Rialto Fighting Improper Servicing Suit from 400 Capital

28 January 2026

A dispute between an investor and a special servicer continues to play out in court.

Investor 400 Capital sued Rialto Capital Advisors late last year, accusing the special servicer of improperly keeping a loan in special servicing. Now, Rialto has changed track, but 400 Capital says it doesn’t go far enough.

It’s a rare look into a fight between a commercial-backed mortgage securities investor and the nation’s largest special servicer by volume. As of June, Rialto was the named special servicer on more than 5,000 loans with a total unpaid principal of more than $94 billion, according to Morningstar.

At the center of the court dispute is a $130 million loan — one connected to a Herald Square hotel and retail location. The loan landed in special servicing with Rialto in October. The borrower said it hasn’t been able to get a refinancing loan to pay off its original debt before a January due date because of upcoming lease expirations.

Rialto ultimately struck a two-year deal with the borrower. The rub: the servicer calls it a forbearance agreement, but 400 Capital believes it to be a loan modification.

That difference in semantics matters to the investor. A loan modification would launch the loan out of special servicing. A forbearance agreement keeps it with Rialto. Staying in special servicing means certain fees for the borrower, as well as default interest, which the investor says benefits Rialto’s but not certificateholders’ interests.

400 Capital filed the suit in New York just before Christmas, seeking emergency action. The company hoped the court would stop Rialto from executing an agreement wherein it would collect millions in default interest before investors got paid out.

But Rialto changed the terms of that agreement and then executed it before the court could look into the matter.

Now 400 Capital has withdrawn its motion for immediate relief, but isn’t abandoning the suit entirely.

The investor says Rialto got caught with its hand in the cookie jar, which led to the last-minute change. Rialto has now agreed to get paid on the back end of the loan instead of up front. But the new agreement still keeps the loan in special servicing, meaning a 25 basis point fee paid to Rialto and default interest that piles up to be paid to Rialto once the loan is closed. That adds up to more for the borrower to pay and more for it to borrow.

“The refinancing gap is only growing as a result of this agreement,” said Quinn Barton, head of CMBS and CRE at 400 Capital. “What they’re doing here is making it even more difficult for the borrower to repay the loan.”

Racking up interests and fees on a performing loan, 400 Capital says, hurts investors by making it less likely the loan will be paid off.

And the loan is indeed performing, the investor argues. Net operating income is more than double its debt service payments, the property is fully leased and has about $6 million in annual excess cash flow.

“It would be common for a loan to get a 30-day, 60-day, 90-day forbearance. Even up to a year might be common in our industry,” said Catie McKee of 400 Capital. “But in this case it just seems very obvious that they have found this loophole where if they call it a forbearance they can keep it in special servicing and keep this whole fee scheme going.”

Rialto, through its investment affiliate Rialto Capital Management, is the country’s largest buyer of CMBS B-piece notes. Those notes give the investor the ability to select the special servicer on the loan, including selecting its own affiliate.

Rialto, for its part, says it’s better for everyone to keep this loan in special servicing. That allows investors to foreclose on the property faster and streamline other remedies in the event of another default. It also allows for easier administration of the full cash sweep the borrower agreed to.

And the default interest that’s accruing incentivizes the borrower to pay off the loan as soon as possible.

“Rialto won’t get paid a dollar of default interest unless everybody else gets paid in full,” Greg Cross, an attorney at Venable who is representing Rialto in the suit, said in a statement. “And to the extent they get paid it will come from the borrower, just like any other fee in this transaction.”

The 25 basis point fee that Rialto gets paid as an active special servicer would typically be paid by the trust, but in this case Rialto negotiated for it to be paid by the borrower.

In court, Rialto is seeking to have the case dismissed, arguing that 400 Capital doesn’t have standing to pursue it. The investor is contractually obligated to bring complaints to its trustee before initiating a lawsuit and 400 Capital did not do that, Cross said in a memo to the court.