Midtown Equities Lobs Class Action At Rialto Capital Advisors

As Rialto Capital Advisors pummels Signature Bank borrowers with one foreclosure filing after another, a heavyweight of New York real estate is going on the offense.

Joseph Cayre of Midtown Equities smacked Rialto, servicer to the $17 billion Signature loan book sold in late 2023, with a suit Monday alleging Jeff Krasnoff’s firm is illegally manufacturing defaults to force borrowers into paying “crippling default interest and fees,” the complaint reads.

In the suit filed by attorneys Terrence and Darren Oved, Midtown alleged that Rialto’s strategy is a “Sinister Pocket Veto Scheme.” The name is a nod to claims that Rialto ignores borrowers, forcing defaults through inaction.

Midtown Equities Lobs Class Action At Rialto Capital Advisors — Oved and Oved’s Terrence Oved (Oved and Oved)

“Rialto’s tactics are akin to a hotel front desk deliberately avoiding a response to a guest’s timely late check-out request—only to later impose penalties on that guest for overstaying,” Terrence Oved explained.

A Rialto spokesperson said: “We continue to engage with borrowers to find the best resolutions possible.”

Midtown’s case is not the first to take Rialto to task. That would be the owner of a Staten Island shopping center that sued the servicer last year over near-identical allegations, then settled weeks later.

But the filing is the first suit that seeks class action status, signaling a growing pushback against Rialto’s tactics. Over 40 landlords may have been affected, the complaint claims.

Plus, Midtown is the first big-name Signature borrower to go head-to-head with Rialto. Until now, landlords fighting the servicer have mostly been mom-and-pops with one or two properties and few resources to take on Krasnoff’s servicing empire.

Midtown’s complaint centers on 205 Montague Street, a Brooklyn Heights office building that Cayre’s firm refinanced with a $45 million loan from Signature months before the bank’s 2023 collapse.

The debt had an initial maturity of August 3, 2024, and Midtown had the option to extend the date by one year so long as it exercised it “in writing” one to three months before the loan would come due, according to the suit.

Ahead of that August maturity, Midtown went into contract to sell 205 Montague and settled on an August 27 closing date. Around the same time, Jonathan Landau of Landau Development and formerly Fortis Property Group, filed plans for a 47-story residential tower on the site of the office building.

In May 2024, Midtown alleges it wrote to Rialto for an extension.

“Instead of acting in good faith and routinely confirming the extended maturity date in writing, [Rialto] embarked on a campaign of deception … to declare a ‘default,’ the suit claims.

Rialto allegedly demanded a pre-negotiation agreement from Midtown. A so-called PNA defines how negotiations between lender and borrower will play out in the event of a dispute. It can also be used to take advantage of borrowers, attorneys say, particularly if the PNA requires the borrower to acknowledge a default has occurred.

Midtown, possibly aware of that threat, declined to sign Rialto’s PNA. Instead, it hounded its servicer for confirmation of the loan extension.

Rialto ignored Midtown’s calls and emails “for significant stretches of time,” the suit claims. When it did respond, it would only say that the extension was “under review.” Then, it would “ghost” again.

Eventually, Rialto got chattier in June and asked Midtown to pay $5,000 for an appraisal it had ordered for the office building; Midtown wired over the money. The appraisal, it claims, hit the loan-to-value threshold required to ink the extension.

But as the closing date for 205 Montague dawned, Rialto still refused to okay the extension “without providing any basis whatsoever,” the suit says.

As a result, Midtown has been forced to repeatedly push the closing date, it alleges, and now risks losing the buyer and its commercial tenant “whose tenancy hangs in the balance.”

Midtown also alleges that Rialto in July “deliberately” stopped withdrawing interest and escrow from the landlord’s account, and stopped using those funds to pay property taxes; though Midtown continued to deposit payments into the account each month.

Instead, Rialto demanded Midtown pay taxes out of pocket, which the landlord claims it was forced to do to avoid a lien.

Cayre’s firm is now asking for at least $20 million and up to $60 million in damages, and for a court to order Rialto to recognize the extension, among other requests.

The end game for Rialto, the firm claims, is money. .

“Rialto’s disregard for Borrowers’ contractual rights is a blatant attempt to extract an unearned windfall or force them into costly, prolonged litigation to enforce their rights,” the Oved brothers wrote in a statement.

“This unlawful practice ends now.”