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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 31, 2019

Tortious Interference Claim Dismissed Based on Economic Justification Defense

On October 22, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Ambase Corp. v ACREFI Mtge. Lending, LLC, 2019 NY Slip Op. 33148(U), dismissing a tortious interference claim based on an economic justification defense, explaining:

To prove a claim for tortious interference with contract, the plaintiff must show: (1) the existence of a valid contract; (2) defendant’s knowledge of the contract; (3) defendants’ intentional procurement of the third-party’s breach without justification; (4) actual breach of the contract; and (5) damages caused by breach of the contract.

The question with regard to the tortious interference claim is whether plaintiff has adequately alleged defendants’ intentional procurement of the third-party’s breach without justification. The first issue is whether plaintiff has alleged Sponsor was predisposed to breach. Defendants primarily rely on Kansas State Bank, where the court found on a motion for summary judgment that defendant did not procure a breach where the breaching party communicated its intent to breach before the alleged interfering conduct on the part of defendant. While the standard here is different, once a plaintiff alleges facts establishing that the breaching party was predisposed toward breaching its agreement, the claim for tortious interference must be dismissed for failure to plead but for causation. Here, defendants contend the plaintiffs have alleged that Sponsor had previously rejected plaintiff Investment’s first attempt to exercise the Equity Put Right, and Sponsor was therefore predisposed to breach, regardless of the effect of Apollo’s notice. Plaintiffs, however, argue that Sponsor was not predisposed to breach – this case is distinguishable from Kansas State Bank because Sponsor did not communicate its intent to reject the Equity Put Right until February 24, 2017 after the defendants withdrew their first out-of-balance notice on February 1, 2017. Construing the facts such that plaintiffs receive the benefit of all possible inferences, plaintiffs’ claim for tortious interference should not be dismissed at this time based on predisposition.

The second issue is whether defendants’ issuance of the shortfall contribution notice could be the but for cause of the breach, since Apollo’s notice could not have had an effect on triggering of the Equity Put Right. The JVA provides that:

In the event that (i) prior to the closing of the Construction Loan, Investor declines to approve a proposed Budget that exceeds the Permitted Variance applicable to the prior approved Budget, (ii) after the closing of the Construction Loan, Investor declines to approve a proposed Budget in which the hard costs exceed an amount equal to one hundred ten percent (110%) of the hard costs set forth in the prior approved Budget, (iii) Manager has not obtained, within twenty-four (24) months of the date hereof, an “Alteration 1” or “New Building” permit…, or (iv) the amount of the Construction Loan is less than fifty percent (50%) of the applicable Budget for the development and construction of the Property…, Investor shall have the right, upon notice within sixty (60) days after the occurrence of the applicable event set forth in clauses (i), (ii) or (iii) above… to require Sponsor to purchase Investor’s equity interest in the Company for a purchase price equal to an amount that would cause Investor to receive a 20% Priority Distribution…”

Defendants contend the documentary evidence shows that both of Apollo’s subsequent notices in January and February 2017 all exceeded the total hard costs in the prior approved June 2015 budget by more than the 110% threshold and it would have been impossible for the reissued notice from Apollo to have had any effect on the numbers at issue.

Plaintiffs’ position is merely that it is a question of fact that should not be decided on this motion to dismiss. The core of plaintiffs’ allegation is that defendants’ withdrawal enabled the breach:

Apollo, colluding with Stem and Maloney, withdrew its First Borrower’s Shortfall Contribution Notice and replaced it with another out of balance letter dated February 1, 2017, this time lowering the out of balance condition to help reinforce Stem and Maloney’s (still incorrect) position that the 10 percent put threshold was not surpassed… By withdrawing the notice, Defendants enabled Sponsor to argue that the Equity Put Right had not been in fact triggered, and Sponsor thereafter breached the Joint Venture Agreement by refusing to honor that right. But for Defendants’ improper conduct of withdrawing and replacing that notice, Sponsor… would have been under vastly enhanced and more urgent pressure to fulfill its contractual obligations under the Joint Venture Agreement concerning the Equity Put Right

Since the Sponsor’s rejection came after the reissuance, it is unclear from the facts alleged whether Sponsor would have breached had defendants not reissued the notice. But if the notices reflect the arithmetic as defendants present it, that it would have been impossible for the notice to have any effect, then the claim may be defeated by the documentary evidence.

The third issue is whether defendants may be excused based on a justifiable economic purpose. For the interference to be deemed tortious, the defendant must have acted without justification and its action must not have been incidental to a lawful purpose. Where a defendant procures the breach of a contract in the exercise of an equal or superior right, it is acting with just cause or excuse and has justification for what would perhaps otherwise be an actionable wrong.

Defendants argue they merely exercised a contractual right to seek shortfall contributions in order to further their economic interest in the venture. Defendants submit the mezzanine loan agreement and the reissued shortfall contribution letter, which states it is based solely upon the Borrower’s original construction budget and Borrower’s December 2016 updated construction budget. Only in their moving papers do defendants state that the lower demand is an attempt to avoid a dispute and collect the payment. Plaintiffs concede defendants had a contractual right, but challenge the adequacy of the evidence that proves they did so to serve an economic purpose. Plaintiffs believe defendants have failed to establish their motivation by irrefutable evidence, but defendants believe they have done so by showing they exercised a contractual right.

As discussed in Intern. Nut Alliance, the exercise of a contractual right is a justifiable economic purpose. Defendants evidence the right by providing the Mezzanine Loan Agreement, which is irrefutable, even if the other correspondence provided in support of the defense is not. The case that plaintiffs cite in support of the proposition that defendants cannot claim economic interest where they act for the benefit of other projects, involves facts not analogous to the instant case. White Plains answered a specific question about whether a generalized economic interest in soliciting business for profit constitutes a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party. Here, the mezzanine loan was part of the financing for the breaching party’s project, and Apollo, having rights under that loan, exercised them. Finally, economic interest is a defense to an action for tortious interference with a contract unless there is a showing of malice or illegality. Plaintiff may have alleged that defendants acted against their interests, but have not alleged that they were motivated by malice or that they acted illegally. Therefore, the claim for tortious interference may be dismissed based on the economic justification defense.

(Internal quotations and citations omitted) (emphasis added).

In New York, there are circumstances where someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

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