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Law360 (May 4, 2020, 7:32 PM EDT) -- A company controlled by private equity investor Henry R. Silverman defied New York state's shelter-in-place order and attempted to hold a "sham" auction at the Manhattan offices of Paul Hastings LLP in order to take control of a real estate development, according to a suit filed in state court.
Hours after a corporate entity partially owned by Hidrock Properties filed the suit Thursday, the court agreed to temporarily halt the auction, described in the suit as a "fire sale" that was allegedly scheduled for the next day at Paul Hastings' offices, which are currently closed because of COVID-19.
The corporate entity 1248 Associates Mezz II LLC, which is also connected to real estate firm Wachtel Missry LLP, claimed the auction was an effort by a Silverman corporate entity to take advantage of an international health crisis to seize control of the development of a 31-story Manhattan high-rise.
Not only did the company, which had provided financing for the project, try to take advantage of the fact that the project was behind schedule after the governor's emergency orders halted construction, the developer claimed, but it also tried to use the pandemic to discourage legitimate buyers by giving the impression that the auction was only to be held in person.
"Defendant has chosen an unthinkable course of action — to try to capitalize on the unprecedented death and disruption brought about by the novel coronavirus, COVID-19, and the government restrictions that have been put in place to protect the public," the developer wrote in its motion for a temporary restraining order halting the auction.
"Where most New Yorkers saw only human tragedy in the COVID-19 pandemic, Defendant saw opportunity," it added.
Although Paul Hastings is not named as a defendant in the suit, the complaint lists real estate partner Paul Olsen as a party to be notified.
According to the complaint, 1248 Associates holds the rights to develop a property at 12 East 48th St. in Manhattan, where it plans to construct a 31-story building that will house a high-end Hilton hotel as well as retail space. In addition to supplying $33 million of its own money, the company partly financed the project with several loans, including $7 million from the allegedly Silverman-controlled corporate entity in 2017, the complaint said.
The project was close to hitting the targets required under the loan agreement in March 2020, according to the complaint, when the COVID-19 pandemic hit and the New York governor issued emergency orders that shut down nonessential construction in the state. The project was not deemed an essential one, the complaint said.
Before the shutdown, the developer was already looking for a way to refinance with a third party in order to repay the loan, according to the complaint, but negotiations fell through when the pandemic struck. The developer said that once the emergency orders are lifted and construction resumes, the project will hit the necessary benchmarks in as little as six months.
However, the complaint alleges, the lender decided to take advantage of the pandemic to try to take control of the project through a "sham" auction of a related Hildrock-controlled corporate entity that was used as collateral for the loan, which would give the buyer control of the project.
The auction was scheduled for May 1 and announced barely two weeks ahead of time in a subscription-only outlet, according to the complaint.
The announcement also indicated that bidders would need to appear in person at Paul Hastings' offices, at a time when the state has ordered residents to practice social distancing and refrain from nonessential trips out of their homes, the complaint alleged.
The whole arrangement was allegedly devised to allow the lender itself to take control of the development.
"Defendant is rigging the sale to guarantee that it is the only bidder so that it can acquire the asset for a pittance," the motion for a TRO alleged.
The court agreed to halt the sale shortly after the complaint and motion for a TRO were filed on Thursday.
Counsel for 1248 Associates and representatives for Paul Hastings and the Silverman-controlled corporate entity did not respond Monday to a request for comment.
1248 Associates is represented by Jacob S. Pultman, Bradley S. Pensyl and Michael F. Westfal of Allen & Overy LLP.
Counsel for the defendant was not available Monday.
The case is 1248 Associates Mezz II LLC v. 12E48 Mezz II LLC, case number 651812/2020 in the Supreme Court of the State of New York, New York County.
--Editing by Amy Rowe.
Clarification: This article has been updated to clarify the role of Paul Hastings in the auction attempt at issue.
For a reprint of this article, please contact reprints@law360.com.
