The firm recently secured an important appellate victory for KKR in a case in which the Plaintiff, Atlas, sought to unwind a multimillion dollar sale of properties to KKR affiliates at a UCC auction. See Atlas MF Mezz. Borrower, LLC v. Macquarie Tex. Loan Holder, LLC, --- N.Y.S.3d ---, 2019 WL 2374960, *1 (1st Dep’t June 6, 2019). The First Department of the New York Appellate Division held that Atlas was not entitled to unwind the sale after closing, and dismissed Atlas’s damages claims against KKR. This was not only a win for KKR, but it also brought much-needed certainty to the law governing UCC foreclosure sales in New York. Bidders at foreclosure sales can now rest assured that their sales cannot be undone after closing, which is a significant and positive development for New York commercial transactions.
The case arose from Atlas’s default on a $71 million mezzanine loan extended by Macquarie, its secured creditor. The loan was secured by Atlas’s equity interests in a holding company that indirectly owned eleven apartment complexes in Texas. After Atlas defaulted, Macquarie announced its intention to sell the holding company at an auction. Atlas attempted to halt the auction by seeking a preliminary injunction in the Southern District of New York, but Atlas’s motion was denied. The auction proceeded as scheduled, and KKR was declared the winning bidder due to its demonstrated financial ability to close on the purchase. Atlas also attempted to bid at the auction, but its bids were rejected because Atlas failed to meet the auction’s requirements.
After losing the auction, Atlas added KKR as a defendant to its lawsuit, which was remanded to New York Supreme Court. Atlas ultimately filed an amended complaint that alleged (without any factual basis) that KKR and Macquarie had conspired to rig the auction. The primary relief Atlas sought was a declaratory judgment claim seeking to unwind the sale. Atlas also sought $30 million in damages based on allegations that KKR had induced Macquarie to breach its mezzanine loan agreement with Atlas. Prior to retaining Quinn Emanuel, KKR’s prior counsel moved to dismiss, but the Court (Ramos, J.) denied the motion at a hearing. KKR then hired Quinn Emanuel.
Quinn Emanuel appealed the Court’s order denying KKR’s motion to dismiss even while aggressively litigating the case at the trial court level. The primary issue on appeal was whether Atlas was entitled to unwind the sale of the holding company to KKR under Article 9 of the UCC. Surprisingly, no New York court had ever definitively addressed the issue, and the few courts in other jurisdictions to have considered it had reached differing (and often cryptic) conclusions. The case thus presented an issue of first impression.
Last month, the First Department validated Quinn Emanuel’s position in a comprehensive, twenty-six page opinion that often adopted Quinn Emanuel’s arguments wholesale and unequivocally held that Atlas was not entitled to unwind the sale. The First Department also emphatically rejected Atlas’s arguments. The First Department began its decision by stating that: “if UCC sales could be unwound, it would only serve to muddy the waters surrounding nonjudicial sales conducted pursuant to article 9 of the UCC, and to deter potential buyers from bidding in nonjudicial sales, which would, in turn, harm the debtor and the secured party attempting to collect after a default.” Id. at *1. The First Department further reasoned that Atlas’s requested relief (unwinding the sale) was at odds with the plain language of the UCC, which allows an aggrieved debtor to seek injunctive relief before a sale has closed, but limits the debtor to seeking damages after closing. Id. at *8. Finally, the First Department held that Atlas’s damages claims against KKR failed because Atlas had defaulted on its mezzanine loan agreement with Macquarie, and thus could not hold KKR liable for inducing Macquarie to breach that agreement (since Atlas had failed to perform under the agreement). Thus, all of Atlas’s claims against KKR were dismissed.