In Construction Case, The Failure To Properly Replace OFAC-Sanctioned Managers of Development Companies May Have Breached Implied Covenant Of Good Faith And Fair Dealing In Operating Agreements

Posted: October 29, 2025 / Written by: Jeffrey M. Eilender, Channing J. Turner, Joshua Wurtzel, Thomas A. Kissane, Samuel L. Butt /

In Construction Case, The Failure To Properly Replace OFAC-Sanctioned Managers of Development Companies May Have Breached Implied Covenant Of Good Faith And Fair Dealing In Operating Agreements

On September 16, 2015, Justice Joel M. Cohen denied the portion of owner and developer defendants’ motion for summary judgment against a claim brought by minority members on the theory that the developers had not properly replaced the managers of the development companies when the original managers were sanctioned by the U.S. Department of Treasury Office of Foreign Assets Control (“OFAC”). In D&V Realty LLC, et al., v. Mikahil Vasilyevich Klyukin, et al., Index No. 656782/2022, Mikhail Klyukin beneficially owned various managers of the development companies. However, when OFAC sanctioned Klyukin in February 2022, these entities became OFAC-blocked entities by operation of law. The managers were replaced. However, plaintiffs claimed that the replacements were also owned by Klyukin, which caused more problems, and a failure to timely appoint appropriate replacement managers caused them harm. The Court upheld plaintiffs’ claim on a theory of breach of the implied covenant of good faith and fair dealing in the operating agreements. The Court explained:

The Court has not, however, previously addressed whether the choice of Ahimsa and Inspiron as replacement managers may have breached the operating agreements, as Plaintiffs claim. Plaintiffs point to no express provision in the operating agreements setting out qualifications or criteria for replacements, but they argue that failure to appoint an independent, non-sanctioned manager violates the implied covenant of good faith and fair dealing in the operating agreements . . . [T]here are disputed issues of fact as to whether the appointment of Ahimsa and Inspiron breached the agreements or caused damage to the Development Companies. While Plaintiffs do not offer evidence that OFAC would have been more likely to grant licenses to sell condominium units had the RI entities appointed managers not associated with Klyukin, discovery—including party depositions and expert discovery—remains outstanding. Accordingly, Plaintiffs’ cross-motion is denied as to this claim.

The attorneys at Schlam Stone & Dolan frequently advise clients concerning real estate developments in collaboration with international owners and entities. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.

Schlam Stone & Dolan LLP represents Defendants Mikhail Klyukin, RI 128 26th Street, LLC, RI 192 8th Avenue LLC, RI 238-240 East 3rd Street, LLC, Orange Real Estate Development LLC, and Ahimsa NY, LLC in this case.