Stuy Town auction set after court overrules mezz foreclosure

The mezzanine debt holders of New York’s Stuyvesant Town have vowed to fight a state court ruling that rejects their attempted foreclosure of the massive residential complex.

Pershing Square Capital Management and REIT Winthrop Realty Trust said they would appeal a ruling by state Supreme Court Justice Richard Lowe, who rejected their bid to foreclose on the 11,227-unit complex before paying down the $3.67 billion senior mortgage.

Following a heated court hearing on the issue in August, Lowe yesterday issued his decision saying Stuy Town’s intercreditor agreement was “unambiguous” in requiring a joint venture between the two firms, known as PSW, “to cure all senior loan defaults”.

He said in trying to foreclosure on the property, PSW was “cherry-pick[ing]” certain language “while ignoring all of the additional language”.

PSW strongly disagrees with the trial court's ruling and will appeal the decision to the New York appellate court. Pershing Square and Winthrop Realty

A foreclosure auction has now been set by Stuy Town special servicer CWCapital Asset Management for 4 October, when the multifamily property is expected to sold as a whole. A spokesman for PSW said an appeal was expected “soon”, with a statement saying only that the JV “strong disagrees with the trial court’s ruling” and would seek to block the auction.

PSW launched mezzanine foreclosure proceedings against Stuy Town at the start of August, shortly after acquiring the property’s three most senior mezzanine loans for $45 million or 15 cents on the dollar from Winthrop. In trying to foreclose on the equity collateral used as security for the original $1.4 billion of mezzanine debt, PSW said it didn’t have to pay down the senior loan first.

However, CWCapital and Bank of America, trustees for the mortgage holders, argued the opposite, saying the complex’s $3 billion first mortgage – which has risen to $3.66 billion with interest – had to be repaid before any foreclosure could take place. Yesterday, Justice Lowe agreed adding PSW’s case was “undermined by the plain language of the contract”.

In its statement, PSW said if an appeal was unsuccessful the value of its investment in the mezzanine debt “may be lost”.

At the court hearing last month, lawyers for CWCapital said there was no mistaking Stuy Town’s intercreditor agreement, signed when Tishman and BlackRock acquired the property in 2006 for $5.4 billion. “You don’t need a road map, you don’t need a chart and you don’t need to be an English major to understand what that one paragraph [in the intercreditor agreement] means,” he said at the time. Speaking to a packed court room, he added that following default “the senior lender drives the bus”. It wasn’t, he argued, for junior lenders to reach over and grab the steering wheel and “crash the bus”.

PSW’s counsellor Edward Weisfelner, of Brown Rudnick, though hit back during the hearing insisting any foreclosure by senior lenders would wipe out junior creditors. “I’m wiped out, gone, kicked to the curb of the proverbial bus.

The two sides may ultimately reach a settlement that would result in Pershing and Winthrop taking control, Joshua Stein, principal of law firm Joshua Stein, told Bloomberg. “The real thing that’s next is negotiations between CWCapital and Pershing,” said Stein, who is not involved in the case. “CWCapital just got a lot more leverage in those negotiations. If Pershing is willing to pay a good price, that’s the end of the discussion.”