Reasonable Self Interest Is An Acceptable Defense

Is When a contract counterparty breaches, the party who is hurt often looks past the breaching party to whoever appears to have encouraged the breach — a lender, an investor, a parent company, a business partner with an interest in the outcome. The tortious interference claim that follows feels intuitive: they knew about the contract, they wanted it broken, it broke. But when the alleged interferer had an economic stake of its own the interference is not necessarily tortious. This point emerges is overlooked in a recent New York cause where the Court of Appeals affirmed the dismissal of the tortious interference claims as insufficiently pleaded.

I Can Protect Myself

The plaintiff, an equity investor in a Manhattan condominium project, alleged that lenders had induced the project’s manager not to object to a strict foreclosure that would extinguish the investors’ equity. The trial court dismissed the interference claim, and the reasoning is key: the lenders had a right to protect their own legal and financial stake in the breaching party’s business without engaging in fraud or other nefarious misconduct.

The trial court stated malice, fraud, or illegal means go beyond allegations of intentional bad-faith acts. Pleading that a defendant acted intentionally, knew about the contract, and wanted the outcome does not satisfy the standard. Pleading that a defendant acted in bad faith does not satisfy it either. The defense yields only to conduct of a different character altogether. because this is how life in the big city goes down. We all know the rules. For if ordinary self-interested conduct were actionable, every restructuring, every workout, every hard negotiation would generate a tort claim.

We must also note also how much the fiduciary-duty waiver impacted this case. The claims against the project’s manager for breach of fiduciary duty had been dismissed because the joint venture was a Delaware LLC whose agreement contained a broad waiver subject only to the implied covenant which is permissible under Delaware law. With the fiduciary route closed and the interference route closed, the plaintiff was left arguing the implied covenant. It survived, but on a narrower and more contested basis than the claims it replaced.

So What?

Identify the defendant’s stake before you plead interference. If the party you want to sue is a lender, investor, affiliate, or commercial partner of the breaching party, assume the economic interest defense applies. Build the claim around what takes the conduct outside legitimate self-interest, not around what the defendant knew.

Understand what “malice, fraud, or illegal means” requires. It is not a synonym for bad faith. Intentional conduct aimed at your detriment is the ordinary case, not the exception. You need misrepresentation, unlawful conduct, or interference motivated by something other than the defendant’s own economic advantage.

The contract case come first. The reliable claim is usually against the counterparty that actually breached. Tortious Interference against the third party is often weak an add-on that frequently does not survive a motion to dismiss.

Defendants: be candid abour protecting yourself. The defense is strongest when the initial record at the pleading stage shows an actual, articulable economic interest rather than a post-hoc rationalization.

Watch how fiduciary waivers reshape the whole dispute. If you are negotiating into an entity with a broad waiver clause, you may be giving up the theory that reaches everyone around the managers as well.

Choose the state of formation deliberately. New York’s LLC statute limits fiduciary waivers more than Delaware’s LLC statute. Nevada requires fiduciary duties to be added to an operating agreement.

A defendant with skin in the game usually has a strong defense unless it acted really, really badly. All parties with experienced corporate attorneys should exploit the advantages of the states that govern all of the agreements including the underlying governance agreements.

David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues. He can be reached at david@seidmanlawgroup.com or 312-399-7390.