Opinion
652050/2015
12-09-2020
AUDTHAN LLC, Plaintiff, v. NICK & DUKE, LLC, Defendant.
Seyfarth, Shaw LLP, 620 Eight Avenue, New York, NY 10018, By: Tracee Elaine Davis, Esq., for Plaintiff. Rosenberg and Estis, P.C., 733 3rd Avenue 14 Fl, New York, NY 10017, By: Bradley S. Silverbush Esq., for Defendant.
Seyfarth, Shaw LLP, 620 Eight Avenue, New York, NY 10018, By: Tracee Elaine Davis, Esq., for Plaintiff.
Rosenberg and Estis, P.C., 733 3rd Avenue 14 Fl, New York, NY 10017, By: Bradley S. Silverbush Esq., for Defendant.
Robert R. Reed, J.
The following e-filed documents, listed by NYSCEF document number (Motion 018) 823, 824, 825, 826, 827, 828, 829, 830, 831, 832, 890, 891, 892, 893, 894, 895 were read on this motion to/for INJUNCTION/RESTRAINING ORDER
The following e-filed documents, listed by NYSCEF document number (Motion 019) 835, 836, 837, 838, 839, 840, 841, 842, 843, 844, 845, 846, 847, 848, 849, 850, 851, 852, 853, 854, 855, 856, 857, 858, 859, 860, 861, 862, 863, 897, 898, 899, 900, 901, 902 were read on this motion to/for MODIFY.
Motions bearing sequence numbers 018 and 019 are consolidated herein for disposition. This action involves a protracted dispute between plaintiff Audthan LLC (Audthan), the 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, Nick & Duke LLC (Landlord).
In motion sequence number 018, brought by order to show cause entered by this court on July 29, 2020 (NYSCEF Doc No. 832), Audthan seeks yet another Yellowstone injunction to prevent Landlord from terminating the Lease. In its notice of termination, previously at issue in motion sequence number 017, Landlord contends that Audthan is in default because it violated certain Lease provisions regarding insurance coverage. In addition to the Yellowstone injunction and related relief, Audthan also seeks leave to file its proposed second amended complaint. Landlord opposes this motion in all respects.
In motion sequence number 019, Audthan seeks to eliminate or reduce its obligation to pay use and occupancy charges to Landlord under the Lease (see notice of motion dated July 31, 2020 [NYSCEF Doc No. 835] ). Landlord opposes and cross moves to vacate the court's prior Yellowstone injunctions on the ground that Audthan failed to comply with conditions of the stay (see notice of cross-motion dated August 31, 2020 [NYSCEF Doc No. 896] ).
Motion Sequence Number 018
In motion sequence number 017, Audthan moved by order to show cause for, inter alia , a Yellowstone injunction and a preliminary injunction to prevent termination of the Lease under a notice of termination issued by Landlord on February 14, 2020 (February 2020 Notice) (see proposed order to show cause, e-filed February 26, 2020 [NYSCEF Doc No. 754] ). On February 26, 2020, this court entered a temporary restraining order which, among other things, stayed and tolled Audthan's time to cure the alleged defaults set forth in the February 2020 Notice and restrained Landlord from seeking to terminate the Lease, or take any other legal action, based on the February 2020 Notice (NYSCEF Doc No. 826) (exhibit A to the affirmation of Tracee E. Davis, Esq., dated July 14, 2020 [Davis affirmation exhibit A] [NYSCEF Doc No. 825] ).
The February 2020 Notice asserts that Audthan violated Articles 5 and 11 of the Lease by failing to provide Landlord proof of all risk insurance, comprehensive boiler and machinery insurance, umbrella casualty insurance and other forms of insurance required under the Lease, for various periods in the Lease term (see affidavit of Tracee E. Davis, Esq., sworn to February 26, 2020 [Davis OSC aff] [NYSCEF Doc No. 757] exhibit A [NYSCEF Doc No. 758] ). The February 2020 Notice also asserted that Audthan violated Article 5 of the Lease by failing to name Landlord as additional insured on property and liability insurance policies, as required by the Lease, rather than loss payee (id. ).
Audthan asserts that it cannot be deemed in default because it was never served a notice of default regarding the breaches of the Lease alleged by Landlord, which rendered the February 2020 Notice invalid, and that the allegations of the February 2020 Notice are unfounded because Landlord had previously been provided all, or substantially all, the proofs of insurance and other documentation which Landlord claims Audthan failed to provide (see affidavit of Bhaveschchandra Shethia, sworn to February 24, 2020, ¶¶ 1-38 [NYSCEF Doc No. 768] ).
With respect to its failure to name Landlord as an additional insured on property and liability policies, Shethia stated that this alleged violation is easily cured, as he had contacted Audthan's insurance broker, who informed him that the carrier which issued those policies is willing to change Landlord's designation from loss payee to additional insured, if Landlord insists on the change (id. ¶ 39).
Landlord, citing Zaid Theatre Corp. v. Sonia Realty Co. (18 AD3d 352 [1st Dept 2005] ), argued in opposition that Audthan's Yellowstone application was jurisdictionally deficient because it did not move to amend its amended complaint at the same time, to seek declaratory relief regarding the parties' respective rights and obligations in regard to the issues raised in the February 2020 Notice. Seeking to excuse its failure to serve a notice to cure before serving its February 2020 Notice, Landlord also argued that insurance defaults are incurable, as a matter of law, and so issuing a notice of default would have been futile. To support this argument, Landlord submitted the affidavit of Robert Sterling, president of Stockbridge Risk Management Inc., a specialist in insurance policy review and compliance (NYSCEF Doc No. 808). Sterling's affidavit did not take issue with Audthan's alleged failure to provide evidence of insurance. He did note, however, that Audthan had improperly listed Landlord on several policies as the named insured, not as an additional insured, as required by the Lease. Sterling also identified several other alleged insurance defaults not reflected in the February 2020 Notice, which he characterized as serious and incurable.
On July 2, 2020, after oral argument, the court entered its decision and order on Audthan's motion in sequence number 017 ( [Davis affirmation exhibit C] [NYSCEF Doc No. 828] ). The court found that, under Zaid Theatre Corp ., Audthan had indeed erred in seeking a Yellowstone injunction without moving at the same time to amend its complaint to incorporate allegations challenging the validity of the purported insurance violations Landlord raised in the February 2020 Notice (id. at 13). The court denied the motion but granted Audthan a 30-day extension of the temporary restraining order staying the termination of the Lease to allow Audthan time to refile its application for a Yellowstone injunction and to seek leave to amend its complaint (id. ). Audthan moved within the time prescribed by this court's order (see Audthan's proposed order to show cause in sequence number 018, filed July 27, 2020 [NYSCEF Doc No. 823] ).
In its refiled motion, Audthan relies primarily on its prior arguments made in motion sequence number 017 to support its application for a Yellowstone injunction and preliminary injunction (see Davis affirmation ¶ 8). Audthan also relies upon the supplemental affidavit of Pati Liberatore, sworn to July 14, 2020 ( [Liberatore aff] [Davis affirmation exhibit D] ). Liberatore is a senior account executive with USI Insurance Services, LLC, Audthan's insurance broker. Liberatore's affidavit addressed the defaults listed in the February 2020 Notice as well as the additional allegations of insurance violations that Landlord did not assert in the February 2020 Notice, but raised for the first time in its opposition.
With respect to its proposed second amended complaint, Audthan argues that its proposed amendments are not prejudicial to Landlord and are proper, inasmuch as they simply add allegations to address this action's procedural history and Landlord's notices of default and termination, including the February 2020 Notice.
Landlord, citing First Natl. Stores v. Yellowstone Shopping Ctr. (21 NY2d 630 [1968] ), notes that a Yellowstone injunction is only appropriate if Audthan shows that: (i) it holds a commercial lease; (ii) it received a notice to cure; (iii) it sought an injunction to toll the cure period before it expired; and (iv) it is prepared and maintains the ability to cure the alleged default (see also Boi To Go, Inc. v. Second 800 No. 2 LLC , 58 AD3d 482, 482 [1st Dept 2009] ).
In opposition, Landlord argues that Audthan is not entitled to a Yellowstone injunction because its defaults of the Lease's insurance provisions are not curable, as a matter of law, and so are not appropriate for Yellowstone relief. It also contends that, as it did not first serve a notice to cure, delivery of the February 2020 Notice to Audthan effectively terminated the Lease as of February 28, 2020.
Landlord also submits a second affidavit of Robert Sterling in opposition. This affidavit, sworn to August 26, 2020 (NYSCEF Doc No. 892), contains an examination of purported insurance defaults even more detailed than his prior submission. Still, none of the violations discussed in Sterling's latest submission were raised in the February 2020 Notice.
Landlord's arguments are unavailing. First, it was improper for Landlord to issue the February 2020 Notice without first giving Audthan written notice of default and an opportunity to cure. Under the Lease, an "Event of Default" on which Landlord may premise a ten-day notice of termination must entail either Audthan's failure "to pay in full any installment of Basic Rent ... or Additional Rent or Taxes when the same become due and payable, and such failure shall continue for ten (10) business days after written notice thereof" (Lease, Section 15.01 [a] ), or Audthan's failure "to perform or observe any other of its obligations under" the Lease that continues "for 30 days after written notice thereof" (id. Section 15.01 [b] ). The February 2020 Notice does not state any grounds for termination under subsection (a), and so Audthan was entitled to treat the February 2020 Notice as a notice to cure, triggering its contractually mandated period to cure the defaults alleged ( 117-119 Leasing Corp. v. Reliable Wool Stock LLC , 139 AD3d 420, 421 [1st Dept 2016] ).
Furthermore, Landlord's assertion that insurance defaults are incurable as a matter of law is unfounded. Landlord cites, among other authorities, Bliss World LLC v. 10 W. 57th Street Realty LLC (170 AD3d 401 [1st Dept 2019] ), but Bliss World does not support Landlord's contention. In that case, the tenant, which had failed to procure insurance, was denied a Yellowstone injunction because none of the steps it proposed to take to cure its noticed defaults "involve[d] any retroactive change in coverage, which [meant] that the alleged defaults raised by the landlord [were] not susceptible to cure" ( id. 170 AD3d at 401-02 [citations omitted] ).
Audthan maintains that it previously provided Landlord with copies of all necessary insurance documentation, but it also produced these documents in February 2020, as part of its show cause application in motion sequence number 017. Landlord confirms receipt of these documents (see Sterling aff ¶ 11, citing NYSCEF Doc Nos. 769-792). Audthan also indicated that it would be able to change Landlord's designation to additional insured on each policy Landlord requests retroactively. Landlord does not take issue with this representation. The additional instances of alleged insurance defaults set forth in the Sterling affidavit were not complained of in the February 2020 Notice and so could not form a basis for terminating the Lease as of February 28, 2020. Accordingly, Audthan has made its requisite showing.
Landlord requests that, in the event that Audthan's motion for a Yellowstone and/or preliminary injunction is granted, Audthan be required to post a bond or undertaking in accordance with CPLR 6312. This application is granted.
With respect to Audthan's motion for leave to file its proposed amended complaint, Landlord argues that the proposed amended complaint goes beyond the February 2020 Notice and the underlying insurance defaults, raising new and different issues which will require additional discovery and vacatur of the Note of Issue. These issues were addressed in the court's decision and order in motion sequence number 020, e-filed on September 16, 2020 (NYSCEF Doc No. 903). As Landlord has not contended that the proposed amended complaint is otherwise prejudicial or improper, Audthan's motion for leave to file its proposed second amended complaint is granted.
Motion Sequence Number 019
At the time it entered the Lease, the Property had several outstanding violations preventing Audthan from beginning construction work. These included a finding of harassment made against the Property in 2009 by the New York City Department of Housing and Preservation and Development (HPD) (see affidavit of George Cooper, RA, sworn to July 31, 2020 [Cooper aff] [NYSCEF Doc No. 854] ¶ 9). Under the terms of the Lease, Audthan is responsible for clearing all violations issued against the Property, including pre-existing violations. In the Lease, Landlord acknowledged that the building permit for construction at the Property could not be obtained until Audthan entered an agreement with HPD to cure the harassment violation (see Lease [Cooper aff exhibit A] [NYSCEF Doc No. 855] Sections 14.01 to 14.03). The Lease also authorized Audthan to negotiate a cure agreement with HPD and required Landlord to cooperate in good faith in executing all documents necessary to cure the HPD harassment finding (id. Section 14.01) and to otherwise to cooperate with Audthan and not to withhold or delay its approval or execution of such documents (id. Sections 33.09 and 33.10).Audthan duly negotiated a settlement with HPD, memorialized in a cure agreement reached in December 2015 (Cure Agreement) (Cooper aff exhibit F [NYSCEF Doc No. 860] ), and sent the Cure Agreement to Landlord for review and execution. Landlord not only failed to execute and return the Cure Agreement but also failed to respond to Audthan's requests that it do so (Cooper aff ¶¶ 15-18), creating one of the disputes that led Audthan to commence this action.
In motion sequence number 003, commenced by notice of motion e-filed on March 9, 2016 (NYSCEF Doc No. 72), Audthan moved for an order to compel Landlord to execute the Cure Agreement and ancillary documents. On May 31, 2017, the court denied Audthan's motion (see decision and order dated May 31, 2017 [NYSCEF Doc No. 253] ). In that decision, the court noted that it appeared that Landlord had not acted in good faith with respect to the Cure Agreement but concluded that the injunctive relief sought must be denied because Audthan had not demonstrated irreparable harm, as it had not shown that denial of the motion would cause the project to fail, and because the balance of the equities favored Landlord as the relief sought, if granted, would change the status quo (id. at 7, 9-11).
In motion sequence number 019, Audthan moves to have its use and occupancy charges under the Lease eliminated or reduced. Audthan asserts this should be done because it continues to be charged for use and occupancy of a leasehold to which Landlord has denied it any benefit by virtue of Landlord's refusal to sign the Cure Agreement as required under the terms of the Lease. Audthan contends that the continued imposition of use and occupancy charges, exacerbated by the financial harm the Covid-19 epidemic is causing the real estate industry, creates the risk that it may not be able to complete its development project at the Property.
Landlord opposes and cross-moves to vacate the Yellowstone injunctions previously granted in this action on the ground that Audthan has failed to comply with conditions of the stay thereunder, namely the alleged insurance defaults asserted by Landlord's expert in opposition to Audthan's motion sequences number 017 and 018.
"[I]t is a basic principle of equity that, in a proper proceeding, the court that issued an injunction may modify its provisions to conform to changed conditions" ( Board of Trustees of Town of Huntington v. W. Wilton Wood, Inc. , 97 AD2d 781, 782 [2d Dept 1983], appeal dismissed 61 NY2d 605, lv dismissed 61 NY2d 904 [1984] [citations omitted] ). "A motion to vacate or modify a preliminary injunction is addressed to the sound discretion of the court and may be granted upon ‘compelling or changed circumstances that render continuation of the injunction inequitable’ " ( Thompson v. 76 Corp. , 54 AD3d 844, 846 [2d Dept 2008], quoting Wellbilt Equip. Corp. v. Red Eye Grill, 308 AD2d 411 [1st Dept 2003] ).
Although Audthan's argument is well taken, Audthan again does not allege that denial of the motion will cause its project to fail. As neither the continued delay in construction nor the continued costs incurred constitute a change in circumstances, or justify changing the status quo, Audthan's motion must be denied. Landlord's cross motion must also be denied, as the grant of the Yellowstone injunction in motion sequence number 018 moots its arguments.
Accordingly, it is
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, May 31, 2017, and July 29, 2020, as to all outstanding violations Landlord has listed in the July 2015, June 2016, October 2017, and February 2020 Notices; and it is further
ORDERED that Audthan's motion for leave to serve its proposed second amended complaint is hereby granted and Audthan is directed to serve the proposed second amended complaint upon Landlord's attorney within 10 days after service of a copy of this order with notice of entry hereof; and it is further
ORDERED that Landlord has 20 days from the date of service of the second amended complaint to serve an answer thereto; 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 the 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 Audthan's motion for a preliminary injunction pursuant to CPLR 6301 is denied as moot; and it is further
ORDERED that Audthan's motion to reduce or eliminate its use and occupancy charges under the Lease is denied; and it is further
ORDERED that Landlord's cross-motion to vacate the Yellowstone injunctions previously granted by this court is denied; and it is further
ORDERED that all additional discovery in this matter shall be completed within 60 days from the date of service of a copy of this order with notice of entry; and it is further
ORDERED that, within 15 days from completion of discovery, plaintiff Audthan LLC shall cause the action to be placed upon the trial calendar by the filing of a new note of issue and certificate of readiness (for which no fee shall be imposed), to which shall be attached a copy of this order; and it is further
ORDERED that the parties shall appear for a virtual status conference in Part 43 on February 11, 2021, at 11:00 a.m.