NY Court of Appeals Holds No Bankruptcy Preemption of Lender Tort Claims Against Related Third Parties

The State of New York Court of Appeals (the highest appellate court in New York) has held that claims against non-debtor related parties, based on their actions to aid or induce Chapter 11 debtors to breach contractual loan covenants, were not subject to preemption under federal bankruptcy law.

The 2-1 decision by the New York high court is a case of first impression and will certainly be a point of reference in future litigation arising from single asset real estate cases. The case has direct relevance for real estate lenders bringing actions against non-debtor parties after a bankruptcy filing by the borrower, such as non-recourse carve-out guarantors or debtor-related parties who may have aided the borrower/debtor in breaching its loan covenants to the lender.

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