Mezzanine Lender Cannot Prevent Mortgage Lender From Foreclosing on Real Property

On February 14, 2022, Justice Andrew Borrok of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. 342 Prop. LLC, 2022 N.Y. Slip Op. 30488(U), holding that, absent a controlling clause in an intercreditor agreement, a mezzanine lender had no basis to contest the mortgage lender's right to foreclose on the real property securing the mortgage loan, explaining:

The Mezzanine Lender was structurally subordinate to the Mortgage Lender's position. In the absence of an intercreditor agreement (i.e., an agreement between the Mortgage Lender and the Mezzanine Lender) providing otherwise, the Mezzanine Lender simply has no basis to contest the Mortgage Lender's right to foreclose on the real property. This is the nature of holding the mezzanine position.

It does not matter that the borrower under the mezzanine loan documents may have violated the mezzanine loan documents by consenting to the foreclosure of the Mortgage. The Mortgage Lender is not a party to that agreement and the Mezzanine Lender does not aver that there is an intercreditor agreement preventing foreclosure [*3] by the Mortgage Lender.

Stated differently, although the Mezzanine Lender may have bargained for the right to pay off the Loan or conduct a UCC sale, the Mezzanine Lender did not bargain for the ability to prevent the Mortgage Lender from foreclosing on the real property. It only bargained for the rights set forth in the mezzanine band documents and the intercreditor agreement including its ability to pursue its recourse claims against the Borrower to the extent that the Borrower may be in breach of the mezzanine loan [**3] documents. This it may do.

The attorneys at Schlam Stone & Dolan frequently litigate commercial-lending and real-estate-finance disputes. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning your rights as a mortgage or mezzanine lender or as a commercial borrower.