Questions of Fact Precluded Judgment on Reasonableness of Foreclosure Sale

On May 21, 2024, the First Department issued a decision in Clover Private Credit Opportunities Origination (Levered) II, L.P. v. Sanberg, 2024 NY Slip Op. 02774, holding that questions of fact precluded judgment on reasonableness of foreclosure sale, explaining:

[W]e disagree with the court’s finding that the auction and foreclosure sale of the collateral securing the loan was commercially reasonable as a matter of law. Article 9 of the UCC, which was incorporated into the loan documents, requires that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. The court properly noted that commercial reasonableness is ordinarily a question of fact not to be resolved on the pleadings. Applying this standard, however, the court improperly found that the auction was commercially reasonable as a matter of law because the facts alleged by defendants do not support any basis to conclude that the process or price was unreasonable.

This case presents different facts and context from DeRosa. As defendants note, the collateral in this case was more complex than the sale of an apartment, which necessarily would have had a wider range of interested and qualified buyers. Defendants also persuasively contend that plaintiffs attached unreasonable and oppressive conditions for submitting a bid, thus hindering participation in the auction process. The text of the published notices were in small font, buried within the print editions of The Wall Street Journal and an Alaskan publication (each on one occasion), and did not clearly identify the assets being sold. The notice made mention of the sale of assets in Alaska without providing a further description. Further, once the auction date was postponed, plaintiffs admittedly did not give public notice of the postponement, simply stating that it provided all interested parties with notice of the changed date. Plaintiffs’ concession that no third parties participated in the auction further suggests that there remain factual issues surrounding whether the sale was marketed in a fair way and otherwise conducted in a commercially unreasonable manner.

Defendants’ allegations regarding the sales price of the collateral also raise factual issues surrounding whether it was commercially reasonable. Courts have consistently declined to disturb a foreclosure sale upon a challenge to the amount recovered for the collateral, except in the narrow circumstance where the price alone is so inadequate as to shock the court’s conscience. Here, at the pleading stage, plaintiff’s credit bid of $10.4 million for the collateral — which had secured a $145 million loan only eighteen months before — was sufficient to meet this standard. Plaintiffs’ assertions that the stock price and value of the collateral had sharply declined since the origination of the loan present factual questions that should not have been resolved on the motion.

(Internal quotations and citations omitted).

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