Ackman loses appeal on New York's Stuyvesant Town

NEW YORK Tue Sep 28, 2010 6:28pm EDT

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NEW YORK (Reuters) - A state appeals court ruled against hedge fund manager William Ackman on Tuesday, paving the way for bondholders to sell the massive Manhattan apartment complexes Stuyvesant Town and Peter Cooper Village in a foreclosure auction next week.

The New York State Supreme Court Appellate Division, First Department, denied a request by a joint venture of Ackman's Pershing Square Capital Management LP and Winthrop Realty Trust to reverse a lower court judge's ruling that the venture could not elbow past holders of $3 billion of mortgage bonds to gain control of the properties.

The lower court lifted a temporary injunction that stopped the bondholders from foreclosing on the property, and did not allow the Ackman joint venture to go ahead with its plan to foreclose on the equity in the owners.

The bondholders have scheduled an October 4 auction to sell the properties to the highest bidder.

"We're going to ahead on Monday," said Greg Cross, attorney for CWCapital, the bondholders' representative. "They had no more ability to enjoin our foreclosure than the Red Sox have to stop the Yankees from signing free agents."

But the Pershing/Winthrop venture, called PSW, vowed to continue to fight.

"The decision by the appellate court is not a ruling on the merits of the appeal from the trial court's September 16th injunction, which PSW intends to vigorously pursue," the venture said in a statement.

Ackman is set to meet with CWCapital on Friday.

Some potential buyers said they would like to acquire the property outside of a foreclosure sale to avoid hundreds of millions of dollars of transfer taxes and additional mortgage recording taxes.

The bondholders' securities are backed in part by the $3 billion mortgage that investors, led by private equity firm Tishman Speyer Properties, used in 2007 to buy the 56-building apartment complex on the east side of Manhattan for $5.4 billion.

The properties were built after World War Two to house returning veterans. About 25,000 people live in the 11,277 apartments. Tishman announced its agreement to buy the properties from original owner MetLife Inc in late 2006, near the height of the U.S. commercial real estate boom.

As part of the financing, the companies Tishman Speyer set up to buy the properties, called PCV ST Owner LP and ST Owner LP, also borrowed $1.4 billion in junior loans. Those loans were secured by the interest in the companies, while the mortgage was secured by the properties. The Ackman venture sought to gain control of the property by gaining control of PCV ST Owner and ST Owner.

The slump in the U.S. commercial real estate market and an adverse court decision forced the owners to default on the loans in January. By then, the property had lost more than half its value.

After no junior lender stepped up to take over the owners and assume the mortgage, CWCapital, which represents the bondholders, moved to foreclose on the property.

In August, Ackman created PSW with Winthrop, the original maker of three junior loans, to buy $300 million worth of junior loans for 15 cents on the dollar. The joint venture then moved to foreclose on the interest in the limited partnerships without first paying the $3.66 billion mortgage principal plus accrued interest and fees due the bondholders.

On September 16, the lower court ruled against Ackman's PSW.

The case is Bank of America NA et al v. PSW NYC LLC, New York State Supreme Court, New York County, No. 651293/2010.

(Reporting by Ilaina Jonas; Editing by Gerald E. McCormick, Richard Chang and Steve Orlofsky)

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