We are no fans of special servicers. At the top of our list of bad commercial loan servicers are CWCapital Asset Management (“CW Capital”) and LNR Partners. We have litigated complex CMBS cases against both companies, something few lawyers have done. Because our practice is so unique, we are always searching court records for cases involving these servicers.
This post discusses an unsuccessful RICO case brought in 2011 against CWCapital and Bank of America. Although we didn’t litigate that case, the court’s opinion and order tossing the lawsuit is worth discussing. Unfortunately, it looks like the lawyers representing the borrowers may have waited too long to file their suit. That’s a shame, we hate to seek banks escape responsibility for their actions.
Nightingale Properties v. CWCapital and Bank of America
Nightingale Properties and its affiliates are a national commercial real estate business. Based in New York, they own and run properties throughout the United States. Included in their holdings are four retail properties in Tennessee and one in Pittsburgh, Pennsylvania.
The Nightingale business are owned by two men, Elchonon Schwartz (“Schwartz”) and Simon Singer (“Singer”). The properties were originally financed by Lehman Brothers Bank. After the financial meltdown, Bank of America became the successor to Lehman Brothers. The special servicer for the loans was CWCapital.
For those new to the CMBS method of commercial real estate financing, “CMBS” is short for Commercial Mortgage Back Securities. Typically, a bank makes the initial loan and then sells the loan to a trust.
The typical CMBS trust is made up of institutional investors. These investors purchase a pool of loans. The trust itself has no employees and therefore relies on third parties to administer the loans.
Most CMBS loans have a servicer and a special servicer. The servicer acts as the liaison between the lender and property owner. Basically, that means collecting the mortgage payments and insuring taxes and insurance premiums are paid timely. If the borrower is struggling or misses a payment, most commercial loan documents say that the special servicer takes over. Special servicers have far more power than the servicer.
The special servicer is bound by the terms of the loan and a document called a “pooling and servicing agreement” or PSA. Most borrowers never review them; the average pooling and servicing agreement is over 700 page, mostly in fine print.
The Tennessee and Pennsylvania loans that are central to this story were non-recourse. That means in the event of default, the trust could only seek to collect from the rents and the property itself. In this case, however, the loans documents imposed limited recourse against Schwartz and Singer in the event of a default.
In March of 2010, CW Capital notified Nightingale that it had defaulted on the Tennessee properties. According to the court’s opinion, the default was non-monetary.
Monetary vs Nonmonetary Defaults
Most loan defaults occur when the borrower misses a mortgage payment. A loan can often be placed in default for other reasons, however. For example, let’s say Nightingale’s note and loan documents require the company pay $5,000 per month to repay the mortgage note. If Nightingale doesn’t come up with the $5,000 mortgage payment, chances are very good the special servicer will declare a default.
The lender usually wants the special servicer to take immediate action to protect the property, collect all rents directly and get a receiver appointed to take day-to-day control of the property before any assets can be dissipated.
Let’s change our scenario slightly. Let’s say that the loan is secured by a mortgage on a shopping mall and the loan documents require a minimum occupancy rate of 88%. If tenants move out causing occupancy to slip to 85%, the special servicer can declare a default even if every monthly mortgage payment was made timely. This is known as a non-monetary default. In our experience, both judges and juries dislike non-monetary defaults.
Special Servicer CWCapital Declares Default against Nightingale
Court records indicate that in 2010, CWCapital declared nonmonetary defaults on the four Tennessee properties. That same year CW Capital also defaulted the Pittsburgh borrower. The reason for that default isn’t clear.
Although Schwartz and Singer were named as guarantors in some of the lawsuits, the court made no findings as to whether the two men were liable for the Nightingale defaults.
Nightingale Accuses CWCapital of Libel
Before the lawsuits were filed, Nightingale accused CW Capital of publishing slanderous comments about the Schwartz and Singer. The men say the company published “servicing notes” that contained false information. Specifically, the notes falsely claimed that courts had ruled that the loans were in full recourse to the Guarantors (Schwartz and Singer.) Another note claimed that the borrowers were not cooperating.
In the CMBS and commercial real estate world, “servicing notes” are a big deal. Banks often rely on these notes when making loan decisions. They are often cited in trade publications making it impossible to always determine who may have read them or been effected by one.
Schwartz and Singer claim they found out about the improper servicing notes and demanded immediate correction. Court records indicate that CW Capital acknowledged its sins and agreed to publish corrected information in the servicing notes.
According to the complaint, Nightingale says that CWCapital never followed through with its promise to rectify their wrongdoing (false statements).
As we understand the evidence, once CWCapital made its promise to correct the improper servicing notes, both parties went about their business. For Nightingale, that meant trying to find help to dig out form the five troubled loans. Nightingale did not immediately file a suit for libel and slander. Apparently they were satisfied with CW’s promise to correct the damaging information.
CW Capital Sued in Tennessee, New York and Federal Court (RICO)
After learning the servicing notes were never corrected, Nightingale filed libel suits in New York and Tennessee state courts. Those actions appear to be timely. Several months later, Nightingale filed a third lawsuit, this one in federal court. The federal case alleged violations of the Racketeer Influenced and Corrupt Organizations Act, RICO for short.
The court first ruled that New York law applied to the case because Nightingale, CW and Bank of America all have officers in New York. (In our experience, many commercial loan documents specify that New York law applies to CMBS loan disputes.)
Under New York law, Nightingale only had one year to sue for the false statements.
How was Nightingale damaged because of the bad servicing notes? Nightingale claims it lost the opportunity to obtain refinancing because of the false claims of being cooperative and for having been found personally liable on the guaranties. The company also claimed they lost two other deals because CW Capital never fixed the notes as promised.
The federal lawsuit was primarily drafted as a RICo complaint. RICO is one of the most powerful litigation tools for plaintiffs. Originally drafted as a criminal statute to combat organized crime and biker gangs, the law also has potent civil remedies for victims of criminal conspiracies.
Under the Act, a successful plaintiff is entitled to triple damages and legal fees and costs of litigation. Unfortunately, very few lawyers know how to properly prosecute a RICO case.
Court Dismisses RICO Action
After a lengthy analysis, the court concluded that the allegations against CWCapital didn’t rise to the level of pattern of racketeering activity. The federal RICO claim was dismissed, although the state court claims were allowed to proceed.
We are not surprised by the allegations against CWCapital as special servicer for the loans at issue here. In our opinion, CW is one of the most aggressive servicers in business today. Although their loyalty is supposed to be to the trust, we believe they sometimes act in their own best interest. If that means they want your property, watch out! Some special servicers believe that ends justify the means.
For example, if CW wants to acquire the Nightingale properties for its own portfolio, why not take whatever actions as necessary to push the price of the property down. In this case, that could mean making false statements about Nightingale. That keeps Nightingale from refinancing and getting out of default. If that is what happened here, both the trust and Nightingale are the big losers.
Another takeaway is to remember that certain types of lawsuits must be filed very quickly. Libel, slander and legal malpractice claims are three great examples (depending on the state).
Some unscrupulous lenders and servicers will make promises just to run down the clock. That means unsuspecting borrowers don’t find out until after the statute of limitations period (time to file a lawsuit) has elapsed.
Finally, if you are considering a RICO claim, make sure you have experienced RICO counsel. MahanyLaw and Judge, Lang & Katers have joined forces to sue banks and servicers on behalf of businesses. To date, we have prosecuted cases in almost 40 states.
If you own a CMBS financed property and are having difficulty with your servicer or trustee, give us a call. All inquiries are kept confidential. Not quite ready to call, visit our CMBS information page and use our text searchable blog to read stories on specific special servicers.
For more information, contact attorney Brian Mahany at [hidden email] or by phone at (414) 704-6731.
MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers – “We Sue Banks”