This article is a brief reminder of the basics of the New York One-Action Rule. After a default, typical commercial home loan documents give the lender the right to take alternative remedies simultaneously or in any order. For example, if a borrower defaults on a mortgage beyond all applicable notice and relief periods, the mortgage usually gives the lender the right to enforce their mortgage while pursuing the bond or, if applicable, security. However, any lender should be aware that some states have adopted “single-action rules” that, in many circumstances, restrict a lender`s right to take multiple legal steps to collect the debt at the same time. We would like to point out that the rules of a single action can vary greatly from state to state, and this article focuses specifically on the application of the rule in New York. First, the court rejected the argument that RPAPL § 1301 prevented the plaintiff from bringing Nebari`s action, stating that the plaintiff`s decision to exclude each defendant`s interests was “not a sham” and “not even a court case.” Moreover, the only court case relating to Article 9 of the UCC was the joint action brought by the defendants. In addition, the Court noted that paragraph 9-604(a) of the UCC provided the applicant with the opportunity to “take action against personal property (members` interests) without affecting his rights with respect to real property.” Finally, there are two interesting exceptions to the single action rule: (1) if the guarantor triggers a liability for recourse in the context of a mortgage foreclosure. New York courts have ruled that if this happens, a lender can make a new election under the rule and sue to obtain the security, regardless of whether the lender first opted for mortgage foreclosure; and (2) the exclusion of members` interests under Article 9 of the UCC does not imply the single action rule, since the enforcement procedure under Article 9 is neither an action for an order nor a judicial proceeding. While the corresponding action was still pending, the plaintiff filed a lawsuit on or about 1. In September 2021, Nebari filed a lawsuit against the defendants to (i) seal the mortgages on the Highland and Yaphank properties; (ii) exclude its own security rights in personal property situated on Highland and Yaphank property; and (iii) claim any default from each defendant under the “bad boy” warranties. In response, the defendants filed a motion to dismiss the action, arguing that the Nebari lawsuit violated New York`s single action rule under Section 1301 of the RPAPL because (i) the plaintiff had exhausted his remedy by excluding each defendant`s interest as a member pursuant to Section 9 UCC and (ii) the plaintiff`s exception for a defect judgment constituted a separate claim.
for a monetary judgment in violation of RPAPL 1301(1). Justice Emerson rejected both arguments. Last week, the UK`s High Court issued a momentous ruling on a bailout presented by Virgin Active based on the repayment of most of the rent arrears. This was a test for the new composition rules introduced last year, according to which 75% of the votes of all creditors no longer have to be obtained, provided certain conditions are met. This article looks again at the current pre-insolvency restructuring rules and how this might affect owners, as well as the impact of the Virgin Active case. The Nebari decision serves as an important reminder that, although RPAPL § 1301 provides lenders with a safety net of recourse, the decision on what remedy to take is not always clear. Therefore, it is important for advisors to advise their clients on other claims and lawsuits that can be brought against debtors without violating New York`s single action rule. Olshan, a New York-based law firm, represents large corporations and entrepreneurs in their largest transactions, probl. Second, the court rejected the argument that the plaintiff`s plea for a judgment of defect violated section 1301 of the RPAPL on the basis that (i) RPAPL § 1371(2) allows a plaintiff in a foreclosure action to file an application for leave to grant a judgment of default, and (ii) the New York courts unanimously rule that a plaintiff has the right to seek a judgment of default against a guarantor in an action in foreclosure (Libertypointe Bank v 7 Waterfront Prop., LLC, 94AD3d 1061, 1062 [2d Dept 2012]). After the late payment, the plaintiff exercised its rights under the loan agreement and sought to exclude the interests of the individual defendants` members under Article 9 of the UCC.
In response, on or about March 17, 2021, the defendants commenced a lawsuit (the “Joint Claim”) to prohibit the sale by each defendant`s member. Section 1301(3) of the New York Real Property Actions Law (“NY RPAPL”) contains what the courts call the “single action rule.” This rule states that in the event of default on a debt secured by both immovable property and a promissory note (and possibly collateral), the lender may not simultaneously exclude the mortgage and simultaneously bring an action for pecuniary damages on the promissory note or guarantee. On the contrary, once the creditor has chosen one of these avenues, he cannot pursue the other in separate proceedings, unless authorized by the court. Mortgage foreclosure has its own hurdles. A sale of the property often yields less than the amount of the outstanding debt, so the lender must seek the difference in a default judgment against the lender or guarantor. New York law requires lenders to seek a judgment on deficiencies in the same lawsuit in which they seek to enforce the mortgage. Therefore, lenders must appoint the guarantor in the initial foreclosure measure and file an application for a judgment of default after the foreclosure sale. If no application for a judgment of default is made, the proceeds of the foreclosure sale will be considered as the full satisfaction of the mortgage, the lender then losing the right to initiate a second procedure to recover the promissory note or security. In a recent decision by the Suffolk County Commercial Division, Judge Elizabeth H.
Emerson took a close look at the New York Single Action Rule, noting that the rule does not apply if an ongoing lawsuit is not directly related to the collection of the same mortgage debt. It should be noted, however, that the constitutionality of the Safeguards Act is currently being challenged in the United States District Court for the Southern District of New York in Melendez et al. v. City of New York et al. The plaintiffs argue that the Guarantee Act violates the Constitution`s commercial clause, which prohibits the state from interfering with private contractual obligations. In November 2020, the district court granted the defendant`s request to dismiss the case, but on appeal, the Second Circuit quashed the case and sent the case back to the district court for a new hearing. On March 28, 2022, the plaintiffs filed a motion for summary judgment arguing that the court should declare the Guarantee Act unconstitutional in light of the Second Circuit decision. In deciding the way forward, the lender must take into account that, even if the lender is able to obtain a monetary judgment based on the bond or security, the judgment does not mean much if the borrower or guarantor does not have the means to comply with the judgment; and the lender must exhaust its collection efforts on the judgment before being allowed to foreclose its mortgage. A careful examination of safeguards is also necessary.
Many home loans include non-recourse debt, where the lender agrees to limit the execution of their loan to collateral (i.e., ownership). However, some loans are structured as non-recourse loans, requiring the developer to provide a personal guarantee for “non-recourse exceptions” or “bad boys.” These carve-out guarantees are triggered during deferred events such as filing bankruptcy, fraud, waste, or other actions. If these individual owners […] are forced to permanently close their businesses now or suffer serious personal economic losses such as the loss of a house, the economic and social damage inflicted on the city will be significantly aggravated and considerably worse than if these businesses can temporarily close and return or, if not, to close later, gradually and not all at once. Against the backdrop of this new reality, mortgage lenders are also in uncharted territory and may consider foreclosure as a possible remedy if training is not available. With the possibility that underlying properties could be sold at significantly lower valuations, lenders and borrowers are reminded of New York`s “one-action rule” and the remedies available to lenders. In this context, we are also looking at a New York law enacted during the pandemic to protect personal guarantors from tenancy obligations, so the burden falls on building owners. New York`s Single Action Rule: Choose Your Way Wisely During the COVID-19 pandemic, New York, like many other states, imposed foreclosure moratoriums prohibiting mortgage enforcement proceedings. Now that these moratoriums have been lifted, commercial property owners are facing the reality of much lower valuations caused by the lingering effects of the pandemic. Homeowners are therefore faced with a situation they never thought they would encounter: the possibility that their building is no longer worth the amount of pre-pandemic debt that weighs on it.