Moritt Hock & Hamroff recently reported on the impact of the COVID-19 pandemic onUniform Commercial Code (“UCC”) Article 9 sales.  Now, a second significant decision on this issue has been published.  While our last alert concerned whether Article 9 sales may proceed in light of Governor Andrew Cuomo’s Executive Order precluding foreclosures (and reported a decision holding such Article 9 sales may proceed), this latest decision addresses the Article 9 “commercial reasonableness” standard in the present environment, holding that the sale terms  established by the lender in question were  not reasonable and staying the sale for at least thirty (30) days.

Under the Uniform Commercial Code (“UCC”), “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” See N.Y. U.C.C. § 9-610(b).  This raises the question of what is “commercially reasonable” in the COVID-19 environment?  In a  decision issued on June 23, 2020 in the case of D2 Mark LLC v. OREI VI Investments, LLC, Index No. 652259/2020, Justice Andrea Masley of Commercial Division of the New York State Supreme Court in Manhattan held that a sale scheduled  on only thirty-six (36) days’ notice, requiring   the winning bidder to make a non-refundable deposit of 10% of the purchase price, pay the remainder within 24 hours, and preventing the borrower from  bidding, was commercially unreasonable – particularly in light of the present COVID-19 pandemic.

The loan at issue is a mezzanine loan secured by membership interests in an entity that owns the Mark Hotel located at Madison Avenue and East 77^th Street.  There are two loans on the property – a $230 million senior loan, and the $35 million mezzanine loan at issue.   In light of the COVID-19 pandemic and the shuttering of New York City, the borrower was late on a single payment on the mezzanine loan (the payment due in May 2020), and failed to make two payments on the senior loan (April and May 2020), which resulted in a cross default under the mezzanine loan.  As a result of the late and missed payments, the lender declared an Event of Default and scheduled a UCC Article 9 sale.

The borrower alleged that the property was worth upwards of $600 million — well in excess of the senior and mezzanine loans combined — and that the mezzanine lender was using the COVID-19 pandemic, and the unreasonable auction sale procedures it utilized, to buy the property on the cheap.  The Article 9 sale procedures in question included:

• Only 36 days’ notice – the sale notice was issued May 18, 2020, and the sale was to proceed June 24, 2020. The borrower alleged that generally auctions are done on 60-90 days’ notice.
• Requiring the winning bidder to pay a non-refundable deposit of 10% of the purchase price.
• Requiring the winning bidder to pay the remaining amount of the purchase price within 24 hours of the end of the auction.
• Prohibiting the borrower from bidding (although this restriction was lifted June 8, 2020).
• Prohibiting any potentially interested party from communicating with the borrower.
• Not making sufficient accommodations regarding the actual auction in light of COVID-19 (including potentially having the auction live at the lender’s attorneys’ offices).
• Effectively precluding any potentially interested party from visiting the hotel until June 15, 2020, when the Mark Hotel was allowed to re-open.
• Allowing the lender to “credit bid,” or bid the amount of the outstanding loan plus interest and costs, before or after third party bidding closed.

The Court agreed these terms were commercially unreasonable.  Indeed, the Court noted that there were only two bidders that proceeded to the stage where they were required to provide financials.  The Court therefore ordered that the June 24, 2020 auction must be canceled, that the sale be must re-noticed, that the auction cannot proceed for at least thirty (30) days, and that bidders must have the option of participating virtually.

This decision highlights the importance of insuring that Article 9 sales are commercially reasonable, particularly in the present COVID-19 environment.  Moritt Hock & Hamroff’s creditors rights’ team continues to follow the courts’ diverging views on navigating foreclosures in New York and how to best satisfy the commercial reasonableness requirement under the facts and circumstances of each particular situation.

Key Takeaways:

• In the COVID-19 environment, there will likely be a number of defaults under mezzanine financing agreements.
• If you plan to notice an Event of Default and schedule an Article 9 sale, you need to insure that the terms of the sale are “commercially reasonable.”
• Court are likely to be more stringent regarding the commercial reasonableness requirement in the present COVID-19 environment.
• To insure that the sale is deemed commercially reasonable, some measures to take include (i) insuring there is enough time between the notice of the sale and the actual auction; (ii) insuring the auction notice is published in a manner intended to reach as  many potential bidders as possible; (iii) insuring the bidders have either access to the property or where that is not feasible, reasonable data on the property and its condition; (iv) insuring that the financial terms of the auction are not onerous; (v) insuring that the borrower is not precluded from bidding; and (vi) insuring that bidders may participate virtually.

About the authors:

Marc L. Hamroff

Marc L. Hamroff joined the firm in 1983 and became a name partner in 1989.  He currently serves as the firm's Managing Partner.

Mr. Hamroff Chairs the firm's Financial Services Practice which includes the Bankruptcy, Equipment Leasing, Secured Lending, Distressed Assets and Creditors' Rights Groups.  He provides special concentration in litigation, workout and bankruptcy matters nationwide.  The firm has represented official and unofficial groups and committees of lessors and lenders in complex workouts both in and out of Chapter 11 cases including the representation of the bank group in connection with a failed national vehicle lessor.  By example, Mr. Hamroff represented a multi-national asset based lender in the successful equity participation following a structured bid to acquire a biotechnology company in a highly contested Delaware Chapter 11 case and has headed up the restructure, turnaround and bankruptcy exit strategy for various healthcare workouts including DIP lending, cash collateral structures and asset sales of assisted living facilities, nursing homes and regional hospitals.

In his capacity as head of the Financial Services Group, he has spearheaded the representation of secured lenders, banks and lessors in a wide range of transactions.  These include the closing of asset based and healthcare lending transactions, the formation of a captive finance companies, the creation of the core loan and finance documentation packages, the purchase and sale of loan and lease portfolios including the entire commercial finance portfolio of a wholly owned subsidiary of a public company, and preparation of funding and dealer finance transactions.

Mr. Hamroff led the team in confirming the Plan in the Chapter 11 cases of Dial-A-Mattress and 1 800 Mattress.com which provided for the successful sale of the companies' assets to Sleepys pursuant to Section 363 of the Bankruptcy Code. 

In one of the first Chapter 11 cases ever filed in New York by a timeshare resort, Mr. Hamroff successfully represented the mortgage lender in the widely publicized Chapter 11 case of In re Gurneys Inn Resort & Spa, Ltd, 215 B.R. 659 (Bankr. E.D.N.Y. 1997).

Mr. Hamroff works closely with the firm's Litigation Group and actively handles a wide variety of commercial litigation cases including injunction and attachment proceedings, construction litigation, business divorce/separation cases and restrictive covenant disputes.  

Mr. Hamroff regularly provides educational and strategic seminars on a multitude of issues affecting the leasing and secured lending community.

He led a web based seminar for the Equipment Leasing Association, entitled "What Are You Financing?" focusing on bundled financing techniques and financing balance sheet driven collateral.  He publishes the firm's Financial Services Alert Newsletter, and is a regular contributor to the firm's Secured Financing blog.         

Mr. Hamroff also serves as an adjunct professor of law at Hofstra University School of Law where he has been teaching Secured Transactions: UCC Article 9 and related matters for the past 10 years

Mr. Hamroff is admitted to practice in New York.

Danielle J. Marlow

Danielle J. Marlow is a partner in the firm's Litigation Practice Group. 

Ms. Marlow has over 23 years of experience, and has litigated extensively in both state and Federal courts throughout the country, and before the American Arbitration Association.  She has represented both plaintiffs and defendants.  On the plaintiff’s side, Ms. Marlow has successfully obtained settlements totaling hundreds of millions of dollars, and on the defendant’s side, she has obtained dismissal and summary judgment of numerous claims.

Ms. Marlow's particular practice areas include class actions, financial services and securities litigation, employment litigation, estate litigation, real estate litigation, breach of fiduciary duty and derivative claims, shareholder and partnership disputes, antitrust, breach of contract, business torts, false advertising, claims for unfair competition and misappropriation of trade secrets, and qui tam or “whistleblower” litigation.

Ms. Marlow has litigated numerous claims arising out of investments in securities, hedge funds, and other investment vehicles.  She has also litigated numerous business disputes, claims for breach of contract, restrictive covenant claims, real estate and lease disputes, disputes between members of limited liability companies and partnerships, and dissolution proceedings.  With respect to class actions, she has both prosecuted and defended against class actions, and is well versed in the Class Action Fairness Act, the requirements of class certification, fact and expert discovery related to class actions, and class action settlements.

Ms. Marlow is admitted to practice in New York as well as before the United States District Courts for the Eastern and Southern Districts of New York.