41-45 Property Owner, LLC v. CDM1, LLC

Background

41-45 Property Owner, LLC, described as the sponsor of 520 Park Avenue, brought two claims against CDM1, LLC concerning CDM1’s failure to close on the purchase of a condominium unit. The claims were for breach of contract and breach of the implied covenant of good faith and fair dealing, an obligation that New York law reads into contracts.

The parties entered an Option Agreement on or around October 6, 2017, for a $34 million purchase price. CDM1 paid an $8.5 million deposit. The agreement required 41-45 Property Owner to take reasonable measures to test and verify that the building’s tank-and-pump system would not create noise impairing the purchaser’s use and enjoyment of the unit. After CDM1 said it would not attend the scheduled closing, 41-45 Property Owner obtained a consulting report stating that the mechanical room was not making noise and that sound levels in the unit were below industry norms. CDM1 rejected the report because the automatic fire pump had not operated during the testing and requested more information and testing. CDM1 did not cure its alleged default after receiving 41-45 Property Owner’s notice of default.

Claims and Motion

The breach-of-contract claim sought retention of CDM1’s deposit under the agreement’s liquidated-damages provision. The implied-covenant claim alleged that CDM1 imposed additional requirements concerning compliance with the noise-testing provision and used 41-45 Property Owner’s alleged noncompliance as a pretext for ending the agreement. That claim sought approximately $2.4 million for costs to remove CDM1’s modifications and return the unit to its original condition for marketing.

CDM1 moved to dismiss the implied-covenant claim. The court’s March 28, 2023, brief order granted the motion; this opinion supplied the reasoning.

Court’s Analysis

The court applied New York law under the agreement’s choice-of-law provision. It treated the contract’s liquidated-damages provision as clear and unambiguous. That provision allowed 41-45 Property Owner, after cancellation and an uncured default, to retain the entire Premium Payment and specified other funds, and stated that the parties would be released and discharged from further liability and obligations under the agreement and offering plan.

The court reasoned that the parties’ relationship was contractual and that the implied covenant arose from the Option Agreement. Because the agreement released the parties from further contractual liability after cancellation, the implied-covenant claim could not provide additional damages or an additional basis for liability beyond the deposit forfeiture. The court also explained that the claim was duplicative of the contract claim: if 41-45 Property Owner prevailed on the contract claim, the liquidated-damages provision would prevent additional recovery; if it did not prevail, the court stated that CDM1 would have been substantially justified in failing to close and therefore would not have acted in bad faith for pretextual reasons.

The court rejected the argument that the issue was not ready for decision because the parties disputed whether the liquidated-damages provision applied. It stated that contract interpretation and claims barred as a matter of law may be resolved on a motion to dismiss.

Disposition

Judge Lorna G. Schofield granted CDM1’s motion to dismiss the Second Cause of Action for breach of the implied covenant of good faith and fair dealing. The court dismissed that claim. The opinion does not state a disposition of the separate breach-of-contract claim.