Debtor’s Rights of Redemption from a Mezzanine Loan UCC

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In Atlas MF Mezzanine Borrower, LLC v. Macquarie Texas Loan Holder LLC, 2019 NY Slip Op 04495, decided June 6, 2019, the Appellate Division, First Department, dismissed causes of action seeking an Order overturning a mezzanine loan foreclosure sale, on grounds including claims that the lender breached the duty of good faith and fair dealing by not conducting a “commercially reasonable” UCC sale and that the transferee at the sale did not act in good faith.According to the Appellate Division, “…if UCC sales could be unwound, it would only serve to muddy the waters surrounding nonjudicial sales conducted pursuant to article 9 of the UCC, and to deter potential buyers from bidding in nonjudicial sales, which would, in turn, harm the debtor and the secured party attempting to collect after a default.” This decision is posted at

http://www.nycourts.gov/reporter/3dseries/2019/2019_04495.htm.

The Permanent Editorial Board (“PEB”) for the Uniform Commercial Code, acting under the authority of the American Law Institute and the Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws), has issued a Commentary disagreeing with the decision in Atlas MF Mezzanine Borrower, LLC. According to the Editorial Board’s “Commentary”, “a transferee who has not acted in good faith does take subject to the debtor’s right of redemption in addition to other rights of the debtor in the collateral.” 

 “Although the debtor may indeed be entitled to seek monetary damages for a disposition that did not comply with [UCC] Section 9-610 [citations omitted], the debtor is also entitled to the debtor’s right of redemption and other rights in the collateral when the transferee has not acted in good faith. A bad faith transferee may not rely on the ‘take free’ rule. Any policy based on commercial certainty is subordinate to the policy of not rewarding those that do not act in good faith.”

PEB Commentary No. 22, “Status of a Disposition Under Section 9-610 of the Uniform Commercial Code if the Transferee Does not Act in Good Faith”, dated August 24, 2020, can be obtained at

https://www.ali.org/about-ali/governance/committees/joint-committees/.