Foreclosures – Judicial and Non-Judicial

auction-300x206Some of our prior blog posts have dealt with foreclosure actions concerning real property.  A recent New York Supreme Court case, however, deals with a different type of foreclosure, and the effects of the COVID-19 pandemic on the same.

Most foreclosure cases in New York State are of the judicial type, and deal with the foreclosure of real property.  In a judicial foreclosure, the owner of real property gives a mortgage and note to a lender, in exchange for a loan.  The real property is collateral for the loan.  If the borrower fails to repay the loan, or otherwise defaults on the loan by failing to follow the loan terms, the lender may file a foreclosure action in the appropriate New York State Court, which would be the Supreme Court in the county in which the property is located.

New York State currently has a moratorium, due to the effects of the coronavirus, on judicial foreclosures.  Under this Administrative Order, “no auction or sale of property in any residential or commercial matter shall be scheduled to occur prior to October 15, 2020.”  However, not every foreclosure case in New York is a judicial foreclosure, requiring a Court proceeding.  Non-judicial foreclosures occur most commonly in coop matters.  An owner of a cooperative apartment does not own real property, but, rather, shares in the cooperative corporation, which, in turn, owns the real property on which the building is located.  As a result, if the shareholder defaults on a share loan, the lender may foreclosure on the shares without Court intervention.  The lender can issue notices under the Uniform Commercial Code (UCC), which is integrated into New York law, and have an auction sale under the UCC rules, without going to Court.

Another type of non-judicial foreclosure involves a mezzanine loan.  A mezzanine loan involves giving a security interest in the stock shares of the company that owns the real estate in question, a similar principle to a coop loan.  For example, ABC Real Estate LLC is a company that owns real property.  It already has a primary mortgage loan, which it may have taken out to buy the property, but subsequently wishes to raise additional funds.  It locates a secondary lender, who, instead of taking a mortgage in the real property, files a UCC evidencing a lien on the ownership shares of ABC Real Estate LLC.  If the LLC subsequently defaults on the mezzanine loan, the lender can then, after giving the proper legal notices, have a public UCC sale of the company shares to raise funds to repay the debt.

In the case referenced in this post, that was the situation.  Due to a default, the defendant (in this case, the lender) sought to have a UCC foreclosure sale, via video conference (due to COVID), and the plaintiff (the borrower) sued to prevent the sale, claiming that it was unfair because of the COVID restrictions on judicial sales.

The Court agreed, saying that due to the pandemic, lenders should exercise caution in attempting to proceed with UCC foreclosure in New York State while the COVID-19 pandemic continues.  Even though the administrative order did not technically apply to non-judicial foreclosures, it ruled that it would be fair to delay the sale under current conditions.

Our blog will continue to update our readers on whether foreclosure sales (be they judicial or non-judicial) will be allowed to resume after the current moratorium is scheduled to expire on October 15, 2020.

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