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Law360 (March 31, 2020, 7:08 PM EDT ) A Pittsburgh-area shopping center said it could fold under the strain of coronavirus-related business shutdowns if Wells Fargo and a Starwood Property Trust subsidiary follow through on an "outrageous" threat to seize the rent payments being submitted by the strip mall's tenants, a federal lawsuit said Monday.
North Hills Village LLC, which operates the 600,000-square-foot shopping center in Ross Township, Pennsylvania, said loan servicer LNR Partners LLC had demanded a "cash sweep" that would divert all the rent payments from North Hills Village tenants directly to LNR and Wells Fargo to service a loan with a final payment due in December 2021.
"Without a legitimate legal basis to do so, defendants seek to deprive North Hills Village of funds necessary for the operation and continued vitality of the shopping center," the complaint filed in the U.S. District Court in Pittsburgh said. "Defendants' outrageous actions — in the midst of a global pandemic and financial crisis — jeopardize the ability of North Hills Village to operate as a going concern."
North Hills Village claimed that LNR and Wells Fargo had breached their loan and cash management agreements, and sought an injunction stopping the cash sweep and a declaratory judgment from the court that the demand was improper, since the mall had fixed the potential vacancy that triggered the rent grab.
The mall had gotten the underlying loan from JP Morgan Chase in 2016, and JP Morgan gave LNR and Wells Fargo the rights to service the loan, the complaint said. Under the loan and cash management agreement, tenants' rent is put into a "lock box" account with Wells Fargo, and is then used each month to pay back the loan, fees, taxes, insurance and other expenses, with any remainder used to maintain and operate the shopping center.
According to the complaint, the lease for one of the major tenants, Burlington Coat Factory, was soon to expire, so North Hills Village said it informed LNR and Wells Fargo that it was negotiating a new lease. The companies agreed to a five-year renewal with a "modest rent reduction," and submitted the proposed agreement to LNR and Wells Fargo for review and approval in early February.
Despite approving Burlington's lease renewal, LNR said the expiration of Burlington's lease triggered the cash sweep provision in the loan agreement, through which all the money in the lock box account would go to LNR and Wells Fargo starting April 1 instead of any excess going back to the shopping center, the suit said.
The lawsuit said the cash sweep would be especially damaging in a time of state-ordered shutdowns of nonessential businesses and stay-at-home orders to prevent the spread of the COVID-19 coronavirus.
North Hills Village tenants include Petco, Target and a Kuhn's supermarket, all among the "essential businesses" allowed to stay open under Pennsylvania Gov. Tom Wolf's closure orders. But the shopping center argued that it was in danger of shuttering completely if it couldn't pay its other bills with its share of the rent.
"If a cash sweep is implemented and North Hills Village is deprived of all further distributions of the North Hills Village funds until the end of the loan agreement, the North Hills Village Mall itself is in jeopardy of failing and North Hills Village will be forced into default under the loan agreement due solely to the draconian and punitive actions by LNR and Wells Fargo," the complaint said.
A temporary restraining order and, eventually, a permanent injunction would prevent such harm, the suit said.
North Hills Village argued in its lawsuit that it had fixed the expiration of Burlington's lease by getting a renewal and keeping that spot in the shopping center filled with a tenant, either of which should have averted a cash sweep under the loan agreement.
"LNR cannot approve the Burlington lease renewal and claim that the renewal it approved does not qualify as a cure for Burlington's failure to renew," the complaint said. "North Hills Village cannot put a replacement tenant in the Burlington space because Burlington has renewed. And North Hills Village cannot negotiate a new lease with Burlington (nor would it know what, if any, terms it could change to appease LNR) because LNR has approved the Burlington lease renewal."
LNR told North Hills Village on March 25 that it might stop the cash sweep if the shopping center could put up some extra security for the loan. North Hills Village said it has $2.6 million in a "rollover reserve account" with Wells Fargo that it could take $1.5 million from as security for the loan while maintaining more than the $1 million minimum in the account. But the suit said both LNR and Wells Fargo breached the cash management agreement when they refused to release the money.
Counsel for North Hills Village declined to comment Tuesday. Representatives of Wells Fargo and LNR's parent company, Starwood, did not immediately respond to requests for comment.
North Hills Village is represented by Mark C. Zheng, Daren S. Garcia, Joseph R. Miller and John M. Kuhl of Vorys Sater Seymour and Pease LLP.
Counsel information for LNR and Wells Fargo was not immediately available.
The case is North Hills Village LLC v. LNR Partners LLC et al., case number 2:20-cv-00431, in the U.S. District Court for the Western District of Pennsylvania.
--Editing by Jack Karp.
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