Brooklyn Journal of Corporate, Financial & Commercial Law

First Page



Owners of commercial real estate frequently use mezzanine debt as an additional source of financing. In contrast to mortgage loans, which are secured by real property, the collateral for mezzanine real estate loans is the mezzanine borrower’s ownership interest in the entity that owns the property. This ownership interest is considered personal property, and thus foreclosure and disposition of the collateral is governed by the Uniform Commercial Code, which requires foreclosure sales to be “commercially reasonable.” During COVID-19, mortgage loan foreclosures were stayed in New York pursuant to executive order. Despite the fact that, in a practical sense, mezzanine loan foreclosures achieve substantially the same effect as mortgage loan foreclosures (in both situations, the lender can either take over the property or sell the collateral to satisfy the debt), the executive orders did not, on their face, restrict mezzanine foreclosures. As mezzanine creditors initiated foreclosure proceedings during the pandemic, and their defaulted debtors sought preliminary injunctions against foreclosure sales, courts were faced with two crucial questions. First, did the executive order prohibit mezzanine loan foreclosures? If not, how can a foreclosing lender conduct a commercially reasonable foreclosure sale during a pandemic? This Note proposes that while a moratorium on commercial mortgage loan foreclosures exists to protect borrowers that can demonstrate financial hardship due to the applicable emergency, a parallel moratorium should also protect mezzanine debtors facing the same financial hardships. If the mezzanine borrower cannot demonstrate that it has defaulted on its loan obligations because of the emergency, then its lender should be free to commence foreclosure proceedings. In such a case, courts should generally apply well-settled precedent to determine if a preliminary injunction is appropriate but must take the existing emergency into account when determining whether a proposed foreclosure sale is commercially reasonable.