On May 28, 2026, the New York Court of Appeals issued a decision that is already reverberating through the state’s commercial real estate finance and private equity bar. 

In 111 W. 57th Inv. LLC v. 111 W57 Mezz Inv. LLC, a divided 4-3 Court reinstated a claim for breach of the implied covenant of good faith and fair dealing brought by an equity investor whose stake in a Manhattan luxury tower had been wiped out through a mezzanine lender’s strict foreclosure. The ruling arrives in a state whose courts have long prided themselves on strict adherence to freedom of contract among sophisticated commercial parties, and it has prompted immediate debate about whether that tradition is shifting.

Factual Background

The case grew out of the financing and construction of what the plaintiff described as “the world’s skinniest residential building,” a luxury tower at 111 West 57th Street in Manhattan. Plaintiff 111 West 57th Investment LLC contributed $65 million in equity alongside two other members, 111 West 57th Sponsor LLC (“Sponsor”) and Atlantic 57 LLC, to form a joint venture, 111 West 57th Partners LLC. Under their Joint Venture Agreement (“JVA”), the Sponsor served as day-to-day manager, subject to a list of “Major Decisions” requiring the plaintiff's written consent. The JVA also contained a broad waiver of fiduciary duties among the members.

To fund the roughly $1 billion project, the joint venture borrowed $725 million, including a $400 million senior mortgage loan and a $325 million mezzanine loan. The mezzanine loan was provided by entities affiliated with the private equity and alternative asset management firm Apollo Global Management (collectively, “Apollo”). The mezzanine financing was structured through a multi-tier ownership chain and was secured by a pledge of equity interests rather than the real property itself—a standard mezzanine lending structure that allows a lender to accept pledged collateral in satisfaction of a defaulting borrower’s debt under Article 9 of the Uniform Commercial Code rather than go through a judicial mortgage foreclosure.

Construction cost overruns pushed the mezzanine loan out of balance and into technical default. In March 2017, the joint venture’s subsidiary entered a forbearance agreement with Apollo, which at that time exercised a contractual right to split the mezzanine loan into senior and junior tranches. Apollo later assigned the junior tranche to Spruce Capital Partners. Two days after the assignment, Spruce issued a notice of default and initiated a UCC Article 9 strict foreclosure, which allowed it to accept the pledged equity collateral in full satisfaction of the debt without a public sale. That process extinguished the joint venture’s equity, including the plaintiff’s $65 million investment, while, according to the plaintiff's allegations, permitting the Sponsor to retain a continuing role and equity interest in the project going forward.

The plaintiff sued, alleging that Apollo, Spruce, and the Sponsor had colluded in what it called a “backroom deal” to strip the plaintiff of its equity value while preserving benefits for insiders. Among its claims: that Apollo’s assignment of the junior mezzanine loan to Spruce, in furtherance of that alleged scheme, breached the implied covenant of good faith and fair dealing inherent in the pledge and security agreement between the joint venture’s subsidiary and Apollo.

Procedural History

Originally, the New York County Supreme Court dismissed the plaintiff’s tortious interference claims but allowed the implied covenant claim against Apollo to proceed. The Appellate Division, First Department, modified that ruling, dismissing the implied covenant claim as well. The First Department reasoned that because the loan agreement gave Apollo an unqualified right to assign the junior mezzanine loan “in its sole discretion,” the implied covenant could not be invoked to override that express contractual grant of discretion. As to the tortious interference claims, the appellate court found the plaintiff had failed to establish that Apollo and Spruce were the “but for” cause of the Sponsor’s decision not to object to the foreclosure.

The Court of Appeals granted leave to appeal in 2025.

The Majority Opinion

Writing for the majority, Chief Judge Wilson—joined by Judges Rivera, Troutman, and Ogden—reaffirmed the baseline rule that every contract governed by New York law carries an implied covenant of good faith and fair dealing, encompassing “any promises which a reasonable person in the position of the promisee would be justified in understanding were included” in the bargain. 

The majority acknowledged that where a contract expressly grants a party “sole discretion” over a particular decision, courts are generally reluctant to use the implied covenant to second-guess the exercise of that discretion, since doing so risks rewriting the parties’ bargain rather than enforcing it.

But the majority drew a distinction between the scope of a discretionary right and its purpose. The assignment clause at issue, the Court reasoned, was primarily a mechanism for the lender to manage its own credit risk—allowing Apollo to reduce or eliminate its exposure by selling off the loan—subject to negotiated restrictions on which entities could serve as an assignee. It was not, in the majority’s view, a blank check permitting Apollo to use the assignment power as an instrument in a scheme with a third party to extinguish the borrower’s equity for the benefit of insiders. 

Even where a contract vests one party with broad, facially unqualified discretion, the majority held, that grant does not immunize conduct that uses the discretionary right as a vehicle to accomplish something the bargain never contemplated—here, an alleged coordinated effort among the lender, the assignee, and the Sponsor to appropriate the plaintiff’s equity value through the mechanics of a strict foreclosure while preserving benefits for the Sponsor.

Because the plaintiff’s amended pleading alleged specific facts suggesting that Apollo, Spruce, and the Sponsor had reached an understanding well before the assignment to use the foreclosure process to cut the plaintiff out of the project despite anticipating that the project would ultimately be profitable, the majority concluded that the pleading stated a legally cognizable claim for breach of the implied covenant. 

The Court reinstated the claim and remitted the matter to Supreme Court for further proceedings, while otherwise affirming dismissal of the tortious interference claims—finding that the plaintiff had not adequately alleged that the Sponsor’s own conduct breached any enforceable obligation under the JVA, given the parties’ negotiated waiver of fiduciary duties and the absence of “objecting to foreclosure” from the JVA's list of Major Decisions requiring the plaintiff’s consent.

The Dissent

Judge Garcia, joined by Judges Singas and Cannataro, dissented in part, and would have affirmed the Appellate Division's dismissal of the implied covenant claim in full. The dissent’s central objection is that the majority’s approach undermines the predictability that sophisticated commercial parties rely on when they negotiate detailed, heavily lawyered financing agreements. In the dissent’s view, prior to this decision, a plaintiff in the investor’s position faced “a high bar” to invoking the implied covenant against a counterparty’s exercise of an expressly bargained-for discretionary right, and New York courts intervened in freedom of contract between sophisticated commercial parties only in extraordinary circumstances.

The dissent argued that the assignment clause was unambiguous, that Apollo negotiated for and received an unrestricted right to assign the loan (subject only to the negotiated list of prohibited transferees, which Spruce was not on), and that the majority’s analysis—which the dissent characterized as analogizing the parties’ complex, negotiated mezzanine financing arrangement to comparatively simple everyday transactions—improperly permits courts to use the implied covenant to rewrite the specific, bargained-for terms of a sophisticated, multi-million-dollar contract based on the court’s own sense of fair play, rather than enforcing what the parties actually agreed to. Judge Halligan took no part in the decision.

Analysis and Implications

First: It complicates a body of New York case law that has generally treated express grants of “sole discretion” as close to dispositive in defeating implied covenant claims. Commentators have already begun asking whether the decision signals a broader recalibration of New York’s traditionally contractarian approach to complex commercial agreements, particularly in the context of distressed-debt and structured finance transactions where “sole discretion” language is a standard risk-allocation tool.
 

Second: The decision has particular resonance in mezzanine lending and Commercial Mortgage-Backed Securities-adjacent transactions, where strict foreclosure under UCC Article 9 is a favored remedy precisely because it is faster and less encumbered by the procedural protections of judicial mortgage foreclosure. Lenders and their counsel will need to consider whether assignment and foreclosure decisions, even where nominally within a party's contractual discretion, could expose them to implied covenant liability if a plaintiff can plead facts suggesting coordination with other parties to disadvantage a junior equity holder.
 

Third: The decision underscores the continuing vitality, and the fact-intensive nature, of allegations concerning insider self-dealing in joint venture and mezzanine structures. The Court was careful to distinguish the reinstated implied covenant claim, which survived at the pleading stage based on specific allegations of a coordinated scheme, from the dismissed tortious interference and fiduciary duty claims, which failed for lack of adequate factual support and because of the JVA's broad fiduciary duty waiver. Practitioners drafting joint venture and mezzanine loan documents should expect continued scrutiny of both discretionary assignment clauses and fiduciary duty waivers, and should not assume that either will categorically foreclose implied covenant liability where a plaintiff can plausibly allege that a nominally discretionary contractual right was exercised as part of a scheme to defeat the fruits of the parties’ bargain.

Because the Court’s holding arose at the motion-to-dismiss stage, the ultimate merits of the plaintiff's allegations remain to be litigated on remand in Supreme Court, New York County. The case is likely to be closely watched as it proceeds, both for what discovery reveals about the underlying transaction and for how lower courts apply the Court of Appeals’ framework in future disputes involving discretionary contractual rights in commercial finance agreements.

If you have questions about how this decision impacts you and your organization, please connect with Max directly at mtf@gdblaw.com.