On October 5, 2023, the First Department of New York’s Appellate Division limited the ability of borrowers to use a claim for breach of the implied covenant of good faith and fair dealing as a club to prevent lenders from exercising their rights under the parties’ loan documents. In 2013, a subsidiary of AmBase Corporation invested approximately $65 million to develop a supertall residential tower in Manhattan. AmBase entered into a joint venture with developers Michael Stern and Kevin Maloney (the “Sponsor”) and another investor, Atlantic. The project was financed with a $400 million construction loan from AIG secured by the property, and a $325 million mezzanine loan from Apollo, which was later split into senior and junior mezzanine loans.
By January 2017, the construction loan was out of balance, leading to demand notices by AIG and Apollo. The original mezzanine borrower entered into a forbearance agreement with Apollo. During the forbearance period, AmBase alleged, Apollo, AIG, and the Sponsor negotiated a “backroom deal” with Spruce Capital Partners LLC to bring their entity into the project and wipe out AmBase’s equity. On June 28, 2017, Apollo assigned the $25 million junior mezzanine loan to Spruce. On June 30, 2017, the day after the forbearance period expired, Spruce—as the new junior mezzanine lender—delivered a notice of Event of Default to the junior mezzanine borrower. When that payment was not made, Spruce sent a proposal of strict foreclosure pursuant to UCC 9-620(a).
AmBase sued to block the foreclosure and obtained a TRO, but the court denied a preliminary injunction on the ground that AmBase lacked standing to challenge the foreclosure. Spruce foreclosed on the junior mezzanine loan, acquired the equity subject to Apollo’s senior mezzanine loan, and eliminated AmBase’s interest in the property. AmBase filed an amended complaint, contending that the Sponsor and Spruce entered into the “backroom deal” with Apollo and AIG to deprive AmBase of its equity interest. AmBase asserted a tortious interference claim against Apollo, AIG and Spruce, alleging that the “backroom deal” interfered with its joint venture agreement with the Sponsor, but the trial court ruled there had been no breach of the joint venture agreement and dismissed the claim. AmBase also asserted a claim against Apollo for breach of the implied covenant of good faith and fair dealing in the parties’ Pledge Agreement, alleging that Apollo’s assignment of the junior mezzanine loan was undertaken in bad faith as part of the “backroom deal,” and that Apollo had exercised its discretion under the Pledge Agreement in bad faith. The trial court denied Apollo’s motion to dismiss this claim.
The First Department reversed. The court reiterated its prior direction that “where a contract allows one party to exercise a contractual right in its sole discretion and for any reason whatsoever, the covenant of good faith and fair dealing cannot serve to negate that provision.” The court went on to hold that the relevant loan and pledge agreement, “when read together, conferred considerable discretion to the Apollo Lenders. Because Apollo had the absolute right to assign the Pledge Agreement in its sole discretion under the loan documents,” the First Department held, “there can be no implied covenant claim against them.” Accordingly, the First Department dismissed AmBase’s claim against Apollo.
The case is 111 West 57th Investment LLC v. 111 W57 Mezz Investment LLC, No. 2023-00158 (N.Y. App. Div. Oct. 5, 2023). The plaintiffs are represented by Ice Miller LLP. The defendants are represented by Dechert LLP and Greenberg Traurig, LLP. The opinion is available here.
