New York Supreme Court Casts Doubt on Viability of Claims That a Pledge Agreement Clogs the Equity of Redemption

A recent decision from the Commercial Division of the New York State Supreme Court addresses one of the most discussed issues in real estate financing circles: whether an accommodation pledge agreement in connection with a mortgage loan interferes with or “clogs” the borrower’s right to redeem the mortgage under the equity of redemption.  Although no court had ever enjoined a UCC foreclosure sale on the basis that the pledge was a clog on the equity of redemption, prior court decisions left open the possibility that a borrower could succeed on such a claim.  However, in Atlas Brookview Mezzanine LLC v. DB Brookview LLC, Justice Borrok finally squarely addressed the issue and granted a motion to dismiss a declaratory judgment claim based on the theory that the pledge agreement, which was granted as an accommodation to the mortgage lender and not in connection with a mezzanine loan, clogged the mortgage borrower’s right to redeem the property under the mortgage.  Justice Borrok held that permitting such a claim to proceed would be inconsistent with the agreement between sophisticated investors represented by counsel and that the debt could be paid off at any time prior to the foreclosure sale under the Uniform Commercial Code (“UCC”).  The rationale underlying Justice Borrok’s decision casts doubt on the ability of a borrower to successfully bring a claim premised on the argument that a pledge agreement, voluntarily entered into, interfered with its equity of redemption.