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State High Court Preserves Lenders' Tort Claims Against Debtors' Insiders
A lender's state law tort claims against "non-debtor third-parties for tortious interference with a contract" were "not preempted" by "federal bankruptcy law," held the New York Court of Appeals on Nov. 24, 2020. Sutton 58 Associates LLC v. Pilevsky, 2020 WL 6875979, 1 (N.Y. Ct. Appeals, Nov. 24, 2020) (4-3). In a split opinion, the Court of Appeals reversed the Appellate Division's dismissal of a lender's complaint against the Chapter 11 debtors' non-debtor insiders. The lender will still have to prove its case at trial.
The Asserted Claims
The insiders had allegedly interfered with the borrower debtors' loan agreements with the lender on a $147.25 million loan. According to the lender, the defendants wrongfully caused the debtors to breach "covenants in … loan agreements prohibiting … borrowers from incurring non-permitted indebtedness, owning other assets, and transferring any interest in … borrowers." Id. at 2. The insiders had also caused the borrower debtors to breach provisions requiring the borrowers to remain special purpose bankruptcy remote entities." Id. Therefore, asserted the lender, the defendant insiders had delayed the lender's "ability to exercise its contractual remedies" causing the bankruptcy case to be "more protracted" when the borrower debtors had no longer qualified "as single asset real estate entities and [had] taken on another creditor." Id. These acts allegedly resulted in "significant loss in value of the [debtor's] development site." Id.
Relevance
No "controlling precedent" existed under New York law, explained the Court of Appeals. Id. at 3. By providing commercial lenders in New York with a state law remedy against a debtor's non-debtor insiders, the court has given them additional leverage in pre-bankruptcy restructuring negotiations. In New York, at least, a debtor's insiders will no longer be able to hide behind the ample protections given to debtors under the Bankruptcy Code (Code). Less than a week after the Sutton decision, though, a California federal appellate court affirmed the bankruptcy court's disallowance of a lender's abuse of process and tortious interference claims, holding that "the Bankruptcy Code preempted the state law [claims] because they arose from the" debtor's filing of an affiliate's bankruptcy petition. In re Bral, 2020 WL 7025096, 1 (9th Cir. BAP Nov. 30, 2020).
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