What is a UCC foreclosure sale of an ownership interest in New York?

This page explains New York law. Mezzanine and other equity-secured loans are not secured by a mortgage on the building; they are secured by a pledge of the ownership interests in the company that owns it. Article 9 applies to any transaction that creates a security interest in personal property by contract (UCC 9-109(a)(1)), so when the loan defaults, the lender can sell those interests without a lawsuit and, in effect, take control of the building. KOR Law LLP's debtor and creditor practice represents sponsors, guarantors and lenders in these sales.

How is it different from a mortgage foreclosure?

Because the building itself is not sold, its mortgage stays in place, and the buyer of the interests takes over a company that still owes the mortgage lender. For the mortgage side of a default, see what happens after a lender declares a commercial loan in default in New York.

How does the sale work, step by step?

1. Default. After default, the secured party has the rights in Part 6 of Article 9 and those in the loan agreement, except where Article 9 forbids varying them (UCC 9-601(a), 9-602).
2. Notification. The secured party sends a signed notification of disposition to the debtor, any secondary obligor such as a guarantor, and, for collateral other than consumer goods, other secured parties and lienholders that qualify under the statute (UCC 9-611(b), (c)).
3. Contents. The notice must describe the debtor, the secured party and the collateral, state the method of disposition, say the debtor is entitled to an accounting and any charge for it, and give the time and place of a public sale or the time after which a private sale will happen (UCC 9-613(a)(1)).
4. Timing. In a non-consumer transaction, a notice sent after default and at least 10 days before the earliest disposition date in it is timely (UCC 9-612(b)). Otherwise, whether notice was reasonable is a question of fact (UCC 9-612(a)).
5. The sale. The secured party may sell by public or private proceedings, as a unit or in parcels, at any time and place and on any terms, so long as every aspect is commercially reasonable (UCC 9-610(b)).
6. Proceeds. Cash proceeds go first to reasonable expenses of the sale and, where the agreement provides, reasonable attorney's fees, then to the secured debt, then to qualifying subordinate liens (UCC 9-615(a)). Any surplus goes to the debtor, and the obligor is liable for any deficiency (UCC 9-615(d)).

What makes a sale "commercially reasonable"?

The statute does not define it with a checklist, but it gives several anchors:

• A sale in the usual manner on a recognized market, at the current price in a recognized market, or otherwise in conformity with reasonable commercial practices among dealers in that type of property is commercially reasonable (UCC 9-627(b)).
• The fact that a higher price could have been obtained at a different time or by a different method is not, by itself, enough to make the sale unreasonable (UCC 9-627(a)).
• A sale approved in a judicial proceeding, by a bona fide creditors' committee, by a representative of creditors or by an assignee for the benefit of creditors is commercially reasonable, but approval is not required (UCC 9-627(c), (d)).

Disputes therefore tend to focus on the practical details: how widely the sale was marketed, how much time bidders had to investigate the building and its debt, what information and access they were given, what conditions the bidders had to meet, and whether the terms favored a lender credit bid.

Can the rules be waived in the loan documents?

Many of them cannot. A debtor or obligor may not waive or vary the commercial reasonableness requirement, the notification and content rules, the surplus and deficiency rules, the redemption right, or the remedies for noncompliance (UCC 9-602(e), (g), (h), (k), (m)). The exceptions are narrow: the right to notification of disposition and, outside consumer-goods transactions, the right to redeem can be waived only by an agreement entered into and authenticated after default (UCC 9-624(a), (c)). That is why forbearance and workout agreements signed after a default deserve a close read; see what you give up when you sign a forbearance agreement in New York.

How do you challenge or stop a sale?

• Before the sale. If it is established that the secured party is not proceeding in accordance with Article 9, a court may order or restrain the disposition on appropriate terms (UCC 9-625(a)). The usual vehicle is a temporary restraining order and preliminary injunction (CPLR 6301), which requires an undertaking before a preliminary injunction is granted (CPLR 6312(b)). How quickly that relief can be sought is covered in how fast you can get a TRO or preliminary injunction in a New York business dispute. The firm's commercial litigation practice handles TROs and preliminary injunctions, as well as UCC disputes over secured transactions.
• Redeem. Tender all obligations secured by the collateral plus the reasonable expenses and attorney's fees in 9-615(a)(1), at any time before the secured party disposes of the collateral or enters into a contract to do so (UCC 9-623).
• After the sale. A person is liable for damages for any loss caused by a failure to comply with Article 9, including loss from the debtor's inability to obtain, or increased costs of, alternative financing (UCC 9-625(b)).
• On a deficiency claim. In a non-consumer case, once the debtor or a guarantor puts compliance in issue, the secured party must prove the sale complied. If it cannot, the deficiency is limited to the amount by which the debt, expenses and fees exceed the greater of the actual proceeds or what a complying sale would have brought, which is presumed to equal the debt unless the secured party proves otherwise (UCC 9-626(a)).
• Sales to insiders of the lender. If the buyer is the secured party, a related person or a secondary obligor and the price is significantly below the range a complying sale to an outsider would have brought, the deficiency or surplus is calculated on that hypothetical price (UCC 9-615(f)); the debtor bears the burden on that point (UCC 9-626(a)(5)).

What changes the answer?

• The pledge and loan documents. They define default and the lender's remedies, within the limits of UCC 9-602.
• Who received notice, and when. The debtor and any secondary obligor must be notified, and 10 days is the timeliness safe harbor in non-consumer deals (UCC 9-611(c), 9-612(b)).
• Public or private sale. The lender may buy at a private sale only for collateral customarily sold on a recognized market or with widely distributed price quotations (UCC 9-610(c)).
• Post-default waivers. Only an agreement authenticated after default can waive notice or redemption (UCC 9-624).
• Any intercreditor agreement. The mortgage lender and the mezzanine lender may have their own agreement that affects who can buy and on what terms; read it with the pledge.
• Guaranties. A guarantor is a secondary obligor entitled to notice (UCC 9-611(c)(2)), and its liability for any deficiency turns on the sale's compliance; see what defenses a personal guarantor has when a New York lender sues.

For example: a ten-day notice on a building's equity

Common mistakes

• Treating the notice as a formality. The clock to redeem or seek an injunction is often just over 10 days.
• Assuming the lender can buy at a private sale. Not unless the collateral is customarily sold on a recognized market or has widely distributed price quotations (UCC 9-610(c)).
• Signing a post-default waiver casually. It is one of the few ways notice and redemption rights can be given up (UCC 9-624).
• Arguing only that the price was low. A better price at another time or by another method is not enough on its own (UCC 9-627(a)); focus on the process.
• Guarantors staying silent. Compliance has to be placed in issue for the deficiency limits in 9-626 to apply.
• Ignoring the mortgage. The building's mortgage remains, and its lender has its own remedies.

What to do this week

1. Get the pledge agreement, the loan agreement, any guaranty and any intercreditor agreement you have. Lenders planning a sale can see where it fits in how a lender enforces a defaulted commercial loan in New York.
2. Read the notice of disposition and mark its date, the sale date, and the method of sale.
3. Request an accounting of the secured debt in a signed writing (UCC 9-210).
4. Collect evidence of value: recent appraisals, offers, rent rolls and the mortgage balance.
5. Decide quickly whether redemption, refinancing or court relief is realistic, and line up the funds or papers.
6. Speak with a lawyer before the sale date; the first meeting list is in what to bring to a first meeting about a loan dispute.

Frequently asked questions

Does the lender need a court order to sell pledged membership interests?

No. After default, a secured party may dispose of collateral without a lawsuit, though it may also use any available judicial procedure (UCC 9-601(a), 9-610(a)).

Can the lender keep the interests instead of selling them?

Only by following the acceptance rules: the debtor must consent in a record authenticated after default, or, for a full-satisfaction proposal, fail to object within 20 days (UCC 9-620(a), (c)).

Who gets notice besides the borrower?

Any secondary obligor, such as a guarantor, and, for non-consumer collateral, other secured parties or lienholders that qualify under the statute (UCC 9-611(c)).

What if the sale brings more than the debt?

The secured party must account to the debtor for the surplus and pay it over (UCC 9-615(d)(1)).

Is a UCC sale a voidable transfer?

A transfer that results from enforcing a security interest in compliance with Article 9, other than an acceptance of collateral in satisfaction of the debt, is not voidable under the constructive fraud provisions (Debtor and Creditor Law 277(e)(2)); see voidable transfers in New York.

How is a mezzanine sale different for the building's tenants?

The landlord entity stays the same; only its ownership changes. That is different from a mortgage foreclosure, where the property itself passes to a new owner through a court sale; see commercial or residential foreclosure: which protections apply.