During the past few months several New York cases involving UCC sales of equity pledged to secure mezzanine loans have underscored whether the concept of commercial reasonableness may apply differently during the COVID-19 pandemic. A typical mezzanine real estate loan structure involves a loan made to a mezzanine borrower that owns all of the equity interests in a special purposes entity (often a limited liability company) that in turn owns a commercial real estate property. The mezzanine borrower pledges its equity interest in the property owner as collateral to secure the mezzanine loan. When a default arises under the mezzanine loan the lender may seek to sell its collateral under the UCC, provided, however, that every aspect of a disposition of collateral, including the method, manner, time and place and other terms of sale must be commercially reasonable. See N.Y. U.C.C. §9-610(b)
Executive Orders Barring Residential and Commercial Foreclosures
Pursuant to a number of executive orders, New York state barred residential and commercial foreclosures for an initial period of 90 days to June 20, 2020 and subsequently extended that time period to Jan. 1, 2021 (the Executive Orders). These Executive Orders, however, did not expressly bar UCC sales of collateral but the rationale for such orders was considered and/or implicitly adopted by courts in connection with UCC sales.
