New York Commercial Reasonability Standards in UCC Mezzanine Foreclosure Sales During COVID-19 

January 19, 2021


The COVID-19 pandemic has brought with it a host of novel legal issues, and just as nature abhors a vacuum, the legal profession abhors a lack of precedent. A case in point relates to mezzanine loan foreclosure sales under the New York Uniform Commercial Code (UCC). Fortunately, New York courts have provided an initial answer as to whether these sales can proceed under the many executive orders issued by New York Governor Andrew Cuomo and have started to coalesce around standards for what might make these sales “commercially reasonable” in the age of COVID-19. This Alert will attempt to provide guidance on how to conduct such sales so that they are more likely to be considered commercially reasonable. 

Governor Cuomo’s Executive Orders

On March 20, 2020, Governor Cuomo issued Executive Order 202.8, which provided that “[t]here shall be no … foreclosure of any residential or commercial property for a period of ninety days.” This was extended pursuant to Executive Order 202.28 (issued on May 7, 2020), which stated “there shall be no initiation of a proceeding or enforcement of either an eviction of any residential or commercial tenant, for nonpayment of rent or a foreclosure of any residential or commercial mortgage, for nonpayment of such mortgage, owned or rented by someone that is eligible for unemployment insurance or benefits under state or federal law or otherwise facing financial hardship due to the COVID-19 pandemic for a period of sixty days beginning on June 20, 2020.” The moratorium on commercial mortgage foreclosure proceedings has since been extended through January 31, 2021, by Governor Cuomo’s Executive Order 202.81. 

The question of whether Governor Cuomo’s executive orders apply to mezzanine loan foreclosure sales under the UCC (which are not foreclosures of a direct interest in real estate, but of the equity interests in an entity that owns real estate) was answered by the Supreme Court, New York County in 1258 Assoc Mezz II LLC v. 12E48 Mezz II LLC.1 In a decision and order dated May 18, 2020, Justice Frank P. Nervo agreed that a mezzanine lender could proceed with a UCC foreclosure on the grounds that, “[w]hile the terms of Executive Order No. 202.8 prohibit foreclosure of any commercial property for a period of ninety days without limitation to mortgages, that provision addresses enforcement of a judicially ordered foreclosure. The sale of the pledged interests in this matter results from the parties’ agreement, as guided by the UCC.” In August, Justice Leon Ruchelsman of the Supreme Court, Kings County relied on this case in deciding 893 4th Ave. Lofts LLC v. 5AIF Nutmeg, LLC.2 The court reached a similar result under the language of Executive Order 202.28 and held that the mezzanine lender’s UCC foreclosure sale should not be stayed. 

With two decisions establishing that Governor Cuomo’s executive orders do not apply to UCC foreclosure sales of mezzanine loan interests because such sales are not judicially ordered foreclosures, the next major question that needed to be addressed concerns how — in the age of COVID-19 — such UCC foreclosure sales can be “commercially reasonable,” as required under the UCC. As one might expect, the “commercial reasonableness” standard looks and feels a bit different during a global pandemic.

Commercially Reasonable Sales 

Under UCC § 9-610(b), “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” New York courts have begun to provide guidance as to what may constitute a commercially reasonable UCC foreclosure sale of mezzanine loan interests during the current pandemic. 

In D2 Mark LLC v. OREI VI Invests., LLC,3 the Supreme Court, New York County enjoined a UCC foreclosure sale from moving forward because the terms of the proposed sale were commercially unreasonable. By decision and order dated June 23, 2020, the court found that, among other things: (i) 36 days’ notice for the sale was too short, as complex commercial assets typically require 60 to 90 days’ notice of sale, and interested bidders were deprived of an opportunity for inspection because the subject property was only permitted to be open for eight days prior to the sale per the then-existing executive orders; (ii) certain terms “rigged” the auction so that only the defendant could obtain the collateral; (iii) there was not robust interest in the sale because only two bidders were pre-qualified; and (iv) the sale advertisements were not clear whether the sale would be virtual or in person, which might cause potential bidders to avoid it due to COVID fears. The court stated that “what is reasonable during normal business times, may not be reasonable during a pandemic.” 

The court stayed the sale for 30 days from June 24, giving the market 30 additional days of notice and allowing time for a commercially reasonable sale to be effectuated. The court also provided other useful guidelines as to how the sale might be made commercially reasonable: the mezzanine lender was directed to “re-notice” the sale and inform the market of changes that might affect interest in bidding at the auction; the notice also had to “clearly state that bidders may participate virtually” to address fears about COVID, and the notice “must, at a minimum, comport with current CDC, state and local regulations.”

Additionally, the administrative order of the chief administrative judge of the courts issued on October 22, 2020 (AO/232/20), did not extend a moratorium on real property auctions set in place by administrative order AO/157/20, dated July 23, 2020. AO/232/20 provides that all auctions going forward must be conducted in accordance with the applicable judicial district foreclosure plan and rules, must “comply with UCS COVID-19 related protocols addressing social distancing, wearing of masks, and (if indoors) screening of attendees,” and requires foreclosure auction plans in New York City to “provide for the contingencies of both outdoor and indoor auctions.” 

Finally, in GVS Portfolio I B, LLC, v. Teachers Insurance Annuity Association of America,4 the Supreme Court, New York County enjoined a UCC mezzanine loan foreclosure sale, but required the parties to submit a stipulation concerning terms and notice of the sale. The parties were able to agree to all terms except for a date of sale. In an order dated October 23, 2020, the court ruled that the date of sale would take place on March 10, 2021 (the initial sale had been scheduled for September 3, 2020, via video conference). The court found this date appropriately balanced plaintiff’s position, which relied on consistent appraisals that a six-month marketing period was required, and considered the impact of COVID-19, but also recognized the principle that “defendant is entitled to dispose of collateral after a default in a commercially reasonable manner.” 

Takeaways & Conclusion 

As these cases and orders make clear, parties can institute UCC foreclosure proceedings on mezzanine loans during COVID-19 in New York, but what is commercially reasonable under the UCC in the age of COVID-19 is not business as usual. Accordingly, the following procedures are recommended to bolster commercial reasonability of mezzanine foreclosure sales under the UCC:

  • Any sale must allow for sufficient notice. While 60 to 90 days appears to be a reasonable amount of a time for a complex commercial real estate asset during the COVID-19 pandemic, the GVS Portfolio decision required nearly five months. 
  • The notice of sale should definitively indicate whether the sale will be virtual or in person. It cannot be ambiguous.
  • A sale process must provide for adequate time for viewing/inspection, given the relevant restrictions in place during the pandemic. This will require monitoring future executive orders that affect the closing of certain types of businesses or otherwise restrict the ability to view or inspect a property. 
  • All sales must comport with current CDC, state, and local regulations. All sales must also comply with the applicable judicial district foreclosure auction plan and any other rules. 
  • Pursuant to AO/232/20, any in-person foreclosure auction that fails to comply with social distancing, wearing of masks, and (if indoors) screening of attendees, must be postponed. Accordingly, any in-person/indoor foreclosure auction must strictly adhere to these guidelines. 
  • Pursuant to AO/232/20, New York City foreclosure auctions must provide for the contingencies of indoor and outdoor auctions. 

An important caveat and final note is that the COVID-19 pandemic is a situation in flux, with no clear indication of how the situation will worsen or improve in the future. It is possible that the situation could worsen to the point where courts find that a UCC sale would be per se commercially unreasonable. However, as it currently stands, New York courts have provided some guidance on how to conduct a commercially reasonable UCC foreclosure sale in the context of mezzanine loan foreclosures during COVID-19, and have made clear that the current mortgage foreclosure moratorium under Governor Cuomo’s executive orders does not apply to mezzanine loan foreclosure sales under the UCC.

1  No. 651812/2020 (Supreme Court of the State of New York, County of New York)
2  No. 511942/20 (Supreme Court of the State of New York, County of Kings)
3  Index No. 652259/2020 (Supreme Court of the State of New York, County of New York: Commercial Division)
4  Index No. 654095/2020 (Supreme Court of the State of New York, County of New York: Commercial Division)

Related Practices

If you have any questions about the issues raised in this alert, contact a member of Cozen O'Connor's Distress Real Estate Practice


This alert was published in Thompson Reuters Real Estate Finance Journal, Summer 2021.