Court Concludes That Plaintiff Alleged Willful Misconduct

In an Opinion, dated June 26, 2023, in Manhattan Chrystie St. Dev. Fund LLC v. Witkoff Group LLC, 2023 NY Slip Op 50622(U), Justice Robert Reed denied Defendants’ motions to dismiss a breach of guaranty claim. Plaintiff brought a claim for breach of a guaranty that assured Plaintiff payment and performance of certain obligations in the event of ‘willful misconduct’ by the managing member of a joint venture. The Court explained:

Since the term "willful misconduct" is not defined in the guaranty and since defendants' impressible cross- references to either separate and distinct agreements or inapplicable provisions of the guaranty are not helpful in defining the term, the court will turn to case law in order to define "willful misconduct".

In Kelly v. Blum, the Court of Chancery defined "willful conduct" as an action that is "[v]oluntary and intentional, but not necessarily malicious," in denying a motion to dismiss where the complaint alleged willful self-dealing (2010 Del. Ch. LEXIS 31, 2010 WL 629850, *12 [Del. Ch. 2010] [citing Black's Law Dictionary]). The same court relied on a similar definition of "willful misconduct" in a different case holding that the complaint there adequately stated a breach of contract where the agreement provided for liability in cases of willful misconduct and the complaint pled the defendant "willfully declined to obtain [plaintiff's] consent on a number of issues as contractually required, and as a result unjustifiably burned through [plaintiff's] investment" (In re Cadira Grp. Holdings, LLC Litig., 2021 Del. Ch. LEXIS 151, 2021 WL 2912479, *9 [Del. Ch. 2021]).

Consistent with definitions stemming from Kelly and Cadira cases, this court also adopts — at least for purposes of considering the within pre-answer motion to dismiss — a definition of "willful misconduct" as an action that is voluntary and intentional, but not necessarily malicious. Here, there is no real dispute that the complaint alleges that the JV and managing member intentionally breached section 4.04(a) of the JV agreement by refusing to pay the preferred return. The complaint alleges that "in defiance of the [JV] Agreement and flagrant disregard of PEP Member's invoices and letters, the JV and/or Managing Member refuse to pay sums over $12.4 million [now over $16 million] owed to PEP Member" in the form of preferred return payments (Complaint at 51). These allegations of voluntary and intentional wrongdoing satisfy the requisite willful misconduct at the pleadings stage.

The attorneys at Schlam Stone & Dolan frequently handle breach of contract actions, including those concerning guaranties. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.