Recent Developments in New York State Practice
By Lori Marks-Esterman
This past year during the COVID-19 pandemic has been exceptionally difficult in so many ways. Yet through all this, New York’s legal system soldiered through with the grit and determination people expect of New Yorkers.
Below we lay out how New York’s commercial division, a niche segment of the New York State court system devoted exclusively to commercial cases, is set up and well-positioned to navigate these unprecedented times, as well as recent matters the commercial division has faced, including UCC and mezzanine foreclosures. We also discuss recent revisions to New York’s blue sky laws, which eliminated New York’s anomalous regulations of certain private placements of securities.
New York’s Commercial Division
New York’s trial courts have a commercial division which is devoted exclusively to business disputes. The commercial division was created in 1995, which at the time was one of the first state court trial divisions devoted exclusively to business cases. Today, New York’s most complex, business cases are assigned to the commercial division.
The commercial division rules address which types of cases qualify. For example, commercial lease disputes qualify, but actions for failure to pay rent do not. Additionally, there are minimum amount in controversy requirements; New York County, for example, has a $500,000 minimum amount in controversy.
A significant benefit of litigating in New York’s commercial division is the opportunity to have commercial cases heard by experienced judges whose sole focus is commercial matters. Additionally, there are a small number of commercial division judges in each county throughout the state, making it far easier for those who practice in these courts to understand how the case will play out. For example, there are only eight commercial division judges in New York County. This is in stark contrast to the Southern District of New York (the federal court located in New York County), which has more than 50 judges, most of whom have large criminal caseloads.
Additionally, the judges in the commercial division approach their cases in a hands-on way. For example, many commercial matters start with seeking expedited relief at the outset of the case. New York’s approach is practical and streamlined. The court clerks process these requests quickly, and if you file in the morning, you will very often get heard by a judge that same day – even today, during the COVID-19 environment. And, unlike many other forums, New York’s commercial division judges generally view summary judgment motions as a tool to narrow the issues before trial, and to potentially lead the parties to settlement. New York is the financial capital of the world and the real-world sensibilities and sophistication of New York commercial division judges can be a great asset.
New York’s Handling of UCC and Mezzanine Foreclosures During COVID-19
As part of wide ranging COVID-19 relief, New York State has had a moratorium on real property foreclosures. However, New York courts have held that UCC foreclosures are not subject to this moratorium, as pledged equity interests are not 'real property'.
Mezzanine financing is a form of financing whereby the borrower, typically a limited liability company (LLC) which owns the real estate fee owner, also typically an LLC, pledges the LLC membership interests issued by the fee owned that it holds as security for the loan. Upon default, the collateral for a mezzanine loan (the membership interest in the fee owner) is subject to a foreclosure sale under Article 9 of the Uniform Commercial Code (UCC). Unlike a real property foreclosure, a mezzanine UCC sale can be done relatively quickly and without judicial intervention by the foreclosing lender. To conduct a lawful UCC foreclosure sale, the UCC requires that “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” UCC 9-610(b).
In ordinary times, conducting a 'commercially reasonable sale' was well understood. COVID-19 has required courts to struggle with what is a 'commercially reasonable' sale in the midst of a global pandemic that has decimated many real estate sectors and has made the method, time and place requirements difficult, and often impossible, to comply with. Given the pandemic’s significant disputation, many mezzanine borrowers have challenged UCC sales via lawsuits seeking injunctive relief to halt or delay the foreclosure sale. Several courts in New York have granted temporary restraining orders halting UCC foreclosure sales and requiring more time and enhanced sale procedures to account for the pandemic. However, New York’s intermediate appellate court recently held that the trial court’s injunctive relief to halt the mezzanine foreclosure sale was wrongfully granted because “the feared loss of an investment can be compensated in money damages.” Given the different approaches taken by courts, practitioners are well advised to keep abreast of developments in this area.
Recent Revisions to New York’s Blue Sky Requirements
New York is home to significant pools of investment capital for privately held and publicly traded companies. Companies offering and selling securities often seek to gain access to capital by relying on exemptions from the Securities Act of 1933 (the Securities Act) registration requirements and avoiding the high costs, investment in time and ongoing disclosure requirements associated with a registered public offering subject to Securities and Exchange Commission (SEC) review.
The National Securities Markets Improvement Act of 1996 (NSMIA) preempts states from requiring state-level registration and qualification of 'covered securities', with the exception that states’ securities commissions could require notice filings and continue to collect filing fees. Issuers frequently seek to rely on Rule 506 of Regulation D under the Securities Act as the basis for their registration exemption because securities offered and sold in reliance thereon on Rule 506 of Regulation D are considered 'covered securities'. After NSMIA became federal law in January 1997, most states amended their blue sky securities regulations and only required the payment of a filing fee and the filing of a copy of the Form D with the state. However, New York continued to require more onerous forms and filings to be made prior to making sales of securities. In light of NSMIA, there was industry confusion about whether New York’s filing requirements were inconsistent with federal securities laws, and whether companies conducting Regulation D offerings within or from New York were required to comply with New York’s blue sky statute.
Effective December 2, 2020, New York eliminated such uncertainty by adopting final rules that standardized federal and multistate systems. New York’s filing requirements are now the same as, rather than prior to and more extensive than, the federal requirements. The final rules require issuers conducting Regulation D offerings within or from New York to:
• file a Form D with the SEC within 15 days following the first sale of securities;
• file a notice that a Form D was filed with the SEC via the North American Securities Administrators Association electronic filing depository system (the EFD);
• pay filing fees of $1,200 (for offering amounts over $500,000) or $300 (for offering amounts of $500,000 or less); and
• consent to service of process via the EFD.
New York’s recent change is a welcome development for issuers and investors, but it is not universal. Issuers of real estate securities must continue to file the Form 99 as prescribed by the Real Estate Finance Bureau. Issuers of theatrical securities that are relying on exemptions under Regulation D may choose between filing through the EFD or filing New York’s Form 99.