CCO Condo Portfolio Junior Mezzanine, LLC v. Feldman

Background

CCO Condo Portfolio (AZ) Junior Mezzanine, LLC brought the action against Ziel Feldman and HFZ Capital Group LLC to enforce four guaranties tied to four junior mezzanine loans involving Manhattan condominium projects. The borrowers defaulted in November 2019, and the defendants had guaranteed payment of principal and interest. CCO Condo’s predecessor assigned its interests in the loans to CCO Condo in September 2020.

CCO Condo first scheduled a Uniform Commercial Code foreclosure sale for November 12, 2020. HFZ Capital sued in New York state court the day before, claiming the proposed sale was rushed and commercially unreasonable. The state court stopped the first two scheduled sales and later found that the November sales were commercially unreasonable because of confusion in the marketing, the requirement that the collateral be sold only as one package, and an allegedly excessive deposit requirement. That court allowed CCO Condo to schedule another sale under the loan agreements and New York law.

CCO Condo then scheduled a sale for January 7, 2021. It notified the defendants 28 days in advance, marketed the sale through newspapers and an investor list of more than 31,000 contacts, and provided potential bidders access to a digital data room. The revised sale allowed bids on the four property interests individually or as a package. It reduced the initial deposit from $1 million to $500,000, replaced the prior $9 million winning-bid deposit with a deposit equal to 5% of the winning bid, and allowed the initial deposit to be credited toward that amount. The sale proceeded with Mannion Auctions, a New York-licensed auctioneer. CCO Condo was the only bidder and made a $65 million credit bid for the interests in all four properties.

Procedural History

CCO Condo filed this federal action on March 23, 2021, and filed an amended complaint on April 22, 2021. The court previously granted summary judgment for CCO Condo on the defendants’ liability under the guaranties, but found material factual disputes about whether the property sale was commercially reasonable. After discovery, the court held a one-day bench trial on September 26, 2023, addressing that issue.

Legal Standard

Under Article 9 of New York’s Uniform Commercial Code, every aspect of a secured party’s disposition of collateral must be commercially reasonable. The court evaluates the totality of the circumstances, including the creditor’s good-faith efforts and accepted business practices in the relevant industry. A potentially higher price from using a different sale method or timing does not by itself make the sale commercially unreasonable. The party challenging the proceeds also bears the burden of showing that they were significantly below the range that a compliant sale to someone other than the secured party would have produced. The price alone must be so inadequate that it shocks the court’s conscience before a foreclosure sale will be disturbed on that basis.

Court’s Analysis

The court rejected the defendants’ challenge to the timing and advertising of the sale. The state court had declined to require a 60- to 90-day delay, and the loan agreements required notice between 15 and 30 days before the sale. CCO Condo gave 28 days’ notice. The court also found that CCO Condo exceeded the agreements’ advertising requirements by publishing notices in the New York Times for seven consecutive days, placing additional newspaper advertisements, sending information to a large investor list, and providing due-diligence materials to potential bidders.

The court determined that the sale’s timing during the winter holiday period and the COVID-19 pandemic did not make it commercially unreasonable. It credited testimony that the properties were losing value and that proceeding promptly could help preserve their value. The court also found the revised deposit requirements reasonable because they were reduced from the terms used for the earlier sale and helped ensure that bidders could complete the purchase.

The court rejected the defendants’ characterization of the sale terms as giving CCO Condo a unilateral right to override a winning bid. It interpreted the provision as allowing CCO Condo to designate a backup bidder if the winning bidder failed to satisfy the closing requirements. The court also held that CCO Condo being the sole bidder did not itself invalidate the sale.

As to price, the court found that the defendants offered no evidence showing that the properties’ fair market value was dramatically higher than the $65 million credit bid. Testimony for CCO Condo attributed potential reductions in value to unfinished construction, lawsuits concerning one property, and publicly known internal issues involving HFZ Capital. The court therefore concluded that the price was not so low as to shock its conscience.

Disposition

The court concluded that the January 7, 2021 sale was commercially reasonable and directed that judgment be entered in favor of CCO Condo. It awarded CCO Condo $86,350,220.27 for amounts due under the guaranties and attorney fees and costs incurred through summary judgment, plus $732,858.40 for attorney fees and costs incurred after summary judgment. The Clerk was directed to enter judgment for a total of $87,083,078.67, plus prejudgment interest at 9% on $86,042,036.29 from April 22, 2021, until the date judgment was entered, and to close the case.