930 Fifth Ave. Corp. v Shearman

[*1] 930 Fifth Ave. Corp. v Shearman 2007 NY Slip Op 52153(U) [17 Misc 3d 1126(A)] Decided on October 31, 2007 Civil Court Of The City Of New York, New York County Lebovits, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through November 14, 2007; it will not be published in the printed Official Reports.

Decided on October 31, 2007
Civil Court of the City of New York, New York County

930 Fifth Avenue Corporation, Petitioner,

against

Martha Anne Shearman and John Betts, Respondents.



50775/06



Kossoff & Unger, New York City (Sally Unger of counsel), for petitioner.

Gallet Dreyer & Berkey, LLP, New York City (Merrill Berkowitz of counsel), for respondent.

Gerald Lebovits, J.

In this nonpayment proceeding, petitioner, a cooperative corporation, seeks a judgment for possession and money against Martha Anne Shearman and John Betts, the respondent-shareholders of two cooperative apartments, Apartments 3-C and 3-D, which have been combined in their Fifth Avenue building.

Petitioner seeks $30,267 to replenish an escrow account, while respondents counterclaim for the return of that money. Petitioner also seeks, in maintenance, or rent, $13,504.84 for Apartment 3-C and $10,028.70 for Apartment 3-D.

This proceeding raises two issues. The first issue, which has remained sub judice since the close of petitioner's prima facie case, is whether petitioner may secure a possessory judgment against respondents to replenish the escrow account. That issue consumed only a small fraction of trial time but is the only issue worthy of extended discussion. The second issue is the validity of respondents' warranty-of-habitability defense and abatement counterclaim, which respondents raise against the arrears they owe. This second issue consumed greater than 95% of the trial, which was held over nine days, but it requires only a brief discussion.

I. The Escrow Agreement

A. The Facts

On December 3, 2001, respondent Shearman entered into an escrow agreement with petitioner cooperative corporation "as a guaranty to the Apartment Corporation of full compliance with the terms of the Lease and House Rules." (Escrow Agreement at ¶1.) Shearman agreed, under the escrow agreement, to deposit $30,267 and to maintain a balance in [*2]that amount. The escrow agreement also provided that petitioner would return to Shearman any balance remaining in the escrow account when she would sell the apartment so long as she "fulfilled all of her obligations under the lease and this [escrow] agreement." (Escrow Agreement at ¶2.) The escrow agreement further provided that any amount that Shearman was required to replenish into the escrow account would be considered "additional rent." (Escrow Agreement at ¶3.)

Paragraph 1 of the escrow agreement notes that the agreement's overall goal is to guarantee Shearman's full compliance with the proprietary lease and house rules. Full compliance under the escrow agreement means that Shearman would fulfill all maintenance obligations and pay all assessments, rent, and additional rent.

In compliance with the escrow agreement, Shearman deposited $30,267 to guarantee full compliance with the proprietary lease and house rules. When respondents stopped paying rent, petitioner, with respondents' consent by virtue of a letter dated April 2003 from Shearman, used the escrow money for rent. The entire escrow account now having been entirely drawn down, petitioner seeks an order requiring respondents to replenish it, and respondents seek an order for their return.

B. The Law

An escrow account is a security deposit. If money deposited with a landlord serves as a quasi-insurance policy to ensure compliance with the terms of the lease, the money represents a security deposit, not rent. Even though petitioner and Shearman agreed that the money in the escrow fund would be deemed "additional rent," the escrow account is a security deposit, and therefore is not rent.

As two authors have explained, "[a] 'security deposit' is consideration advanced on a lease or license agreement and is held by the lessor or licensor to ensure an occupant's full performance of the terms and conditions of the underlying contract." (Daniel Finkelstein and Lucas A. Ferrara, Landlord and Tenant Practice in New York § 7:2, at 7:4 [2006 ed.].) GOL § 7-103 (1) provides that a security deposit made by a tenant at a landlord's request continues to be the tenant's property and shall be held in trust without being commingled with the landlord's personal assets. Thus, in Peterson v Oklahoma City Hous. Auth. (545 F2d 1270, 1274 [10th Cir 1976]), the court found that "if the deposit is security for the performance by each tenant of the conditions of his lease, kept with other such deposits in a separate account, and is returnable to him on termination of the tenancy if the conditions of the lease have been fulfilled, it is a security deposit."

The escrow fund is a security deposit because, under the escrow agreement, the cooperative would use the funds to ensure compliance with the terms of the proprietary lease, would keep the funds in a separate account, and would return them if they are still in the escrow account when Shearman sells her shares allocated to the cooperative apartment. Collectively, [*3]this evidences that the escrow account is a security deposit.

Civil Court does not have jurisdiction over security deposits. Courts have found under RPAPL 711 (2) that "[s]ecurity deposits are not rent, and they cannot be recovered in a nonpayment proceeding." (225 Holding Co., LLC v Beal, 2006 NY Slip Op 51269[U], *1, 2006 WL 1843973, at *1, 2006 NY Misc. LEXIS 1724, at *1 [App Term 2d Dept 9th & 10th Jud Dists, June 28, 2006, mem] [citation omitted]; accord Park Holding Co. v Johnson, 106 Misc 2d 834, 837 [Hous Part, Civ Ct, NY County 1980].) Secondary sources also consider a security deposit not to be rent: "Since the proceeds are not rent,' they may not be recovered by way of a nonpayment proceeding." (Finkelstein and Ferrara, supra, § 7:4, at 7:5.) The escrow funds are not additional rent despite the litigants' agreement to the contrary.

Litigants may not confer jurisdiction on the court to rule on an escrow account simply by calling the funds "additional rent." Despite Dolan's writing in Rasch's New York Landlord and Tenant Practice in New York that "rent will not be deemed to include any other payments which the tenant has covenanted to make, unless the parties expressly provide that such other payments shall constitute rent" (1 Robert F. Dolan, Rasch's Landlord and Tenant & mdash; Summary Proceedings § 12:3, at 524-526 [4th ed 1998]), the Second Department has ruled to the contrary. The Court in Ross Realty v V & A Fabricators, Inc. (42 AD3d 246, 250 [2d Dept 2007]), found that "accelerated rent" is not "rent due" and is therefore outside the jurisdiction of Civil Court, a "local court for the purposes of summary proceedings" (id.), despite what the parties call the amount due. The Second Department explained that "accelerated rent" is "contractual damages not recoverable in a summary proceeding." (Id.)

Nor does this court possess the equitable jurisdiction to order respondents to replenish the escrow account. As many courts have found, "except for proceedings for the enforcement of housing standards and applications for certain provisional remedies, the New York City Civil Court may not grant injunctive relief." (Broome Realty Assocs. v Sek Wing, 182 Misc 2d 917, 918 [App Term 1st Dept 1999, per curiam]; accord World Realty Corp. v Consumer Sales, 9 Misc 3d 136(A), 2005 NY Slip Op 51696[U], *2, 2005 WL 2683595, at *2, 2005 NY Misc. LEXIS 2288, at *2 [App Term 2d Dept 9th & 10th Jud Dists, Oct. 20, 2005]; 7 Highland Mgt. Corp. v McCray, 9 Misc 3d 129[A], 2005 NY Slip Op 51530[U], *2, 2005 WL 2347662, at * 2, 2005 NY Misc LEXIS 2074, at *2 [App Term 2d Dept 9th & 10th Jud Dists, Sept. 23, 2005, mem]; Topaz Realty Corp. v Morales, 9 Misc 3d 27, 28-29 [App Term, 2d Dept 9th & 10th Jud Dists, July 21, 2005, mem].)

In Topaz Realty, the parties agreed to a stipulation by which the landlord promised to give to the tenant funds held in escrow when the tenant vacated the premises. The tenant was unable to return the key to the landlord because the landlord refused to give him a receipt in return. Civil Court ordered the landlord's attorney to hand over to the tenant the funds held in escrow. On appeal, the Appellate Term, Second Department, found that Civil Court's order directing the landlord's attorney to release the funds "was injunctive and equitable in nature and not within the jurisdiction of the Civil Court." (Topaz, 9 Misc 3d at 28.) [*4]

In World Realty Corp., the Appellate Term, Second Department, refused to extend equitable jurisdiction to the Suffolk County District Court, whose jurisdiction may not exceed the New York City Civil Court's jurisdiction. (2005 NY Slip Op 51696[U], *2, 2005 WL 2683595, at *2, 2005 NY Misc. LEXIS, at *2.) The parties agreed to settle a commercial nonpayment proceeding through a so-ordered stipulation. The stipulation called for the landlord's attorney to return to the tenant funds held in escrow when the premises were surrendered. The District Court found that the tenant's failure sufficiently to clean the apartment materially breached the stipulation and awarded the escrow funds to the landlord. The tenant appealed, claiming that the cleanliness of the apartment was, at most, a de minimis breach and that the landlord breached the settlement stipulation. On appeal, the Appellate Term, Second Department, found that "the tenant is limited to seeking to enforce the stipulation in a court that has equitable jurisdiction or seeking money damages for breach of stipulation." (Id.)

The First and Second Departments are split on whether Civil Court has the jurisdiction to release funds held in escrow. (See One York Property LLC v Vista Media Group Inc., 12 Misc 3d 1155[A], 2006 NY Slip Op 50899[U], *5, 2006 WL 1358464, at *5, 2006 NY Misc LEXIS 1186, *5 [Civ Ct NY County, May 17, 2006] [discussing split between departments].) The Appellate Term for the First Department held in Future 40th St. Realty, LLC v Mirage Night Club, Inc., that Civil Court properly directed the release to the tenant of funds held in escrow after the tenant complied with the terms of a settlement stipulation in a nonpayment proceeding. (See 2002 NY Slip Op 50243[U], *1, 2002 WL 1448861, at *1, 2002 NY Misc LEXIS 739, at *3 [App Term, 1st Dept 2002, per curiam].)

Although the First and Second Departments are split, they are split in regard to the issue of releasing funds already held in an escrow account. The issue here is whether Civil Court should order the replenishment of funds to an escrow account. Civil Court's jurisdiction does not extend that far.

Even if this court did have jurisdiction over the escrow account€"and it does not€"the funds would be considered future rent according to paragraph 3 of the escrow agreement. But under this court's limited jurisdiction, "no suit can be brought for future rent." (Maflo Holding Corp. v S.J. Blume, Inc., 308 NY 570, 575 [1955].) Civil Court is "without authority to provide for the disposition of future rent." (Notre Dame Leasing Corp. v Sirico, NYLJ, Apr. 2, 1992, at 26, col 2 [App Term 2d Dept 2d & 11th Jud Dists, mem].) In Notre Dame Leasing, Civil Court awarded the tenant an abatement of $700 for previous months' rent and a future abatement of rent for $600 to enable the tenant to purchase a refrigerator. The Appellate Term, Second Department, modified the decision, striking the order regarding the award of future rent. The Appellate Term, Second Department, explained that Civil Court does not have the jurisdiction to abate future rent.

Petitioner has remedies. Petitioner could, were it so advised, bring a holdover proceeding, arguing that in failing to maintain the escrow balance, respondents breached a material term of their proprietary lease and a substantial obligation of the tenancy. (See e.g. [*5]Markowitz v Landau, 171 AD2d 564, 565 [1st Dept 1991].) Petitioner could also bring a plenary action in Supreme Court, which has the equitable jurisdiction to direct respondent to replenish the escrow funds.

Conversely, the court may not grant respondents' counterclaim directing petitioner to return the $30,267 in escrow funds that petitioner has long drawn down. The court does not have the jurisdiction to direct that relief. Also, respondents, having agreed in writing in April 2003 to allow petitioner to use the funds for rent, may not now withdrawn their consent. Respondents argue that petitioner was not authorized to draw down the escrow funds without their prior notice and permission, but Shearman's April 2003 letter obviated the need for notice and provided the required permission.

II. The Abatement Claim

The second issue concerns respondents' warranty-of-habitability and abatement defense and counterclaims. The court finds respondents' arguments over heat, mice and roaches, and asbestos in their basement storage area frivolous and disagrees with them in full.

As to the alleged problem with heat since 2002, respondents come forward only with a vague log itself contradicted by a dozen unsubstantiated heat complaints to the Department of Housing Preservation and Development. If there were problems with heat, they were caused by one non-functioning heating unit that, under ¶ 18 (a) of the proprietary lease, was respondents' obligation to repair or replace. The court rejects as wholly unsupported by the credible evidence respondents' shifting contentions that any heating problem was the cooperative corporation's responsibility because (1) if the problem came from the heating unit, respondents used the cooperative's plumbers to repair the unit; or (2) if the problem did not come from the heating unit, heat was absent because the building riser did not send heat to the unit.

As to the problem with roaches and mice since 2000, respondents have only themselves to blame, because they did not provide reasonable access to exterminate. In 2005, for example, the building exterminator was unable to gain access to respondents' combined apartments for 48 days. Moreover, according to the credible testimony of Patrick Burke, the superintendent, respondents refused for seven years to remove temporarily respondents' radiator covers to allow proper extermination.

Finally, as to the asbestos contamination in the basement storage area, respondents claim that they suffered injury because of "property damage from asbestos powder covering their property; their inability to use or retrieve any of their personal property stored there, and the incomplete cleanup effected by petitioner." (Respondents' Post-Trial Memorandum of Law, Oct. 30, 2007, at 12.) But respondents may not recover for property damage in this summary proceeding seeking an abatement; the trial evidence does not show how and to what extent respondents could not use their storage property; and the evidence proves that respondents cured the asbestos violation immediately after they learned about it. It is speculation contradicted by [*6]the evidence that petitioner's cleanup was incomplete. Additionally, petitioner argues without contradiction that respondents neither lived in nor were charged or paid rent for their storage area (Petitioner's Post-Trial Memorandum of Law, Oct. 30, 2007, at 7.) Thus, respondents may not recover for a violation of their residential warranty of habitability even if they had sought that relief.

III. Judgment and Further Proceedings

Final judgment for money and possession in petitioner's favor for $13,504.84 for Apartment 3-C and $10,028.70 for Apartment 3-D, for a total of $23,533.54, for rent through October 2007. The warrant of eviction may issue forthwith. Execution stayed for five days.

Both petitioner and respondent seek reimbursement for their reasonable attorney fees and costs under Article 28 of the proprietary lease, but only petitioner is the prevailing party entitled to attorney fees and costs. Neither side prevailed on the issue of the escrow funds: Petitioner may not compel respondents to replenish the escrow fund, and respondents may not obtain the return of funds already withdrawn. The prevailing party is determined, therefore, on the issue over which the parties spent more than 95% of their litigation: that petitioner obtained a judgment for all the rent it sought and that petitioner defeated respondents' defense and counterclaim for a rent abatement. This proceeding is adjourned for an attorney-fee hearing to Tuesday, November 27, 2007, at 2:00 p.m. By November 23, 2007, petitioner shall serve on respondents billing records for any legal-fee amount for which it seeks reimbursement.

Petitioner's application to adjourn for a hearing to ascertain whether to impose costs on respondents for their nonappearance in January 2007 is denied as academic in light of the court's determination that petitioner is entitled to reasonable attorney fees and costs for the entire proceeding.

This opinion is the court's decision and order.

Dated: October 31, 2007

J.H.C.