Ackman Cries ‘Ludicrous!’ The Stuy Town War Translated

— Early last week, activist investor Bill Ackman and Boston-based Winthrop Realty Trust announced they had bought all of the controlling slices of a second mortgage, and were seeking to seize control of Stuy Town, which has been in default since January, through a foreclosure. This was seen as likely to antagonize the holders of the first mortgage, who through special servicer CW Capital, were in the midst of a foreclosure process of their own. (Mr. Ackman told Crain’s: “I think CW Capital will welcome us. … We are peacemakers.”)

— CW Capital, however, was not pleased. On Wednesday, the firm sued to stop the Ackman/Winthrop foreclosure in court, alleging that the investor agreement bars any of the second mortgage holders from foreclosing while CW Capital is in the midst of its foreclosure (unless Ackman/Winthrop want to pay off the $3 billion mortgage in full, plus interest).

— Yesterday, the foreclosure was put on pause, as the two parties agreed to appear in court early next month.

The Ackman team has yet to file its responses in court, but, in case there was any thought to the contrary, they are projecting confidence in their position.

According to a filing by CW Capital, the special servicer sent a letter to the Ackman/Winthrop team (named PSW) a day after the mortgage purchases were made public, warning that CW believed PSW did not have authority to foreclose.

PSW’s response, according to CW: “ludicrious.”

From CW’s filings:

In response, by letter dated August 11, 2010, PSW characterized CWCAM’s interpretation of Section 6(d) as “ludicrous.” Providing no explanation for its position, and despite the unambiguous requirements of Section 6(d), PSW stated:

‘You are entitled to no such assurances in any event. Your cited provision of the Intercreditor Agreement does not require the payment of the Senior Loan as a condition to a transferee acquiring the Equity Collateral. Your contrary interpretation is totally without merit or foundation and a poor and ultimately unsuccessful effort to intimidate my client.’

Time will tell on this one, but CW’s contention is that the intercreditor agreement for the second mortgage holders specifically bars the PSW action. All of this comes down to “Section 6d,” which, per CW’s filings, looks something like this:

30. Specifically, Section 6(d) provides that:

To the extent that any Qualifed Transferee acquires the Equity Collateral pledged to a Junior Lender pursuant to the Junior Loan Documents in accordance with the provisions and conditions of this Agreement. . . provided, however, . . (B) all defaults under (1) the Senior Loan and (2) the applicable Senior Junior Loans, in each case which remain uncured or unwaived as of the date of such acquisition have been cured by such Qualifed Transferee or in the case of defaults that can only be cured by the Junior Lender following its acquisition of the Equity Collateral, the same shall be cured by the Junior Lender prior to the expiration of the applicable Extended Non-Monetary Cure Period.

In English: If the loans (the first mortgage) aren’t paid off, CW says PSW can’t foreclose.

The next formal step comes Sept. 2, when both CW and PSW are slated to appear in court. 

Here’s one of the filings from CW:

Affidavit of Andrew J Hundertmark in Support of Preliminary Injunction