Court Revives Eli Karp’s Madison Realty Capital Claim

Eli Karp got a second shot at his lawsuit against Madison Realty Capital.

A Brooklyn appellate court revived Karp’s 2021 lawsuit against the lender, clearing the way for the developer to pursue claims that Madison orchestrated a “loan-to-own” scheme at a troubled East Flatbush project.

A panel of judges ruled last week that a lower court improperly dismissed Karp’s 2023 case that alleged Madison made false promises to fund the Hello Nostrand project and deliberately pushed the development into default to seize control. The revived suit seeks damages for fraud, breach of contract and bad faith dealing.

An attorney for Madison did not immediately respond to a request for comment. In court filings, the firm has argued the default stemmed from Karp’s failure to repay his original loan. The appellate court’s decision was first reported by AmNewYork.

Madison ultimately acquired the site at 1580 Nostrand Avenue with a $70 million credit bid last year after Karp’s plans for an apartment complex stalled, with only one rental building completed. The property had been mired in litigation for years. Karp’s Hello Living bought the site for $13 million in 2014 with plans to build a luxury apartment complex.

But as soon as construction started, he ran into trouble with lenders. According to Karp, Madison bought up the projects’ mezzanine debt, raised the interest rate which then led him to take on more debt ultimately forcing him into default.

Karp put the property into bankruptcy in 2021, one day before Madison could initiate a UCC foreclosure process. Madison then sold the $6 million mezzanine loan and $73 million senior loan on the property to another firm, Arch Companies, which then sued Karp to initiate another foreclosure on the property.

Then Arch ran into trouble of its own, and Karp agreed to the bankruptcy sale. Madison later took back over the senior loan.

Karp was once a promising developer who bet on building luxury rental apartments in less gentrified Brooklyn neighborhoods. All of his projects had “Hello” in their names and stood out for their sleek designs, which appeared out of character next to neighboring buildings.

In January, Karp sued the lender on another foreclosed apartment building, Hello Lenox, alleging they intentionally overvalued the Brooklyn property in a separate “loan-to-own” scheme.