Christopher's Partner, LLC v Christopher's of Colonie, LLC

[*1] Christopher's Partner, LLC v Christopher's of Colonie, LLC 2008 NY Slip Op 52738(U) Decided on November 5, 2008 Supreme Court, Albany County Platkin, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 5, 2008
Supreme Court, Albany County

Christopher's Partner, LLC, Plaintiff,

against

Christopher's of Colonie, LLC, Defendant.



6152-08



Nolan & Heller, LLP

Attorneys for Plaintiff

(Justin A. Heller, of counsel)

39 North Pearl Street

Albany, New York 12207

Lombardi, Reinhard, Walsh & Harrison, P.C.

Attorneys for Defendant

(Paul E. Davenport, of counsel)

111 Winners Circle

Albany New York 12205

Flink, Smith & Associates

Attorneys for Proposed Intervenors

(James W. Hyde, IV, of counsel) 23 British American Boulevard

Latham, New York 12110

Richard M. Platkin, J.

Plaintiff Christopher's Partner, LLC moves by Order to Show Cause, dated July 21, 2008, for an order of seizure pursuant to CPLR 7102. Defendant Christopher's of Colonie, LLC opposes the application. In addition, defendant moves for renewal pursuant to CPLR 2221, and Vincent Rua and Carol Stykes-Rua move to intervene in this proceeding in their individual capacities. Plaintiff opposes the latter two applications.

In its prior Decision & Order dated September 12, 2008,[FN1] the Court rejected two of three alleged events of default relied upon by plaintiff in support of its application for an order of seizure. With respect to the third alleged event of default, the Court determined that "plaintiff is likely to succeed in establishing that defendant is in default under the Note based on its failure to make the June and July rent payments." However, the Court's decision also recognized the potential viability of defendant's affirmative defense of waiver:

. . . [T]he record does not foreclose defendant's contention that discussions between Rua and Juneau during the period from July 7, 2008 (when Juneau called for a meeting to discuss a company's situation, including rent issues, in order to develop a mutually agreeable strategy) and July 21, 2008 (the date of the instant application) ripened into a waiver on the part of Juneau, binding on plaintiff, that authorized the continued withholding of rent as a strategy for obtaining financial concessions from the landlord and excused the alleged event of default. While the Note includes a clause setting forth certain rules governing waivers, its language does not preclude plaintiff, through its words or conduct, from voluntarily and intentionally relinquishing its right to declare a default and accelerate repayment (see Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 NY2d 175, 184 [1982]).

***

Based on the foregoing, the Court orders a hearing [on October 10, 2008] on the issue of whether plaintiff waived or is otherwise foreclosed from exercising its right to assert an event of default based on defendant's failure to pay its June and July rent. Pending such hearing, the temporary restraining order set forth in the Order to Show Cause dated July 21, 2008 shall remain in effect . . . . (internal footnotes omitted).MOTION FOR RENEWAL

On October 7, 2008, defendant moved by Order to Show Cause pursuant to CPLR 2221 to renew its opposition to plaintiff's application for an order of seizure and for certain related relief. The new facts relied upon by defendant pertain to an amendment to its lease that, among other things, defers its obligation to make the June and July 2008 rent payments until January 1, [*2]2009.[FN2] Defendant argues that this lease modification, executed on October 3, 2008, eliminates the remaining event of default relied upon by plaintiff in support of its application for an order of seizure.

A motion to renew must be denied where the new facts would not change the prior determination (CPLR 2221 [e] [2]). It is well established that after a lender validly accelerates repayment of a loan upon an event of default, the borrower has no right to unilaterally cure the default and resume making periodic payments; rather, the lender is required to accept nothing less than a tender of full payment (Albertina Realty Co. v. Rosbro Realty Corp., 258 NY 472 [1932]; First Fed. Sav. Bank v. Midura, 264 AD2d 407 [2d Dept 1999]).

The Court accepts as true, for purpose of the motion for renewal, that as of October 3, 2008, defendant no longer was in default of its lease obligations to its landlord. But the landlord's willingness to allow defendant to cure its default under the lease in no way binds plaintiff to make a similar concession with regard to its rights and remedies as a creditor of defendant pursuant to the Note. Nor does the lease amendment, to which plaintiff is not a party, work to retroactively negate the event of default relied upon by plaintiff.

Since the October 3, 2008 lease amendment is not probative of whether defendant was in default of its obligations to plaintiff under the Note at pertinent times, it would not change the Court's prior determination. Accordingly, the motion for renewal is denied.[FN3]

MOTION TO INTERVENE

On the afternoon of October 9, 2008, counsel to Vincent Rua and Carol Stykes-Rua in their individual capacities (collectively "the Ruas" or "movants") presented this Court with an Order to Show Cause ("OTSC") seeking leave to intervene in this proceeding, including the evidentiary hearing scheduled for the following morning. While the Court had significant reservations about the timing of this application — made on the eve of the hearing and on a day of religious observance when plaintiff's counsel was unavailable to be heard — the Court nonetheless signed the OTSC and made the application returnable the following morning.

Following oral argument on October 10, 2008, the Court orally denied the Ruas' application to intervene. As is more fully set forth in the transcript of the morning's proceedings, the Court's ruling was based on, inter alia: (1) the unavailability of intervention as of right under CPLR 1012 (a) (3), the statute relied upon by the Ruas in support of their application; (2) the untimeliness of the application; (3) the fact that defendant's counsel was fully and ably representing the interests sought be asserted by the Ruas; (4) the potential for delay and prejudice to plaintiff arising from the belated application to intervene; (5) the separate and distinct (though admittedly related) nature of the issues sought to be raised by the Ruas; and (6) the fact that the Ruas inappropriately were seeking to use intervention as a substitute for the provisional remedy of pre-judgment attachment. [*3]

Accordingly, the Ruas' application to intervene is denied for the foregoing reasons, as further amplified in the October 10, 2008 hearing transcript.

VIABILITY OF WAIVER DEFENSE

The purpose of the evidentiary hearing held on October 10, 2008 was to assist the Court in determining defendant's likelihood of success in establishing its affirmative defense of waiver: whether plaintiff's words and conduct during the period from July 7, 2008 (when David Juneau called for a meeting to discuss the company's financial situation, including rent issues) until July 21, 2008 (the date of the application for an order of seizure) constituted a voluntary and intentional relinquishment of its right to declare the Note in default and accelerate. The Court also entertained argument on the related defense of equitable estoppel.

At the hearing, the Court heard testimony from Vincent Rua ("Rua") on behalf of defendant and from David Juneau ("Juneau") on behalf of plaintiff. Each side also offered documentary evidence, principally email communication between these individuals and defendant's financial records, in support of its respective position. Based upon the credible evidence adduced, the Court finds as follows:

Rua is the general manager of the defendant LLC and, in that capacity, is responsible for managing the company's business and financial affairs. Plaintiff, through its sole member, Juneau, had no active involvement in the day-to-day management or affairs of the company, but did meet every week or two with Rua to discuss issues of significance affecting the company.

In early 2008, Juneau and Rua discussed, both in person and through email, the possibility of defendant pursuing rent concessions from its landlord based on the store's lower-than-expected sales and the lack of mall "traffic". During these discussions, Rua raised the notion of defendant deliberately withholding rent payments from the landlord as a negotiating strategy, but Juneau opposed this course of action, fearing that the landlord would accelerate defendant's obligations under the lease and evict defendant. Rua doubted it would come to that and, in any event, believed that defendant still would have the opportunity to negotiate, or, if necessary, seek bankruptcy protection. They also discussed the possibility of defendant liquidating and/or filing for bankruptcy protection if sales did not improve and rent concessions were not forthcoming.

Despite these fiscal concerns, additional funds were infused into the company in March 2008, with the hope that sales would improve. However, even by June 2008, defendant continued to struggle financially, with that month's sales falling below the June 2007 level.

Juneau first learned of defendant's failure to pay its rent in a July 1, 2008 email from Rua that stated, in pertinent part:[FN4] "Cash flow is bad as you'd expect. I'm holding June's rent and will do same for July. Cash at this point is $18,000 more than GL says due to June rent being held. [*4]I'm trying to get cash up over $25,000 . . . then we'll think about paying rent down slowly." The same email further advised Juneau to "make sure we have our UCC's filed in case we need to do something drastic in August" (emphasis in original), a reference to the possibility that the company might need to liquidate and/or seek bankruptcy protection.

It is apparent from Rua's email of July 1, 2008 that rent was being withheld due to defendant's financial difficulties, not as a result of a negotiating strategy. While Rua understandably sought to make the best of a bad situation by seeking to leverage the company's inability to pay its rent into much-needed rent concessions, the sole rationale for rent withholding presented to Juneau on July 1, 2008 was defendant's lack of available cash flow to meet these obligations. Further, Rua was well aware at this time that Juneua opposed the use of rent withholding as a negotiating strategy, based both on the legal risks associated with such a strategy as well as Juneau's view that it would not be successful.

Juneau responded to Rua by email on July 7, 2008, stating, in pertinent part: "You, Carol and I need to meet to discuss the [company's] situation. Failure to pay June's rent without [the landlord's] consent puts the company in jeopardy of calling the entire lease due. I certainly don't understand the logic of how you would consider committing $2-4k a month for advertising if you didn't send in June's rent. Do not commit to anything from this point on, without us having a discussion and our mutual agreement." Juneau's email also requested detailed financial information for the meeting.[FN5]

Rua and Juneau met in person on July 10, 2008 to discuss the future of the company. At this meeting, they discussed Rua's desire to pursue rent concessions from the landlord, and Juneau consented to (or acquiesced in) such negotiations. While Juneau did not believe that these efforts would be fruitful, he had no reason, either in his capacity as 50 percent member of the defendant LLC or as a creditor of defendant, to oppose Rua's efforts to obtain a reduced rent for defendant. Indeed, Juneau feared that if he could face personal liability in his capacity as member of the defendant LLC if he opposed such a beneficial effort.

Both Juneau and Rua agree that the prospect of defendant paying the June and July 2008 rent was not discussed at the meeting. From Juneau's perspective, he had already been told by Rua in the July 1, 2008 email that the company's cash flow was insufficient to pay to $33,000 to $36,000 required for defendant to become current on its rent, so it would have been futile for him to demand or argue otherwise. Moreover, Juneau's contemporaneous review of defendant's financial documents, including cash flow projections prepared by Rua, confirmed the bleak picture of defendant's finances set forth in Rua's July 1, 2008 email. Rua's own projections, which assumed significant cost reductions, expressed the view that if business did not improve over the short term, the company should be ready to liquidate.[FN6]

On the other hand, Rua asserts that defendant could and would have paid its June and July rent if requested to do so by Juneau. According to Rua, defendant could have drawn down various reserve funds, borrowed against the approximately $20,000 credit balance on its [*5]"BusinessCard" account with HSBC and/or accepted a proposed new infusion of capital from the Ruas.

Juneau acknowledges that the Ruas had offered to invest some amount of additional funds in the defendant LLC, but testified without contradiction that this proposal was conditioned on plaintiff making concessions that it deemed unacceptable with respect to its equity position in the defendant LLC and/or the terms of the outstanding Note.

As to borrowing, Juneau claims to have been unaware of the "BusinessCard" credit account and questions whether this account is merely a charge card issued to the defendant company. Moreover, Juneau notes that defendant has not shown that its members (including, of course, plaintiff) would have agreed to incurring additional indebtedness to defray its operating expenses.

Following the July 10, 2008 meeting, Juneau continued to obtain information regarding defendant's bleak financial condition. Thus, Juneau was aware that as of July 11, 2008, the balance in defendant's primary bank account was only $24,000.[FN7] Further, Juneau reviewed company balance sheets dated July 11, 2008 and July 14, 2008, which confirmed the company's precarious financial situation. Juneau also received revised financial projections from Rua on July 13, 2008 that continued to project negative cash flow for the company in the near term, even if defendant's monthly expenses were reduced substantially. And again Rua's own projections noted that if sales did not improve, liquidation would be necessary.

Based on the information available to him as of July 14, 2008, Juneau determined that the defendant company was not financially viable and, therefore, directed counsel to commence this proceeding to protect plaintiff's rights as a secured creditor of defendant. In the interim, Rua continued to pursue efforts to negotiate rent concessions, but the landlord's agent cancelled several scheduled meetings. On July 21, 2008, plaintiff commenced this proceeding.

During the pendency of this application, Juneau continued to acquiesce in Rua's efforts to obtain rent concessions from the landlord, negotiations that Rua ultimately brought to a successful conclusion on October 3, 2008 with the execution of the aforementioned lease modification agreement. However, plaintiff expressly reserved its rights as creditor at all times during this period.

Having made the foregoing factual findings on the basis of the credible evidence adduced at the October 10, 2008 hearing, the issue then becomes whether defendant has established a likelihood of success in establishing its affirmative defense of waiver.

A lender may, through its words or conduct, voluntarily and intentionally relinquish a contractual right, including the right to declare a loan in default and demand accelerated repayment (see Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 NY2d 175, 184 [1982]). "Waiver may arise by either an express agreement or by such conduct or a failure to act as to evince an intent not to claim the purported advantage" (Hadden v Consolidated Edison Co. of NY, 45 NY2d 466, 469 [1978]). But a waiver "is not created by negligence, oversight, or thoughtlessness, and cannot be inferred from mere silence" (Peck v Peck, 232 AD2d 540, 540 [2d Dept 1996]). Rather, there must be proof that there was "a voluntary and intentional [*6]relinquishment of a known and otherwise enforceable right" (id.). Further, waiver "should not be lightly presumed and must be based on a clear manifestation of intent to relinquish a contractual protection" (Team Mktg. USA Corp. v. Power Pact, LLC, 41 AD3d 939, 941-942 [3d Dept 2007]). Applying these principles, the Court concludes that the factual record does not support a defense of waiver.

As an initial matter, it is undisputed that plaintiff did not expressly agree to forego its right to accelerate repayment of the Note upon an event of default — a right that is preserved by Limited Liability Company Law § 611, which provides that a member who lends money to the LLC has the "has the same rights and obligations with respect thereto as a person who is not a member." Indeed, it appears that there was no discussion at all between Rua and Juneau regarding plaintiff's rights as a creditor and how those rights might be implicated by defendant's continuing failure to meet its financial obligations.

Nor can a waiver be inferred from Juneau's alleged failure to direct Rua to make the June and July rent payments. Rua, as the company's general manager responsible for managing its financial affairs, did not seek Juneau's prior consent to withhold the June and July rents; rather, Rua simply informed Juneau of his unilateral decision to withhold the June and July rents. Indeed, by the time that Juneau learned of the non-payment of rent, the June rent already was one month late.[FN8]

When Juneua was informed of defendant's non-payment of rent, Rua advised him that this course of action was based on defendant's lack of cash flow, not as the execution of a negotiating strategy for obtaining rent concessions from the landlord. And Rua's representations concerning the company's poor fiscal condition and lack of available cash on hand were corroborated by Juneua's review of the company's balance sheets, bank account balances and Rua's own financial projections. Thus, even assuming that plaintiff had the right or responsibility as a 50 percent member of the defendant LLC (or as its creditor) to direct the company's general manager to make the June and July rent payments, the record demonstrates that plaintiff had no reason to believe that defendant had the capacity to become current on its rent or that a demand to Rua to make such payments would be anything but a futile gesture.[FN9]

Nor does the record support Rua's contention that he understood Juneau's email of July 7, 2008 as directing him not to make any further expenditures, including rent payments, without mutual agreement. Juneau testified, more credibly, that the reference in the email to "not [*7]commit[ing] to anything from this point on" must be understand by reference to the preceding sentence, which asked how Rua could "consider committing $2-4k a month for advertising if [he] didn't send in June's rent." And again, the credible evidence demonstrates that defendant's failure to pay its rent was necessitated by defendant's poor fiscal condition.

Further, Juneau's consent to (or acquiescence in) rent renegotiations between Rua and the landlord cannot be deemed a waiver of plaintiff's right to pursue its remedies as a creditor on the basis of defendant's non-payment of rent. As explained previously, there was no reason for Juneau to oppose Rua's efforts to negotiate a reduced rent for defendant. But Juneau's consent to these negotiations, given after he was told that defendant could not and was not paying its rent, cannot reasonably be understood as manifesting consent to the non-payment of rent. Certainly Juneau never indicated that his concerns over defendant's failure to pay its rent (and its underlying inability to do so) would be fully addressed through execution of a lease modification agreement with the landlord. Moreover, Rua acknowledges that he was aware of Juneau's long-standing opposition to the use of rent withholding as a strategy, and implied consent will not be presumed lightly in such a circumstance.

Based on the foregoing, the Court determines that the defendant has failed to demonstrate that plaintiff's words and conducts constituted a waiver of its right to declare the Note in default on the basis of the non-payment of rent and to accelerate the Note in response thereto.

In addition to waiver, defendant raises the argument that plaintiff's conduct in its dual role as a member of the defendant LLC and as a creditor of the company gives rise to an equitable estoppel. Defendant contends that it relied to its detriment upon Juneau's silence regarding plaintiff's intentions with respect to pursuing an event of default under the Note based on the non-payment of rent, as well as Juneau's acquiescence in rent negotiations with the landlord. According to defendant, had Juneau informed Rua that defendant's failure to pay rent would result in plaintiff declaring the Note in default, "the rent withholding strategy would have certainly been, at the very, rethought and most likely abandoned, and the rent paid" (Defendant's Post-Hearing Memorandum of Law, at 10).

To establish the applicability of the doctrine of equitable estoppel, defendant must demonstrate the following with respect to its own conduct: "(1) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (2) reliance upon the conduct of [plaintiff]; and (3) action based thereon of such a character as to change [defendant's] position prejudicially" (Brelsford v. USAA, 289 AD2d 847 [3d Dept 2001]). With respect to plaintiff, defendant must show: "(1) conduct which amounts to a false representation or concealment of material facts . . . ; (2) intention, or at least expectation, that such conduct shall be acted upon by the other party; (3) knowledge, actual or constructive of the real facts" (id. [internal quotations omitted]). Defendant's reliance must be reasonable or justifiable under the circumstances (see Verra v. Bowman-Verra, 266 AD2d 682 [3d Dept 1999]; see also Nassau Trust, supra). As with waiver, defendant bears the burden of establishing the elements of equitable estoppel.

Applying these principles, the Court concludes that defendant's proof falls well short of establishing a viable defense of equitable estoppel. Plaintiff was under no obligation to disclose to defendant its intention to pursue its remedies as a creditor under the Note, rights expressly preserved under Limited Liability Company Law § 611. Nor can Juneau's acquiescence in Rua's rent negotiations with the landlord reasonably be interpreted as an agreement by plaintiff to forego its rights as a creditor. Moreover, Rua never once inquired of Juneau as to how the non-[*8]payment of rent (and defendant's other fiscal difficulties) would bear on the creditor-debtor relationship between plaintiff and defendant.

And even if any of Juneau's conduct in his dual roles as member and creditor could be understood as falsely representing plaintiff's intentions, defendant cannot demonstrate a prejudicial change in its position as a result thereof. Again, the proof before the Court, including Rua's own words, demonstrates that defendant's failure to pay the June and July rents was attributable to its lack of available cash. And defendant has not shown that it could or would have become current on its rent had it known that plaintiff intended to assert its rights as a creditor under the Note and security agreement.

Accordingly, defendant has failed to demonstrate a likelihood of success in establishing the elements of the affirmative defense of equitable estoppel.

CONCLUSION

Plaintiff has demonstrated that defendant's failure to pay its June and July rents constitutes an event of default under the Note, and defendant has not demonstrated the viability of its affirmative defenses of waiver or equitable estoppel. Therefore, the Court finds that it is highly probable that plaintiff will succeed on the merits of its claim against defendant, and that all other prerequisites for issuance of an order of seizure pursuant to CPLR 7102 (c) have been established.

Accordingly, it is

ORDERED that defendant's motion for renewal is denied; and it is further

ORDERED that the application of Vincent Rua and Carol Stykes-Rua to intervene in this proceeding is denied; and it is further

ORDERED that plaintiff's application for an order of seizure is granted, in accordance with the separate paper entitled "Order of Seizure" signed on the same date as this Decision & Order.

This constitutes the Decision and Order of the Court. This Decision and Order is being returned to plaintiff's counsel. The signing of this Decision and Order shall not constitute entry or filing under CPLR Rule 2220. Counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.

Dated: Albany, New York

November 5, 2008

RICHARD PLATKIN

A.J.S.C.

Papers Considered:

Order to Show Cause for Order of Seizure with TRO

Order to Show Cause, dated July 21, 2008; [*9]

Affidavit of David R. Juneau, sworn to July 21, 2008, with attached exhibits A-D;

Proposed Order to Show Cause seeking to vacate TRO, undated;

Affidavit of Vincent Rua, sworn to August 19, 2008, with attached Exhibits A-E;

Affidavit of Paul E. Davenport, Esq., sworn to August 19, 2008, with attached exhibit A;

Affidavit of David R. Juneau, sworn to August 21, 2008, with attached exhibits A-G;

Sur-Reply Affidavit of Vincent Rua, sworn to September 4, 2008;

Affidavit of Paul E. Davenport, Esq., sworn to September 4, 2008;

Affirmation of Justin A. Heller, Esq., dated September 5, 2008.

Order to Show Cause for Renewal of Prior Application to Vacate TRO

Order to Show Cause, dated October 7, 2008;

Affidavit of Vincent Rua, sworn to October 7, 2008, with attached exhibits A-B;

Affidavit of Paul E. Davenport, Esq., sworn to October 7, 2008;

Affirmation of Justin A. Heller, Esq,. dated October 8, 2008, with attached exhibit;

Affidavit of Paul E. Davenport, Esq., sworn to October 8, 2008, with attached exhibit A.

Order to Show Cause to permit intervention of Carol Stykes-Rua and Vincent Rua

Order to Show Cause, dated October 9, 2008;

Affirmation of James W. Hyde, IV, dated October 9, 2008, with attached exhibits A-B;

Affirmation of Justin A. Heller, Esq., dated October 8, 2008, with attached exhibit.

Post-Hearing

Plaintiff's Post-Hearing Brief, dated October 24, 2008;

Memorandum of Law, dated October 24, 2008;

Transcript of Motion Practice Proceeding, dated October 10, 2008;

Transcript of Evidentiary Hearing, dated October 10, 2008. Footnotes

Footnote 1: The background of this proceeding is set forth at length in the prior Decision & Order and will not be repeated here, except to the limited extent necessary to resolve the pending applications.

Footnote 2: Plaintiff argues that Mrs. Stykes-Rua, as a 50 percent member of defendant, lacked authority under the company's operating agreement to execute the lease amendment. Defendant argues that such action is supported by past practice. In view of the Court's disposition of defendant's application for renewal, it is unnecessary to resolve this issue.

Footnote 3: At the October 10, 2008 hearing, the Court orally denied the motion for renewal for the foregoing reasons.

Footnote 4: Rua testified that the shortfall in June sales was the impetus for the rent reduction strategy, and that he discussed this strategy with Juneau and obtained his consent thereto sometime in June. However, Rua could not recall any details of this alleged conversation (in contrast to his detailed recollection of the January and February 2008 conversations), and Juneau denies that there was any such conversation. Further, the documentary evidence does not support Rua's recollection of events. Accordingly, the Court credits the testimony of Juneau and declines to credit the testimony of Rua in this regard.

Footnote 5: The strongly worded nature of Juneau's reply is inconsistent with Rua's contention that Juneau previously had agreed to a rent withholding strategy or, indeed, that he previously had been aware of Rua's intention to pursue such a strategy.

Footnote 6: Indeed, Juneau believed that Rua's projections were, if anything, overly optimistic.

Footnote 7: The balance sheet showed a lower balance, because an $18,000 check for the June rent had been written and entered into the accounting system, but not signed or delivered to the landlord.

Footnote 8: Juneau testified, without contradiction, that the lease required rent payments to be made on the first day of the month.

Footnote 9: The record is unclear on whether defendant could have borrowed sufficient funds to become current on its rent, but the Court credits Juneau's testimony that he was unaware of such alleged capacity at pertinent times. Indeed, the documentary evidence supports his view that the credit line relied upon by Rua was simply a company charge card. Since waiver is the voluntary and intentional relinquishment of rights, financial capacities of which plaintiff was unaware are of no moment. Further, plaintiff was under no duty to make concessions regarding its equity position or the outstanding Note in order to facilitate an infusion of additional capital into the defendant company.