Mezzanine Loan Held Not to Clog Equity of Redemption

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A loan for real estate projects in Kansas City and Cincinnati was secured by a mortgage on the land being developed and by the pledge of the membership interests in the borrower. The lenders commenced a UCC foreclosure sale of the membership interests.

The borrowers sought a preliminary injunction enjoining the UCC sale, asserting that their agreements with the lenders, providing for the enforcement of the pledges of their interests, clogged their equitable right to pay and discharge the mortgage before a foreclosure. The Supreme Court, New York County, denied the motion. According to the Court,

“…Plaintiffs’ equitable right of redemption has not been, as they assert, ‘clogged’ by the operative agreements. Plaintiffs, at this very moment, retain a right of redemption under UCC Section 9-623 (“Right to redeem collateral”), which provides that redemption may occur at any time before a secured party disposes of the collateral at a foreclosure sale. Thus, the UCC provides a right of redemption if Plaintiffs can fulfill their obligations under the applicable agreements. Additionally, there is nothing to prevent Plaintiffs from taking part in the bidding process at the UCC sale”.

HH Cincinnati Textile L.P. v. Access Capital Servicing LLC, 2018 NY Slip Op 31263, decided June 19, 2018, is posted at http://www.nycourts.gov/reporter/pdfs/2018/2018_31263.pdf.

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