The COVID-19 pandemic has resulted in significant financial distress for borrowers under commercial loan arrangements. Many borrowers have missed payments or otherwise defaulted on their loans, triggering the potential exercise of rights and remedies by secured creditors.
Non-judicial foreclosure, i.e., a Uniform Commercial Code (UCC) foreclosure sale, is the basic method under Article 9 of the UCC for a secured creditor to realize on personal property collateral securing its loans. A UCC foreclosure sale involves the secured creditor disposing of the collateral in a public sale (i.e., an auction), without judicial process. A key requirement of Article 9-610 in this context is that every aspect of the disposition, including the method, manner, time, place, and other terms, must be commercially reasonable.
Two recent New York court decisions bearing on UCC Article 9-610's commercial reasonableness requirement complicate secured creditors' ability to access their UCC foreclosure sale rights during the COVID-19 pandemic. Both of these decisions arose in the mezzanine real estate finance context. Such financings often involve structurally subordinate loans secured by equity interests (constituting collateral governed by UCC Article 9), which loans are placed at a level structurally above underlying real estate mortgage financings.
The first such decision involved an attempt by a lender to foreclose on equity interests securing a mezzanine loan made to The Mark Hotel in New York City, in a sale that had been scheduled for mid-June of 2020. In this case, the borrower succeeded in obtaining a preliminary injunction from the Commercial Division for New York County Supreme Court, temporarily prohibiting the lender's UCC foreclosure sale of the equity interests.1
The second such decision involved an attempt by a lender to foreclose on equity interests securing a mezzanine loan made to a commercial property in Albany, New York, known as 677 Broadway, in a sale that had been scheduled for mid-July of 2020. Similar to The Mark Hotel case, the borrower in the 677 Broadway case succeeded in obtaining a preliminary injunction from the Supreme Court of the State of New York, temporarily prohibiting the lender's UCC foreclosure sale of the equity interests.2
Both The Mark Hotel and 677 Broadway decisions effectively support the notion that a UCC foreclosure sale conducted during a pandemic may not be commercially reasonable. Although neither decision expressly clarifies what would make a UCC foreclosure sale during a pandemic commercially reasonable, both decisions nonetheless serve as notice to secured creditors to take special caution in exercising their UCC foreclosure sale rights during the pandemic.
1. D2 Mark LLC v OREI VI Invests., LLC, Index No. 652259/2020 (Supreme Court of the State of New York, County of New York: Commercial Division, June 23, 2020).
2. Shelbourne BRF LLC, Shelbourne 677 LLC v. SR 677 BWAY LLC, Index No. 652971/2020 (Supreme Court of the State of New York, August 3, 2020),
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