Allegations that Defendant Encumbered Its Interests in Development Project to Obtain Financing States Breach of Contract Claim

On May 9, 2022, in a decision and order in AmBase Corp. v. 111 W. 57^th Sponsor LLC, 2022 NY Slip. Op. 31503(U), Justice Joel M. Cohen denied Defendant’s motion to dismiss a breach of contract cause of action premised on Defendant’s obtaining financing for a development project to fund capital calls that allegedly encumbered Defendant’s interest in the project. The Court explained:

Plaintiffs' claim under section 9.1 of both the [Joint Venture Agreement] and the Manager LLC Agreement survives. [footnote omitted]. These are parallel provisions providing that "[t]he Members shall not make, suffer, or permit (i) any Transfer, encumbrance or lien upon such Member's interest in the Company, (ii) any Transfer, encumbrance or lien upon the direct or indirect shares of stock, membership interest, partnership interest or other equity interest in the Members, . . . without, in each instance, obtaining the prior written approval of the Members, which approval may be withheld in such Member's absolute discretion" (JVA § 9.1[a]; Manager LLC Agreement § 9.1[a]).

Contrary to Defendant's arguments, it is not fatal to Plaintiffs' claim that section 9.1 does not mention Capital Calls. Section 9.1 regulates each member's ability to raise funds by transferring or encumbering their interests. The FAC alleges that the "loans" Sponsor used to make capital contributions entitled third parties to a percentage of Control's and Sponsor's equity in the project, and that Sponsor did not disclose, much less obtain approval for, the arrangement (FAC ¶¶ 96, 106). Thus, Plaintiffs have adequately alleged that the loan obtained by Control involved a transfer of Control's indirect interest in the Company.

The attorneys at Schlam Stone & Dolan frequently litigate breach of contract claims and real estate development disputes. Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such claims.