Opinion
652050/2015
08-28-2018
AUDTHAN LLC, Plaintiff, v. NICK & DUKE, LLC, Defendant.
Seyfarth Shaw LLP, 620 8th Ave, New York, NY 10018, By: Jonathan P. Wolfert, Esq., Attorneys For Plaintiffs Hubell & Associates LLC, 1185 Avenue of the Americas, 18th FloorNew York, N.Y. 10036, By: Richard Adam Hubell, Esq., Attorneys For Defendants
Seyfarth Shaw LLP, 620 8th Ave, New York, NY 10018, By: Jonathan P. Wolfert, Esq., Attorneys For Plaintiffs
Hubell & Associates LLC, 1185 Avenue of the Americas, 18th FloorNew York, N.Y. 10036, By: Richard Adam Hubell, Esq., Attorneys For Defendants
Robert R. Reed, J.
Motions bearing sequence numbers 008 and 009 are consolidated for disposition. This action involves a dispute between plaintiff Audthan LLC (Audthan), tenant under a long-term ground lease, dated May 24, 2013 (Lease), for real property located at 182-188 Eleventh Avenue, in the County, City and State of New York (Property), and the Property's fee owner and lessor, defendant Nick & Duke, LLC (Landlord).
In motion sequence number 008, Audthan moves for, among other relief, an order compelling Landlord to return its security deposit to a segregated account and to maintain the security deposit in such account, in accordance with General Obligations Law (GOL) Section 7-103. In motion sequence number 009, Audthan moves for a Yellowstone injunction or, in the alternative, a preliminary injunction pursuant to CPLR 6301, staying and tolling termination of the Lease, among other relief, to ensure that the parties' dispute may be decided on the merits.
Background
The Lease, which runs from May 24, 2013 to March 31, 2053, is renewable in Audthan's sole discretion for an additional 48 years and seven months (first amended complaint, dated July 28, 2015 [FAC], ¶¶ 12-14). Among other things, the Lease also provides that Audthan will construct on the Property a residential and commercial building of approximately 58,000 square feet, plus roughly 15,000 square feet of affordable housing (Project) (id. ¶ 15).
Audthan alleges that Landlord breached the Lease by willfully obstructing its efforts to construct the Project, and by improperly attempting to terminate the Lease, by making unfounded violation and default claims against Audthan. Audthan further alleges that Landlord improperly charged it attorneys' fees and late charges, which it has paid under protest, to prevent Landlord from using nonpayment as a pretext to terminate the Lease (id. ¶¶ 1-3). Audthan contends Landlord seeks to terminate the Lease without due cause, hoping to reap the benefits of the substantial work and expenditures Audthan has invested in the Property since commencement of the Lease, while denying Audthan the benefit of its bargain (id. ).
Audthan asserts six causes of action in its FAC. First, Audthan seeks a declaration setting forth the parties' rights and obligations, and prays that the court determine that (i) Audthan has not breached the Lease, (ii) Audthan's alleged failure to cure violations and defaults are not sufficient bases to terminate the Lease, (iii) Landlord has unclean hands, and (iv) Landlord's "refusal to review, sign and act upon" Audthan's "requests for consent, applications for permits and approvals necessary to carry out the Project" constitutes a breach of Landlord's express obligations under the Lease (id. ¶ 53).
In its second cause of action, Audthan seeks damages for Landlord's several breaches of the Lease, which include improperly charging Audthan attorneys' fees and late charges as additional rent, serving an invalid notice of termination on Audthan, on or about July 18, 2015 (July 2015 Notice), and refusing to honor its obligation to review, sign and act upon Audthan's requests for consents, permits and approvals needed to carry out the Project (id. at ¶¶ 59).
In its third cause of action, also for breach of the Lease, Audthan alleges that, because of Landlord's breaches, it is entitled to an order, compelling Landlord's specific performance of its contractual obligations (id. at ¶¶ 62-63).
In its fourth cause of action, also for breach, Audthan alleges that, despite Audthan's performance, Landlord acted purposefully and in bad faith and breached its implied duty of good faith and fair dealing under the Lease by serving the July 2015 Notice without due cause (id. at ¶¶ 66-68).
In its fifth cause of action, Audthan seeks an order, preliminarily and permanently enjoining Landlord from commencing a special proceeding or taking any action under the July 2015 Notice (id. at ¶ 71).
In its sixth cause of action, also for a preliminary and permanent injunction, Audthan seeks an order enjoining Landlord "to take such affirmative steps as are reasonably necessary to permit [Audthan] to engage in and carry out the Project" (id. at ¶ 74).
Landlord answered the FAC on September 21, 2015, generally denying Audthan's allegations and asserting several affirmative defenses.
Audthan's motion (sequence number 009) marks the third time it has sought a Yellowstone injunction, to prevent Landlord from terminating the Lease. The court issued a decision and order on February 10, 2016, on Audthan's first Yellowstone application, in motion sequence number 002. Audthan moved by order to show cause for a Yellowstone injunction or, in the alternative, a preliminary injunction, to stay and toll Landlord's July 2015 Notice, which was delivered to Audthan on July 18, 2015. This July 2015 Notice purported to terminate the Lease, effective August 3, 2015, because Audthan had allegedly failed to cure certain violations at the Property within one year of the Lease's Commencement Date (see February 10, 2016 decision and order [February 2016 Order], at 3-4 [NYSCEF Doc. No. 331] ).
In First Natl. Stores v. Yellowstone Shopping Ctr. (21 NY2d 630 [1968] ), the Court of Appeals held that it was powerless to revive a lease where the tenant had commenced an action for a declaratory judgment during the lease's cure period, and had obtained an order to show cause for a preliminary injunction, but had not included a temporary restraint in the order to toll the cure period (id. 21 NY2d at 637-38 ). "As a result of this decision, tenants developed the practice of obtaining a stay of the cure period before it expired to preserve the lease until the merits of the dispute could be resolved in court" (Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assoc., 93 NY2d 508, 514 [1999] [citation omitted] ).
The February 2016 Order granted Audthan both a Yellowstone injunction and a preliminary injunction "to the extent of providing the same injunctive relief provided in the temporary restraining order contained within the order to show cause dated July 29, 2015" (id. at 16). The court explained that Audthan had satisfied the standard for a Yellowstone injunction by showing that "(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises" (id. at 13-14, quoting Graubard Mollen , 93 NY2d at 514 ).
That order to show cause, entered on July 29, 2015, ordered, among other things, that Audthan's time to cure violations identified in the July 2015 Notice was thereby "tolled and stayed," and further ordered that Landlord, and "all persons... acting on behalf of or in concert with the Landlord," were prevented, restrained and enjoined from:
"(a) claiming that the Lease is terminated pursuant to the Notice of Termination; and (b) commencing any summary proceedings or any other legal action against Audthan concerning the Notice of Termination, or in any way disturbing Audthan's tenancy or possession of the Property on the grounds set forth in the Notice of Termination..."
(NYSCEF Doc. No. 48, at 2).
The February 2016 Order also granted Audthan a preliminary injunction. Noting that " ‘[t]he party seeking a preliminary injunction must demonstrate a probability of success on the merits, danger of irreparable injury in the absence of an injunction and a balance of equities in its favor’ " (id. at 13, quoting Nobu Next Door, LLC v. Fine Arts Hous., Inc. , 4 NY3d 839, 840 [2005] ), the court found that Audthan showed a likelihood of success on the merits by showing that it had taken timely and " ‘substantial steps’ to cure the violations" of which Landlord then complained, and was "actively working toward that end" (id. , quoting Baruch, LLC v. 587 Fifth Ave., LLC , 44 AD3d 339, 340 [1st Dept 2007] ).
The court further determined that the harm to Audthan from losing the Lease "could well be irreparable" because money damages were not likely to be adequate compensation for the loss of decades of tenancy remaining to Audthan under the Lease (id. at 14, quoting Empire State Bldg. Assoc. v. Trump Empire State Partners , 245 AD2d 225, 230 (1st Dept 1997] ). The court also found that the equities favored Audthan because Landlord offered no explanation for its delay in serving the Notice on Audthan while, in the meantime, Audthan continued its work and investment in the Project and had almost completed its cure of the complained-of violations (id. ).
The February 2016 Order also rejected Landlord's argument that this action should be dismissed and that Audthan's claims should be relegated to Civil Court, to be heard in a summary proceeding there, because the Civil Court lacks jurisdiction to grant the mandatory relief Audthan seeks, to compel Landlord's specific performance under the Lease (id. at 15, citing Manhattan Parking Sys.-Serv. Corp. v. Murray House Owners Corp. , 211 AD2d 534, 535 [1st Dept 1995] ).
Audthan's second Yellowstone application was made by cross motion, following Landlord's July 2016 motion to dismiss. The Landlord's motion, designated as motion sequence number 006 and brought by order to show cause, was premised on its May 16, 2016 notice of default and a June 23, 2016 notice of termination (June 2016 Notice). Landlord claimed that Audthan allowed certain additional violations to issue against the Property and not only failed to cure those violations in a timely fashion but also failed to respond to its 30-day cure notice. Landlord argued that these failures caused the Lease to terminate according to its terms, which purportedly entitled it to dismissal of five of Audthan's six causes of action under CPLR 3211 (a)(7), among other relief.
Audthan opposed Landlord's motion and cross-moved for a Yellowstone injunction or, in the alternative, a preliminary injunction under CPLR 6301, to stay and toll the June 2016 Notice.
The court denied Landlord's motion, noting that conflicting affidavits prevented Landlord from demonstrating its entitlement to judgment as a matter of law (decision and order dated May 31, 2017 [May 2017 Order] [NYSCEF Doc. No. 253], at 19), and granted Audthan both a Yellowstone injunction and a preliminary injunction, "for the reasons set forth in the decision on the Prior Motion," entered February 10, 2016 (id. at 20).
Audthan's Current Motion for a Yellowstone or a Preliminary Injunction
In motion sequence number 009, Audthan moves by order to show cause for an order:
(a) granting a Yellowstone injunction or, in the alternative, a preliminary injunction, to stay and toll termination of the Lease, under Landlord's notice of termination, dated October 9, 2017 (October 2017 Notice);
(b) staying and tolling the Lease's cure period for the violations alleged in the October 2017 Notice;
(c) temporarily and preliminarily enjoining Landlord from taking legal action, or action pursuant to the October 2017 Notice;
(d) temporarily and preliminarily enjoining Landlord from commencing any special proceedings pursuant to the October 2017 Notice; and
(e) enjoining Landlord from issuing any further default or termination notices without prior court approval upon noticed motion.
Landlord opposes Audthan's motion, praying that Audthan's motion be denied in its entirety, and that the underlying temporary restraining order be vacated. In the alternative, if Audthan is awarded injunctive relief, Landlord asks that Audthan be required to provide an undertaking, in an amount not less than $500,000, to indemnify Landlord for the damages it may sustain if it is determined later that Audthan was granted injunctive relief in error.
The court entered an order to show cause with temporary restraints on October 19, 2017 (NYSCEF Doc. No. 353), preventing Landlord from claiming the Lease terminated pursuant to the October 2017 Notice and barring Landlord from commencing any summary proceeding or other action, pending the hearing of this motion.
In its October 2017 Notice, Landlord lists seven "Complaint/Information" tickets, issued against Landlord and its prior tenants between April 18, 2007 and February 1, 2012, by the Fire Department of the City of New York (FDNY) for their violations of Title 15 of the New York City Administrative Code (Administrative Code) at the Property (see affidavit of Richard A. Hubell, sworn to April 9, 2018 [Hubell aff], exhibit B). The "violations" Landlord lists in the October 2017 Notice include failing to have a fire safety director on duty at the Property, failing to submit an FDNY-approved revised fire safety plan for the Property, and failing to comply with the FDNY Commissioner's Violation Orders (see Hubell aff, exhibits C through I).
Landlord asserts that the violations it listed in its October 2017 Notice constitute "Legal Requirements" which Audthan was required to cure and remove of record within one year after the Lease's "Commencement Date" (Hubell aff, exhibit B at 2), but that, by leaving the resulting fines and judgments unpaid, Audthan failed to cure and remove them of record, thereby breaching the Lease.
Section 5.02 of the Lease, entitled "Lessee's Compliance with Legal Requirements," provides in relevant part, that: "Lessee shall observe and promptly comply or cause compliance with (a) all Legal Requirements ...." The term "Legal Requirements" is defined in Article 40 of the Lease to be "the requirements of all federal, state and local laws, statutes, codes, ordinances, rules and regulations, including judicial opinions and presidential authority, at any time applicable to the Property whether now existing or hereafter enacted."
Landlord also argues that, since the Lease's "Commencement Date" was May 24, 2013, the date the Lease was executed, the year to cure these violations elapsed on the "Cure Date," that is, on May 24, 2014, which gave rise to an "Event of Default" (see Hubell aff, exhibit B, at 2). Landlord also contends that, as Audthan cannot show that the subject violations could not be cured and removed of record within the one-year cure period, the Notice of Termination is effective and should not be stayed or tolled.
In opposition, Audthan defends its conduct, arguing that Landlord never gave it notice of the alleged violations it listed in the October 2017 Notice, even though Landlord had ostensibly known about them for years. Audthan also asserts that it not only identified and cured all fire safety violations on the Property long before Landlord issued the October 2017 Notice, but it had begun curing the violations listed in the October 2017 Notice before the Lease commenced, and so was entitled to the benefit of the toll provided in Section 15.01[c] of the Lease.
Under Lease section 15.01(c), a "violation of Legal Requirements" which "is not cured and removed of record within one (1) year after the Commencement Date" is an "Event of Default," giving Landlord, under certain circumstances, grounds to terminate the Lease, under section 15.02. Section 15.01(c), however, also provides an exception, stating, in pertinent part, that "in the case of any such violation which cannot be cured and removed of record within such one (1) year period, if Lessee shall commence efforts to cure the same within such one (1) year period, and thereafter diligently and continuously endeavor to effectuate such cure... then the time for such cure shall be extended to such period as may be reasonable under the circumstances to allow for such and cure and removal of record of such violation(s)."
Finally, Audthan argues that the violations at issue here did not arise from its alleged failure to comply with Legal Requirements under the Lease regarding unsafe conditions arising at the Property. Rather, it contends the matters noticed were fire safety violations — specifically, failure to provide a fire safety inspector at the Property and failure to obtain an FDNY-approved fire safety plan — which were caused by the neglect of Landlord and its prior tenants. Audthan asserts that, as the fire safety violations had been cured, and all that remains are the unsatisfied Criminal Court fines and judgments imposed on the Landlord and its prior tenants for their inaction, which do not encumber the Property, it has not failed to comply with Legal Requirements.
This argument is well-taken, but the court need not reach the merits on this issue, as Audthan has satisfied the standard for a Yellowstone injunction: it has shown that it holds a commercial lease and that it received the October 2017 Notice from Landlord on October 11, 2017, in which Landlord threatened to terminate the Lease on October 25, 2017. In response, Audthan cross moved for a Yellowstone injunction on October 19, 2017, prior to the termination date set forth in the October 2017 Notice, and has shown its ability "to cure the alleged default by any means short of vacating the premises" ( Graubard Mollen , 93 NY2d at 514 [internal quotation marks and citation omitted] ).
As to its ability to cure, Audthan showed that it made efforts to identify and cure fire safety problems and FDNY violations at the Property prior to the October 2017 Notice, and that it cured all violations identified at the Property before Landlord issued the October 2017 Notice (see affidavit of George John Cooper, RA, sworn to October 18, 2017, ¶¶ 18-31). To the extent these fines and judgments which Landlord and its prior tenants left unsatisfied prove to be defaults of Legal Requirements on Audthan's part, they may still be cured by payment of a sum less than $18,000.
The purpose of a Yellowstone injunction is to maintain the status quo , so a commercial tenant like Audthan, threatened with the termination of its lease, "may protect its investment in the leasehold by obtaining a stay tolling the cure period ... and [so] avoid a forfeiture" ( Graubard Mollen , 93 NY2d at 514 ). The law does not favor forfeitures, and so Audthan need not demonstrate a likelihood of success on the merits to obtain the protection of a Yellowstone injunction ( TSI W. 14, Inc. v. Samson Assoc., LLC , 8 AD3d 51, 53 [1st Dept 2004] ), as it would otherwise be required to do under CPLR 6312.
Although the court does not reach the question of whether a preliminary injunction under CPLR 6312 should be granted, the court notes that the arguments Landlord offered on this motion to support terminating the Lease do not undermine Audthan's likelihood of success on the merits. For example, it appears that the first alleged violation, premised on the complaint/information ticket issued against Landlord on April 18, 2007 for its failure to post a fire safety director at the Property, in violation of Administrative Code Section 15-216 (a) and (b), was resolved more than a decade ago. Landlord admits that it "disposed of" this violation by entering its guilty plea and paying its $750 fine (Landlord's memorandum in opposition at 16) but contends that the payment was made on "02/19/18," which it asserts was "after the one (1) year cure period" (id. ).
The "02/19/18" date, though, does not appear in the Civil Court "Record of Court Action" on which Landlord relies, or in the other documents which form exhibit C to the Hubell affidavit. "02/19/18" is apparently an erroneous transcription of the arraignment date, which was February 19, 2008. The matter was adjourned to "4/22 to pay" (see Hubell aff, exhibit C). Similarly, the "Crims Appearance History" sheet, dated September 26, 2017, also included in exhibit C to the Hubell affidavit, indicates that the last appearance for this violation was held on "04/22/2008" for "(FINE)" (id. ). Thus, the only notations in the documents Landlord has submitted which relate to its payment of this fine are dated April 22, 2008, more than 10 years ago, and more than five years before the May 24, 2013 Commencement Date of the Lease.
As to the other alleged violations raised in the October 2017 Notice, even if Landlord's reading of the Lease's default, notice and cure provisions were deemed reasonable, it does not appear that the court would necessarily construe them to be violations of Legal Requirements remaining of record on the Property. The violations raised in the October 2017 Notice may instead constitute "Existing Permitted Encumbrances" under Section 31.02 of the Lease, which apparently do not trigger defaults.
Article 15 of the Lease, governing defaults, makes no mention of "Existing Permitted Encumbrances."
Between September 29, 2009 and June 25, 2013, the Criminal Court of the City of New York convicted Landlord and its former tenants of the six other Administrative Code violations listed in Landlord's October 2017 Notice, and imposed fines and judgments against them totaling $17,250 (Hubell aff, exhibits C through I), none of which have been paid. The Landlord left unpaid the three fines and judgments imposed against it, which total $5,750 (see id. , exhibits D, H, and I).
Article 40 of the Lease defines "Existing Permitted Encumbrances" to include, among the conditions and circumstances "in existence on the date hereof," any:
"violations of law, ordinances, orders or requirements whether or not noted and whether or not disclosed by an examination and inspection or search of the Demised Premises by any federal, state or municipal departments having jurisdiction, as the same may exist on the date of the commencement of the term of this Lease or hereafter [and] all legal requirements and all violations thereof whether or not the same have been noted, and whether or not the same would be disclosed by an inspection of the Property."
Thus, it appears these fines and judgments are the sort of "violations of law, ordinances, orders or requirements" or "legal requirements and [ ] violations thereof" contemplated by the Lease with respect to "Existing Permitted Encumbrances."
Perhaps more importantly, if the October 2017 Notice violations are not "Existing Permitted Encumbrances," Landlord's failure to notify Audthan of their existence may constitute a breach of the Lease (see Section 31.02, which provides "Lessor represents to Lessee that, except for the Original Lease and the Existing Permitted Encumbrances, Lessor has not done or suffered anything whereby the Demised Premises have been encumbered in any way whatever").
Furthermore, the court would be loath to let Landlord use its delinquent fines and judgments, and those of its former tenants, to trigger forfeiture of Audthan's tenancy, where Landlord failed to inform Audthan of its alleged breach until well after the purported cure period had passed. Even if it believes its conduct to be justified, Landlord may still have violated its obligation of good faith and fair dealing under their contract ( Salvano v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 85 NY2d 173, 191 [1995], citing Restatement [Second] of Contracts § 205, comments a and d, and Wood v. Duff—Gordon, 222 NY 88 [1917] [Cardozo, J.]; see also Echostar Satellite L.L.C. v. ESPN, Inc. , 79 AD3d 614, 619 [1st Dept 2010], quoting Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 NY3d 96, 106 [2006] [party may "be estopped from invoking a contractual right where estoppel would ‘in the interest of fairness... prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party's words or conduct, has been misled into acting upon the belief that such enforcement would not be sought’ "] ).
Although mindful of the history of this case, and of Landlord's failure to present a meritorious basis for seeking to terminate the Lease in its October 2017 Notice, and the likelihood that any future default or termination notice during the pendency of this action will result in yet another Yellowstone injunction application, the court denies Audthan's motion to bar Landlord from issuing any further default or termination notices without prior leave of court.
Audthan's Motion to Compel Landlord to Return Security Deposit
In motion sequence number 008, Audthan seeks to compel Landlord to return Audthan's security deposit (Security Deposit) to a segregated, interest-bearing trust account at a banking organization within the State of New York (Security Deposit Account), in compliance with GOL Section 7-103. Audthan also seeks to enjoin Landlord from moving the Security Deposit from the Security Deposit Account and to provide an affidavit with a corroborating bank statement each month, attesting to the balance and any transfers into and out of the Security Deposit Account. Landlord opposes Audthan's motion and cross moves to compel Audthan to replenish the Security Deposit, asserting that Audthan is obliged to do so under the Lease.
Audthan alleges that, between May 2013 and June 2015 and pursuant to the terms of the Lease, Landlord received several payments which comprised Audthan's Security Deposit, in the total principal amount of $931,085 (see ¶¶ 6 and 16 of affidavit of John Jacobson, sworn to September 2, 2016 [Jacobson aff], annexed as exhibit G to the affidavit of Jonathan P. Wolfert, sworn to October 9, 2017 [Wolfert aff] ).
Audthan alleges that Landlord violated Audthan's Lease rights, and New York's General Obligations Law, by failing to maintain the Security Deposit in a separate, interest-bearing account and instead deposited those funds in the business checking account (Operating Account) Landlord held at JPMorgan Chase Bank, N.A. (Chase) (Jacobson aff ¶¶ 1-5).
Audthan alleges that Landlord commingled the Security Deposit in its Operating Account with Audthan's rent checks (see id. ¶ 6), among other deposits, and that Landlord has admitted that the Operating Account is its "Chase Checking Account," which it uses to pay for a variety of expenses and disbursements (exhibit E to the Wolfert aff, ¶ 2).
Audthan alleges that Landlord wasted the Security Deposit by using those funds for personal purposes. Audthan further alleges that it repeatedly sought to verify that the Security Deposit was held in safekeeping, in accordance with GOL Section 7-103, through its inquiries to Landlord, its subpoena of account documents from Chase, and discovery requests directed to Landlord (see Jacobson aff ¶¶ 1, 9-18).
In 2015, in response to Audthan's queries, Landlord asserted that it had not commingled the Security Deposit with any other assets but rather had segregated these funds in a Chase account designated as the Landlord's "Rent Security Account" which, at that time, held a balance of more than $900,000. In 2016, however, Audthan learned that this "Rent Security Account" was not a specifically designated security deposit account but only a high yield savings account (Savings Account) that Landlord maintained at Chase along with its Operating Account.
Landlord did not maintain the Security Deposit in its Savings Account. On July 9, 2016, the day after Landlord served its response to Audthan's second discovery requests regarding its Security Deposit, Landlord transferred $931,133.55, approximately the amount of the Security Deposit, from its Savings Account to another savings account for assets held in trust in the name of Landlord's principal's wife. By this transfer, Landlord reduced the balance of its Savings Account to approximately $214, and shortly after reduced its balance to zero.
Audthan states the amount of the Security Deposit should be $931,085.00, excluding interest. Landlord, however, calculated the Security Deposit to be $1,031,085.00. The court will rely on the larger figure.
Landlord retained new counsel after Audthan's motion to compel it to restore the Security Deposit was fully submitted. On April 17, 2018, Landlord's new attorneys wrote to inform the court that Landlord had reinstated the Security Deposit by paying $1,031,000.44 into a segregated, interest-bearing account at Chase, in the name of Nick & Duke LLC Rent Security Account. Landlord's April 17 letter (NYSCEF Doc. No. 446) also annexed a Chase account statement for the month of March 2018, reflecting this deposit. Landlord noted its return of the Security Deposit was without prejudice to its alleged right "to seize the security deposit to mitigate its damages," and asked that oral argument for motions bearing sequence numbers 008 and 009 be rescheduled or that a conference be held prior to their determination. The April 17 letter did not include an explicit withdrawal of Landlord's cross motion to compel Audthan to fund the Security Deposit.
Audthan's counsel responded by letter dated April 18, 2018 (NYSCEF Doc. No. 448). In that letter, Audthan asserted that neither Landlord's return of the Security Deposit nor the April 17 letter affects its motion to restore its Security Deposit. Specifically, Audthan contends that Landlord did not restore the Security Deposit in full, as the amount it deposited was less than $1,031,085, the full principal amount of the Security Deposit, and did not include interest due. Audthan also argues that its motion is not mooted because Landlord still maintains that it was entitled to take the Security Deposit and suggests that it may do so again. Audthan asks that the court grant its motion, ordering Landlord to increase the Security Deposit to its full principal amount and to add interest owed to that amount. Audthan also requests that the court declare that Landlord was not entitled to take the Security Deposit, enjoin Landlord from doing so in the future, and direct Landlord to provide the periodic disclosures it has prayed for, to ensure Landlord properly maintains the Security Deposit.
This facet of the parties' dispute is governed by GOL Section 7-103, which requires Landlord to hold Audthan's Security Deposit in trust, at a bank here in New York, and prohibits Landlord from commingling those security funds with Landlord's other assets, or otherwise treating those funds as its own (see Glass v. Janbach Props., Inc. , 73 AD2d 106, 108 [2d Dept 1980] ["It is beyond cavil that a landlord holding a security deposit under a lease covering the rental of real property does so as a trustee. Such deposit remains the property of the tenant, and may not be mingled with the landlord's funds"] [internal citation omitted] ).
Violation of GOL Section 7-103 "gives rise to an action in conversion and the right to immediate return of the funds" ( 23 E. 39th St. Mgt. Corp. v. 23 E. 39th St. Dev., LLC , 134 AD3d 629, 631 [1st Dept 2015] [citation omitted] ). A landlord who violates the statute "cannot use the security as an offset against unpaid rents" ( Jimenez v. Henderson , 144 AD3d 469, 470 [1st Dept 2016], quoting 23 E. 39th St. Mgt. Corp., 134 AD3d at 631 ). Rather, "[u]pon breaching its fiduciary duty not to commingle the money," the landlord " ‘forfeited any right it had to avail itself of the security deposit for any purpose’ " ( Tappan Golf Dr. Range, Inc. v. Tappan Prop., Inc., 68 AD3d 440, 441 [1st Dept 2009], quoting Dan Klores Assocs. v. Abramoff, 288 AD2d 121, 122 [1st Dept 2001] [alteration marks omitted] ), "including to offset debts owed by tenant due to tenant's breach of a lease" ( Jimenez , 144 AD3d at 470 [internal quotation marks and citation omitted] ).
Moreover, Audthan's alleged non-compliance with terms of the Lease is no defense to Landlord's breach of its fiduciary duty under GOL Section 7-103 ( LeRoy v. Sayers , 217 AD2d 63, 68 [1st Dept 1995], citing Hartzell v. Burdick, 91 Misc 2d 758, 760 [Albany City Court 1977] ). Accordingly, there is no merit to Landlord's argument that Audthan's alleged breach of the Lease relieved it from its obligation to maintain the Security Deposit in a segregated account.
Landlord, through its principal Gurdayal Kohly, claims that it had the right to draw down accelerated rent under the Lease, because Audthan failed to stay the July 8, 2016 expiration of its June 23, 2016 Termination Notice, which it apparently exercised on July 9, 2016, by transferring what remained of Audthan's Security Deposit from the Operating and Savings Accounts (see affidavit of Gurdayal P. Kohly, sworn to November 8, 2017, ¶¶ 8-11).
Landlord had no right to this draw down because it had already violated New York's General Obligation Law at the commencement of the Lease, when it deposited Audthan's Security Deposit in its Operating Account and commingled it with its own funds. Thus, from the Lease's May 24, 2013 Commencement Date, Landlord "forfeit[ed] any right it had to avail itself of the security deposit for any purpose, including to offset debts owed by tenant due to tenant's [alleged] breach of a lease" ( Jimenez , 144 AD3d at 470 [internal quotation marks and citations omitted] ).
At its option, Audthan could have terminated the Lease and held Landlord liable for its conversion of the Security Deposit (see McMaster v. Pearse , 9 Misc 3d 964, 966—67 [Civ Ct, NY County 2005], citing LeRoy v. Sayers, 217 AD2d 63 [1st Dept 1995] ). Audthan, however, did not just want to recover its Security Deposit, as that would have meant walking away from the Lease, and the substantial investments of money, time and effort it had made in the Project. As was its right, Audthan elected to keep the Lease in force, treat Landlord's defaults as partial breaches, and seek recovery of the damages Landlord has caused it (see 13 Williston on Contracts § 39:32 [4th ed. 2018] ).
Landlord violated the General Obligations Law, and its duties as Audthan's trustee, by wrongfully depriving Audthan of its Security Deposit. Accordingly, the court grants Audthan's motion, and denies Landlord's cross motion, insofar as ordering Landlord to restore Audthan's Security Deposit in full, by increasing the principal balance of the Nick & Duke, LLC Rent Security Account to $1,031,085, and to thereafter maintain the Security Deposit in that Nick & Duke LLC Security Deposit Account until the termination of either Audthan's tenancy or the Lease, in accordance with the General Obligations Law.
A tenant in these circumstances, however, is only entitled to recover interest on its security deposit as of right where the lease provides for interest, or the deposit is for the rental of property which "contains six or more family dwelling units" (see Holmes v. Worthen, 19 Misc 3d 33, 34-35 (App Term, 2d Dept 2008), citing, inter alia , GOL § 7-103[2-a] ). Audthan does not meet either of these criteria.
Audthan cites GOL Section 7-103(2) to support its claim for interest. That provision, however, does not require Landlord to place Audthan's Security Deposit into an interest-bearing account. Rather, it states how interest is to be treated if an interest-bearing account is chosen to hold a security deposit. Accordingly, Audthan's motion, to the extent that it seeks to compel Landlord to set up an interest-bearing Security Deposit Account and to compel Landlord to pay interest prior to the opening of the Nick & Duke LLC Rent Security Account described in counsel's April 17, 2018 letter, is denied. Of course, as the Nick & Duke LLC Rent Security Account has now been established as an interest-bearing account, the parties are obligated to comply with this provision of GOL Section 7-103(2) going forward.
Finally, that portion of Audthan's motion, requesting that Landlord be compelled to provide it written monthly account statements, is granted, but its request to compel Landlord to also provide monthly affidavits, attesting to its compliance with GOL Section 7-103, is denied.
Conclusion
Accordingly, for the reasons set forth above, it is hereby
ORDERED that Audthan's motion for a Yellowstone injunction is granted, to the extent of providing the same injunctive relief afforded by the temporary restraining order contained within the order to show cause dated July 29, 2015, which order was continued by this court's decisions and orders of February 10, 2016 and May 31, 2017, as to all outstanding violations Landlord has listed in the July 2015, June 2016, and October 2017 Notices; and it is further
ORDERED that Audthan's motion to bar Landlord from issuing any further default or termination notices without prior approval of this court upon noticed motion is denied; and it is further
ORDERED that Audthan's motion for a preliminary injunction pursuant to CPLR 6312 is denied as moot; and it is further
ORDERED that Audthan's motion to compel Landlord to return and maintain Audthan's Security Deposit, in the principal amount of $1,031,085, in a segregated trust account at a banking organization within the state of New York, in accordance with General Obligations Law Section 7-103, is granted, and Landlord's cross motion to compel Audthan to fund the Security Deposit is denied; and it is further
ORDERED that Audthan's motion to compel Landlord to deposit the Security Deposit in an interest-bearing account, and to pay Audthan accrued interest on the Security Deposit, is denied; and it is further
ORDERED that Audthan's motion to compel Landlord to provide it written monthly account statements of the Security Deposit Account is granted, but its motion to compel Landlord to also provide Audthan monthly affidavits, attesting to continued compliance with General Obligations Law Section 7-103, is denied; and it is further
ORDERED that Landlord's request to require Audthan to post an appropriate undertaking with respect to the injunctive relief awarded herein is granted, and the parties are directed to either file a written stipulation with the court, setting forth an agreed amount for the undertaking, or to settle an order on notice with recommendations as to the undertaking's amount; and it is further
ORDERED that counsel shall appear for a status conference in Part 43 of this court on September 13, 2018, at 11:00 A.M.