The Mark Hotel Borrower Granted Injunction Delaying Mezzanine Lender's Foreclosure Sale

• Published date: 21 September 2020
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Melissa Hinkle , Christopher J. Dickson, Nathan M. Bull and Howard R. Hawkins, Jr.

The authors of this article discuss a recent preliminary injunction granted in favor of a borrower enjoining the mezzanine lender from proceeding with a Uniform Commercial Code foreclosure sale of the equity interests in The Mark Hotel.

The Supreme Court of the State of New York, County of New York: Commercial Division has issued a preliminary injunction in favor of the plaintiff D2Mark LLC (the "Borrower") enjoining the defendant, OREI VI Investments LLC (the "Mezzanine Lender") from proceeding with a Uniform Commercial Code ("UCC") foreclosure sale of the equity interests in The Mark Hotel for 30 days. The court found many of the terms of the sale to be not commercially reasonable, as required under the New York UCC, and the current COVID pandemic exacerbated the defects in the Mezzanine Lender's actions, resulting in the court granting the request for an injunction. As a result of this decision granting a borrower, and subjecting a lender to, an injunction on the sale of certain loan collateral, and notwithstanding the unique facts and circumstances of this particular case, a common loan document provision may require revision in order to avoid or mitigate against such risk of injunction.

BACKGROUND

The Mezzanine Lender is the holder of a non-recourse mezzanine loan in the amount of $35 million made to the Borrower (the "Loan"). To secure the Loan, the Borrower pledged to the Mezzanine Lender the Borrower's membership interest in D2 Mark Sub LLC (the "Collateral"), a subsidiary of the Borrower indirectly owning leasehold estates in The Mark Hotel, located on Madison Avenue and East 77th Street in New York City. Following certain monetary and material non-monetary events of default under the Loan,¹ the Mezzanine Lender gave notice to the Borrower on May 18, 2020, pursuant to the New York Uniform Commercial Code ("New York UCC"), of a sale of the Collateral to be held on June 24, 2020 (i.e., 36 days from the notice of sale).

On June 6, 2020, the Borrower sought an injunction to stay the auction until August 18 or 19, 2020, alleging, in part, that the sale process was not commercially reasonable and in particular, that certain executive orders in effect due to the pandemic were relevant, and should be considered by the court in this case. In determining whether or not to grant a preliminary injunction, the court applied the familiar three-part test that requires the movant to establish:

1. A likelihood of success on the merits of the action;
2. The danger of irreparable harm in...