News

November 9, 2026

A New York mall owner facing foreclosure on a $210 million loan has found an ally in its town. On August 24, 2026, the Town of Victor voted to begin eminent-domain proceedings to take most of Eastview Mall and transfer title to an affiliate of the current borrower—which has agreed to cover the town’s legal expenses. If it works, the mortgage lien will be discharged, the lender will receive the value of the property—according to the borrower, currently appraised at $112 million—and the borrower’s affiliate will keep the mall.

The lender, a CMBS trustee, is foreclosing. U.S. Bank N.A. v. Eastview Mall, LLC, Index No. 850427/2026 (Sup. Ct. N.Y. Cty.). But the borrower pleads the condemnation as a defense. And if the condemnation succeeds, the foreclosure will be moot.

Is it common for borrowers to use eminent domain to avoid foreclosure?

It is certainly not common for borrowers to use eminent domain to avoid foreclosure.

But the Town of Victor is no stranger to the use of eminent domain for the benefit of the Eastview Mall. In 2021, at the request of the mall’s principals, the town sought to condemn vacant space adjoining the mall. This vacant space had once been occupied by Lord & Taylor, but following its bankruptcy, had remained unoccupied. 

The Fourth Department initially halted the condemnation, holding that the town failed to establish a public purpose. Indeed, according to the court, the Town admitted that it had “no idea what it intends to do” with the property, and did “not even rule out simply transferring title to Eastview Mall, LLC, which owns the adjoining mall and whose principals asked the Town to condemn the property.” HBC Victor LLC v. Town of Victor, 212 A.D.3d 121, 124 (4th Dep’t 2022) (“Victor I”). 

But two years later, the Fourth Department reversed course and approved a revised redevelopment plan, holding that “it is well settled that ‘the [t]aking of substandard real estate by a municipality for redevelopment by private corporations has long been recognized as a species of public use.’” HBC Victor LLC v. Town of Victor, 225 A.D.3d 1254, 1256 (4th Dep’t 2024) (“Victor II”) (alteration in original). This condemnation was ultimately successful, but the owner of the condemned property and the Town continue to battle in court over the amount the Town owes as just compensation.

Is a condemnation award the economic equivalent of a foreclosure sale?

In theory, maybe. In practice, no, a condemnation award is not the economic equivalent of a foreclosure sale.

The borrower’s best argument is that the mall is worth $112 million whether auctioned or taken, so the lender’s economic outcome is the same: obtain $112 million in a foreclosure sale or receive $112 million in just compensation from the Town. This is because, upon condemnation, the Town takes “free from the mortgage lien,” but the “equitable lien of the mortgage then attached to the damages awarded for the land.” Muldoon v. Mid-Bronx Holding Corp., 287 NY 227, 229 (1942).

But that argument measures price, not the bargain. The loan agreement recites the lender’s reliance on its ability, after default, to “recover the Debt by a sale of the Property.” Foreclosure lets the lender credit bid, control timing, and sell to the highest bidder. In contrast, a borrower-arranged taking lets the borrower and the Town pick the timing and permits the borrower to keep the asset through an affiliate. If the mall recovers (its current appraisal is less than one-third of its 2012 appraised value), the upside belongs to borrower’s affiliate—not the lender.

The lender’s direct challenge is narrow. A petition under E.D.P.L. § 207 is due 30 days after the Town publishes its findings, and the lender (or any other challenger) must show the determination was “without foundation and baseless.” Victor II, 225 A.D.3d at 1255. But the lender’s challenge is not completely hopeless: a condemnation that results in “‘merely incidental public benefit coupled with a dominant private purpose’” is improper and will “invalidate the taking.” Victor I, 212 A.D.3d at 124. Evidence that the borrower orchestrated and funded the taking for the borrower’s sole benefit will support the lender’s challenge.

Does the mall guarantor face recourse exposure?

Potentially, the mall guarantor could face recourse exposure.

The loan here is nonrecourse—meaning that the lender can’t pursue the borrower or its guarantor, Rochester Malls, LLC, beyond the property. But the guaranty includes standard nonrecourse carveouts, which permit the lender to pursue the guarantor either for its losses or the full amount of the debt upon the occurrence of certain nonrecourse-carveout events.

As a threshold matter, a genuinely involuntary condemnation likely would not trigger recourse liability. Indeed, section 5.3 of the loan agreement contemplates an involuntary condemnation and requires the borrower to “diligently prosecute,” and permits the lender to participate in, any condemnation proceedings.

But this is not an involuntary condemnation, as it appears that the borrower and the Town are working together to prevent a foreclosure. This gives the lender several arguments under the nonrecourse carveouts of the guaranty.

First, the guarantor is liable for the lender’s losses caused by the borrower or its affiliates’ “willful misconduct.” 

A deliberate breach of contract, even if “motivated exclusively” by the breaching party’s own “economic self-interest,” is not enough. Metropolitan Life Ins. Co. v. Noble Lowndes Int’l, Inc., 84 N.Y.2d 430, 439 (1994). The conduct must be “tortious in nature, i.e., wrongful conduct in which defendant willfully intends to inflict harm on plaintiff at least in part through the means of breaching the contract between the parties.” Id. at 438. And so when “the conduct is merely intentional breach of contract,” it does not qualify. Intrepid Invs., LLC v. Selling Source, LLC, 165 A.D.3d 523, 525 (1st Dep’t 2018). 

The guarantor will argue that the borrower simply wants to save its mall and escape a special servicer it accuses of bad faith. But the lender will try to show that the borrower recruited the Town, and will then argue that a taking that extinguishes the mortgage and returns the mall to the borrower’s affiliate is designed to strip the lender of its collateral. Harm to the lender is the object of that plan, and the borrower pursues it by breaching section 5.3—working with the condemnor rather than “cooperat[ing]” with the lender in the condemnation.

Second, the guarantor is liable for the lender’s losses caused by the assertion of a “defense, judicial intervention or injunctive or other equitable relief of any kind” to the extent not “raised or asserted in good faith.” 

Here, in response to the lender’s foreclosure action, the borrower filed an answer with affirmative defenses—including based on the condemnation—and also asserted counterclaims. The lender could thus argue that, given the borrower’s collusion with the Town, the borrower’s defenses and counterclaims were not raised or asserted in good faith. Compare U.S. Bank Nat’l Ass'n as Tr. of Registered Holders of GS Mortg. Sec. Corp. II, Com. Mortg. Pass Through Certificates, Series 2012-GCJ9 v. Mattone, 769 F. Supp. 3d 298, 313 (S.D.N.Y. 2025) (nonrecourse carveout for assertion of defenses not triggered because carveout required judicial finding that defense was frivolous or asserted in bad faith and no such judicial finding was made), with NCCMI, Inc. v. Bersin Props., LLC, 226 A.D.3d 88, 91, 93 (1st Dep’t 2024) (nonrecourse carveout for assertion of defenses triggered by borrower’s filing of answer with affirmative defenses in response to foreclosure complaint because carveout was triggered if borrower “contests or in any way interferes with” foreclosure action, including by “‘bringing any counterclaim’” or “‘claiming any defense’”). The nonrecourse carveout for defenses here falls in between these two cases: it is triggered only if the defense is not raised or asserted in good faith, but it does not require a prior judicial finding.

On the flip side, however, the guarantor can argue that the assertion of the condemnation as a defense to the foreclosure didn’t cause the lender any losses (which is all this nonrecourse carveout triggers), because the condemnation is happening one way or another—regardless of the assertion of the defense. And the borrower could also argue that the lender will receive as just compensation whatever the value of the property is—which is all it would have recovered in a foreclosure anyway.

Third, the guarantor is liable for the full amount of the debt—not just the lender’s losses—as a result of the “Transfer” of the property.

The loan agreement defines “Transfer” to have occurred if the Borrower shall “sell, convey, mortgage, grant, bargain, encumber, pledge, assign or transfer” the property, “whether voluntarily or involuntarily.” The lender will argue that a condemnation of the property fits into this definition, and that whether the transfer was voluntary or involuntary is irrelevant. 

But the guarantor has strong counterarguments. 

A guaranty is to be interpreted in the “strictest manner.” 1995 CAM LLC v. W. Side Advisors, LLC, 45 N.Y.3d 150, 154 (2025). And “even though it can be termed a sale,” a condemnation is “not a voluntary sale or conveyance.” Application of Mazzone, 281 N.Y. 139, 146 (1939). It is instead a “compulsory taking of an estate in fee absolute upon payment of just compensation to the owner.” Id. at 147.

Here, the transfer clause restricts what the borrower does: “neither Borrower nor any other Person having a direct or indirect ownership or beneficial interest in Borrower shall sell, convey, mortgage, grant, bargain, encumber, pledge, assign or transfer the Property.” In a condemnation, the Town takes the property.

The structure of the loan documents also cuts against the lender, as section 5.3 separately governs condemnation and directs the lender to the award. See CP III Rincon Towers, LLC v. Cohen, 2022 WL 61318, at *12–14 (S.D.N.Y. Jan. 6, 2022) (in assessing liability under nonrecourse-carveout guaranty, similar definition of “Transfer” did not include involuntary recordation of liens against property when guaranty had separate recourse provision only for “voluntary” liens).

We have not located any decision addressing whether a borrower-arranged condemnation is a “Transfer.” The closest, however, is an Eighth Circuit case in which a borrower tried to dress up a voluntary sale as being done “in lieu of condemnation.” Affordable Communities of Mo. v. Fed. Nat’l Mortg. Ass’n, 815 F.3d 1130 (8th Cir. 2016). There, the borrower’s loan waived a prepayment penalty if the loan was repaid from a condemnation award, and the court assumed that the term “condemnation award” also included a sale “in lieu of condemnation.” Id. at 1132, 1133. But the borrower had already decided to sell the property, and in its purchase agreement, the buyer was required to obtain a letter from the city threatening condemnation—which the buyer did. Id. at 1132. In rejecting the borrower’s claim that the prepayment penalty didn’t apply because the sale was done “in lieu of threatened condemnation,” the Eighth Circuit upheld the district court’s finding that the letter from the city “did not cause” the sale because the borrower “had already intended to sell the property before receiving it.” Id. at 1133. The court thus looked past the condemnation label and asked who actually drove the transfer. A lender here would ask a New York court to do the same thing: treat a taking the borrower engineered as the borrower’s own transfer. But no New York court has taken that step, and the strict construction that governs guaranties cuts against it.  

How should you respond when a borrower recruits a town to take the collateral?

If you represent the lender, build the record now. Put the borrower’s role, funding, and affiliate grantee into that record, FOIL the Town’s communications with the borrower, and plead all applicable nonrecourse carveouts against the guarantor.

If you represent the borrower or guarantor, assume every email to town hall will become an exhibit. Exposure potentially turns on whether the borrower endured the taking or arranged it.

Joshua Wurtzel is a partner at Schlam Stone & Dolan LLP who focuses his practice on complex commercial, real-estate, and commercial-lending litigation. He has been recognized on the Best Lawyers “Ones to Watch® in America” list in Commercial Litigation and the New York Metro Super Lawyers® "Rising Stars" list in Business Litigation.