Clogging by Equity Pledge Clarification

[Fries, Richard]

Good morning everyone and pardon this intrusion.

 

In response to a question on the clogging of the equity of redemption (enforcing an equity pledge as additional collateral for a mortgage loan), I referenced the recent Atlas Brookview decision of the Supreme Court, New York County in November 2021.  

 

Without editing (or expanding) my note, which might be slightly out of context, I am taking the liberty of presenting it below.

 

Best wishes.

 

Richard  

 

RICHARD S. FRIES
Partner

SIDLEY AUSTIN LLP
787 Seventh Avenue
New York, NY 10019
+1 212 839 5640
richar...@sidley.com
www.sidley.com

 

The Supreme Court, New York County in Atlas Brookview (Justice Borrok), in ruling that a pledge of membership interests as additional collateral for a mortgage loan does not clog the equity of redemption, said, among other things –

 

(i)                          The (dual collateral) structure was entered into voluntarily;

 

(ii)                        The dual collateral was a “business term and business deal” among sophisticated parties represented by good counsel; and

 

(iii)                     “Commercial certainty is a paramount concern.”

 

It seems, based on this latest decision (albeit rendered by a lower court in connection with mortgaged property located in Illinois), that it will be difficult for borrowers successfully to challenge an equity pledge as a clog on the mortgagor’s equity of redemption.

 

We have discussed, many times, the arguments on both sides of this issue.   We have mentioned the relatively recent (2020) decision in HH Mark Twain v. Acres Capital which seemed to indicate the equity pledge might constitute a clog.

 

However, now, precisely on point (rather than dicta or a preliminary indication on a motion to dismiss), Atlas Brookview provides very current – November 2021 -- precedent for the propriety and enforceability of the equity pledge as additional collateral for a single mortgage loan.

 

I do not know if there will be an appeal.

 

P.S.    Several law firms have written alerts on this decision and Jeff Steiner and Scott Weinberg wrote an excellent article which appeared in the New York Law Journal.

 

Best wishes to all.

 

Richard

 

RICHARD S. FRIES
Partner

SIDLEY AUSTIN LLP
787 Seventh Avenue
New York, NY 10019
+1 212 839 5640
richar...@sidley.com
www.sidley.com

 

 

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