The project was to have become the J Hotel
Jay-Z is suing investment firm Highland Capital Management for $3.7m (£2.3m) over a 2007 loan to help him build a hotel in Manhattan.
The rapper, real name Shawn Carter, says that, when the value of the land he had bought fell, he tried to give it back to Highland to avoid repossession.
Mr Carter says the company dragged its heels costing him millions in interest.
Highland said it would defend itself against the "meritless" claims, saying the loan remained in default.
The new building was to have been called the J Hotel.
Mr Carter also claims that Highland improperly diverted funds from a reserve account he had set up to cover any environmental problems.
"This action arises out of the efforts by defendants to bleed additional funds from the plaintiff," the rapper's lawyers stated in legal documents.
"Defendants embarked on a bad faith course of conduct."
Mr Carter is seeking the damages, as well as a declaration allowing the land to be given back to Highland.