Judge ignores AG’s objections over Madison managing Toledano portfolio

Schneiderman claimed the lender created scheme knowing 27-year-old was “destined to default”

From left: 27 St. Mark’s Place, 66 East 7th Street, 223 East 5th Street, 514 East 12th Street, Raphael Toledano and Josh Zegen
From left: 27 St. Mark’s Place, 66 East 7th Street, 223 East 5th Street, 514 East 12th Street, Raphael Toledano and Josh Zegen

UPDATED, May 19, 11:55 p.m.: A federal bankruptcy judge approved a final consent order Thursday allowing Madison Realty Capital to formally replace Raphael Toledano as property manager of 15 troubled East Village rental buildings, despite a scathing objection from New York State Attorney General Eric Schneiderman, an outside party in the case.

U.S. Bankruptcy Judge Robert Drain held a hearing Tuesday in which he granted approval, and then filed it with the court Friday. Just prior to Tuesday’s hearing, Schneiderman’s office, as a “party of interest,” filed a 42-page document blasting Toledano, his lender Madison and the then-proposed final order.

The judge ruled that Toledano is barred from entering the properties, contacting the tenants and collecting rents. The judge also did not directly address the AG’s objection.

Last month, the court signed off on an interim order allowing the temporary transfer in property management duties away from the controversial 27-year-old landlord. Toledano’s pending deal to sell the deeds to Madison for about $13 million is expected to be approved by the court and finalized by the end of the third quarter, sources said.

An affiliate of Brookhill had filed for Chapter 11 bankruptcy protection on the 15 properties in late March, more than a month after Madison filed to foreclose on the buildings. A deal to sell the properties to Joseph Sutton for $145 million also fell through. Sources close to Madison said that about 80 of the 281 residential and 15 commercial units are vacant, roughly the same amount at the time of Toledano’s $97 million purchase in 2015.

Schneiderman Argued That The Court should consider Madison’s “bad faith” in making loans to Toledano as part of a preconceived scheme and that the consent order was unfair and inadequate.

Schneiderman wrote, “Madison created a deal with Toledano that … ensured that the debtors would default on these loans at the earliest possible date, because there was not enough income coming into these properties to cover the monthly debt servicing obligations of the loan. … Madison’s plan from the outset assumed that the debtors would engage in unlawful conduct in an effort to meet Madison’s loan terms.”

Schneiderman claimed Toledano was “destined to default” because it was impossible to satisfy the loan’s term after a reserve fund covering initial interest payments ran out. He calls the bankruptcy proceeding part of an “ongoing property flipping scheme.”

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In the filing, the AG noted that along with the Division of Housing and Community Renewal’s tenant protection unit is investigating the parties involved in the bankruptcy proceeding. Both agencies investigated rent-stabilized renters’ claims they were pressured to vacate 444 East 13th Street, a Toledano-owned building not in the 15-building portfolio. Toledano paid $1.2 million last year to settle claims that he harassed tenants at that building.

The AG also pointed to Toledano’s proposed, incomplete renovation proposal, and said elements of it would violate New York City law.

“Madison’s investment memo assumed that Toledano would vacate, renovate and reconfigure nearly half of the units in the portfolio within the first two years. In some buildings the required turnover rate was as high as 80-100 percent,” the AG said.

In response to the AG submission, Toledano said, “Madison and I reached an amicable solution and I’m in the process of receiving a substantial payout from them.”

A representative for Madison said, “We are pleased that the court has granted Silverstone, Madison’s affiliate, the ability to manage and operate the buildings and look forward to working with the tenants to materially improve the quality of their environment.”

Sources close to Madison said that since its property management arm Silverstone Property Group took over at the buildings in mid-April, it has addressed a total of 85 city and state building violations. The sources said the properties collectively have 424 existing violations.

Amy Spitalnick, press secretary for the AG, responded to the ruling with a statement: “Our investigation and court filings make clear: This was a loan-to-own scheme with the goal of driving tenants out of their homes and apartments out of stabilization. We’ll keep fighting to protect tenants who are being harassed and displaced by these kinds of predatory landlords and lenders.”

Madison, which has been accused of loan-to-own practices in the past, claimed in its foreclosure filing that Toledano owes roughly $140 million. That included $125 million in loans against the 15 properties, as well as interest and attorneys’ fees. The loan, which critics called overleveraged, was intended to cover future renovation costs in addition to the acquisition.

Hiten Samtani contributed reporting.