Although mezzanine lenders undertake a greater risk when entering into mezzanine loans due to the fact that their rights are junior and subordinate to mortgage lenders, they are afforded with the benefit of, in addition to typically receiving a higher interest rate, the ability to conduct relatively speedy foreclosure sales under the Uniform Commercial Code (UCC). Given these are unprecedented times, where the global pandemic is likely to result in an increasing number of borrowers defaulting on loans, it is particularly important for mezzanine lenders to pay close attention to the way the courts are beginning to respond to foreclosures in order to learn how to protect one of their most effective remedies: the UCC foreclosure sale.

In this article, we will review a recent case, D2 Mark LLC v. OREI VI Investments LLC, 2020 WL 3432950 (2020), to understand how the court’s decision may provide mezzanine lenders with guidance in structuring a UCC foreclosure sale auction in the COVID-19 landscape so as to strengthen their position against any claims by the mezzanine borrower that the sale is not commercially reasonable.

‘D2 Mark’

D2Mark LLC (D2Mark), as mezzanine borrower, and OREI VI Investments, LLC (OREI), as mezzanine lender, entered into a Loan Agreement and a Pledge and Security Agreement, both dated as of May 19, 2017, pursuant to which D2Mark pledged its membership interests in D2 Mark Sub, LLC (“Collateral”), which indirectly owns and operates the Mark Hotel, as security for a $35 million mezzanine loan. After the hotel was forced to close due to COVID-19 governmental restrictions, the mortgage borrower failed to make payments under the mortgage loan which caused a cross default of the mezzanine loan. Subsequently, OREI made protective advance payments totaling $2.2 million to cure the mortgage loan default and avoid the mezzanine loan from being wiped out in a mortgage loan foreclosure.

Eventually, OREI provided notice to D2Mark of its plan to sell the collateral pursuant to the UCC on June 24, 2020—36 days from the date of such notice. The terms of the sale included the following: (i) the sale would be virtual or in a law firm office in New York City, (ii) the winning bidder was expected to pay a non-refundable deposit equal to 10% of the purchase price immediately and the remainder 24 hours after the end of the auction, (iii) OREI agreed not to “credit bid” after accepting the highest and best bid unless the bidder and runner up failed to timely close,[1] (iv) written consent was required by OREI to communicate with D2Mark about the foreclosure, and (v) D2Mark could have access to the data room and could bid if it showed the financial ability to timely close.[2]

The sale was advertised in the Wall Street Journal for seven days and on June 15, 2020, the Mark Hotel re-opened, which allowed only eight days for bidders to visit the property before the auction.

On June 6, 2020, D2Mark filed for injunctive relief enjoining the mezzanine lender from moving forward with the proposed sale of the collateral. D2Mark (1) alleged a violation of UCC Section 9-610(b) because 36 days’ notice to the market was unreasonable; (2) sought a declaratory judgment that the sale violates New York Executive Order 202.28 issued by Governor Andrew Cuomo which bars eviction proceedings for 60 days beginning June 20, 2020 which barred foreclosures of any residential or commercial property for 90 days (the “executive order”); (3) sought injunctive relief enjoining the sale until September 8, 2020; and (4) alleged a breach of the covenant of good faith and fair dealing because the value of the Collateral far exceeded the $35 million mezzanine loan[3] so initiating a foreclosure in the midst of a pandemic demonstrated bad faith.

The court ruled in favor of D2Mark and issued the preliminary injunction temporarily preventing OREI’s UCC foreclosure sale on June 24, 2020 and required at least an additional 30 days until the sale could be held (i.e. the sale cannot be held before July 23, 2020). The court also required that OREI re-notice the sale and OREI must clearly state that the bidders may participate in the sale virtually. At a minimum, OREI must comport with current CDC, state and local regulations. Additionally, OREI must provide D2Mark with a copy of the notice at least 24 hours before it is issued.


Although the courts granted the mezzanine borrower the preliminary injunction, the courts still reaffirmed that UCC foreclosure sales during this time are not commercially unreasonable on their face and do not violate any executive order currently in effect.[4] This should provide mezzanine lenders some comfort that remedies to recoup any losses during the pandemic are still available. The D2Mark case, however, serves as both a cautionary tale of the ways mezzanine lenders may harm their ability to access their remedies and a guide of the ways mezzanine lenders can structure their sale in a commercially reasonable manner.

In the subject case, the court stressed that because there is no recognized market in public UCC mezzanine foreclosure sales, the mezzanine lender has to create a market and thus the responsibility to implement procedures that are fair and do not preclude interested and capable bidders. In other words, if the market that mezzanine lenders create appears “rigged” then it will become increasingly difficult for courts to view the sale as commercially reasonable.

In D2Mark, the courts viewed D2Mark’s initial preclusion from participating in the sale, bidders restrictions on communicating with D2Mark, and the stringent 24-hour funding term of the sale as “rigging” the sale so that the result would be OREI obtaining the Collateral at auction by a credit bid at a substantial discount from its current value. Indeed, the court appeared to accept D2Mark’s assertion that the property was worth well in excess of its 2017 appraised value of $427 million, and, accordingly, significantly more than the combined mortgage and mezzanine debt amount of $265 million.

Additionally, the courts believed the mezzanine lender failed to take into account the timing and public policy concerns the current landscape calls for. The court insinuated that what may be reasonable pre-COVID may be different than what is reasonable now, and expected the mezzanine lender to provide the bidders with more time to inspect the property (i.e. not just eight days) and the unequivocal right to virtually participate. To be sure, more notices of UCC public foreclosure sales are providing for such sales to be conducted live via Zoom videoconference or similar means.

Furthermore, while the court did not agree with D2Mark’s claim that the executive order applied to UCC foreclosures, it did assert that it was “persuasive authority that support plaintiff’s contention that what is reasonable during normal business times, may not be reasonable during a pandemic.”

Going forward, when structuring a UCC foreclosure, mezzanine lenders should be aware of the current CDC guidelines and governmental restrictions in place and make sure the terms of their sale fully comply. Although 30 days may, in many instances, especially pre-COVID, be accepted as commercially reasonable timing for a UCC foreclosure sale, it appears the court viewed 60 days as a more reasonable amount of time in light of the current transportation and site-visit restrictions.

In D2Mark, it is unclear, however, whether the courts would have ruled differently if the mezzanine borrower was given the opportunity to participate in the sale from the beginning, if bidders had the full thirty-six days to visit the Mark Hotel as opposed to eight days and if there were not substantial equity remaining in the collateral.

While the aforementioned guidance should strengthen mezzanine lenders’ position that a UCC foreclosure sale is reasonable in the current environment, mezzanine lenders should still continue to stay attuned to the current business practices as they are changing rapidly. Structuring a UCC foreclosure sale accordingly can avoid any unnecessary delays in what otherwise could be an uncontestable UCC foreclosure sale.



[1] OREI subsequently added these terms on June 8, 2020.

[2] OREI subsequently added these terms on June 8, 2020.

[3] D2Mark currently values the property in excess of $600 million. In 2017, in connection with the initial financing, the property was appraised for $427 million.

[4] The court in 1258 Assoc Mezz II LLC v 12E48 Mezz II LLC, Index No. 65182/2020 (NYSCEF No. 58, May 18, 2020) concluded that UCC foreclosures (as opposed to mortgage foreclosure sales) were not covered by N.Y.E.O 202.8 and that UCC foreclosures could continue.


Jeffrey B. Steiner and Scott A. Weinberg are partners at McDermott Will & Emery. John Bauco and Jessica M. Bragg, associates at the firm, assisted in the preparation of this article.