Court Revives $100M Lawsuit Against Real Estate Investor Philip Pilevsky

New York’s highest court has revived a lawsuit seeking nearly $100 million in damages against real estate investor Philip Pilevsky for allegedly obstructing loan agreements for a proposed residential tower in Manhattan, ruling that state law claims for tortious interference were not preempted by federal bankruptcy law.

In a 23-page majority opinion, a divided New York Court of Appeals sided with concerns that a lower court’s ruling dismissing the case on preemption grounds could have dramatic and lasting effects on New York City’s real estate development community, which commonly relies on the so-called bankruptcy remote special purpose entity loan structures to manage risk.

The device also minimizes the prospect of bankruptcy.

The suit accused Pilevsky, his sons and their related entities of interfering with the loan agreements between lender Sutton 58 Associates and a nonparty borrower. According to Sutton, the Pilevskys improperly sought an ownership interest in the development project by loaning $50,000 to the borrowers to retain counsel and then transferring three rental apartments to the borrowers.

Sutton, an affiliate of Gamma Real Estate, said the alleged gambit violated the loan agreements, which were structured to ensure that the borrowers would be single-asset real estate entities if they filed for bankruptcy.

When the loans matured in 2016, the borrowers filed for Chapter 11 bankruptcy protection, but the proceedings were extended because they had taken on another creditor and no long qualified as single-asset real estate entities, resulting in a significant loss in value of the development site.

In state court, the Pilevskys moved for summary judgment dismissing the tortious interference complaint, but a Supreme Court judge denied the motion, holding that the action was not preempted because it did “not involve the bankruptcy” and, instead, the defendants were alleged to have interfered with “separate contractual agreements.”

An intermediary appeals court, however, reversed that ruling on preemption grounds because the alleged damages arose “only because” of the bankruptcy filings.

On appeal to the high court, Sutton argued that the alleged wrongful conduct occurred prior to the bankruptcy proceedings and were grounded in independent contract obligations. Preemption, the plaintiff claimed, would deprive it of any forum or remedy for the Pilevskys’ actions and upend expectations that lenders had for large-scale real estate projects governed by similar loans.

Court of Appeals Associate Judge Leslie E. Stein, writing for the majority, agreed that the tortious interference claims were “peripheral to, and do not impugn,” the bankruptcy process. The dispute, she wrote, turned contractual questions that proceeded the bankruptcy case and would not interfere with the administration of the debtor’s estate.

“Resolution of plaintiff’s claims in state court does not risk interference with the bankruptcy court’s control over, or disposition of, the bankruptcy estate insofar as the present suit does not impair the debtors’ estates,” Stein wrote.

“In other words, plaintiff’s allegations state a claim for tortious interference with contract, and the remedy for that tort will not affect the debtor’s estate,” the judge said. “As such, these claims will not encroach upon the province of the bankruptcy court.”

Ronald Greenberg, a Kramer Levin Naftalis & Frankel partner who represents the plaintiffs, said in a statement that he was “gratified by the Court of Appeals’ decision, which is a victory both for our client and for real estate financing in New York.”

The ruling came over the objection of Associate Judge Jenny Rivera, who took issue with the plaintiff’s “alleged misuse of the bankruptcy system.” In a 33-page dissent, Rivera challenged the majority’s assertion that the tortious interference claims were separate from the bankruptcy proceedings.

“That conclusion,” she said, “will come as a surprise to defendants who plaintiff alleges were parties to a ‘scheme’ that depended on and succeeded only by virtue of borrowers’ bankruptcy filings.

“It is also contrary to congressional intent in enacting our reticulated Bankruptcy Code with remedies for a party aggrieved by the type of manipulation of the bankruptcy system alleged by plaintiff in its state action,” Rivera continued. “And I do not anticipate it will be well-received by the bankruptcy courts, which have exclusive jurisdiction over bankruptcy filings and sole authority to determine whether a bankruptcy petition is filed in bad faith.”

Rivera was joined in her dissent by Associate Judges Eugene M. Fahey and Michael J. Garcia.

Chief Judge Janet DiFiore and Associate Judges Rowan D. Wilson and Paul G. Feinman all lined up behind Stein’s majority opinion.

Robert S. Smith, a retired New York Court of Appeals judge who represents the Pilevskys, said that he agreed with Rivera’s “excellent dissent.”

“We think the issue is very important and will have far-reaching consequences for bankruptcy law, and we’re considering our next steps,” said Smith, now a partner with Friedman Kaplan Seiler & Adelman.