[Editor’s Note: This post originally appeared in September 2014 on our sister site Mahany Law. The post has been rewritten, updated and moved to this site.]
Imagine that you are a borrower on a major commercial real estate project. Your project has plenty of equity, but cash flow is tight. Despite the tough economy, you manage to hold on. Although you are in no danger of default, a break on interest or payment terms would be welcome. The special servicer on your loan invites you to miss a payment so they can get involved and “help” you modify the loan terms.
You listen to their advice and instead of getting help, you are suddenly facing a demand for a deed in lieu of foreclosure.
Fantasy? Keep reading. One hotel owner says that special servicer LNR Partners is guilty of those things.
Unless you are familiar with commercial real estate lending, the term “special servicer” may be foreign to you. If you slip behind in your payments and the loan is owned by a trust or CMBS (“Commercial Mortgage Backed Security”), you will probably find yourself dealing with a special servicer. These are the folks called in to manage troubled assets.
Theoretically, the special servicer’s job is to quickly get the mortgage current or maximize the recovery for the trust. Their duty is obviously to the trust that holds the note and mortgage and not to the borrower. Modern day loan documents typically give special servicers vast powers including the power to purchase the property for themselves.
This doesn’t mean that special servicers don’t have to play by rules, however.
Recent lawsuits across the country suggest that special servicers may be more interested in inflating their own fees or acquiring the property for themselves instead of maximizing the amount of recovery or protecting the CMBS trust.
Readers of this blog know that we have posted several stories about cases against special servicers. The three largest special servicers are LNR Partners, CW Capital and C-III Asset Management.
In our opinion, LNR Partners is one of the worst special services.
Martin Taplin, the Sagamore Hotel and LNR Partners Fraud
Martin Taplin was a prominent Miami Beach developer and the owner of the Sagamore Hotel on South Beach. We say “was” since he died after this post was first written.
Marty’s story bears telling, his story will probably resonate with many other commercial property owners.
The Sagamore Hotel is located at ground zero in Miami Beach, the corners of Lincoln Road Mall and Collins Avenue. While Martin Taplin was alive, the Sagamore was also known as the Art Hotel because of its collection of museum quality artwork.
At the time of the bankruptcy, Taplin and Sagamore Partners (the corporate entity that actually owned the hotel) owed approximately $31 million. The original loans had been assigned multiple times. In fact, the note holders couldn’t even find some of the original loan documents.
The most recent transfer occurred in 2006 when the notes were transferred to Nomura Credit & Capital. Thereafter, two years later Nomura transferred the note to a trust known as JPMCC 2006-LDP7. Effectively, the Sagamore’s loans were securitized and sold into a trust. That transfer was the beginning of all the hotel’s problems.
Banks, mortgage companies and other lenders have offices and employees. You can pick up the phone or drive into an office and speak to someone. A CMBS trust (commercial mortgage backed securities) is an entity with no office or staff. It exists on paper only.
To create mortgage-backed securities, a group of mortgages are assembled into a pool, transferred into a trust, securitized, and marketed to investors as “pieces” of the pool in the form of certificates representing interests in the trust’s pool of mortgages. That is what Nomura did. Typically, borrowers have no say in who owns their note.
CMBS trusts typically have a trustee and servicer who make sure that taxes and insurance is paid and monthly mortgage payments collected. They have no authority to change the terms of the loan or even give a short extension on payment. That power belongs to the special servicer.
The special servicer for JPMCC was LNR.
As many will recall, America’s economy was still hurting during the summer of 2009. Discretionary spending on things like luxury travel was down. Still, Sagamore was making its payments on time, every month.
In 2009, it was common for many borrowers to seek a loan modification. Marty decided the prudent thing to do was explore that option in case the recession became long term.
Because his loan was no longer owned by a lender, he couldn’t just call the bank that originally made the loan. Nor could he call JPMCC, the trust holding his loans.
Taplin approached LNR after learning they were the special servicer.
According to Taplin’s complaint against LNR,
“Taplin explained that while Sagamore was handling the effects of the recession and the Hotel was not in danger of default, Taplin sought only to inquire as to potential options so as to be informed in the event the recession did continue as some economists were predicting. In response, [LNR Partners] recommended to Taplin that Sagamore request a loan modification, as only then could they discuss the matter with him. But in order to even discuss the loan modification, [LNR} represented that the Loan had to first be in default.”
Taplin never wanted to default and had invested $20 million of his own funds into the hotel. He was prepared to keep doing so.
Taplin had a second meeting with LNR,
“On July 30, 2009, Taplin again met with Wolpert, Brown, and Galinsky at LNR’s headquarters in Miami-Dade County, Florida. Taplin did not want to withhold payment as instructed by LNR, and he insisted that there must be an alternative to withholding payment as a means to get the Loan to LNR. Based on Taplin’s previous discussions with LNR, Taplin remained optimistic that LNR would have in place available options if the recession continued. Wolpert, Brown, and Galinsky advised Taplin, however, that so long as the Loan remained current and in good standing, LNR was not authorized to take any actions with respect to the Loan. Wolpert, Brown, and Galinsky specifically advised that LNR needed to “get the file” before it could give the Loan any consideration, which could be accomplished only if Sagamore withheld payment on the Loan. Wolpert, Brown, and Galinsky explained to Taplin that once the Loan payment was withheld, LNR would become the Special Servicer on the Loan. Although Taplin never asked that the Loan be restructured or modified, Wolpert, Brown, and Galinsky represented that LNR would have the necessary authority, in its sole discretion, to do so. This was in furtherance of LNR’s premeditated plan to lure Sagamore into default in order to abuse the special servicing fee structures of the PSA [Pooling and Servicing Agreement]. “
“When Taplin expressed his concerns with withholding payment on the Loan and the potential consequences of doing so under the terms of the Loan Agreement, Wolpert, Brown and Galinsky assured Taplin that upon Sagamore’s tactical withholding of payment on the Loan, the Loan could be modified and/or restructured, and any events of default arising from Sagamore’s non-payment would be disregarded and waived. In fact, Wolpert, Brown, and Galinsky specifically represented and assured that LNR would have Sagamore in and out of special servicing within 60 to 90 days and that Sagamore’s Loan would then be transferred back to the Master Servicer. Taplin was urged to act quickly, though, with LNR’s representatives noting that if Sagamore withheld payment at some time in the future, as opposed to doing so right away, LNR would not be in the same position to offer what it could immediately.”
If you are thinking you know what happened next, you are correct.
The hotel wrote to the trustee to say it was withholding payment on August 10th. The loan was transferred a couple days later to special servicing and LNR Partners.
After intentionally missing a payment as requested by LNR, Taplin says he was given just one option by LNR. They demanded a deed in lieu of foreclosure. No work out, no modification, nothing that he was promised.
Had LNR raised this issue at the July 2009 meeting, the hotel would have paid the monthly mortgage payment due in August 2009, and it would have avoided the alleged default and foreclosure attempts.
What Taplin didn’t know (nor do many other borrowers whose notes are owned by a trust) is that the special servicer typically has undisclosed financial incentives to not help borrowers, particularly borrowers who have large amounts of equity.
Special servicers only get paid when a loan is in special servicing. When that happens, they are typically entitled to servicing fees, workout fees, liquidation fees, legal fees… you get the picture. The longer the loan is in special servicing, the more companies like LNR get paid.
Worse, the pooling and servicing agreements that exist in virtually all CMBS trusts give the special servicer the right to acquire the property and set the acquisition price. Talk about a conflict of interest!
According to Taplin, “LNR’s fraudulently-induced withholding of payment by Sagamore gave it license for virtually unfettered arbitrariness in dealing punitively, oppressively, and in bad faith with Sagamore. LNR manipulated the special servicer process for its own self-interest and enrichment, and to extort control of a property that was performing successfully.”
To save the property, Sagamore Partners went into voluntary bankruptcy. Thereafter Taplin sued LNR Partners.
Taplin, an owner of the hotel, claimed LNR’s “defective practices in foreclosure processing is widespread, documented and beyond dispute” and that “Sagamore is not the lone victim of LNR’s scheme to inflate its own fees while destroying the value of real estate.” More ominously, Taplin claims that LNR wants to “pirate” the hotel for its own gain.
We agree and are currently fighting LNR in another equally egregious case.
While we fight special servicers on a daily basis, they continue to operate in an almost unregulated environment. That is how they continue to seemingly get away with murder. (Unfortunately, many cash strapped borrowers don’t have the funds to fight.)
New York State is contemplating investigating LNR, CW Capital and C-III.
Some say that special servicers are rigging auctions or trying to get less for the property so they can acquire the property themselves. (We have seen this too in other cases.)
Since this story was first posted, we heard from one insider who has verified our worst thoughts. As we continue to investigate these cases, we invite others with inside knowledge to come forward. We also welcome the opportunity to talk with those who feel victimized by banks, master servicers or special servicers. Victim of Special Servicing Fraud – see below.
Post Script on Martin Taplin and the Sagamore Hotel
Taplin ultimately prevailed in his battle with LNR but the victory was bittersweet. As the battle dragged on for years, the emotional toll was too much for Marty. Shortly after winning his court battles, he suffered an untimely death. Over the years I became friends with Marty and truly admired his stamina and drive for justice. Sadly, he is no longer with us. The hotel has been sold.
Lawyers that Sue Banks
The lender liability lawyers at Mahany Law and Judge Lang & Katers sue banks, special servicers and others in the lending field. We do not represent banks making us unique in this area of law.
Most lawyers follow the money which means representing banks and servicers. Not us. If you believe you have been victimized by a loan servicer or lender, contact us. All inquiries are protected by the attorney – client privilege and kept confidential. For more information write to attorneys Chris Katers at [hidden email] or the author of this post, attorney Brian Mahany ([hidden email]) or call us 877-858-8018.