The New York State Supreme Court, New York County Commercial Division (the “Court”) has decided in US Bank, NA v 342 Property LLCon February 14, 2022, that a mezzanine lender who is not a party to the loan documents evidencing a concurrent mortgage does not have standing and, therefore, has no basis to bar a lender’s motion summary judgment mortgage in a foreclosure action against a mortgage borrower affiliated with a mezzanine borrower.

Background

342 Property LLC (the “Mortgage Borrower”) has received a $40,000,000.00 mortgage loan (the “Mortgage Loan”) secured by real property located in the State of New York and the hotel which therein (collectively, the “Property”). The Loan was evidenced by a mortgage, promissory note and other loan documents governed by New York law (the “Mortgage Loan Documents”) in favor of the US Bank National Association, as trustee of Mortgage Stanley Capital I Inc. (the “Mortgage Loan”), by assignment from a previous lender.

In addition, the parent company of the Mortgage Borrower (“Mezzanine Borrower”) received from Axonic Credit Opportunities Master Fund, LP (the “Mezzanine Lender”) a mezzanine loan of $16,000,000.00 (the “Mezzanine Loan ”) secured by a pledge of member interest in the Mortgage Borrower and evidenced by loan documents governed by New York law (the “Mezzanine Loan Documents”).

Concurrently, the Mortgage Lender and the Mezzanine Lender entered into an Intercreditors’ Agreement, dated May 21, 2015, which establishes, Inter othersthe Mezzanine Lender’s right to repay the Mortgage Loan, effect a UCC Sale and seek remedies against the Mezzanine Borrower to the extent that the Mezzanine Borrower has defaulted under the Mezzanine Loan Documents.

Subsequently, the Mortgage Borrower failed to pay the amounts then due and payable under the Mortgage Loan and defaulted under the Mortgage Loan Documents, having evidently suffered financial hardship as a result of the COVID-19 restrictions. 19. After the Mortgage Borrower and its affiliates agreed not to contest a foreclosure action in exchange for the Mortgage Lender’s agreement not to pursue recourse against the Borrower’s principals, the Mortgage Lender then commenced a foreclosure action against the mortgage borrower for non-payment of the loan under the mortgage loan. Documents.

The mortgage lender sought summary judgment against the mortgage borrower in the underlying foreclosure action. The mezzanine lender then asserted that the mortgage borrower agreeing to allow the mortgage lender to bring the immediate foreclosure action and appointing a receiver constituted a default under the mezzanine loan documents and adversely affected the mezzanine lender.

The Court considered the mortgage lender’s motion for summary judgment to determine, in the absence of any material facts in dispute, whether the mortgage lender’s foreclosure claim can be determined at law.

Decision

Ruling in favor of the mortgage lender, the Court granted the mortgage lender’s motion for summary judgment and ruled that the mezzanine lender had “no reason to contest the mortgage lender’s right to foreclose” on the property. That is, the Court held that the Mezzanine Lender was not a party to the Mortgage Documents and held no interest in the Property. As such, in the absence of an agreement between the Mortgage Lender and the Mezzanine Lender providing otherwise, the Mezzanine Lender had no standing to assert any claims or defenses to this motion.

The Court’s decision in US Bank, NA v 342 Property LLC reaffirms the established principle that a mezzanine lender’s remedy is subject to the rights and defenses of a mortgage lender against an affiliated mortgage borrower who subsequently defaults under the mortgage loan, which also constitutes a default under the loft loan.

We will continue to monitor future developments in this area and advise you accordingly.

1 US Bank NA vs. 342 Prop. LLC2022 NY Slip Op. 30488(U).

2 Complaint, dated 08 October 2020, Index n° 655136/2020 (Dkt. n° 2).

3 Decision and Order on Motion Seq. 005, of February 14, 2022, index n° 655136/2020 (Dkt. n° 189).

4 Decision and Order on Motion Seq. 005, of February 14, 2022, index n° 655136/2020 (Dkt. n° 189).

5 Axonic Credit Opportunities Master Fund, LP’s Memorandum of Law in Opposition to Motion for Summary Judgment (Mot. Seq. 005), dated October 26, 2021, Index No. 655136/2020 (Dkt. No. 167).

6 See above fn. 4.