell their mezzanine stake to CWCapital in October 2010.
After taking over the mezzanine debt, the suit claims, CWCapital secretly and illegally foreclosed on the equity collateral securing it (i.e. the senior borrowing entity that owns Stuy Town) and then filed a deed in lieu of foreclosure, taking control of the entire property. It did so, the suit alleges, without paying off the senior debt bondholders (whom it represented as special servicer) first. In other words: the firm did exactly what it had prevented Pershing and Winthrop of doing, or so the suit alleges. The suit claims that by doing so, CWCapital violated the October 2010 agreement under which Pershing sold its mezzanine stake.
“This was always the Defendant’s plan,” the complaint reads. “Even at the time Defendants signed the Agreement, they intended to do exactly what they told Justice Lowe Plaintiff (Pershing and Winthrop) could not do.”
The suit alleges that CWCapital “engineered an elaborate bipartite fraud” to take control of the complex, and that its title to the property was a “nullity.”
In October 2015, CWCapital reached a deal to sell Stuy Town to Blackstone and Ivanhoe Cambridge for $5.3 billion. The deal closed in December. CWCapital has since repaid the senior bondholders and raked in more than $500 million in default interest payments, according to the complaint.
“CWCapital breached its agreement with Pershing and Winthrop when it secretly foreclosed on the equity collateral,” the plaintiffs’ attorney Stephen Meister of Meister, Seelig & Fein LLP told The Real Deal. Pershing Square and Winthrop seek $500 million in damages “plus punitive damages or rescission of the (October 2010) agreement,” according to the suit.
Bank of America and U.S. Bank are also named as defendants because they served as trustees for the senior mortgage trusts serviced by CWCapital.
CWCapital could not immediately be reached for comment.
CORRECTION: An earlier version of this post incorrectly stated that the plaintiffs’ complaint concerns CWCapital’s decision to file a deed in lieu of foreclosure. In fact, it concerns the alleged secret foreclosure on the equity collateral that preceded the filing.