In 2010, an Arizona company called EJM Kyrene Property agreed to sell property to sell 15 industrial properties located throughout the United States for $136 million. The buyer was KTR Property Trust. One of those properties was located in Tempe, Arizona.
There was some dispute over the Tempe property, apparently caused by possible environmental problems with the tract. Over the next two years, the parties would amend the contract 11 times. After finally agreeing on terms, the parties then entered into 8 more extension agreements. Exhausted by little progress and no closing, the seller (EJM) terminated the contract.
Like many sellers, EJM didn’t own the property outright. At the time they cancelled the contract they still owed $14.9 million on the property. Unfortunately for EJM, it’s balloon note came due about the same time that negotiations with the seller broke down. With the sale of the property off, EJM began securing loan extensions from its lender.
Furious that EJM backed out of the deal after 2 years of marathon negotiations, KTR secretly purchased the loan from the lender. Evidently KTR thought by buying the note, they could gain leverage over EJM. They believed that EJM was struggling financially and needed extensions from the prior lender.
EJM says KTR was wrong. When EJM asked its new lender for an extension, KTR responded by declaring the note was in default. Nonsense, said EJM, as they had never missed a payment.
EJM claims that it wasn’t in default and offered to pay the loan in full. KTR wasn’t willing to accept the $14.9 balance. Instead, they demanded $19.8 million. Fearing they would lose the property, EJM paid and on December 31st, 2013 sued KTR for the $4.9 million in overcharges.
EJM also demanded punitive damages.
Since the case was originally filed, 6 of the 8 counts have been tossed by the court including claims for punitive damages. EJM may soon get a ruling, however, on the remaining two claims for breach of contract and breach of the implied duty of good faith and fair dealing.
We have seen these cases before. Often the offender isn’t the original lender or noteholder. Instead, it is a special servicer or a special purpose entity that purchased the note and hoped to get the property for a steal.
That appears to be the case here. If the allegations of the complaint are true, it appears that KTR tried to purchase the property directly. When the seller (EJM) cancelled the deal, they tried an end run and purchased the note hoping that by not extending the note, EJM would default. When they didn’t default, KTR simply declared a default and proceeded to tack on millions of dollars of default interest and fees.
Fortunately for EJM, they had the funds to pay off both the balance and the disputed fees. Many borrowers don’t have that luxury, however.
Unfortunately, many property owners we represent don’t have deep pockets. They can’t afford counsel and certainly can’t afford millions of dollars in bogus charges and fees.
KTR and its affiliates have denied the allegations and have not yet had their day in court. We share this story, however, because the allegations and claims are unfortunately way too familiar.
If you own a commercial property and believe you are the victim of a wrongful foreclosure or unfair charges and fees, let us know. Our lender liability lawyers represent property owners and borrowers. We never represent banks, trustees, or special servicers.
Often cases can be handled on a hybrid or alternative fee basis. Defending against a well-funded lender / servicer isn’t easy. Most lender liability lawyers defend banks and charge ridiculous fees. Few represent borrowers and those that do rarely have experience with complex CMBS financing.
For more information, visit our wrongful foreclosure page or contact attorney Christopher Katers at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can also be contacted at [hidden email] or directly at (414) 704-6731. All inquiries kept strictly confidential.
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