Dive Brief:

• A Nevada judge this month rejected Rialto Capital Advisors’ (RCA) motion to dismiss a suit filed against the loan servicer by funds activist investor Carl Icahn controls. The complaint filed in June alleged fraud in connection with RCA’s handling of a $73 million loan on a Primm, Nevada, outlet mall contained in a commercial mortgage-backed security (CMBS) trust.
• In its request to have the suit thrown out, Miami-based RCA asserted Icahn Funds —  due to an unrelated short play against malls via a CMBS derivatives index — wanted the loss on the outlet loan to be realized more quickly because, “Icahn, perversely, actually benefited from the value decline experienced by Prizm outlets, as well as the losses experienced by a myriad of other struggling malls across the U.S.,” according to a July 20 filing by RCA. 
• Nevada District Court Judge Mark Denton stated that he was not persuaded by Rialto’s arguments, ruling that the court has jurisdiction and that Icahn funds’s fraud claim passes “muster,” according to a copy of his Oct. 17 order provided to CFO Dive.  

Dive Insight:

The court’s decision to uphold the suit was hailed by an attorney for Icahn as a notable one for CMBS investors, citing a long history of so-called “special” loan servicers like Rialto using the complexity of documents related to securitized loans to avoid scrutiny of their actions. 

“It’s an important decision in terms of holding special servicers accountable,” attorney Michael Hanin of Kasowitz Benson Torres, said in an interview. He represents the funds —  Icahn Partners LP and Icahn Partners Master Fund LP — which filed the complaint.     

The suit also comes as any financial executives with real estate holdings are likely to face a rising number of similar disputes with lenders and other parties as the valuation of retail and offices properties is impacted by the slowing economy. Some office and mall properties have already seen a downshift in valuations as a result of a drop in demand due to hybrid work and e-commerce shopping.

Hanin — who said he is seeing the appraised value of some commercial real estate properties plummeting to as little as $10 million from $150 million ten years ago — expects to see an increase in litigation stemming from those changes.

The suit alleges that Rialto failed in its duties as the $73 million senior loan’s debt’s servicer to maximize the recoveries for the trust’s investors, instead “running Prizm Outlets into the proverbial ground” and delaying the sale until April 30, 2021, when it was sold for $400,000. It marks the largest loss on a CMBS conduit loan since the 2008 financial crisis, Icahn’s lawyers assert.

An attorney for Rialto did not respond to a request for comment.