111 W. 57th Inv. LLC v. 111 W57 Mezz Inv. LLC

Summary

The New York Court of Appeals holds that a party's contractual sole-discretion clause does not eliminate the implied covenant of good faith and fair dealing. The court concludes that the plaintiff sufficiently pleaded that Apollo breached the implied covenant by assigning a mezzanine loan as part of an alleged scheme to strip the plaintiff of its equity in a real estate project. The court reinstates that claim but affirms dismissal of the tortious interference claims against Apollo and Spruce.

Holdings

1. A party's sole discretion with respect to a contractual right does not, by itself, exculpate that party from complying with the implied covenant of good faith and fair dealing. The discretion must be exercised in a manner consistent with the contract's purpose and may not be used arbitrarily, irrationally, or in bad faith to destroy or injure the other party's right to receive the fruits of the agreement.
2. The second amended complaint sufficiently pleaded that Apollo breached the implied covenant in the Pledge Agreement by assigning the junior mezzanine loan to Spruce as part of an alleged backroom deal designed to strip plaintiff of the value of its equity investment.
3. The tortious-interference claims against Apollo and Spruce were insufficiently pleaded and remained dismissed.

Questions Presented

1. Whether a contractual grant of sole discretion to assign a loan categorically exculpates the lender from the implied covenant of good faith and fair dealing.
2. Whether plaintiff sufficiently pleaded that Apollo breached the implied covenant by assigning the junior mezzanine loan as part of an alleged scheme to deprive plaintiff of the benefit of its bargain.
3. Whether plaintiff sufficiently pleaded tortious interference with the joint venture agreement against Apollo and Spruce.

Disposition

other