Malcolm Shabazz Dev. Corp. v Wu

[*1] Malcolm Shabazz Dev. Corp. v Wu 2021 NY Slip Op 50452(U) Decided on May 18, 2021 Supreme Court, New York County Lebovits, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 18, 2021
Supreme Court, New York County

Malcolm Shabazz Development Corporation, Plaintiff,

against

Ruth Wu, Defendant.



657107/2019



Reid Rodriguez & Rouse, LLP, New York, NY (Gregory L. Reid of counsel), for plaintiff.

Taylor & Cohen LLP, New York, NY (Robert Cohen of counsel), for defendant.
Gerald Lebovits, J.

This action is a suit on a guarantee of a commercial tenant's lease obligations. The lease was to run from 2018 to 2028. At the end of May 2019, plaintiff terminated the lease upon the tenant's default in paying rent. Tenant held over until mid-September 2019, when plaintiff dispossessed tenant pursuant to a judgment of possession entered by the New York City Civil Court.

Plaintiff then commenced this action by CPLR 3213 motion for summary judgment in lieu of complaint, relying on defendant's guarantee. Plaintiff sought—and obtained without opposition—a judgment for $2,284,590 (plus interest), which represented rent, real-estate tax payments, and other expenses over the full 10-year term of the lease.

Defendant later moved to vacate this court's order granting summary judgment, arguing that the terms of the lease and the guarantee foreclosed plaintiff's claim to the $2,284,590 that this court initially had awarded. This court concluded that defendant was correct that plaintiff was not, and indeed could not yet be, entitled under the guarantee to rent and related expenses for the full term of the lease. This court therefore entered an order on March 30, 2021, that reconsidered and vacated the branch of the court's prior order granting plaintiff summary judgment on damages. (See Malcolm Shabazz Dev. Corp. v Wu, 2021 NY Slip Op 21073 [Sup Ct, NY County 2021].)

This court's March 30 order held that plaintiff's recovery in this proceeding is limited to the obligations of defendant under the guarantee that had accrued as of March 2021, rather than through the end of the lease in July 2028. That holding raised the question of how much defendant did owe as of the end of March 2021. This court therefore directed the parties to file supplemental submissions addressing several topics relevant to that question. (See id. at *4-*5.) The parties have now filed supplemental affidavits and documentary evidence as directed.

In brief, plaintiff contends that it is entitled to a judgment of approximately $677,000 (plus interest); defendant contends that plaintiff's judgment is limited to approximately $51,000 (plus interest). This court largely, though not entirely, agrees with plaintiff.

DISCUSSION

The parties agree on several significant facts that shape this court's inquiry. The tenant first defaulted on its monthly rent obligation in March 2019, and paid no rent from then until its dispossession on September 12, 2019. The lease was terminated as of May 31, 2019. The tenant held over from then until September 12, 2019. And plaintiff has not relet the premises after dispossessing the tenant. The question, then, is what the tenant (and the guarantor) should owe plaintiff on these facts.

I. Defendant's Obligations under the Guarantee to Pay Rent and Additional Rent for the Period of March 2019 to March 2021

A. Rent for March 1, 2019, to September 12, 2019

Under the lease, the tenant owes fixed rent ($20,000/month) and additional rent (all other monetary obligations imposed by the lease beyond fixed rent, such as quarterly real-estate taxes, late fees, and so on). (See NYSCEF No. 13 at ¶¶ 39.1, 39.2 [lease].) If plaintiff terminates the lease due to the tenant's default, plaintiff is entitled to the unpaid rent accrued through the date of termination. Plaintiff also is entitled in that scenario to monthly liquidated damages in the amount of fixed-plus-additional rent owed under the lease for the balance of its term, offset by any rental income earned by the plaintiff during that time through reletting the premises.[FN1] (See id. at ¶ 18.) If the tenant holds over after termination, the tenant will owe for each month a sum equal to twice the fixed rent for the last full month of the lease's term. (See id. at ¶ 58.1; see also NYSCEF No. 112 at ¶¶ 24-25.)

Defendant concedes that under the guarantee she owes fixed rent for March, April, and May 2019, and additional rent in the form of the first quarter's real estate taxes. (See NYSCEF No. 138 at 2-3.) Beyond those sums, however, this court concludes that defendant also owes further additional rent consisting of a 15% late charge for each of those three months—a further $9,000. (See NYSCEF No. 13 at 11 ¶ 39.2.) Defendant's submission does not address this aspect of additional rent.

The parties differ about what the tenant (and thus the defendant) owe in holdover rent for the period June 1, 2019, to September 12, 2019. Defendant suggests that she owes only $40,000. She bases that figure on statements that appear in plaintiff's initial CPLR 3213 motion papers. (See NYSCEF No. 138 at 4, citing NYSCEF No. 8 at ¶ 25.) As plaintiff's current submissions reflect, though, the true figure is substantially higher.[FN2] Defendant owes (i) $20,000 monthly rent for each of June, July, and August 2019, and $8,000 in pro-rated monthly rent for September 1 to September 12, 2019; (ii) additional rent in the form of late charges for that unpaid rent; (iii) additional rent in the form of quarterly real-estate taxes; (iv) $20,000 in additional holdover rent for each of the three full months plus $8,000 for the partial month; and (v) late charges for the unpaid holdover rent.[FN3] (See NYSCEF No. 112 at ¶¶ 20, 26, 28.)

B. Rent for September 13, 2019, to March 31, 2021

The parties also disagree about what, if anything, the tenant and defendant guarantor owe for the 18-month period between plaintiff's dispossession of the tenant and this court's March 2021 order. That is, plaintiff contends that defendant owes the same basic sums for that period as for the period between March and September 2019: fixed rent, plus additional rent in the form of real-estate taxes, late charges, and the like. Defendant argues that she owes nothing at all.

Defendant's argument is as follows. Her obligations for this period are assessed in the form of liquidated damages under ¶ 18 (c) of the lease. Liquidated damages are not enforceable when they are merely a penalty (rather than an ex ante attempt to approximate difficult-to-determine damages). According to defendant, plaintiff was using the premises for its own benefit [*2]for nearly that entire 18-month period, such that it did not sustain damages from the loss of its tenant. Absent any actual injury, assessing liquidated damages for that period would impose a penalty for the tenant's default. Those damages, therefore, are unenforceable against either the tenant or defendant. (See NYSCEF No. 138 at 4-7.) This court finds several steps of defendant's argument unpersuasive.

Defendant's basis for claiming that plaintiff itself used the premises from October 2019 through March 2021 (and therefore sustained no damages) is somewhat thin. Defendant offers only her own affidavit. The relevant portion of the affidavit states, in full, that defendant "own[s] the building next door" to the premises and "visit[s] frequently"; that during those visits she has observed plaintiff "us[ing] the premise[s] . . . for a food pantry and related services," including "during daytime hours on weekdays"; and that she has seen this "use of the premises . . . continu[ing] up to the present." (NYSCEF No. 133 at ¶¶ 8-9.) The affidavit does not provide any specific dates of visits or any details about what exactly defendant observed during those visits that led her to conclude plaintiff was using the leased premises. The latter omission is especially significant because, as plaintiff points out (NYSCEF No. 112 at ¶ 47), the underlying lease expressly excludes the building's ground-floor kitchen from the leased premises (see NYSCEF No. 13 at ¶ 68.)

Admittdly, though, this affidavit might suffice to create a factual dispute about whether plaintiff has itself used the leased premises in some fashion.[FN4] But defendant has not established that this use of the premises would necessarily render the liquidated damages provision so disproportionate to plaintiff's actual injury as to be an unenforceable penalty. That is particularly true if plaintiff's use has occurred only during the pandemic, given the likely pandemic-related impairments to plaintiff's ability to relet the premises.

Moreover, defendant's argument suffers from a fundamental problem at the next step: even if this court were to hold the liquidated-damages provision unenforceable as against the tenant, that holding would not carry over to defendant guarantor.

The liability of a guarantor "may be broader than and exceed the scope of that of the principal where the guarantee, which is a separate undertaking, is, by its unqualified language, enforceable against the guarantor." (Raven Elevator Corp. v Finkelstein, 223 AD2d 378, 378 [1st Dept 1996].) And ¶ 7 of defendant's guarantee "provides expressly that "[n]o . . . unenforceability of any Obligation shall affect, impair or be a defense to the enforceability of the Guarantee." (NYSCEF No. 13 at 42.) Thus, "[n]othwithstanding the invalidity . . . or unenforceability of any Obligation of the Tenant to the Landlord, the Guaranty shall remain in full force and effect and shall be binding in accordance with its terms upon the Guarantor." (Id.) Given this waiver of unenforceability-based defenses, defendant would remain obligated to pay post-termination liquidated damages under the lease even if those damages could not be assessed against the tenant. (See LFR Collections LLC v Blan Law Offices, 117 AD3d 486, 486 [1st Dept 2014] [affirming grant of plaintiff's summary-judgment motion, where the guaranty "stated that it would not be affected by any invalidity or unenforceability of the underlying obligation of the borrower"]; Manufacturers Hanover Trust Co. v Green, 95 AD2d 737, 737 [1st Dept 1983] [*3][reversing denial of plaintiff's summary-judgment motion, where the guarantee provided that it would be a continuing, absolute and unconditional guarantee of payment regardless of the validity, regularity or enforceability of any of said Obligations or purported Obligations"].)

The two Appellate Division decisions cited by defendant are not to the contrary.[FN5] Neither decision purports to address a scenario in which a guarantee has expressly waived unenforceability defenses, much less holds that a guarantor must be exonerated from liability despite an unenforceability-defense waiver.[FN6] These two decisions make clear that a lender or lessor may in some circumstances be foreclosed from holding some guarantors liable on a given obligation if the obligation is unenforceable as against the guarantor's principal. But that does not mean all guarantors are shielded from that form of liability.

Defendant's only argument against holding her liable for post-dispossession fixed and additional rent is that the lease's liquidated-damages clause providing for that liability is unenforceable. Given the court's conclusion that this argument fails, defendant also is responsible for fixed and additional rent for the period September 13, 2019, through March 31, 2021, inclusive.

C. Annual Donations to the Clara Mohammed School of New York

The lease requires the tenant to make $5,000 annual donations to the Clara Mohammed School of New York. (See NYSCEF No. 13 at ¶ 70.) Plaintiff asserts, and defendant does not dispute, that the tenant did not do so. (See NYSCEF No. 112 at ¶¶ 6, 7, 36.)

Defendant contends that she cannot be held liable to plaintiff for this lease obligation because only the Clara Mohammed School itself, not plaintiff, has standing to enforce the obligation. (See NYSCEF No. 138 at 8.) This contention is without merit. The lease requires the tenant—and thus the guarantor—to pay, as additional rent, "all other amounts and obligations which Tenant assumes or agrees to pay under this lease," and late charges for any "item of [a]dditional [r]ent not paid when due." (NYSCEF No. 13 at 11; see also id. at 7.) Plaintiff is thus entitled under the lease to collect as additional rent the $5,000 annual donations that the tenant agreed to make to the Clara Mohammed School. The Clara Mohammed School conceivably could have brought a breach-of-contract action against the tenant or defendant guarantor directly, as an intended third-party beneficiary of the lease. But that does not foreclose plaintiff from seeking to hold defendant liable on her obligation to pay the amount of the donations to plaintiff as additional rent. Defendant is thus responsible for the $15,000 in total donations for 2019, 2020, and 2021 and for late charges for the three unpaid donations (plus appropriate interest).

D. Defendant's Claimed Offsets of Her Rent Obligations

Defendant also argues that her obligations under the lease and guarantee, whatever those obligations might be, should be set off by nearly $50,000. This court largely agrees.

Defendant points first to $40,000 that the tenant already paid plaintiff: $20,000 as a [*4]security deposit and $20,000 as fixed rent for the last month of the lease. Defendant contends that this money should be applied to her obligations under the guarantee. This court concludes that defendant's obligations, as described above, should be set off by the $40,000.

To be sure, defendant, as the guarantor, is undisputedly responsible for the lease's last month's rent (or at least, any deficiency between that rent and rent collected by plaintiff upon reletting). And it is also undisputed that under the lease, upon default, plaintiff may use or retain tenant's security deposit "for the payment of any Rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default, including without limitation any damages or deficiency accrued . . . after summary proceedings or other re-entry by Landlord." (NYSCEF No. 13 at ¶ 47.2.) Thus, defendant presumably will be responsible for paying part or all of that $40,000 at some point.[FN7] But this court declines to put the burden of uncertainty as to when that obligation will come due on the individual guarantor—particularly since the lease still has more than seven years left to run. Instead, plaintiff may include a claim relating to the security deposit and to the last-month's rent in any future action against defendant to recover damages accruing under the lease and guarantee from April 1, 2021 on. Plaintiff's judgment for damages accruing from March 1, 2019, to March 31, 2021, shall be offset by the $40,000 that the tenant already paid.[FN8] That $40,000 shall be deemed to apply to the tenant's fixed-rent arrears for March and April 2019, in particular.

Defendant also contends that this court should offset defendant's obligations by an additional $9,913.80. This sum, defendant asserts, represents a penalty the tenant had to pay the City Department of Buildings (DOB) to clear a pre-existing code violation for the premises. (NYSCEF No. 138 at 8-9.) As to this claimed setoff, the court is unpersuaded.

Plaintiff's principal represents in an affidavit that plaintiff reimbursed the tenant $8,618.40 for clearing the DOB violation. (See NYSCEF No. 112 at ¶ 18.) Plaintiff has produced evidence, in the form of a check and a rent ledger, to support this representation. (See NYSCEF Nos. 124, 127.) And defendant's own submission of a DOB payment history reflects that the penalty paid to clear the violation was $8,618.40. (See NYSCEF No. 135.) Defendant thus is not entitled to a setoff for paying to clear the DOB violation, because the tenant already received that sum back from plaintiff. With respect to the remaining $575.40, the payment history provided by [*5]defendant, standing alone, does not establish that those fees were related to the pre-existing violation, as opposed to the alterations that the tenant was also performing.[FN9] (See id.)

To sum up: this court concludes that in this proceeding, plaintiff is entitled to collect damages from defendant under the lease and guarantee as follows.

(i) Fixed rent for the period May 2019 through March 2021, inclusive (given the $40,000 setoff of fixed rent arrears for March and April 2019 discussed above);(ii) Additional rent, in the form of quarterly real-estate taxes and late charges for fixed rent, for the period March 2019 through March 2021;(iii) Additional rent, in the form of $5,000 annual donations to the Clara Mohammed School for 2019, 2020, and 2021, plus late charges for those donations; and(iv) Holdover rent in the amount of $20,000/month for the period June 1, 2019, to September 12, 2019, inclusive, plus late charges for that rent.

Plaintiff also is entitled to collect appropriate statutory interest on these sums, as well as reasonable costs and disbursements.

To ensure that both parties have an opportunity to address the proper calculation of plaintiff's damages, interest, and costs given this court's rulings laid out above, the parties are directed to Settle Order.

Dated: 5/18/2021 Footnotes

Footnote 1:Paragraph 18 (c) of the lease calculates the tenant's liquidated-damages obligations by reference merely to the "rent" being paid by tenant. But ¶ 39.1 of the lease defines "rent" to include both fixed and additional rent. (See NYSCEF No. 13 at 9.)

Footnote 2:To the extent defendant is suggesting plaintiff should be estopped from claiming entitlement to the higher figure now, this court does not perceive a basis for estoppel. Holding that plaintiff is entitled to a larger amount in liquidated damages for the specific period June to September 2019 than plaintiff initially claimed would not lead to awarding more in damages here overall than in the initial default judgment. (To the contrary, this court concludes here that plaintiff is entitled only to about one-third of the amount of that judgment, before interest.) And given this court's vacatur of the initial default judgment, there is no basis to apply the doctrine of judicial estoppel, either. (See Becerril v. City of NY Dept. of Health & Mental Hygiene, 110 AD3d 517, 519 [1st Dept 2013] [explaining that judicial estoppel precludes a party from taking a given legal position only where the party took a contrary position in a prior proceeding and thereby secured a ruling in its favor].)

Footnote 3:Defendant objects preemptively to the possibility that plaintiff could claim liquidated damages consisting not only of $20,000/month in fixed rent, but also $40,000/month in holdover rent for the same period. (See NYSCEF No. 138 at 4.) Because plaintiff claims only $40,000/month in rent for the period of the tenant's holdover (rather than $60,000/month), this court need not reach that issue.

Footnote 4:Plaintiff admits that since the advent of the COVID-19 pandemic it has operated a food pantry in front of the premises on Saturdays, which has required plaintiff's employees to enter the premises during those operations. (See NYSCEF No. 112 at ¶¶ 45-46.)

Footnote 5:See Cleo Realty Assocs., L.P. v Papagiannakis (151 AD3d 418 [1st Dept 2017]); Rallye Leasing, Inc. v L.I. Seafood & Dumpling House (213 AD2d 533 [2d Dept 1995]).

Footnote 6:The First Department's decision in Cleo Realty also relied in part on the criminally usurious character of the charges at issue in that case (see 151 AD3d at 419), which would have rendered those charges void as against public policy regardless (see Blue Wolf Capital Fund II, L.P. v American Stevedoring, Inc., 105 AD3d 178, 184 [1st Dept 2013]). There is no usury here.

Footnote 7:The facts here thus materially differ from cases in which courts have declined to apply a security-deposit setoff because the guarantees at issue would not cover the tenant's post-vacancy/post-eviction obligations. (See 501 Fifth Ave. Co., LLC v Aslam, 136 AD3d 535, 536 [1st Dept 2016]; Wiener v Han, 291 AD2d 297, 297 [1st Dept 2002]; 511 W. 25th St. Owner LP v WESTKiD25, LLC, 2019 NY Slip Op 32056[U], at *3 [Sup Ct, NY County July 16, 2019].)

Footnote 8:Plaintiff suggests that this court should not permit an offset here because defendant was required to have asserted the affirmative defense of payment in a responsive pleading. (See NYSCEF No. 137 at 9.) But plaintiff has obtained a default judgment based precisely on defendant's failure altogether to file a responsive pleading. The question now is the extent of plaintiff's damages given defendant's admission of the facts as to liability. In answering that question, this court takes into account that the tenant's payment of $40,000 for the security deposit and last-month's rent is undisputed.

Footnote 9:Defendant implies, but does not directly argue, that some sort of setoff also should be applied because the tenant's substantial alterations to the premises increased their value, which inured ultimately to plaintiff's benefit. (See NYSCEF No. 138 at 9; NYSCEF No. 133 at ¶¶ 3-7.) But the lease expressly provided that the tenant would receive a four-month rent concession related to its build-out of the premises, thereby taking those alterations into account. (See NYSCEF No. 13 at 11.)