Mack Real Estate sues for $566M over Fortis project loans
Developer and senior lender accused fraud, misrepresentation and negligence
By: Pat Ralph | Research By Jay Young
Fortis Group’s Joel Kestenbaum with 161 Maiden Lane (Property Club, Fortis Group)
Fortis Property Group’s beleaguered One Seaport condominium project in Lower Manhattan is facing more legal trouble, this time over a mezzanine loan that the lender claims is fraudulent.
Mack Real Estate is accusing Fortis and the 161 Maiden Lane project’s senior lender, Bank Leumi USA, of fraud in connection with the $66 million loan, according to a lawsuit filed Thursday. The suit also names Harel Insurance Company and Valley National Bank, which acquired Bank Leumi for $1.1 billion last year.
The lawsuit also accuses Fortis and co-principal Joel Kestenbaum of misrepresentation and negligence over the financing, which Fortis and Mack agreed to in September 2018. The lender is seeking at least $100 million on those counts and $566 million altogether in a series of legal actions involving Fortis projects.
Mack also accused Fortis of breaching the terms of their agreement, for which the lender is seeking at least $80 million in damages.
Kestenbaum, the guarantor on the loan, was hit with the same accusations in connection with the collateral provided in the agreement, the One Seaport property itself and the “intentional physical waste” of the project, according to the summons. Mack is seeking at least $162.5 million in connection with the claims.
The lawsuit alleges that Bank Leumi and Harel Insurance Company aided and abetted fraud in connection with the mezzanine loan. It also claims that Bank Leumi and Harel committed fraud, breached its contract and nullified both the intercreditor agreement that was signed between Bank Leumi and Mack in 2018 and an amendment to that document two years later.
Mack also accused Bank Leumi and Harel of fraud and unjust enrichment in connection with the $40 million mortgage and mezzanine loans it provided to Fortis in March 2020 for the developer’s 17-unit, 50,000-square-foot Polhemus Residences at 100 Amity Street in Cobble Hill, according to the summons. Fortis bought the Brooklyn property in 2015 as part of its $240 million deal with the State University of New York for 18 buildings that were formerly part of the Long Island College Hospital campus.
Mack is asking the court to award at least $170 million in compensation stemming from these claims and to nullify or amend the intercreditor agreement and amendment.
The plaintiff is also asking state Supreme Court Judge Barry Ostrager to declare that Bank Leumi is not entitled to priority of payment as the senior lender, to revise the agreement so that payment priorities are reversed, that Mack should not be required to pay any recoveries to Bank Leumi, and to award Mack at least $20 million in restitution.
Fortis and Kestenbaum are also being sued over the mortgage and mezzanine loans the developer received from Mack in March 2020 for its Polhemus condo project. The lender is seeking damages of no less than $33.1 million.
Mack is also demanding that any damages awarded to Fortis and Kestenbaum in their legal dispute against Bank Leumi over One Seaport should be paid to the plaintiff, and that any payments from the lawsuit that are kept by Fortis or Kestenbaum should be deemed unjust enrichment.
The court documents do not include a pre-foreclosure filing or specific details regarding the defendants’ alleged actions. Attorneys representing both sides did not respond when reached for comment.
Mack’s lawsuit over its mezzanine loan for One Seaport is the latest in a series of legal and financial sagas that have plagued Fortis’ 60-story, 98-unit Financial District project since construction began in 2016.
In 2017, a 36-year-old construction worker named Juan Chonillo died after falling from the 29th floor of the project. Chonillo was wearing a safety harness, but it was not attached to anything.
The incident resulted in a concrete subcontractor, SSC High Rise Construction, pleading guilty to second-degree manslaughter. One year later, a crane operator sent a concrete bucket smashing into the building’s 34th floor, causing concrete to pour onto the street below.
Fortis and the building’s former contractor Pizzarotti have traded lawsuits over who is to blame for the tower leaning three inches to the north.
Bank Leumi put a $120 million non-performing construction loan for the project up for sale in October 2020, claiming that Fortis had been in default of the loan agreement since the developer stopped paying interest and failed to obtain a temporary certificate of occupancy for a single condo unit in the tower earlier that year. The note has yet to be sold, according to Newmark.
Later that month, Fortis sued Bank Leumi and its other lenders, claiming that they reneged on a contract by not fully funding the construction loan they agreed to provide. The developer also claimed that the lenders were required to provide funding in the event of budgetary issues or construction delays.
Bank Leumi sought to foreclose on the $120 million worth of loans tied to the property and take ownership from Fortis in December 2020. The lender claimed that $99.9 million of its $120 million credit line had been extended through mortgages, notes, credit agreements and loan agreements.
Fortis replaced Pizzarotti as the property’s construction manager with Ray Builders, which then left the project in 2021, claiming the developer owed it $6.8 million.
That April, the city stepped in and halted work on the manager-less project. But construction had already been stalled for months. The court in June 2021 approved a temporary receiver to oversee the site and signed off on the hiring of Engel Burman Construction to secure the site and assess its status.
Fortis and Bank Leumi entered into mediation last year to resolve their claims, but negotiations fell apart this year because the parties “were too far apart,” Bank Leumi’s attorney said at the time.
Judge Ostrager in February rejected Bank Leumi’s motion seeking summary judgment on the foreclosure action. A trial is slated for November 2023, according to court records.