Rialto Capital Advisors has ratcheted up its foreclosure campaign against Signature Bank borrowers, firing off lawsuits at a breakneck pace.
Bearing the brunt of Rialto’s legal siege are Aby Rosen and Michael Fuchs.
Jeff Krasnoff’s special servicing arm slapped the RFR principals and their firm with another pre-foreclosure filing this week, alleging the investors defaulted on a $45 million loan backed by an Upper East Side retail condo.
That makes six suits by Rialto alleging the duo defaulted on a Signature mortgage or promissory note. Rialto started servicing $19 billion of the failed bank’s loans a year ago after partnering with Blackstone entities and the Canada Pension Plan Investment Board to buy a stake in the FDIC-seized debt.
Rialto, in a statement, said, “We continue to engage with borrowers to find the best resolutions possible and expect borrowers to honor the commitments they made under their agreements.” An RFR spokesperson declined to comment.
For Rosen and Fuchs, the action adds to an imposing pile of lawsuits. On top of the six suits, the partners face foreclosure on Midtown office buildings at 475 and 522 Fifth Avenue, have defaulted on a $219 million mortgage at 285 Madison Avenue and are fighting Cooper Union to reclaim its ground lease at the Chrysler Building.
For Rialto, the filing adds to evidence of a take-no-prisoners approach on Signature loans. Borrowers have been sounding alarms.
Since Rialto took over the Signature loan book, it has filed at least 37 cases alleging defaults, most seeking to foreclose. The suits kicked off in April with a filing claiming Rosen defaulted on $39 million in promissory notes.
By early October, Rialto had sued 15 borrowers to the tune of $300 million, an analysis by The Real Deal found. In the past six weeks, that figure has surpassed $458 million, court records show.
The most recent case concerns the ground-floor commercial space at 188 East 78th Street, the Empire Condominium, an ultra-luxury building RFR developed in 2000.
Rialto claims RFR stopped making payments on the retail condo’s debt in April 2023, about three weeks after Signature collapsed. The sponsors in 2022 had secured a modification on the loan that held them liable for $15 million in principal in the event of a default.
Rialto hit the borrowers with a default notice on the loan in February, then on the limited guaranty in November.
Rosen and Fuchs also signed a recourse guaranty that lets their lender pursue them personally if the collateral goes to auction and a sale doesn’t cover the loan amount.
Rialto claims $65.7 million is now due on what had been $45 million in debt, thanks in part to 19 percent default interest.
The high-dollar suits against Rosen and Fuchs are not typical of Rialto’s foreclosure filings. Most target small-scale owners or family firms whose properties are one-off assets — a West Village townhouse, Long Island strip mall and an affordable housing project in the Bronx, for example — and the loans are modest. Many are $10 million or less.
The typical sponsor, then, is unlikely to have the funds, legal team or know-how to fend off a servicing empire like Rialto.
The manager of a Long Island hotel and a shuttered Kips Bay homeless shelter dreaded the news that Rialto would service the buildings’ Signature Bank loans.
“I was like, ‘Ugh, we got unlucky; we have Rialto as a lender,’” said the manager, who requested anonymity for fear of retribution.
Rialto ultimately sent default notices, one of which demanded $443,000 in fees.
“I don’t know how I’m going to come up with the money,” the borrower said, noting the loan comes due in January. “I don’t know how to stop them. I don’t know what to do.”
Other landlords have alleged Rialto contrived defaults to squeeze them for fees or their assets, but few have taken the servicer to court. Rialto has declined to comment on the claims.
One who did sue was a Staten Island shopping center owner who claimed in March that Rialto manufactured financial obligations to “fabricate a default” on its $14 million loan by refusing to approve an extension.
That suit was settled in a mere two weeks.
Since then, two other owners have played David to Rialto’s Goliath, one alleging the servicer’s lawsuits are a part of a larger scheme.
The owners of the Clinton Hill retail building at 1090 Fulton Street and a Rockaway Beach office property at 2-34 Beach 102nd Street sued the servicer in November, claiming Rialto failed to acknowledge extension requests and hit them with “erroneous and outrageous mortgage statements” claiming defaults and thousands of dollars in late charges and interest that they do not owe.
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“Rialto’s arbitrary process is not unique to the Fulton Loan and the Beach Loan, but a systemic course of conduct undertaken by Rialto to deny borrowers of Signature-originated loans the benefits of their bargains,” the suit reads.
Last week, the Federal Deposit Insurance Corporation, which holds a majority stake in the Signature loans Rialto is servicing, sought to bump the case from state court to federal. The FDIC’s lawyer declined to comment.