Sole Discretion to Assign a Loan Does Not Extinguish the Implied Covenant Against Bad-Faith, Collusive Assignments

Introduction

In 111 W. 57th Inv. LLC v 111 W57 Mezz Inv. LLC (2026 NY Slip Op 03376 [May 28, 2026]), the New York Court of Appeals addressed whether a lender’s contractually granted “sole discretion” to assign a loan forecloses liability under the implied covenant of good faith and fair dealing when the assignment is alleged to be part of a collusive scheme to strip an equity investor of the economic benefit of its bargain.

The dispute arose from financing for the development of a luxury residential tower at 111 West 57th Street in Manhattan. Plaintiff, the largest equity investor, claimed that the junior mezzanine lender (Apollo) assigned a $25 million junior mezzanine loan to Spruce at par to enable a Uniform Commercial Code (“UCC”) strict foreclosure that would wipe out the joint venture’s equity—principally plaintiff’s—while allegedly leaving the sponsor positioned to retain or “carry over” value through side arrangements.

The key issues were: (1) whether plaintiff sufficiently pleaded a breach of the implied covenant of good faith and fair dealing against Apollo under the Pledge and Security Agreement (and integrated Loan Documents) despite Apollo’s “sole discretion” assignment rights; and (2) whether plaintiff sufficiently pleaded tortious interference with the joint venture agreement (“JVA”) against Apollo and Spruce.

Summary of the Opinion

The Court of Appeals (Wilson, Ch. J.) held that plaintiff adequately pleaded a claim that Apollo breached the implied covenant of good faith and fair dealing by assigning the junior mezzanine loan to Spruce as part of an alleged “backroom deal” intended to deprive plaintiff of the “fruits of the contract.” The Court therefore reinstated the implied covenant claim against Apollo and remitted for further proceedings.

The Court otherwise affirmed dismissal of plaintiff’s tortious interference claims against Apollo and Spruce as insufficiently pleaded (the Court did not reinstate those tort claims).

Judge Garcia dissented in part, warning that the majority’s approach undermines commercial certainty by using the implied covenant to “rewrite” sophisticated loan documents and by allowing “bad behavior” allegations to substitute for a contract-based limitation on an assignment clause.

Analysis

Precedents Cited

1) The Court’s core implied-covenant framework

  • Kirke La Shelle Co. v Paul Armstrong Co., 263 NY 79 (1933) and Kalisch-Jarcho, Inc. v City of New York, 58 NY2d 377 (1983): foundational statements that every contract includes a covenant that neither party will destroy the other’s right to the contract’s “fruits.”
  • Singh v City of New York, 40 NY3d 138 (2023): reaffirmed the covenant’s scope and the “heavy burden” to show an unexpressed promise implicit in the contract “viewed as a whole.”
  • Cordero v Transamerica Annuity Serv. Co., 39 NY3d 399 (2023): emphasized that the covenant requires reasonable performance, and that courts infer promises a reasonable promisee would have understood were included (drawing on Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62 [1978]).
  • Dalton v Educ. Testing Serv., 87 NY2d 384 (1995): central to the majority’s reasoning—where a contract contemplates discretion, the covenant includes a promise not to act “arbitrarily or irrationally” in exercising that discretion.
  • Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62 (1978): supplied the policy “tension” between freedom of contract and the need to protect parties from harsh effects of unchecked market conduct, supporting the role of implied doctrines such as the covenant.
  • 511 W. 232nd Owners Co. v Jennifer Realty Co., 98 NY2d 144 (2002): reiterated the “fruits of the contract” formulation and the “reasonable promisee” lens used to infer implied promises.

2) The “sole discretion” split in the Appellate Division

A key feature of the majority opinion is its treatment of a doctrinal inconsistency in Departmental case law about whether “sole discretion” language defeats the implied covenant.

  • The Appellate Division relied on First Department cases suggesting “sole discretion” forecloses implied-covenant claims: Tr. Funding Assoc., LLC v Capital One Equip. Fin. Co., 149 AD3d 23 (1st Dept 2017) and Cambridge Investments LLC v Prophecy Asset Mgt., LP, 188 AD3d 521 (1st Dept 2020).
  • The majority contrasted those cases with other Departmental authority (and even later First Department authority) recognizing that expressly discretionary rights still cannot be exercised in bad faith to frustrate contractual benefits, including: Greenland Asset Mgt. Co. v MicroCloud Hologram, Inc., 244 AD3d 528 (1st Dept 2025); Gutt v N. Am. Partners in Anesthesia, LLP, 237 AD3d 1063 (2d Dept 2025); Ahmed Elkoulily, M.D., P.C. v New York State Catholic Healthplan, Inc., 153 AD3d 768 (2d Dept 2017); Scheer v Elam Sand & Gravel Co., 177 AD3d 1290 (4th Dept 2019); and Gizara v New York Times Co., 80 AD3d 1026 (3d Dept 2011).

The Court adopted the “prevailing view” that a grant of “sole discretion” does not per se exculpate a party from the implied covenant. At the same time, it preserved a distinct line of cases treating an express “sole discretion” termination right as generally immune from implied-covenant narrowing, citing Vendome v. Oldenburg, 198 AD3d 450 (1st Dept 2021), ELBT Realty, LLC v. Mineola Garden City Co. 144 AD3d 1083 (2d Dept 2016), Chrysler Credit Co. v Dioguardi Jeep Eagle, Inc., 192 AD2d 1066 (4th Dept 1993), and Burdett Radiology Consultants, P.C. v. Samaritan Hosp., 158 AD2d 132 (3d Dept 1990).

3) Pleading and motion-to-dismiss standards

  • 34-06 73, LLC v Seneca Ins. Co., 39 NY3d 44 (2022) and Leon v Martinez, 84 NY2d 83 (1994): confirm liberal pleading standards—accept allegations as true and give every favorable inference.
  • Cortlandt St. Recovery Co. v Bonderman, 31 NY3d 30 (2018): emphasized that on a motion to dismiss, courts test pleading adequacy, not evidentiary proof.

4) Persuasive and comparative authority highlighted by the Court and dissent

  • Delaware alignment cited by the majority: Glaxo Group Ltd. v DRIT LP, 248 A3d 911 (Del 2021); Charlotte Broadcasting, LLC v Davis Broadcasting of Atlanta, L.L.C., 2015 WL 3863245 (Del Super Ct June 10, 2015), affd 134 A3d 759 (Del 2016); Cygnus Opportunity Fund, LLC v Washington Prime Group, LLC, 302 A3d 430 (Del Ch 2023). These cases were invoked to support that discretion invites—rather than defeats—implied-covenant scrutiny when used to defeat contractual expectations.
  • The dissent’s cautionary contract-law canon that implied obligations cannot contradict express terms relied on Murphy v Am. Home Prods. Corp., 58 NY2d 293 (1983), and cited In re January 2021 Short Squeeze Trading Litig., 76 F4th 1335 (11th Cir 2023) (quoting Third Story Music, Inc. v Waits, 41 Cal App 4th 798 [1995]) to argue covenant limits on discretion should be rare.
  • The dissent’s lender-assignment comparators: Empresas Cablevision, S.A.B. de C.V. v JPMorgan Chase Bank, N.A., 680 F Supp 2d 625 (SD NY 2010) and Norte v WorldBusiness Capital, Inc., 2015 WL 7730980 (SD NY 2015). The majority responded that both, properly understood, support the “fruits of the contract” inquiry rather than a categorical rule driven solely by assignment-clause text.
  • The dissent’s market-stability line of cases emphasizing New York’s commercial predictability: Crair v Brookdale Hosp. Med. Ctr., Cornell Univ., 94 NY2d 524 (2000); 159 MP Corp. v Redbridge Bedford, LLC, 33 NY3d 353 (2019); Bluebird Partners v First Fid. Bank, 94 NY2d 726 (2000); and Ezrasons, Inc. v Rudd, 44 NY3d 532 (2025).

Legal Reasoning

1) The new clarifying rule: “sole discretion” does not negate the implied covenant

The Court’s central doctrinal clarification is that a contractual grant of “sole discretion” (here, to assign a loan) does not, by itself, eliminate the implied covenant’s constraint against bad-faith conduct that undermines the other side’s reasonably expected contractual benefits. In practical terms, the majority rejects a categorical approach under which “sole and complete discretion” language is treated as an implied-covenant safe harbor.

2) “Who” restrictions do not license “how” misconduct

The Loan Agreement contained limitations on who Apollo could assign to (lists of “prohibited transferees”). The dissent argued that because sophisticated parties negotiated specific restrictions, courts should not imply further limitations. The majority answered with a structural distinction: a negotiated “who” limitation does not imply permission to deploy assignment power in any manner, including as an instrument of alleged fraud or collusion. The implied covenant addresses the manner of performance where conduct—though arguably within literal text—defeats the contract’s intended benefit.

3) Integrated documents and the “fruits” of the bargain

The majority treated the Pledge Agreement and Loan Agreement as “intertwined” and part of an “integrated agreement,” reinforcing that the “fruits of the contract” analysis must consider the integrated financing structure and its purpose: to facilitate forbearance and continuation of the Project without unjustly destroying the Joint Venture’s equity expectations. The implied promise inferred was narrow in formulation but forceful in effect: Apollo would not exercise assignment discretion in collusion with others to strip plaintiff of its equity participation—the very economic interest the restructured financing was supposed to preserve pending cure/continuation.

4) Pleading sufficiency: collusion allegations tied to assignment mechanics

Applying Leon v Martinez and Cortlandt St. Recovery Co. v Bonderman, the Court held the complaint plausibly alleged bad-faith exercise of assignment discretion. The pleaded facts included: Apollo’s provision of financial models to Spruce projecting massive equity upside through strict foreclosure; assignment at par despite default; the speed with which Spruce declared default and pursued strict foreclosure; and Apollo’s alleged cooperation and continued role (including contemporaneous forbearance needs) supporting the alleged scheme.

The dissent characterized the majority as focusing on “bad” behavior while ignoring that the alleged breach was “assignment” itself. The majority’s answer (including in footnotes) was that the assignment is alleged as a component of a broader collusive course of conduct that, if proven, plausibly amounts to an implied-covenant breach because it weaponized a contractual power to destroy the counterparty’s expected benefit.

5) Tortious interference: dismissal affirmed

The Court of Appeals affirmed dismissal of the tortious interference claims as insufficiently pleaded. The Appellate Division had relied on deficiencies including “but for” causation and failure to plead an underlying breach of the JVA’s implied covenant. Supreme Court had also relied on the economic interest defense. The Court of Appeals did not reinstate the tort claims, leaving the implied-covenant contract claim as the revived path forward.

Impact

1) Resolving a doctrinal fault line in New York contract law

The most immediate precedential effect is the Court’s express adoption of the rule that “sole discretion” clauses do not categorically bar implied-covenant claims. This harmonizes New York’s high-level covenant doctrine (from Dalton v Educ. Testing Serv. through Singh v City of New York) with Departmental lines of authority that had appeared to treat discretion as an implied-covenant escape hatch.

2) Increased scrutiny of distressed-loan assignments used to engineer foreclosure outcomes

In the mezzanine/structured-finance context, the decision signals that courts may look beyond the formality of an assignment right and scrutinize allegations that assignment was used as a tool in a collusive strategy to capture equity value (especially where strict foreclosure under the UCC can convert collateral into ownership without a public sale). The ruling does not prohibit assignments or strict foreclosures; it preserves a cause of action where those tools are alleged to have been deployed in bad faith to defeat the other side’s contractual expectations.

3) Drafting and litigation behavior

Loan documents routinely use “sole discretion,” “final and conclusive,” and broad remedies clauses. After this decision, lenders and sponsors should expect that such language will not, standing alone, foreclose implied-covenant theories when plaintiffs plead that discretion was exercised as part of a scheme to deprive them of the bargain’s economic fruits. Borrowers and equity investors, meanwhile, have clearer footing to plead around broad discretion where they can tie the challenged conduct to frustration of the contract’s purpose.

4) Market certainty vs. judicial policing of opportunism

The dissent framed the decision as threatening New York’s “stable” commercial law and inviting courts to impose a subjective “fair play” overlay. The majority positioned its holding as continuity with settled doctrine, not a new standard, and emphasized that sophistication is already embedded in the “reasonable person in the position of the promisee” test. The practical compromise is that the implied covenant remains a “heavy burden” claim, but “sole discretion” is no longer an automatic pleading-stage knockout.

Complex Concepts Simplified

  • Mezzanine loan: financing secured not by the real property directly, but by a pledge of ownership interests in the entity that owns (or controls) the property. Foreclosure can transfer control of the project entity.
  • Pledge and Security Agreement: the contract where the borrower pledges collateral (here, membership interests/equity interests) to secure repayment of the loan.
  • UCC strict foreclosure (UCC 9-620): a process where the secured party accepts the collateral in full satisfaction of the debt if the debtor does not timely object. It can avoid a public auction and thereby eliminate the chance that surplus value returns to the debtor/equity.
  • Implied covenant of good faith and fair dealing: a background rule in every contract preventing either party from using contractual rights in a way that destroys the other party’s right to receive the deal’s benefits, even if no express clause is violated.
  • “Sole discretion” clauses: provisions granting one party wide latitude. This decision clarifies they do not grant permission to act in bad faith to defeat the counterparty’s contractual expectations.
  • Tortious interference with contract: a claim that a third party intentionally caused a contracting party to breach. It typically requires pleading a breach, causation (often “but for”), and sometimes overcoming defenses such as economic justification.
  • Economic interest defense: a doctrine that can shield conduct interfering with a contract when the defendant acted to protect a legitimate financial stake—unless malice, fraud, or illegal means are adequately pleaded.

Conclusion

111 W. 57th Inv. LLC v 111 W57 Mezz Inv. LLC restores and clarifies a core New York contract principle in a high-stakes finance setting: even where a contract grants “sole discretion” to assign a loan, the assigning party may still be liable under the implied covenant of good faith and fair dealing if the discretion is exercised in bad faith to frustrate the counterparty’s right to the “fruits of the contract.” The Court reinstated the implied-covenant claim against Apollo at the pleading stage, while leaving tortious interference claims dismissed.

For future disputes, the decision is most significant for (1) narrowing the perceived safe harbor created by “sole discretion” language, (2) permitting implied-covenant scrutiny of loan assignments allegedly used to engineer value capture through strict foreclosure, and (3) reaffirming that sophisticated parties are protected by—rather than excluded from—the implied covenant’s baseline constraint against opportunistic destruction of contractual benefits.