Everything old is new again. As the pandemic’s impact on the real estate industry matures, lenders are becoming more reluctant to keep kicking the can down the proverbial road and are taking action to enforce their rights. The raft of litigation arising out of pandemic-induced foreclosure actions and diligence-intensive distressed deals are causing lenders and borrowers alike to carefully scrutinize their loan documentation. Methods of enforcement and potential defenses are critical.
Both mezzanine lenders contemplating foreclosure, and mezzanine borrowers considering their options, would be wise to be cognizant of and adapt their practices in response to recent New York Court decisions concerning the “commercial reasonableness” of Article 9 foreclosure sales of limited liability membership interests.
It is well known that Article 9 of the Uniform Commercial Code requires “every aspect of a disposition of collateral, including the method, manner, time, place, and other terms” to be “commercially reasonable.” U.C.C. §9-610(b). However, what is considered “commercially reasonable” has always been a litigated issue; it is, therefore, no surprise that it continues to be litigated during a worldwide pandemic. While no bright-line rule yet exists regarding what is or what is not commercially reasonable during a pandemic, New York courts have found shorter notice-to-sale time periods and in-person sales requirements to be unreasonable.