The explosive growth of mezzanine and other types of subordinate commercial real estate lending during the last two decades was enabled, in part, by the relative standardization of the intercreditor arrangements that governed the rights and obligations of senior and junior lenders. A sustained rise in real estate values prior to 2007 generally enabled borrowers to re-finance maturing debt. As a re- sult, the universe of case law interpreting common provisions in the common forms of intercreditor agreements used in these transactions is quite limited. However, in the aftermath of the liquidity crises, a number of recent decisions have contributed to the body of case law in this area, with important repercus- sions for senior and junior lenders alike.
In December 2011, two courts, following Bank of America, N.A. v. PSW NYC LLC1 (commonly known as the “Stuy Town” case), each held that language in the applicable intercreditor agreement required a foreclosing mezzanine lender, as a condition to completing its UCC foreclosure, to cure existing defaults under the related mortgage loan. When a mortgage loan has been accelerated or is in maturity default, these holdings require the mezzanine lender to repay the mortgage loan in full before completing a UCC foreclosure.
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