By Dean Seal

Law360 (June 1, 2020, 3:50 PM EDT) -- A real estate investment trust in New York has agreed to drop its lawsuit accusing the Royal Bank of Canada of using the COVID-19 pandemic as an opportunity to illegally seize and sell off the trust's assets at fire-sale prices.

AG Mortgage Investment Trust Inc. indicated earlier this month that it was close to a settlement with the bank, and followed up in a letter to the U.S. District Judge Lorna G. Schofield last week saying an agreement had been reached. The New York federal judge filed an order Friday declaring the action dismissed.

"In consideration of the settlement reached among the parties, plaintiffs … hereby dismiss with prejudice all their claims in this action against defendants RBC (Barbados) Trading Bank Corporation and Royal Bank of Canada, with all parties to bear their own costs and attorneys' fees," the trust said in its own filing on Friday.

Neither the trust nor the bank responded to requests for comment on the terms of the settlement, which are not disclosed in court filings.

Two wholly owned subsidiaries of AG filed the suit back in March, days after the trust warned that it might not be able to satisfy the glut of margin calls it faced from lending banks like RBC as uncertainties about the coronavirus dent the market for mortgage-based assets.

In a lawsuit filed in Manhattan two days later, AG said RBC was the only major lender stubbornly refusing to cut the trust a break and that pushed forward with an auction of $11 million worth of AG's commercial mortgage-backed securities that, according to AG, were only seized because RBC marked down their value in ways that don't reflect reality.

The complaint alleged that RBC is one of many banks that have applied "opportunistic and unfounded" markdowns on mortgage-based assets in an attempt to trigger widespread margin calls on entities like AG. A margin call occurs when the value of a margin account — an investment account with assets bought with borrowed money — drops and a lender requires the borrower to either make up the difference with more collateral or have the asset seized.

This explosion in margin calls has brought the nation's mortgage-based REITs "to the brink of collapse," AG said, but most banks have stopped short of pushing the industry "into the abyss" and have agreed to hold back on taking action against those trusts' assets for the time being.

RBC is the lone exception, having pressed on with an effort to seize AG's commercial mortgage-backed securities, but it has done so with a margin call that's based on the bank's "entirely subjective and self-serving calculation" of the CMBS' market value, according to the suit. The terms of the repurchasing agreement between the parties that financed the CMBS mandate a means for assessing those values.

Using this allegedly bunk calculation, RBC moved forward with an auction of the trust's CMBS at 11 a.m. on the day the suit was filed, which AG feared would dramatically underprice the CMBS and set off a chain reaction of other banks being pressured to foreclose on the assets of other REITs, the suit said.

Hours after filing the suit, AG sought a temporary restraining order to halt the auction, but Judge Schofield said in an order that evening that she hadn't had a chance to review the case until after the auction had already commenced. A phone hearing on the matter was scheduled for the next morning.

An attorney for the trust said in a letter the next day that the parties had conferred on the matter and that, "based upon those discussions, [he] understands that there are no other auctions scheduled by defendants this week in respect of plaintiffs' securities."

"The parties are going to continue their discussions to see if we can avoid the need for burdening the court with any additional applications for emergency relief and therefore request that the court adjourn today's conference at 11:30 to early next week," attorney Jonathan E. Pickhardt said. "The parties will report to the court in the interim if we have been able to reach a consensual resolution."

Court records show that the two sides continued to confer outside of the courtroom, repeatedly had hearings pushed back and ultimately reached an agreement without ever having to meet before Judge Schofield.

AG is represented by Susheel Kirpalani, Jonathan Pickhardt, Rex Lee and Lindsay Weber of Quinn Emanuel Urquhart & Sullivan LLP.

RBC is represented by Maria Da Silva, Christopher P. Malloy and Scott D. Musoff of Skadden Arps Slate Meagher & Flom LLP.

The case is AG MIT CMO LLC et al. v. Royal Bank of Canada et al., case number 1:20-cv-02547, in the U.S. District Court for the Southern District of New York.

--Editing by Alanna Weissman.

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