PCVST Mezzco 4, LLC et al. v. Wachovia Bank Commercial Mortgage Trust 2007-C30 et al. (the “Action”)

A high profile dispute between the senior mortgage lender consisting of four securitization trusts (collectively, the “Senior Lender”) and their special servicer, CWCapital Asset Management LLC (“CW”), on one hand and on the other the assignees of certain junior mezzanine lenders who financed the 2006 acquisition of Stuyvesant Town and Peter Cooper Village (the “Property”) will be played out in the New York Supreme Court as a result of a January 12, 2015 federal court decision granting plaintiffs’ motion to remand the Action to state court for lack of federal subject matter jurisdiction. According to papers filed by the Senior Lender, the six plaintiffs controlling six separate tiers of mezzanine debt are affiliates of Centerbridge Partners, L.P. In their amended complaint, plaintiffs attack the Senior Lender’s orchestration of a deed in lieu of foreclosure transaction in June 2014 which they claim violated the governing intercreditor agreement and other loan documents, improperly rendering their junior loans worthless and depriving them of the opportunity to participate in more than $1 billion of current Property value in excess of the outstanding senior mortgage debt. 

Background of the Dispute

In November 2006, shortly before the Great Recession, for a purchase price of $5.4 billion, two affiliates of Tishman Speyer Properties, L.P. (collectively, the “Senior Borrower”) acquired the Property from Metropolitan Life Insurance Company. The Property, located on the east side of lower Manhattan, is the largest rent regulated residential complex in New York City. The acquisition was financed by a $3 billion mortgage loan (the “Senior Loan”) evidenced by six promissory notes which were later sold into the four securitization trusts comprising the Senior Lender and $1.4 billion in loans to the direct and indirect parents of the Senior Borrower divided into eleven tiers of debt in decreasing order of seniority (collectively, the “Junior Loans” with the “Junior 1 Loan” being the most senior and the “Junior 11 Loan being the most junior). Each mezzanine loan was secured by a pledge of the equity interests of its borrower with the Junior 1 Loan secured by the equity interests in the Senior Borrower, the Junior 2 Loan secured by the equity interests of the immediate parent of the Senior Borrower and so on. The relationship between the Senior Loan and the Junior Loans was governed by an intercreditor agreement dated February 16, 2007 (the “Intercreditor Agreement”).

On January 8, 2010 the Senior Borrower failed to make a monthly installment of debt service and the Senior Lender issued a notice of default to the Senior Borrower demanding payment of all amounts then due and provided copies of that notice to the Junior Lenders. By a letter to the Senior Borrower dated on January 29, 2010 CW accelerated the Senior Loan and copies of the acceleration letter were sent to all Junior Lenders. The default and acceleration letters triggered a right on the part of each Junior Lender under the Intercreditor Agreement to purchase the Senior Loan, but none of the Junior Lenders attempted to exercise that right until after the Senior lender acquired the Property through a deed in lieu transaction.

Senior Lender Actions

Before acquiring the Property through the deed in lieu transaction challenged in the Action, the Senior Lender had initiated and abandoned two other strategies to address the Senior Borrower’s payment defaults. The first strategy was to commence an action in January 2010 to foreclose on the Property. The Senior Lender obtained a judgment of foreclosure in June 2010, but in August 2010, before the foreclosure sale was scheduled to occur, the Senior Lender learned that PSW NYC LLC (“PSW”), a joint venture between Pershing Square Capital Management LP and Winthrop Realty Trust, had purchased the Junior 1-3 Loans which were also in default, and through a credit bid at a UCC foreclosure sale intended to purchase the equity interests securing those loans without first paying off the Senior Loan. Relying on a provision in the intercreditor agreement, the Senior Lender asserted that any transferee of the equity collateral for any of the junior loans including PSW was first required to payoff the Senior Loan and in September 2010 obtained a court order preliminarily enjoining PSW from acquiring equity interests securing the Junior 1-3 Loans without first paying the total outstanding Senior Loan indebtedness of more than $3.67 billion. According to plaintiffs’ amended complaint, after the preliminary injunction was issued, CW acting as special servicer formed PCV-M Holdings LLC (“PCV-M”) which purchased the Junior 1-3 Loans through a servicing advance made by the lead securitization trust. After acquiring the Junior 1-3 Loans through PCV-M, the Senior Lender abandoned its foreclosure action and no foreclosure sale of the Property was ever conducted.

Through the exercise of the voting and control rights in the Junior 1 Loan pledge agreement granted to the Junior 1 Lender (now owned by PCV-M), CW operated the Property for roughly the next three and a half years in its capacity as the managing member of PCV-M. According to defendants, from the date of the Senior Lender’s purchase of the Junior 1-3 Loans through PCV-M in the fall of 2010 through the spring of 2014, none of the Junior Lenders objected to the Senior Lender’s actions or attempted to exercise any right under the Intercreditor Agreement to acquire the Senior Loan or the Junior 1-3 Loans.

The second strategy adopted by the Senior Lender to enforce its remedies under the loan documents was initiated in May 2014 when PCV-M notified all of the Junior Lenders that as the owner of the Junior 1-3 Loans it was exercising its right to sell the pledged interests securing those loans (namely, ownership of the Senior Borrower) through a UCC foreclosure sale. The owner of the Junior 4-9 Loans, STown Mezz Inc. (“STown”), responded by asserting that such a sale would not be commercially reasonable unless a credit bid by PCV-M for the Junior 1-3 equity collateral included PCV-M’s payoff of the Senior Loan which STown contended was required by the Intercreditor Agreement. In order to fend off an auction sale of the equity interests in the Senior Loan Borrower, on May 29, 2014 STown also notified PCV-M that it was exercising its rights under the Intercreditor Agreement to purchase the Junior 1-3 Loans at par. 

The Senior Lender then decided not to complete the UCC sale and, instead, adopted its third and final strategy, implementing a deed in lieu of foreclosure transaction to acquire title to the Property. Thus on June 3, 2014 two nominees of the Senior Lender acquired the Property from the Senior Borrower by two deeds (one for Stuyvesant Town and one for Peter Cooper Village) in lieu of foreclosure. The deed in lieu of foreclosure agreement pursuant to which title to the Property was transferred was signed on behalf of the Senior Borrower by a Managing Director of CW (in its capacity as managing member of PCV-M) and on behalf of the Senior Lender by the same Managing Director of CW (in its capacity as special servicer).

Centerbridge Acquires the Junior 4-9 Loans and Commences the Action 

On June 10, 2014 STown appears to have assigned its rights and interest in the Junior 4-9 Loans to plaintiffs, which defendants allege, upon information and belief, in their motion to dismiss are managed by Centerbridge. The Centerbridge plaintiffs allege in their amended complaint that because CW was on all sides of the deed in lieu transaction it was a sham, the purpose of which was to frustrate the Junior 4-9 Lenders’ attempt on May 29, 2010 to purchase the Junior 1-3 Loans at par and thereby gain control of the Property. The Centerbridge plaintiffs also allege that the deed in lieu transaction improperly conveyed a windfall to the Senior Lender and CW amounting more than $1 billion.

In their motion to dismiss the amended complaint, defendants contend, among other things, that the Intercreditor Agreement and all of the Junior Lenders’ rights thereunder terminated when the Senior Lender’s nominees acquired the Property through the deed in lieu transaction on June 3, 2010, that the Centerbridge plaintiffs’ purchased claims are barred by New York’s champerty statute and that in all events the deed in lieu transaction did not violate, and was entirely consistent with the Senior Lender’s rights under, the Intercreditor Agreement and the other Senior Loan documents.

The Senior Lender and other defendants’ motion to dismiss the amended complaint was filed in the New York federal court before the case was remanded to state court and before plaintiffs’ response to the dismissal motion was due. A new briefing schedule is likely to be adopted under the supervision of the state court and the dismissal motion will be heard and decided in the first instance by a judge sitting in the Commercial Division of the New York Supreme Court. The claims made by each constituency and the outcome in this case are likely to influence future intercreditor litigation as well as the negotiation and drafting of future intercreditor agreements.