“It’s one borrower suing a special servicer, whereas the special servicer is lawyered up to handle hundreds of such suits, and the documents are in their favor.”
– Richard Fischel, Brighton Capital Advisors
Commercial mortgage-backed securities borrowers have long chafed at special servicers, who they say drag out negotiations and collect fees as long as possible while their distressed real estate assets languish.
Mostly, there is little borrowers can do. CMBS deals are structured to protect special servicers from litigation, and owners of individual real estate assets don’t often have the same legal firepower.
But a recent crop of lawsuits and counterclaims against special servicers, including a high-profile suit filed by billionaire Carl Ichahn, may make it harder for special servicers to continue business as usual.
In one ongoing case in the Circuit Court of Cook County, special servicer Rialto Capital Advisors sought to foreclose on an art deco-style office building at 20 N. Wacker Drive that houses the Lyric Opera of Chicago. The borrower, Manhattan-based investment firm 601W, filed a counterclaim on May 31 calling Rialto’s practices “predatory.”
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Borrowers Face Long Odds
In numerous recent lawsuits filed against special servicers, a pattern emerges: A relatively small real estate company, the owner of one asset in a pooled CMBS deal, sues the special servicer for the allegedly exorbitant fees they charge. The suits face long odds for a couple of reasons.
Special servicers often ask borrowers to sign “pre-negotiation” letters that make it harder to bring legal challenges as a condition for a loan modification. But even if borrowers do sue, the cases often do not survive initial motions to dismiss because they lack standing. When they do survive, borrowers are usually outgunned. Many such lawsuits are quickly dismissed.
“It’s one borrower suing a special servicer, whereas the special servicer is lawyered up to handle hundreds of such suits, and the documents are in their favor,” said Richard Fischel, a geologist-turned CMBS attorney who, after stints at Willkie Farr & Gallagher LLP and a large state pension fund, is now a partner at Brighton Capital Advisors, a firm that advises CMBS borrowers and their counsel on navigating issues with servicers…
