On June 23, 2020, the New York County Supreme Court (Commercial Division) issued a preliminary injunction temporarily halting the UCC foreclosure sale of the Mark Hotel on New York's Upper East Side (D2 Mark LLC v. Orei VI Investments LLC, (2020)). The decision may be the first time that a preliminary injunction preventing a UCC foreclosure sale in New York has been granted in connection with a mezzanine loan. Preliminary injunctions are more common in connection with foreclosures on cooperative shareholder interests. The court was persuaded by the mezzanine borrower's contentions that the procedures for the foreclosure sale were not commercially reasonable for reasons including conditions caused by the COVID-19 pandemic.

On March 27, 2020, the Mark Hotel suffered significant financial hardship when it was forced to temporarily close its doors as a result of the COVID-19 pandemic. Retail tenants on the property failed to pay over $1 million in rent. The borrower, D2 Mark LLC, missed payments on a senior mortgage loan of $230 million, causing a cross-default of a $35 million mezzanine loan from defendant Orei VI Investments LLC (mezzanine lender).

On March 20, 2020, Governor Cuomo issued Executive Order 202.8 barring residential and commercial foreclosures for a period of 90 days. The executive order expired on June 20, 2020 and was replaced by Executive Order 202.28, which extended these protections for a further 60 days, through August 20, 2020. All parties agreed that these executive orders prevented the senior mortgagee from initiating any mortgage foreclosure proceedings until August 20, 2020.

The borrower and the mezzanine lender engaged in forbearance negotiations. However, in the midst of finalizing the negotiations, and apparently without any warning to the borrower, the mezzanine lender gave notice of the UCC foreclosure sale of the borrower's only asset, a 100% interest in the entity that owns the Mark Hotel (the collateral).

UCC foreclosure sales are governed by Section 9-610 of New York's Uniform Commercial Code, which requires that all aspects of the sale or disposition of collateral be commercially reasonable.

The mezzanine lender hired a consultant to conduct the sale process, including contacting and pre-qualifying potential bidders. The notice of sale scheduled the foreclosure sale for June 24, 2020, 36 days from when the notice of sale was given, and precluded the borrower from bidding at auction. Of 115 entities signing non-disclosure agreements reflecting an interest in bidding, only two pre-qualified by submitting financial statements.

On June 6, 2020, the borrower brought suit:

On June 8, 2020, 15 days before the sale date:

On June 15, 2020, eight days before the sale date, the hotel re-opened, allowing bidders the opportunity to visit the premises.

In allowing the borrower's motion, the court held that the borrower had met all the requirements for the issuance of a preliminary injunction by establishing:

New York's commercial bar will likely keep a close eye on the progress of this and related matters.

The Mark Hotel case may mark the first time that a New York court has issued a preliminary injunction halting a UCC foreclosure sale in connection with a mezzanine loan. Unusually, the borrower was successful in establishing that it would suffer irreparable harm if the foreclosure sale was allowed to proceed. Showing irreparable harm is traditionally the biggest hurdle in obtaining preliminary injunctive relief for commercial parties (for whom damages are typically an adequate remedy). The court was persuaded by the terms of the parties' loan agreement, which provided that the only remedy available to the borrower was injunctive relief, and not monetary damages. Loan documents often provide that a borrower cannot seek damages if the lender acts unreasonably, but that the borrower must instead seek injunctive relief. Since the lender must act reasonably in a foreclosure sale, but no damages remedy is available if the lender fails to act reasonably, injunctive relief is the borrower's only protection.

The court did not address whether Governor Cuomo's executive orders barred the foreclosure; however, a previous Supreme Court decision held that they do not prohibit non-judicial UCC foreclosures (see Legal Update, Dechert: Mezzanine Foreclosure in the Time of Coronavirus: The Final Chapter). The court was, however, influenced by the executive orders and noted that the delay in the sale was in the spirit of New York City's planned reopening, and, given the uncertainty of transportation within the City, required the mezzanine lender's revised notice of sale to specifically advise bidders that they may participate virtually.

While not specifically citing the Mark Hotel case in Shelbourne BRF LLC v. SR 677 BWAY LLC, Index No. 652971/2020 (Sup. Ct. NY Co.), another Commercial Division judge recently applied similar reasoning in issuing an injunction to delay a UCC foreclosure sale by a mezzanine lender of the borrowers' LLC interests in two real property holding companies. In Shelbourne, the court similarly considered the limited remedies available to the borrowers and the sale and market conditions impacted by COVID-19 in deciding to issue the injunction in favor of the borrowers. The court also looked to a recent administrative judge order that prohibited residential and commercial foreclosure sales until after October 15, 2020.

Parties seeking to use the UCC foreclosure sale process should re-evaluate measures previously seen as commercially reasonable in light of business closure orders and other health measures that hinder potential bidders from performing due diligence and participating in the auction.

For a collection of resources related to the global coronavirus and general crisis management guidance in real estate and construction matters, see Real Estate Global Coronavirus Toolkit.