By Dean Seal

Law360 (March 25, 2020, 9:35 PM EDT) -- A real estate investment trust in New York sued the Royal Bank of Canada on Wednesday for allegedly using the COVID-19 pandemic as an opportunity to illegally seize and sell off the trust's assets at fire-sale prices.

AG Mortgage Investment Trust Inc. warned in a statement on Monday that it might not be able to satisfy the glut of margin calls it now faces from lending banks like RBC as uncertainties about the coronavirus crisis cripple the market for mortgage-based assets.

In a lawsuit filed in Manhattan two days later, AG says RBC is the only major lender stubbornly refusing to cut the trust a break and that pushed forward on Wednesday with an auction of $11 million worth of AG's commercial mortgage-backed securities that, according to AG, were only seized because RBC marked down their value in ways that don't reflect reality.

"This opportunistic and unsound behavior amid the most significant public health and economic crisis in a generation — and while government efforts to restore liquidity to the markets are underway — must be stopped," the trust said. "Defendants' actions not only are in clear breach of the parties' contracts and defendants' duty of good faith and fair dealing, they pose an existential threat to plaintiffs' and their peers' very existence, and risk undermining government efforts to stabilize the financial markets."

The lawsuit contends RBC is only one of many banks that have applied "opportunistic and unfounded" markdowns on mortgage-based assets in an attempt to trigger widespread margin calls on entities like AG. A margin call occurs when the value of a margin account — an investment account with assets bought with borrowed money — drops and a lender requires the borrower to either make up the difference with more collateral or have the asset seized.

This explosion in margin calls has brought the nation's mortgage-based REITs "to the brink of collapse," AG said, but most banks have stopped short of pushing the industry "into the abyss" and agreed to hold back on taking action against those trusts' assets for the time being.

RBC is the lone exception, having pressed on with an effort to seize AG's commercial mortgage-backed securities, but it has done so with a margin call that's based on the bank's "entirely subjective and self-serving calculation" of the CMBS' market value, according to the suit. The terms of the repurchasing agreement between the parties that financed the CMBS mandate a means for assessing those values.

"It is entirely unclear what 'source' defendants have been using to calculate 'market value' in this illiquid market, but it is crystal clear that plaintiffs have not agreed to use it," AG said.

Using this sham calculation, RBC moved forward with an auction of the trust's CMBS at 11 a.m. Wednesday that AG feared would dramatically underprice the CMBS and set off a chain reaction of other banks being pressured to foreclose on the assets of other REITs, according to the complaint.

Hours after filing the suit, AG sought a temporary restraining order to halt the auction, but U.S. District Judge Lorna G. Schofield said in an order Wednesday evening that she hadn't had a chance to review the case until after the auction had already commenced. A by-phone hearing on the matter is scheduled for Thursday morning.

AG claims the bank's actions violate the parties' contracts and could undermine the efforts of federal and state agencies to stabilize the economy.

RBC did not respond to a request for comment Wednesday. Counsel for the trust declined to comment.

AG is represented by Susheel Kirpalani, Jonathan Pickhardt, Rex Lee and Lindsay Weber of Quinn Emanuel Urquhart & Sullivan LLP.

Counsel information for RBC in this matter is not currently available.

The case is AG MIT CMO LLC et al. v. Royal Bank of Canada et al., case number 1:20-cv-02547, in the U.S. District Court for the Southern District of New York.

--Editing by Janice Carter Brown.

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