Apr 13, 2015

Court of Appeals #7

Decisions recently released during the 2014-15 Term of the Court of Appeals adjudicated an array of cases relating to the practice of law (requirement that out-of-state attorneys have an office in New York; and privilege with respect to statements made by a lawyer prior to commencement of litigation), on the one hand, and real property (recovery of attorneys’ fees by a residential tenant prevailing in litigation; amount due under the acceleration clause of a lease; amendment of a mechanic’s lien; and the application of a force majeure provision in a commercial lease), on the other.

Does the Judiciary Law require non-resident attorneys to maintain an office within New York “for the transaction of law business”?  Answer:  Yes.

Schoenefeld v. State of New York, 2015 NY Slip Op 02674 (decided on March 31, 2015) arose out of Judiciary Law § 470 “which mandates that a non-resident [attorney] maintain an ‘office for the transaction of law business’ within the state of New York[.]”.  The United States Court of Appeals for the Second Circuit asked the New York Court of Appeals “to set forth the minimum requirements necessary to satisfy the statutory directive[.]”.

The Court briefly summarized the facts:

Plaintiff Ekaterina Schoenefeld is a New Jersey resident who was admitted to the practice of law in New York in 2006. Schoenefeld is also admitted to practice in New Jersey and maintains her only law office in Princeton. According to the complaint, in 2007, Schoenefeld attended a continuing legal education class entitled Starting Your Own Practice, which was offered by the New York State Bar Association in New York City. There, she learned of the statutory requirement that nonresident attorneys must maintain an office within New York in order to practice in this State. Specifically, under Judiciary Law § 470, “[a] person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state.”

The prior proceedings:

Schoenefeld commenced [an] action in federal district court in July 2008, alleging that Judiciary Law § 470 was unconstitutional on its face and as applied to nonresident attorneys in violation of the Privileges and Immunities Clause of the United States Constitution (US Const, art IV, § 2). She alleged that she was unable to practice in the State, despite her compliance with all admission requirements, because she does not maintain an office in New York. She further maintained that there was no substantial state interest served by the office requirement, which was not applicable to New York resident attorneys.

The decision by the District Court:

The district court granted plaintiff’s motion for summary judgment and held that section 470 violated the Privileges and Immunities Clause.  The court determined that the office requirement implicated nonresident attorneys’ fundamental right to practice law. The court then rejected the state interests proffered by defendants as insubstantial and found that, in any event, the statute did not bear a substantial relationship to the interests asserted as there were less restrictive means of accomplishing those interests.

The question raised by the Second Circuit:

The Second Circuit determined that the constitutionality of the statute was dependent upon the interpretation of law office requirement…The court observed that the requirements that must be met by nonresident attorneys in order to practice law in New York reflect an important state interest and implicate significant policy issues. The court therefore certified the following question for [review by the Court of Appeals]: “Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an ‘office for the transaction of law business’ within the state of New York, what are the minimum requirements necessary to satisfy that mandate?”

The threshold considerations:

Here, the statute appears to presuppose a residency requirement for the practice of law in New York State. It then makes an exception, by allowing nonresident attorneys to practice law if they keep an “office for the transaction of law business” in this State. By its plain terms, then, the statute requires nonresident attorneys practicing in New York to maintain a physical law office here.

However, recognizing that there may be a constitutional flaw if the statute is interpreted as written, defendants urge us to construe the statute narrowly in accordance with the doctrine of constitutional avoidance… In particular, they suggest that the provision can be read merely to require nonresident attorneys to have some type of physical presence for the receipt of service — either an address or the appointment of an agent within the State. They maintain that interpreting the statute in this way would generally fulfill the legislative purpose and would ultimately withstand constitutional scrutiny. 

The Court sustained the physical presence requirement:

The statute itself is silent regarding the issue of service. When the statute was initially enacted in 1862, however, it did contain a service provision. At that time, it essentially required that an attorney who maintained an office in New York, but lived in an adjoining state, could practice in this State’s courts and that service, which could ordinarily be made upon a New York attorney at his residence, could be made upon the nonresident attorney through mail addressed to his office. Upon the enactment of the Code of Civil Procedure in 1877, the provision was codified at section 60 of the Code. In 1909, the provision was divided into two parts — a service provision, which remained at section 60 of the Code, and a law office requirement, which became section 470 of the Judiciary Law. Notably, after we invalidated a New York residency requirement for attorneys…the legislature amended several provisions of the Judiciary Law and the CPLR to conform to that holding…Section 470, however, was not one of the provisions amended and has remained virtually unchanged since 1909.

Even assuming the service requirement had not been expressly severed from the statute, it would be difficult to interpret the office requirement as defendants suggest. As the Second Circuit pointed out, even if one wanted to interpret the term “office” loosely to mean someplace that an attorney can receive service, the additional phrase “for the transaction of law business” makes this interpretation much less plausible. Indeed, the Appellate Division departments have generally interpreted the statute as requiring a nonresident attorney to maintain a physical office space…Defendants’ proffered interpretation, on the other hand, finds no support in the wording of the provision and would require us to take the impermissible step of rewriting the statute[.]

And, at the same time, admonished that:

The State does have an interest in ensuring that personal service can be accomplished on nonresident attorneys admitted to practice here. However, it is clear that service on an out-of-state individual presented many more logistical difficulties in 1862, when the provision was originally enacted. The CPLR currently authorizes several means of service upon a nonresident attorney, including mail, overnight delivery, fax and (where permitted) email…Under our own Court rules, the admission of attorneys who neither reside nor have full-time employment in the State is conditioned upon designating the clerk of the Appellate Division in their department of admission as their agent for the service of process for actions or proceedings brought against them relating to legal services offered or rendered…Therefore, there would appear to be adequate measures in place relating to service upon nonresident attorneys and, of course, the legislature always remains free to take any additional action deemed necessary.

Takeaway:  The Court of Appeals appears to have invited the Legislature to amend the Judiciary Law to eliminate the physical presence requirement for non-resident attorneys to practice in New York.  Moreover, the Court of Appeals appears to have opened the door for the Second Circuit to abrogate the statute on constitutional grounds.

Are statements made by attorneys prior to the filing of suit privileged?  Answer:  Such statements are qualifiedly privileged if the statements are pertinent to a good faith anticipated litigation.

Front, Inc. v. Khalil, 2015 NY Slip Op 01554 (decided on February 24, 2015), presented the question of “whether statements made by attorneys prior to the commencement of litigation are privileged.”

The Court summarized its holding:

We hold that such statements are protected by a qualified privilege. If the statements are pertinent to a good-faith anticipated litigation, no cause of action for defamation can be based on those statements.

The factual background:

Defendant/third-party plaintiff Phillip Khalil was employed as Director of Engineering for plaintiff Front, Inc. (Front), an American architectural and engineering design and consulting firm, from June 2003 through March 2011. During his employment, Khalil, a citizen of the United Kingdom, applied for and obtained resident alien status. Front sponsored Khalil’s application. In March 2011, Khalil orally resigned from his position at Front, informing the firm that he intended to take a position with defendant Eckersley O’Callaghan Structural Design (EOC), a United Kingdom firm and one of Front’s competitors. Khalil subsequently tendered a written letter of resignation to Front.

Shortly thereafter, an engineer employed by Front observed an external hard drive connected to Khalil’s work computer. Upon investigation, Front allegedly discovered that Khalil had downloaded to the device the firm’s entire network drive directory, which allegedly included all projects Front worked on, client contact information, and other proprietary information. Front confronted Khalil, who apparently admitted that he had intended to save Front’s files to his hard drive. Front immediately terminated Khalil’s employment. Upon further investigation, Front allegedly discovered that Khalil worked on approximately 40 side projects for Front’s competitors, including EOC, in violation of the terms of his employment contract. Front also asserted that Khalil, with assistance from defendant James O’Callaghan, diverted work away from Front to EOC — namely, a project for the Apple Store on Broadway in New York City.

Front retained Meister Seelig & Fein LLP (MSF), and, in April 2011, Jeffrey A. Kimmel, an MSF attorney, sent a letter to Khalil. The letter stated that Khalil attempted to steal Front’s confidential and proprietary information, that he conducted an illegal competing side business which unlawfully diverted business opportunities from Front, misappropriated trade secrets, and violated applicable ethical and professional codes of conduct as well as the duty of loyalty owed to Front. Additionally, the letter stated that Khalil may be subject to punishment under the Economic Espionage Act of 1996, stating in a footnote that he “violated the terms of [his] application and immigration status” and “several codes of conduct and ethics of the various boards of licensure and professional associations to which [he is] a member.” The letter demanded, among other things, that Khalil cease and desist from using Front’s confidential and proprietary information, return the proprietary information he had taken, and refrain from contacting Front’s clients.

Thereafter, Kimmel sent a letter to O’Callaghan and EOC, enclosing and referencing the earlier letter to Khalil, and stating that Khalil conspired with EOC to breach his fiduciary duty to Front, that EOC was aware that Khalil was a full-time employee of Front, and that EOC was diverting business away from Front to itself. The letter made demands that were nearly identical to those made in the letter to Khalil. Kimmel copied O’Callaghan and Brian Eckersley, EOC partners, on the letter.

Litigation followed against Khalil, O’Callaghan, and EOC that sought the following relief:

[D]amages for claims including civil conspiracy, misappropriation of trade secrets, and common-law unfair competition. As to Khalil, Front asserted causes of action for breach of contract, the implied covenant of good faith and fair dealing, and fiduciary duty.

Followed by a third-party claim:

Khalil commenced a third-party action against Kimmel and MSF, asserting a cause of action for libel per se based upon the statements made by Kimmel in his April 2011 letter to Khalil. Specifically, Khalil asserted that the allegations made in the letter were expressed as “statement[s] of fact, not based upon information and belief or otherwise qualified in any manner.” Additionally, Khalil alleged interference with a prospective business relationship, and tortious interference with business relations. Khalil, O’Callaghan, and EOC collectively moved to dismiss the complaint, pursuant to CPLR 3211 (a) (5) and (7) and CPLR 3016 (b), on the ground that it was time barred, failed to state a cause of action, and lacked the requisite specificity. Kimmel and MSF moved to dismiss the third-party complaint for failure to state a cause of action.

A decision of Supreme Court:

[S]upreme Court, New York County determined “that the letter to Khalil is absolutely privileged” and that it therefore did “not need to reach the question of malice,” citing First Department precedent as support. The court reasoned that the letter to Khalil “clearly relate[d] to the litigation initiated by Front” and “the demands made in the letters to Khalil and to O’Callaghan and EOC…substantially reflect the causes of action and relief requested” in the main action. The court added: “The fact that the litigation was not initiated until approximately six months after the letters were sent does not alter the court’s conclusion[.]”

And by the Appellate Division:

The Appellate Division upheld the dismissal of the third-party action against Kimmel and MSF, concluding that “an absolute privilege attaches to the statements made by [Front]’s counsel in the April 2011 letters, because they were issued in the context of ‘prospective litigation[.]’”

The Court summarized the history of the immunity from liability for defamation:

Commencing with this Court’s 1897 decision in Youmans v. Smith (153 NY 214 [1897]), we have held that absolute immunity from liability for defamation exists for oral or written statements made by attorneys in connection with a proceeding before a court “when such words or writings are material and pertinent to the questions involved”…There we stated that to allow such statements to be a basis for a defamation action “would be an impediment to justice, because it would hamper the search for truth and prevent making inquiries with that freedom and boldness which the welfare of society requires”…We also noted that where an attorney’s statements are “so needlessly defamatory as to warrant the inference of express malice” the privilege has been abused and “protection is withdrawn”…Nearly a century later in Park Knoll Associates v. Schmidt (59 NY2d 205 [1983]), this Court held that relevant statements made in judicial or quasi-judicial proceedings are afforded absolute protection so that those discharging a public function may speak freely to zealously represent their clients without fear of reprisal or financial hazard…The privilege attaches to such statements irrespective of an attorney’s motive for making them…

A conflict that existed between the Appellate Divisions:

Although it is well-settled that statements made in the course of litigation are entitled to absolute privilege, this Court has not directly addressed whether statements made by an attorney on behalf of his or her client in connection with prospective litigation are privileged. Three Appellate Division Departments, however, have addressed this issue directly and have come to differing conclusions. The First Department has held that an absolute privilege attaches to statements made by an attorney in connection with prospective litigation…Although the Second Department had held…that absolute privilege did not apply to statements made prior to litigation, it has recently held…that statements made pertinent to a settlement of a prospective malpractice litigation were afforded an absolute privilege. In contrast to the First and Second Departments, the Third Department has held that a statement made prior to litigation should not be afforded absolute privilege[.]

Resolving the conflict, the Court stated:

The rationale supporting the application of privileged status to communication made by attorneys during the course of litigation is also relevant to pre-litigation communication. When litigation is anticipated, attorneys and parties should be free to communicate in order to reduce or avoid the need to actually commence litigation. Attorneys often send cease and desist letters to avoid litigation. Applying privilege to such preliminary communication encourages potential defendants to negotiate with potential plaintiffs in order to prevent costly and time-consuming judicial intervention. Communication during this pre-litigation phase should be encouraged and not chilled by the possibility of being the basis for a defamation suit.

Nonetheless,”[a]s a matter of policy, the courts confine absolute privilege to a very few situations”…We recognize that extending privileged status to communication made prior to anticipated litigation has the potential to be abused. Thus, applying an absolute privilege to statements made during a phase prior to litigation would be problematic and unnecessary to advance the goals of encouraging communication prior to the commencement of litigation. To ensure that such communications are afforded sufficient protection the privilege should be qualified. Rather than applying the general malice standard to this pre-litigation stage, the privilege should only be applied to statements pertinent to a good-faith anticipated litigation. This requirement ensures that privilege does not protect attorneys who are seeking to bully, harass, or intimidate their client’s adversaries by threatening baseless litigation or by asserting wholly unmeritorious claims, unsupported in law and fact, in violation of counsel’s ethical obligations.  Therefore, we hold that statements made prior to the commencement of an anticipated litigation are privileged, and that the privilege is lost where a defendant proves that the statements were not pertinent to a good-faith anticipated litigation.

Finally, the Court applied the law to the facts:

The letters at issue here were written in the preliminary stages of an anticipated action. MSF and specifically Kimmel, acting on behalf of their client Front, sent a letter to Khalil informing him of Front’s investigation in an attempt to avoid litigation by requesting, among other things, that Khalil return the allegedly stolen proprietary information and cease and desist his use of that information. A copy of that letter was then forwarded to EOC. Thus, at the time the letters were sent, Kimmel and MSF had a good-faith basis to anticipate litigation and the statements in the letters were pertinent to that anticipated litigation. Therefore, the letters at issue were properly found to be subject to a privilege; however, rather than the absolute privilege applied by the courts below, a qualified privilege applied because they were written prior to litigation. Nevertheless, because the letters are privileged the third-party action was properly dismissed.

Is the reciprocity provision of Real Property Law § 234 concerning attorney’s fees triggered where a lease provides that a landlord may cancel the lease upon the tenant’s default, retake possession of the demised premises and apply any rents collected from re-letting premises toward landlord’s attorneys fees?  Answer:  Yes.

Graham Ct. Owner’s Corp. v. Taylor, 2015 NY Slip Op 01482 (decided on February 19, 2015) [Rivera, J.], presented the question of whether “Real Property Law § 234, which imposes a covenant in favor of a tenant’s right to attorneys’ fees, applies to a lease that authorizes the landlord to cancel the lease upon tenant’s default, repossess the premises and then collect attorneys’ fees incurred in retaking possession; [where] the lease permits the landlord to recover fees that result from the tenant’s breach, and therefore serves as the basis for the tenant’s statutorily implied rights to attorneys’ fees; [and whether, under the circumstances] [RPL] § 234 applies to the parties’ lease [so] that the tenant is entitled to attorneys’ fees as the prevailing party in this summary holdover proceeding.”

The Court summarized the facts:

The parties’ current dispute arose from a holdover proceeding commenced by the landlord, appellant Graham Court, against tenant, respondent Kyle Taylor. The apparent basis for the holdover proceeding can be traced back to the tenant’s successful rent overcharge complaint filed with the New York State Division of Housing and Community Renewal (DHCR). There, the landlord denied the overcharge, contending that the apartment was properly deregulated under the law, based on various renovations allegedly conducted by the landlord. Tenant, in turn, asserted that it was he who had performed electrical upgrade work on the premises for which the landlord sought to take credit. DHCR eventually found that the landlord misrepresented the facts, and concluded that the apartment was subject to regulation, and the landlord had overcharged the tenant. By way of relief, DHCR ordered a rent reduction and repayment for the overcharges, and awarded the tenant treble damages in accordance with the Administrative Code of the City of New York § 26-516. The Appellate Division subsequently affirmed Supreme Court’s dismissal of the landlord’s CPLR Article 78 challenge to DHCR’s determination…

The prior proceedings:

Approximately four months after DHCR rendered its decision in favor of the tenant, and while the landlord’s Article 78 was pending in Supreme Court, the Landlord commenced the underlying summary holdover action against the tenant seeking to evict the tenant and regain possession of the premises, and demanding rent arrears and $3,000.00 in legal fees. In support of its claims, the landlord alleged that the tenant breached the lease by failing to obtain the required prior written consent to install a new electrical system in the kitchen — the same electric upgrade work disputed by the parties in the matter before DHCR. When the tenant failed to cure the breach or terminate the premises, the landlord commenced the holdover proceeding.

For his part, the tenant denied that he breached the lease, and asserted a defense of retaliatory eviction under Real Property Law § 223-b seeking all appropriate relief under that provision. Tenant also counterclaimed for attorneys’ fees and damages under sections 234 and 233-b. The landlord responded in a post trial memorandum that Real Property Law § 234 did not apply because the statute only recognized a tenant’s implied right to attorneys’ fees if the lease provided for landlord’s fees incurred in an action for the tenant’s breach, and that the parties’ lease lacked such a provision.

The disposition in Civil Court:

Civil Court dismissed the proceeding, finding the tenant had not breached the lease because the landlord’s agents authorized the tenant’s electrical work. Moreover, the court concluded the landlord’s principal lied repeatedly during the course of the nonjury trial, and the proceeding was commenced in retaliation for the tenant’s successful DHCR rent overcharge claim. Thus, the court awarded the tenant attorneys’ fees as part of the damages for the retaliatory eviction under Real Property Law § 223-b (5), but denied fees under section 234. Both parties thereafter appealed. Appellate Term modified, denying the tenant attorneys’ fees under Real Property Law § 223-b, and otherwise affirmed.

The decision by the Appellate Division:

In a split decision, the Appellate Division modified, on the law, by granting the tenant’s claim for attorneys’ fees pursuant to Real Property Law § 234 and remanding for a hearing on the fee amount, and otherwise affirmed…The court concluded that the lease provides that in any action or summary proceeding the landlord may recover attorneys’ fees incurred as a result of the tenant’s failure to perform a covenant or agreement contained in such lease, and therefore fits within the statute’s coverage. The dissent argued that section 234 should be strictly construed, and as such could not be extended to apply to the lease which merely allows for an offset of rents collected when the landlord relets the premises.

The relevant statute – Real Property Law § 234:

“Whenever a lease of residential property shall provide that in any action or summary proceeding the landlord may recover attorneys’ fees and/or expenses incurred as the result of the failure of the tenant to perform any covenant or agreement contained in such lease, or that amounts paid by the landlord therefor shall be paid by the tenant as additional rent, there shall be implied in such lease a covenant by the landlord to pay to the tenant the reasonable attorneys’ fees and/or expenses incurred by the tenant as a result of the failure of the landlord to perform any covenant or agreement on its part to be performed under the lease or in the successful defense of any action or summary proceeding commenced by the landlord against the tenant arising out of the lease.”

In order for the tenant to be eligible for attorneys’ fees under this section, the parties’ lease must permit the landlord, in any action or summary proceeding, to recover attorneys’ fees as a result of the tenant’s breach. Where a lease so provides, the court must interpret the lease to similarly permit the tenant to seek fees incurred as a result of the landlord’s breach or the tenant’s successful defense of a proceeding by the landlord. Here, we hold that paragraph 15 provides the basis for the tenant’s claim for reciprocal rights to attorneys’ fees within the meaning of Real Property Law § 234.

The applicable provision of the lease:

Paragraph 15 of the lease, titled “Tenant’s default”, sets forth the landlord’s remedies and the tenant’s liabilities upon the tenant’s failure to comply with a term or rule in the lease. According to this paragraph, where a properly notified tenant fails to cure a default the landlord may cancel the lease and retake possession of the premises, if necessary, by way of an eviction proceeding or other lawsuit. Upon cancellation of the lease and the landlord’s repossession of the premises the tenant is liable for rent for the unexpired term. The landlord’s rights to attorneys’ fees are set forth in clause D. (3) of this paragraph, which states, in part,

“D. If this Lease is cancelled, or Landlord takes back the Apartment, the following takes place:

“(3) Any rent received by Landlord for the re-renting shall be used first to pay Landlord’s expenses and second to pay any amounts Tenant owes under this Lease. Landlord’s expenses include the costs of getting possession and re-renting the Apartment, including, but not only reasonable legal fees, brokers fees, cleaning and repairing costs, decorating costs and advertising costs.”

Thus, clause D. (3) anticipates that after a tenant’s default leads to the reletting of the premises, the landlord is entitled to collect attorneys’ fees incurred in gaining possession. Under these circumstances, clause D. (3) complies with the requirements of Real Property Law § 234 that the lease provide “in any action or summary proceeding” for the landlord’s recovery of attorneys’ fees “incurred as the result of the failure of the tenant to perform any covenant or agreement contained in such lease.”

The landlord’s arguments:

The landlord argues that the lease is outside the coverage of Real Property Law § 234 because under clause D. (3) the landlord may collect attorneys’ fees from rents received by rerenting the premises to another tenant, and not from the original defaulting tenant as fees incurred in an action for the tenant’s violations of the lease. In essence the landlord seeks to distinguish the attorneys’ fees provision on two grounds: the fees permitted under the lease constitute costs for reletting of the premises and not for litigating the tenant’s breach; and the amount recouped as fees is applied as an offset of the amount owed by the tenant, and thus serves to beneficially mitigate the tenant’s debt. We find unpersuasive these arguments which seek to avoid the application of Real Property Law § 234 by ignoring the terms of paragraph 15, and the practical implications of clause D. (3).

Here, the lease provides for the landlord’s right to cancel the lease, retake possession and relet the premises only upon the tenant’s failure to cure a default. Thus, the landlord’s attorneys’ fees under paragraph 15 D. (3) for “getting possession and re-renting” are incurred as a result of the tenant’s breach. The issue is not whether the attorneys’ fees are available in the landlord’s underlying proceeding against the tenant for the breach of the lease. There is no such limitation found in the text of Real Property Law § 234…Rather, the issue is whether the lease provides that “in any action or summary proceeding” the landlord may recover attorneys’ fees incurred as the result of the tenant’s breach of a leasehold covenant or agreement. That is what the lease here provides by permitting recovery of attorneys’ fees for getting possession and reletting only when the tenant breaches the lease.

The landlord’s other contention that the statute should be treated as a form of mitigation that reduces the amount owed by the tenant to the landlord disregards the import of clause D.(3). That clause states that “any rent received by Landlord for the re-renting shall be used first to pay Landlord’s expenses and second to pay any amounts Tenant owes under this Lease.” By its language, clause D. (3) must be read to assume that, but for this sequenced payment of attorneys’ fees, the tenant would be entitled to demand credit for the full rent collected by the landlord for reletting the premises, and to have that credit applied against any amount the tenant owed under the lease. Thus, because the amounts received are initially used to pay the landlord’s attorneys’ fees, less money remains for reducing the tenant’s outstanding debt. The landlord argues otherwise, but the tenant is effectively paying the landlord’s attorneys’ fees by way of this “relet and collect” lease provision.

The purpose of RPL § 234:

We are mindful that Real Property Law § 234 is a remedial statute intended to “equalize the power of landlords and tenants”…As this Court [previously] stated…

“[t]he overriding purpose of Real Property Law § 234 was to level the playing field between landlords and residential tenants, creating a mutual obligation that provides an incentive to resolve disputes quickly and without undue expense. The statute thus grants to the tenant the same benefit the lease imposes in favor of the landlord”

[In the prior case] the Court also identified an additional purpose of section 234 “to discourage landlords from engaging in frivolous litigation” intended to “harass tenants, particularly tenants without the resources to resist legal action, into terminating legal occupancy”…With this understanding, the Court broadly interpreted Real Property Law § 234, giving expansive meaning to the definition of tenants and the types of landlord actions covered under the statute, and applying the statute retroactively to preexisting leases to extend the reach of the statute.

And the application of the law to the facts:

Our interpretation of paragraph 15, and clause D. (3) in particular, furthers the legislative purposes that favor the tenant’s right to attorneys’ fees. In contrast, acceptance of the landlord’s interpretation of Real Property Law § 234 and clause D. (3) requires that we approve language in this lease whereby the landlord is allowed to recover attorneys’ fees that result from the tenant’s breach, while at the same time denying the tenant a similar right of recovery, merely because the landlord will recoup the fees by reletting the premises. This construction of the statute and the lease agreement would once again favor the landlord, in contravention of the legislative intent to place the parties on an equal footing[.]

Moreover, this interpretation permits a landlord to escape the statute’s coverage by recharacterizing the landlord’s attorneys’ fees as costs incurred by reletting, contracting the statute’s coverage by limiting its scope. It also encourages creative ways to structure recovery of fees so as to appear attenuated from the tenant’s breach. As the Appellate Division recognized, this would “reward ‘artful draftsmanship’ and undermine the salutary purpose of section 234[.]

Is a provision in a commercial lease that provides for acceleration of rent as a result of a tenant’s breach an unconscionable and unenforceable penalty?  Answer:  Yes, but only if the accelerated amount is grossly disproportionate to the landlord’s actual losses.

172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc., 2014 NY Slip Op 08872 (decided on December 18, 2014) [Rivera, J.], “involved a dispute over future rental payments sought under an acceleration clause from an out-of-possession tenant after termination of the leasehold agreement.”

The Court briefly summarized the facts:

Real property owner, plaintiff 172 Van Duzer (“Van Duzer”), and tenant, defendant Globe Alumni Student Assistance Association (“Association”), entered into a one-year commercial rental lease agreement. The lease provided that defendant Globe Institute of Technology (“Globe”) would use the property as a dormitory for Globe’s for-profit educational institution. Prior to the end of the one-year term, Van Duzer and the Association extended the lease for a nine-year period, and Globe signed a guarantee that it would be jointly and severally liable for the Association’s obligations under the lease[.]

*     *     *

Several months after executing the lease extension, Van Duzer received several violations issued by the New York City Environmental Control Board. The Association failed to cure, and instead vacated the premises and ceased paying rent. Van Duzer terminated the lease with notice to the Association, and commenced an action to recover possession and past due rent. The Civil Court awarded Van Duzer possession of the premises with a zero dollar money judgment.


[V]an Duzer commenced the present action against defendants for rent arrears and an amount equal to the future remaining rent owed on the lease. Van Duzer thereafter moved for summary judgment based on an acceleration clause in the leasehold agreement which provides that upon the tenant’s default the landowner may terminate the lease, repossess the premises, and “shall be entitled to recover, as liquidated damages a sum of money equal to the total of … the balance of the rent for the remainder of the term…” The provision also states that “[i]n the event of Lease termination Tenant shall continue to be obligated to pay rent and additional rent for the entire Term as though th[e] Lease had not been terminated.”

*     *     *

Supreme Court granted Van Duzer summary judgment on liability, finding the parties had clearly agreed that upon termination of the lease the Association would be liable for rent, and referred the matter to a Special Referee to determine damages. The court denied defendants’ request for discovery, concluding that under New York law the landowner was entitled to collect full rent due under the lease with no obligation or duty to relet, or attempt to relet, the abandoned premises in order to minimize damages. Thereafter, upon the parties’ stipulation, the court entered judgment for Van Duzer in the amount of $1,488,604.66, consisting of the rent remaining due under the lease, reduced by the amount of rent Van Duzer was able to collect by reletting the premises between August 2008 until February 2011, plus interest.

The Appellate Division affirmed because “defendants failed to raise a triable issue of fact as to whether the liquidated damages constituted an unenforceable penalty.”

The Court of Appeals noted that:

[Defendants’] challenges to the validity of the acceleration clause, claiming what amounts to a per se rule barring accelerated rent as damages when the landowner holds rightful possession of the property.

The Court of Appeals analyzed the state of the law:

[Defendants] claim that Van Duzer is barred from collecting unpaid future rents pursuant to the acceleration clause because under this Court’s decision in Fifty States Management Corp v Pioneer Auto Parks, Inc. (46 NY2d 573 [1979]), a landowner cannot claim accelerated rental payments when the landlord terminates the lease and retakes possession. Defendants’ reliance on Fifty States is misplaced because the acceleration clause in that case was “intended to secure the tenant’s obligation to” pay rent in the context of an ongoing leasehold, and the clause set the damages for a breach of that obligation…The Court concluded that a lease term providing for accelerated rent upon a tenant’s default in rent payment, as a condition of the tenant’s continued possession of the property, is enforceable absent a claim of “fraud, exploitative overreaching or unconscionable conduct”…Here, defendants do not argue that they want to be put back in possession. Thus, unlike the landowner in Fifty States, Van Duzer is not seeking to deploy the acceleration clause in the course of a continuing leasehold for purposes of ensuring the tenant’s compliance with a material provision of the lease.

Nor can defendants challenge the validity of the acceleration clause based on this Court’s recognition in Fifty States that, “where a lease provides for acceleration as a result of a breach of any of its terms, however trivial or inconsequential, such a provision is likely to be considered an unconscionable penalty and will not be enforced by a court of equity”…That rule addresses, in part, the inequities of damages disproportionate to the losses incurred as a result of a tenant’s collateral or minor breach…That rule continues in force, but is inapplicable to defendants, who committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.

The Court of Appeals also discussed the precedents as to a duty to mitigate:

To the extent defendants suggest that a landowner should be subject to a duty to mitigate, we previously rejected this argument in Holy Properties Ltd., L.P. v Kenneth Cole (87 NY2d 130 [1995]). In that case the Court stated that once a tenant abandons the property prior to expiration of the lease, a “landlord was within its rights under New York law to do nothing and collect the full rent due under the lease”…The Court adhered to this established approach, and stated that parties in business transactions depend on the certainty of settled rules, “in real property more than any other area of the law, where established precedents are not lightly to be set aside”…We see no reason to reverse course in defendants’ case. In particular where, as in Holy Properties, the parties here freely agreed to bind defendants to pay rent after termination of the landlord-tenant relationship…

As to New York law on liquidated damages, the Court stated:

Defendants argue, in the alternative, that the liquidated damages as future rent provided for under the acceleration clause are grossly disproportionate to Van Duzer’s actual losses, and therefore constitute an unenforceable penalty. Defendants are correct that an acceleration clause is subject to judicial scrutiny based on a challenge that it is nothing more than a means by which to exact a penalty otherwise proscribed by the law.

As a general matter parties are free to agree to a liquidated damages clause “provided that the clause is neither unconscionable nor contrary to public policy”…Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable…A provision which requires damages “grossly disproportionate to the amount of actual damages provides for a penalty and is unenforceable”…

Whether a provision in an agreement is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances”.  “The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact a penalty”.  Where a party establishes a penalty, the proper recovery is the amount of actual damages established by the party.

The Court reversed the Appellate Division concluding that:

Defendants claim that because the acceleration clause permits Van Duzer to hold possession and immediately collect all rent due, the damages are grossly disproportionate to the landowner’s actual damages. They contend this is a windfall that allows Van Duzer to double dip get the full rent now and hold the property. On its face this argument is compelling because arguably the ability to obtain all future rent due in one lump sum, undiscounted to present-day value, and also enjoy uninterrupted possession of the property provides the landowner with more than the compensation attendant to the losses flowing from the breach even though such compensation is the recognized purpose of a liquidated damages provision…Although the acceleration clause in Fifty States was held enforceable, that case is distinguishable from the instant case because there the landlord did not get to keep the property.

And remanded the case with the following instructions:

On the record before us it appears that the court below limited the damages hearing before the Special Referee to whether the landowner relet the premises. This was error. Defendants should have had the opportunity to present evidence that the undiscounted accelerated rent amount is disproportionate to Van Duzer’s actual losses, notwithstanding that the landowner had possession, and no obligation to mitigate.

May a mechanic’s lien be retroactively amended to reflect the name of the true owner of the property or does a misnomer invalidate the lien?  Answer:  The Lien Law, under the specific circumstances of this case, authorizes an amendment because the misnomer was a misdescription and not a misidentification.

Matter of Rigano v. Vibar Constr., Inc., 2014 NY Slip Op 08762 (decided on December 16, 2014) [Lippman, Ch. J.], raised the question of “whether a notice of mechanic’s lien can be amended nunc pro tunc to reflect the name of the true owner of the property or whether the misnomer invalidates the lien.”

The Court briefly summarized the facts:

George Vignogna (the sole shareholder of Vibar Construction Corp.) and Nick Rigano (the sole shareholder of Fawn Builders, Inc.) were business partners for over 35 years before deteriorating business conditions in 2007 led to disputes concerning the construction contract at issue here. Their relationship had consisted of Rigano, through Fawn Builders, Inc. (Fawn Builders), purchasing property and Vignogna, through Vibar Construction Corp. (Vibar), developing the property. The parties would split the profits and rarely reduced their agreements to writing, trusting in their long-term business relationship to help them avoid any conflict. During their last project, Vibar constructed a common driveway to access the Pound Ridge, New York property in question and maintains that Rigano and Fawn Builders failed to compensate it for the construction of the road. The record shows that Rigano consented to construction of the driveway as demonstrated by the construction and easement agreement the parties signed in 2006 (signed by Rigano individually and for Fawn Builders as president).

Vibar filed a notice of mechanic’s lien on the property to recover the cost of constructing the road. The notice provided that Fawn Builders owned the property, when it was actually owned by Rigano, Fawn Builders’ sole shareholder and president.

The prior proceedings:

Rigano sought to have the lien discharged on the ground that he, not Fawn Builders, owned the property, asserting a jurisdictional defect that invalidated the lien. Rigano had indeed acquired title to the property when, on February 14, 2007, he, as president of Fawn Builders, transferred the property from Fawn Builders to himself, as an individual. The deed stated that Rigano and Fawn Builders were located at the same address, and Rigano signed the deed as “president” of Fawn Builders.

Vignogna petitioned to amend the notice of lien, arguing that naming Fawn Builders as the owner of the lot was a “misdescription” that did not warrant invalidating the lien. He noted that at all times during the parties’ partnership, Rigano owned property in his corporation’s name. He also contended that the transaction in which the land was transferred from Fawn Builders to Rigano was not one for consideration, noting that Rigano was the sole beneficial owner of Fawn Builders and signed the deed as president of Fawn Builders, and that there was no indication of any transfer tax having been paid.

The Court of Appeals described the decisions of Supreme Court and the Appellate Division as follows:

After initially holding in favor of Vignogna, and concluding that the notice “substantially complied” with the Lien Law requirements, on reargument and renewal, Supreme Court granted Rigano’s petition and discharged the mechanic’s lien.

The Appellate Division affirmed, holding that “[w]hile a failure to state the true owner or contractor or a misdescription of the true owner will not affect the validity of a notice of lien, a misidentification of the true owner is a jurisdictional defect which cannot be cured by an amendment nunc pro tunc”…the Court held that the notice was jurisdictionally defective because it “completely misidentified the true owner of the subject premises[.]”. 

The governing law:

Article 2 of the Lien Law provides that it “is to be construed liberally to secure the beneficial interests and purposes thereof”…which include “provid[ing] security for laborers and materialmen and…provid[ing] notice and a degree of certainty to subsequent purchasers”.  It states that “substantial compliance…shall be sufficient for the validity of a lien and to give jurisdiction to the courts to enforce the same”…and “[a] failure to state the name of the true owner…or a misdescription of the true owner, shall not affect the validity of the lien”…The Lien Law also authorizes amendment provided it does not “prejudice…an existing lienor, mortgagee or purchaser in good faith”…Thus, read together, it explicitly provides that it should be construed liberally, states that a misdescription of the true owner shall not invalidate a lien, and allows amendment where a third party would not be prejudiced.

And applied the law to the facts:

The Court is mindful of the power a lien gives to the holder over another’s property, and, because of the potential for abuse, it must be understood that the Lien Law does not sanction amendment without confirmation that the true owner and listed owner are closely related and there was consent to the construction work.

*     *     *

We conclude that the Lien Law authorizes the type of amendment sought under the specific circumstances here where the defect is plainly a misdescription and not a misidentification.

*     *     *

In contrast, the present, stricter construction contravenes the intent of the statute. Here, the true owner, Rigano, and the listed owner, Fawn Builders, are closely related, as the deed to the property made clear. Rigano and Fawn Builders had the same interest and control over the property in question — Rigano owned 100% of Fawn Builders. Significantly, the transfer of the property was not accomplished in an arm’s length transaction no transfer tax was paid and Rigano merely conveyed the property to himself from his corporation. Further, Rigano had notice of the lien because he shares an address with Fawn Builders. Naming Fawn Builders gives, at the very least, inquiry notice to the public that there is a lien on the property, and a correct address to contact the true owner. And Rigano, who appears to have consented to a substantial majority of the work done on the property, signing as an individual and for Fawn Builders as its one and only shareholder, understood that a lien could be placed on the property upon a failure to pay for the work. This notice of lien would not have caught Rigano off guard. Finally, no third-party purchaser was or would be prejudiced by this amendment.

Was an express “force majeure” clause in oil and gas leases triggered “when then-Governor Paterson mandated formal public environmental review to address the impact of the combined use of high-volume hydraulic fracturing and horizontal drilling”?  Answer:  The “force majeure” clause did not modify other provisions of the lease.

Beardslee v. Inflection Energy, LLC, 2015 NY Slip Op 02677 (decided on March 31, 2015), answered a question certified to the Court of Appeals by the United States Court of Appeals for the Second Circuit:

The Court summarized the facts:

Plaintiffs, various landowners in Tioga County, entered into separate oil and gas leases with Victory Energy Corporation (Victory), whereby plaintiffs leased to Victory “the rights of drilling, producing, and otherwise operating for oil and gas and their constituents, including the right to conduct geophysical, seismic, and other exploratory tests” from under their property for a nominal annual fee or, if drilling commenced, the right to receive a royalty on gross proceeds. The majority of the leases were executed in 2001, although leases were also signed in 2002, 2004, 2005, 2006, and 2009. Victory shared its leasehold interests with Megaenergy, Inc. In July 2010, defendant Inflection Energy, LLC (Inflection) assumed from Megaenergy, Inc. the operational rights and responsibilities under most of the leases.

The relevant lease provisions:

Each of the leases contains an identical term clause, also known as a habendum clause, which establishes the primary and definite period during which the energy companies may exercise the drilling rights granted by the leases. Specifically, the leases’ habendum clause provides:

“It is agreed that this lease shall remain in force for a primary term of FIVE (5) years from the date hereof and as long thereafter as the said land is operated by Lessee in the production of oil or gas.”

Under this provision, the interests conveyed by the leases exist for a five-year “primary term,” followed by an open secondary term so long as the land is operated by the lessee in the production of oil or gas.

Each lease also contains what the parties refer to as a “force majeure clause.” Generally, a force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance…[.]

The “force majeure” provision:

“If and when drilling or other operations hereunder are delayed or interrupted by lack of water, labor or material, or by fire, storm, flood, war, rebellion, riot, strike, differences with workmen, or failure of carriers to transport or furnish facilities for transportation, or as a result of some order, rule, regulation, requisition or necessity of the government, or as a result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding. All express or implied covenants of this lease shall be subject to all Federal and State laws, Executive Orders, Rules or Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable in damages for failure to comply therewith, if compliance is prevented by, or if such failure is the result of any such Law, Order, Rule or Regulation.”

The subsequent developments:

On July 23, 2008, then-Governor David Paterson ordered formal public environmental review to address the impact of combined use of high-volume hydraulic fracturing (HVHF) (commonly known as “fracking”) and horizontal drilling (2008 Directive). In particular, he directed the New York State Department of Environmental Conservation (DEC) to update and supplement its 1992 generic environmental impact statement (GEIS) on conventional oil and gas exploration…On December 13, 2010, following the DEC’s issuance of a draft Supplemental GEIS (SGEIS), Governor Paterson issued Executive Order No. 41 in which he instructed the DEC to revise the draft SGEIS and address “comprehensively the environmental impacts associated with [HVHF] combined with horizontal drilling” in a final SGEIS…The Governor also indicated that pursuant to the State Environmental Quality Review Act (SEQRA), “no [HVHF] permits [could] be issued” by the State before “the completion of a Final SGEIS”…In response to these developments, Inflection sent notices of extension to the landowners, asserting that New York’s governmental action constituted a force majeure event under the leases, which purportedly extended the leases’ terms.

On September 7, 2011, the DEC released a Revised Draft SGEIS, and issued a press release informing the public that “[n]o permits for [HVHF] will be issued until the SGEIS is finalized and [the DEC] issues the required Findings Statement.”

The proceedings in the District Court:

In February 2012, after the primary term of the leases had expired, the landowners commenced this declaratory judgment action against Inflection, Victory, and Megaenergy (collectively, energy companies) in the United States District Court for the Northern District of New York, seeking a declaration that the leases had expired by their own terms. The energy companies answered and counterclaimed for a declaration to the contrary, arguing that each lease was extended by operation of the force majeure clause. In particular, the energy companies referenced the portion of the force majeure clause that states:

“[i]f and when drilling…[is] delayed or interrupted…as a result of some order, rule, regulation, requisition or necessity of the government, or as the result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding…”

The energy companies averred that New York’s moratorium on the use of horizontal drilling and HVHF triggered the force majeure clause. The landowners, insisting that no force majeure event had occurred, moved for summary judgment declaring that the leases had expired. The energy companies opposed the motion and cross-moved for summary judgment declaring that the leases’ primary terms were extended by a force majeure event so that the leases were still in full force and effect.

The Decision by the District Court:

On November 15, 2012, the District Court granted summary judgment to the landowners, declaring that all of the leases had expired by their own terms, and entered judgment accordingly…The District Court denied the energy companies’ cross motion for summary judgment and dismissed their counterclaims holding that the force majeure clause did not extend the leases. It declined to rule on whether a force majeure event occurred, stating that even if it did, the force majeure clause would have no effect on the habendum clause and the lease terms because the energy companies did not have an obligation to drill. The District Court also concluded that Governor Paterson’s 2008 Directive did not frustrate the purpose of the leases, because the energy companies could drill using conventional methods and that the 2008 Directive was foreseeable. The energy companies appealed.

And the issues certified by the Second Circuit:

The Second Circuit observed “that this case turns on significant and novel issues of New York law concerning the interpretation of oil and gas leases, a legal field that is both relatively undeveloped in the State and of potentially great commercial and environmental significance to State residents and businesses”… Accordingly, [the Second Circuit] certified to [the Court of Appeals] the following questions:

(1) “Under New York law, and in the context of an oil and gas lease, did the State’s Moratorium amount to a force majeure event?”

(2) “If so, does the force majeure clause modify the habendum clause and extend the primary terms of the leases?”

The Court of Appeals answered the second question in the negative and, as a result, held the first question to be academic.

After summarizing the generally-applicable contract jurisprudence, the Court of Appeals applied the law to the facts:

[W]e hold that the force majeure clause does not modify the primary term of the habendum clause and, therefore, does not extend the leases. The habendum clause in the leases does not incorporate the force majeure clause by reference or contain any language expressly subjecting it to other lease terms…Moreover, the language in the force majeure clause stating that “the time of such delay or interruption shall not be counted against Lessee” does not refer to the habendum clause with specificity. Thus, the habendum clause is not expressly modified or enlarged by the force majeure clause.

And rejected the contentions of the energy companies:

The energy companies, however, broadly assert that under New York law the phrase “anything in this lease to the contrary notwithstanding” has consistently been held to mean that, regardless of other contract terms, that clause controls. Accordingly, they insist that the force majeure clause necessarily has the effect of modifying the habendum clause.

As an initial matter, “under New York law, clauses similar to the phrase ‘[n]otwithstanding any other provision’ trump conflicting contract terms”…Accordingly, the language in the force majeure provision does not supersede all other clauses in the leases, only those with which it is in conflict. Based upon our analysis, because the force majeure clause is not in conflict with the provisions of the primary term of the habendum clause, the words “anything in this lease to the contrary notwithstanding” alone are insufficient to compel the conclusion that the force majeure clause modifies the primary term, as compared to the secondary term, of the habendum clause.

Because the force majeure clause expressly refers to a delay or interruption in drilling or production for any enumerated reason, it follows that the clause only conflicts with and, therefore, modifies the secondary term of the habendum clause, in which the lessee has the obligation to operate in the production of oil or gas, or the lease terminates. Moreover, the second sentence in the force majeure clause, which deals exclusively with governmental regulations, pertains only to the energy companies’ express or implied covenants — the lessee’s obligations. As the energy companies made no express or implied covenants applicable to the primary term (other than to pay delay rentals, which are not at issue here), the force majeure clause must relate to only continuous drilling/production operations during the secondary term of the leases…Furthermore, this latter sentence in the force majeure clause expressly indicates that the subject clause deals with lease termination, not lease expiration. The corresponding habendum clause provision is its secondary term, which also addresses the conditions under which the leases would terminate, whereas the primary term deals with lease expiration. 

Thus, we interpret the “notwithstanding” language of the force majeure clause as excusing the energy companies’ performance only during the secondary term of the habendum clause, during which operations in the production of oil and gas would be necessary for leases to remain viable. To read the force majeure clause as applying to the primary term would be to interpret the leases in a manner contrary to the plain intent of the parties.

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