A $130 million loan tied to Midtown Manhattan properties is at the center of a lawsuit that accuses a firm hired to ensure the debt is repaid of self-serving tactics.

Rialto Capital, tasked with overseeing the loan on behalf of investors, allegedly engineered a way to keep it in default so that the company could win extra fees over time, according to a lawsuit filed Tuesday by alternative asset manager 400 Capital Management in New York State Supreme Court.

By putting the loan into forbearance rather than modifying its terms, Rialto won the rights to up to $12.7 million in default interest and fees, the suit said. Rialto's decision came at the expense of investors like 400 Capital, an owner of one of several commercial mortgage bonds backed by the loan, according to the suit.

"The proposed agreement hardwires in excessive compensation to Rialto," said Quinn Barton, head of CMBS at 400 Capital. "That additional interest burden exacerbates the stress in this deal, making a future borrower pay-off clearly more costly and less likely."

Rialto hit back in a rebuttal filing, arguing the loan is in worse shape than the lawsuit claims and that modifying it wouldn't have provided an easy fix. Putting the loan into forbearance was the solution that worked best for bondholders collectively, according to the legal filing. 

Rialto also rejected assertions that it's generating excessive fees from the workout arrangement, saying any default interest it's owed will accrue for payment only after bondholders are repaid. 

"The agreement includes significant credit enhancements for the [bondholders] and avoids enforcement delays and litigation costs," a spokesperson for Rialto said. 

The legal clash is the latest to highlight the role of workout specialists known as special servicers, which have become key players in the $700 billion market for commercial mortgage-backed securities. Miami-based Rialto is one of the largest in the business, designated to oversee more than $90 billion worth of CMBS loans, according to its website. High interest rates and a growing number of struggling office properties have made special servicers even more prominent. Earlier this year, a greater share of CMBS loans were in special servicing than at any time other than during the Covid-19 pandemic or the aftermath of the 2008 financial crisis.

In April, investor Carl Icahn won a skirmish in a long-running suit targeting the servicer of a struggling Nevada outlet mall, and last year, special servicer Midland Loan Services Inc. enraged bondholders with a surprise decision to at least temporarily hold back $164 million of the money they were owed.