New York Appellate Court Puts Huge Road Block In Way Of Borrowers Seeking To Enjoin UCC Article 9 Sales
Over the last year, since the onslaught of the COVID-19 pandemic, we have continued to report on how the courts have handled efforts by lenders to address pandemic-related defaults, including by means of Uniform Commercial Code (“UCC”) Article 9 sales, and borrowers’ efforts to enjoin and otherwise avoid such sales. (MHH May Blog, MHH June Blog and MHH November Blog) Our prior reports noted a change in the tide of the courts’ views of UCC Article 9 sales, from the more critical view expressed by some courts over the spring and summer of 2020, to a view of decreased leniency and increased sympathy for the plight of lenders expressed during the fall of 2020 and the winter of 2021.
The most recent pronouncement by the New York Appellate Division, First Department in the case of Shelbourne BRF LLC et al. v. SR 677 Bway LLC Case No. 2020-03604 now imposes an even more significant stumbling block in the path of borrowers seeking to delay or stop UCC Article 9 sales — by holding that under no circumstances can the threatened loss of equity interests securing mezzanine or other financing constitute irreparable harm. This effectively means that it will be difficult, if not impossible for borrowers to obtain a temporary restraining order enjoining a UCC Article 9 sale, as such borrowers will not be able to demonstrate irreparable harm – an essential prerequisite for obtaining injunctive relief.
As we previously reported, on August 3, 2020, Justice Schecter of the New York State Supreme Court, New York County Commercial Division, issued a decision in Shelbourne BRF LLC et al. v. SR 677 Bway LLC Index No. 652971/20, enjoining a lender from conducting a UCC Article 9 sale. In her decision, Justice Schecter held that: “Severe turmoil in the real estate market due to the pandemic makes the notion of a sale resulting in payment of fair market value highly uncertain” and “[b]ids will likely be discounted due to uncertainty about the continued length and severity of the pandemic.” As we noted, in October 2020, when the borrower again sought to enjoin the Article 9 sale, Justice Schecter reversed herself and denied the motion, noting the increased re-opening following the prior shutdowns and the fact that mezzanine foreclosures were proceeding.
Notwithstanding this reversal, the lender in Shelbourne appealed Justice Schecter’s prior August 2020 decision granting the injunction. The Appellate Division, First Department reversed, noting that the threatened loss of the equity interests that were the subject of the UCC Article 9 sale does not constitute irreparable harm, as the loss of the equity interests could be compensated by money damages:
As to the propriety of the preliminary injunction, we find that plaintiffs failed to demonstrate the requisite irreparable harm. Notwithstanding the existence of the COVID-19 pandemic, the feared loss of an investment can be compensated in money damages (see Broadway 500 W. Monroe Mezz II LLC v Transwestern Mezzanine Realty Partners II, LLC, 80 AD3d 483 (1st Dept 2011)
The cited Broadway 500 case makes clear that the threatened sale of equity interests in an entity holding real property, as opposed to the threatened sale of real property itself, does not constitute irreparable harm:
Since “[plaintiffs’] interest in the real estate is commercial, and the harm [they] fear is the loss of [their] investment, as opposed to loss of [their] home or a unique piece of property in which [they have] an unquantifiable interest,” they can be compensated by damages and therefore cannot demonstrate irreparable harm.
Broadway 500 W. Monroe Mezz II LLC, LLC, 80 AD3d 484. Put simply, these decisions make clear that a borrower seeking to enjoin the sale of equity interests securing mezzanine or similar financing may never be able to obtain injunctive relief because the borrower cannot show the required threat of irreparable harm.
Notwithstanding the foregoing, lenders still need to make sure that the terms of any such UCC Article 9 sale are “commercially reasonable” and otherwise appropriate, including because a borrower may still sue for damages for a sale deemed not “commercially reasonable” or otherwise proper. Such damages can consist of the difference between the price obtained for the equity interests and the proceeds that would have been obtained had the sale been conducted appropriately. But this decision certainly will create a road block in the way of efforts by borrowers to enjoin UCC Article 9 sales from proceeding.
- With the advent of increased re-opening following the introduction of COVID-19 vaccines and lower numbers of cases, more UCC Article 9 sales are proceeding.
- Courts are less and less willing to enjoin UCC Article 9 sales based upon allegations of COVID-19 hardships.
- Now, following the Shelbourne decision, borrowers will likely be unable to demonstrate irreparable harm based upon a threatened UCC Article 9 sale, which is a prerequisite to obtaining injunctive relief.
- But to avoid a potential claim for damages following the completion of a UCC Article 9 sale, lenders should make sure that the terms of such sale are “commercially reasonable,” including by providing adequate notice, publication, the ability to view the subject property virtually, and the option to participate in the auction virtually.
If you have any questions, please feel free to reach out to either Marc Hamroff at (516) 880-7231 or firstname.lastname@example.org or Danielle Marlow at (516) 880-7205 or email@example.com.