Biz Brief: What is “Commercially Reasonable” During a Pandemic?

On June 23, 2020, the Supreme Court of New York enjoined a secured creditor from foreclosing on its security interest.  In D2 Mark LLC v. OREI VI Investments LLC, the creditor was attempting to conduct a foreclosure sale on the debtor’s membership interest in the Mark Hotel (a landmark property in Manhattan), after the debtor admitted that it defaulted on its payment obligations to the creditor.

The creditor engaged a broker (which had significant experience with hotel financing, sales and foreclosure sales) to assist with the sale. Through the broker’s efforts, over 700 potential bidders were contacted, and a virtual data room for diligence was created.  However, the court granted the debtor’s motion and issued an injunction preventing the foreclosure sale.  The court held that the debtor sufficiently demonstrated that the proposed foreclosure sale was not reasonable.

The court explained that under Article 9 of the UCC, “every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” (UCC§9-610[b]) The court reasoned that what may be reasonable during normal times may not be reasonable during a pandemic, such as: precluding the debtor from bidding; limiting contact between bidders and the debtor; a mere 36 days between the notice and the proposed sale date; and not accommodating for New York City’s stay at home orders which deprived interested bidders from making on-site inspections.  As a result, the court granted the injunction for 30 days, and instructed the creditor to re-notice the sale.

It is interesting to see how the courts are attempting to balance the rights of the parties during the COVID-19 pandemic.  Last month we prepared a Biz Brief on in In re Hitz Restaurant, where the court required the tenant (restaurant) to pay 25% of its rent to the landlord (creditor), because even with the various shutdown orders, the tenant was admittedly able to use about 25% of its restaurant.  It appears that the courts are trying their best to find a reasonable balance during these unprecedented times.