Two new cases concerning disputes between senior lenders and mezzanine lenders suggest that the general principle that New York courts will strictly enforce arms-length commercial real estate agreements may not be quite the hard-and-fast rule that many expect it to be. These cases involve loan structures that are substantively similar to the now well-known Bank of America v. PSW NYC (Stuyvesant Town) case concerning the Stuyvesant Town apartment complex.1 The cases indicate that in light of the current state of the real estate market, the strategy of purchasing mezzanine loans at a deep discount with the intention to quickly foreclose those positions carries with it real litigation risk.
‘Stuyvesant Town’
The leading case dealing with mezzanine lenders’ rights to foreclose on equity collateral while the senior loan is in default is Stuyvesant Town. In that decision, the New York Supreme Court conducted a thorough analysis of the relevant intercreditor agreement that purported to define the relative rights of the senior lender and the mezzanine lender.2 The case arose after the most junior mezzanine lender, who had recently purchased the mezzanine loan in a private transaction, initiated a foreclosure proceeding, seeking to take control of the borrower entity.3 The senior lender, however, sought to stop that foreclosure by seeking a preliminary injunction.4 The Stuyvesant Town court granted the injunction and stopped the mezzanine foreclosure.5 According to the court, the central issue was whether the intercreditor agreement permitted a transferee at the foreclosure sale of the borrower’s equity collateral to take the collateral without first curing a senior loan default.6 Section 6(d) of that intercreditor agreement provided:
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