Earlier this year, my colleague, Madeline Greenblatt, wrote about the emergence of a new body of case law emanating from the myriad effects the COVID-19 pandemic has had on the real estate industry.  In her blog, Madeline discussed a recent decision from the Manhattan Commercial Division (Borrok, J.), rejecting a commercial tenant’s argument that it should be excused from paying rent based upon the doctrines of impossibility and frustration of purpose.  Madeline aptly predicted we would see an uptick in COVID-19-related commercial lease disputes.  Right she was.

Just last week, the Manhattan Commercial Division in A/R Retail, LLC v Hugo Boss Retail, Inc. (2021 NY Slip Op 21139 [Sup Ct, NY County, May 19, 2021] [Cohen, J.]), yet again rejected a commercial tenant’s reliance on the doctrines of impossibility and frustration of purpose to excuse non-performance of its rent obligations.

Background of the Dispute

Located at the Shops in Columbus Circle (the “Shops”) in Manhattan – an upscale, highly trafficked shopping mall in Time Warner Center – the tenant, Hugo Boss, operates a two-story retail store (the “Store”) pursuant to a 13-year commercial lease (the “Lease”) with the landlord, A/R Retail, LLC (“A/R”). The Lease includes a force majeure clause excusing the non-performance of certain obligations based upon events beyond the non-performing party’s reasonable control, including, among other things, war, terrorism, acts of God, strikes, or any order or regulations of or by any governmental authority.

On March 7, 2020, as the COVID-19 pandemic swept through New York, Governor Cuomo signed Executive Order 202, declaring a State disaster emergency for the entire State of New York.  Executive Order 202 kicked off a series of related Executive Orders which, as relevant here, mandated commercial and retail store closures. Pursuant to the Executive Orders, A/R closed the Shops – including the Store – on March 17, 2020.

Hugo Boss paid rent under the Lease for the month of April 2020, but did not pay rent in full thereafter.  On September 9, 2020, the Shops reopened to the general public and, since then, the Store remains open for business (albeit at limited capacity).  Hugo Boss’ business at the Store, however, declined significantly since the pandemic.  Although Hugo Boss continued to operate the Store, it had not paid rent in full since April 2020.

A/R and Hugo Boss brought separate actions against each other based on overlapping theories of liability and defenses.  In the first action, A/R asserted claims against Hugo Boss for breach of the Lease, and for attorneys’ fees and costs.  Hugo Boss asserted defenses and counterclaims based upon the doctrines of impossibility and frustration of purpose.  Separately, Hugo Boss asserted claims against A/R for, among other things, rescission or reformation of the Lease based upon the doctrines of impossibility and frustration of purpose.

A/R moved for summary judgment on its causes of action for a money judgment against Hugo Boss for amounts due under the Lease, and sought dismissal of Hugo Boss’ affirmative defenses and counterclaims.

The Court’s Decision

The Court first determined that A/R established its prima facie entitlement to judgment of matter of law because it was “undisputed” that Hugo Boss failed to pay rent and other charges due under the Lease.  The Court then concluded that Hugo Boss failed to raise triable issues of fact sufficient to warrant rescinding or reforming the Lease based on the doctrines of frustration of purpose or impossibility of performance.

The Court began its analysis with a brief discussion of the “Coronation Cases” and the legal principles underlying the doctrine of frustration of purpose.  Describing the doctrine “as a narrow one,” the Court explained the doctrine is only applicable where the basis of the underlying contract has been completely destroyed.  Partial frustration – such as a diminution in business, where a tenant could continue to use the premises for an intended purpose – is not enough.  In addition, the doctrine is not available “where the event which prevented performance was foreseeable and provision could have been made for its occurrence,” or where the contract actually addresses the particular calamity that eventually befell the parties.

Applying these principals, the Court rejected Hugo Boss’ argument that pandemic-related restrictions “entirely frustrated” the purpose of the Lease.  Although the pandemic triggered several months of shutdown, the resulting set of capacity restrictions only reduced – and did not completely eliminate – Hugo Boss’ ability to generate revenue from its retail operation.  The Court acknowledged that, although the adverse economic effects of the pandemic undoubtedly are real and significant, the temporary closure of the Store, and resulting restrictions, did not “rise to the level of triggering an extra-contractual common law right to rescind a 13-year lease.”

The Court also concluded the force majeure clause – which specifically addressed the risk of government restriction on the use of the premises – undermined Hugo Boss’ frustration of purpose defense.  Even though the Lease did not explicitly mandate payment of rent in the event of a government shutdown or capacity limitation, the fact that the Lease addressed the risk of government orders or regulations – and stated the specific grounds on which the parties’ prompt performance of their obligations might be excused (or not) – was, in the Court’s view, sufficient to demonstrate that government closures and capacity restrictions were not “wholly unforeseeable.”

Finally, the Court rejected Hugo Boss’ impossibility of performance defense.  As the Court explained, impossibility excuses a party’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and is produced by “an unanticipated event that could not have been foreseen or guarded against in the contract.”  Financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, is insufficient.

To the extent Hugo Boss’ impossibility argument was predicated on government orders — both during the shutdown period and afterward — the Court concluded that the risk of such disruptions was not unforeseeable, as it was addressed in the Lease’s force majeure clause.  Furthermore, it was undisputed that Hugo Boss operated the Store during the reopening period (September 2020 to present).  And so, the Court concluded that Hugo Boss’ performance under the Lease was not “objectively impossible” even though its business was affected by the pandemic.

Collection of New York Cases Rejecting Impossibility and Frustration of Purpose Theories in the Wake of COVID-19

Since the pandemic hit, a number of New York cases assessing commercial lease disputes have held that the temporary and evolving restrictions on a commercial tenant’s business do not warrant rescission or other relief based on frustration of purpose or impossibility of performance.  Below is a non-exhaustive list of such cases:

Although an overwhelming number of New York courts have rejected commercial tenants’ frustration of purpose and impossibility theories, at least one New York court held that the tenant’s performance under the subject lease was made impossible by the COVID-19 pandemic (see 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, No. 510160/2020 [Sup Ct, Kings County, Mar. 15, 2021]).  However, the landlord has since filed a motion to reargue/renew, and a notice of appeal.  The motion to reargue is fully submitted and awaiting decision.

Takeaway

In recent cases where tenants have sought to avoid their rent obligations during the pandemic, New York courts have looked to the specific terms of each lease, rather than the highly unusual circumstances of the COVID-19 pandemic, to decide whether the tenant’s performance under the lease was excusable due to either frustration of purpose or impossibility.  A majority of New York courts that have addressed the issue seem to agree that the doctrines of impossibility or frustration of purpose are unavailable where (as in most cases) the lease addresses the possibility of a government-mandated shutdown, or the tenant’s business ultimately resumed operations (even at limited capacity).

We all hoped ringing in the New Year would mean leaving some of the hardships from the COVID-19 pandemic behind in 2020. However, in just two short months, businesses struggling with rent and other financial obligations due to COVID-19 restrictions are getting little to no relief from the Commercial Division.

You first read Madeline Greenblatt’s post about Commercial Division Justice Andrew Borrok dismissing lingerie brand Victoria’s Secret’s lawsuit seeking to rescind its lease for its 20,000 square foot flagship store located in Herald Square, and avoid its $937,734.17 monthly rent obligation due to COVID-19 . In that case, the New York County Supreme Court rejected Victoria’s Secret’s argument that its lease agreement should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.”

Then, only two weeks ago, James Wicks and I wrote about a decision issued by Commercial Division Justice Timothy S. Driscoll in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In a case of first impression in New York, Justice Driscoll followed the lead of a majority of courts across the nation finding that loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage under commercial liability insurance policies.

Adding another decision to the list,  in Valentino U.S.A, Inc. v 693 Fifth Owner LLC,   Justice Andrew Borrok rejected Valentino U.S.A, Inc.’s (“Valentino”) attempt to be relieved of its $18,975,000.00 yearly rent obligations due to COVID-19 shutdowns. In its complaint, luxury fashion company Valentino brought the following eight causes of action against its landlord Defendant 693 Fifth Owner LLC (“Landlord”) to avoid its obligations under its lease agreement (“Lease”) for its prestigious Fifth Avenue storefront in New York City: (i) declaratory judgment of frustration of purpose – lease termination; (ii) in the alternative, declaratory judgment of frustration of purpose – rent abatement; (iii) impossibility of performance – lease rescission; (iv) in the alternative, impossibility of performance – rent abatement; (v) rescission based on failure of consideration; (vii) constructive eviction; (vii) declaratory judgment; and (viii) injunctive relief. While Valentino unsurprisingly cited the series of executive orders issued by Andrew Cuomo limiting and/or prohibiting “non-essential” business operations, Valentino also argued that even in a “post-pandemic New York City (should such a day arrive)” the “social and economic landscapes have been radically altered in a way that has drastically, if not irreparably, hindered Valentino’s ability to conduct high-end retail business” from its storefront. Valentino further argued that factors such as unprecedented financial disruptions, decreases in consumer spending, and unparalleled unemployment would have long lasting effects on brick-and-mortar retail stores like Valentino’s.

The Landlord moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence), 3211(a)(7)(failure to state a claim), and 3211(c) (motion treated as one for summary judgment) arguing the lease agreement itself allocates to Valentino the risk of its inability to operate the premises and that financial loss does not equate to frustration or impossibility.[1] The Landlord pointed to several significant portions of the Lease including:

  • Section 2.3: Valentino promises to pay its rent “without any abatement, set-off or deduction whatsoever….”
  • Section 22.11: In the event of a governmental closure order or cataclysm, Valentino must continue to pay its rent.
  • Section 9.1: Valentino is required to comply with present and future governmental orders, whether foreseen or unforeseen.
  • Section 4.1: Valentino is not entitled to any set-off in rent liability based upon condition of Premises.
  • Section 21.11: In the face of cataclysmic events such as “failure of power, restrictive governmental laws or regulations, riots, insurrection, war, acts of terrorism, acts of God, floods, hurricanes, windstorms, fire or other casualty, condemnation or other reason of a similar or dissimilar nature…nothing contained in this Section shall operate to excuse Tenant from the prompt payment of Rent or any other payments or charges required by the terms of this Lease.”

The Court held that pursuant to Section 21.11 of the Lease, the parties expressly allocated the risk that Valentino would not be able to operate its business and that Valentino is therefore not forgiven from its performance, including its obligation to pay rent by virtue of a state law. Because the provision was broadly drafted, it was of no consequence that the COVID-19 pandemic was not specifically enumerated in the Lease. The Court further held that because Valentino failed to plead that it moved out of the premises or that the landlord substantially interfered with its use and possession, its claim for constructive eviction could not succeed. Evidence that Valentino was open for curbside retail and by appointment, or that Valentino vacated the premises only after the filing of the action, only hurt Valentino’s claim for constructive eviction. Based on these findings, Valentino’s complaint was dismissed in its entirety.

Upshot:

Recent decisions in the Commercial Division demonstrate that New York businesses have an uphill battle when seeking relief from rent and other financial obligations due to COVID-19 losses. In terms of rent obligations, claims of frustration of purpose and/or impossibility of performance are proving unsuccessful. Tenants should review their lease agreements for provisions which allocate the risk to tenants in the event of cataclysmic events.

[1] See 407 East 61st Garage Inc. v Savoy Fifth Ave Corp

COVID-19 continues to generate litigation in a variety of contexts in the Commercial Division.  Only two weeks ago did our colleague Madeline Greenblatt author a blog about COVID-19 not excusing commercial rental obligations.  Now, in what appears to be a case of first impression in New York at least, Justice Timothy S. Driscoll ruled in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In so ruling in Soundview Cinemas Inc. v. Great Amer. Ins. Group, the Court followed the lead of a majority of courts across the nation that have decided business interruption coverage cases arising out of the COVID-19 pandemic.

Soundview Cinemas  operated a movie theater in Port Washington, New York.  The business was insured under a commercial general insurance policy issued by Great American Insurance, with limits of $1.15 million for business personal property and $600,000 for business income and extra expense — all defined terms in the policy.  In response to the onset of the COVID-19 pandemic, on March 7, 2020, Governor Andrew Cuomo issued Executive Order No. 202, which declared a disaster emergency for the entirety of New York State. The complaint alleges that the pandemic and ensuing Executive Orders forced its final curtain call: the curtains came down, the box office closed and the theater shuttered its doors.  Demand was made under the policy, to which Great American declined.

The complaint asserted a myriad of claims against the carrier and broker, ranging from negligence to breach of fiduciary duty.  The policy itself contained a “civil authority” clause (covering actual losses of income caused by edict of civil authority prohibiting access to the property), as well as a “virus exclusion” (excluding coverage for damages caused by viruses, bacteria, or microorganism).  The defendants immediately moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence) and 3211(a)(7)(failure to state a claim).

As to the claims against the insurance brokers, the Court easily found that based upon the pleading, there were no allegations that the insured sought specific coverage that would apply to a pandemic, or that would support a claim that the broker should have procured additional insurance.  In fact, the Court noted that “Plaintiff does not even allege that any such insurance coverage for pandemic-related government closures existed prior to March 2020.”  Turning to the claims against the insurer, the Court concluded that under the “majority view,” loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage.

The Nassau County Commercial Division now joins the ranks of many courts nationwide that have addressed or are currently addressing claims for business interruption coverage arising out of the COVID-19 pandemic.[1] For instance, a District Court in Missouri held that policyholders adequately stated a claim for physical loss based on COVID-19 closures. In Studio 417 v. The Cincinnati Insurance Co., hair salons and restaurants in Springfield and Kansas City, Missouri, filed claims for losses due to COVID-19 closures under “all-risk” property insurance policies issued by The Cincinnati Insurance Co. Cincinnati denied the claims and the policyholders filed suit in the Western District of Missouri, asserting a right to payment under the policies’ coverages for business income, extra expense, dependent property, civil authority, extended business income, ingress and egress, and sue and labor. In its motion to dismiss, Cincinnati argued that the insureds failed to allege a “physical loss” and that this requirement can only be satisfied through “actual, tangible, permanent, physical alteration of property.” The court disagreed, finding that COVID-19 can constitute a “direct physical loss” to property sufficient to trigger coverage because “loss,” based on its plain and ordinary meaning, encompasses “the act of losing possession” and “deprivation” of property. Further, the court reasoned that the policy language extends coverage for direct physical loss or damage. Rejecting Cincinnati’s argument that both “loss” and “damage” require some form of tangible or physical alteration, the court held that pursuant to the rules of policy construction, “loss” and “damage” must have different meanings based on the use of the disjunctive word “or.” The Missouri court held, “[e]ven absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”

Another recent decision, issued by a New Jersey district court on February 10, 2021, was not so favorable to the policyholder. In Causeway Automotive, LLC, et al. v Zurich American Insurance Co., plaintiffs sought coverage for losses sustained as a result of COVID-19 under business income and extra expense “caused by action of civil authority” provisions of their policy. Zurich maintained that it properly denied coverage based on a virus exclusion which states the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” In opposition to Zurich’s motion to dismiss, plaintiff insureds argued the virus exclusion was ambiguous and, therefore, should be interpreted in plaintiffs’ favor. Plaintiffs further argued that because the COVID-19 virus was but one cause in a sequence of events that led to their losses, the virus exclusion does not apply. The court disagreed, finding that plaintiffs’ potential interpretations of the virus exclusion did not render it ambiguous or otherwise unclear. The court was similarly unpersuaded by plaintiffs’ argument that the virus exclusion did not apply because their losses were not caused by COVID-19 but, rather, by the Governor’s Executive Orders requiring closure of certain aspects of Plaintiffs’ business. To determine whether the loss was “caused by” an excluded peril, the New Jersey court employed the efficient proximate cause test. The court found that the Governor’s orders were issued for the sole reason of reducing the spread of the virus that causes COVID-19 and would not have been issued but for the presence of the virus in the State of New Jersey. As a result, the New Jersey court granted the insurer’s motion to dismiss.

As one of the few cases getting past the motion to dismiss stage, on January 14, 2021, Cherokee County District Court Judge Douglas A. Kirkley granted partial summary judgment in favor of the insured on a claim for business interruption losses caused by COVID-19. In Cherokee Nation et al. v. Lexington Insurance Co. et al, plaintiffs argued that under their all-risk policy, a direct physical loss or damage occurs when a covered property is rendered unusable for its intended purpose. Plaintiffs maintained that COVID-19 caused the Nation to shut down covered properties, engage in disinfection efforts, and implement protective measures before reopening. The insurers argued that plaintiffs had not demonstrated a direct physical loss or damage and that contamination, pollution, and other similar exclusions applied. In granting summary judgment, the Oklahoma court found plaintiffs established a “plausible claim for a fortuitous ‘direct physical loss’” under their all-risk tribal property policy.

 

 

[1] University of Pennsylvania Carey Law School has created a “Covid Coverage Litigation Tracker” which compiles data from business interruption coverage cases across the nation and tracks judicial rulings. While the site’s organizers are transparent about limitations of the available data, the site can be an excellent resource for tracking COVID related insurance cases nationwide.

 

 

 

 

 

 

 

 

The lingerie brand Victoria’s Secret (“VS”) has struggled in recent years. VS’ overtly sexy aesthetic has failed to keep up with shifting consumer tastes towards comfort and gender and size inclusivity. In 2019, VS canceled its marquee fashion show, which had run annually for 23 years, showcasing supermodels in VS’ trademark angel wings strutting the runway with millions tuning in to watch. In addition, the long-standing relationship between founder Leslie Wexner and convicted sex offender/disgraced financier Jeffrey Epstein has been given renewed attention, eventually leading to claims of a toxic culture of misogyny within the company.

victoria's secret VS also has been no match for COVID-19. After experiencing sharply declining sales in recent years, VS has been forced to shutter approximately one-quarter of all its US and Canadian stores in 2020.

In May 2020, VS became one of the first major brands to try to legally break one of its leases due to the coronavirus pandemic. However, on January 7, 2021, it was further dealt a blow by Commercial Division Justice Andrew Borrok who dismissed VS’ lawsuit against Herald Square Owner LLC (“Landlord”) seeking to rescind the lease (the “Lease”) for its 20,000 square foot flagship store located in Manhattan’s heavily foot-trafficked Herald Square and avoid its $937,734.17 monthly rent obligation.

The Complaint

In its Complaint, VS alleged that its Herald Square location was forced to close in March 2020 due to the coronavirus pandemic and Governor Cuomo’s Executive Orders ordering a statewide lockdown to combat it.  It claimed that the Lease should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.” According to VS, the “purpose of tendering a monthly rent of $937,734.17 or more to operate a retail store is completely frustrated when that store cannot open . . . [or] can open at only a marginal capacity,” and the governmental actions prohibiting the operation of VS’ store during the pandemic render performance under the Lease to be impossible. It also alleged that COVID-19’s effect on retail could not have been foreseen by either party at the time the Lease was entered into.

Landlord’s Summary Judgment Motion

Landlord filed an Answer asserting two counterclaims against VS for breach of the Lease and breach of the Lease’s guaranty. On that same day, Landlord also filed a motion for summary judgment dismissing the Complaint, asserting that VS’ claims were defeated by Article 26 of the Lease, pursuant to which VS specifically anticipated a store closure in the event of a failure of the Landlord to perform any of its obligations due to “governmental preemption” or an “order” arising out of a “national emergency,” and that VS would still be required to pay rent under such circumstances. Therefore, Landlord argued that the doctrines of “frustration of purpose” and/or “impossibility of performance” are precluded when the risk was foreseeable, and when the Lease contemplated the precise risk in question and allocated that risk to VS.  Landlord also stressed the fact that the Lease did not contain a force majeure clause.

VS’ Opposition Papers

The thrust of VS’ opposition papers was that Article 26 of the Lease only contemplated a “temporary store closure” and not “a massive, government-shutdown of all non-essential commercial activity in New York City” due to COVID-19. In the opening paragraphs of its opposition brief, VS appealed to the court’s heartstrings:

At the outset, we recognize this motion’s significance. This Court will likely be the first to rule on the novel issues presented, and its ruling will have sweeping consequences reaching beyond this action to the many other suits mirroring the allegations of the Complaint. . .  But this case is about what happens when the unthinkable occurs; indeed, something so profound – so extraordinary – that it exceeds that which was reasonably possible or even perceivable when those “what ifs” were conjured. Where (as here) such an occurrence shatters the very core of a commercial deal, the frustration of purpose doctrine operates to rescind the contract. . . COVID-19 epitomizes such an event.

Landlord’s Reply Papers

In its reply papers, Landlord’s counsel reiterated that the issue is not whether the Lease specifically addresses a forced store closure as a result of COVID-19, but rather whether the Lease contemplated the risk of a forced store closure, and if so, how the Lease allocated that risk, which would be dispositive of VS’ claim.

Additionally, in a rather crafty maneuver, Landlord’s counsel submitted an affidavit in which he described visiting Herald Square in August 2020. Although VS’ store was boarded up, he visited the open neighboring stores and purchased various hipster items in those locations, submitting pictures and receipts from Macy’s (beard oil), H&M (socks), and Urban Outfitters (a waterproof earbud case). He also visited the fully-open VS’ West 125th Street store and purchased a fragrance called “Seduction.” The shopping excursion was done to show that “retail stores, and even a Victoria’s Secret store, can operate in Manhattan in the post-COVID-19 environment,” and that all VS was really arguing was that it could not operate its flagship store profitably.

The Decision

In the end, the Court was persuaded by Landlord’s arguments and granted summary judgment dismissing the Complaint in its entirety, stating succinctly:

The Complaint is premised on the mistaken theory that the parties did not allocate the risk of tenant not being able to operate its business and that tenant is therefore somehow forgiven from its performance by virtue of a state law. This is contrary to the express allocation of these risks set forth in Paragraph 26 of the Lease Agreement . . .  It is of no moment that the specific cause for the government law was not enumerated by the parties because the Lease as drafted is broad and encompasses what happened here — a state law that temporarily caused a closure of the tenant’s business. . . The parties agreed that this would not relieve the tenant’s obligation to pay rent.

The Takeaway

The COVID-19 pandemic and the governmental actions taken have caused numerous financially strapped commercial tenants to commence lawsuits against their landlords seeking to rescind their leases and/or avoid paying rent premised on a force majeure clause in the lease and/or under the doctrines of impossibility of performance and frustration of purpose. There will undoubtedly be more such lawsuits in 2021. Recent decisions by Commercial Division justices, including this most recent decision by Justice Borrok, demonstrate the high bar that commercial tenants will have to surmount to be excused from their lease obligations given the Court’s narrow application of common law defenses in the face of conflicting lease language.

As New York courts reopen and the mandatory stay-at-home order is lifted, what remains unclear is how the numerous Executive Orders issued by Governor Andrew M. Cuomo during the COVID-19 pandemic will affect individuals and businesses who, based on the economic effects of the crisis, may no longer be able to abide by previously issued court orders.

In a recent decision, Justice Lawrence Knipel addressed one of likely many present-day contractual issues brought on by the coronavirus pandemic.

In 538 Morgan Avenue Properties et al., v. 538 Morgan Realty LLC et al., Plaintiffs entered into a business sales contract with Defendants in 2015 whereby Plaintiff NY Stone purchased Defendant SD’s business.  At the same time, the parties entered into a separate real estate sales contract whereby Plaintiff 538 Morgan Avenue Properties purchased from Defendant the real property where SD’s business was located.  While Plaintiffs continued to make payments to Defendants under the contracts for the business and real property, Defendants cancelled the real estate contract, asserting a material breach by Plaintiffs based on their failure to pay a certain amount by the contract’s “as of date.”  In turn, Plaintiffs brought this action for breach of contract, claiming that all payments were made within a reasonable time and Defendants were in breach when they cancelled the real estate contract.

In 2017, the Court issued an order granting Plaintiffs’ motion for a preliminary injunction enjoining Defendants from interfering with their tenancy at the property under the condition that Plaintiffs pay a monthly use and occupancy fee in the amount of $22,986 along with a filing of an undertaking fee of $80,000.

Shortly before New York’s stay-at-home order was lifted in June 2020, Plaintiffs moved for an order modifying the preliminary injunction issued in the case concerning the use and occupancy payments due in light of the COVID-19 crisis.

In New York, although a landlord can recover use and occupancy costs for the reasonable value of the premises and use of those premises, the Court, ultimately, has broad discretion in awarding use and occupancy during the pendency of an action or proceeding (43rd St. Deli, Inc. v. Paramount Leasehold, L.P.).  When awarding use and occupancy, the Court takes into account the actual value of the property, whatever restrictions apply because of agreements between the parties, governmental decrees, and other factors (438 W. 19th St. Operating Corp. v. Metropolitan Oldsmobile, Inc.).

Here, to persuade the Court to modify the existing monthly use and occupancy payments due in light of the COVID-19 crisis, Plaintiff NY Stone argued that because it operates a stone fabrication store, which requires work to be done in person, the business was negatively affected by the government’s response to the COVID-19 pandemic through the Governor’s signing of numerous executive orders, including Executive Order 202.8, which forced Plaintiffs to first decrease their workforce and then completely forbid any of their employees from working on-site.  Accordingly, Plaintiffs asked the Court to waive any use and occupancy payments for the period from March 22, 2020 until such time as Plaintiffs are legally permitted to resume business operations.

Interestingly, Executive Order 202.8 (which Plaintiffs relied on in their motion) only prohibited “enforcement of either an eviction of any tenant residential or commercial, or a foreclosure of any residential or commercial property for a period of ninety days.”  The Executive Order, however, had no bearing on a commercial tenant’s obligations to pay rent nor did it mention forgiveness of a commercial tenant’s debt owed.

The Court recognized that because the Executive Order at issue was silent on use and occupancy fees, the Court had the power to modify use and occupancy upon a proper showing, leaving room for the possibility that a tenant’s use and occupancy could be modified or completely forgiven.

However, the Court, ultimately, denied Plaintiffs’ request for modification as Plaintiffs in this case failed to bring forth any competent evidence in the form of financial documentation or an accountant’s affidavit with supporting evidence to demonstrate that Plaintiffs could not actually pay for use and occupancy for the months during which they could not operate on-site.

Takeaway:  Courts have deference in issuing and modifying some court orders.  Even so, attorneys must make every effort to prove with the necessary evidence why a previously issued court order is entitled to and worthy of modification.

The COVID-19 pandemic has had widespread impact on litigation, with some courts and most cases coming to a screeching halt.  Some courts have responded with Orders or rules (Massachusetts Sup. Jud. Ct. Order OE-144 [March 20, 2020]; Wisconsin S. Ct. Order [March 25, 2020]; Florida S. Ct., No. AOSC20-16 [March 18, 2020]), while others have not, leaving the practitioner to determine the logistics under existing procedural rules and whatever Executive or Administrative Orders are in place.

As of this writing, we thought it might be helpful to provide the landscape in the state and federal courts in New York, and the impact, if any, Governor Cuomo’s Executive Order 202.7 may have.  We also provide links to helpful resources as you near your first virtual deposition.  We intend to update this as the landscape changes.

New York Law on Remote Depositions

New York Civil Practice Law and Rules (“CPLR”) 3113(b) mandates that an “officer” put the deponent under oath. The officer, or someone acting under the direction of the officer, must record the testimony.  Typically, a notary public or a stenographer serves the function of an officer who then records the testimony.

Pursuant to CPLR 3113(d), the officer administering the oath and transcribing the testimony must be physically present at the location where the deponent is testifying. Put simply, the statute does not permit the officer to be at a remote location and accessible by telephone. The rationale makes sense:  the officer who swears in the witness must have proof that the person before them is the actual witness.  SIgnifciantly, however, the statute allows the parties to stipulate otherwise (CPLR 3113[d]; In re Estate of Smith, 29 Misc 3d 832, 834 [Sur Ct 2010] [The court notes that “unless otherwise stipulated to by parties, the officer administering the oath shall be physically present at the place of the deposition”]). CPLR 3113(d), in part, states that “[u]nless otherwise stipulated to by the parties, the officer administering the oath shall be physically present at the place of the deposition and the additional costs of conducting the deposition by telephonic or other remote electronic means, such as telephone charges, shall be borne by the party requesting that the deposition be conducted by such means.”  In Washington v Montefiore Hospital et al., the Third Department held that because the court reporter who administered the oath was not present in the deponent’s office during his testimony, and rather, was present by telephone, the deposition was not conducted in accordance with CPLR 3113. However, there, the Court held that because there was no objection to the manner in which the oath was administered, thus preventing any correction of defect, the objection was waived (see Matter of Washington v Montefiore Hosp., 7 AD3d 945, 948 [3d Dept 2004]).

The rule further provides,that the testimony can be recorded by “stenographic or other means.” Indeed, CPLR 3113(d) permits the parties to “stipulate that a deposition be taken by telephone or other remote electronic means and that a party may participate electronically.” The stipulation must be agreed to by all the parties to a litigation and must detail 1) the method of recording; 2) the use of exhibits; and 3) who must and may be physically present.

Federal Law on Remote Depositions

Pursuant to Federal Rule of Civil Procedure (“FRCP”) 30(b)(4), “the parties may stipulate – or the court may on motion order – that a deposition be taken by telephone or other remote means.” In other words, under federal law, the court can order that a deposition be taken by telephone or other remote electronic means even in the absence of an agreement between the parties (Fed R Civ P 30[b][4]). Rule 30(b)(3) further states that testimony may be recorded by “audio, audiovisual, or stenographic means” and that the party who notices the deposition bears the recording costs.  In addition, any party can arrange to have the deposition testimony transcribed.

The COVID-19 pandemic has even caused certain federal judges to temporarily supplement their individual rules to permit all depositions to be taken by remote means, including telephone and videoconference (see Judge Lewis J. Liman’s COVID-19 Emergency Individual Practices in Civil and Criminal Cases).  The rule also provides that “[f]or avoidance of doubt, a deposition will be deemed to have been conducted “before” an officer so long as that officer attends the deposition via the same remote means (e.g., telephone conference call or video conference) used to connect all other remote participants, and so long as all participants (including the officer) can clearly hear and be heard by all other participants” (see id.).

Rule 30(b)(5) states that, unless the parties stipulate otherwise, the “deposition must be conducted before an officer appointed or designated under FRCP 28 (Nowlin v Lusk, 2014 WL 298155, at *5 [WD NY Jan. 28, 2014]).  Under FRCP 28, the deposition must be taken before either: 1) an officer authorized by federal law or by the law in the place of examination to administer oaths; or 2) a person appointed by the court where the action is pending. Rule 28 defines “officer” as a “person appointed by the court under this rule or designated by the parties under Rule 29(a).”  Notably, under FRCP 29(a), the parties can stipulate that “a deposition may be taken before any person, at any time or place, on any notice, and in the manner specified – in which event it may be used in the same way as any other deposition.” Put simply, the parties can stipulate that remote video depositions will be conducted by a person who is not a notary. The stipulation can also address the remote participation of the officer. The Rule does not require the parties to obtain the court’s approval of these stipulations. However, it is important to note that local rules can require approval for these stipulations.  Therefore, it is critical to consult both the Local Rules of the operative District Court, and the Individual Rules of the assigned Magistrate and Article III Judge.

Although the parties can stipulate otherwise, federal courts have held that a deposition is deemed to have been conducted before an officer if that officer “attends the deposition via the same remote means (e.g., telephone conference call or video conference) used to connect all other remote parties, and so long as all participants (including the officer) can clearly hear and be heard by all other participants)” (see Sinceno v Riverside Church in City of New York, 2020 WL 1302053, at *1 [SD NY Mar. 18, 2020] [permitting all depositions to be taken by telephone, video conference, or other remote means in light of the COVID-19 pandemic]).

In sum, federal law, unlike New York State law, does not require the physical presence of the officer in the same location as the deponent.

Executive Order 202.7 and Depositions

In light of the COVID-19 pandemic, on March 19, 2020, Governor Cuomo issued Executive Order 202.7 (“EO”), which suspended until April 18, 2020 the rule requiring the physical appearance of a notary public for the signing of documents.  To date, it is unclear whether the suspension will be extended. It is also not clear what impact, if any, the EO has on CPLR 3113’s physical presence requirement.  The EO addresses the witnessing of document signings, not the administration of oaths at depositions. Specifically, Executive Order 202.7 permits notary services to be performed by video provided the following conditions are met:

  • The person seeking the Notary’s services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;
  • The video conference must allow for direct interaction between the person seeking the Notary’s services and the Notary (g., no pre-recorded videos of the person signing);
  • The person seeking the Notary’s services must affirmatively represent that he or she is physically situated in the State of New York;
  • The person seeking the Notary’s services must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;
  • The Notary may notarize the transmitted copy of the document and transmit the same back to the person seeking the Notary’s services; and
  • The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution.

The New York Department of State has issued guidance to notaries regarding Executive Order 202.7.  Below are the additional considerations for notaries:

  • Notaries public using audio-video technology must continue to follow existing requirements for notarizations that were unaltered by the Executive Order. This includes, but is not limited to, placing the notary’s expiration date and county where the notary is commissioned upon the document.
  • If the notary and signatory are in different counties, the notary should indicate on the document the county where each person is located.
  • An electronically transmitted document sent to the notary can be sent in any electronic format (e.g., PDF, JPEG, TIFF), provided it is a legible copy.
  • The notary must print and sign the document, in ink, and may not use an electronic signature to officiate the document.
  • The signatory may use an electronic signature, provided the document can be signed electronically under the Electronic Signatures and Records Act (Article 3 of the State Technology Law). If the signer uses an electronic signature, the notary must witness the electronic signature being applied to the document, as required under Executive Order 202.7.
  • The Executive Order does not authorize other officials to administer oaths or to take acknowledgments, and only applies to notary publics commissioned by the Secretary of State’s office.
  • Following remote notarization, if the notary receives the original document within 30 days, the notary may notarize the document again (i.e., physically affixing a notary stamp and hand signing the document) using the original remote notary date.
  • Additionally, when performing remote notarization pursuant to this Executive Order, the Department recommends the following best practices. (However, not following these two recommendations will not invalidate the act or be cause for discipline):
    • Keep a notary log of each remote notarization;
    • Indicate on the document that the notarization was made pursuant to Executive Order 202.7.

Some Helpful Links and Advice From Court Reporters

So what are court reporters doing in light of the pandemic?  Adapting of course!  Many are offering free virtual or on-line demonstrations of how to conduct a remote deposition, or helpful  information on how the depositions would proceed.  Some examples can be found at Enright, Veritext or Bee Reporting, to name a few.  You might want to share these “tutorials” with your witness or clients so they understand the process before “taking the stand”.

 

 

In recent years, the New York court system has endorsed alternative dispute resolution (“ADR”) as a way to increase efficiency in the court system, making ADR presumptive in most civil cases.  As a pioneer of efficiency, the Commercial Division has reinforced – through the adoption of multiple ADR-related rules and rule amendments – its “strong commitment to early case disposition” through ADR.

Consistent with this commitment, Commercial Division Rule 3(a) was recently amended to permit as an ADR mechanism the use of a “neutral evaluator” (as an alternative to a mediator), and to allow for the inclusion of “neutral evaluators” in rosters of court-approved neutrals.  The amendment, effective December 20, 2021, provides:

At any stage of the matter, the court may direct or counsel may seek the appointment of an uncompensated mediator or neutral evaluator for the purpose of helping to achieve a resolution of all or some of the issues presented in the litigation. Counsel are encouraged to work together to select a mediator or neutral evaluator that is mutually acceptable and may wish to consult any list of approved neutrals in the county where the case is pending . . . .

The amendment to Rule 3(a) will enable the Commercial Division to use the full range of ADR services contemplated by Part 146 of the Rules of the Chief Administrative Judge, which includes both mediators and neutral evaluators, and describes the qualification requirements for each.

Under Part 146.4, a lawyer or judge seeking qualification as a neutral evaluator must be admitted to practice for at least five years, and have at least five years of substantial experience in the specific subject area of the cases over which he or she will serve as a neutral.  In addition, the candidate must complete six hours of approved training in procedural and ethical matters related to neutral evaluation (as opposed to the 40-hour training requirement to become a mediator).  Once trained and certified, the neutral evaluator may be added to rosters of neutrals and selected by judges or parties to help facilitate the resolution of complex commercial matters, alongside the mediators already available.

The amendment to Rule 3(a) will help address the need for expanded ADR services as the New York court system continues to implement the presumptive ADR system, particularly in light of the many challenges posed by the COVID-19 pandemic.  As the Commercial Division Advisory Council (“CDAC”) explained in its proposal to amend Rule 3(a), given the recent initiatives to encourage ADR and the effects on litigation resulting from the COVID-19 pandemic, the rule change would permit attorneys and judges – some with just as much practical experience as current mediators – to become neutral evaluators without being required to undergo the more extensive training required of mediators.

The rule change may also increase diversity of court-approved neutrals.  According to the CDAC, the challenges posed by a 40-hour mediation training requirement may have a disproportionate impact on women and minorities, who may feel that taking time away from client work and business development could put their career prospects at risk.

The pro-ADR initiative continues to be a priority for the New York Court system, especially in the Commercial Division. Indeed, several Commercial Division Rules address ADR.  Rule 3, as discussed above, permits courts in the Commercial Division to direct the appointment of a mediator – and now a neutral evaluator – to facilitate the resolution of a case, and expressly encourages counsel to “work together to select a mediator” or neutral evaluator mutually acceptable to the parties.  Rule 10 requires counsel to certify that he or she has discussed with the client the availability of ADR mechanisms in the Commercial Division.  And, Rule 11 requires that preliminary conference orders contain specific provisions for means of early disposition of the case through ADR.

In addition to these Rules, many of the Commercial Division justices encourage parties to explore ADR.  For example, in New York County, Justice Borrok’s individual rules explain that “the parties are encouraged to identify as early as possible any case where ADR would be appropriate” and “write a joint letter to the Court asking to be referred to ADR.”  Likewise, in New York County, Justice Cohen’s and Justice Reed’s individual part rules require the parties to report prior to the status conference whether they have attempted the ADR process offered by the Court.  In Suffolk County, Justice Emerson’s individual part rules address the procedure for seeking ADR and provide a link for more information on the Court’s ADR program.  And, in Queens County, Justice Grays’ individual rules expressly authorize the Court to refer matters to the Commercial Division ADR program without the parties’ request or consent.

Takeaway:

The recent amendment to Rule 3(a) will undoubtedly help facilitate access to the ADR programs already encouraged by the New York court system and Commercial Division justices.  By adding neutral evaluators to rosters of neutrals, the Commercial Division will enhance the options and solutions it provides to businesses that choose to bring their cases to New York courts, providing more diversity and experience in its neutrals and more types of ADR mechanisms.  This is especially true as litigants determine how to advance their cases in the aftermath of the COVID-19 pandemic.

As we all are acutely aware, during the last 21+ months, the normally slow-to-change practice of law has been thrust into overdrive, forcing lawyers and courts to quickly pivot from a largely in-person practice to virtual.

New York courts in particular have done an incredible job expanding access to litigants online by, among other things, expanding e-filing capabilities, conducting virtual appearances for conferences and oral arguments, encouraging remote depositions, and even conducting trials online. I’ve discussed with colleagues and adversaries alike the newfound efficiencies that have emerged out of the necessity caused by the COVID-19 pandemic.

New York’s Commercial Division, ever the agent of progress, keeps a good thing going with respect to virtual access. Just last week, on October 19, 2021, Chief Administrative Judge Lawrence K. Marks promulgated new Commercial Division Rule 36 (Administrative Order 299/2021), which will allow Commercial Division judges to conduct virtual evidentiary hearings and non-jury trials on consent of the parties.

In a memo published by the Commercial Division Advisory Council last June 2020, the Advisory Council advocated for this new rule (adopted in large part by AO/299/21). Among the benefits cited are the cost and time savings that virtual conference technology would bring. A global business hub, New York is the venue of choice for much commercial litigation around the country and around the world. Rule 36 will remove many of the obstacles in coordinating party, witness, lawyer, and court scheduling by largely reducing or eliminating the time and cost of necessary travel.

The public’s collective comfort with using video conferencing technology has only increased since the Advisory Council’s June 2020 memo. Having already incorporated such technologies into many other facets of the legal practice (i.e. “Zoom meetings”, remote depositions, etc.), expanding its use to evidentiary hearings and bench trials is not much of a stretch. Video conferencing technologies have only improved in efficiency and security after months of rapid development necessitated by stay-at-home orders, travel bans, and quarantine mandates from earlier in the pandemic (some of which still apply in certain jurisdictions).

It is important to note that Rule 36 requires the consent of all parties. Additionally, the Rule is permissive, not mandatory, meaning that even if all parties consent, ultimately the availability of virtual evidentiary hearings and non-jury trials lies within the Court’s discretion. This flexibility allows for the tailored application of video conferencing technologies to evidentiary hearings and/or bench trials where a virtual appearance would be appropriate.

Given the technological developments in this area over the past 21+ months, and given the encouragement by the judiciary, cost-savings to the client, and overall efficiencies promoted, I have no doubt that Rule 36 will be a welcome addition to practitioners who find themselves regularly practicing in the Commercial Division.

So, without further ado, we give you Commercial Division Rule 36:

Rule 36. Virtual Evidentiary Hearing or Non-jury Trial.

(a)        If the requirements of paragraph (c) of this Rule are met, the court may, with the consent of the parties, conduct an evidentiary hearing or a non-jury trial utilizing video technology.

(b)       If the requirements of paragraph (c) of this Rule are met, the court may, with the consent of the parties, permit a witness or party to participate in an evidentiary hearing or a non-jury trial utilizing video technology.

(c)        The video technology used must enable:

(i)        a party and the party’s counsel to communicate confidentially;

(ii)       documents, photos and other things that are delivered to the court to be delivered to the remote participants;

(iii)      interpretation for a person of limited English proficiency;

(iv)      a verbatim record of the trial; and

(v)       public access to remote proceedings.

(d)      This Rule does not address the issue of when all parties do not consent.

Rule 36 becomes effective as of December 13, 2021.

In March 2020, the New York State Courts and attorneys’ offices all over the state shut down as part of the public’s broad effort to slow the spread of the Coronavirus, and the legal profession quickly transitioned to remote operations.  Remote team meetings, court appearances, arbitration hearings, networking events, and depositions were all borne from the necessity imposed by closed offices and social distancing.

Despite the sometimes steep learning curve associated with the remote conferencing technology and systems, remote proceedings became surprisingly effective.  Lawyers who once swore that there was nothing like being in the same room as their adversary found that, in many cases, the Zoom or Teams suite works just fine.  As a consequence, one need not look beyond the pages of this blog to see that for many, remote practices are here to stay.  Commercial Division Rule 1 now allows attorneys to request to appear remotely, saving client costs and avoiding the unnecessary risk of infection.  In February, we wrote about the Commercial Division Advisory Committee’s proposed rule authorizing and regulating the use of remote depositions.  The proposed rule has received favorable comment.

Continue Reading Even as Pandemic Wanes, Remote Depositions Remain the New Normal

Several weeks back, we reported on an apparent uptick in commercial lease disputes over the last 18 months in this new COVID era.  It only follows that there would be a corresponding uptick in Yellowstone applications from commercial tenants embroiled in such disputes.

As most readers know, injunctive relief under Yellowstone preserves the “status quo” pending a dispute between a commercial landlord and tenant over this or that alleged event of default such that the landlord is prohibited, at least temporarily, from terminating the tenant’s tenancy until the court has an opportunity to hear and determine the nature of the dispute in due course.

The standard for relief under Yellowstone isn’t exactly a high bar, at least as far as injunctions go.  An applicant need only show that it holds a valid and enforceable commercial lease; received from the landlord a notice of default; made a timely application for relief within the corresponding cure period; and has the ability to cure the alleged default should the court decide in the landlord’s favor.  Yellowstone injunctions are even available when the alleged default is limited to the issue of nonpayment of rent — which, for reasons associated with the recent and ongoing pandemic, tends to be primary basis asserted of late.

Of course, a commercial tenant’s success under Yellowstone is made even easier if the landlord fails to give proper notice of default, which is precisely what happened earlier this year up in Buffalo in a case called Ronald Benderson 1995 Trust v Erie County Med. Ctr. Corp.

In Benderson, Erie County Commercial Division Justice Timothy J. Walker addressed a dispute involving an area hospital (landlord) and real-estate developer (tenant) under a commercial lease for certain retail space located in the lobby of the hospital.

The lease provided that, while in the process of leasing up the lobby retail space, the tenant-developer would be responsible for paying the landlord-hospital a “Partial Rent” amount…

determined by multiplying the Full Rent due for each month by a fraction the numerator of which is the total combined square footage of each subtenant open for business in the Demised Premises and the denominator of which is the total square footage of the Demised Premises.

That is, until such time as the “Full Rent” amount becomes due, which occurs…

once all the rentable space in the Demised Premises has been sublet and each subtenant is open for business (the ‘Full Rent Commencement Date’), [at which time] Lessee shall pay to Lessor an annual rental of $19,600.00 payable in equal monthly installments of $1,633.3 each for each year of the term (the ‘Full Rent’).

The initial lease term was for 10 years, with an option to renew for an additional 10 years at an increased “Full Rent” annual amount of $21,560.00 payable in equal monthly installments of $1,796.67.

The developer eventually exercised the renewal option for a second 10-year term beginning in the summer of 2013, at which time it began making pro-rated “Partial Rent” payments of $1,405.25 based on the 78% of the lobby it had leased up at the time.  The developer timely made such payments without any objection from the hospital over the next seven years through the fall of 2020.

In September 2020, after significantly expanding its footprint and patient-flow in the interim, and after determining that the fair market value of its lobby space had substantially increased, the hospital attempted to serve the developer with notice under the lease’s default provision, which provided that…

if Lessee defaults in the payment of rent . . . , Lessor shall give Lessee notice of such default and if Lessee does not  cure any default within thirty (30) days, after the giving of such notice . . . , then Lessor may terminate this Lease on not less than thirty (30) days’ notice to Lessee.

According to the court’s decision, the hospital’s notice “claimed for the first time that, six years earlier, on an unspecified date in 2014, the ‘Full Rent Commencement Date’ had occurred, . . . [and therefore] declared that ‘Lessee shall pay to Lessor an annual [as opposed to “Partial”] rental of $19,600 payable in equal monthly installments of $1,633.33 each for each year of the term.'”

The notice went on to state that “the renewal option . . . does not include a ‘Partial Rent’ period; it only permits for ‘new annual rent of $21,560.00 payable in equal monthly installments of $1,796.67′”; but that the developer “has continued to pay only ‘Partial Rent’ of $1,405.25/month for the space”; and that the hospital therefore was “providing notice of default.”

In November 2020, after attempts at resolution by the parties had broken down, the hospital demanded that the developer “quit and surrender” the entire lobby space, which prompted the developer to move for Yellowstone and other injunctive relief.

Justice Walker granted the relief requested, taking issue with the hospital’s default notice in at least three respects.

First, the court found the notice to be void because it conflicted with former Governor Cuomo’s statewide moratorium on commercial evictions in place at the time.

Second, the court found that the hospital’s notice “failed to trigger the commencement of the cure period” because it was sent to the wrong party at the wrong address, despite prior written notice to the hospital of a valid assignment of the lease by the original tenant-developer to the plaintiff.

Finally, and most substantively, the court found that the hospital’s notice was “so impermissibly vague that it was insufficient to commence a ‘cure’ period as a matter of law.”  For one, the hospital “identified two different and logically inconsistent rental rates” — $1,633.33/mo. and $1,796.67/mo. — in the same notice.  But the hospital also failed to explain how it was that the developer could even “cure” the alleged default in the first place.  To wit, “the notice letter was silent as to whether ‘cure’ meant paying increased rent moving forward, paying back-rent for years in the past, or which amount of rent would apply in either case.”

In short, the court found that “the ‘cure’ period could not have expired because it was never commenced,” effectively serving as a stark reminder to commercial landlords and their counsel to be sure to provide “clear, unambiguous, and unequivocal” notice of default to the proper party at the proper address.