Sutton 58 Assocs. LLC v. Pilevsky

• Decision Date: 24 November 2020
• Docket Number: No. 80,80
• Citation: 140 N.Y.S.3d 897,36 N.Y.3d 297,164 N.E.3d 984
• Parties: SUTTON 58 ASSOCIATES LLC, Appellant, v. Philip PILEVSKY, et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

36 N.Y.3d 297

164 N.E.3d 984

140 N.Y.S.3d 897

SUTTON 58 ASSOCIATES LLC, Appellant, v. Philip PILEVSKY, et al., Respondents.

No. 80

Court of Appeals of New York.

November 24, 2020

OPINION OF THE COURT

STEIN, J.

On this appeal, we are asked to determine whether federal bankruptcy law preempts plaintiff's state law claims asserted against non-debtor third parties for tortious interference with a contract. Giving due consideration to the presumption against preemption, we hold that plaintiff's state law claims are not preempted under the circumstances presented here.

I.

Plaintiff Sutton 58 Associates, LLC loaned $147,250,000 to nonparties BH Sutton Mezz LLC (mezz borrower) and Sutton 58 Owner LLC (Mortgage Borrower) (collectively, the borrowers) in order to finance the development and construction of an apartment complex on a Manhattan property owned by Mortgage Borrower. Mezz borrower owned 100% of the membership interest in Mortgage Borrower. The loan contracts consisted of a mezzanine loan agreement between plaintiff and mezz borrower, as well as acquisition and building loan agreements between plaintiff and Mortgage Borrower. These agreements forbade the borrowers from incurring any debt other than short-term trade debt, from acquiring any unrelated assets and from engaging in other business, and compelled them to remain "Special Purpose Bankruptcy Remote" entities. ¹ The agreements also prohibited the sale or transfer of any direct or indirect interest in either the property or the borrowers without plaintiff's consent. It is undisputed that these provisions were intended to ensure that, if the borrowers filed for bankruptcy, they would be single-asset real estate entities and the bankruptcy process would, at the very least, be expedited. ²

Plaintiff and mezz borrower also entered into a pledge and security agreement, in which mezz borrower pledged its 100% membership interest in Mortgage Borrower as collateral for the mezzanine loan.

This agreement gave plaintiff the right to foreclose upon and sell that membership interest—and, by extension, the development site—in the event of a default.

When the loans matured in January 2016, the borrowers defaulted. Plaintiff issued notices of default and sought to conduct a UCC foreclosure sale of mezz borrower's membership interest in Mortgage Borrower pursuant to the pledge and security agreement. Shortly before the scheduled sale, the borrowers unsuccessfully moved in Supreme Court for a preliminary injunction to block the sale. A few days after Supreme Court ordered that the sale proceed at the end of February 2016, mezz borrower filed a voluntary petition for chapter 11 bankruptcy in federal court.

Plaintiff initially moved to dismiss mezz borrower's bankruptcy petition on the ground that it was filed in bad faith or, alternatively, sought to lift the automatic stay imposed under bankruptcy law in order to permit plaintiff to pursue the sale. ³ Thereafter, in April 2016, Mortgage Borrower separately filed a voluntary petition for chapter 11 bankruptcy in federal court. After the Bankruptcy Court commented that plaintiff's motion to dismiss mezz borrower's bankruptcy petition was "premature," plaintiff withdrew that motion without prejudice. Plaintiff did not seek to renew the motion during the bankruptcy proceedings or otherwise move to dismiss Mortgage Borrower's bankruptcy petition.

The bankruptcy cases were consolidated for joint administration. Plaintiff cooperated with a creditors' committee to develop and file a joint plan of liquidation. As part of the plan of liquidation, an auction sale was held in December 2016, during which plaintiff placed the winning credit bid—in the amount of $86 million—for the project site. ⁴ In early 2017, plaintiff and the borrowers' other creditors voted to accept the plan of liquidation, which Bankruptcy Court confirmed.

Meanwhile, in September 2016, plaintiff commenced this action in state court against defendants Philip Pilevsky, Michael Pilevsky, Seth Pilevsky, Prime Alliance Group Ltd., and Sutton Opportunity LLC—various affiliated persons and entities—alleging that defendants had tortiously interfered with the loan agreements between plaintiff and the nonparty borrowers. According to plaintiff, defendants had engaged in a scheme to obtain an ownership interest in the development project in violation of the loan agreements. Plaintiff averred that, as part of this alleged scheme, defendants loaned $50,000 to mezz borrower to retain counsel, transferred three rental apartments to Mortgage Borrower so that it would no longer be a single asset real estate entity, and sold a 49% interest in BH Sutton Owner LLC—the parent company of mezz borrower—to a Pilevsky entity, thereby transferring to defendants an indirect interest in the borrowers and the development project. ⁵ Plaintiff asserted that these actions violated the covenants in the loan agreements prohibiting the borrowers from incurring non-permitted indebtedness, owning other assets, and transferring any interest in the borrowers, as well as those provisions requiring the borrowers to remain special purpose bankruptcy remote entities. With respect to damages sustained, plaintiff asserted that the conduct of defendants delayed its ability to exercise its contractual remedies—because the bankruptcy proceeding was more protracted due to the borrowers no longer qualifying as single asset real estate entities and having taken on another creditor ⁶ —which, in turn, resulted in a significant loss in value of the development site.

Defendants moved for summary judgment dismissing the complaint, as relevant here, on the ground that the action was preempted by the Bankruptcy Code. Supreme Court denied the motion, holding that the action was not preempted because it "d[id] not involve the bankruptcy" and, instead, defendants were alleged to have interfered with "separate contractual agreements." On defendants' appeal, the Appellate Division reversed and granted defendants' motion based upon its conclusion that plaintiff's claims were preempted by federal law because "plaintiff's damages [arose] only because of the bankruptcy filings" ( 168 A.D.3d 477, 89 N.Y.S.3d 630 [1st Dept. 2019] ).

Plaintiff appealed to this Court as of right ( see CPLR 5601[b][1] ).

II.

Plaintiff argues that the Appellate Division erroneously held that its tortious interference claims are preempted by federal bankruptcy law. Plaintiff contends that neither field nor conflict preemption precludes a New York court from adjudicating its tort claims, observing that the borrowers' bankruptcy proceedings were successfully concluded and that plaintiff's action against defendants—who were not the debtors in the bankruptcy proceeding—did not pose any obstacle to resolution of those proceedings. Plaintiff does not dispute that so-called bad-faith filing claims, or other tort claims premised upon conduct within a bankruptcy proceeding, may be preempted. However, plaintiff asserts that a distinction has been, and should be, drawn between such claims and those that, as here, allege wrongful conduct by non-debtor defendants that occurred prior to the bankruptcy proceeding and that are grounded in independent contractual obligations. According to plaintiff, preemption would unfairly deprive it of any judicial forum or remedy for defendants' alleged wrongdoing and would upset the expectations of numerous lenders for large-scale real estate projects governed by similar loan agreements.

In response, defendants urge us to uphold the dismissal of plaintiff's claims on preemption grounds. Defendants contend that federal law has occupied the field of bankruptcy, to the exclusion of state law remedies. Defendants also assert that allowing plaintiff's tort claims to proceed in state court would conflict with federal bankruptcy law because the potential liability against third parties would discourage lending to, and counseling for, debtors—thereby indirectly chilling bankruptcy filings. As for plaintiff's remedies, defendants argue that they are limited to those available against the debtors in the bankruptcy proceeding—namely, a motion to dismiss the proceeding or for relief from the automatic stay imposed under bankruptcy law.

Although the parties cite varied case law from across the country relating to preemption in the bankruptcy context, no controlling precedent answers the question before us. Defendants' preemption arguments are not wholly implausible. Nevertheless, defendants ultimately "bear[ ] the ‘considerable burden’ of overcoming the presumption that Congress did not intend to preempt" plaintiff's tortious interference claims ( Nealy v. U.S. Healthcare HMO, 93 N.Y.2d 209, 218, 689 N.Y.S.2d 406, 711 N.E.2d 621 [1999], quoting De Buono v. NYSA–ILA Medical and Clinical Services Fund, 520 U.S. 806, 814, 117 S.Ct. 1747, 138 L.Ed.2d 21 [1997] ). For the reasons discussed herein, we conclude that defendants have not met that burden.

III.

The United States Constitution empowers Congress to establish uniform laws ⁷ on the subject of bankruptcy ( see U.S. Const art I, § 8, cl 4 ), and Congress has effectuated this power by enacting the Bankruptcy Code ( see 11 USC 101 et seq. ). The Supremacy Clause, in turn, provides that federal law "shall be the supreme Law of the Land and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding" ( U.S. Const art VI, cl 2 ). Therefore, "when federal and state law conflict, federal law prevails and state law is preempted" ( Murphy v. National Collegiate Athletic Assn., 584 U.S. ––––, ––––, 138 S.Ct. 1461, 1476, 200 L.Ed.2d 854 [2018] ).

Preemption of state law may occur by express statutory provision or through implication, the latter of which may be accomplished through either federal preemption of the field of a particular subject matter or the existence of an irreconcilable conflict between...