Five Star Development clinched an early win against Josh Zegen’s Madison Realty Capital in a legal feud that stretches from Arizona to Texas in which Five Star is accusing Madison of violating Arizona’s RICO law.
A judge blocked the foreclosure of a cluster of El Paso properties pledged as collateral for the $585 million construction loan that Madison provided in 2023 for the development of a $2 billion Ritz-Carlton resort near Scottsdale, court documents show.
Five Star and Madison started working together on the $2 billion Ritz project in 2007. Plans for the project include 80 branded villas, 33 branded “estate homes,” and a Ritz-Carlton hotel.
But Madison sought to foreclose in April, alleging Five Star’s $585 million loan went into default for non-payment.
Five Star, which is based in Scottsdale, alleged Madison acted in bad faith and manufactured the default. Madison, which was founded in the early aughts, has a reputation for being a gloves-off lender, but has recently tried cultivated a more institutional image.
Madison didn’t respond to requests for comment.
District Court Judge Francisco Dominguez issued a temporary injunction, which put the foreclosure on hold.
In the words of Five Star’s attorney Dan Brockett, “we won round one.”
According to the filing, Madison didn’t properly credit all of Five Star’s loan payments, improperly reflecting that Five Star didn’t pay the loan. The lender also inflated interest rates, Five Star alleged, calling into question Madison’s calculation of the loan balance.
“These were strong-arm shark tactics for a lender to exercise, and we’re gratified that the judge has put a stop to that,” said Brockett, a partner with Quinn Emanuel.
The case is expected to go to trial in February.
This foreclosure is a part of a larger legal battle playing out in Arizona Superior Court, where Five Star has filed a lawsuit accusing Madison of sabotaging the Ritz-Carlton development by interfering with the development of the hotel portion of the project.
It’s not uncommon for borrowers to sue their lenders, but it is rare to see those lawsuits mention potential RICO violations, as Five Star’s Arizona suit does.
Specifically, the developer accuses a Madison employee of violating the state’s racketeering statute by forging the signature of Five Star founder Gerald Ayoub to approve unauthorized construction costs. It also claims the lender withheld payment from hotel contractors and misused funds that were intended for the development of the hotel.
According to Five Star, the result of Madison’s actions is: “all the money under the loan has now been used up, and the hotel is a long way from being done,” Brockett said.
Five Star is asking the court for damages.
Read more
Madison Realty Capital comes of age
Madison Realty Capital lists River North site of failed tower
Josh Zegen’s Madison Realty Capital moves to take over Aby Rosen’s big Gowanus site
