Prospective Loss of Equity Is No Basis to Enjoin a UCC Foreclosure, Appellate Division HoldsApril 9, 2021 – Herrick Restructuring Review
The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.
A First Department decision from last month makes it harder for mezzanine borrowers to enjoin UCC foreclosure sales.
When there is a default under mezzanine loan documents, the lenders can retake their collateral by noticing and conducting foreclosure sales under the UCC. But mezzanine borrowers can seek relief from a court to enjoin UCC foreclosure sales.
During the COVID-19 pandemic, some borrowers succeeded in preventing mezzanine lenders from exercising their rights to a prompt UCC sale by obtaining injunctive relief in New York courts. One example was in the supreme court decision appealed from in Shelbourne BRF LLC v. SR 677 Bway LLC, No. 2020-03604 (1st Dep’t Mar. 4, 2021). The supreme court granted plaintiff borrowers’ motion for a preliminary injunction and enjoined a UCC foreclosure sale of interests in LLCs.
But on appeal, the First Department found that the borrowers “failed to demonstrate the requisite irreparable harm” required for an injunction. This was because “[n]otwithstanding the existence of the COVID-19 pandemic, the feared loss of an investment can be compensated in money damages.” And so a prospective loss of equity is not enough to enjoin a UCC foreclosure.
This makes it harder for mezzanine borrowers to enjoin UCC foreclosure sales: a win for mezzanine lenders seeking to retake collateral.
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