Opinion
No. 600827/2009.
2009-09-10
URBAN ARCHAEOLOGY LTD., Plaintiff, v. 207 EAST 57TH STREET LLC, Successor–In–Interest to 207 East 57th Street Associates, Defendants.
Barry J. Yellen, Esq. (Clark E. Alpert, of counsel), New York City, for plaintiff. Epstein Becker & Green, P.C. (Ralph Berman, Steven M. Ziolkowski, of counsel), for defendant.
Barry J. Yellen, Esq. (Clark E. Alpert, of counsel), New York City, for plaintiff. Epstein Becker & Green, P.C. (Ralph Berman, Steven M. Ziolkowski, of counsel), for defendant.
O. PETER SHERWOOD, J.
In this action, inter alia, for breach of a lease agreement, defendant 207 East 57th Street, LLC, Successor–In–Interest to 207 East 57th Street Associates (“defendant” or “landlord”) moves pursuant to CPLR § 3211(a)(1) and (7) for an order dismissing the complaint for failure to state a cause of action and based upon the documentary evidence submitted. Plaintiff opposes the motion.
Background
The facts as alleged in the complaint are as follows: On July 15, 2008, plaintiff Urban Archaeology Ltd., as tenant (“plaintiff” or “tenant”) entered into a written commercial lease agreement (“the Lease”) with defendant's predecessor, 207 East 57th Street Associates, for lease of retail space on the ground floor of a building located at 207 East 57th Street in Manhattan (“the premises”). The Lease was for an initial ten-year term with a five-year renewal option (Berman Aff., Ex. “B”, Lease ¶ 2[a] through [d] ) at an initial base rent of $38,906.25 per month for the first three years with incremental increases in the base rent for the remaining term of the Lease (Lease ¶ 3[a] ). Upon the execution of the Lease, the first month's rent was to be paid together with a security deposit, which could be met either in cash or by providing a letter of credit (Lease ¶ 35[a] and [b] ). Plaintiff apparently deposited a letter of credit in the sum of $155,625.00 and paid the first month's rent of $38,906.25 (Berm Aff. Ex. “A”, Compl. ¶ 27).
Before taking possession of the premises, plaintiff advised defendant that because of the economic downturn it was unable to perform according to the terms of the Lease and sought modifications to the lease including a lowering of the base rent (Compl.¶¶ 6, 10, 15). Instead, defendant served plaintiff with a Notice of Default, dated February 23, 2009, indicating that plaintiff was in default in the payment of the balance of rent owed for January 2009 in the sum of $24,303.08, plus the rent of $38,906.25 due for February 2009, and the additional rent due for those months for common charges in the sum of $1,226.90, for a total sum due of $64,436.23, and directing that it cure by March 4, 2009 (Berman Aff. Ex. “C”). Thereafter, on or about March 5, 2009, defendant served a Notice of Termination, terminating the Lease effective March 17, 2009. Defendant then drew down the letter of credit to cover the amount of plaintiff's arrears as provided for under the terms of the Lease (Berman Aff. ¶ 5; Lease ¶ 35[c] ).
On March 18, 2009, plaintiff commenced the instant action by filing the summons and verified complaint seeking a judgment: (1) declaring that plaintiff is excused from performing under the terms of the Lease due to “Unavoidable Delay” as that term is defined in the Lease (Compl. ¶¶ 19 through 25); (2) returning to plaintiff the sum of $194,531.25, representing payment of the first month's rent of $38,906.25 together with the letter of credit plaintiff deposited in the sum of $155,625.00 (Compl. ¶¶ 27 through 29); and (3) reimbursement of attorney's fees, costs and disbursements in an amount in excess of $50,000.00 (Compl. ¶¶ 30 through 32).
CPLR § 3211 Motion and Parties' Arguments
Defendant now moves for an order pursuant to CPLR § 3211(a)(1) and (7) dismissing the complaint based upon documentary evidence and for failure to state a cause of action. In support of its motion, defendant submits the affirmation of its attorney, Ralph Berman, Esq ., of the law firm Epstein Becker & Green, PC, together with exhibits “A” through “C” consisting of the summons and verified complaint, the Lease, the Notice of Default and the Notice of Termination, and a supporting memorandum of law. Defendant contends that plaintiff's allegations of “Unavoidable Delay” all relate to financial hardship which is specifically excluded from the definition of Unavoidable Delay as defined in the Lease. On that basis, defendant argues that plaintiff is not excused by its adverse economic circumstances from performing its obligations under the Lease.
In opposition, plaintiff submits a sworn affidavit of its Chief Operating Officer, Gilbert Shapiro, who states that plaintiff has been in the business of designing, installing and manufacturing upscale decorative items and “artifacts” for use in clients' homes and businesses for over 30 years (Gilbert Aff. ¶ 3). The Lease at issue was the most expensive Lease plaintiff had ever undertaken and plaintiff claims that the broad “Unavoidable Delay” provision of the Lease was an essential part of its decision to enter into the Lease. Mr. Gilbert contends that the “Unavoidable Delay” provision discharged plaintiff from performing its obligations under the Lease in the event of a serious economic crisis outside its control that severely affected its industry and interfered with supply and demand of its product. In this regard, Mr. Gilbert avers that at the time defendant purchased the property subject to the Lease it was aware that plaintiff was in financial distress stemming from the worldwide economic crisis. He claims that he met with landlord's principal on March 2, 2009, shortly after defendant had purchased the premises, in an effort to re-negotiate the terms of the Lease, either by allowing plaintiff a “time-out” or temporarily reducing the amount of rent due. Defendant rejected plaintiff's requests and demanded performance. Plaintiff claims to have expended over $600,000.00 in preparing the Leased premises, posting the first month's rent, and posting the letter of credit. In the interim, the economic crisis hit with catastrophic results for plaintiff's clients and rendering the opening of an upscale store catering to a luxury market and at an extremely high rent not economically viable. Mr. Green anticipates that it may take years for the subject store to operate in any meaningful way or to be profitable. Mr. Green contends that the broad language of what he characterizes as the “ force majeure ” clause of the Lease excuses plaintiff's performance under the present unprecedented economic crisis, which was not foretold by the world's preeminent economic experts, and further that such circumstances must be contrasted with a situation under which non-performance is sought for financial difficulties of a party's own making. Here, plaintiff argues that the circumstances which are serving to frustrate performance under the terms of the Lease are due to an unforeseeable and extreme occurrence that was beyond its control and without any fault or negligence on its part. Plaintiff claims that all it needed was the time and rent abatement to ride out the economic tsunami and, instead, defendant decided to “go for broke” by keeping the first month's rent and spending down the letter of credit.
Plaintiff also submits an expert affirmation of Paul Wachtel, a Professor of Economics at the Stern School of New York University, attesting to the unprecedented nature and severity of the current economic downturn which has been likened to an “economic tsunami”. Professor Wachtel states that the present economic downturn was “unforeseeable as to its occurrence or as to the extent and length of this deep crisis” and no high-profile economist had predicted its occurrence. He further states that learned economists and financial experts agree that the purchase of discretionary upscale decorative items of the kind sold by plaintiff are among the first things to go in an economic crisis of the present severity.
In reply, defendant argues that economic inability to perform contractual obligations is not a valid basis for excusing compliance with the terms of the contract. Defendant contends that the “Unavoidable Delay” clause of the Lease is unambiguous and specifically excludes financial hardship as a basis for discharging plaintiff's obligations under the Lease. Nor may principles of impossibility or commercial impracticability be invoked to excuse performance in cases of financial hardship. Alternatively, defendant argues that even if plaintiff's economic hardship were held to constitute an Unavoidable Delay, defendant would not be obliged to return the first month's rent as such provision cannot be applied retroactively to void an obligation that had already been fulfilled.
Legal Analysis
It is well settled that, as a general rule, on a motion to dismiss a plaintiff's claim pursuant to CPLR § 3211(a)(7) for failure to state a cause of action, the court is not called upon to determine the truth of the allegations ( see, Campaign for Fiscal Equity v. State, 86 N.Y.2d 307, 317 [1995];219 Broadway Corp. v. Alexander's, Inc., 46 N.Y.2d 506, 509 [1979] ). Rather, the court is required to “afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference [citation omitted]. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss” (EBC I v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005] ). The court's role is limited to determining whether the pleading states a cause of action, not whether there is evidentiary support therefor ( see, Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 [1977] ). Similarly, a dismissal motion pursuant to CPLR § 3211(a)(1), “may be granted where documentary evidence submitted conclusively establishes a defense to the asserted action as a matter of law' “ (Goldman v. Metropolitan Life Ins. Co., 5 N.Y.3d 561, 571 [2005], quoting Held v. Kaufman, 91 N.Y.2d 425, 430–431 [1998] ).
Defendant's motion to dismiss turns upon construction of the “Unavoidable Delay” provision of the lease and whether it encompasses the circumstances of plaintiff's inability to perform under the Lease due to the circumstances of the present recession. The key provisions of the Lease at issue are paragraphs 1 and 38. Paragraph 1 of the Lease defines “Unavoidable Delay” as follows:
Unavoidable Delay means a delay resulting from strikes or labor troubles or accident, or from any cause whatsoever beyond Landlord or Tenant's reasonable control (other than Landlord or Tenant's financial hardship), including, but not limited to, acts of foreign and/or domestic terrorism, laws, governmental preemption in connection with national emergency or by reason of any requirements of any governmental authority, or by reason of the conditions of supply and demand which have been or are affected by war or other emergency.
Paragraph 38 of the Lease, titled Inability to Perform provides as follows: The obligation of each party hereunder to perform all of the covenants and agreements hereunder on the part of such party to be performed shall be excused by the period of Unavoidable Delay, as it relates to the particular obligation affected by such Unavoidable Delay and such party's inability to perform shall not relieve the other party of its obligations to perform under this Lease.
The law in New York is well settled that “once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even when unforseen circumstances make performance burdensome” (Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 [1987] ). The impossibility of performing the contract may be raised as an affirmative defense in a breach of contract action, but financial difficulty or economic hardship of the promisor, even to the extent of insolvency or bankruptcy, does not establish impossibility sufficient to excuse performance of a contractual obligation ( see, 407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 [1968];Stasyszyn v. Sutton East Assocs. ., 161 A.D.2d 269, 271, 555 N.Y.S.2d 297 [1st Dept 1990] ). The defense is applied narrowly “due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances ( see, Kel Kim Corp. v. Central Markets, Inc., supra ), such as when destruction of the subject matter of the contract by an act of God, vis major or by law makes performance objectively impossible ( 407 E. 61st Garage v. Savoy Fifth Ave. Corp., supra ). Thus, parties to a contract have not been permitted to avoid contractual obligations on the ground of impossibility where a commodity swap agreement was rendered extremely disadvantageous due to an increase in the price of cobalt (General Elec. Co. v. Metals Resources Group Ltd., 293 A.D.2d 417, 741 N.Y.S.2d 218 [1st Dept 2002] ); financial condition of a contracting party changed due to the fraud of Bernie Madoff (Sassower v. Blumenfeld, 24 Misc.3d 843, 878 N.Y.S.2d 602, 2009 N.Y. Slip Op. 29198 [Sup.Ct.2009] ); contracting party unable to secure financing in a form required ( Stasyszyn v. Sutton East Assocs., supra ); party unable to secure the level of insurance required due to a liability insurance crisis ( Kel Kim Corp. v. Central Markets, Inc., supra ), and a party was unable to generate sufficient cash flow due to the catastrophic economic collapse of the Asian market (Bank of New York v. Tri Polyta Finance B.V., 2003 WL 1960587 [S .D.NY 2003] ).
The contract here was entered into by sophisticated commercial parties who could have anticipated the possibility that future events might result in financial disadvantage on the part of either party, even if the precise cause or extent of such financial disadvantage was not foreseen at the time the contract was executed ( see, General Elec. Corp. v. Metals Resource Group Ltd., supra ). Thus, under the circumstances extant at bar the impossibility of performance doctrine does not relieve plaintiff of its obligations under the Lease.
Plaintiff urges this court to adopt the reasoning of the United States District Court for the Southern District of Indiana in the case of Hoosier Energy Rural Elec. Cooperative v. John Hancock Life Ins. Co., 588 F.Supp.2d 919 (S.D.Ind.2008). The Court held that the defendant had shown a likelihood of success on the merits on its defense of temporary commercial impracticability where the nature and scope of the present unprecedented credit crisis rendered performance under the contract at issue therein prohibitively expensive. The Court distinguished the facts of that case from those of the Kel Kim or Bank of New York cases by stating that the defendant before it did not seek to excuse its performance in its entirety for an unlimited period of time, but rather sought a reasonable extension during a time of severe economic crisis. This Court finds the reasoning of the Hoosier decision to be unpersuasive. If that argument prevailed, “every debtor in a country suffering economic distress could avoid its debts” ( Bank of New York v. Tri Polyta Finance B.V., supra ).
Nor may the plaintiff prevail on the doctrine of force majeure. A force majeure provision will also be narrowly construed and is not intended to buffer a party against the normal risks of a contract. Generally, “only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused” ( Kel Kim Corp. v. Central Markets, Inc., supra ). In this case, the force majeure clause does not specifically include plaintiff's inability to meet its obligations due to a severe economic crisis. In fact, following the catchall language “from any cause whatsoever beyond Landlord or Tenant's reasonable control” contained in this provision is the exclusion “other than Landlord or Tenant's financial hardship”. It would, therefore, appear that the parties to the Lease considered the possibility of a change in the financial circumstances of either party, even if not specifically anticipating the nature or extent of such economic downturn, and determined that this provision would not shield the parties from liability for any non-performance of their respective obligations on such basis.
Conclusion
Based upon the foregoing discussion, it is
ORDERED, that defendants' motion pursuant to CPLR § 3211(a)(1) and (7) to dismiss the complaint is granted and the complaint is dismissed, without costs and disbursements; and it is further
ORDERED, that the Clerk is directed to enter judgment accordingly.
This constitutes the decision and order of the court.