Pershing Square Capital Management and Winthrop Realty Trust have hit CWCapital with a $500M lawsuit over alleged foul play in its handling of the $5.3B Stuyvesant Town-Peter Cooper Village deal. 

The specifics are complex, but the suit basically boils down to an argument that CWCapital strong-armed Pershing and Winthrop into giving up control of the deal, allowing CWCapital to step in and reap a tidy profit. 

Tishman Speyer and Blackrock bought Stuy Town in 2006 for $5.4B, and financed that deal with a lot of senior and mezzanine debt. 

When they defaulted in 2010, the mezzanine debt—which usually gives its owners first dibs on selling the property it’s financing—started to look pretty attractive. Pershing and Winthrop snapped it up, planning to sell the property, repay the senior lenders and pocket the rest. 

CWCapital, the special servicer representing the senior lenders, had other plans. 

The firm secured an injunction that would have forced Pershing and Winthrop to pay off $3.6B in senior debt before the sale, turning their plan on its head. Sensing a quagmire, the firms caved and sold their mezzanine debt to CWCapital in 2010. 

This is where it gets interesting. The suit alleges CWCapital then sold Stuy Town for $5.3B, without paying off the senior lenders first. In other words, it did exactly what Pershing and Winthrop had been hoping to do.

Pershing and Winthrop, unsurprisingly, weren’t happy about that. “This was always the Defendant’s plan,” the complaint reads. [TRD]