In a recent decision, New York County Commercial Division Justice Joel Cohen sided with Carter Ledyard’s client, a convertible note lender, in granting a preliminary injunction directing its commercial borrower to deliver first position mortgages to secure the borrower’s $1.8 million loan obligation. The borrower is formerly a publicly-traded company which stated in its public filings that it owns a portfolio of over 3,200 residential properties nationwide.
The court required the borrower to provide first priority mortgage security for the loan, even though the borrower failed to record the mortgages at the time of signing the loan. The Court determined that the mortgages were required by the loan documents and are “a unique, bargained-for contractual remedy” that the lender is entitled to while the litigation continues.
“The decision is a rare issuance of a ‘mandatory injunction,’ which compels specific conduct during a pending litigation rather than one prohibiting conduct,” says Carter Ledyard counsel Jacob H. Nemon.
Notably, the Court ruled that Carter Ledyard’s client demonstrated a likelihood of success in the case even though the borrower had a “potentially meritorious usury defense” to enforcement of the loan.
“An intervening decision from New York’s highest court determined that the value of a conversion discount – by which a lender may choose to convert the debt owed to it by a public company into company shares – which is given as consideration for a loan must be included in calculating the effective rate of interest on the loan,” explains Mr. Nemon. “If the effective rate exceeds the maximum rate of interest permitted in New York, a loan might not be enforced.”
“We forcefully argued to the Court that, under the facts of this case, the value of the conversion discount could not be reasonably determined at the time of contracting. Not only had the borrower’s shares been suspended from trading on the New York Stock Exchange months prior to the borrower seeking the loan, but the financial statements of the company grossly overstated the company’s worth and were restated to drastically reduce the company’s financials only months after the loan documents were signed.”
The court’s decision requires the parties to confer about suitable properties in the borrower’s portfolio on which to grant mortgages.
Carter Ledyard counsel Jacob H. Nemon is representing the lender.