The COVID-19 pandemic has disrupted most sectors of the national economy, but perhaps none have been impacted as completely as the commercial real estate industry. Stay-at-home orders and state restrictions on commercial businesses shuttered properties nationwide and left owners with little cash flow and mounting debt. Commercial borrowers, saddled with large mortgage and mezzanine loans, lacked the funds necessary to satisfy their loan payments. In response, a number of states instituted restrictions on residential and commercial mortgage foreclosure actions, many of which remain in effect. Although businesses have largely reopened, they are operating at limited capacities under fluctuating state restrictions.
These circumstances have not dissuaded mezzanine lenders from foreclosing on commercial borrowers who default on their scheduled loan payments. Unlike mortgage loans, which are secured by a security interest in property, mezzanine loans are secured by a pledge of equity interest in the borrower entity itself. As such, mezzanine loan foreclosures are governed by the Uniform Commercial Code (UCC). Most mezzanine lenders foreclose by conducting a public sale of the collateral. UCC § 9-610(b) requires “every aspect” of such a sale to be “commercially reasonable,” including the “method, manner, time, place, and [any] other terms” of the sale.
Commercial reasonableness normally hinges upon the “robustness” of the procedural means employed to advertise and conduct the foreclosure auction, especially as compared to industry practice.  This involves a substantial “marketing process” to attract additional bidders, including issuance of a foreclosure notice, adequate advertising in relevant publications, access to diligence and property materials, and sufficient time between notice and sale.Mezzanine lenders may even employ real estate brokers, investment bankers, or other professionals with experience in foreclosure actions to ensure the reasonableness of their sale. Commercial reasonableness also is tied to the sale price itself, although a low price (as compared to the fair market value of the collateral) will not render the sale commercially unreasonable so long as the lender makes a serious effort to achieve the highest possible sale price.
Commercial Reasonableness in the COVID-19 Era
The pandemic has tested the adequacy of the “commercial reasonableness” standard in standard auction processes while sparking a renewed focus on auction prices. The value of a mezzanine entity’s equity interests is directly tied to the value of the corresponding property. Thus, a tumultuous real estate market with fluctuating property prices makes it challenging to determine the value of the underlying collateral.
Four New York courts have heard cases in which mezzanine borrowers were attempting to enjoin public foreclosure sales of their collateral. As the epicenter of the pandemic and the largest metropolitan area in the U.S., New York City was particularly affected by business closure requirements. To assist property owners, the state issued a number of executive and administrative orders restricting mortgage foreclosure actions: on March 20th, Governor Cuomo issued Executive Order 202.8, which halted mortgage foreclosure actions for borrowers for 90 days. This blanket mortgage foreclosure ban was followed by Executive Order 202.28, which ceased mortgage foreclosure actions for borrowers “facing financial hardship due to the COVID-19 pandemic.” On October 20th, Governor Cuomo extended this moratorium until January 1, 2021. Meanwhile, Chief Judge Marks, the Chief Administrative Judge of New York, issued Administrative Order 157/20 on July 24th staying auctions or sales of property until October 15, 2020.
The four court cases all turned on the New York courts’ interpretations of the commercial reasonableness of mezzanine foreclosure actions in light of these orders and the tumultuous real estate market. Two of the four New York courts allowed the proposed mezzanine foreclosure sales to proceed. In 1248 Assocs. Mezz II LLC, the court reasoned that Governor Cuomo’s Executive Order No. 202.8 “addresse[d] enforcement of a judicially ordered foreclosure,” not foreclosures governed by the UCC. Relying on this reasoning, the court in 893 4th Ave. Lofts LLC likewise held there to be “no basis upon which to stay the” challenged UCC foreclosure auctions.
Conversely, the court in D2 Mark LLC temporarily delayed the proposed mezzanine foreclosure sale. The court found the defendant mezzanine lender’s auction terms to be commercially unreasonable under UCC 9-610(b) because they effectively made the defendant the only viable bidder. One of the main reasons the court considered defendant to be the only viable bidder is because the statewide closures restricted potential bidders’ access to the underlying property, a luxury hotel on the Upper East Side, giving bidders insufficient time to conduct due diligence. In dicta, the court also considered the Executive Order halting mortgage foreclosures to be an indication that normally reasonable actions may be deemed unreasonable during a pandemic.
The last case, Shelbourne BRF LLC, expanded on this reasoning. In enjoining the proposed sale, the court relied on Administrative Order 157/20 staying foreclosure actions. Although this Order technically applied only to mortgage loan foreclosures, the court decided that the “same logic” was relevant to mezzanine loan foreclosures. Because the commercial reasonableness of the sale was directly related to the “severe turmoil in the real estate market,” and since this turmoil might lead auction participants to submit discounted bids, the court reasoned that it was “highly uncertain” that the membership interests would sell for fair market value.
The Shelbourne court’s reliance on Administrative Order 157/20 drew both praise and criticism. Some observers suggested that the court unreasonably ignored the legal distinctions between mezzanine and mortgage foreclosures, while others argued that the court was correct to treat the membership interests as analogous to interests in real property. In the meantime, Chief Judge Marks has ordered the resumption of all foreclosure matters. The Shelbourne court subsequently denied another request to enjoin the foreclosure, citing the expiration of Administrative Order 157/20 and the fact that other mezzanine foreclosures were “proceeding” under the “current conditions.”“Given the circumstances of this case and the current state of the pandemic,” the court stated, “further enjoining this sale would be highly inequitable.”
Looking Forward: A Return to Normal?
Some view the court’s decision to allow the Shelbourne foreclosure sale to proceed as an indication that courts are now “return[ing] to the approach [they] had [to commercial reasonableness] prior to the COVID-19 pandemic.” This argument is certainly persuasive; of the four foreclosure sales, only the Shelbourne sale was enjoined solely due to implications arising from the COVID-19 pandemic, but even that sale eventually occurred.
Yet, the Shelbourne court specifically cited the “current state of the pandemic” in their decision to permit the sale. Chief Judge Marks, moreover, noted that foreclosure actions remain “subject to . . . [applicable] current or future federal and emergency relief provisions.” Just last week, a New York court temporarily halted another planned mezzanine foreclosure sale, which involved CIM Group’s attempt to auction off equity interests in four junior mezzanine loans on four luxury residential properties in Manhattan. HFZ Capital Group, the owner of the properties, argued that CIM’s actions were a “predatory attempt to capitalize on the Covid-19 pandemic by conducting a rushed, commercially unreasonable sale[.]” Notably, this dispute is being heard amid a recent surge in COVID-19 cases and the attendant increase in city and state restrictions.
It seems clear that one of the most challenging periods of the pandemic lies ahead as the country enters what health officials predict to be the “darkest” months yet. Many other mezzanine lenders have initiated foreclosure sales in recent months. Given that no court yet has permanently halted a mezzanine foreclosure sale, it seems unlikely that one will do so going forward. Yet, the court’s recent decision regarding the HFZ sale indicates that the commercial reasonableness of foreclosure sales will continue to hinge on the specifics of each case and the pandemic’s continuing impact on the commercial landscape. This suggests that commercial reasonableness will remain an important consideration that mezzanine lenders must contemplate when deciding whether to foreclose on a mezzanine borrower.
 Matthew Goldstein, Worried Lenders Pounce on Landlords Unable to Pay Their Loans, N.Y. Times (Aug. 13, 2020), https://www.nytimes.com/2020/08/13/business/commercial-landlord-loan-foreclosure.html.
 Covid-19 Related Eviction and Foreclosure Orders/Guidance 50-State Tracker, Perkins Coie LLP (Oct. 28, 2020), https://www.perkinscoie.com/en/news-insights/covid-19-related-eviction-and-foreclosure-ordersguidance-50-state-tracker.html.
 N.Y. Times, As U.S. Breaks Hospitalization Records, N.Y. and Other States Add Restrictions,https://www.nytimes.com/live/2020/11/11/world/covid-19-coronavirus-live-updates#ny-will-limit-private-gatherings-and-require-bars-and-restaurants-to-close-daily-at-10-pm (last updated Nov. 13, 2020).
 See Goldstein, supra note 1.
 Brian W. Harvey & Eric D. Lemont, When Mezz Gets Messy . . ., Resource: Working Through the Great Recession (Goodwin Proctor 2009), Fall 2009, at 6.
 Mark S. Edelstein et al., Courts: A Foreclosure Pandemic Pause? (Part 2), Morrison & Foerster LLP (Aug. 18, 2020), https://www.mofo.com/resources/insights/200818-foreclosure-pandemic.html.
 James D. Prendergast, Real Estate Mezzanine Lending Collateral Foreclosure, 27 Prac. Real Est. L. 11, 26 (2011).
 U.C.C. § 9-610(b) (Am. Law Inst. & Nat’l Conference. of Comm’rs on Uniform State Laws (2012).
 Anthony G. Eonas & Erin M. Secord, Exploring the Creditor’s Duty of Reasonable Care Under UCC Article 9 Amidst Recession and Revision, 89 Or. L. Rev. 623, 639 (2010); see also Prendergast, supra note 6.
 J. Dean Heller, What’s in a Name: Mezzanine Debt Versus Preferred Equity, 18 Stan J. of L. Bus. & Fin. 40, 52 (2012); Brian W. Harvey & Eric D. Lemont, When Mezz Gets Messy . . ., Resource: Working Through the Great Recession (Goodwin Proctor 2009), Fall 2009, at 7.
 Prendergast, supra note 6, at 28.
 Heller, supra note 9.
 See 1248 Assocs. Mezz II LLC v. 12E48 Mezz II LLC, No. 651812/2020, 2020 WL 2569405 (N.Y. Sup. Ct. May 18, 2020); 893 4th Ave. Lofts LLC v. 5Aif Nutmeg, LLC, No. 511942/20, 2020 WL 4936913 (N.Y. Sup. Ct. August 25, 2020); D2 Mark LLC v. OREI VI Invs. LLC, No. 652259/2020, 2020 WL 3432950 (N.Y. Sup. Ct. June 23, 2020); Shelbourne v. SR 677 BWAY LLC, No. 652971/2020 (N.Y. Sup. Ct. Aug. 3, 2020) (order granting preliminary injunction).
 Jimmy Vielkind, New York Sees Another Day of Record Coronavirus Deaths, Wall St. J. (Apr. 8, 2020, 6:00 p.m.), https://www.wsj.com/articles/new-york-sees-another-day-of-record-coronavirus-deaths-11586383250?page=3.
 Amy Rhinehardt & Sunny Tice, Executive Order 202.8 and 202.9: 90 Day Suspension of Mortgage Payments; Moratorium on Evictions and Foreclosures, Bond Schoeneck & King (Mar. 27, 2020), https://www.bsk.com/news-events-videos/executive-order-2028-and-2029-90-day-suspension-of-mortgage-payments-moratorium-on-evictions-and-foreclosures; N.Y. Exec. Order No. 202.8 (Mar. 20, 2020), https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO_202.8.pdf.
 N.Y. Exec. Order No. 202.28 (May 7, 2020), https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO202.28.pdf,
 N.Y. Exec. Order No. 202.70 (Oct. 20, 2020), https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO_202_70.pdf.
 Chief Adm. Judge of the Courts, Adm. Order of the Chief Administrative Judge of the Courts, AO/157/20, State of N.Y. Unified Court System (2020), https://www.nycourts.gov/whatsnew/pdf/2020_10_22_11_14_11.pdf.
 1248 Assocs. Mezz II LLC v. 12E48 Mezz II LLC, No. 651812/2020, 2020 WL 2569405 (N.Y. Sup. Ct. May 18, 2020); 893 4th Ave. Lofts LLC v. 5Aif Nutmeg, LLC, No. 511942/20, 2020 WL 4936913 (N.Y. Sup. Ct. August 25, 2020).
 1248 Assocs. Mezz II LLC, 2020 WL 2569405, at *1 (N.Y. Sup. Ct. May 18, 2020).
 893 4th Ave. Lofts LLC, No. 511942/20, 2020 WL 4936913, at*5 (N.Y. Sup. Ct. August 25, 2020).
 D2 Mark LLC v. OREI VI Invs. LLC, No. 652259/2020, 2020 WL 3432950 (N.Y. Sup. Ct. June 23, 2020).
 Id. at 10.
 Id. at 11.
 Shelbourne BRF LLC v. SR 677 BWAY LLC, No. 652971/2020 (N.Y. Sup. Ct. Aug. 3, 2020) (order granting preliminary injunction).
 Steven Herman & Nicholas Brandfon, New York State Supreme Court Temporarily Halts UCC Foreclosure of Mezzanine Loan, Cadwalader Wickersham & Taft LLP (Aug. 20, 2020), https://www.cadwalader.com/resources/clients-friends-memos/new-york-state-supreme-court-temporarily-halts-ucc-foreclosure-of-mezzanine-loan (remarking that “the Court ignored the legal distinction between a mezzanine loan and a mortgage loan” even though “a mezzanine foreclosure is clearly not a mortgage foreclosure”) ; Mark S. Edelstein et al., Courts: A Foreclosure Pandemic Pause? (Part 2), Morrison & Foerster LLP (Aug. 18, 2020), https://www.mofo.com/resources/insights/200818-foreclosure-pandemic.html (noting that it “seem[ed] as though the court . . . correctly considered the membership interests at stake to be akin to real property interests”).
 Lawrence K. Marks,
 Shelbourne BRF LLC v. SR 677 BWAY LLC, No. 652971/2020 (N.Y. Sup. Ct. Oct. 27, 2020) (denying preliminary injunction).
 Janice Mac Avoy et. al., New York Supreme Allows Previously Enjoined UCC Foreclosure Sale to Proceed, Fried, Frank, Harris, Shriver & Jacobson (Oct. 29, 2020), https://www.friedfrank.com/siteFiles/Publications/FFTOCUCCForeclosureShelbourne10292020.pdf.
 Chief Admin. Judge of the Courts, Adm. Order of the Chief Adm. Judge of the Courts, AO/232/20, State of N.Y. Unified Court System (2020), https://www.nycourts.gov/whatsnew/pdf/2020_10_22_11_14_11.pdf.
 Keth Larsen & Jerome Dineen, HFZ Sues CIM to Halt Condo Foreclosure Sale, (Nov. 12, 2020, 2:28 p.m.), https://therealdeal.com/2020/11/11/hfz-sues-cim-to-halt-condo-foreclosure-sale/.
 See Wilson Wong, Colin Sheeley, & Corkey Siemaszko, Once Again, U.S. Records New Daily High, Nearly 100,000, for Covid-19 Cases, NBCNews (Oct. 30, 2020, 9:42 PM), https://www.nbcnews.com/news/us-news/u-s-records-more-90-000-covid-19-cases-one-n1245450;
 Will Feuer, Berkeley Lovelace Jr., & Noah Higgins-Dunn, U.S. Prepares for Worst Four Months of the Pandemic as it Stares Down the ‘Darkest’ Days Yet, CNBC, (Nov. 12, 2020, 9:22 A.M.), https://www.cnbc.com/2020/11/11/us-prepares-for-worst-four-months-of-the-pandemic-as-it-stares-down-the-darkest-days-yet.html.
 Rich Bockmann, One of Soho’s Priciest Retail Spaces Heads to Foreclosure, TheRealDeal (Oct. 7, 2020, 2:18 PM), https://therealdeal.com/2020/10/07/one-of-sohos-priciest-retail-spaces-heads-to-foreclosure/; Sylvia Varnham O’Regan, Wonder Works’ UES Condo Being Shopped at Foreclosure Sale, TheRealDeal (Oct. 8, 2020, 4:18 PM), https://therealdeal.com/2020/10/08/wonder-works-ues-condo-being-shopped-at-foreclosure-sale/; Katherine Kallergis, Mezz Lender Forecloses on Ocean Drive Hotel in South Beach, TheRealDeal (Oct. 2, 2020, 5:30 PM), https://therealdeal.com/miami/2020/10/20/mezz-lender-forecloses-on-ocean-drive-hotel-in-south-beach/;