As mortgage loan transactions continue to become increasingly complex, lenders often worry about the remedies they have if borrowers fail to live up to their obligations. In the event of a default, lenders have the choice under New York’s election of remedies statute (RPAPL § 1301 (1)) to either (i) enforce the note and/or guaranty and obtain a money judgment, or (ii) pursue an action in equity to foreclose on the mortgage. However, because of New York’s one-action rule (RPAPL § 1301(3)), lenders are barred from bringing simultaneous actions to recover on the same mortgage debt.
In a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson took a close look at New York’s one-action rule and determined that the rule did not apply where a pending lawsuit was not directly tied to collecting on the same mortgage debt.
In Nebari Natural Resources Credit Fund I, LP v Speyside Holdings LLC, et al, defendants, which consisted of multiple LLCs and their members (the “Individual Defendants”) (collectively, “Defendants”) owned two commercial properties consisting of certain parcels of vacant land in Yaphank, New York (the “Yaphank Property”) and Highland Mills, New York (the “Highland Property”). In or around February 2020, plaintiff Nebari Natural Resources Credit Fund I, LP (“Plaintiff”) and Defendants entered into a loan agreement (the “Loan Agreement”), whereby Plaintiff agreed to loan Defendants $ 17 million (the “Loan”) to pay off an existing $ 10 million loan and to provide working capital for the operation of a quarry at the Highland Property. The Loan was secured by, among other things, mortgages on both Properties, pledges by the Individual Defendants of their membership interests in Defendants, and “bad boy” guarantees by the Individual Defendants. However, the relationship between the parties quickly soured, with Plaintiff declaring Defendants in default as early as November 2020.
Following the default, Plaintiff exercised its rights under the Loan Agreement and sought to foreclose on the Individual Defendants’ membership interests, pursuant to UCC Article 9. In response, on or about March 17, 2021, Defendants commenced an action (the “Related Action”) seeking to enjoin the sales of the Individual Defendants’ membership interests.
While the Related Action was still pending, on or about September 1, 2021, Plaintiff commenced the Nebari action against Defendants, seeking to (i) foreclose the mortgages on the Highland and Yaphank Properties; (ii) foreclose its own security interests in the personal property on the Highland and Yaphank Properties; and (iii) recover any deficiency from the Individual Defendants under the “bad boy” guarantees. In response, Defendants filed a motion to dismiss the complaint, arguing that the Nebari action violated New York’s one-action rule under RPAPL § 1301 because (i) Plaintiff exhausted its remedy by pursuing a foreclosure of the Individual Defendants’ membership interests under UCC Article 9, and (ii) Plaintiff’s cause of action for a deficiency judgment constituted a separate action for a money judgment in violation of RPAPL 1301(1). Justice Emerson rejected both arguments.
First, the Court rejected the argument that RPAPL § 1301 barred Plaintiff from commencing the Nebari action, explaining that Plaintiff’s decision to foreclose on the Individual Defendants’ membership interests was “not an action on the note,” nor was it “even a judicial proceeding.” In addition, the only judicial proceeding relating to UCC Article 9 was the Related Action, which was commenced by Defendants. Further, the Court highlighted that UCC 9-604(a) provided Plaintiff the remedy of proceeding “against the personal property (the membership interests) without prejudicing any of its rights with respect to the real property.”
Second, the Court rejected the argument that Plaintiff’s cause of action for a deficiency judgment was in violation of RPAPL § 1301, based on the fact that (i) RPAPL § 1371(2) allows a plaintiff in a foreclosure action to make a motion for leave to enter a deficiency judgment, and (ii) New York courts consistently hold that a plaintiff has a right to seek a deficiency judgment against a guarantor in a foreclosure action (Libertypointe Bank v 7 Waterfront Prop., LLC, 94AD3d 1061, 1062 [2d Dept 2012]).
The Nebari decision serves as an important reminder that while RPAPL § 1301 provides lenders with a safety net of remedies, the decision of which remedy to pursue may not always be clear. Therefore, it is critical that counselors advise their clients on other claims and actions that can be pursued against debtors, without running afoul of New York’s one-action rule.