Carmel Wins, Capital Properties Loses in Rincon Apartments Lawsuit

By Barbra Murray, Contributing Editor

Barry Lee, of Manatt, Phelps & Phillips L.L.P.

The credit crunch may be behind us for the most part, but the fallout continues, as evidenced by a lender liability/wrongful foreclosure action filed by Capital Properties against Carmel Partners regarding the latter’s foreclosure on Rincon Residential Towers in San Francisco. The verdict just came in–a San Francisco Superior Court judge has ruled in favor of the defendants, so the high-rise apartment complex will remain in Carmel’s hands.

Capital Properties relied on a multi-firm team that included Boies, Schiller & Flexner L.L.P. for representation. Carmel has the law firm of Manatt, Phelps & Phillips L.L.P. to thank for its victory.

Barry W. Lee, a partner with Manatt, reflects on the outcome and its greater meaning. “If you look at this case in its own little capsule, I think it says that when borrowers and lenders find themselves in a situation that many borrowers and lenders found themselves in after the crash, you need to work in good faith with each other to come to a reasoned solution,” he said.

The story begins in 2007–just before the capital markets froze and the real estate market went into a downward spiral–when Capital Properties acquired Rincon Residential Towers from Beacon Capital Partners L.L.C. for $143 million, relying in part on a two-year, $110 million loan from Bear Stearns to fund the purchase. Just as Capital Properties was finishing up its renovation of the upscale multi-family destination, Bear Stearns crumbled. As Manatt describes it, Capital Properties later attempted to arrange an extension on the Rincon loan or purchase the loan at a discount, but to no avail.

The loan went into default before a Carmel entity, CP III Rincon Towers Inc., acquired the debt on the 709-unit apartment community. Carmel later took over ownership of the asset, which it has renamed Carmel Rincon Luxury Apartments. “I’ve represented both lenders and owners and not withstanding what some people think, lenders, generally speaking, are not interested in having to foreclose;  they’re just trying to get to an economically rational solution to problems,” Lee said. “Given the fact that the loan was already in default, there was the expectation that foreclosure was a definite possibility. But I’m pretty confident that our client would have been just as happy to be paid back the amount that was owned on the loan.”

In February 2010, Capital Properties filed the lawsuit and recorded a lis pendens, or pending litigation, on the property. The plaintiff had wanted to regain ownership of Rincon and obtain $40 million in damages. Among Capital Properties’ claims, as Manatt recounted, the loan defaults had been wrongfully declared and the lenders hindered efforts to refinance.

The court thinks otherwise. The plaintiff’s lawsuit, the judge has found, was part of a strategy to interfere with any sale of the loan. “I think that the court’s opinion very clearly indicates that the evidence, to this judge, showed that the borrower wasn’t really working to try to get to a reasoned solution to the problem,” Lee said. “A corollary of that of course is to know what your documents say–and I think they did know what their documents say, which may have accounted for what their approach was.”