330 Hudson Owner, LCC v Rector, Church-Wardens & Vestrymen of Trinity Church in the City of New York

[*1] 330 Hudson Owner, LCC v Rector, Church-Wardens & Vestrymen of Trinity Church in the City of New York 2009 NY Slip Op 51018(U) [23 Misc 3d 1131(A)] Decided on May 26, 2009 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 26, 2009
Supreme Court, New York County

330 Hudson Owner, LCC, Plaintiff,

against

The Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New York, Defendant.



600804-2009



Attorneys for Plaintiff:

Randy M. Mastro, Esq

J. Ross Wallin, Esq.

GIBSON, DUNN & CRUTCHER, LLP

200 Park Avenue

New York, New York 10166

Attorneys for Defendant:

Stephen W. Greiner, Esq.

Sameer Advani, Esq.

WILLKIE FARR & GALLAGHER, LLP

787 Seventh Avenue

New York, New York 10019

Bernard J. Fried, J.

Before me is a motion by plaintiff 330 Hudson Owner LLC ("Hudson"), seeking a preliminary injunction pursuant to First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 NY2d 630 (1968), to toll the time in which Hudson may cure an alleged default of its ground lease with defendant The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York ("Trinity"), and to enjoin Trinity from pursuing termination of the ground lease or forfeiture during the pendency of this action.

On September 12, 2007, Hudson and Trinity entered into a 99-year ground lease concerning certain premises owned by Trinity, for the purpose of Hudson developing a mixed-use building that would house a boutique hotel and office and retail space (the "ground lease" or "lease"). The lease requires Hudson, "[a]t all times prior to the final completion of the Project (subject to Excusable [*2]Delays and Landlord Delays) [to] diligently and continuously pursue the completion" of this project and to "substantially complete" the work within two years of the commencement date. (Lease §§ 1.189-1.191, 13.1(a).) The construction commended around June 2008. The two-year deadline is subject to two potential six-month extensions, subject to conditions including 30 days' written notice to Trinity, the existence of no outstanding monetary or material non-monetary default, and Hudson's using "commercially reasonable and diligent efforts" to complete the project "as soon as practicable." (Lease § 13.1(a).)

"Excusable delays" are delays that prevent performance of a non-monetary obligation, are "beyond the reasonable control of Tenant," and cannot include "Tenant's insolvency or financial condition or unavailability of money." (Lease § 1.58.)

In a January 9, 2009 letter to Trinity, Hudson asserted that the "ongoing economic crisis" facing our country and the world constituted an "Excusable Delay" under the ground lease. (Brodsky Aff. ¶ 17.) Hudson stated in its letter that, "in order to justify any additional investment in the Project, 330 Hudson needs Trinity's commitment now that Trinity will engage in good-faith negotiations with 330 Hudson" to "restructure ... the financial terms of the Ground Lease in recognition of the unprecedented and unavoidable devastation affecting the economy in the short term and the changed global economic order which will take hold following the immediate crisis." Hudson asserted that it would consider Trinity's agreement to such a restructuring "a threshold issue for 330 Hudson to consider a commitment of any additional funds to preserve the Project." (Brodsky Aff. Ex. 2.) By "funds to preserve the Project," Trinity interpreted this language to mean the close-up costs during the halt in construction. (Trans. at 30.)

On January 16, 2009, Trinity sent Hudson a notice to cure, noting four defaults under the ground lease. Only one alleged default is at issue in this motion: the alleged slowdown in work by Hudson's general contractor, Pavarini McGovern, LLC, under § 13.1(a).[FN1] (Brodsky Aff. Ex. 3.) The parties afterward agreed to extend the time to cure through March 16, 2009. Trinity refused to extend it further. Hudson then brought this motion seeking a temporary restraining order ("TRO") extending its time to cure. On March 17, 2009, I granted a TRO tolling plaintiff's time to cure and restraining [*3]Trinity from taking action to terminate the lease, without an undertaking.[FN2]

A Yellowstone injunction maintains the status quo "so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture." Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assocs., 93 NY2d 508, 514 (1999). The party requesting a Yellowstone injunction must demonstrate that: (1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises."

Id. Since the law does not favor forfeiture of a leasehold, a tenant "need not, as a prerequisite to the granting of a Yellowstone injunction, demonstrate a likelihood of success on the merits" or prove its ability to cure a default. Herzfeld & Stern v. Ironwood Realty Corp., 102 AD2d 737, 738 (1st Dept. 1984). "The proper inquiry is whether a basis exists for believing that the tenant desires to cure and has the ability to do so through any means short of vacating the premises." Id.

The only alleged default at issue is Trinity's assertion that the slowdown in work by Pavarini violates Hudson's obligation, under § 13.1(a) of the lease, to "diligently and continuously pursue completion" of the project.

The parties have submitted affidavits in support of their positions on this motion, and I have heard oral argument. No evidentiary hearing is necessary, as the relevant facts are undisputed. I now render my decision.

It is undisputed that Hudson halted construction at the site some months ago. In September 2008, Hudson instructed Pavarini to stop activities resulting in "additional monetary exposure" to Hudson, because of "a loss of project funding." (Phillips Aff.[FN3] ¶ 7.) Hudson's monthly reports between October 2008 and January 2009 reported that the project was under "suspension." (Phillips Aff. ¶ 7.) No further contracts were put out to bid during that time. (Phillips Aff. ¶ 8.) Alexander Phillips, Vice-President of Tishman Construction Corporation of New York ("Tishman"), Trinity's construction advisor in connection with Hudson's project, visited the site between September 2008 [*4]and April 2009. Beginning in October 2008, he observed "a decline in the level and pace of construction activity at the Project site." (Phillips Aff. ¶ 9.) Between early January 2009 and early April 2009, the construction work and the progress made were "minimal" and "slow." (Phillips Aff. ¶ 10.) When Phillips visited the site on April 2 and 8, the site was "completely shut down." (Phillips Aff. ¶ 11.) The existing building structure remains incomplete. Phillips opined that, the longer it remains exposed while no construction goes on, the more likely it is that exposure to the elements will "result in damage and deterioration." (Phillips Aff. ¶ 12.)

Hudson concedes that construction at the site has been grinding to a halt ever since at least October 2008 and has now halted altogether. Hudson's counsel describes the construction as having entered a "period of repose while market conditions, improved weather and the parties have a chance to have a dialogue." (Trans. at 13.) Hudson has not alleged that the absence of labor, materials or anything else (other than the current financial crisis) has prevented completion of the construction of the project.

In its January 9, 2009 letter, Hudson threatened Trinity that it would not be able to "justify any additional investment in the Project" unless Trinity committed to "engage in good-faith negotiations with 330 Hudson" to "restructure ... the financial terms of the Ground Lease," and that it would not commit any additional funds for close-up costs either unless Trinity would agree to renegotiate the lease. (Brodsky Aff. Ex. 2.) I read this language as a concession by Hudson that it does not intend to invest more money in the project according to the terms of the lease as it now stands.

In its January 9, 2009 letter, Hudson cited the "current economic crisis" as an "Excusable Delay" that excused default of the requirement in § 13.1(a) to "diligently and continuously pursue completion" of the project. I agree with Trinity that Hudson's argument that the current credit crisis counts as "Excusable Delay" under the lease is contradicted by the lease language excluding Hudson's "insolvency or financial condition or unavailability of money" from the definition of "Excusable Delay." (Lease § 13.1(a).)

Hudson argues, however, that it has also met its obligations under § 13.1(a) of the lease to "diligently and continuously pursue completion" of the project, despite the shutdown in construction, based on evidence of negotiations with potential tenants, its previous financial investment in the project, its sponsors' assets, its exploration of and investment in a "close-up" plan to protect the site during the lapse in construction, and its sponsors' declaration of their ability and intention to complete the project by its substantial completion date. To be specific: Hudson has asserted a desire, willingness and ability to substantially complete the construction as required in the lease. (Brodsky Aff. ¶ 44; Trans. at 18-19, 51-52, 58-59.) Hudson has submitted evidence that Hudson has already invested $35 million in the project, it has completed various aspects of the construction already, and the sponsor partners have $1.7 billion in assets under management. (Brodsky Aff.[FN4] ¶¶ 14, 39.) William D. Brodsky, a principal of Tribeca Associates LLC, one of the three sponsor partners of Hudson, has averred that Hudson has received "strong expressions of interest from at least three major office tenants" and is in "active discussions" with them concerning potential lease agreements. (Brodsky Aff. ¶ 15.) Brodsky further avers that Hudson has signed a management agreement with [*5]Kors Hotels for the 168-room hotel. (Brodsky Aff. ¶ 16.) Brodsky opines that Hudson could complete the project by the substantial completion date. (Brodsky Aff. ¶ 40.)

Furthermore, Howard Glatzer, a principal of Latus Partners LLC, one of the sponsors of Hudson, has averred that Hudson already is "actively pursuing a plan to close up'" the site until Hudson decides to resume construction. (Glatzer Aff. ¶ 2.) Hudson estimates that it has spent $2.8 million in "close-up" costs so far, and estimates that the remaining costs of the close-up will exceed $7.9 million. (Glatzer Aff. ¶ 8.) Allan Brot, a principal of The J Companies, LLC, a construction firm, which was hired by Hudson to evaluate several alternative close-up plans, avers that Hudson is evaluating "various means and methods" of closing up the site, and all of these "means and methods" are "consistent with good construction practices." (Brot Aff. ¶¶ 5-6.) Both Pavarini and Hudson's structural engineer, Thornton Tomasetti, Inc., have made recommendations about the steps necessary to "close-out" the site, to protect it from the elements while construction is in suspension. (Phillips Aff. ¶¶ 13-16; Glatzer Aff. ¶ 3.) As of Phillips's April 8 visit to the site, some of the steps recommended by Pavarini had not been completed as scheduled. Hudson does not deny that Hudson has not followed through on the timeline proposed by Pavarini. (Glatzer Aff. ¶ 3.)

I disagree with Hudson that this evidence warrants the issuance of a Yellowstone injunction pending final determination of this action.

It is undisputed that Hudson decided to stop construction at least eight months ago, that construction stopped altogether at least two months ago, and that Hudson has no present intention to resume construction. Hudson has refused to commit to a date certain when Hudson would resume construction. (Trans. at 52.) Although Hudson asserts that it is considering several different close-up plans during this lapse in construction activity, the undisputed evidence shows that Hudson is not pursuing any of them in a diligent or continuous fashion. Hudson conceded in its January 9, 2009 letter that any further funding of a close-up plan would be conditional on Trinity's agreeing to renegotiate its lease with Hudson. It is undisputed that Hudson has not complied with the close-up timeline of its own advisor since that time.

I conclude, from the undisputed evidence before me, that Hudson has not shown a willingness, desire, or ability diligently and continuously to pursue completion of the project. Rather, the evidence indicates that Hudson is attempting to use its shutdown in construction as leverage to force Trinity to renegotiate its lease.

In view of my conclusion that a Yellowstone injunction is not warranted, I do not need to reach Trinity's alternative argument that, if I do grant a Yellowstone injunction, it should be conditioned on Hudson's taking appropriate steps to protect the property during the lapse in construction by pursuing the close-up of the project and the issuance of a bond, or Hudson's argument that the $10 million letter of credit and $15 million in prepaid rent, which Hudson provided in accordance with the ground lease, are adequate security for Hudson's performance of its lease obligations.

Accordingly, it is

ORDERED that Motion Seq. No. 001 is denied; the temporary restraining order issued on March 17, 2009, which stayed the time to cure in the January 16, 2009 notice to cure, is vacated; and it is further

ORDERED that the parties are to appear for a preliminary conference on June 23, 2009 at 10:30 a.m. [*6]

DATED:___________________

_______________________________

J.S.C. Footnotes

Footnote 1:

The four asserted defaults in the January 16 notice are: (1) failure to pay $100,000 in consultant fees to Trinity's construction advisor, Tishman Construction Company of New York ("Tishman") from August 1, 2008 to January 16, 2009, under § 3.10; (2) failure to provide information requested by Tishman concerning scheduling and scope of work, under § 13.3(g); (3) alleged slowdown in work by Hudson's general contractor, Pavarini McGovern, LLC, under § 13.1(a); and (4) breach of the covenants in Article 6 of the ground lease regarding the required limits for excess/umbrella insurance coverage. (Brodsky Aff. Ex. 3.)

Hudson has disputed all four alleged defaults. Trinity did not defend the first, second, and fourth alleged defaults in its opposition papers, and its counsel conceded at oral argument that only the third alleged default is at issue. (Trans. at 9, 11, 17, 34.) Since Trinity has defended only the third in this motion, I consider the first, second, and fourth asserted defaults to be withdrawn by Trinity.

Footnote 2:

On March 25, 2009, Trinity issued another notice to cure to Hudson, based on Hudson's alleged failure to ensure that the construction of the project proceeds "in accordance with... good construction practices," by "diligently and continuously prosecut[ing] the Close-Up Work to completion" so as to protect the building, in default of its obligation under § 13.1(b). (Wallin Aff. Ex. A.) This default notice concerns Hudson's alleged failure to pursue the close-up plan recommended by its advisors, to protect the site from the elements during the lapse in construction. This notice to cure is not the subject of this motion, except insofar as Trinity is asking me to condition any Yellowstone injunction on Hudson's complying with the terms of such a close-up plan.

Footnote 3:

Affidavit of Alexander Phillips.

Footnote 4:

Affidavit of William D. Brodsky.