Going Green – February 2022 – New developments in mezzanine foreclosures | Cadwalader, Wickersham & Taft LLP

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The Supreme Court of the State of New York, County of New York (the “Court”) has decided in Atlas Brookview Mezzanine LLC v DB Brookview LLCon November 18, 2021, that a housing pledge contracted as part of a mortgage loan did not “obstruct” the borrower’s right of redemption.

In order to avoid delays in mortgage foreclosure proceedings, many lenders have recently required, in addition to the borrower granting a mortgage on the property, that the sole owner of that borrower commits 100% of his interest in the property. borrower as additional security. for a mortgage loan. This arrangement is usually structured by requiring the borrower’s sole member to enter into a collateral agreement secured by a pledge and surety agreement, and is often referred to as a “housing” pledge. Housing pledge gives the lender the option to seize the pledged interests through a UCC foreclosure sale (which can usually be completed within 60-90 days) instead of initiating foreclosure proceedings mortgage (which in some jurisdictions can take more than two years to complete).

Despite the increased use of the housing pledge structure by lenders, many legal practitioners remained uncertain whether such a structure could be enforced under New York law. Primarily, legal practitioners have debated whether a housing pledge (and the lender’s right to seize such a pledge) would be unenforceable because it obstructed (or prevented) a borrower’s right of redemption. The right of redemption is a fair doctrine that allows a borrower to pay the full amount owed to the lender, including principal, interest and fees, to “redeem” the mortgaged property. The redemption right generally cannot be waived, waived or compromised until a default occurs. Under New York law, the right of redemption exists until the property sells in a mortgage foreclosure sale. Once the foreclosure sale is final, however, the borrower no longer has the right to redemption.

Although previous lawsuits have been filed in New York State by borrowers claiming that a UCC foreclosure sale based on a housing pledge violates the borrower’s equitable right of redemption (see HH Mark Twain LP v Acres Capital Servicing LLC[1], for example), until the Court’s decision in Atlas Brookview Mezzanine LLC v DB Brookview LLCthe New York courts have not directly ruled on whether a pledge of housing interferes with the borrower’s right of redemption.

context

Atlas Brookview LLC (“Borrower”) has acquired a mortgage loan in the amount of $64,900,000 secured by real estate located in the State of Illinois (the “Loan”). The loan documents entered into under the loan (other than the mortgage) were governed by New York law. The original lender required, as additional security for the loan, that the borrower’s sole owner, Atlas Brookfield Mezzanine LLC, execute security secured by a pledge and security agreement whereby it pledged 100% of its stake in the borrower. The Loan was then assigned by the Original Lender to DB Brookview LLC (“Lender”).

The borrower defaulted on the loan and the lender elected to foreclose on the housing pledge, and a UCC foreclosure sale was originally scheduled for August 25, 2020. The borrower then filed suit asking the court to grant a temporary restraining order and a preliminary injunction to stop the UCC Foreclosure Sale, arguing that the housing pledge violated the borrower’s equitable right of redemption.

The Court granted the temporary restraining order restraining the lender from proceeding with the UCC Foreclosure Sale before the expiry of the due date (that is to say, October 9, 2020), but did not grant the preliminary injunction, noting that the accommodation pledge did not violate the borrower’s right of equitable redemption, as the borrower still had the right to cure the default and to redeem the property under the UCC. The borrower subsequently failed to repay the loan by the due date and a UCC foreclosure sale was completed in February 2021.

The borrower later asked the court for a declaratory judgment declaring the housing pledge to be “void” and asked the court to set aside the UCC foreclosure sale. The borrower argued that the housing pledge was unenforceable because it had the effect of obstructing the borrower’s right of equitable redemption by shortening the time the borrower would otherwise have to remedy the defects and redeem the property if the lender had instead sued for mortgage foreclosure. Notably, the borrower argued that an accommodation pledge would allow a lender to make a “quick” UCC sale in as little as 30 days. The lender in turn filed a motion to dismiss the borrower’s action.

Decision

The Court ultimately granted the lender’s motion to dismiss the borrower’s action, finding that the borrower was a commercially sophisticated borrower represented by counsel and had voluntarily agreed to the loan structure requiring the housing pledge as additional security, thus allowing the borrower to later claim that this housing pledge was “void” and unenforceable and would be inconsistent with the agreement between the parties. In support of its decision, and in response to the borrower’s argument that a UCC foreclosure sale was a quick UCC sale preventing the borrower from exercising its equitable right of redemption, the Court noted that, in this case, the UCC sale was not a “30 day sale” as notice of default, as well as the notice of disposal[2]were sent to the borrower months before the due date and scheduled UCC foreclosure sale and that the borrower could have repaid the loan at any time prior to the UCC foreclosure sale.

The borrower has filed a notice of appeal in this matter.

This decision reassures many lenders who have structured their mortgages with housing pledges as additional security. Although this case specifically states that there was no “lock-up” in the borrower’s redemption rights, the Court again focuses on the fact that sophisticated parties, represented by sophisticated lawyers, concluded a business transaction that the Court was loath to void. New York is historically a very commercial jurisdiction, and there are many cases that repeatedly argue that sophisticated parties represented by sophisticated attorneys will be held to the terms of the documents they have entered into. While in this case the result was not favorable to the borrower, it does support the general principle that the election of New York for governing law is preferable because the courts will generally apply the documents as they are. written.

In the interest of full disclosure, Cadwalader has represented the Borrower in this litigation.

We will continue to monitor these and other bills of interest and provide updates as needed.

[1] HH Mark Twain LP v Acres Capital Servicing LLC, Index No. 656280/2019, 2020 NY Misc. LEXIS 2515 (NY Sup. Ct. June 2, 2020). Note: in HH Mark Twain LP v Acres Capital Servicing LLC, the court did not rule on the borrower’s claim that the lender had unlawfully “obstructed” the borrower’s right to equitable redemption, but instead decided to deny the borrower’s request for a preliminary injunction of the UCC foreclosure sale because the court found that the borrower had failed to prove that he would suffer irreparable harm absent the preliminary injunction.

[2] The notice of disposition describes the debtor, the secured creditor and the collateral to be disposed of; indicates the method of disposition and that the debtor is entitled to an accounting of unpaid obligations at a stated fee; and indicates the time and place of a public sale or the time after which any other disposal is to be made.

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