Opinion
BRSC 284-09
10-30-2009
BRUCE HANSEN AND JOANNE ALONSO, Plaintiffs, v. JOHN LORENZO, Defendant.
This small claims action was commenced by plaintiffs Bruce Hansen ("Mr. Hansen") and Joanne Alonso ("Ms. Alonso") (collectively, Mr. Hansen and Ms. Alonso are "Plaintiffs" or "Tenants") on or about March 23, 2009 seeking damages in the amount of $3,600 for the return of their security deposit given to defendant John Lorenzo ("Mr. Lorenzo" or "Landlord" or "Defendant") pursuant to a certain lease agreement dated September 1, 2007. Defendant denied the substantive allegations of the Complaint and asserted counterclaims for property damage, unpaid rent, use and occupancy, and attorney's fees.
The parties appeared by counsel at the trial de novo on October 1st and 5th, 2009. Following the completion of the trial, counsel, with permission of the Court, submitted post-trial letter memoranda of law. Below are the Court's findings of facts and conclusions of law.
FINDINGS OF FACT
Upon careful consideration and review of the credible testimony and evidence, the Court finds the parties entered into a month-to-month written lease agreement for the premises located at 53 South Evergreen Drive, Selden, NY commencing on or about September 1, 2007 ("the Lease") (Plaintiffs' Exhibit 1). According to the Lease, the monthly rent was $1,800 plus utilities, and was due on the 15th day of each month. At the commencement of the Lease, Plaintiffs paid the last month's rent ($1,800) and further gave a $3,600 security deposit (Id.).
At trial, counsel stipulated that Defendant and non-party Craig Leonard ("Mr. Leonard") are partners and co-Landlords for the transaction herein. The Court further notes that although he was present at trial, Mr. Lorenzo did not take the witness stand to refute any of the claims herein.
Neither party offered an explanation why Mr. Leonard, who testified at trial and was identified as a "Landlord" in the Lease, was not named as a Defendant.
In any event, it was undisputed that Mr. Leonard deposited Plaintiffs' security deposit in an account containing personal funds maintained at Washington Mutual Bank. He further testified that the security deposit was neither used to satisfy the Judgment awarded in the related summary proceeding discussed below nor applied towards rental arrears. Instead, Mr. Leonard testified that the security deposit was used to make repairs to the premises after Plaintiffs vacated. However, Mr. Leonard did not substantiate with any detail the repairs performed and no corroborating documentary evidence was offered.
THE PRIOR LANDLORD-TENANT SUMMARY PROCEEDING
The Court takes Judicial Notice of a previously adjudicated non-payment summary proceeding commenced by Defendant herein captioned John Lorenzo v. Bruce Hansen and Joanne Alonso, BRLT 1294-08 ("Summary Proceeding"). The parties settled that proceeding by Stipulation of Settlement, dated April 30, 2008, a copy of which was introduced at the trial herein as Plaintiffs' Exhibit 2. Pursuant to the Stipulation of Settlement, Plaintiffs acknowledged rental arrears of $1,800 which they agreed to pay on or before May 14, 2008. Plaintiffs further agreed to vacate the premises on or before June 14, 2008 (Plaintiffs' Exhibit 2).
According to the Court's file, on or about May 22, 2008, due to Plaintiffs' noncompliance with the Stipulation of Settlement, Defendant was awarded a Judgment against Plaintiffs in the amount of $1,300 and a Warrant of Eviction was issued. Apparently, Plaintiffs remained in possession of the premises until on or about July 14, 2009, one (1) month following the agreed upon vacatur date. Defendant herein alleged in the counterclaim that he is entitled to the fair rental value of the premises for the additional month as use and occupancy, or, in the alternative, an offset against Plaintiffs' claim for the return of their security deposit.
CONCLUSIONS OF LAW
Notwithstanding the various disputes raised at trial regarding payments purportedly made by Plaintiffs pursuant to the Lease and/or the Stipulation of Settlement in the Summary Proceeding, the issue before this Court is whether Plaintiffs are entitled to the return of their security deposit, and, if so, is Defendant entitled to an offset against those funds. For the reasons discussed below, the Court answers the former question in the affirmative and the latter question in the negative.
I. Plaintiffs' Claim for the Return of their Security Deposit
As stated previously, it was undisputed that Defendant's partner and co-Landlord Mr. Leonard commingled Plaintiffs' security deposit and those funds remained in a personal bank account until after Plaintiffs vacated the premises. The Court notes that although the Defendant herein did not actually convert the security deposit, he is nonetheless responsible for his partner's violation of the fiduciary relationship (See McMaster v. Pearse, 9 Misc 3d 964, 804 NYS2d 640 (NY Civil Ct. 2005) ("The obligation [of a landlord relating to security deposits] . . . do[es] not permit a cofiduciary to claim exemption from responsibility based upon passivity, ignorance of the law, or even the contrary advice of counsel")).
It is well-established that where a landlord commingles a security deposit with personal funds, the commingling constitutes a conversion, and the tenant is entitled to the immediate return of the commingled funds (See General Obligations § 7-103; LeRoy v. Sayers, 217 AD2d 63, 635 NYS2d 217 (1st Dep't 1995)). Consequently, Defendant's claim for an offset against the security deposit due to Plaintiffs' failure to fulfill their contractual obligations pursuant to the Lease is misplaced.
As a general principle, "[t]he right of setoff . . . allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A" (See Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138 (2d Cir. 2002) (internal citation omitted)). To permit a setoff as Defendant requests, the debt and credit must have been mutual inasmuch that they were "due to and from the same persons in the same capacity" (In re Midland Ins. Co., 79 NY2d 253, 582 NYS2d 58 (1992) (emphasis added) (holding that the transactions need not be the same for there to be mutuality in the obligations)). On the other hand, an offset is not permitted where the "obligations lack mutuality . . . [for instance] where one party is a trust beneficiary asserting his or her rights against a trustee, and the other is a creditor exercising his or her contractual rights" (Westinghouse Credit Corp., supra, 278 F.3d at 149 (emphasis added) (quoting In re Consolidated Indem. & Ins. Co., 287 NY 34 (1941)).
The latter is precisely the situation presented here. The relationship between landlord and tenant has been changed by General Obligations Law § 7-103 "from [that of] debtor-creditor to trustee-cestui que trust" (In re Perfection Technical Servs. Press, Inc., 22 AD2d 352, 256 NYS2d 166 (2d Dep't 1965), aff'd, 18 NY2d 644, 273 NYS2d 71 (1966)). In other words, the obligation of Defendant Landlord to refrain from commingling Plaintiffs' security deposit and Plaintiffs' contractual obligations pursuant to the Lease lack the requisite mutuality to permit an offset; the former asserted by trust beneficiaries [Plaintiffs] seeking the return of their security deposit and the latter by a creditor [Defendant] seeking enforcement of contractual obligations under the Lease (See generally Fore Improvement Corp. v. Selig, 278 F.2d 143 (2d Cir. 1960)).
The Appellate Division, Second Department addressed this issue in In re Perfection Technical Servs. Press, Inc., supra . In that case, the Court, in reversing the Appellate Term, held that a landlord who commingled the tenant's security deposit could not subsequently use those funds as an offset for unpaid rent when the assignee for the creditors sought to recover the commingled security deposit (Id., 22 AD2d at 356, 256 NYS2d at 170). The Court held:
The inability of the commingling landlord to set off claims against the deposit flows from the change in his legal status. He does not owe a debt as he once did; he owes a duty not to commingle the deposit with his own funds. Upon a breach of that duty, he forfeits his right to avail himself of the deposit for any purpose. To allow him to set off the deposit against his individual claims is to treat the deposit as a debt and the landlord as a debtor — precisely the situation which section 233 was enacted to change (Id.).
More recently, Courts have directed the immediate forfeiture of the commingled security deposit and barred an offset in favor of the offending Landlord notwithstanding the fact the tenant had breached the lease (See Dan Klores Assocs., Inc. v. Abramoff, 288 AD2d 121, 121-22, 733 NYS2d 388 (1st Dep't 2001) (holding that a landlord who commingled the security deposit may not use the deposit to "offset . . . justifiable repair costs after the tenant vacates); Kelligrew v. Lynch, 2 Misc 3d 135A, 784 NYS2d 921 [App. Term 9th & 10th Jud. Dists. 2004] (holding that the "[t]enant's failure to comply with the terms of a lease is not a defense to a landlord's breach of the duty not to commingle the [security] deposit with personal funds"); Vidipax, LLC v. Brown Bear Realty Corp., 22 Misc 3d 1104A, 880 NYS2d 228 (NY Sup. Ct. Jan. 7, 2009) ("[Where there is] commingling at the time of lease expiration . . . defendant [Landlord] forfeited any right he had to avail himself of the security deposit for any purpose entitling plaintiff to its immediate return notwithstanding that plaintiff may have breached the lease") (internal citations omitted)).
In the instant matter, since it is undisputed that Mr. Leonard in his capacity as trustee breached his duty to refrain from commingling Plaintiffs' security deposit, and further since Defendant may not claim an exemption for his partner's breach of their fiduciary duty, an offset by the Landlord against other monies due is not permissible. Parenthetically, although Plaintiffs' counsel conceded during closing statements that Plaintiffs owed Defendant $1,400, the Court is constrained by the law as stated above and will not direct an offset. Moreover, the Court notes that even if an offset was permitted in this case, which it is not, Mr. Leonard claimed that he used the security deposit to pay for repairs to the premises but he failed to substantiate that the purported repairs were required, performed and/or the alleged damage was caused by Plaintiffs.
The Court's decision is not intended to suggest that a landlord who commingles a tenant's security deposit with personal funds does not have an opportunity to cure the conversion. Indeed, a landlord revives its right to hold the deposit where the commingled funds are deposited into a segregated account prior to the expiration of the lease and commencement of an action by the tenant to recover the deposit (See McMaster, supra, 9 Misc 3d at 966-67, 804 NYS2d at 643 & n.2 (NY City Civ. Ct. 2005) (citing Milton R. Friedman, Friedman on Leases § 20.4 [Nature of Security Deposit — Statutes], at 1293 [4th ed. PLI 1997] ("Landlord's right to the security [deposit] is revived if the commingling ceases before tenant brings an action to recover the deposit. But segregation after expiration of the term and vacation by tenant is held too late for such revival"))).
Finally, although not raised by the parties at trial, the Court finds paragraph 35 of the Lease, which provided "Should the Tenant default under the terms of this lease, Tenant will forfeit security and waive all rights to it", to be void under General Obligations Law § 7-103 as the provisions of the statute cannot be waived.
Accordingly, Plaintiffs have demonstrated by a preponderance of the evidence their right to an award for the return of their commingled security deposit in the amount of $3,600, with interest from the earliest date of the conversion, which in this case was the date of inception of the Lease, September 1, 2007 (See Vidipax, LLC, supra, 22 Misc 3d 1104A, 880 NYS2d 228), plus costs.
II. The Counterclaim — Defendant is Not Entitled to An Award of Attorney's Fees
At trial, Defendant's counsel asserted that the counterclaims were withdrawn with the exception of the claim for attorney's fees. Accordingly, paragraph 18 of the Lease provided, inter alia, that Defendant is entitled to an award for attorney's fees associated with "Landlord's cost of re-renting" the premises in the event of a breach by Plaintiffs (Plaintiffs' Exhibit 1, at ¶ 18). While this section of the attorney's fees provision is inapplicable to the herein matter, that paragraph further provided that "[I]n the event of a dispossess proceeding or any other lawsuit arising out of this Lease, Tenant specifically agrees to pay Landlord[] reasonable attorney's fees plus costs and disbursements [or] any such action" (Id.)
Initially, the Court notes that Defendant could not recover attorney's fees in the Summary Proceeding because the Lease did not deem attorney's fees as "additional rent" (See Henry v. Simon, 2009 NY Slip Op. 51369U, 2009 NY Misc. LEXIS 1638 [App. Term 9th & 10th Jud. Dists. June 29, 2009]; Binghamton Housing Auth. v. Douglas, 217 AD2d 897, 630 NYS2d 144 (3d Dep't 1995); Acierno v. Faldich, 4 Misc 3d 98, 782 NYS2d 509 [App. Term 9th & 10th Jud. Dists. 2004]; RPAPL § 741(5)). Defendant, however, is permitted to seek attorney's fees from the Summary Proceeding in this small claims action, which were plead as a counterclaim, notwithstanding the fact he did not pursue them at arbitration. However, inasmuch as Defendant failed to substantiate the claim and/or submit time entries identifying the dates, amount of time devoted and description of the legal services provided in the Summary Proceeding, an award of attorney's fees is not justified.
Accordingly, it is hereby,
ORDERED, that judgment is awarded to Plaintiffs against Defendant in the amount of $3,600, with interest from September 1, 2007, plus costs; and it is hereby further
ORDERED, that the counterclaim is dismissed.
This constitutes at the Decision and Order of the Court.