New York County Supreme Court Determines a Sale Of Pledged Assets Under The UCC Is Not Barred By Executive Order Suspending Foreclosure Proceedings

By: Paul M. O’Brien, Esq.

In an action concerning a mezzanine lender and an LLC which pledged its membership interest in an entity owning real property, an auction upon default is permitted to go forward.

Background

Although a temporary restraining order initially prevented an Article 9 UCC foreclosure from proceeding, by Decision and Order dated May 18, 2020 New York County Supreme Court Justice Frank P. Nervo vacated the temporary restraining order, denied a request for a preliminary injunction and permitted a non-judicial foreclosure sale to proceed.

In 1248 Associates Mezz II LLC v. 12E48 Mezz II LLC (NY County Index No.: 651812/2020) the plaintiff commenced an action by filing an order to show cause, complaining of defendant’s efforts to proceed with a UCC foreclosure auction in the midst of COVID-19. The plaintiff cited Governor Cuomo’s Executive Order 202.8, which halted all non-essential construction in the state and suspended in-person gatherings, as a basis to postpone the scheduled sale of what amounted to plaintiff’s membership interest in a not-yet-completed Manhattan luxury tower. Defendant contended that it was entitled to proceed with a UCC foreclosure action because plaintiff did not substantially complete the project by December 31, 2019 – long before the global pandemic impacted the project’s progress.

Initially, the Court denied the plaintiff’s application for a temporary restraining order on the basis that “preliminary injunctive relief requested is encompassed by the [Executive Order].” But, defendant suggested that its UCC foreclosure was not subject to the Executive Order and informed plaintiff that it intended to proceed with the foreclosure sale. In response, the plaintiff re-filed its action and sought clarification from the court concerning whether the Executive Order 202.8 barred a non-judicial UCC foreclosure sale of pledged collateral.

Decision

Justice Nervo ultimately distinguished between the enforcement of a judicially ordered foreclosure and the sale of pledged assets under the UCC. Furthermore, Justice Nervo was not persuaded by plaintiff’s allegations that a foreclosure sale which mandates virtual participation or risky in-person attendance would result in irreparable harm to plaintiff. Deeming plaintiff’s damages speculative at best, Justice Nervo permitted the sale of collateral to proceed.

This decision, which appears to be one of first impression interpreting Governor Cuomo’s recent Executive Orders, highlights the court’s reluctance to advance expansive or novel interpretations of the Governor’s promulgations. Considering that the text of Executive Order 202.28 clarified the reach of Executive Order 202.8 as being only to a “residential or commercial mortgage, for non-payment”, the Court’s determination that the Executive Order did not suspend the UCC sale appropriately limited its application.

Conclusion

If you have any questions about how statewide Executive or Administrative orders might affect your rights or remedies, please contact Paul O’Brien at pobrien@frblaw.com or (212) 203 – 3255.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.