Electronically Filed

6/15/2022 4:47 PM
Steven D. Grierson
CLERK OF THE COURT
1 COMP
GARMAN TURNER GORDON LLP
2 Dylan T. Ciciliano
Nevada Bar No. 12348
3 Email: dciciliano@gtg.legal
7251 Amigo Street, Suite 210 CASE NO: A-22-854147-B
4 Las Vegas, Nevada 89119
Tel: (725) 777-3000 Department 31
5 Fax: (725) 777-3112

6 KASOWITZ BENSON TORRES LLP

Michael A. Hanin (Pro Hac Vice Forthcoming)
7 Edward E. Filusch (Pro Hac Vice Forthcoming)
Jill L. Forster (Pro Hac Vice Forthcoming)
8 Andrew W. Breland (Pro Hac Vice Forthcoming)
1633 Broadway
9 New York, New York 10019
Tel: (212) 506-1700
10 Fax: (212) 506-1800

11 Attorneys for Icahn Partners LP and

Icahn Partners Master Fund LP
12
DISTRICT COURT
13
CLARK COUNTY, NEVADA
14
ICAHN PARTNERS LP and ICAHN CASE NO.:
15 PARTNERS MASTER FUND LP, DEPT.:

16 Plaintiffs, COMPLAINT

17 v.
Business Court Requested- EDCR
18 RIALTO CAPITAL ADVISORS, LLC, 1.61(a)(1)
19 Defendant. Arbitration Exempt:
1. Amount in Controversy in Excess of
20 $50,000.00,
2. Declaratory Relief Requested
21

22

23 Plaintiffs Icahn Partners LP and Icahn Partners Master Fund LP (together, “Icahn” or

24 “Plaintiffs”), by and through their counsel, the law firms of Garman Turner Gordon, LLP and

25 Kasowitz Benson Torres LLP hereby file their complaint against defendant Rialto Capital

26 Advisors, LLC, Special Servicer (“Rialto” or the “Special Servicer”) for the COMM 2012-

27 CCRE4 Commercial Mortgage Pass-Through Certificates (the “Trust”), as follows:

28 ///
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Case Number: A-22-854147-B

 1 PRELIMINARY STATEMENT

2 1. This action stems from Rialto’s brazen and egregious misconduct servicing a

3 commercial mortgage loan held by the Trust. By this action, Plaintiffs seek to recover for the

4 harm caused by Rialto’s misconduct, and to shed light on how Rialto’s actions – and analogous

5 actions by Rialto and other CMBS market participants – are undermining the basic integrity of

6 the trillion-dollar CMBS market.

7 2. As the Trust’s special servicer, Rialto was empowered to make crucial decisions

8 regarding the Trust’s distressed assets in order to maximize recoveries for Trust investors as a

9 collective whole. Instead, Rialto placed its own interests ahead of Trust investors – and

10 succumbed to outside pressure to obfuscate and delay inevitable losses – by artificially

11 prolonging the life of a dying Trust asset: a $73 million mortgage loan secured by an outlet

12 center in Primm, Nevada: Prizm Outlets. As a direct consequence of Rialto’s indefensible

13 servicing decisions and fraudulent acts, the Trust recovered only $400 thousand on the $73

14 million loan, and incurred an additional $12.85 million in fees, advances, and expenses.

15 3. Prizm Outlets (formerly known as Fashion Outlets) is a 376,000 square foot,

16 single-story, fully enclosed outlet center built in 1997 located off Interstate I-15 in Primm, on the

17 California border. Prizm Outlets exemplifies the death of the American mall in under-serviced

18 areas: rising vacancies as retailers reduce their physical presence, falling foot traffic as

19 consumers move to online shopping, and crumbling properties not worth the investment to

20 maintain, let alone upgrade. Almost fully occupied when the loan was issued in 2012,

21 occupancy at Prizm Outlets began an inexorable decline after 2016, leaving the property half

22 vacant by late 2017. When the borrower failed to repay the loan at maturity in November 2017

23 (leaving an unpaid principal balance of almost $67 million), Rialto appointed a receiver who

24 attempted to stabilize operations.

25 4. Under the contract governing the Trust, control over servicing decisions rests with

26 the most junior class of bonds (certificates) with at least 25% of its principal balance remaining

27 after incorporating losses implied by appraisals. When Prizm Outlets was appraised for $25.54

28 million on April 1, 2018 – $50 million less than the original balance of the loan – that dramatic
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 1 loss should have wiped out the entire balance of the Trust’s most junior bonds (the Class G

2 Certificates) and nearly 75 percent of the balance of the Trust’s second-most junior bonds (the

3 Class F Certificates). Crucial “control” rights over servicing decisions, therefore, would have

4 (and should have) imminently shifted to the Plaintiffs here – Class E Certificateholders – who

5 would have acted to maximize what value remained at Prizm Outlets by recognizing existing

6 losses. Instead, because it was not in Rialto’s interest – or the interest of other influential market

7 participants – to appropriately recognize losses to the Trust, Rialto schemed to deny control to

8 the Class E Certificates while running Prizm Outlets into the proverbial ground.

9 5. Specifically, after Rialto foreclosed on Prizm Outlets in September 2018, Rialto

10 manipulated appraisals to prevent a change in the controlling class to the Class E

11 Certificateholders, who would have demanded an immediate sale of Prizm Outlets and/or

12 replaced Rialto as Special Servicer. With the Class E Certificateholders deprived of control

13 rights artificially, Rialto repudiated its obligation to operate the declining outlet center “solely for

14 the purpose of its prompt disposition and sale” and wrongfully preserved Prizm Outlets in the

15 Trust for the maximum 39 months permitted by applicable tax law.

16 6. Rialto’s deliberate servicing misconduct is patent and undeniable. In the ensuing

17 year after Prizm Outlets was appraised for $25.54 million in April 2018, market conditions at

18 Prizm Outlets, and the market environment for comparable malls, both deteriorated significantly.

19 With the Class E Certificates again set to assume “control” over servicing in April 2019, Rialto

20 secured a fantasy $28.8 million appraisal for Prizm Outlets by instructing the appraiser to adopt

21 indefensible “assignment-specific assumptions,” including occupancy rates of nearly 100% for

22 the half-vacant mall. As Rialto intended, the $3.3 million increase artificially prevented the

23 transfer of control rights to the Class E Certificates.

24 7. By October 2019, with losses mounting and a shift of “control” to the Class E

25 Certificates once again imminent, Rialto took the extraordinary step of securing another

26 appraisal – months before one was required by the Trust documents – for the purpose of inflating

27 Prizm Outlets’ appraised value by the amount required to deprive the Class E Certificates of

28 control. The $29.9 million appraisal combined assumptions supplied by Rialto that were
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 1 detached from reality (e.g., disregarding the property’s $800,000 annual ground lease payment)

2 with a false reality of Rialto’s own making: a new 10-year lease inked in October 2019 with

3 supposed “anchor tenant” HeadzUp (the “HeadzUp Lease”), an “experiential entertainment

4 facility” with no track record of operations. The HeadzUp Lease was a ruse perpetrated by

5 Rialto to create the illusion of improving conditions at Prizm Outlets. In truth, Rialto induced

6 HeadzUp to sign the lease with a $650,000 upfront payment; HeadzUp never paid rent or any

7 other amounts under the lease; and HeadzUp walked away with the upfront payment. Worse,

8 Rialto actively concealed the HeadzUp default and reported falsely to Trust investors that

9 HeadzUp was set to commence operations.

10 8. Rialto’s mirage that Prizm Outlets was worth $30 million (or anything close)

11 evaporated in March 2020 with the emergence of the COVID-19 pandemic, and control shifted

12 to the Class E Certificates. But it was too late, and the damage to the Class E Certificateholders

13 from their lost opportunity to exercise control rights – i.e., millions of lost value from failing to

14 sell Prizm Outlets “promptly,” and millions in fees, expenses, and servicing advances paid to

15 operate Prizm Outlets recklessly – could not be undone. Whereas the losses to the Class F and G

16 Certificates were assured by deteriorating market conditions before Rialto began servicing Prizm

17 Outlets in 2018, the losses to the Class E Certificates were the preventable consequence of

18 Rialto’s actions.

19 9. The Prizm Outlets saga is no isolated incident and reverberates far beyond the

20 Trust at issue here. Rialto’s brazen manipulation of “control” over its servicing decisions – and

21 the associated failure to recognize obvious losses in CMBS trusts – is standard operating

22 procedure for many CMBS special servicers. Such servicer misconduct is often the product of

23 self-interest and to the detriment of CMBS investors “on the whole,” whose interests servicers

24 are bound to protect. The free and fair operation of the CMBS market is routinely eroded when

25 servicers artificially avoid recognizing manifest losses in the short-term and, in doing so,

26 exacerbate losses to CMBS investors in the long-term.

27 10. Increasingly in recent years, however, CMBS servicers have succumbed to the

28 improper influence of large participants in the market for certain CMBS derivatives with an
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 1 outsized interest in delaying or avoiding losses in specific CMBS trusts. Specifically, investors

2 can bet on the performance of certain CMBS (and by extension their constituent loans and

3 properties) by buying or selling insurance on the CMBX indices: baskets of 25 CMBS

4 transactions grouped by year of origination. The market for these CMBS derivatives is

5 exponentially greater than value of the underlying CMBS, with trillions of dollars in CMBX

6 trading each year. While buyers of protection against CMBS losses must pay their “insurance

7 premiums” up front, protection sellers are obligated to pay only where defined “credit events”

8 occur: e.g., write-downs, principal shortfalls, and/or interest shortfalls on a referenced CMBS.

9 Because servicers are responsible for determining when credit events occur, they are subject to

10 manipulation by protection sellers who seek to skirt their own payment obligations.

11 11. Putnam Investments (“Putnam”) is among the largest and most vocal sellers of

12 protection (i.e., insurance) against losses in the CMBX.6 index, which includes the Trust. In

13 pursuit of additional yield, Putnam and other large mutual funds have invested billions of their

14 investors’ money in their CMBX.6 insurance positions (which insure a number of distressed

15 loans backed by malls and other properties), which they have marketed to their investors as

16 analogous to U.S. Treasury bonds, which is false. It has long been suspected that Putnam and

17 others have taken extraordinary steps to protect these risky investments by exerting undue

18 influence on servicers and appraisers to avoid recognizing losses in select CMBS trusts – and

19 thereby avoid triggering CMBX credit events – by any means necessary.

20 12. Recent events have proven these suspicions to be well-founded. On January 19,

21 2022, amazingly, Putnam wrote the special servicer and other deal parties in another CMBX.6

22 trust (“CRE-2”) cautioning against “any modification, discounted payoff, or liquidation” that

23 would result in a “recovery far less than the loan balance” – i.e., trigger Putnam’s insurance

24 obligation – on a loan backed by the Crossgates Mall in Albany, New York, one of the largest

25 CRE-2 mortgage loan assets. Following a familiar playbook, Putnam demanded that the special

26 servicer in CRE-2, TriMont, secure a “more accurate appraisal” before it even “considered”

27 taking any action with respect to the loan. Putnam punctuated its thinly-veiled threats by

28 promising legal action against the servicer and others in response to any action contrary to
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 1 Putnam’s demands. Putnam’s actions are analogous to a health insurance company threatening a

2 doctor to provide a sick patient a clean bill of health in order to avoid an obligation to provide

3 health coverage. Putnam’s letter is attached as Exhibit A here.

4 13. Putnam and others similarly attempted to influence Rialto’s decision-making with

5 respect to Prizm Outlets – and communicated and/or threatened Rialto and other deal parties for

6 this purpose – to avoid triggering payment obligations on the risky insurance policies that they

7 issued on behalf of their unsuspecting investors, with dire consequences for the Class E

8 Certificateholders. The full nature and extent of these threats and communications, and the

9 influence of Putnam and others on Rialto’s wrongful acts, will be revealed in discovery.

10 14. Whatever Rialto’s influences, Plaintiffs seek to recover, by this action, damages

11 to compensate the Class E Certificateholders for Rialto’s deliberate and wrongful acts.

12 PARTIES

13 15. Plaintiff Icahn Partners LP is a Delaware limited partnership with Delaware

14 citizenship.

15 16. Plaintiff Icahn Partners Master Fund LP is a Delaware limited partnership with

16 Delaware citizenship.

17 17. Together, Plaintiffs are the beneficial owners of $16,227,000 of current

18 Certificate Balance of the Class E Certificates, representing approximately 84 percent of the

19 Class E Certificates. Plaintiffs purchased, among other things, all rights, title, and interest in, to

20 and under these Class E Certificates and all rights, claims, demands, and causes of action of any

21 kind relating to these Class E Certificates in November 2021.

22 18. Defendant Rialto Capital Advisors, LLC is a Delaware limited liability company

23 with Delaware citizenship. Rialto maintains a principal place of business in Miami, Florida, and

24 has offices across the country, including in Las Vegas, Nevada.

25 JURISDICTION AND VENUE

26 19. Subject matter jurisdiction is appropriate in this Court because the amount in

27 controversy exceeds the Court’s jurisdictional minimum. Venue is appropriate in Clark County

28 because the property at issue in the action is located in Clark County, because a substantial
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 1 portion of the events relevant to Plaintiffs’ claims occurred in Clark County, and because Rialto

2 maintains a place of business in Clark County.

3 FACTS

4 A. BACKGROUND

5 The Trust and its Service Providers

6 20. The Trust was created on or about November 1, 2012 pursuant to a Pooling and

7 Servicing Agreement (the “PSA”) by and among Deutsche Mortgage & Asset Receiving

8 Corporation, as Depositor, Wells Fargo Bank, N.A., as Master Servicer, Rialto, as Special

9 Servicer, U.S. Bank, N.A., as Trustee, Wells Fargo Bank, N.A., as Certificate Administrator,

10 Paying Agent, and Custodian, and Park Bridge Lender Services, LLC, as Operating Advisor.

11 21. At its inception, the Trust held 48 fixed-rate mortgage loans, secured by first lien

12 mortgages on 152 commercial and multifamily properties, primarily consisting of retail property,

13 with an aggregate value of approximately $1,110,172,754.

14 22. The Trust issued Certificates that were sold to investors ranging in seniority from

15 the most senior Class A-1 Certificates to the most junior Class G Certificates. Certificateholders

16 are entitled to payments of principal and interest from the Trust, pursuant to a schedule of

17 priority set forth in the PSA, based on the cash flow generated by payments from mortgage loan

18 borrowers. If mortgage loans default and/or fail to repay the amounts due, certificateholders may

19 incur losses. Certificates are divided into classes, often referred to as tranches, which vary in

20 payment priority and in the order of loss recognition. Generally, the more senior classes are

21 repaid first and the more junior classes are the first to incur write downs (losses) as a result of

22 loan defaults. The chart below lists the classes in the Trust in order of seniority and provides the

23 initial Certificate Balance for each class.

24 Class of Certificates Initial Certificate

Balance
25
Class A-1 $59,118,000
26
Class A-2 $148,657,000
27 Class A-SB $70,571,000
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 1 Class A-3 $499,354,000

2 Class A-M $111,100,000

Class X-A $888,800,000
3
Class X-B $104,156,000
4
Class B $65,271,000
5 Class C $38,885,000
6 Class D $45,829,000
7 Class E $19,442,000

8 Class F $18,054,000
Class G $34,719,345
9

10 23. The Trust’s Master Servicer is generally responsible for administering loans that
11 are performing, while the Special Servicer is generally responsible for administering loans that
12 default or that have become seriously delinquent. Among other things, the Special Servicer is
13 responsible for negotiating workouts with borrowers and exercising remedies in respect of
14 defaulted loans, including by acquiring the property securing a defaulted loan (“REO Property”)
15 through foreclosure, deed in lieu of foreclosure, or otherwise.
16 24. The Master Servicer and the Special Servicer service the loans pursuant to the
17 PSA and in the best interests, and for the benefit, of all Certificateholders as a collective whole in
18 accordance with a standard of care defined in the PSA (the “Servicing Standard”). The Servicing
19 Standard requires that loans be administered not only “in the best interests of and for the benefit
20 of all Certificateholders on the whole,” but also free from conflicts of interest and with the aim of
21 “maximiz[ing] the timely recovery of principal and interest” for the Trust.
22 25. The Servicing Standard further requires that servicers administer the loans
23 consistent with the higher of two standards: “with the same care, skill, prudence and diligence
24 with which the Master Servicer or the Special Servicer, as the case may be, services and
25 administers similar mortgage loans for other third-party portfolios” or “with the same care, skill,
26 prudence and diligence with which the Master Servicer or the Special Servicer, as the case may
27 be, services and administers commercial and multifamily mortgage loans owned, if any, by the
28 Master Servicer or the Special Servicer . . . .” The Servicing Standard also requires that servicers
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 1 act “without regard to any potential conflict of interest arising from,” among other things, the

2 right to obtain compensation for their services and their relationships with other parties to the

3 PSA.

4 26. A “Special Servicer Termination Event” occurs when, among other things, the

5 Special Servicer fails “to observe or perform in any material respect any of its other covenants or

6 obligations contained in” the PSA, including by breaching the Servicing Standard, when that

7 “failure continues unremedied for a period of 30 days” after written notice to the Special

8 Servicer.

9 27. Under Section 6.03(a) of the PSA, the Special Servicer is neither exculpated nor

10 indemnified for any loss, liability or expense incurred by reason of the Special Servicer’s breach

11 of the Servicing Standard, willful misconduct, bad faith, fraud, negligence in the performance of

12 duties under the PSA, or negligent disregard of its duties under the PSA.

13 28. The Trustee for the Trust holds the mortgage loans for the benefit of

14 Certificateholders. When the Trustee has “actual knowledge” of a Special Servicer Termination

15 Event, the Trustee must exercise its rights “as a prudent person would exercise or use under the

16 circumstances in the conduct of such person’s own affairs,” including the right to take all actions

17 necessary to protect the interests of Certificateholders and enforce their rights and remedies.

18 Special Servicing and REO Property

19 29. A CMBS special servicer has several options when servicing a distressed

20 mortgage loan asset, including reaching an agreement with the borrower to defer payments,

21 extending the term of the loan, and modifying other material loan terms. In lieu of an agreement

22 with the borrower, the special servicer may determine that the optimal course of action is to sell

23 the loan, or to foreclose on the property.

24 30. Where a special servicer acquires REO Property for the trust through foreclosure,

25 however, the Special Servicer is required to sell the REO Property promptly, and may not

26 operate REO Property on a long-term basis. The Special Servicer is required to “manage,

27 conserve, protect and operate” all REO Property “for the Certificateholders . . . solely for the

28 purpose of its prompt disposition and sale,” consistent with the Servicing Standard and the best
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 1 interests of Certificateholders as a collective whole. The Special Servicer must accept the first

2 (or, if multiple offers are contemporaneously received, the highest) cash offer that constitutes a

3 fair price for the property considering, among other things, an appraisal of the REO Property.

4 Under rules governing real estate mortgage investment conduits like the Trust, REO Property

5 must be sold no later than the end of the third year following the year of acquisition.

6 31. When the Trust acquires REO Property, the Special Servicer is required to

7 promptly obtain an appraisal to determine its fair market value, unless an appraisal had been

8 obtained within the prior nine months and no material adverse change in circumstances had

9 occurred. Thereafter, the Special Servicer is required to obtain an updated appraisal, or a letter

10 updating the appraisal, every nine months until the REO Property is sold. The cost of these

11 appraisals is a Trust expense, allocated to the most junior classes first.

12 32. The cost of rehabilitating and operating REO Property prior to its sale is borne by

13 the Trust. The Special Servicer creates a segregated account to hold all revenues received from

14 REO Property, and withdraws funds necessary to manage and operate it, such as amounts needed

15 to pay insurance premiums, taxes, ground rents, repair costs, and capital improvements. If

16 revenues from the REO Property are insufficient to cover operating costs, the Master Servicer is

17 required to advance funds (a “Property Advance”). The Master Servicer is also responsible for

18 advancing funds necessary to make required payments of principal and interest to

19 Certificateholders when collections on a loan are insufficient (“P&I Advances”). Both Property

20 Advances and P&I Advances are later reimbursed from amounts received on the loan or other

21 Trust funds, along with interest on the advances at the prime rate. The Master Servicer is not

22 required to make Property Advances or P&I Advances if the Master Servicer or the Special

23 Servicer determines that the advances will not be recoverable.

24 33. Pursuant to Section 3.12 of the PSA, the Special Servicer receives a monthly fee

25 (the “Special Servicing Fee”) of 0.25% per annum of the current Principal Balance, taking into

26 account all payments of principal and principal losses, of all of the loans it services. When the

27 Special Servicer sells REO Property, it receives a liquidation fee (the “Liquidation Fee”) equal

28 to, generally, the lesser of 1% of the sale proceeds (net of expenses incurred in liquidating the
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 1 REO Property) and $1 million.

2 Servicing Control Rights

3 34. In the CMBS industry, servicing control rights – i.e., the right to direct certain

4 servicing decisions and to terminate and replace the special servicer – are typically vested with

5 the most junior class of certificateholders, who face the most immediate risk of loss in the event

6 a mortgage loan becomes distressed. To ensure that the certificateholders exercising servicing

7 control rights have genuine “skin in the game,” control rights typically transfer to next most

8 junior class when the Certificate Balance of the controlling class is written down based on

9 reductions to the appraised value of a distressed trust asset. Timely and accurate appraisals –

10 grounded in facts and credible assumptions – are therefore crucial to ensure that the

11 certificateholders exercising control rights have an incentive to maximize recovery for all

12 certificateholders.

13 35. The PSA for the Trust provides that only the three most junior classes of

14 Certificates – the Class E Certificates, the Class F Certificates, and the Class G Certificates – are

15 eligible to exercise servicing control rights. Once Class E Certificates lose servicing control

16 rights, such rights become vested in an Operating Advisor tasked with overseeing the Special

17 Servicer’s compliance with the Servicing Standard.

18 36. The Master Servicer is responsible for calculating and allocating the “Appraisal

19 Reduction Amount” or “ARA,” which approximates the implied loss to the trust by combining

20 (i) the unpaid balance owed on a mortgage loan with (ii) unpaid servicer advances and other

21 charges, and then subtracting 90% of the appraised value of the property securing the loan. The

22 Master Servicer is required to consult with the representative of the controlling Class (the

23 “Directing Holder”) or the Operating Advisor when calculating the ARA. The Master Servicer

24 must calculate the ARA when certain defined events occur indicating that a loan is in distress,

25 including when a receiver is appointed for a property and when the Special Servicer acquires a

26 REO Property.

27 37. The ARA (i.e., the implied loss to the Trust) is allocated to the Classes in reverse

28 order of seniority (from most junior to most senior), up to the amount of each Class’s Certificate
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 1 Balance, when determining the control Class. When the allocation of the ARA reduces the

2 Certificate Balance of the controlling Class by 75% or more, control shifts to the next most

3 junior Class or the Operating Advisor, as applicable. In other words, the ARA is used to

4 determine which Class, if any, may exercise control rights.

5 38. While the controlling Class of certificateholders has certain rights to direct and

6 replace the Special Servicer, the Special Servicer must at all times adhere to the Servicing

7 Standard, and must resist any direction that contravenes the Servicing Standard.

8 The Prizm Outlets Loan and Property

9 39. Prizm Outlets is a 376,000 square foot, single-story, fully enclosed outlet center

10 located in Primm, Nevada, a town with a population of roughly one thousand residents. Prizm

11 Outlets opened in 1998 and was renovated in 2004. On or about November 6, 2012, the owner

12 of Prizm Outlets obtained a $73 million senior loan with a November 6, 2017 maturity date (the

13 “Prizm Loan”) that was subsequently acquired by the Trust. The Prizm Loan was formerly one

14 of the Trust’s largest assets, comprising 6.9% of the deal at securitization.

15 40. When the Prizm Loan was issued, Prizm Outlets was appraised at $125 million.

16 At that time, Prizm Outlets was ninety-six percent (96%) occupied, with Neiman Marcus Last

17 Call, Williams Sonoma, Old Navy, and Vanity Fair as anchor tenants and numerous major in-

18 line tenants occupying the smaller storefronts in the mall. For the twelve months before the

19 Prizm Loan was issued, Prizm Outlets’ net operating income (“NOI”) was nearly $9 million, and

20 the ratio of net cash flow to the total principal and interest owed on the Prizm Loan (referred to

21 as the underwritten NCF DSCR) was a robust 1.80x.

22 B. RIALTO DISREGARDS ITS OBLIGATION TO SELL PRIZM OUTLETS

“PROMPTLY” FOLLOWING FORECLOSURE
23

24 41. Occupancy at Prizm Outlets began an inexorable decline in 2016, sinking to 73%

25 by January 2017 and plummeting through 2019, until the property was left half vacant. Analysts

26 at JPMorgan described their tour of Prizm Outlets in August 2017 as “reveal[ing] few shoppers,

27 stretches of vacant storefronts and poorly maintained common areas.” The JPMorgan analysts

28
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 1 predicted that “loan losses would likely be ‘significant.’”1

2 42. Due to declining occupancy and the looming November 2017 maturity date, the

3 Prizm Loan was added to the master servicer’s “watchlist” in January 2017. After the borrower

4 indicated it would be unable to repay at maturity, the Prizm Loan was transferred to special

5 servicing in or around September 2017. On November 6, 2017, the borrower failed to repay all

6 amounts due upon maturity of the Prizm Loan, leaving an unpaid principal balance of almost $67

7 million.

8 43. The borrower presented a restructuring proposal in late 2017, which Rialto

9 rejected. Instead, Rialto had a receiver appointed in or about December 2017. The receiver

10 assumed control of all cash flow from Prizm Outlets and attempted to stabilize operations and to

11 address immediate capex needs. The receiver remained in place until Rialto foreclosed on the

12 property in September 2018.

13 44. On April 1, 2018, Prizm Outlets was appraised at $25.54 million, nearly $50

14 million less than the Prizm Loan’s original $73 million balance. Recognizing that loss would

15 have wiped out the entire balance of the Trust’s Class G Certificates and nearly 75 percent of the

16 balance of the Trust’s Class F Certificates. The resulting ARA of over $45 million required that

17 control shift to the Class F Certificates, with any further losses requiring that control shift to the

18 Class E Certificates. The Class G Certificates nonetheless remained the Trust’s “Controlling

19 Class” through April 2019.

20 45. On or about September 27, 2018, Rialto foreclosed on Prizm Outlets with the

21 borrower’s cooperation. Prizm Outlets became REO Property.

22 46. Rialto’s servicing directive after foreclosing on Prizm Outlets was to act “solely

23 for the purpose of its prompt disposition and sale” in order to maximize recovery for all

24 Certificateholders. Rather than sell Prizm Outlets promptly to capture the property’s limited

25 value, Rialto embarked on a quixotic 39-month plan to reposition Prizm Outlets.

26

27
1
Sarika Gangar, CMBX bellwether mall from COMM 2012-CR4 headed back to lenders, DEBTWIRE (Dec. 18,
28 2017).
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 1 47. By the time of the September 2018 foreclosure, occupancy at Prizm Outlets had

2 fallen below 66%. As one investor described a trip to Prizm Outlets he took in 2018: “I go in,

3 and I don’t see anybody for five minutes—an employee, a customer, nobody. . . . It was like

4 something out of a zombie movie.”2

5 48. Real estate experts consider mall vacancy rates of 10% or more to reflect distress,

6 and vacancy rates in excess 40% to suggest a potential death spiral, a phenomenon when

7 vacancies at department stores or other large anchor tenants infect the middle-mall stores that

8 depend on the traffic from the larger tenants. As conditions deteriorate and sales decrease, more

9 stores vacate, resulting in fewer visitors, which perpetuates the cycle of decreasing sales and

10 occupancy.

11 49. Prizm Outlets was in the midst of such a spiral when Rialto foreclosed on the

12 property in September 2018, and there was no reasonable expectation that occupancy would

13 increase. Ten tenant leases (representing 9.1% of available space) were set to expire in 2019,

14 and the vast majority of tenant leases were set to expire over the next 2-3 years. Additionally,

15 many existing leases contained a ‘keystone tenant default’ clause granting an automatic right to

16 terminate if a primary tenant (or group of tenants) vacated Prizm Outlets, and/or ‘co-tenancy

17 default’ clause granting an automatic right to terminate if overall occupancy declined below a set

18 level, generally between 65% and 85%. Given the low occupancy levels, many Prizm Outlets

19 leases were already in default at the time of foreclosure.

20 50. Occupancy therefore predictably declined further in the months following

21 foreclosure, falling to 57.4% by February 2019. By 2019, only five tenants remained with

22 square footage of 10,000 or more. Below is Prizm Outlets floor plan at the time of securitization

23 in 2012, with vacancies in pink:

24

25

26

27
2
Ian Frisch, The $2 Billion Mall Rats, ESQUIRE (Nov. 30, 2020), available at https://www.esquire.com/news-
28 politics/a34785141/shopping-mall-short-hedge-fund-covid-19/.
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10

11

12

13

14

15 By comparison, below is Prizm Outlets floor plan at the time of the October 2019 appraisal, with

16 vacancies in white:

17

18

19

20

21

22

23

24

25

26

27

28
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 1 51. The tenants that remained at Prizm Outlets suffered from the low foot traffic and

2 attendant low sales. For example, by October 2019, Prizm Outlets was generating sales per

3 square foot of $278.18, roughly 25% below national averages.

4 52. Given the low sales and available options to terminate, numerous Prizm Outlets

5 tenants received incentives to stay, including rental reductions, moving from a standard rent

6 lease structure to a straight gross ‘percentage in lieu’ structure based on percentage of sales. In

7 other words, instead of actual rent, tenants assumed an obligation to pay a small percentage of

8 (their de minimus) sales in lieu of rent. By October 2019, many tenants’ leases were structured

9 this way; i.e., as 1.0% of sales in lieu of rent. The average rent per square foot per year at Prizm

10 Outlets was approximately $13.24.

11 53. Prizm Outlets’ declining income was wholly inadequate to cover the substantial

12 costs to operate the property. The rent owed on the ground lease alone (i.e., the lease of the land

13 on which the Prizm Outlets was built) – consisting of a base annual rent plus a percentage rent

14 based on total gross rental receipts – cost $881,148 in 2017 and $842,338 in 2018. Net operating

15 income for the property declined from roughly $4.2 million in 2017 to $200,000 in 2018. By

16 2019, Prizm Outlets was reporting materially negative operating income.

17 54. Rialto responded to this rapidly deteriorating situation by committing millions of

18 dollars to repairs, refurbishments, and gratuitous enhancements. By October 2019, Rialto had

19 not only spent $2,087,851 for HVAC repairs and replacement, $506,652 for full restroom

20 renovations, and $219,747 for exterior painting, but had also devoted $1,937,799 of Trust funds

21 to creating the largest “mural project” in the country at Prizm Outlets as part of rebranding

22 efforts designed to “grab the attention of Gen Z” and act as “a significant non-retail demand

23 driver” that would increase traffic to the property.

24 55. Despite spending millions to maintain, rebrand, and otherwise “reposition” the

25 property, a December 2019 Las Vegas Review Journal article reported, “It seems little has

26 changed, as empty stores fill much of the outlet mall’s hallways and a handful of customers

27

28
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 1 could be seen walking around on a Friday afternoon last month.”3 Rialto’s decision to manage

2 and operate Prizm Outlets, instead of promptly selling the property, ultimately caused the Trust

3 to incur nearly $13 million in fees, advances, and expenses for a property that should have been

4 sold immediately and in no event warranted this level or type of investment.

5 56. The fate of Prizm Outlets should have been obvious to Rialto from the property’s

6 status and financial condition at the time of foreclosure, particularly in light of broader national

7 trends. Traditional malls have suffered for years due to a convergence of forces, including a

8 natural contraction in response to unsustainable retail sprawl, falling foot traffic as consumers

9 move to online shopping, and rising vacancies as a slew of major retailers filed for bankruptcy

10 and winnowed their physical stores. By 2017, there were over 1,200 malls in the United States

11 and it was estimated that there was 26 square feet of retail for every person in the United States,

12 roughly 10 times the amount of retail space per capita in Europe. A reduction in brick and

13 mortar stores in response to this “over-retailing” and other market trends was inevitable. In

14 2017, Credit Suisse predicted that one in four malls would close by 2022. That year, a record

15 8,640 retail stores closed. In 2019, more than 9,300 retail stores were shuttered, and an analysis

16 by UBS predicted that 75,000 stores would be forced out of business by 2026.

17 57. Lower-tier malls were failing long before the pandemic, particularly enclosed

18 malls in tertiary markets like Prizm Outlets. The New York Times reported in January 2015 that

19 more than two dozen enclosed shopping malls had closed since 2010, with an additional 60 on

20 the brink and almost one-fifth of enclosed malls with troubling vacancy rates. A 2019 analysis

21 of 39 malls, including Prizm Outlets, found that net operating income fell on average 5% in

22 2017, and another 9% in 2019. Average occupancy was 85% in 2018.

23 58. While the overall prospects for malls generally were dire in 2018, the prospects

24 for Prizm Outlets were especially bleak. Rialto’s sole charge under the PSA was to sell Prizm

25 Outlets “promptly,” not embark on the task of resuscitating an empty and dying enclosed mall.

26
3
Subrina Hudson, Primm’s Fashion Outlets getting new name, direction, LAS VEGAS REVIEW-JOURNAL (Dec. 5,
27 2019), available at https://www.reviewjournal.com/.
28
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 1 59. Rialto’s attempt at rehabilitation was neither bad judgment nor recklessness.

2 Rather, it was a deliberate and fraudulent ploy to create the illusion of improving conditions at

3 Prizm Outlets through its misconduct chronicled herein, and influenced wrongfully by interested

4 parties exogenous to the Trust, including, on information and belief, certain sellers of CMBX

5 “protection.”

6 C. RIALTO WRONGFULLY DEPRIVES THE CLASS E CERTIFICATES OF

THEIR CONTROL RIGHTS
7

8 60. As explained above, the PSA affords the Directing Holder of the Controlling

9 Class the right to direct Rialto – subject to Rialto’s compliance with the Servicing Standard –

10 regarding the disposition of Prizm Outlets and other specially-serviced Trust assets. Among

11 other control rights, the Trust’s Directing Holder is authorized to terminate and replace the

12 Special Servicer.

13 61. After Prizm Outlets was appraised for $25.54 million in April 2018, the implied

14 loss to the Trust, i.e., the ARA, was at least $45 million. Another nearly $3 million implied loss

15 to the Trust that month brought the total ARA up to nearly $48 million. Under Section 4.08 of

16 the PSA, the ARA should have shifted control of the Trust from the Class G Certificates to the

17 Class F Certificates, and very nearly to the Class E Certificates. Inexplicably, Class G remained

18 the control class through at least May 17, 2019.

19 62. By April 2019, the implied loss caused by Prizm Outlets had increased further

20 such that control of the Trust should have shifted immediately to the Trust’s Class E Certificates,

21 skipping the Class F Certificates entirely. Specifically, the Trustee’s April 2019 remittance

22 report stated the ARA had reached approximately $48.3 million. This ARA would have shifted

23 control to Class E Certificateholders, who had made clear that they intended to minimize losses

24 and maximize recoveries for Certificateholders on the whole by seeking to immediately sell

25 Prizm Outlets and (if necessary) replace Rialto as Special Servicer in order to do so. Instead,

26 Rialto manipulated the ARA through fraudulent appraisals and restated ARAs, thereby depriving

27 Class E Certificateholders of their bargained-for servicing control rights under the PSA.

28 ///
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 1 63. The chart below demonstrates how the manipulated appraisals – each obtained at

2 the precise moment control was set to shift to the Class E Certificateholders – reduced the ARA

3 to avoid the shift in control:

10

11

12

13

14

15

16 Rialto Avoids A Shift in Control to the Class E Certificates By Procuring a False

and Inflated $28.8 Million Appraisal
17

18 64. To avoid the imminent change of control to the Class E Certificates, Rialto
19 procured, on April 10, 2019, an appraisal of Prizm Outlets from CBRE at $28.8 million (the
20 “28.8 Million Appraisal”) – more than $3 million higher than the $25.54 million appraisal
21 obtained one year prior. Among other egregious falsehoods, the 28.8 Million Appraisal made
22 the baseless and objectively nonsensical assumption that occupancy at Prizm Outlets would
23 increase from 57.4 percent to 95 percent, as reported by Kroll Bond Rating Agency (“KBRA”)
24 in a credit profile on the Prizm Loan. The full appraisal was never made public.
25 65. In sharp contrast to the incredible 28.8 Million Appraisal, KBRA – an
26 independent rating agency that conducted surveillance of certain distressed CMBS trusts –
27 pegged the value of Prizm Outlets at $10.4 million in January 2019 and $9.5 million in February
28 2019 – i.e., approximately one-third of the appraised value procured by Rialto.
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 1 66. An appraised value above $25.64 million, however, was necessary for Rialto to

2 avoid a change in control to the Class E Certificates. The 28.8 Million Appraisal caused the

3 ARA to fall from $48.3 million in April 2019 to $45.1 million in May 2019 – leaving the Class F

4 Certificates a $3 million control “cushion.” Rialto relied on the 28.8 Million Appraisal to

5 belatedly recognize the Class F Certificates as the controlling Class, effective as of May 17,

6 2019.

7 67. In June 2019, a certificateholder sent a letter to the Master Servicer and

8 Certificate Administrator, Wells Fargo Bank, to obtain the 28.8 Million Appraisal. The

9 certificateholder and other investors noted, among other things, that the appraisal was

10 unjustifiably optimistic and appeared designed to prevent the Class E Certificateholders – who

11 held the genuine first loss position based on the actual value of Prizm Outlets – from exercising

12 their control rights. Wells Fargo Bank declined to provide the appraisal and, on information and

13 belief, provided no response to the certificateholder letter.

14 Rialto Procures Another Inflated Appraisal

15 68. Although the 28.8 Million Appraisal provided a $3 million cushion against a

16 further change in control rights, the implied loss to the Trust continued to grow as servicer

17 advances and fees for Prizm Outlets continued to climb. Within just six months, the ARA had

18 increased by over two million dollars, the “cushion” was nearly depleted, and a change of control

19 – and an end to Rialto’s failed rehabilitation plan – was inevitable. Rialto therefore took

20 extraordinary steps to reduce the ARA by creating the illusion that Prizm Outlets was

21 salvageable: inducing a new tenant, HeadzUp, to sign a 10-year lease at Prizm Outlets by

22 making a $650,000 up front payment to HeadzUp.

23 69. On or about September 26, 2019, Rialto executed a ten-year lease with HeadzUp

24 (the “HeadzUp Lease”) – an unproven and uncreditworthy “experiential” entertainment company

25 – for 24,610 square feet (approximately 7 percent) of Prizm Outlets. Lease payments were

26 scheduled to begin in November 2019, with an anticipated grand opening in December 2019.

27 HeadzUp was advertised as an entertainment facility that would feature interactive experiences

28 such as 3D trick art, escape rooms, ax throwing, and carnival games. The HeadzUp Lease was
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 1 the first new lease executed by Prizm Outlets since the mall began experiencing financial woes.

2 70. The base rent for the HeadzUp Lease was $24,610 per month for the first year,

3 with built-in annual increases of 3 percent. The HeadzUp Lease also provided that HeadzUp

4 would pay a pro-rata share of Prizm Outlets’ operating expenses, as well as an additional

5 percentage rent based upon any gross sales in excess of $3 million for the month.

6 71. Although the HeadzUp Lease required that HeadzUp pay its first month’s rent

7 upon execution, it failed to make this payment. The HeadzUp Lease did, however, include a

8 $1.3 million “Tenant Allowance” payable by Rialto to HeadzUp, with the first installment of

9 $650,000 due upon execution of the lease. Although Rialto never received payment of

10 HeadzUp’s first month’s rent (or any rent), Rialto wired $650,000 to HeadzUp on or about

11 October 18, 2019.

12 72. The entity that signed the HeadzUp Lease, 3D Selfie Studios Primm, LLC (d/b/a

13 HeadzUp) (the “HeadzUp LLC”), was formed on September 24, 2019 as part of a web of limited

14 liability companies created by HeadzUp founders Chad Dillow and Tim Shelburn. The HeadzUp

15 LLC had three members – each shell companies dominated and controlled by Dillow or Shelburn

16 – that guaranteed the HeadzUp Lease. In 2020, one of the three members of the HeadzUp LLC

17 filed for a no-asset Chapter 7 bankruptcy, where no distributions were made because no assets

18 were available to pay creditors.

19 73. HeadzUp LLC defaulted on the lease almost immediately upon execution. The

20 HeadzUp LLC never paid rent under the HeadzUp Lease, never paid its share of operating

21 expenses under the HeadzUp Lease, and never opened for business. The HeadzUp LLC never

22 returned the $650,000 Tenant Allowance wired to its account by Rialto. While the lease required

23 that the HeadzUp LLC place these funds in a construction disbursement account or provide a

24 surety bond, it did neither.

25 74. Rialto nonetheless used the HeadzUp Lease – for which it paid $650,000 and was

26 never paid a dime by HeadzUp – as justification to secure an increased “emergency” appraisal

27 for Prizm Outlets, in October 2019, that Rialto used to deprive the Class E Certificates of control

28 rights.
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 1 75. Each appraisal is a significant expense borne by the Trust, and nothing in the PSA

2 required a renewed appraisal in October 2019. To the contrary, Section 3.15(c) provides for a

3 new appraisal every nine months, and industry practice is for one year (or more) to pass between

4 appraisals. Yet, on or about October 8, 2019, Rialto re-engaged CBRE to perform an expedited

5 appraisal of Prizm Outlets on a three-week timetable, requiring a full report no later than

6 October 29, 2019.

7 76. On November 8, 2019, CBRE sent Rialto a revised appraisal for Prizm Outlets

8 assigning a value of $29.9 million (the “29.9 Million Appraisal”). The 29.9 Million Appraisal

9 relied heavily on the newly executed HeadzUp Lease and represented a $1.1 million increase

10 from the appraised value six months earlier. The appraisal reduced the ARA to $47.1 million,

11 artificially preserving control with the Class F Certificates.

12 77. As reported by Debtwire on November 21, 2019, Trust investors immediately

13 questioned the timing of the appraisal and requested a second opinion: “This is the second time a

14 last-minute appraisal on this loan has prevented an imminent shift in control . . . Since many

15 bondholders would disagree with the appraisal value on this loan, can the special servicer please

16 obtain a broker opinion of value (from a major mall broker . . . ) and report that value to

17 bondholders in servicer commentary?” The investor (appropriately) questioned why the

18 appraisal was obtained just six months after the prior appraisal when the PSA directs one to be

19 obtained only every nine months.4 Notably, at or about the same time, independent bond agency

20 KBRA set the value of Prizm Outlets at only $9 million.

21 78. With investors in an uproar, Wells Fargo Bank, the Trust’s Certificate

22 Administrator, took the unusual and perhaps unprecedented step of releasing CBRE’s 215-page

23 appraisal on November 25, 2019. The appraisal rationalized the $29.9 million appraised value

24 by referencing the new 10-year lease signed by HeadzUp. CBRE deemed the HeadzUp Lease so

25 significant that it highlighted it in the first page of its cover letter to Rialto enclosing the report,

26 stating that “[i]t should be noted a new anchor tenant lease with HeadzUp for 10-years was

27
4
Maura Webber Sadovi, CMBX6 reference deal’s Fashion Outlets appraisal ticks up 3.8%, eliciting investor
28 complaint, DEBTWIRE (Nov. 21, 2019).
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 1 signed that is expected to commence in November 2019” and “is expected to drive traffic to the

2 center over the next several years.”

3 79. Separate and apart from the HeadzUp Lease, the appraisal relied on a laundry list

4 of “extraordinary assumptions” provided by Rialto – assumptions “regarding uncertain

5 information used in an analysis which, if found false, could alter the appraiser’s opinions or

6 conclusions.”

7 80. For example, Rialto directed CBRE that the rent owed by Prizm Outlets on its

8 ground lease – which CBRE projected would remain an expense of over $800,000 per year and

9 escalate to over $1 million per year by 2025 – was somehow not adverse to the marketability of

10 Prizm Outlets. The assumption that a million-dollar annual obligation on the property would not

11 impact marketability was patently false. Indeed, an undisclosed issue with the ground

12 leaseholder would ultimately cause a sale of Prizm Outlets to fall through. Rialto also directed

13 CBRE to assume that remarketing Prizm Outlets would cause “per square foot sales [to] trend

14 toward market average” such that sales would escalate by “48% over a 4-year period.” CBRE

15 claimed that, through remarketing, “the subject would move to mirror highly similar properties

16 such as evidenced by Tanger Factory Outlet Centers,” a company that, at the time, had a

17 12,922,000 square foot portfolio with 36 premium outlets across the country with 97%

18 occupancy. Further, Rialto directed CBRE to assume (1) that existing tenants would remain at

19 Prizm Outlets and not invoke clauses permitting them to terminate their leases based on low

20 occupancy, low sales, and anchor tenants vacating Prizm Outlets, and (2) that occupancy would

21 increase from 55.7% to 95% within four years.

22 81. CBRE itself questioned the extraordinary assumptions it was forced to make in

23 the appraisal. For example, in December 2019, the Las Vegas Review Journal published an

24 article about the new lease with HeadzUp and Prizm Outlets’ rebranding efforts. Cathy

25 Enderwood, a senior associate at CBRE “recruited for her vast knowledge of and experience

26 with regional malls,” was quoted as saying that, despite the new HeadzUp Lease, “getting

27 visitors, and even locals, inside Prizm could still be a challenge if the mall fails to ink more

28 tenants.” She explained that “[a]n outlet mall is dependent on the brands . . . you’d have to have
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 1 something so compelling to bring people there,” and Prizm Outlets’ location on the Nevada-

2 California border was a challenge because “How can you compete with Vegas?”5

3 82. The extraordinary assumptions supplied by Rialto allowed CBRE to project that

4 Prizm Outlets’ net operating income, which had been rapidly declining for years, would increase

5 from negative $543,406 annualized in 2019 to a positive $4.9 million in four years, with gross

6 income increasing from $3.6 million annualized in 2019 to $10.8 million in four years. Had

7 CBRE conducted the appraisal without accepting the extraordinary assumptions supplied by

8 Rialto, the appraised value of Prizm Outlets would have been more comparable to the values

9 assigned by KBRA, and control would have shifted to the Class E Certificates.

10 83. Aside from the fraudulent assumptions provided by Rialto, the linchpin of the

11 29.9 Million Appraisal was the newly executed HeadzUp Lease. As CBRE stated in the

12 appraisal:

13 [A] new anchor tenant lease with HeadzUp for 10-years was signed that is
expected to commence in November 2019. HeadzUp is an interactive
14 entertainment venue that has a second location in Las Vegas and is expected to
drive traffic to the center over the next several years. In addition, there are
15
ongoing discussions with several retailers to lease large blocks of space at the
16 subject and a new mural art walk project has been completed which is seen as
increasing traffic to the center in a short period of months.
17

18 84. Rialto knew that the HeadzUp Lease was illusory, and the notion that HeadzUp

19 was an “anchor tenant” was false. CBRE’s false notion stemmed from another “extraordinary

20 assumption” supplied by Rialto: “[t]hat our classification of tenants reasonably reflects industry

21 norms such that Anchor/Keystone tenants are generally synonymous with Tier One tenants . . . .”

22 The term “anchor tenant,” however, refers to well-known department stores – like Macy’s,

23 Nordstrom, and Neiman Marcus – that lease large amounts of space in a mall and act as marquee

24 tenants drawing in foot traffic to the mall writ large. HeadzUp was no anchor tenant, and the

25 HeadzUp Lease was a ruse perpetrated by Rialto.

26

27
5
Subrina Hudson, Primm’s Fashion Outlets getting new name, direction, LAS VEGAS REVIEW-JOURNAL (Dec. 5,
28 2019), available at https://www.reviewjournal.com/.
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 1 85. Rialto knew that the appraised values determined by CBRE were the false

2 byproduct of the equally false assumptions that Rialto forced CBRE to accept; Rialto nonetheless

3 reported the false appraised values to Certificateholders via the Trustee’s monthly remittance

4 reports and by other means.

5 86. Rialto also deliberately concealed HeadzUp’s almost instantaneous default from

6 Certificateholders and misrepresented to the Class E Certificateholders and others that HeadzUp

7 would open for business soon. Rialto affirmatively touted its new lease with HeadzUp in

8 servicer comments reported to investors from November 2019 through March 2020. Among

9 other things, Rialto reported that HeadzUp was “expected to open 2/16/2020,” despite knowing

10 that HeadzUp had never paid rent and had not commenced the construction necessary for it to

11 open. Rialto intended these false statements regarding the appraised value of Prizm Outlets, and

12 the HeadzUp Lease, to deprive the Class E Certificateholders of their control rights and to

13 defraud and mislead the Class E Certificateholders regarding their control rights in order to

14 prevent them from pursuing those rights. Relying on those statements, the Class E

15 Certificateholders did not exercise control rights and did not take the steps necessary to exercise

16 those control rights.

17 87. Rialto continues to perpetuate its ruse to this day. In defense of its conduct in

18 early 2022, Rialto advised the Trustee that “HeadzUp commenced paying rent in November

19 2019” and blamed the pandemic for HeadzUp’s failure to open. In fact, as Rialto knew and

20 represented to a Nevada court in another action, HeadzUp failed to pay rent or its share of

21 operating expenses, and walked away with Rialto’s $650,000 inducement payment, months

22 before the March 17, 2020 stay-at-home order issued that closed Prizm Outlets.

23 88. In January 2020, Certificate Administrator Wells Fargo Bank issued a remittance

24 report indicating a $52.8 million ARA attributable to Prizm Outlets. That impaired loss

25 calculation would have and should have – once again – shifted control to the Class E

26 Certificates. Without explanation, however, Wells Fargo Bank subsequently revised its

27 remittance report to “restate” the ARA to $47.8 million on the grounds that the Master Servicer –

28 also Wells Fargo Bank – had “overstated the ARA.” Neither Wells Fargo Bank, nor Rialto, nor
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 1 any other deal party for the Trust has ever justified this extraordinary adjustment.

2 D. THE COVID-19 PANDEMIC FORCES RIALTO TO CHANGE COURSE

3 89. On March 11, 2020, the outbreak of COVID-19, and the subsequent closure of

4 Prizm Outlets by order of the governor of Nevada, shattered Rialto’s illusions that Prizm Outlets

5 could be rehabilitated successfully. After the ARA jumped from $47.9 million in February 2020

6 to $52.1 million in March 2020, Rialto ceded control to the Class E Certificates, effective

7 March 17, 2020.

8 90. After the Class E Certificates became the controlling class, the Directing Holder

9 resolved to sell Prizm Outlets as quickly as practicable. Unfortunately, it was too late to avoid

10 the damage caused by the failure to dispose of Prizm Outlets “promptly.”

11 91. Newmark Knight Frank (“Newmark”), the largest mall broker in the country,

12 worked to market Prizm Outlets along with LOGIC Commercial Real Estate (“LOGIC”). A

13 marketing piece from these companies showed the space that had been leased by HeadzUp

14 remained vacant and several major anchor tenants planned to leave Prizm Outlets when their

15 leases expired in January 2021 – GAP, Nike Factory Store, Old Navy, and Williams-Sonoma.

16 92. After delaying the sale due to complications around marketing the property in the

17 midst of the COVID-19 pandemic, initial attempts to auction Prizm Outlets in January 2021

18 resulted in a final bid of $1.5 million. By March 2, 2021, that bid failed to close due to an

19 undisclosed issue with the ground leaseholder, according to an investor and an S&P Global

20 Ratings report.

21 93. In early March 2021, Newmark and LOGIC again called for offers on Prizm

22 Outlets. On April 30, 2021, Prizm Outlets was sold to Kohan Retail Investment Group, a

23 contrarian investment company that specializes in purchasing troubled shopping malls, for

24 approximately $400,000.

25 E. RIALTO’S DELIBERATE MISCONDUCT DAMAGES THE CLASS E

CERTIFICATEHOLDERS
26

27 94. By the time Prizm Outlets was sold nearly three years after foreclosure, Rialto had

28 incurred $12.85 million in fees, advances, and expenses at the property. Offsetting these costs
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 1 against the $400,000 sale proceeds, the sale resulted in a net negative $12.4 million in proceeds

2 available for distribution to Trust investors.

3 95. The sale also caused the Trust to recognize a $62.2 million loss (the full principal

4 amount outstanding on the Prizm Loan) in May 2021. This loss reduced the Certificate Balances

5 of the Class F and G Certificates to zero, and the Certificate Balance of the Class E Certificates

6 to just under $6 million. The Class E Certificates suffered additional losses thereafter as the

7 Trust repaid fees and expenses relating to Prizm Outlets. The loss incurred on Prizm Outlets

8 was, according to one Bank of America analyst, the largest loss, both in terms of dollar amount

9 and as a percent of the original loan balance, for a CMBS conduit loan since the 2008 financial

10 crisis.

11 96. The losses to the Class G and Class F Certificates were assured when the Trust

12 took possession of Prizm Outlets in September 2018. This is precisely why – had Rialto adhered

13 to the Servicing Standard – control over servicing should have shifted to the Class E Certificates.

14 97. The losses to the Class E Certificates, however, were the avoidable and direct

15 result of Rialto’s failure to sell Prizm Outlets promptly, which would have occurred had the

16 Class E Certificates not been deprived of their control rights.

17 98. As set forth below, on information and belief, Rialto deprived the Class E

18 Certificates of their control rights at the behest of, or under the influence of, Putnam and other

19 sellers of insurance against losses in the Trust and other CMBS trusts.

20 F. THE INFLUENCE OF CERTAIN CMBS DERIVATIVE INVESTORS

21 99. The troubling facts chronicled herein reflect an all-too-common practice that

22 threatens the integrity of the CMBS market: special servicers avoid recognizing inevitable short-

23 term losses in favor of an “extend and pretend” mentality that causes greater – and entirely

24 avoidable – long-term losses to investors. In some instances, the special servicers are enabled by

25 the acquiescence or assistance of out-of-the-money certificateholders in control positions that are

26 obtained or preserved artificially. Under the pooling and servicing agreements governing most

27 CMBS deals, however, controlling certificateholders are not stewards for all CMBS investors

28 and are contractually permitted to pursue their own financial interests. It is therefore incumbent
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 1 upon special servicers to act in the best interest of all certificateholders on the whole, and to

2 secure accurate, credible appraisals to ensure that control rests with investors with actual skin in

3 the game.

4 100. Unfortunately, CMBS special servicers are routinely influenced to avoid

5 recognizing trust losses by market participants with an interest in trust performance via CMBS

6 derivatives. The CMBX is a synthetic tradeable index that references the value of 25 CMBS

7 transactions originated in a single calendar year. CMBX indices have different tranches, which

8 correspond to the tranches of the referenced deals, ranging in rating from AAA (referencing the

9 most secure debt) to BB (referencing the riskiest debt). CMBX investors either sell or buy

10 protection through the credit default swap (“CDS”) market. Protection sellers (i.e., insurance

11 sellers) agree to compensate the protection buyers for losses in the 25 referenced deals and, in

12 return, protection buyers pay the protection sellers an upfront payment and monthly coupon.

13 Protection sellers are therefore “long” certain CMBS (i.e., betting losses in the CMBS deals in

14 the index will be delayed or avoided), whereas protection buyers are “short” certain CMBS (i.e.,

15 betting CMBS deals in the index will suffer losses).

16 101. The CMBX.6 index references 25 CMBS transactions from 2012, including the

17 Trust, that have significant exposure to mall loans like the Prizm Loan. By May 2019, the

18 exposure in CMBX.6 was 43% retail and 17% malls, with 39 malls in the index. Accordingly,

19 many market participants interested in expressing a view on these loans and properties, including

20 Plaintiffs and their affiliates, have amassed significant long or short positions on the CMBX.6,

21 and have battled in research pieces, and in the press, over whether this retail/mall trade

22 represents the next “Big Short.”

23 102. Prizm Outlets was one of a handful of CMBS mall loans watched closely by

24 investors because it was one of the earliest malls in the CMBX.6 index’s reference deals to be

25 foreclosed upon, and was seen as a bellwether for the health of the retail market. When Prizm

26 Outlets finally sold, it was the first realized loss for the CMBX.6 index’s BB tranche.

27 103. Aside from Rialto itself, the primary beneficiaries of Rialto’s indefensible

28 conduct with respect to Prizm Outlets were sellers of CMBX.6 protection, who had the most to
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 1 gain when the obvious, inevitable, and unprecedented losses to Prizm Outlets were wrongfully

2 delayed for years.

3 104. Mutual fund giant Putnam, along with other large mutual funds, have sold billions

4 of dollars of protection linked to CMBX.6, including in the riskiest BBB- and BB tranches, and

5 have been extremely public and vocal in support of their positions. Despite investing a

6 significant portion of certain funds sold to individual investors in this risky derivative trade with

7 the potential for catastrophic losses for their investors, Putnam has marketed these funds to

8 investors as comparable to U.S. Treasury bonds, which is ridiculous. These mutual funds’ multi-

9 billion-dollar investments, and misleading assurances to investors, provide ample motive for

10 them to ensure that losses on CMBS loans that would trigger “protection” payments are delayed

11 or prevented altogether. All the while, these mutual funds continue to rake in profits from

12 protection buyers’ premium payments.

13 105. A November 2020 article from Esquire profiling a prominent short seller’s

14 CMBX.6 investment notes, “It was common knowledge that AllianceBernstein and Putnam

15 thought the malls would survive, and had invested heavily into the CMBX.6 tranches. In effect,

16 they were keeping the price of CMBX.6 high through sheer perception—and the size of their bet,

17 which was reported to be upwards of $6 billion combined.”6

18 106. Putnam and AllianceBernstein (“Alliance”) have for years used the press to tout

19 their position and present an unjustifiably rosy picture of their risk of catastrophic losses. In

20 October 2019 – the same month in which Rialto procured the premature and inflated 29.9

21 Million Appraisal – Alliance released a white paper arguing that “the American mall isn’t dying

22 – it’s evolving to meet modern consumer demands” and “returns on the CMBX.6 are likely to be

23 far higher than short sellers expect.” According to Alliance, “regional malls in the CMBX.6 are

24 likely to fully or at least partially pay off their loans at maturity,” and losses would not occur

25

26

27
6
Ian Frisch, The $2 Billion Mall Rats, ESQUIRE (Nov. 30, 2020), available at https://www.esquire.com/news-
28 politics/a34785141/shopping-mall-short-hedge-fund-covid-19/.
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 1 quickly since “special servicers are likely to work with borrowers to minimize losses by

2 extending loan maturities and making loan modifications.”7

3 107. Even as the pandemic devastated the retail sector and Alliance and Putnam lost

4 more than a billion dollars invested for their clients, they continued to promote the trade. Brian

5 Phillips of Alliance (who later left the firm in June 2020) told The Wall Street Journal in late

6 March 2020, “We are running stress scenarios, ’08, ’09 type of stress scenarios, and we are still

7 comfortable.” Putnam mirrored Alliance’s assurances, stating publicly that the fund “stands

8 behind its investment thesis and has fully and accurately described that thesis and its risks to our

9 clients,” and pointing to the benefit of possible forbearance from lenders.8

10 108. Putnam and others have employed a more insidious tool to prop up their long

11 CMBS position – direct intervention in the operation of the CMBS deals referenced by CMBX

12 indices. CMBS market participants have long suspected – and have advised Plaintiffs here – that

13 mutual funds have interfered proactively in the CMBS market to protect their investments,

14 exerting undue influence on servicers and appraisers to artificially prop up the values of the

15 trusts in CMBX indices. As an anonymous source told Debtwire, “The fundamental question is

16 why has CMBX held up? It has everything to do with two managers who have taken a different

17 view and have an endless amount of money to support it.”9

18 109. Although the tip of the proverbial iceberg, recent conduct by Putnam offers

19 concrete proof of Putnam’s ongoing attempts to interfere with CMBS servicing decisions to

20 avoid further losses on its CMBX derivatives. On January 19, 2022, Putnam wrote the special

21 servicer and other deal parties in another CMBX.6 trust – CRE-2 – to dissuade them from

22 recognizing losses in connection with one of CRE-2’s largest mortgage assets, a loan secured by

23 the Crossgates Mall in Albany, New York (the “Crossgates Loan”). On the baseless pretext of

24 expressing “concerns” about CRE-2’s directing holder, Putnam’s letter advised the special

25
7
Brian Phillips, Kimberly Chan, Eric Goldstein, and John Huang, The Real Story Behind the CMBX.6,
26 ALLIANCEBERNSTEIN (Oct. 2019).
8
Esther Fung, AllianceBernstein, Putnam Dig in Deeper with Bets on Malls, THE WALL STREET JOURNAL (Mar. 31,
27 2020).
9
28 Maura Webber Sadovi, CMBX6 Short-Seller Alder Hill Shuts Funds, DEBTWIRE (Sept. 17, 2019).
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 1 servicer and other deal parties that Putnam “will be ready to take legal action” to avoid any

2 actions “inconsistent with the best interests of the Trust, its shareholders and more broadly the

3 functionality and liquidity of CMBX.” Putnam’s letter then expressed “concerns” about “any

4 modification, discounted payoff, or liquidation” that would result in a “recovery far less than the

5 loan balance.” Putnam’s threat to CRE-2’s service providers was delivered loud and clear:

6 recognize a loss on the Crossgates Loan, and we will sue you. Putnam’s actions are, as noted

7 above, akin to a health insurance company avoiding its obligation to pay for a sick patient’s care

8 by threatening to sue a doctor unless he or she issues the patient a clean bill of health.

9 110. Upon information and belief, Putnam and others followed a similar playbook to

10 prevent the Trust from recognizing losses connected to Prizm Outlets. Just as Putnam’s letter

11 feigned concerns about the directing holder in CRE-2 as a pretext to induce the servicer not to

12 recognize losses, an unknown “industry source” (presumably Alliance or Putnam) raised

13 concerns about possible conflicts of interest when a prominent CMBX short investor was

14 appointed as the Directing Holder for the Class E Certificates and sought to sell Prizm Outlets,

15 even inducing the CRE Finance Council to look into the matter.10

16 111. The known and suspected efforts by Putnam and others to influence the timing

17 and extent of losses in CMBS trusts are wrongful and manipulative, and the SEC is affirmatively

18 seeking to eradicate such actions through a new proposed rule. The SEC recently proposed File

19 No. S7-32-10, Prohibition Against Fraud, Manipulation, or Deception in Connection with

20 Security-Based Swaps, a rule designed to eliminate the “manipulative” practice of “CDS [sellers]

21 endeavoring to influence the timing of a credit event in order to . . . avoid the obligation to pay

22 by ensuring a credit event occurs after the expiration of the CDS.” The manipulation of

23 appraisals and other abusive practices concerning mortgage derivatives bring back memories of

24 the conduct that precipitated the financial crisis of 2008.

25

26
10
27 Maura Webber Sadovi, MP Securitized Credit wants fast sale of Nevada mall in CMBX6 reference deal; new dual
role draws heat, DEBTWIRE (July 16, 2020); Maura Webber Sadovi, CREFC scrutinizes possible conflict of interest
28 raised by CMBX short MP, DEBTWIRE (July 24, 2020).
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 1 G. PLAINTIFFS PROVIDE NOTICE OF A
SPECIAL SERVICER TERMINATION EVENT
2

3 112. Rialto’s actions with respect to Prizm Outlets, including failing to sell the

4 property “promptly” and procuring deliberately inflated appraisals based on knowingly false

5 assumptions in pursuit of its own interests and at the behest of others, constituted – among other

6 things – material defaults of its covenants and obligations in the PSA, and gave rise to a Special

7 Servicer Termination Event.

8 113. A Special Servicer Termination Event, defined in Section 7.01(b) of the PSA,

9 includes “any failure on the part of the Special Servicer duly to observe or perform in any

10 material respect any of its other covenants or obligations contained in this Agreement, which

11 failure continues unremedied for a period of 30 days” after “written notice of such failure” is

12 given to the Special Servicer. Notice of a Special Servicer Termination Event may be provided

13 by the Holders of 25% of any Class of Certificates. A Special Servicer Termination Event can

14 be noticed at any time.

15 114. Plaintiffs are holders of greater than 25% of the Class E Certificates. Plaintiffs

16 acquired their Class E Certificates by purchasing (among other things) all rights, title, and

17 interest in, to and under these Class E Certificates, and all rights, claims, demands, and causes of

18 action of any kind relating to these Class E Certificates, the PSA, and related documents, from a

19 seller in November 2021. Plaintiffs paid at least $500,000 for these Class E Certificates.

20 115. Rialto’s conduct alleged herein wrongfully and intentionally deprived the Class E

21 Certificates, and only the Class E Certificates, of valuable control rights that the Class E

22 Certificates could have and would have used to, among other things, avoid substantial losses.

23 116. Plaintiffs, as holders of 84% of the Class E Certificates, seek to remedy this

24 egregious example of a widespread malfeasance by Rialto, who, like certain other special

25 servicers, engaged in machinations designed to obscure or delay the recognition of inevitable

26 losses incurred by the Trust. These practices have broad implications for market integrity, but

27 have been shielded from legal scrutiny due to the challenges inherent in pursuing legal action,

28 including the time, expense, and disparate impact across multiple individual certificateholders,
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 1 who are often unable to identify and communicate with one another.

2 117. On December 10, 2021, Plaintiffs, as Holders of greater than 25% of the Class E

3 Certificates, provided notice to Rialto and the Trustee that Rialto defaulted materially in

4 observing and performing its covenants and obligations in the PSA with respect to Prizm Outlets,

5 including by breaching the PSA’s Servicing Standard. A copy of this notice of default is

6 attached hereto as Exhibit B.

7 118. On December 28, 2021, Rialto provided the Trustee a letter in response that

8 confirmed Rialto’s default by offering no credible explanation for the implausible appraisal

9 results that repeatedly divested the Class E Certificateholders of their control rights. Rialto

10 disclaimed responsibility for its servicing decisions on grounds that it cannot decide to sell REO

11 Property without the consent of the Trust’s controlling class, ignoring that Rialto’s misconduct

12 preserved control with the wrong class of Certificates, and that Rialto must act consistent with

13 the Servicing Standard regardless of the controlling class. Rialto also cited the HeadzUp Lease

14 in defending the 29.9 Million Appraisal, ignoring that Rialto paid $650,000 to induce that lease

15 and misrepresenting that HeadzUp commenced paying rent in November 2019. A copy of

16 Rialto’s letter is attached hereto as Exhibit C.

17 119. Rialto’s default has not been remedied, and the thirty-day cure period under

18 Section 7.01(b)(ii) of the PSA has elapsed. Accordingly, to the extent no Special Servicer

19 Termination Event existed previously, such an event occurred no later than January 10, 2022.

20 120. Section 11.02 of the PSA provides the Holders of 25% of each Affected Class the

21 right to demand that the Trustee exercise all available remedies upon written notice that a Special

22 Servicer Termination Event has occurred and is continuing and an offer of a reasonably

23 satisfactory indemnity. If the Trustee fails to do so within sixty days, Certificateholders may

24 commence proceedings themselves.

25 121. On February 11, 2022, after Rialto failed to cure the Special Servicer Termination

26 Event for a period of thirty days, Plaintiffs wrote the Trustee providing further written notice of a

27 Special Servicer Termination Event, requesting that the Trustee take action against Rialto, and

28 offering to indemnify the Trustee. A copy of this letter is attached hereto as Exhibit D. The
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 1 Trustee has not commenced an action against Rialto. Plaintiffs have therefore satisfied, to the

2 extent at all applicable to Plaintiffs’ claims, all preconditions to commencing, and have the right

3 to commence, this action.

4 FIRST CAUSE OF ACTION

5 Breach of Contract

6 122. Plaintiffs repeat all of the foregoing allegations as if fully set forth herein.

7 123. The PSA is a valid and enforceable contract.

8 124. Plaintiffs have performed all of their obligations under the PSA.

9 125. Rialto breached the PSA and violated the Servicing Standard by the conduct

10 alleged herein and deprived the Class E Certificates of their unique and valuable servicing

11 control rights by, among other things, securing knowingly and wrongfully inflated appraisals of

12 Prizm Outlets.

13 126. Rialto’s breaches, individually and collectively, constitute a Special Servicer

14 Termination Event.

15 127. Plaintiffs have performed all conditions, covenants, and promises necessary under

16 the PSA for the commencement of this action.

17 128. As a result of Rialto’s breaches of their covenants and obligations under the PSA

18 with respect to Prizm Outlets, Plaintiffs, as holders of Class E Certificates, were deprived of

19 servicing control rights under the PSA and suffered damages in an amount to be proven at trial,

20 but in no event less than $15 million.

21 SECOND CAUSE OF ACTION

22 Breach of the Implied Covenant of Good Faith and Fair Dealing

23 129. Plaintiffs repeat all of the foregoing allegations as if fully set forth herein.
24 130. The PSA is a valid and enforceable contract.
25 131. Plaintiffs have performed all of their obligations under the PSA.
26 132. The covenant of good faith and fair dealing is implied into every contract,
27 including the PSA.
28 ///
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 1 133. The covenant of good faith and fair dealing dictates that parties to a contract must

2 refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party

3 to the contract from receiving the fruits of the bargain. The implied covenant also operates to

4 preserve the parties’ contractual bargain and prevent bad faith conduct where a valid contract

5 exists but does not address the precise matters in dispute.

6 134. To the extent not a breach of the PSA’s plain language, Rialto’s conduct

7 prevented Plaintiffs from receiving their reasonable and justified expectations under the PSA by

8 the conduct alleged herein, including by depriving the Class E Certificateholders of their unique

9 and valuable servicing control rights.

10 135. Defendant has breached the covenant of good faith and fair dealing.

11 136. Plaintiffs have performed all conditions, covenants, and promises necessary under

12 the PSA for the commencement of this action.

13 137. As a result of Rialto’s breach of the duty of good faith and fair dealing, Plaintiffs,

14 as holders of Class E Certificates, were deprived of servicing control rights under the PSA and

15 suffered damages in an amount to be proven at trial, but in no event less than $15 million.

16 THIRD CAUSE OF ACTION

17 Fraud

18 138. Plaintiffs repeat all of the foregoing allegations as if fully set forth herein.
19 139. Rialto knowingly provided false and misleading information to appraisers with
20 the intention of generating equally false and misleading appraised values for Prizm Outlets,
21 which Rialto then reported to the Class E Certificateholders and others. Rialto also made
22 knowingly false representations intended to mislead the Class E Certificateholders with regard
23 to their control rights, including the representation that HeadzUp was “expected to open
24 02/16/2020,” when in fact Rialto knew that HeadzUp had defaulted on its lease and would
25 never commence operations. Rialto made these and other false representations to the Class E
26 Certificateholders and others in the Trust’s monthly reports and by other means, with the
27 intention that the Class E Certificateholders and others rely on them, to their detriment, as to
28 their control rights
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 1 140. Rialto knew, but failed to disclose, that these and other representations were

2 intentionally false when made.

3 141. In reliance on Rialto’s false statements, the Class E Certificateholders were

4 unable to exercise, and did not exercise, their servicing control rights, which were wrongly

5 withheld due to Rialto’s false statements. But for these false statements, the Class E

6 Certificateholders would have been able to exercise, and would have exercised, their servicing

7 control rights (including through legal action, if necessary) and would have directed the

8 immediate sale of Prizm Outlets.

9 142. Plaintiffs, as holders of Class E Certificates, were damaged by these false

10 representations in an amount reflecting the increased losses to the Class E Certificates caused

11 by the belated sale of Prizm Outlets.

12 143. Plaintiffs, as holders of Class E Certificates, are entitled to an award of costs and

13 attorney fees incurred in bringing this action, as permitted by law and/or by the parties’

14 contracts.

15 FOURTH CAUSE OF ACTION

16 Declaratory Judgment

17 144. Plaintiffs repeat all of the foregoing allegations as if fully set forth herein.
18 145. The PSA provides that indemnification of the Special Servicer by the Trust is not
19 available as a result of willful misconduct, bad faith, fraud or negligence in the performance of
20 duties under the PSA, or in negligent disregard of its duties under the PSA.
21 146. Rialto has acted fraudulently, willfully, in bad faith, negligently, or in negligent
22 disregard of its duties under the PSA.
23 147. Rialto stated in its letter to the Trustee that it intends to seek indemnification for
24 all costs and expenses incurred in responding to Plaintiffs’ notice of default.
25 148. There is a justiciable controversy over whether Rialto is entitled to
26 indemnification from the Trust in connection with this action.
27 149. Plaintiffs request a judgment declaring that Rialto is not entitled to
28 indemnification from the Trust for any of their costs, liabilities, or other losses in connection
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 1 with their conduct as alleged in this complaint or the present litigation.

2 PRAYER FOR RELIEF

3 WHEREFORE, Plaintiffs respectfully request that the Court enter judgment against

4 Rialto for the following relief:

5 (i) Awarding compensatory damages to Plaintiffs, and for the benefit of all Class E

6 Certificateholders, in an amount to be determined at trial;

7 (ii) Awarding costs, interest, expenses, and attorneys’ fees;

8 (iii) Declaring that Rialto is not entitled to indemnification from the Trust for any of

9 its costs, liabilities or other losses in connection with its conduct as alleged in this complaint or

10 the present litigation; and

11 (iv) Granting such other and further relief as this Court deems just and proper.

12 DATED this 15th day of June 2022.

13 GARMAN TURNER GORDON LLP

14
/s/ Dylan T. Ciciliano
15 GARMAN TURNER GORDON LLP
Dylan T. Ciciliano
16 Nevada Bar No. 12348
Email: dciciliano@gtg.legal
17 7251 Amigo Street, Suite 210
Las Vegas, Nevada 89119
18 Tel: (725) 777-3000
Fax: (725) 777-3112
19
KASOWITZ BENSON TORRES LLP
20 Michael A. Hanin (Pro Hac Vice Forthcoming)
Edward E. Filusch (Pro Hac Vice Forthcoming)
21 Jill L. Forster (Pro Hac Vice Forthcoming)
Andrew W. Breland (Pro Hac Vice Forthcoming)
22 1633 Broadway
New York, New York 10019
23 Tel: (212) 506-1700
Fax: (212) 506-1800
24
Attorneys for Icahn Partners LP and
25 Icahn Partners Master Fund LP

26

27

28
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EXHIBIT A
EXHIBIT B
 Icahn Partners LP
Icahn Partners Master Fund LP
16690 Collins Ave., PH-1
Sunny Isles Beach, FL 33160

December 10, 2021

VIA FEDEX
U.S. Bank National Association
190 South LaSalle Street, 7th Floor
Chicago, Illinois 60603
Attn: CMBS Account Management – COMM 2012-CCRE4
Fax: 866-807-8670

Re: COMM 2012-CCRE4 Commercial Mortgage Pass-Through

Certificates: Notice of Default/Special Servicer’s Failure to Perform

Ladies and Gentlemen:

We write as holders of in excess of 25 percent of the Class E Certificates (the “Instructing

Holder”) in the above-referenced trust (the “Trust”). We write pursuant to the Pooling and
Servicing Agreement (the “PSA”), dated as of November 1, 2012, by and among Deutsche
Mortgage & Asset Receiving Corporation, as Depositor, Wells Fargo Bank, N.A., as Master
Servicer, Rialto Capital Advisors, LLC (“Rialto”), as Special Servicer, U.S. Bank, N.A., as
Trustee, Wells Fargo Bank, N.A., as Certificate Administrator, Paying Agent and Custodian, and
Park Bridge Lender Services, LLC, as Operating Advisor.1

In accordance with Section 7.01(b)(ii) of the PSA, the Instructing Holder hereby provides
written notice of Rialto’s failure to observe and perform in material respects the covenants and
agreements imposed by the PSA, including compliance with the Servicing Standard. The
Instructing Holder requests that the Trustee immediately inform itself with respect to the facts
described below (to the extent the Trustee is not already aware of such facts) and pursue all
appropriate claims to recover damages on behalf of the Trust.

Relevant Background

Information available to the Instructing Holder suggests that Rialto’s actions with respect
to what was formerly one of the Trust’s largest assets — a senior loan converted into an ownership
interest in the 376,000 square foot Prizm Outlets (f/k/a Fashion Outlets) mall in Primm, Nevada
(the “Property”) — violated the standards governing servicing of the Trust’s distressed assets (the
“Servicing Standard”). Instead of selling the Property “promptly” as required by the PSA to
maximize recovery for all Certificateholders, Rialto retained the Property in the Trust by relying
on inflated appraisals and otherwise avoiding recognizing losses that would have shifted control
of the Trust to holders of the Class E Certificates, who would have demanded an immediate sale
of the Property and/or replaced Rialto as Special Servicer. As a result of Rialto’s conduct, the Trust
1
Capitalized terms used but not defined have the meaning given to them in the PSA.

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Page 2 of 5

recovered roughly 400 thousand dollars on a 73 million dollar Trust loan and incurred
$12.85 million in additional fees, advances, and expenses to support the Property when Rialto
knew, or should have known, that the Property did not warrant this level of investment. The Trustee
should immediately exercise its authority under Sections 7.01(b), 7.04, and 8.01(a) of the PSA to
investigate Rialto’s conduct and to pursue the appropriate claims against Rialto, and any other
culpable parties, to recover damages on behalf of the Trust.

The Instructing Holder expects that U.S. Bank, as one of the country’s leading providers
of CMBS trustee services, will share the Instructing Holder’s concern regarding the troubling facts
described herein, which are no aberration and threaten the integrity of the CMBS market. Far too
often, special servicers eschew the contractually required prompt sale of REO properties, an
“extend and pretend” mentality that results in massive — and entirely avoidable — losses to
bondholders. Far too often, these special servicers are enabled by the acquiescence or assistance
of out-of-the-money bondholders in “control” positions obtained or preserved artificially. Whereas
these bondholders are permitted to pursue their parochial interests, the special servicers are bound
by standards of conduct and obligated to maximize recovery for all Certificateholders.

The Instructing Holder therefore urges the Trustee, when considering the conduct detailed
herein, to consider the Special Servicer’s motives and whether its conduct was influenced by
market participants with an interest in delaying or avoiding the recognition of losses in certain
CMBS trusts. As you may know, several large mutual funds have touted their “long” positions in
derivative contracts referencing CMBS trust certificates, i.e., that these funds have placed bets —
to the tune of many billions of dollars — that losses on certain CMBS certificates will be delayed
or avoided. These sellers of “insurance” or “protection” in the CMBS market have the most to gain
when CMBS trusts delay recognizing obvious and inevitable losses, as occurred with respect to
the Property. We expect that the Trustee’s pursuit of the claims requested hereby will reveal
whether and to what extent exogenous forces from the CMBS derivatives market influenced
Rialto’s decision-making with respect to the Property.

The Servicing Standard

The PSA requires the Trust’s Special Servicer to service and administer the Mortgage
Loans on behalf of the Trust Fund and the Trustee (as Trustee for all Certificateholders) and in the
best interests, and for the benefit, of the Certificateholders in accordance with the Servicing
Standard. The Servicing Standard requires that the Special Servicer service and administer the
Mortgage Loans consistent with the higher of two standards: “with the same care, skill, prudence
and diligence with which . . . the Special Servicer . . . services and administers similar mortgage
loans for other third-party portfolios” and “with the same care, skill, prudence and diligence with
which . . . the Special Servicer . . . services and administers commercial and multifamily mortgage
loans owned, if any, by . . . the Special Servicer . . . .” PSA §§ 1.01 (definition of “Servicing
Standard”), 3.01(a).

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When the Special Servicer forecloses on a Mortgaged Property following default on a

Mortgage Loan, “[t]he Special Servicer shall manage, conserve, protect and operate each Serviced
REO Property for the Certificateholders . . . solely for the purpose of its prompt disposition and
sale . . . .” Id. § 3.15(a) (emphasis added). That is, the Special Servicer must be in the business of
selling REO Property promptly, not rehabilitating and operating REO Property long-term.

Rialto’s Apparent Breach of the Servicing Standard

In 2012, the Property’s owner obtained a $73 million senior loan with a November 2017
maturity date (the “Loan”) that was later packaged into the Trust. The Property was appraised at
$125 million when the Loan was issued. In or about 2016, however, occupancy at the Property
began an inexorable decline; occupancy rates declined to 73 percent by January 2017 and
continued the downward trend through 2018 and 2019. The Loan was transferred to special
servicing in September 2017 after the borrower indicated it would be unable to repay the Loan at
maturity. Rialto rejected the borrower’s restructuring proposal, had a receiver appointed, and
foreclosed on the Property (with the borrower’s cooperation) on or about September 27, 2018.

After foreclosing on the Property, it appears Rialto disregarded its obligation to operate the
Property “solely for the purpose of its prompt disposition and sale” and to maximize recovery for
all Certificateholders. Rather than sell the Property promptly to capture whatever value remained,
Rialto committed to a 39-month plan to “reposition the asset” — the longest period of time legally
permitted by the laws governing REMICs (see PSA § 3.15 [requiring disposition by the close of
the third calendar year following acquisition]) — that ultimately caused the Trust to accrue nearly
$13 million in fees, advances, and expenses.

On April 1, 2018, the Property was appraised at $25.54 million based on steadily declining
occupancy, declining (and later negative) operating income, millions in unpaid obligations, and an
annual ground lease payment of $750,000. The dramatic reduction in appraised value compared to
the Loan’s original $73 million balance resulted in a nearly $50 million loss (the “ARA” or
“Appraisal Reduction Amount”)2 as of April 1, 2018. Had the Trust recognized that loss timely
and appropriately, it would have wiped out (i) the entire Certificate Balance of the Trust’s Class
G Certificates and (ii) approximately 75 percent of the Certificate Balance of the Trust’s Class F
Certificates. For unknown reasons, the Class G Certificates remained the Trust’s “Controlling
Class” through April 2019.3

By April 2019, the ARA had increased further such that control of the Trust should have
shifted to the Trust’s Class E Certificates, skipping the Class F Certificates entirely. In response,

2
The Appraisal Reduction Amount is applied to reduce the Certificate Balance allocable to a Class
in determining the Controlling Class.
3
The Trust’s Controlling Class is the most subordinate class of Control Eligible Certificates (the
Class G, Class F, and Class E Certificates) with an aggregate Certificate Balance (reduced by the ARA) at
least equal to 25% of initial Certificate Balance of that Class. If no class meets that requirement, the
Controlling Class is the Class E Certificates.

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Rialto appears to have taken steps to artificially preserve control with the Class F Certificates in
exchange for the Class F Certificateholders agreeing to preserve Rialto as Special Servicer.
In an apparent effort to implement and perpetuate this arrangement, Rialto secured dubious
appraisals that appear to have been — based on the circumstances, timing, and results —
manufactured to generate the desired outcome. For example:

x On April 10, 2019, the Property was appraised at $28.8 million (the “28.8 Million
Appraisal”) — more than $3 million higher than the $25.54 million appraisal obtained one
year prior. The 28.8 Million Appraisal avoided a change in control to the Class E holders
by ensuring that value remained with at least 25 percent of the Class F holders. The
28.8 Million Appraisal relied on objectively unrealistic assumptions, including an
assumption that occupancy would increase from 57.4 percent to 95 percent.

x On October 18, 2019, the Property was appraised again, this time for $29.9 million (the
“29.9 Million Appraisal”). Nothing in the PSA required this renewed appraisal, a
significant expense borne by the Trust. Absent the renewed appraisal, control of the Trust
would have shifted to the Class E Certificates. The 29.9 Million Appraisal, however,
compensated for ongoing losses from the Trust operating the Property and preserved the
Class F Certificates as the control class.4

x In January 2020, Wells Fargo, as Certificate Administrator, issued a remittance report

indicating a $52.8 million Appraisal Reduction Amount that would have and should have
— once again — divested the Class F Certificates of their control position in the Trust.
Without explanation, however, Wells Fargo issued a revised report “restating” the ARA to
$47.8 million on the grounds that the Master Servicer (also Wells Fargo) had “overstated
the ARA.” The restatement had the effect of eliminating a $5 million loss and, again,
preserving the Class F Certificates as the Controlling Class.

x On March 11, 2020, the outbreak of COVID-19 and the subsequent closure of the Property
by order of the governor of Nevada demanded another meaningful increase to the ARA.
Control shifted to the Class E Certificates, effective March 17, 2020.

The 28.8 Million Appraisal and 29.9 Million Appraisal did not reflect, and had no basis in,
reality and appear to have been manufactured to preserve control of the Trust with the Class F
Certificates. The restated ARA from January 2020, which has never been explained by Wells
Fargo, implicates similar concerns. Tellingly, opinions of value provided by Kroll Bond Rating
Agency, which conducted surveillance of the Trust and the Property, pegged the Property’s value
at $10.4 million in January 2019, $9.5 million in February 2019, and $9 million in September 2019
— i.e., approximately one-third of the appraised values.

4
When trust investors raised concerns about the validity of the 29.9 Million Appraisal, Wells Fargo
Bank, the Trust’s Certificate Administrator, took the unusual and perhaps unprecedented step of releasing
a 215-page appraisal justifying the higher valuation based on a new 10-year lease signed by HeadzUp for
24,610 square feet of the Property. It appears that this business never opened. The terms of this lease, and
the parties involved in obtaining the lease, are unknown.

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Damage to the Class E Certificateholders

After the Class E Certificates became the Controlling Class in March 2020, the Special
Servicer’s 39-month rehabilitation plan was revised to sell the Property as quickly as practicable.
Unfortunately, it was too late to avoid the substantial damage caused by the failure to promptly
dispose of the Property. Initial attempts to auction the Property in January 2021 resulted in a final
bid of $1.5 million. That bid failed to close and the Property was sold in April 2021 for roughly
$400,000 (the “April 2021 Sale”). Accounting for the $12.85 million in fees, advances and
expenses, the result was a net negative $12.4 million in proceeds available for distribution.

The April 2021 Sale also caused the Trust to recognize a $62.2 million loss, reducing the
Certificate Balances of the Class F and G tranches to zero, and the Certificate Balance of the Class
E tranche to just under $6 million. The Class E Certificates have continued to suffer losses as the
Trust repays fees and expenses relating to the Property. The losses to the Class G and Class F
tranches were assured when the Trust took possession of the Property in September 2018; but the
losses to the Class E tranche were avoidable and the direct result of the failure to sell the Property
promptly. A timely and appropriate sale would have achieved a more meaningful recovery; at a
minimum, the Trust would have avoided much or all of the nearly $13 million in fees, advances
and expenses incurred attempting to rehabilitate the Property.

* * *

The Trustee is hereby notified of Rialto’s failure to observe and perform in material respect
the covenants and agreements imposed by the PSA, including compliance with the Servicing
Standard. PSA § 7.01(b)(ii). Rialto’s failure cannot be cured or remedied because the Property has
been sold and the damage has been sustained by the Trust. The Instructing Holder therefore and
hereby requests that the Trustee immediately inform itself with respect to the facts above and
pursue any appropriate claims on behalf of the Trust, including by instituting an action, suit, or
proceeding against Rialto to recover for the damages to the Trust caused by any breaches of the
Servicing Standard. The Instructing Holder hereby agrees to reasonably indemnify the Trustee and
provide the Trustee with reasonable security against the costs, expenses, and liabilities it will or
may incur in connection with any such action.

Please contact the undersigned, or Michael Hanin, Esq. of Kasowitz Benson Torres LLP
(mhanin@kasowitz.com), to discuss any of the above.

Sincerely yours,

Icahn Partners LP and Icahn Partners Master

Fund LP, holders of Class E Certificates

By:
y: __________________________
_ __________
__ __________________
Name: Irene March
Title: Executive Vice President

{99999/1010/12/10/2021/00544931v1 }
EXHIBIT C
 Philip R. Stein
Tel 305-350-7220
Fax 305-351-2147
pstein@bilzin.com

December 28, 2021

VIA E-MAIL, FEDERAL EXPRESS, AND CERTIFIED U.S. MAIL

U.S. Bank National Association

190 South LaSalle Street, 7th Floor
Chicago, IL 60603
cmbs.transactions@us.bank.com

Re: COMM 2012-CCRE4 Commercial Mortgage Pass-Through Certificates

(“Trust”): Icahn Partners LP and Icahn Partners Master Fund LP, holders
of Class E Certificates’ Purported Notice of Default dated December 10,
2021

Ladies and Gentlemen:

We represent Rialto Capital Advisors, LLC (“Rialto”), as Special Servicer of the Trust
identified above. We feel compelled to write in response to the referenced letter dated December
10, 2021, in which the holder of in excess of 25 percent of the Class E Certificates1 (the
“Instructing Holder”) purports to provide a notice of default pursuant to § 7.01(b)(ii) of the Pooling
and Servicing Agreement (the “PSA”), dated November 1, 2012, governing the servicing of the
Trust (the “Notice of Default”) concerning Rialto’s compliance with the PSA, including the
Servicing Standard.2

As an initial matter, the Notice of Default is procedurally defective and untimely. Section
7.01(b) sets forth grounds for the Special Servicer’s termination, but no action has been taken to
terminate Rialto as the Special Servicer notwithstanding the fact that the Class E Certificates
became the Controlling Class in March 2020. Moreover, § 7.01(b)(ii) provides Rialto with a 30 day
cure period to remedy any alleged breaches of its obligations under the PSA. Here, the
complained-of actions were taken by Rialto between September 2017 and March 2020. As such,
there is no default in Rialto’s performance as Special Servicer that could be cured by such late
notice, and the Property was sold eight months ago.

1
On or about December 1, 2021, 50% of the beneficial interest in the Class E Certificates was transferred
to Icahn Partners LP and Icahn Partners Master Fund LP. Rialto is perplexed by the timing of the transfer
of Class E Certificates, which occurred eight months after the sale of Prizm Outlets (f/k/a Fashion Outlets)
mall in Primm, Nevada (the “Property”), the sale that resulted in the alleged damages to the Trust.
2
Capitalized terms used but not defined herein have the meaning set forth in the Pooling and Servicing
Agreement (“PSA”) dated November 1, 2012.
December 28, 2021
Page 2

In any event, the allegations contained in the purported Notice of Default are wholly
without merit. Indeed, they appear to be based on a number of misperceptions and/or
misapplications of the terms of the PSA. Rialto will not attempt herein to catalog an exhaustive
list of such errors, and will instead simply identify a few significant examples.

First, the Instructing Holder appears to be operating on the presumption that Rialto alone
determined whether and when to foreclose upon, and sell, the Property. That is not the case. The
Instructing Holder states that “Rialto rejected the borrower’s restructuring proposal, had a receiver
appointed, and foreclosed on the Property,” but each of these actions are defined in the PSA as
“Major Decisions,” and Rialto does not have sole authority to make such decisions. See PSA, p.
43 (defining Major Decisions to include “(a) any proposed or actual foreclosure… (which may
include acquisitions of an REO Property)… (b) any modification, consent to a modification or
waiver of a monetary or material non-monetary term … (c) any sale of a … REO Property … for
less than the applicable Repurchase Price.”).

Another example of the Instructing Holder’s misunderstanding Rialto’s role is the

suggestion that Rialto caused the Trust to incur approximately $13 million in fees, advances, and
expense. Again, the PSA is clear that such advances are not within Rialto’s sole discretion. In
fact, the PSA states that “the Special Servicer shall have no obligation to make an affirmative
determination that any Advance is, or would be, a Nonrecoverable Advance, and in the absence
of a determination by the Special Servicer that such an Advance is a Nonrecoverable Advance,
then all such decisions shall remain with the Master Servicer or Trustee, as applicable.” See PSA
§ 3.21(d).

Second, contrary to the Instructing Holder’s assertion that Rialto was required to
immediately sell the Property, the PSA provides that the Serviced REO Property “shall be
disposed of prior to the close of the third calendar year following the year in which the Trust Fund
acquires ownership of such Serviced REO Property for purposes of Section 860G(a)(8) of the
Code,” and in fact the PSA details circumstances permitting an even longer period of time in which
to sell the Property. Rialto’s strategy was, therefore, not only in compliance with the specific
requirements of the PSA pertaining to the sale of the subject REO Property, but also within the
bounds of Rialto’s reasonable business judgment pursuant to the Servicing Standard.

When the Trust took title to the Property pursuant to a foreclosure in September 2018, the
value of the Property had severely declined from the time it was acquired in 2012. Recognizing
the decline in value, the Instructing Holder states that the April 1, 2018 appraisal appraised the
Property at $25.54 million based on declining occupancy and declining operating income. Rialto,
exercising reasonable business judgment and acting in the best interest of all Certificateholders
to maximize value of the Property, engaged in a strategy to attract new tenants thereby increasing
occupancy, generating additional operating income, and rehabilitating the Property to ultimately
achieve a higher sale price. Notably, had Rialto simply liquidated the Property, it would have been
entitled to a liquidation fee without any of the work done to improve the value of the Property.
December 28, 2021
Page 3

While that may have been in Rialto’s financial interest, it would not have benefitted all of the
Certificateholders.3

Third, the Instructing Holder essentially alleges that Rialto engaged in a scheme to obtain
inflated appraisals to avoid shifting control to the Class E Certificates. But that assertion, too, is
completely unfounded. The PSA requires Rialto to periodically obtain new appraisals of the REO
Property conducted by an Independent MAI Appraiser, which it did. In fact, the October 2019
appraisal was obtained consistent with the Servicing Standard, and at a time at which there
appeared to be some suggestions that a “material adverse change” had occurred. Indeed, while
the Instructing Holder suggests that Rialto acted with nefarious intent in obtaining the October
2019 appraisal, it was responsive to “material adverse change” concerns, and ultimately
demonstrated that the Property’s value had increased due to a material beneficial change in
circumstances—namely, the HeadzUp lease and other tenant renewals. Rather than recognize
Rialto’s efforts as beneficial to the Certificateholders, the Instructing Holder questions the validity
of the October 2019 appraisal because HeadzUp did not open for business. While true, this
overlooks the fact that HeadzUp commenced paying rent in November 2019 and HeadzUp
intended to open for business in April 2020, in the midst of the pandemic and stay at home orders.
And, it was those stay at home orders that ultimately caused HeadzUp’s business to fail.

Though the Instructing Holder characterizes the appraisals as “dubious,” Rialto does not
perform the appraisals or determine the Property’s value. Instead, Rialto acted in accordance with
the PSA by engaging a large national third-party Independent MAI Appraiser to conduct each
appraisal. Indeed, the Notice of Default’s statement that Kroll Bond Rating Agency pegged the
Property value at $9 million in September 2019 only further highlights the basis for obtaining an
actual appraisal in October 2019. Incredibly, the Instructing Holder again accuses Rialto of
misconduct by calling the decision to make the October 2019 appraisal public “unprecedented.”
But, by releasing the appraisal, Rialto was simply providing transparency for the benefit of all
Certificateholders. The Instructing Holder can hardly cry “foul” for Rialto’s disclosure.

In short, there is nothing to suggest that Rialto failed to abide by the Servicing Standard
or the PSA. The Property consisted of an outlet mall and, to obtain maximum value for the benefit
of all Certificateholders, Rialto managed the REO Property in accordance with industry standards.
While reasonable minds may disagree as to the strategy employed, the fact remains that the value
of the Property was increasing until Covid-19 and the Nevada Governor’s stay-at-home orders.

Should the Trustee have any further questions or require additional information, .we would
be happy to discuss this matter in more detail.

Finally, please be advised that Rialto intends to seek indemnification pursuant to its rights
under the PSA for all costs and expenses incurred in connection with responding to the Notice of
Default including, but not limited to, recovering its attorneys’ fees.

3
Notably, the decision to sell an REO Property is, pursuant to the PSA, a “major decision.” Rialto does not
have sole or exclusive decision-making authority for such decisions, and thus did not make any such
decision unilaterally.
December 28, 2021
Page 4

Sincerely,

Philip R. Stein

PRS:jmg

cc: Michael Hanin, Esq. (via e-mail only; mhanin@kasowitz.com)

9060113.2
EXHIBIT D
 February 11, 2022

BY EMAIL

Kevin J. Biron
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
kevin.biron@morganlewis.com
Counsel to U.S. Bank National Association

Re: COMM 2012-CCRE4 Commercial Mortgage Pass-Through Certificates:

Further Notice of Servicer Termination Event

Dear Kevin:

On behalf of Icahn Partners LP and Icahn Partners Master Fund LP (the “Instructing
Holders”) this responds to your January 12, 2022 letter and provides further written notice of a
Servicer Termination Event.1

The Instructing Holders’ December 10, 2021 Letter (the “December 10 Letter”) provided
notice, to Rialto and the Trustee, that Rialto defaulted materially in observing and performing its
covenants and obligations in the PSA with respect to the Prizm Outlets (f/k/a Fashion Outlets)
mall, including by breaching the PSA’s Servicing Standard. Rialto’s default has not been
remedied, and the thirty day cure period under the PSA has elapsed. Accordingly, to the extent
no Servicer Termination Event existed previously, such an event occurred no later than January
10, 2022. See PSA Section 7.01(b)(ii).

This letter constitutes notice of such Servicer Termination Event.

1
Capitalized or undefined terms have the meaning given in the December 10 Letter and the PSA.
Kevin J. Biron
February 11, 2022
Page 2

We remind the Trustee of the obligation, pursuant to PSA Section 7.03(b), to provide
notice of this Servicer Termination Event to all Certificateholders. Such Certificateholder notice
should include, at a minimum, all correspondence from the Instructing Holders and Rialto’s
December 28, 2021 letter to the Trustee (the “Rialto Response”).

We do not endeavor to respond here to the many misstatements and inaccuracies in the
Rialto Response, but note that Rialto fails to respond to the fundamental concerns raised by the
Instructing Holders in the December 10 Letter. Rialto offers no explanation for the implausible
appraisal results that narrowly preserved control with the Class F Certificateholders, including:
(i) the $3 million increase in the appraised value of the property between April 2018 and April
2019; and (ii) the $1.1 million increase in the appraised value of the property between April 2019
and October 2019.2 Rialto disclaims responsibility for these purportedly “independent”
appraisals, but Rialto commissioned the appraisals, coordinated their timing, and supplied and/or
approved the “extraordinary” and “assignment-specific” assumptions on which they were based.3
Rialto likewise offers no explanation for the equally implausible revision to the January 2020
remittance report that restated the ARA in the amount necessary to preserve control with the
Class F Certificateholders.

The Rialto Response also ignores entirely questions regarding the influence of interested
market participants, namely large mutual funds with “long” positions in CMBX.6 derivative
contracts betting that losses on certain CMBS certificates will be delayed or avoided. These
funds have the most to gain when CMBS trusts included in CBMX.6 delay recognizing obvious
and inevitable losses, as occurred with respect to the Property.

As you know, the Trustee is already aware of wrongful attempts by sellers of CMBX.6
protection to influence trust-level servicing decisions. For example, on January 19, 2022,
Putnam Investments (“Putnam”) wrote the Trustee and other deal parties in another CMBX.6
trust — COMM 2012-CCRE2 Commercial Mortgage Pass-Through Certificates (the “CRE-2

2
We note that Rialto’s justification for taking the usual step of obtaining an expedited appraisal in
October 2019 three months before one was required under the PSA — that there “appeared to be some
suggestions that a material adverse change had occurred” — cannot be squared with the appraisal itself,
which obfuscated those adverse changes. Among other things, the appraisal relied on extraordinary
assumptions (e.g., that the ground lease was not adverse to the marketability of the Property) and dubious
new leases (e.g., a recently retained 10-year “anchor tenant” lease with HeadzUp). Rialto notes that
HeadzUp “commenced paying rent in November 2019,” ignoring that HeadzUp defaulted nearly
immediately thereafter, undoing the key assumption underlying the appraisal.
3
Rialto disclaims responsibility for its servicing decisions on grounds that it cannot make Major
Decisions unilaterally, apparently forgetting that Rialto must act consistent with the Servicing Standard as
to all matters, including Major Decisions. PSA § 6.07.
Kevin J. Biron
February 11, 2022
Page 3

Trust”) — threatening to take legal action if Putnam disagreed with decisions made by the
special servicer for the CRE-2 Trust, TriMont Real Estate (“TriMont”). In a transparent attempt
to dissuade TriMont and other deal parties from recognizing losses, Putnam expressed its
“concerns” over “any modification, discounted payoff, or liquidation” that would result in a
“recovery far less than the loan balance” on the Crossgates Mall loan. Interfering further,
Putnam requested a “more accurate appraisal” — and a transfer of control away from the
existing controlling class holder (an affiliate of the Instructing Holders) — before TriMont even
“considers” any action with respect to the loan. We reattach Putnam’s letter here.

The Instructing Holders expect that Putnam similarly “followed developments closely”
and stood “ready to take legal action” in connection with the Property, and that the pursuit of
claims here — including the discovery of emails, other internal documents, and depositions —
will reveal whether and to what extent Putnam and other exogenous forces from the CMBX
market influenced Rialto’s decision-making with respect to the Property.4

Given the ongoing Servicer Termination Event, the Instructing Holders look forward to
working with the Trustee to pursue any and all appropriate claims on behalf of the Trust, and will
provide a reasonable indemnity as necessary. If the Trustee elects not to pursue these claims, the
Instructing Holders will enforce their rights pursuant to Section 11.02 of the PSA.

We remain available to discuss this matter at your convenience and look forward to
hearing from you.

Sincerely yours,

/s/ Michael A. Hanin

Michael A. Hanin

Enclosure

4
The Instructing Holders are deeply troubled by Putnam’s recent actions in this arena given the
proverbial “glass house” in which Putnam dwells. As you know, the SEC recently announced its
intention to eradicate the manipulative practice of “CDS [sellers] endeavoring to influence the timing of a
credit event in order to . . . avoid the obligation to pay by ensuring a credit event occurs after the
expiration of the CDS . . . .” Putnam’s actions appear intended to achieve exactly this result, and to avoid
catastrophic losses in funds that Putnam marketed to investors as comparable to U.S. Treasuries (when in
fact they were significantly riskier). If Putnam’s actions are as they appear, they are analogous to an
insurance company influencing a doctor to say his patient is not sick in order to avoid an obligation to
provide health coverage.