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Billionaire investor Carl Icahn's lawsuit against CMBS servicer Rialto Capital Advisors cleared a hurdle as a Nevada judge threw out a request to dismiss the suit, which alleges fraud over RCA's handling of a distressed Nevada mall.
In its motion to dismiss the case, RCA said that Icahn Funds, one of the investors in the Prizm Outlets mall near the California-Nevada border, wanted the loss on the property to come to fruition quicker because the activist investor had an "unrelated short play against malls via a CMBS derivatives index" that positioned him to gain through its speedy failure, CFO Dive reported.
The judge in the case wasn't convinced by RCA's argument, and the case will proceed.
While some industry watchers have applauded the scrutiny of CMBS special servicers, which they say have been doing what RCA allegedly did for years, CFO Dive reported that disputes like this one that hinge on valuations are likely to become more common as the effects of the pandemic on property types like office and retail collide with a challenging economic landscape.
The issue between Icahn and RCA began in 2017 when the Primm, Nevada, mall was half-vacant and unable to pay its $67M in CMBS debt. RCA became the special servicer.
In his complaint, Icahn alleges RCA purposely slowed the loan servicing process and inflated appraisals. In doing so, RCA accrued millions in fees while it took away a chance for bondholders, including Icahn, to take control of the property, according to the lawsuit.
Bondholders gained control of the property in March 2020. By the time they sold the property in 2021 for a mere $400K, they had taken a $62.2M loss — the balance on the loan — while Rialto made $12.85M through fees and other charges, according to the complaint.
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