A contractual clause granting a lender “sole discretion” to assign a loan does not shield the institution from claims that it breached the implied covenant of good faith and fair dealing, New York’s highest court ruled on May 28, 2026. Reinstating an equity investor’s lawsuit over an alleged scheme to strip $65 million in equity from a Manhattan luxury skyscraper project, the decision clarifies the boundaries of lender discretion under New York commercial law.
Writing for a 4-3 majority in 111 W. 57th Inv. LLC v. 111 W57 Mezz Inv. LLC (No. 41), Chief Judge Wilson of the New York Court of Appeals held that explicit discretionary authority cannot be exercised in bad faith to deprive a counterparty of a contract’s intended benefits. Chief Judge Wilson was joined in the majority opinion by Judge Rivera, Judge Troutman, and Judge Ogden. Haley N. Proctor argued for appellants 111 West 57th Investment LLC, while Gary J. Mennitt represented respondents ACREFI Mortgage Lending, LLC and related Apollo entities, and Steven Sinatra represented respondents Spruce Capital Partners LLC and affiliated defendants. Judge Halligan took no part in the decision.
The dispute stems from the development of a luxury residential tower at 111 West 57th Street in New York City. Plaintiff 111 West 57th Investment LLC invested $65 million in equity into 111 West 57th Partners LLC, a joint venture formed alongside Atlantic 57 LLC and 111 West 57th Sponsor LLC (“Sponsor”). To finance construction, the joint venture obtained $725 million in debt, including a $325 million mezzanine loan issued by Apollo entities including ACREFI Mortgage Lending, LLC. Following budget overruns, Apollo and the joint venture executed a forbearance agreement in March 2017 that divided the mezzanine debt into a $300 million senior mezzanine loan and a $25 million junior mezzanine loan, secured by the joint venture’s equity interest under a Loan Agreement and Pledge Agreement.
The Loan Agreement provided that Apollo held the right to assign the junior mezzanine debt in its “sole discretion.” According to the second amended complaint, Apollo used that discretion to engage in a “backroom deal” with Spruce Capital Partners LLC, Joshua Crane, and Robert Schwartz (collectively, “Spruce”). Plaintiff alleged Apollo provided Spruce with financial models showing approximately $600 million in potential cash flow to equity if Spruce bought the $25 million junior loan at par value and executed a strict foreclosure under Uniform Commercial Code Section 9-620. In June 2017, Apollo assigned the loan to Spruce entity 111 W57 Mezz Investor LLC, which immediately declared a default and initiated a strict foreclosure that wiped out the joint venture’s equity, including plaintiff’s $65 million investment, while allegedly allowing Sponsor to remain on the project with carry-over equity.
After the Appellate Division, First Department, dismissed plaintiff’s claim for breach of the implied covenant of good faith and fair dealing against Apollo on the ground that Apollo possessed absolute discretion to assign the loan, the Court of Appeals reversed. Rejecting the notion that sole discretion provides complete immunity, Chief Judge Wilson wrote that “a party’s ‘sole discretion’ with respect to a right does not exculpate that party from complying with the implied covenant with respect to that right.” The court emphasized that “the implied covenant obligates the party with discretion act in good faith, and ‘not [] arbitrarily or irrationally,’ when ‘exercising that discretion.'” The court reinstated the implied covenant claim against Apollo and remitted the matter to Supreme Court, New York County, while affirming the dismissal of separate tortious interference claims against Apollo and Spruce as insufficiently pleaded.
In a partial dissent joined by Judge Singas and Judge Cannataro, Judge Garcia argued that the majority’s decision destabilizes established commercial expectations in complex transactions between sophisticated parties. Judge Garcia wrote that reading implied restrictions into explicit sole-discretion provisions undermines the predictability that makes New York a global financial hub.
Why it matters
Analysis: The Court of Appeals’ ruling provides crucial guidance for real estate finance attorneys, private equity sponsors, and institutional lenders operating under New York law. By holding that an express grant of “sole discretion” does not insulate a lender from implied covenant liability if the discretion is exercised as part of a bad-faith scheme, the decision limits lenders’ ability to rely on broad contractual reservation-of-rights clauses when structuring debt transfers and loan sales.
Legally, the decision resolves inconsistencies across Appellate Division departments regarding whether absolute discretionary rights defeat implied covenant claims at the pleading stage. Aligning New York law more closely with Delaware jurisprudence, the court established that even bargained-for discretionary authority remains constrained by the core requirement that neither party may act in bad faith to destroy the fundamental benefits of the contract.
Practically, mezzanine lenders and loan purchasers face heightened litigation exposure when facilitating debt-for-equity swaps or strict foreclosures on distressed projects. Equity investors in joint ventures gain a fortified legal remedy to challenge collateral transfers orchestrated between lenders and preferred partners. On remand in Supreme Court, New York County, plaintiff will have the opportunity to pursue discovery on its reinstated claim and test its collusion allegations against Apollo.
Source: New York Court of Appeals opinion in 111 W. 57th Inv. LLC v. 111 W57 Mezz Inv. LLC
