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One of These Things Isn’t Like the Other: New York State Court Upholds Commercial Reasonability of Mezzanine Sale – Real Estate & Construction


United States: One of These Things Isn’t Like the Other: New York State Court Upholds Commercial Reasonability of Mezzanine Sale

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On November 10, 2021, the owner of State Street Financial Center in Boston, Massachusetts, defaulted on its debt, consisting of a mortgage in the amount of $535,000,000 and three mezzanine loans totaling $350,000. $000. The day after the loans defaulted, the second mezzanine lender (the “defendant”) sent a notice of sale of the collateral securing its loan, which was a pledge of the interests in an indirect owner of the property (the “plaintiff”). ), and the sale was then scheduled for December 20, 2021. The third mezzanine lender also scheduled a mezzanine sale for December 21, 2021. Plaintiff filed a petition in the New York State Supreme Court seeking to stay the foreclosure, arguing that the mezzanine sale was not commercially reasonable and that she would suffer irreparable harm if the mezzanine foreclosure proceeds as she would lose her property and the monetary damages would not be insufficient. 1

New York Uniform Commercial Code Section 9-627(b) states that “[a] the disposition of the warranty is made in a commercially reasonable manner if the disposition is made. . . in accordance with reasonable commercial usage among dealers of the type of goods being disposed of. »2 The plaintiff argued that the defendant failed to meet this standard because, among other things, (1) the timing was complicated by Christmas and New Years, resulting in lower attendance and chilled auctions during the foreclosure sale, and (2) the defendant was aiming to “rush” the sale to take place one day before the most junior mezzanine lender’s scheduled sale and that it would create confusion for bidders.3 The court quickly ruled on the vacation argument, pointing out that the notices were made public on November 11, 2021 and stating that “[t]The mere fact that the actual sale takes place a few days before a holiday and may interfere with an overall extended holiday period does not mean that the sale is commercially unreasonable in law….[D]detailed information on vacation habits, flight availability and reduced working hours does not affect notices sent in early November. Arguing otherwise would virtually eliminate most of the year as appropriate for planning a sale…”4 The court also rejected plaintiff’s argument that the foreclosure of the most junior mezzanine lender scheduled for the day after the defendant’s sale would confuse bidders because, for example, they might assume that the notice of defendant’s sale was only a recall. of the sale by the other lender. The court noted the sophistication of the parties involved, noting that “only a knowledgeable bidder would be interested in such an expensive property”, that such bidders would be “extremely well advised” and that it was “difficult to imagine a knowledgeable bidder. ..could make such basic and easily verifiable mistakes.”5

After discussion of the commercial reasonableness of the sale, the court shifted gears and considered plaintiff’s argument that he would suffer irreparable harm if defendant proceeded with foreclosure because foreclosure “would result in loss of property which cannot be replaced by any pecuniary damage.”6 The notice detailed the differences between owning and operating real estate and owning an equity interest in another entity and the fact that a mezzanine loan is secured by a pledge of equity rather than a mortgage on properties. The court went on to state unequivocally that an entity that has an equity interest in the owner of real estate does not own real estate, noting that “[t]there are no cases that argue that the ownership interest in such an entity is equivalent to an ownership interest in real property sufficient to make the interest unique and thereby entitle the party to a injunction.”seven

In this case, the court understood the fundamental differences between mortgages and mezzanine loans and maintained the status quo regarding the foreclosure of mezzanine loans. Mezzanine lenders who make large loans to sophisticated parties should be particularly pleased with this decision given that this case involved a large and well-known property and the court placed great weight on the sophistication of the parties in determining whether or not not the foreclosure notice the sale was commercially reasonable.

There have been a number of decisions in recent years regarding mezzanine execution and the borrower’s efforts to thwart the lender’s exercise of remedies. Suffice it to say that while there have been some delays due to COVID, the courts have been very “commercial” in upholding the lender’s rights and remedies. We will continue to monitor this area and provide updates as they arise.


Lincoln St. Mezz II LLC vs. One Lincoln Mezz 2 LLCIndex No. 530492/2021 (NY Sup. Ct., December 8, 2021).

2. UCC § 9-627(b).

Lincoln St. Mezz II LLCIndex n° 530492/2021 to 2.

Lincoln St. Mezz II LLCIndex n° 530492/2021 to 4.

Identifier. at 3.

Identifier. at 5.


The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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