Southern California Property Fight That Hit Several Banks Spurs $1.34B Award

A years-long dispute over a portfolio of commercial properties in Southern California that sparked credit concerns at several banks last year has led to a roughly $1.34 billion arbitration award.

Real estate owner Mohammad Honarkar was “fraudulently induced” into doing business with financier Mahender Makhijani, who breached part of their agreements when arranging financing for hotels, apartment complexes and other commercial real estate, the arbitrator, a retired state judge, concluded in a filing dated this month.

An attorney representing Makhijani didn’t immediately respond to a request for comment.

In separate lawsuits, banks including Western Alliance Bancorp and Zions Bancorp NA claimed that a tangled web of investors used some of the same properties to get multiple loans without full disclosure, leading the lenders to believe they had first-lien rights. That meant they expected to recover value from the properties ahead of other creditors in the event of liquidation, when in reality they couldn’t.

The discovery of the problem led the banks to disclose potential loan losses late last year. When Zions filed its lawsuit involving those properties last October, investors were spooked by the incident amid other credit hits spurred by the collapse of Tricolor Holdings and First Brands Group, which rattled the stock market at that time.

This month’s arbitration decision affirms what banks called fraud when explaining the troubled loans, but it remains unclear how much each company can recover from the loan losses. Some of those properties, including a hotel in the exclusive enclave of Laguna Beach, have been put under court receivership.

Zions has taken a $50 million credit loss for loans backed by some of these properties, and Western Alliance has said the investor group that used those properties to get loans owed it about $98 million.