The motion to intervene, filed Tuesday afternoon in US District Court in Manhattan by attorneys for Chatham, NJ-based Appaloosa Management, alleges that CWCapital "recklessly and imprudently" exposed Appaloosa and other debtholders to "wholly avoidable losses, risks and injuries" by seeking to foreclose on Stuy-Town "when other less hazardous avenues were available." According to court documents, those risks include: exposure to the rent-overcharge claims that were upheld last October by the state's highest court; liability over CWCapital's failure to obtain an environmental assessment of the property before filing for foreclosure; and double transfer taxes.

"A foreclosure judgment will require a double payment of New York City's $100-million transfer tax on the property: once when title is transferred by foreclosure, and a second time, when the property is sold in the inevitably necessary workout of this loan," according to Appaloosa's court filing. "No prudent commercial mortgage lender would willingly assume these tax liabilities, particularly when they could be limited by other means, or avoided entirely in bankruptcy."

Whether bankruptcy was even a viable option in the case of Stuy-Town's owners--a joint venture led by Tishman Speyer Properties and BlackRock Realty--is not clear. "Most loans that closed during the commercial real estate boom that ended a couple of years ago required the principals of the borrower to sign a carveout guaranty, so that if the borrowing entity filed a voluntary bankruptcy proceeding, those principals would become personally liable for the entire loan," Joshua Stein, a partner at law firm Latham & Watkins, tells GlobeSt.com. "Those guaranties—'nonrecourse carveout' guaranties or 'bad boy' guaranties—have hugely disincentivized borrowers from filing bankruptcy during the current cycle of commercial real estate distress."

In simpler cases "where you had one borrower and one lender and everyone wanted to use a prepackaged bankruptcy reorganization to mitigate transfer taxes, it was pretty easy: the parties would agree on all the terms of the prepackaged plan and the bankruptcy filing would proceed," says Stein, who is not involved in the case. "If the lender held a nonrecourse carveout guaranty triggered by a bankruptcy filing, then the lender would have to agree not to enforce the guaranty on account of the prepackaged filing. No big problem there. The story for Stuyvesant Town is, to no great surprise, much more complicated."

According to court documents, Appaloosa also maintains that CWCapital is "burdened by an irreconcilable conflict" of interest between its role as special servicer and its status as a holder of junior notes, and therefore cannot adequately represent the interests of debtholders. In a response to Appaloosa's filing, attorneys for the Stuy-Town JV say they have no objections to the motion to intervene. Appaloosa says in its court filing that it owns more than $750 million of pass-through certificates secured by the Stuy-Town mortgage, along with more than 30% of three tranches of subordinated debt.

Instant Insights /

Hedge Fund Challenges Stuy-Town Special Servicer

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