UCC Foreclosure Commercially Reasonable

In a recent case[1], U.S. District Judge Edgardo Ramos ruled that a foreclosure sale governed by Article 9 of the New York Uniform Commercial Code (UCC)[2] was “commercially reasonable” when viewed as a whole, denying claims made by Ziel Feldman and HFZ Capital Group (collectively, “HFZ”) that the sale was commercially unreasonable and further clarifying this sometimes-murky standard for lenders looking to complete a UCC foreclosure.

Background

HFZ was the payment guarantor on four loans upon which a borrower defaulted during the pandemic. The lender, known as “CCO Condo,” initially attempted to foreclose but was halted by a New York state court’s finding that the planned foreclosure auction was commercially unreasonable. CCO Condo’s second attempt to foreclose was deemed reasonable despite HFZ’s further protests regarding the sale process and ultimate sale price.

With respect to the initial foreclosure sale process, the Court found the sale to be commercially unreasonable due to several factors, including that confusing marketing failed to indicate the true nature of the interests, the bidders could not bid on the four properties individually, and the deposit of $1 million required to qualify as a bidder and to attend the sale was unreasonably high, together with the additional $9 million deposit required from the winning bidder. The Court found that another UCC sale auction could be held if it was done in accordance with their Decision and the terms of the Pledge and Security Agreements governing the loans.

At the second foreclosure sale, CCO Condo clarified the nature of the interests referenced in its advertisements, allowed for bids on the four properties collectively or individually, and reduced the initial deposit by half, as well as reducing the winning bidder’s deposit to 5% of the winning bid. At the sale, CCO Condo submitted the winning credit bid of $65 million for interests in all four properties, which was insufficient to satisfy the entire principal balance of the loans.

Analysis

Sale Process

In support of its claim that the second sales process was commercially unreasonable, HFZ argued that the timing of the sale was improper because the notice period went through the winter holiday season and was in the middle of the pandemic. This argument was unpersuasive since the timeline matched the terms of the Pledge and Security Agreements (which specifically defined the timetables for a commercially reasonable sale) and in the rare cases notice dates have been found to be unreasonable, they have been literally within a day or two of a holiday. The Court also found no reason for a UCC sale, a nonjudicial proceeding, to be halted due to the pandemic.

HFZ also claimed the adjusted deposits were commercially unreasonable. However, the Court found the new deposits were reasonable requirements to ensure that interested parties could fulfill the conditions of closing. Additionally, neither HFZ nor any potential bidders objected to the deposit amount.

Regarding the sale process, HFZ did argue that a provision of the bidding procedures gave CCO Condo the ability to “leap frog” (supersede) any bidder and drive them away. However, this provision only allowed CCO Condo to designate themselves or others as a backup bidder, which did not enable them to “leap frog” the winning bid. If the winning bidder failed to close, the back-up bidder would then be obligated to execute a confirmation of sale and post a deposit. Therefore, the Court found this provision was not commercially unreasonable.

Sale Price

In terms of the sale price, HFZ alleged the price was not commercially reasonable. However, courts have consistently only treated a foreclosure sale as being commercially unreasonable when the price was so far below market that it “shocks the court’s conscience,” and the burden lies with the debtor (i.e., HFZ) to prove the inadequacy of the price. CCO Condo asserted that its credit bid was in line with the market’s valuation of the Properties at the time (during the pandemic before vaccines were widely available) and HFZ offered no evidence that the fair market value was dramatically higher than the final sale price. As a result, the Court could not conclude that the price bid made the foreclosure sale unreasonable.

Conclusion

Although what constitutes a “commercially reasonable” foreclosure sale governed by the UCC has been frequently open to question, and borrowers often attempt to delay sales by arguing that they were not conducted in a reasonable manner, this is another case where a court provided guidance on sale procedures that it would deem reasonable, and if these were followed, the court would refuse to grant borrowers or guarantors further relief. Lenders must continue to be wary of borrower or guarantor attempts to delay these sales, but with careful planning and reliance on prior precedents approved by the courts, lenders should be successful in ultimately getting these sales completed.

[1] CCO Condo Portfolio (AZ) Junior Mezzanine LLC v. Feldman et al., 21 Civ. 2508 (ER) (S.D.N.Y. 2024).

[2] U.C.C. §9-610(b).