172 Van Duzer Realty Corp., Respondent,v.Globe Alumni Student Assistance Association, Inc., et al., Appellants.BriefN.Y.November 19, 2014To be Argued by: NOAH B. POTTER (Time Requested: 15 Minutes) APL 2013-00284 New York County Clerk’s Index No. 113137/09 Court of Appeals of the State of New York 172 VAN DUZER REALTY CORP., Plaintiff-Respondent, - against - GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC. and GLOBE INSTITUTE OF TECHNOLOGY, INC., Defendants-Appellants. BRIEF FOR PLAINTIFF-RESPONDENT Of Counsel: STEVEN D. SKOLNIK SANFORD HAUSLER COX PADMORE SKOLNIK & SHAKARCHY LLP Attorneys for Plaintiff-Respondent 630 Third Avenue, 19th Floor New York, New York 10017 Tel.: (212) 953-6633 Fax: (212) 949-6943 Date of Completion: April 9, 2014 i TABLE OF CONTENTS DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(f)…………….…viii TABLE OF AUTHORITIES……………………………………....……...........iv-vii STATEMENT PURSUANT TO RULE 500.13(a)…………….…………...……..ix PRELIMINARY STATEMENT………………………………………………………..……...1 COUNTER-STATEMENT OF QUESTIONS PRESENTED………...………..….3 COUNTER-STATEMENT OF FACTS…………………….………...…………………………...……...…..5 A. Factual Background………………………………………………...………..5 B. Summary of Legal Arguments and Holdings in the Courts Below……………………………………………………..….…........9 1. Arguments before the Supreme Court………………………...………....9 2. The Supreme Court’s reasoning……………………………………..…11 3. The Appellate Division’s Decision………………………………….…12 ARGUMENT……………………….………………………………………....….13 POINT I - JUDGMENT ENFORCING THE ACCELERATION CLAUSE IS APPROPRIATE BECAUSE APPLELLANTS FAILED TO MEET THEIR BURDEN OF PROOF……………...13 A. The party seeking to avoid a liquidated damages clause on the grounds that it is really a penalty bears the burden of demonstrating that at the time of contract execution (a) damages were easily ascertainable or ii (b) the damages fixed in the contract were conspicuously disproportionate to the non-breaching party’s probable loss...………………………….…..…..13 B. New York presumes the enforceability of liquidated damages provisions ………………………………………...…………………………...15 C. Defendants raised no triable issue of material fact as to whether the Acceleration Clause is a penalty.…….………………………………........…..20 D. Truck Rent-A-Center mandates affirmance ……………………………..........23 POINT II - THIS COURT SHOULD PROTECT FREEDOM OF CONTRACT BY REJECTING THE EXTREME CHANGES PROPOSED BY DEFENDANTS……………....26 A. Appellants’ first argument is based on semantics and is obviously without substantive basis……………………………….……………….…27 B. Appellants’ argument based on Benderson should be disregarded……….....30 C. Appellants’ claim that New York courts do not enforce post- termination “acceleration clauses” without a duty to mitigate is irrelevant but also inaccurate…………………………………………...….35 D. There should be no per se rule that the absence of a duty to mitigate damages makes the damages amount disproportionate to the lessor’s harm and therefore a penalty…………………………….…37 E. A liquidated damages clause categorically obviates the duty to mitigate……………………………………………………………….…38 F. The current New York test is not broken so there is no need to fix it……………………………………………………………………..41 G. A view of some of the other states…………………………………………..43 iii H. Ross Realty, the New York decision on which Appellants rely, is infirm and should be overruled………………..…….…49 I. Appellants’ public policy arguments do not support the drastic changes they seek from the judiciary……………………...……..…50 POINT III - APPELLANTS’ OWN LEGAL AUTHORITY SHOWS THAT PLAINTIFF’S CLAIM IS NOT BARRED BY RES JUDICATA……………………..……..53 CONCLUSION…………...…………………………………………………....…55 iv TABLE OF AUTHORITIES CASES Page(s) STATE 1422 Corp. v Rosenfeld, 44 A.D.3d 451 (1st Dep’t 2007)……………………………..….……………..55 186-90 Joralemon Associates v. Dianzon, 161 A.D.2d 329 (1st Dept 1990)…………………………………….…..…12, 28 American Capital Access Service Corporation v. Muessel, 28 A.D.3d 395 (1st Dept 2006)………………….……………………………..38 Bates Advertising USA Inc. v. 498 Seventh LLC, 7 N.Y.3d 115 (2006)………………….…………………….3, 16, 18, 20, 33, 37 Benderson v Poss, 142 A.D.2d 937 (4th Dept 1988)……….....………….……..11, 27, 30-33, 49-50 Boyle v. Petrie Stores Corp., 136 Misc.2d 380 (Sup Ct. New York County 1985)…………….…………….33 Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997)…………………….………………………………....48 Burke v. Aspland, 56 A.D.3d 1001 (3rd Dept 2008)……………………………………………….54 Crown It Services, Inc. v. Koval-Olsen, 11 A.D.3d 263 (1st Dep’t 2004)…………………………………..….……32, 38 Cummings Properties, LLC v. National Communications Corp., 449 Mass. 490 (2007)……………...………………………………………44-45 Delvecchio v. Bayside Chrysler Plymouth Jeep Eagle, Inc., 271 A.D.2d 636 (2nd Dep’t 2000)…………………………………….………..39 v Dresses for Less, Inc. v. Lenroth Realty Co., 250 A.D.2d 220 (1st Dep’t 1999)………………...…………………………….37 Fairfield Lease Corp. v Marsi Dress Corp., 60 Misc.2d 363 (NY City Civ. Ct. 1969)……...…...………………...…….34-35 Federal Realty Limited Partnership v. Choices Women’s Medical Center, Inc., 289 A.D.2d 439 (2d Dep’t 2001)…………………………………………..39-40 Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, 57 (1979)………………………...………………..15, 27, 29-30 Gallery at Fulton Street, LLC. v. Wendnew LLC, 30 A.D.3d 221 (1st Dep’t 2010)…….…………………….……………..…11, 28 Gannett Suburban Newspapers v. El-Kam Realty Co., 306 A.D.2d 312 (2d Dep’t 2003)……………………………………………..37 Holy Properties Limited, L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130 (1995)…………..……..……………………….10, 11, 28-30, 43 International Publications, Inc. v. Matchabelli, 260 N.Y. 451 (1933)……..………….…………………………………….27, 30 JMD Holding Corp. v. Congress Financial Corp., 4 N.Y.2d 373 (2005)...……………………..………...,,,,,,3,14-16, 18, 23, 24, 37 Kabro Associates of Woodbury v. Off-Campus of Woodbury, Inc., N.Y.L.J., Nov. 16, 1992 at 32 (col. 5)………..………….…..……………….49 Lee Builders v. Wells, 103 A.2d 918 (Del. 1954)….…………………………………………………..48 Long Island Rail Road Co. v. Northville Industries Corp., 41 N.Y.2d 455 (1977)………………………………………………………….28 Matter of Hunter, 42 N.Y.3d 260 (2005)……….…………………………………………………55 vi New 24 West 40th Street LLC v. XE Capital Management, LLC, 104 A.D.3d 513 (1st Dep’t 2013)……………………………..……………36-37 NPS, LLC v. Minihane, 451 Mass. 417 (2008)……………………….……………………………..33, 45 Olim Realty Corporation v. Big John’s Moving, Inc., 250 A.D.2d 744 (2d Dep’t 1998)……...…………….………...………..…28, 37 Parsons & Whittemore, Inc. v. 405 Lexington, 299 A.D.2d 156, 157 (1st Dept 2002)…………..………………11, 22, 28, 38-39 Patchogue Associates v. Sears, Roebuck and Co., 108 A.D.3d 659 (2d Dep’t 2013)………………..…………………………….54 Rand v. Conklin, N.Y.L.J., Jan. 7, 1994, at 29, col. 1…………………………….……………..49 Ring v. Printmaking Workshop, Inc., 70 A.D.3d 480 (1st Dep’t 2010)…………….…...…………………11-12, 28, 37 Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246 (App. T. 2d Dep’t 2004)..….……....…………..11, 27, 49-50, 53 Ross Realty v. V & A Iron Fabricators, Inc., 42 A.D.3d 246 (2nd Dep’t 2007)...………………………………....…….…53-54 Ruth v Shalom Brothers, 276 A.D.2d 408 (1st Dep’t 2000)………………………………………………54 Silver v. Brody, N.Y.L.J., Apr. 23, 1993 at 25 (col. 6)……………...……………….………....49 Stats, LLC v. Elevation, Inc., 2008 NY Slip Op 32449(U), 2008 N.Y. Misc. LEXIS 9622 (Sup Ct, New York County 2008)…………...……..…………………...…34-35 Tenber Associates v. Bloomberg L.P., 51 A.D.3d 573 (1st Dept 2008)………………………...………………….…...20 vii Truck-Rent-a-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1997)………..3, 13, 14, 16, 22-25, 27, 31-32, 34, 36- 37, 41-43 Truck-Rent-a-Center, Inc. v. Puritan Farms 2nd, Inc., 51 A.D.2d 786 (2d Dep’t 1976)…….……………………..…………………..24 Turner-Schraeter v. Brighton Travel Bureau, Inc., 258 A.D.2d 393 (2d Dep’t 1999)…………..…………………………..32-33, 39 Vanguard Commercial Leasing Corp. v. Dayanzadeh, 147 A.D.2d 557 (2nd Dept 1989)………………………...….……………...34-35 FEDERAL Gotlieb v. Taco Bell Corp., 871 F. Supp. 147 (E.D.N.Y. 1994)………...…………….………………..33-34 Oscar De La Renta, Ltd. v. Mulberry Thai Silks, Inc., 2009 WL 1054830 [S.D. N.Y. Apr. 17, 2009, No. 08 Civ. 4341 (RJS)]….......40 W & G Seaford Associates, L.P. v. Eastern Short Markets, Inc., 714 F.Supp. 1336 (D. Del. 1989)………………………….……………….46-47 XCO Intl Inc. v. Pacific Scientific Co., 369 F.3d 998 (7th Cir.2004)………………………………...…………..15-16, 44 STATUTES California Civ. Code §1951.2……………………….…………………………….52 735 ILCS § 5/9-213.1…………………………..……………………………...52-53 New York City Civil Court Act § 204……………………………………………54 New York Uniform District Court Act § 204…………..…………………...……54 DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(t) Plaintiff-Respondent 172 Van Duzer Realty Corp. has no parents, subsidiaries or affiliates. Dated: April 9, 2014 COX P ADM ORE SKOLNIK & SHAKARCHYLLP Attorneys for 172 Van Duzer Realty Corp. ~~ By: __ ~~ __ ~~ ____ _ No POtter: ~. 630 Third Avenue, 19th Floor New York, NY 10017 (212) 953-6633 Vill STATEMENT PURSUANT TO RULE 500.13(a) Upon information and belief, as of the date of the completion of this memorandum of law, following is the status of the only actions related to the action that is the subject of this appeal: 1. "Commerce Bank, N.A., Plaintiff, v. Globe Institute of Technology, Inc. Oleg Rabinovich, and Lyubov Rabinovich a1k/a Luba Rabinovich, Defendants," Supreme Court of New York, County of New York, Index Number 603917/2007; "Globe Institute of Technology, Inc., Oleg Rabinovich, and Luba Rabinovich, Third-Party Plaintiffs, against 878 Education, LLC Michael Goldstein, Dow Lohnes, PLLC, v. Martin Oliner, and ISO LLC, Third-Party Defendants," Supreme Court of New York, County of New York Index Number 590034/2008. (a) The action bearing Index Number 603917/2007, an action on a personal guarantee, has been discontinued. (b) Summary judgment motions have been disposed and a note of issue has been filed in the action bearing Index Number 500034/2008, an action in which the parties asserts claims and counterclaims for breach of contract. 2. "172 Van Duzer Realty Corp., Plaintiff, v. 878 Education LLC, ISO LLC, Martin Oliner individually and DIBI A ISO LLC, Globe Institute of Technology, Inc., Globe Alumni Student Assistance Association, Inc., Muirta, LLC, Oleg Rabinovich, Lyubov Rabinovich A/KJA Luba Rabinovich, Michael IX Rabinovich, Edward Rabinovich, John Does 1-50, and ABC Corps. 1-50, Defendants," Supreme Court of New York, County of New York Index Number 653767/2013. The summons and complaint have been served and answers are due from all defendants in this action for relief from a fraudulent conveyance. Dated: April 9, 2014 cox P ADMORE SKOLNIK & SHAKARCHY LLP Attorneys for 172 Van Duzer Realty Corp. //;?--- By: _______ ~ __________ _ Noah Potter, Esq. 630 Third Avenue, 19th Floor New York, NY 10017 (212) 953-6633 x 1 PRELIMINARY STATEMENT Defendants-appellants herein are Globe Alumni Student Assistance Association, Inc., a former commercial tenant, and its guarantor, Globe Institute of Technology Inc. (the “Association” and “Globe,” respectively; collectively “Appellants”), who argue that this Court should make radical changes to New York’s well-settled law of liquidated damages. They ask the Court to recognize a purported “modern trend” in the law requiring a commercial landlord to mitigate its damages when its tenant simply abandons the leased premises. However, this Court has recently recognized a better trend: favoring enforcement of liquidated damages provisions for which parties have freely contracted in the marketplace. In opposition to the motion for summary judgment in the lower court, Appellants did not attempt to meet their burden of proof to avoid enforcement of the liquidated damages provision at issue. Instead they argued that New York should reverse the burden of proof and transfer it from the breaching party to the non-breaching party. They failed to explain why long-standing New York law is insufficient to protect the rights of contracting parties, and instead they come before this Court invoking various foreign judicial decisions and law journal articles that are inconsistent with each other and asking that the Court do an unspecified “something” to relieve them of liability. Appellants are not entitled to said relief. Instead, this case, in which the tenant abandoned the leased premises 2 after plaintiff-respondent 172 Van Duzer Realty Corp. (“Plaintiff”), a commercial landlord, impaired its ability to use its property for Appellants’ particular benefit, is an exemplar of why and when a liquidated damages provision should be enforced. Summary judgment for Plaintiff was entirely appropriate and should be affirmed. The Association, as tenant, entered into a nine-year extension of a lease with Plaintiff for certain real property (the “Premises”) owned by Plaintiff to be used as a dormitory for students attending a for-profit school operated by Globe. In order to obtain a certificate of occupancy from the New York City Department of Buildings, Plaintiff and the Association executed a “restrictive declaration” that allows the Premises to be used only as a student dormitory. Less than six months after executing the lease extension and the restrictive declaration, Globe sold all its assets and the Association abandoned the Premises. The lease between the Association and Plaintiff contains a provision liquidating damages as the amount of “accelerated rent,” i.e., the balance of the rent reserved under the unexpired term of the lease at the time of lease termination. Plaintiff commenced suit against Appellants seeking damages calculated as the accelerated rent. In opposition to Plaintiff’s motion for summary judgment on liability, Appellants argued that the liquidated damages provision is really a penalty and therefore unenforceable as against public policy. The lower court 3 awarded summary judgment in Plaintiff’s favor and the Appellate Division, First Department affirmed. A party seeking to avoid a liquidated damages provision bears the burden of raising a triable issue of fact as to whether the provision is a penalty, as stated unequivocally by this Court in Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977), and its progeny, JMD Holding Corp. v. Congress Financial Corp., 4 N.Y.2d 373 (2005), and Bates Advertising USA Inc. v. 498 Seventh LLC, 7 N.Y.3d 115 (2006). Appellants did not attempt to raise a triable issue of fact. Instead they argued that New York must adopt a rule that a clause liquidating damages as the amount of “accelerated rent” is per se a penalty unless the lease requires the landlord to mitigate its damages and that the liquidated damages provision in the lease at bar is unenforceable because Plaintiff is not required to mitigate its damages under the terms of the lease. COUNTER-STATEMENT OF QUESTIONS PRESENTED 1. QUESTION: Where a commercial lease contains an “acceleration clause” providing that the tenant remains liable for damages after lease termination, including liquidated damages measured as the combined total of monthly rental payments remaining in the lease term at the time of lease termination, did the lower court err: (a) in holding the acceleration clause enforceable, (b) rejecting Defendants’ argument that liquidated damages calculated as the amount of unpaid 4 rent is per se so plainly and grossly disproportionate to the landlord’s probable loss that the clause should be considered an unenforceable penalty, and (c) disregarding the fact that the lease contained no provision requiring the landlord to mitigate damages? ANSWER: The Court answered this question “no.” Plaintiff submits that the Court’s answer is correct. 2. QUESTION: Where a landlord and tenant execute a restrictive declaration that impairs landlord’s ability to relet its premises specifically for the tenant’s benefit so that the tenant can use and occupy the premises for a student dormitory and the tenant abandons the premises prior to the end of the lease term, did the lower court err in enforcing an accelerated rent clause? ANSWER: The Court answered this question “no.” Plaintiff submits that the Court’s answer is correct. 3. QUESTION: Where a landlord commences a proceeding in the New York City Civil Court for summary possession of its property and the judgment of possession includes an award of zero dollars for rent, did the lower court err in holding that landlord’s claims in a plenary action in the Supreme Court for future rents pursuant to an acceleration clause in the lease were not barred by res judicata? ANSWER: The Court answered this question “no.” Plaintiff submits that the Court’s answer is correct. 5 COUNTER-STATEMENT OF FACTS A. Factual Background Plaintiff is the owner of certain real property (the “Premises”) located in Staten Island. R40.1 Plaintiff, as landlord, and the Association, as tenant, entered into a written lease agreement dated September 1, 2006 (the “Initial Lease”) for the Premises. R47-71. The one-year term of the Initial Lease commenced September 1, 2006. R47. The Initial Lease provides that the Association “shall use the Leased Premises as a dormitory for persons affiliated with Tenant ….” R55. Paragraph 23(c) of the Initial Lease provides in relevant part that, upon lease termination or repossession of the Premises, Plaintiff: shall be entitled to recover, as liquidated damages a sum of money equal to the total of (i) the cost of recovering the Leased Premises, (ii) the unpaid rent earned at the time of termination, plus interest thereon, (iii) late charges on unpaid rent and accrued interest thereon in an amount equal to fifteen percent (15%) per annum, (iv) the balance of the rent for the remainder of the term, (v) any other sum of money and damages reasonably necessary to compensate Landlord for the detriment caused by Tenant’s Default…. In the event of Lease termination Tenant shall continue to be obligated to pay rent and additional rent for the entire Term as though this Lease had not been terminated. R63 (emphasis added). (The text relating to rental amounts due for the balance of 1 Citations to the record on appeal are indicated by the capital letter R followed by the page numbers. 6 the term is the “Acceleration Clause.”) Paragraph 38 provides that “Tenant’s obligation to pay Fixed Rent and additional rent shall survive the expiration or termination of the Term of this Lease.” R67. By a subsequent agreement (the “Lease Extension”) dated May 9, 2007, the term of the Lease was extended for a period of nine years commencing September 1, 2007. R72.2 (The Initial Lease and the Lease Extension are collectively referred to as the “Lease.”) Collectively these provisions of the Lease demonstrate that the parties agreed that after termination the Association would remain obligated to pay an amount calculated as the balance of the rent due for the remainder of the nine-year lease term. The Premises were used as a dormitory for students of Globe, which was operating a for-profit educational institution. R112. Globe executed, as of May 9, 2007, a guarantee (the “Guarantee”) of the Association’s performance under the Lease. R73-74. The Guarantee provides, among other provisions, that Globe would be bound jointly and severally with the Association, R73, that all obligations under the Guarantee were independent of the obligations of the Association and that a separate action could be brought against 2 The Lease Extension at paragraph 2 states that the extended term will commence on the date subsequent to the Expiration Date set forth in the Initial Lease. The Expiration Date is defined in the Initial Lease as the day before the anniversary of the Initial Lease, that being September 1, 2006. R47. 7 Globe whether or not an action was commenced against the Association. R74. On or about June 11, 2007, Plaintiff and the Association executed a Student Dormitory Restrictive Declaration (the “Restrictive Declaration”) with regard to the Premises. R126-27. By executing the Restrictive Declaration, Plaintiff and the Association acknowledged that (a) the Premises would be used only as a student dormitory, (b) the Restrictive Declaration was a condition of issuance of a building permit for the Premises so that the Association could use them as a student dormitory, (c) failure to comply with the terms of the Restrictive Declaration could result in revocation of the building permit or certificate of occupancy for the Premises, and (d) the Restrictive Declaration could not be modified, amended or terminated without the prior authorization of the New York City Department of Buildings. By executing the Restrictive Declaration, Plaintiff limited its ability to relet the property specifically so that the Association could use the Premises as a student dormitory. R124. At the end of October 2007, five months after the Association executed the nine-year extension of the Lease and Globe executed the Guarantee, and four months after Plaintiff executed the Restrictive Declaration, Globe sold all of its assets. R112. In or about February of 2008, the Association abandoned the Premises, ceased paying monthly rent, and informed Plaintiff that no further payments under 8 the Lease would be made. R43.3 Plaintiff informed the Association that the Lease would be deemed terminated as of March 24, 2008. Id. In or about August 2008, the New York City Civil Court granted Plaintiff a judgment of possession of the Premises based on Plaintiff’s notice terminating the Lease effective March 24, 2008. R43-44. Plaintiff commenced this action in September 2009, R82-92, seeking damages due under the Acceleration Clause against Appellants in the amount of the total rent payments due in the balance of the lease term, R86, 88-89, in accordance with Paragraph 23(c) of the Lease. Appellants served an answer with no affirmative defenses. R93-95. In September 2010, Plaintiff moved for partial summary judgment on the Association’s liability under Paragraph 23(c) and Globe’s liability on the Guarantee. R37-38. The Supreme Court, New York County, granted Plaintiff’s motion by decision and order entered December 16, 2010. R22-36. The parties stipulated to entry of judgment in the amount of $1,488,604.66, which was entered on June 20, 2011. R16-21. 3 The Association left the Premises in a substantial state of disrepair that required extensive expenditures to repair. R43, 87. 9 By order entered January 22, 2013, the Appellate Division, First Department, affirmed the Judgment and the motion court’s order. R6-8. B. Summary of Legal Arguments and Holdings in the Courts Below 1. Arguments before the Supreme Court Plaintiff showed execution of a lease agreement, execution of a guarantee, and breach of the lease agreement. It sought the unpaid rent prior to lease termination. It sought liquidated damages calculated as the amount of total future rent due under the Acceleration Clause. (R39-46) As relevant to this appeal, Appellants argued in opposition that the Acceleration Clause is unenforceable for the following reasons: (a) the Acceleration Clause permits recovery only of “rent” but here the Lease was terminated and there can be no liability for rent after lease termination, R119-21, and (b) an acceleration clause is an unenforceable penalty when the lease does not also impose on the landlord a duty to mitigate damages. R121. They also argued that, if the Supreme Court were to find that Plaintiff could be awarded damages in the aggregate amount of the rents that would come due after lease termination then they were entitled to discovery to demonstrate the lack of proportionality of the liquidated damages to Plaintiff’s probable loss, including the amount of rent that Plaintiff has received or would be likely receive from any new tenant and what efforts were made to obtain a new tenant if the Premises were still vacant. R122. 10 In a footnote, Appellants argued that Plaintiff could not recover in the Supreme Court unpaid rent at the time of lease termination since that issue was or could have been adjudicated in the Civil Court summary proceeding that resulted in a judgment of possession and was therefore barred by res judicata. It simultaneously admitted that damages following lease termination could not have been awarded in the summary proceeding. R122. In reply, Plaintiff argued that a commercial landlord is under no duty to mitigate damages after a tenant abandons leased premises, that the Lease explicitly provided for the Association’s continuing liability after lease termination and that such provisions are enforced in New York, that there was no indication of how liquidated damages in the amount of “accelerated rents” for the balance of the lease term would be disproportionate to Plaintiff’s loss resulting from the Association’s abandonment of the Premises. Instead, the circumstances demonstrated that the parties contemplated the probable loss to Plaintiff in the event of the Association’s abandonment in light of the effect of the Restrictive Declaration and its limitation on Plaintiff’s ability to relet the Premises. R134-35. Plaintiff demonstrated that under Holy Properties, L.P. v. Kenneth Cole, Productions, Inc., 87 N.Y.2d 130 (1995), a commercial landlord is under no duty to mitigate when a tenant abandons the premises. R132. It noted that the Guarantee stated that the obligations thereunder were independent of the Lease 11 obligations, R130-31, and argued that res judicata did not bar Plaintiff’s claims because Globe was not a party to the summary proceeding. R136, fn. 5. 2. The Supreme Court’s reasoning In holding the Acceleration Clause enforceable, the Supreme Court relied on the principle that parties to a commercial lease can contract for the continuing liability of a tenant beyond lease termination, citing Holy Properties, Ring v. Printmaking Workshop, Inc., 70 A.D.3d 480 (1st Dep’t 2010), and Gallery at Fulton Street, LLC. v. Wendnew LLC, 30 A.D.3d 221 (1st Dep’t 2006). R31-32. It also focused on the principle that Plaintiff, a commercial landlord, was under no obligation to mitigate its damages once its tenant abandoned the demised premises, citing Holy Properties again and Parsons & Whittemore, Inc. v. 405 Lexington, 299 A.D.2d 156 (1st Dept 2002). R21. The Supreme Court recognized that the Acceleration Clause expressly permits Plaintiff to recover damages in the amount of the balance of rental payments for the remainder of the lease term upon termination of the Lease. R31- 32. The Court declined to follow the decisions to which Appellants cited, Benderson v. Poss, 142 A.D.2d 937 (4th Dep’t 1988) and Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246, 836 N.Y.S.2d 242 (App. T. 2d Dep’t 2004), on the ground that they conflict with controlling First Department case law that a lease provision holding a tenant liable for rent post-termination of the lease is 12 enforceable, citing to Ring and 186-90 Joralemon Associates v. Dianzon, 161 A.D.2d 329 (1st Dep’t 1990). R32. The Supreme Court found that Globe had failed to raise an issue of fact as to its liability under the Guarantee. It rejected Appellants’ argument that res judicata barred Plaintiff’s claims because (a) Globe was not a party to the summary proceeding and (b) Appellants failed to establish that the issue of amounts due under the Acceleration Clause was necessarily decided there. R35. 3. The Appellate Division’s Decision The Appellate Division unanimously affirmed, holding that Plaintiff made a prima facie showing of its entitlement to “accelerated rent” under the express terms of the Lease which provided that the obligation to pay rent would continue in the event of lease termination and that Appellants failed to raise a triable issue of fact as to whether the liquidated damages was really an unenforceable penalty. It rejected Appellants’ argument that res judicata barred Plaintiff’s claims as damages under the Acceleration Clause could not be recovered in the Civil Court summary proceeding. R8. 13 ARGUMENT POINT I JUDGMENT ENFORCING THE ACCELERATION CLAUSE IS APPROPRIATE BECAUSE APPELLANTS FAILED TO MEET THEIR BURDEN OF PROOF A. The party seeking to avoid a liquidated damages clause on the grounds that it is really a penalty bears the burden of demonstrating that at the time of contract execution (a) damages were easily ascertainable or (b) the damages fixed in the contract were conspicuously disproportionate to the non-breaching party’s probable loss Summary judgment for Plaintiff was proper here for the simple reason that the Appellants, as the parties seeking to avoid a litigation damages provision, bore the burden of proof to show that the liquidated damages provision is a penalty and they failed to meet that burden. New York employs a simple and reasonable test to distinguish an unenforceable penalty from a valid liquidated damages clause. The rule is now well-established. A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. Truck Rent-A-Center, 41 N.Y.2d at 425. Liquidated damages constitute the compensation which, the parties have agreed, should be paid in order to satisfy 14 any loss or injury flowing from a breach of their contract. In effect, a liquidated damages provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of a breach of the agreement. Parties to a contract have the right to agree to such clauses, provided that the clause is neither unconscionable nor contrary to public policy. Provisions for liquidated damages have value in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage. In such cases, the contracting parties may agree between themselves as to the amount of damages to be paid upon breach rather than leaving that amount to the calculation of a court or jury. Id. at 423-24 (emphasis added and internal citations omitted). Whether the early termination fee represents 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. JMD Holding Corp., 4 N.Y.3d at 379. In summary, the essential principles emerging from Truck Rent-A-Center and JMD are as follows: a liquidated damages clause is enforceable under New York law unless the party seeking to avoid the clause as a penalty demonstrates that at the time of contract execution (a) actual damages were “readily ascertainable” or (b) the damages measure was “conspicuously disproportionate” to the non-breaching party’s probable future losses. 15 B. New York presumes the enforceability of liquidated damages provisions Although Appellants speak of a “modern trend” imposing upon lessors a duty to mitigate damages caused by lessees’ breach, Appellants Brief at p. 33, in JMD, this Court expressed its inclination not to interfere with parties’ contracts and pointed to a different trend - a presumption in favor of enforcing liquidated damages clauses, and against invalidating them as penalties. Relatedly, we have cautioned generally against interfering with parties’ agreements (see Fifty States Mgt. Corp. v. Pioneer Auto Parks, 46 N.Y.2d 573, 577, 415 N.Y.S.2d 800, 389 N.E.2d 113 [1979] [“Absent some element of fraud, exploitive over-reaching or unconscionable conduct ... to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties”]; cf. 3 Farnsworth, Contracts § 12.18, at 303-304 [3d ed] [“(I)t has become increasingly difficult to justify the peculiar historical distinction between liquidated damages and penalties. Today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation”]; see also XCO Intl. Inc. v. Pacific Scientific Co., 369 F.3d 998, 1002-1003 [7th Cir.2004] [“The rule (against penalty clauses) hangs on, but is chastened by an emerging presumption against interpreting liquidated damages clauses as penalty clauses”]). In XCO Int’l Inc. v. Pacific Scientific Co., 369 F.3d 998 (7th Cir. 2004), the decision from the United States Court of Appeals for the Seventh Circuit cited in 16 the preceding quote, the Circuit Court characterized the entire concept of a prohibition against penalties as an “anachronism.”4 Indeed, as suggested by the XCO Court, the doctrine of an unenforceable penalty clause is strange in a commercial setting in which there is not also a claim of fraud and/or duress. Surely, the idea of contracting for a penalty suggests a lack of free choice, but the doctrine appears in the context of parties freely contracting at arm’s length in the marketplace. While the rule against penalties survives, it is clear that the inclination in this state, as befits a commercial center, is to hold parties to their agreements and to negate contract provisions sparingly and in rare circumstances, as can be clearly seen in this Court’s decisions in Truck Rent-A-Center, JMD, and Bates. In Truck Rent-A-Center, this Court enforced a liquidated damages provision in a lease for a fleet of milk trucks. There, defendant leased the trucks, which the plaintiff had modified for defendant’s particular purposes, for a three-year term at a weekly rate. The contract provided that upon termination due to defendant’s breach plaintiff would be entitled to liquidated damages in the amount of one half of all the rental payments for the balance of the lease term. Claiming breach by plaintiff, 4 XCO cites to the same quote from Justice Oliver Wendell Holmes to which Appellants cite at page 38 of their brief. Appellants cited to Justice Holmes presumably to demonstrate that it is time for the judiciary to realize that leases are not in any way conveyances of interests in real property but are instead only contracts. XCO cites to Justice Holmes to emphasize that the rule against penalties itself is an anachronism and that the rule continues to exist only because of the slow pace at which the law evolves. 369 F.3d at 1002. 17 defendant returned the trucks to plaintiff despite plaintiff’s threat to sue for liquidated damages. The trial court5 found that the liquidated damages provision was reasonable and a fair estimate of actual damages that would be difficult to ascertain precisely. The Appellate Division affirmed. Affirming, this Court held that the parties could reasonably have concluded at the time of contract execution that there might not be a market for sale or re- rental of those specialized vehicles in the event of defendant’s breach, that the value of the trucks might have declined in value, and that plaintiff might incur costs in storing and maintaining the trucks. In JMD, plaintiff borrower moved for summary judgment on its claims that defendant lender had converted its funds when under the parties’ commercial revolving loan agreement it charged plaintiff’s account six hundred thousand dollars as an early termination fee following plaintiff’s breach of the agreement. Plaintiff argued that the fee, in the amount of one to two percent of the forty million dollar line of credit, was an unenforceable penalty, not legitimate liquidated damages. The lower court granted the motion, holding (as relevant here) under Truck Rent-A-Center that the liquidated damages clause was so 5 The fact that validity of the liquidated damages clause was decided at trial is immaterial even though, as stated above, whether a liquidated damages provision is really a penalty is a matter of law. Unlike the case at bar, there is no indication of any summary judgment motion in Truck Rent-A-Center regarding the liquidated damages clause. That action apparently went to trial to test the preliminary issue of whether plaintiff breached the agreement prior to termination of the agreement by defendant, and the issues were thus decided together. 18 disproportionate to any potential damages as to constitute an unenforceable penalty, and the Appellate Division affirmed. This Court reversed the order of the Appellate Division. This Court carefully examined the allegations as to the costs that the defendant had incurred in making a forty million dollar credit line available to the plaintiff and to various factors bearing on the possible amount of damages that could not be known at the time of contract execution. It found that the plaintiff - the party seeking to avoid the liquidated damages provision - provided no factual basis to support any conclusion that the early termination fee was an unenforceable penalty: it presented no proof that the defendant’s prospective damages upon early termination were capable of precise estimation at the time of contract execution or that the fee was grossly disproportionate to the probable loss. 4 N.Y.3d at 385.6 In Bates, plaintiff commercial tenant sued defendant landlord for a refund of rental payments made during a period in which repairs promised by defendant remained incomplete. Under a rent abatement clause in the lease plaintiff was entitled to an abatement of a half-day’s rent for each day on which certain repairs remained incomplete and a full-day’s rent payment for each day on which other 6 Defendant lender had not cross-moved for summary judgment. Apparently on appeal it realized that the question of whether the early termination fee was a penalty could be decided as a matter of law and requested that this Court search the record and grant it summary judgment. The Court responded that, unlike the lower court or the Appellate Division, it is without power to search the record and grant summary judgment to the non-moving party but that upon remittal of the matter to Supreme Court on other issues defendant could make such a motion. 19 repairs remained incomplete. Plaintiff brought suit after making rental payments while repairs remained incomplete. Initially, the Supreme Court dismissed the claim as a penalty. The Appellate Division reversed, reasoning that it would be difficult to determine what damages plaintiff incurred due to the condition of the building and that the one-to-one proportionality between the days the breach continued and the value of the compensation avoided the possibility that the tenant would obtain a benefit in gross disproportion to the injury it suffered. After a bench trial following remand, the Supreme Court awarded plaintiff a credit against future rent in an amount over four million dollars. The Appellate Division affirmed as did this Court. This Court rejected defendant’s argument that the rent abatement clause was a penalty. Defendant had not attempted to show that damages were readily ascertainable at time of contract execution. Instead it argued that plaintiff’s admission that the clause was intended to “incentivize” defendant to perform and to provide “a club over [defendant’s] head” to make sure that it performed - in other words, that the party’s characterization was determinative of whether the clause was a penalty. In response, this Court returned to the simple question of proportionality: …the prospect of damages in the event of breach may always be said to encourage parties to comply with their contractual obligations. Liquidated damages are not 20 transformed into a penalty merely because they operate in this way as well, so long as they are not grossly out of scale with foreseeable losses. Id. at 120. It agreed with the Appellate Division that defendant did not demonstrate that the damages measure was conspicuously disproportionate to plaintiff’s foreseeable losses.7 See also Tenber Associates v. Bloomberg L.P., 51 A.D.3d 573 (1st Dep’t 2008)(liquidated damages clause in a commercial lease enforceable where the tenant failed to show that damages could be anticipated at the time of lease execution or that the amount was plainly or grossly disproportionate to the probable loss). C. Defendants raised no triable issue of material fact as to whether the Acceleration Clause is a penalty The foregoing authority shows that summary judgment for Plaintiff was entirely proper for the simple reason that Appellants failed to meet their burden of showing that the Acceleration Clause is a penalty and therefore unenforceable. In order to defeat summary judgment for Plaintiff, it was incumbent upon Appellants to come forward with evidence sufficient to raise a triable issue of material fact (a) that Plaintiff’s actual loss resulting from the Association’s breach was readily ascertainable at the time of contract execution or (b) that the damages amount was 7 “In this case, we agree with the Appellate Division that 498 has not demonstrated that the rent abatements are conspicuously disproportionate to Bates's foreseeable losses. Rent abatement was keyed to the number of days of 498's nonperformance, and varied from a half day to a day depending upon the importance of the item of work not completed.” Id. 21 conspicuously disproportionate to Plaintiff’s probable loss resulting from the Association’s breach. See Point I.A, supra. Appellants did not in any way address the question of whether the damages that Plaintiff would suffer from their breach were readily ascertainable at the time of contract execution nor did they attempt to raise a triable issue of fact as to whether the damages fixed under the Acceleration Clause were necessarily improperly disproportionate to Plaintiff’s probable losses predictable at the time of contract execution. For example, they failed to offer any evidence whatsoever concerning the likelihood at the time of contract execution that Plaintiff could re-rent the entire Premises to another school as a dormitory upon the Association’s abandonment in the future or whether Plaintiff would be forced to enter into multiple separate leases directly with students for individual housing units due to the unavailability of a replacement commercial tenant for the entire property. They presented no evidence as to the foreseeable demand for dormitories in the area of Staten Island in which the Premises are located or foreseeable vacancy rates for commercial spaces generally in that area. They failed to demonstrate how damages in an amount no more than the amount of rental payments owing for the balance of the Lease term would be disproportionate to the probable loss that would result if the Association abandoned the Premises prior to lease expiration. They failed to 22 present facts tending to show that the Restrictive Declaration was irrelevant as a basis for a reasonable projection of probable damages to Plaintiff in the event that the Association abandoned the Premises prior to the end of the lease term. They argued to the Appellate Division that it was Plaintiff’s obligation to show that it tried to remove the Restrictive Declaration, but this position is preposterous - it was their burden to show that the Restrictive Declaration could be removed easily. There was no attempt to demonstrate how a damages measurement that decreases as the lease term progresses (i.e. with the passage of each month of the lease term the balance of rental payments for the lease term decreases) is necessarily disproportionate to Plaintiff’s probable losses as opposed to, for example, a flat fee applicable no matter the size of the remaining lease term.8 The failure of Appellants to meet their burden of proof as to either of the two prongs of the Truck Rent-A-Center test is dispositive of this appeal as a basic matter of procedural law familiar to any litigator. The burden of proof was upon 8 Instead, as noted above, Appellants argued to Supreme Court that if the Court were to decide that “rent” could be awarded after lease termination then they were entitled to conduct discovery as to lack of proportionality of the liquidated damages to Plaintiff’s probable loss. That position is a non sequitur: if Supreme Court were to find that Plaintiff was entitled to an award of damages subsequent to termination of the Lease, then the Court would necessarily have found that the Acceleration Clause was a valid liquidated damages provision and there would be no reason to permit discovery as to lack of proportionality. Parsons & Whittemore, Inc., 299 A.D.2d at 157 (after finding that liquidated damages provision was not an unenforceable penalty under the Truck Rent-A-Center test, holding “In light of the validity of the liquidated damages clause, the landlord’s efforts, if any, at reletting the premises are irrelevant”). This is the logical application of the principle that a landlord does not bear the burden of proof to show that it attempted to mitigate damages; indeed the utility of a liquidated damages provision is to avoid the need to conduct an inquiry into post-execution facts. 23 them as the parties seeking to avoid a liquidated damages provision, they had a full and fair opportunity to present their proof and they failed to present any proof as to the first prong (were damages readily ascertainable). As discussed below, instead of presenting proof as to the second prong they argued that New York should abandon the case-by-case analysis mandated under Truck Rent-A-Center and instead adopt a rule that liquidated damages are deemed per se disproportionate to the landlord’s loss if there is not also a duty upon the landlord to mitigate damages. App. Br. Point II. Summary judgment for Plaintiff can be affirmed on the basis of Appellants’ failure to meet their burden of proof, as aptly noted by the Appellate Division. D. Truck Rent-A-Center mandates affirmance Although Appellants’s failure to meet their burden of proof is dispositive in and of itself, it is worth reviewing key facts in the record concerning “the nature of the contract and the circumstances” of this liquidated damages provision. JMD, 4 N.Y.3d at 379. This case is an exemplar of when an acceleration clause should be enforced. Plaintiff and the Association both executed the Restrictive Declaration in June 2007, after the parties agreed that the Premises would be used only as a student 24 dormitory9 and one month after they executed the Lease Extension. R72. The Restrictive Declaration provides that the Premises be used only as a student dormitory, R126, paragraph “1,” and that failure to comply with the terms of the Restrictive Declaration may result in loss of the Premises’ certificate of occupancy. R127, paragraph “7.” There is no dispute that Plaintiff impaired its ability to relet the premises so that the Association could lease a space which Globe could use as a student dormitory or that the Association defaulted in paying rent and then abandoned the Premises in the first year of the nine-year extended lease term. In the decision preceding this Court’s Truck Rent-A-Center decision, the Appellate Division, First Department, focused on the special efforts that plaintiff had taken to make the trucks available to the lessee and stated: The underlying transaction herein was the lease of trucks specifically designed and altered for [lessee’s] use in the retail milk trade….When plaintiff agreed to specifically design and provide trucks for this particular business, the parties, at the time of the inception of the agreement, realized that it would be difficult to compute exactly what damages would result from a future breach of that agreement. It is precisely for such an occasion that a liquidated damage clause is appropriate. Truck-Rent-a-Center, Inc. v. Puritan Farms 2nd, Inc., 51 A.D.2d 786, 787 (2nd Dept 1976) (emphasis added). See also JMD, 4 N.Y.3d at 382 (discussing the costs 9 “Tenant shall use the Leased Premises as a dormitory for persons affiliated with Tenant…” (R43.) 25 to defendant commercial financier to keep large amounts of capital available and limiting its ability to loan that capital to other borrowers). Instead of trying to demonstrate that impairment of Plaintiff’s ability to maximize its return from the Premises was immaterial in projecting Plaintiff’s probable loss, Appellants audaciously argue that Plaintiff should be required to prove that it tried to remove the Restrictive Declaration as part of a duty that should have been imposed on Plaintiff. App. Brief at 23-24. This position calls for complete abandonment of the principle that a commercial landlord is not obligated to mitigate damages; it is entirely inconsistent with the Truck Rent-A-Center formulation placing the burden of proof upon the party seeking to avoid a liquidated damages clause. As stated above, it was Appellants’ obligation to show that the Restrictive Declaration is not an obstacle to reletting the Premises. As discussed more fully below, there is no implied duty of a landlord to mitigate its damages at any time, but Appellants propose now that such a duty should apply even where the landlord has acted to its detriment for the tenant’s special purpose and benefit by limiting its ability to make free use of its property after the tenant abandons it in total breach of the lease. Appellants failed completely to meet their burden of proof to demonstrate under the Truck Rent-A-Center line of cases that the parties contracted for a 26 penalty instead of liquidated damages. The Appellate Division’s order, affirming the Judgment and the Motion Court Order, was entirely appropriate and should be affirmed. POINT II THIS COURT SHOULD PROTECT FREEDOM OF CONTRACT BY REJECTING THE EXTREME CHANGES PROPOSED BY DEFENDANTS Instead of attempting to demonstrate that at the time of contract execution either Plaintiff’s actual damages were readily ascertainable or the contracted damages amount was conspicuously disproportionate to Plaintiff’s probable loss resulting from the Association’s breach of the Lease, Appellants make two primary arguments scattered throughout their Points I and III. First, since a tenant cannot be liable for “rent” after lease termination but the liquidated damages provision in the Lease uses the word “rent” to describe the amount of damages that the Association shall continue to be obligated to pay subsequent to termination of the Lease, as a matter of semantics, the liquidated damages provision cannot be enforced. Appellants’ Brief Point I. Second, there should be a rule that a liquidated damages provision is per se a penalty unless the lease also imposes a duty to mitigate on the landlord. Appellants’ Brief Points II-III. Appellants also discuss foreign case law and various commentators’ opinions that an award under a clause providing for 27 present-day full payment in the amount of rents is a penalty unless discounted to present-day value.10 These arguments are contrary to the black-letter law of this state and should be rejected in favor of maintaining the Truck Rent-A-Center case-by-case test for whether a liquidated damages provision is really a penalty. Appellants rely heavily on two decisions, Benderson and Ross Realty, which are isolated and incompatible with the main body of New York case law. They should be disaffirmed. A. Appellants’ first argument is based on semantics and is obviously without substantive basis Appellants have plainly mischaracterized the case law concerning liquidated damages measured as “accelerated rent” by misconstruing and misapplying Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (1979) and selectively quoting from the errant and isolated decision of Benderson. The argument is a semantic distraction that should be rejected forthwith and Appellants’ credibility should be evaluated accordingly. It is incontrovertible that there is no liability for rent after lease termination, but what will survive after lease termination is an action for damages according to 10 Although this argument appears with the duty to mitigate argument, there is no explanation of the relationship between the two. It is also not apparent whether Appellants actually seek to avoid the Acceleration Clause on that basis or obtain a discount of the judgment to which they stipulated. 28 the contract between the parties to the lease, as clearly stated in International Publications, Inc. v. Matchabelli, 260 N.Y. 451 (1933), a decision which Defendants themselves cite.11 Since termination of a lease ends the landlord-tenant relationship, the parties to a lease can contract for the tenant’s continuing liability after termination of the lease: even though termination of the lease ends the tenant’s obligation to pay rent, the former tenant can remain liable not for rent but for contract damages measured as the future rent remaining at the time of lease termination - a measured sometimes colloquially but perhaps inaccurately described as “accelerated rent.” A lease provision for a tenant’s liability for such damages continuing after termination of the lease will be enforced. Holy Properties; Ring; Gallery at Fulton Street; Parsons & Whittemore, Inc.; Olim Realty Corp. 250 A.D.2d 744 (2d Dep’t 1998)(affirming order granting summary judgment for landlord on acceleration clause where tenant had abandoned premises and the landlord reentered); 186-90 Joralemon Assoc. (upholding summary judgment for landlord for rent accruing after the landlord recovered possession of the premises). Such an agreement is a 11 “After the tenant had been ejected in summary proceedings, the lease was at an end. What survived was a liability, not for rent, but for damages. These principles, however, do not prevent landlord and tenant from contracting as they please, even in respect to periods subsequent to eviction, after the termination of the relationship of landlord and tenant.” Id. at 453-54. This Court has even stated: “Lawyers drafting an agreement presumably know that an acceleration clause providing for the recovery of future rents is necessary in a lease….” Long Island Rail Road Co. v. Northville Industries Corp., 41 N.Y.2d 455, 467 (1977). 29 liquidated damages clause: it sets the damages measure as the aggregate amount of the periodic rental payment. These issues were addressed at length at earlier stages of this proceeding. R.31-32, R.132-33. When a tenant abandons leased premises, the landlord has three options: (a) it can do nothing - not terminating the lease - and collect the full rent due, (b) it can terminate the lease and relet for its own account and (c) it can terminate the lease and relet for the tenant’s account. Holy Properties, 87 N.Y.2d at 133-34. “…[A] landlord is under no obligation or duty to the tenant to relet, or attempt to relet abandoned premises in order to minimize damages.” Id. at 133. The Association abandoned the Premises, and Plaintiff obtained possession and reentered. However, at Paragraph 23(c), Plaintiff and the Association contracted to damages post-termination. Due to that provision, Plaintiff was entitled to proceed against the Association and Globe for liquidated damages, notwithstanding that they were denominated “rent” in the Lease. There is nothing complicated about these principles, but Appellants devote much space to claiming that Plaintiff cannot collect “accelerated rent” since it accepted the Association’s surrender of the Premises, citing Fifty States Management Corp. However, Fifty States was a case in which the tenancy was not terminated - the tenant there defaulted in the payment of rent and the landlord demanded the balance of rent due for the unexpired balance of the lease period. 30 Since the lease was still in effect, the “accelerated rent” really was accelerated rent - not liquidated damages post-termination in an amount based on the pre- termination rent. It was in the context of a continuing landlord-tenant relationship - in other words, scenario “(a)” from Holy Properties - that the Court stated that enforcing an acceleration clause would work no forfeiture presuming that the liquidated damages amount would be no more than if the tenant had fully performed and the tenant would be entitled to remain in possession upon payment. That statement made sense in Fifty States because there the tenant had defaulted in rental payments but had not abandoned the property and the tenancy remained in effect. Accordingly, that language does not mean that parties cannot contract for liquidated damages calculated as rents that would be payable under the lease. 12 Appellants’ lead legal argument appears to consist of a complete failure to acknowledge black-letter law dating back to their own authority, Matchabelli. It poses no obstacle to affirming judgment for Plaintiff. B. Appellants’ argument based on Benderson should be disregarded Appellants next cite to the Appellate Division, Fourth Department’s decision 12 Plaintiff cited to Fifty States before the motion court for the principle that an “accelerated rent” clause is a form of liquidated damages. R. 133. However, as noted, in that action the landlord had not terminated the lease and therefore Fifty States is not relevant to all aspects of this action. (Actually, the issue in that decision was not enforceability of a post-termination liquidated damages provision but whether the tenant’s failure to pay rent was a material breach that would justify enforcement of the acceleration clause.) Nonetheless, Appellants have seized upon the use of the word “rent” and constructed out of it an argument that contradicts incontrovertible precedent from this Court. 31 in Benderson, a decision whose reasoning is unclear and on which reliance should not be placed. There the Appellate Division refused to enforce an acceleration clause on the grounds that the parties could not contract for tenant’s liability post- termination. The text of the decision discloses only that plaintiff had leased commercial property to defendant for a five-year term, defendant defaulted in making payments one and a half years into the lease term, plaintiff locked the defendant out and the lease was terminated. The Court recognized that upon lease termination there is no more liability for “rent” but liability for contract damages. It then recited the Truck Rent-A- Center easily ascertainable / proportionality test. Next follows the sentence to which Appellants turn: “Were we to view the accelerated rent provision as one for liquidated damages, it would also be unenforceable since it would provide plaintiffs with damages “grossly disproportionate to the probable loss.” Id. (emphasis added). Benderson is, at a minimum, ambiguous. It is not clear why the Appellate Term harbored any suspicions as to whether the accelerated rent clause required the payment of liquidated damages, because the claim for post-lease termination recovery could only be for contract damages? Further, there is no indication how those damages would be grossly 32 disproportionate to the landlord’s loss: was it because of facts not described in the opinion? Or did the Court hold that a liquidated damages provision in the amount of the balance of the rents remaining in the lease term is per se grossly disproportionate to the landlord’s probable loss? If it is the latter, then the Benderson Court misread Truck Rent-A-Center. There are no per se rules under Truck Rent-A-Center, just the now-familiar two- prong test and burden of proof. Under Benderson as construed by Appellants, the burden of proof would be eliminated except to show that liquidated damages were calculated as the total amount of rent that would be due if the lease were still in effect. The conclusion that no acceleration clause seeking damages measured as future rents will be enforced because such damages are always disproportionate to the loss and so such a liquidated damages clause is always a penalty should be rejected.13 There is nothing whatsoever disproportionate in calibrating damages with reference to the amount of rent to which the landlord would have been entitled had the Association not abandoned the Premises. The amount of such liquidated damages decreases over time. To the contrary, this damages measure is entirely proportional and reasonable. Crown It Services, Inc. v. Koval-Olsen, 11 A.D.3d 263 (1st Dep’t 2004)(fixing damages as amount plaintiff claimed would 13 Benderson is also difficult to understand in that it cited to this Court’s decision in Truck Rent- A-Center but there this Court upheld an acceleration clause. 33 have earned as consulting fees in one year); Turner-Schraeter v. Brighton Travel Bureau, Inc., 258 A.D.2d 393 (2d Dep’t 1999)(awarding 100% of purchase price for vacation resort package); Boyle v. Petrie Stores Corp., 136 Misc.2d 380 (Sup Ct. New York County 1985)(liquidated damages in the amount of 500 hundred thousand dollars per year of a terminated employment contract were proportionate since “the amounts fixed do not exceed the total compensation of the five-year contract.”); see also Bates, 7 N.Y.3d at 119-20 (agreeing with Appellate Division that damages were not conspicuously disproportionate to foreseeable losses: one- to-one proportionality between number of days in which repairs remained incomplete and value of compensation successfully avoided possibility of yielding a benefit in gross disproportion to injury suffered); NPS, LLC v. Minihane, 451 Mass. 417 (2008)(liquidated damages in the amount of future license payments for stadium tickets remaining unpaid upon early termination of agreement bore a reasonable relationship to the anticipated actual damages resulting from a breach in payment: damages amount anticipated a worst-case scenario in which plaintiff could not resell tickets). Appellants cite to Gotlieb v. Taco Bell Corp., 871 F. Supp. 147 (E.D.N.Y. 1994) as if to show that Benderson is part of some continuing valid line of cases. To the contrary, Gotlieb is one of the few decisions citing to Benderson and its reasoning is likewise problematic. The Court that there was no post-termination 34 liability for rent, but concluded that the liquidated damages provision in the lease was grossly disproportionate to the probable loss because the landlord was presently negotiating a new lease at higher rent. There was no attempt to analyze the factors under Truck Rent-A-Center. To the contrary it appears that the Court misapplied Truck Rent-A-Center: it looked not to the proportionality of the damages to loss at the time of contract execution but at the time of the litigation. What it saw was evidence that the former landlord was negotiating a lease at higher rent - not that a lease had been executed. Indeed, the Court speculated that if there were an award “a windfall would be the most likely result.” Id. at 156-57. The point of the liquidated damages clause is to avoid engaging in an analysis of actual damages at the time of breach. The three other authorities to which Appellants cite, Vanguard Commercial Leasing Corp. v. Dayanzadeh, 147 A.D.2d 557 (2nd Dep’t 1989), Stats, LLC v. Elevation, Inc., 2008 NY Slip Op 32449(U), 2008 N.Y. Misc. LEXIS 9622 (Sup Ct, New York County 2008) and Fairfield Lease Corp. v Marsi Dress Corp., 60 Misc. 2d 363 (New York City Civ. Ct. 1969), are equally isolated from the mainstream of New York caselaw and unfounded. They are evolutionary “dead- ends,” with only a handful of decisions citing to them up through 2008. In Vanguard, the Appellate Division, Second Department, refused to enforce a post-termination acceleration clause in an automobile lease that likely was with a 35 consumer. The Court cited to various decisions, including Truck Rent-A-Center, for the principle that the provision was really a penalty, but without even referencing the elements of the Truck Rent-A-Center test. In Fairfield Lease Corp., a decision issued eight years before Truck Rent-A-Center, the New York City Civil Court refused to enforce an acceleration clause in a lease of a coffee machine. It is not apparent that the lessor terminated the lease. The plaintiff lessor cited to decisions holding that a contract by a vendor to pay an amount in excess of lawful interest is in event of default is a penalty. This decision appears not to survive the issuance of Truck Rent-A-Center. In Stats LLC, the Supreme Court of New York refused to enforce an acceleration clause in a license for use of golf-related information following default and license termination. While the Court cited to Truck Rent-A-Center and recited the elements of its test, it concluded without additional analysis that the requirement to pay the license for the balance of the contract term was intended only to guarantee payment grossly disproportionate to plaintiff’s loss. There is no indication in any of these decisions of a discussion of what possible loss to the plaintiff was apparent at the time of contract execution. None of them feature scenarios similar to those present in Truck Rent-A-Center and in the present action wherein the plaintiff limited its ability to use its property for the defendant’s benefit. C. Appellants’ claim that New York courts do not enforce post-termination 36 “acceleration clauses” without a duty to mitigate is irrelevant but also inaccurate Appellants also argue that Plaintiff’s authority concerning liability for damages after lease termination is irrelevant because none of those decisions feature “acceleration clauses.” This argument reverses the inquiry: Plaintiff’s authority shows that parties are free to contract as they please for post-termination liability. Once they do it is incumbent upon the party seeking to avoid the liquidated damages clause to pass the Truck Rent-A-Center test. In any event, and without conceding the validity of Appellants’ logic, there are several decisions enforcing acceleration clauses post-lease termination without imposing a duty to mitigate. In New 24 West 40th Street LLC v. XE Capital Management, LLC, 104 A.D.3d 513 (1st Dep’t 2013), a decision rendered after the Appellate Order herein, the Appellate Division, First Department affirmed an order granting summary judgment to plaintiff landlord on its claim for post-termination “rent” as liquidated damages through the end of the lease term, where defendant tenant ceased paying rent and abandoned the leased premises. The Appellate Division specifically rejected appellants’ argument that “New York law requires a liquidated damages clause in a commercial lease to obligate the landlord to re-rent the premises so as to offset any liabilities to which defendant may be subject due to its material 37 breach of the lease.” 104 A.D.2d at 514. The Court concluded “Defendant’s contention that the lease terms were unconscionable in that they would allow the landlord a windfall of all rent due…notwithstanding that defendant was reluctantly ‘locked-out” of the premise, is an argument wholly without evidentiary support in the record.” Id. at 514-15. See also Gannett Suburban Newspapers v. El-Kam Realty Co., 306 A.D.2d 312 (2d Dep’t 2003)(modifying lower court order to grant summary judgment for commercial landlord on its claim for rent due for remainder of lease term after tenant abandoned premises notwithstanding clause in lease specifically providing that landlord was under no obligation to mitigate its damages by reletting). In Olim Realty Corp., the Appellate Division affirmed an order, as here, granting partial summary judgment on liability in favor of plaintiff landlord enforcing an “acceleration clause” in the amount of “the rent due for the remainder of the lease term” after the tenant abandoned the premises and the lease terminated. There was no reference to any requirement that the lease must impose upon the landlord a duty to mitigate its damages. See also Ring; Dresses for Less, Inc. v. Lenroth Realty Co., 250 A.D.2d 220 (1st Dep’t 1999). D. There should be no per se rule that the absence of a duty to mitigate damages makes the damages amount disproportionate to the lessor’s harm and therefore a penalty The centerpiece of this appeal is Appellants’ request that this Court make a radical change in the law of liquidated damages, discarding the well-established 38 test set forth in Truck Rent-A-Center, JMD, and Bates, thereby reversing the burden of proof. While paying lip-service to the Truck Rent-A-Center test for proportionality, Appellants request that this Court replace Truck Rent-A-Center’s case-by-case evaluation of what losses to the promisee were reasonably foreseeable at the time of contract execution with a per se rule that a liquidated damages provision in a lease that does not also impose on the landlord a duty to mitigate its damages upon the tenant’s abandonment of the premises is a penalty. As explained below, this proposed would be an extreme interference with freedom of contract and should not be adopted. E. A liquidated damages clause categorically obviates the duty to mitigate Appellants’ argument concerning a landlord’s duty to mitigate its damages when the tenant abandons reduces to: if there is no duty to mitigate then the contract provision fixing damages is not a valid liquidated damages provision - it’s a penalty. This position inverts New York contract law, which categorically says the opposite: in general, if there is a valid liquidated damages provision then there is no duty to mitigate damages. American Capital Access Service Corporation v. Muessel, 28 A.D.3d 395 (1st Dep’t 2006)(severance provision of employment agreement was liquidated damages clause that exempted counterclaimant former employee from mitigating her damages); Crown It Services, Inc., supra (in action for breach of anti-competitive agreement, reversing order denying plaintiff’s 39 motion for summary judgment: in light of liquidated damages provision, fixing damages as amount plaintiff claimed would have been earned as consulting fees in one year, mitigation was irrelevant); Parsons & Whittemore, Inc., supra, at footnote 8; Delvecchio v. Bayside Chrysler Plymouth Jeep Eagle, Inc., 271 A.D.2d 636 (2d Dep’t 2000); Turner-Schraeter, supra (affirming order granting summary judgment dismissing complaint in action for refund of the purchase price of a vacation resort package: in light of the valid liquidated damages provision, in the amount of 100% of the price, tour operators’ efforts if any in rebooking were irrelevant). This principle has been applied in the context of commercial leases. In Federal Realty Limited Partnership v. Choices Women’s Medical Center, Inc., 289 A.D.2d 439 (2d Dep’t 2001), plaintiff ex-landlord cross-moved for summary judgment dismissing defendant ex-tenant’s affirmative defense that a lease term fixing liquidated damages for holding over as three times the prior monthly rent was a penalty. The trial term denied plaintiff’s motion. The Appellate Division modified the order, inter alia, by granting the cross-motion, stating: ... our finding that the liquidated damages provisions are binding on both parties precludes a reduction in damages based upon the plaintiff’s alleged failure to mitigate its actual and consequential damages. Thus, the defendant’s first affirmative defense, alleging failure to mitigate damages, should be dismissed. 40 289 A.D.2d at 442 (emphasis added). When these parties agreed to liquidated damages, they agreed that it is not necessary to calculate actual damages - and therefore that it is not necessary to show efforts to mitigate. The point of a liquidated damages clause is to avoid factual inquiries - other than the standard equitable inquiry, applicable to any contract, as to whether the agreement was induced by fraud, is unconscionable, or is contrary to public policy. Accordingly, a factual inquiry into whether the non- breaching party mitigated its damages is irrelevant where there is a liquidated damages clause, and there is no basis for arguing that a liquidated damages clause is an unenforceable penalty as a matter of law when there is not also a clause requiring that the non-breaching party mitigate its damages. Federal Realty, 289 A.D.3d at 441 (“…the purpose of a liquidated damages clause is to prevent, in the event of a breach, any question as to the amount of damages that may be recovered…”). See also Oscar De La Renta, Ltd. v. Mulberry Thai Silks, Inc., 2009 WL 1054830 (S.D.N.Y. Apr. 17, 2009). Appellants and New York law are starting in very different places. For Appellants, the presence or absence of an express duty upon the non-breaching party to mitigate its damages is the criterion that determines whether a contract provision is a valid liquidated damages clause or a penalty. For New York courts, 41 the existence or non-existence of a valid liquidated damages provision is the criterion that determines whether the non-breaching party is or is not obligated to mitigate its damages. The New York rule is a logical application of the Truck Rent-A-Center principle that the question of whether damages are easily ascertainable and whether the damages fixed are proportionate to the promisee’s loss is evaluated at the time of contract execution, not later. If that is the case, then the facts as to what the non- breaching promisee did or did not do subsequent to contract execution are not relevant. Under Appellants’ proposed system, damages can never be fully liquidated since it will always be necessary to present proof as to what the non- breaching party did or did not do subsequent to breach in order to prove mitigation or failure to mitigate damages. There is no apparent reason to interfere with the freedom of parties to contract for damages measures in their commercial leases as they see fit, subject to the minimally-invasive Truck Rent-A-Center test. There is nothing that prevents parties from contracting in a duty to mitigate damages.14 F. The current New York test is not broken so there is no need to fix it Appellants’ legal argument, at bottom, is that New York is stuck in the past and needs to get in on the new thinking concerning the true nature of leases and 14 It is not apparent whether Appellants would allow parties to contract out of a duty to mitigate damages or would declare such a provision void as well. 42 contracts generally. They cite numerous foreign decisions and legal commentators for various principles: (1) acceleration of rent without crediting the lessee for resale or reletting of property violates just compensation and is void as a penalty, (2) not all commercial tenants are sophisticated, (3) public policy favors imposing a duty to mitigate, (4) an award of damages for future rental without a discount to present value is unconscionable, and (5) courts or legislatures should take action of some kind. What comes across most clearly from the authorities Appellants have assembled is that there are many possible approaches to regulating liquidated damages provisions and in particular post-termination liability of ex-tenants where there is an “acceleration clause.” What Appellants have not done is explain why one or another of the systems described in the authority they cite is better than New York’s approach and how so. The New York approach, manifest in the Truck Rent-A-Center two-prong test, maximizes freedom of contract while retaining adequate ability to intervene if an equitable consideration makes appropriate intervention into private contractual relationships. The Truck Rent-A-Center test sets a default position in which judicial inquiry into the reasonableness of a liquidated damages measure is restricted to one narrow time period: the period up to contract execution. The law thus allows parties to dispense with inquiries into events subsequent to contract breach when 43 calculating damages: indeed, the essential point of a liquidated damages provision is to contract out of factual proof as to actual damages. However, the oft-quoted language in Holy Properties that “parties to a lease are not foreclosed from contracting as they please” means in practice that contract parties can structure liquidated damages provisions as they wish, subject to the Truck Rent-A-Center test. Therefore, they can require that the damages amount be calculated based on factors that cannot be determined until after breach, thereby widening the scope of factual inquiry up even through litigation itself. They can allocate the burden of proof as to the elements of the damages calculation. If the parties wish to allocate a burden of proof to the landlord, they can explicitly set the scope of effort to mitigate that the landlord will need to show. In contrast, Appellants requests that this Court create a per se rule requiring that the parties factor into their damages calculation events taking place subsequent to contract breach. This approach is not necessary. The New York test is not broken so it is not necessary to import standards from other jurisdictions to fix it. G. A view of some of the other states According to Appellants, New York State should get in line with the prevailing trend of imposing a duty to mitigate upon a landlord when its tenant abandons the leased premises. To the extent that it is true that courts in other states may impose such a duty it is also irrelevant unless there is some specific 44 compelling reason that would justify the potential chaos that would ensue if the people of this State were to awaken tomorrow and find out that commercial landlords are now required to demonstrate that they attempted to mitigate their damages. The fact that other states have different laws does not mean that New York should set aside or make extreme modifications to its own laws. However, it is worth taking a look at some other decisions from sister states. New York is not alone in its attitude toward preserving freedom of contract. In Cummings Properties, LLC v. National Communications Corp., 449 Mass. 490 (2007), the Massachusetts Supreme Judicial Court held enforceable a liquidated damages provision in a commercial lease where the lease provided for acceleration of all rents upon an uncured default in the payment of rent. With three year remaining in the lease term, the tenant defaulted in one month’s payment. The landlord terminated the tenancy and brought an action seeking a little over five hundred twenty-five thousand as the aggregate remaining rental payments for the terminated lease term. Tenant argued that the accelerated rents provision was a penalty. The trial court awarded the accelerated rents but the intermediate appellate court reversed on the grounds that the provision was a penalty under Massachusetts law since it could be triggered by different events including those resulting in loss than could be easily calculated. Citing to XCO, The Supreme Judicial Court accepted the landlord’s request 45 that the court recognize “the near unanimous trend towards upholding liquidated damages provisions in agreements between sophisticated parties, and to adopt a presumption against interpreting such clauses as penalties.” Id. at 495. The Court noted that the record before it showed: that at the time the lease was entered into, the parties could not have foreseen when in the lease term a breach for nonpayment of rent would occur, what the commercial rental market would be at that time, or what the cost of finding another tenant and the length of time the property might remain vacant might be. In addition, to the extent that the liquidated damages amount represented the agreed rental value of the property over the remaining life of the lease, decreasing in amount as the lease term came closer to expiration, it appears to be a reasonable anticipation of damages that might accrue from the nonpayment of rent. In contrast, the trial record reflects only an assertion by [tenant] that the liquidated damages provision was an unenforceable penalty as a matter of law. As the party contesting its validity, [tenant] has failed to satisfy its burden to show that the liquidated damages clause is a penalty… that is, that the amount it agreed to pay was disproportionate to any reasonable estimate of likely damages at the time the lease was executed. Id. at 496-97. A year later that Court decided NPS, LLC. It upheld a liquidated damages provision in a ten-year license agreement for two luxury seats in a sports stadium where, after defendant licensee defaulted in paying the license fee in the first year, 46 plaintiff licensor brought an action for all fees due during the license term. It noted that “[s]ince there is no bright line separating an agreement to pay a reasonable measure of damages from an unenforceable penalty clause, the reasonableness of the measure of anticipated damages depends on the circumstances of each case.” Id. at 420 (internal punctuation and citations omitted). As to the proportionality of the damages amount, it explained that the measure was based on a projection of the worst-case scenario in which the plaintiff could not resell the tickets. In response to the argument that plaintiff was obligated to mitigate its damages upon defendant’s breach, the Court said: We will follow the rule in many other jurisdictions and hold that, in the case of an enforceable liquidated damages provision, mitigation is irrelevant and should not be considered in assessing damages. When parties agree in advance to a sum certain that represents a reasonable estimate of potential damages, they exchange the opportunity to determine actual damages after a breach, including possible mitigation, for the “peace of mind and certainty of result” afforded by a liquidated damages clause. In such circumstances, to consider whether a plaintiff has mitigated its damages not only is illogical, but also defeats the purpose of liquidated damages provisions. Since the liquidated damages provision at issue here is enforceable, the question is irrelevant. Id. at 423. In W & G Seaford Associates, L.P. v. Eastern Short Markets, Inc., 714 F.Supp. 1336 (D. Del. 1989), the United States District Court for the District of 47 Delaware upheld an accelerated rent clause against a tenant who cancelled a lease as food-store anchor tenant in a shopping center and never took possession of the premises. ESMI, the defendant ex-tenant, made the same argument as do Appellants here: the liquidated damages provision should not be enforced because it would yield a windfall: The principle underlying ESMI’s double-recovery argument is that a plaintiff in a contract action should not recover as liquidated damages an amount greater than it would have received had there been no default. This general principle is not violated here. The stipulated damages bear a reasonable relation to the actual and consequential damages that could have been reasonably forecast by the parties at the time they drafted the clause. Id. at 1348. The Court’s discussion of the difficulty of finding one large specialized tenant for commercial premises is relevant to this appeal as well, particularly the role of the Restrictive Declaration and the need to find a very particular type of tenant: Beyond the fact that the stipulated damages here go well beyond compensation for lost rent, there is no guarantee that [plaintiff] will be able to re-let the premises to another food-store tenant. [Plaintiff] certainly has the right under the lease to re-let the premises, but there is considerable uncertainty as to whether it will be able to find an attractive anchor tenant such as Safeway or ESMI, especially in light of the thin market for food 48 stores in Seaford. Given the number of turndowns from potential tenants and the opening of the new Food Lion store across the street, finding such a tenant is unlikely. Moreover, the Court finds that, at the time of contracting, it was foreseeable that the Safeway premises might not be leased for several years if ESMI failed to occupy, and that W & G would suffer substantial damages in such circumstances. Id.. More recent Delaware decisions show that Delaware’s standard for avoiding a liquidated damages provision is stricter than New York’s. In Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997), the Delaware Supreme Court upheld as valid liquidated damages a five hundred fifty million dollar termination fee as part of merger negotiations. The Court described the test in Delaware for distinguishing a penalty from valid liquidated damages under Lee Builders v. Wells, 103 A.2d 918 (Del. 1954): “Where the damages are uncertain and the amount agreed upon is reasonable, such an agreement will not be disturbed.” As to the second prong, the test, the Court continued, “[t]hus, to fail the second prong of Lee Builders, the amount at issue must be unconscionable or not rationally related to any measure of damages a party might conceivably sustain.” Id. at 48 (emphasis added). It is difficult to project a standard for upholding a liquidated damages provision that is more lenient than a showing that the measure is “rationally related to any measure of damages a party might conceivably sustain.” Id.. 49 The foregoing provides a counterweight to Defendants’ insistence that New York’s approach to liquidated damages is behind the times and does not sufficiently intervene into contractual relations to protect contract parties from assuming penalties. H. Ross Realty, the New York decision on which Appellants rely, is infirm and should be overruled Appellants rely primarily on Ross Realty for their argument that a clause accelerating future payments after lease termination is not effective unless there is a duty upon the landlord to mitigate as well. There, the Appellate Term affirmed final judgment for the landlord in a commercial nonpayment proceeding in District Court that denied landlord’s request for accelerated rent under the lease. The Appellate Term said …where, as here, the lease does not require the landlord to rerent the premises upon its recovery of possession after a default in rent and to apply the rent received from the rerenting to the benefit of the tenant, the accelerated rent clause is deemed to impose a penalty and is not enforceable. Id. at 73. Ross Realty turns out to be without any valid basis in New York law. It cites (1) to Benderson, which contains no such statement, (2) to Silver v. Brody, N.Y.L.J., Apr. 23, 1993, at 25, col. 6, which cites only to Benderson, (3) to Kabro 50 Associates of Woodbury v. Off-Campus of Woodbury, Inc., N.Y.L.J., Nov. 16, 1992, at 32, col. 5, which cites to nothing, and to Rand v. Conklin, N.Y.L.J., Jan. 7, 1994, at 29, col.1, which cites only to Benderson, Silver and Kabro. In short, the holding of Ross is grounded in nothing. Other aspects of Ross call into question its relevance and validity. There is no indication that a liquidated damages clause for post-termination damages was at issue. The District Court refused to award accelerated rent, finding that a surrender or acceptance of surrender had terminated the lease. To the contrary, the opinion recites that the landlord had not accepted the tenant’s surrender, meaning that the lease was still in effect, unlike all the other authority discussed (and the action at bar as well). Therefore the tenant could be held liable for rent - real rent, not contract damages measured as rent. The Appellate Term refers to recovering possession and re-renting for the benefit of the tenant, not the landlord, but it is not apparent how this decision is relevant to the present appeal. The foregoing is in addition to the question as to how Ross reached its conclusion about mitigation when its purported source, Benderson, does not require a duty to re-rent after recovery of possession. Hence, Ross is of dubious validity and should not be followed by this Court. I. Appellants’ public policy arguments do not support the drastic change they seek from the judiciary 51 Appellants argue that requiring a duty to mitigate damages serves public policy by preventing economic waste. This argument is not the same as claiming that enforcing an acceleration clause affirmatively violates public policy, just that Appellants believe that such a requirement would encourage a better public policy. Further, it assumes that a landlord will allow property to remain idle when there is an acceleration clause; however, Appellants elsewhere argue that acceleration clauses should not be enforced because a landlord can simultaneously collect accelerated rents and relet property, thus obtaining what Appellants characterize as windfall profits. Neither of these rationales creates a compelling public policy argument; moreover, the Restrictive Declaration further vitiates these considerations in the case at bar. Indeed, there are more compelling contrary arguments. Requiring a duty to mitigate damages in commercial leases where the tenant abandons the premises interferes with freedom to contract for the measure of liquidated damages, even among sophisticated commercial entities represented by counsel. It interferes with the right of an owner not to rent his property, to renovate it, or to use it for the owner’s own purposes as the owner sees fit. The risk of physical damage to the property is primarily the owner’s risk, and should not be subject to judicial disposition. In fact, a limitation on acceleration clauses in commercial leases could result in higher rents, refusal to rent property at all, or at least refusal to rent to 52 tenants who seem to be credit risks, or refusal to rent without guarantors, since landlords would need to offset the impairment of their ability to protect themselves from loss when tenants wantonly abandon leased premises. It could also discourage landlords from agreeing to specialized use limitations such as those embodied in the Restrictive Declaration, geared to permit the functioning of organizations such as student dormitories that may find it more difficult to find suitable space for their endeavors than run-of-the-mill commercial operations. An accelerated rent clause freely-negotiated at arm’s-length in the open market represents an agreement by the parties to simplify proof of damages in the event of litigation and an election to avoid the waste and judicial inefficiency of successive actions for unpaid rent. Absent evidence of fraudulent inducement, unconscionability or overreaching, it should be enforced. Appellants request a change in the law so extreme that it is irresponsible. There is no attempt to project what would be the effect on the marketplace were this Court were to reverse centuries of the law of leases and liquidated damages at the behest of Appellants so that they can evade responsibility for their misdeeds. There is no attempt to project what would be the effect on rents throughout the State of New York should the Court decide to eliminate a tool that landlords use to protect themselves against tenants’ willfully abandoning their leaseholds, as the Association did here. Several of the journal articles to which Appellants cite call 53 upon state legislatures to take action and reform the law of liquidated damages by imposing upon landlords a duty to mitigate. Indeed, that has been the practice of other states, such as California (Cal. Civ. Code §1951.2) and Illinois (735 ILCS § 5/9-213.1), that have sought to embark upon a new course. It is respectfully submitted that the merits of the argument that Appellants have presented here are inappropriate in this forum. Instead they should be presented to the legislature for a full and open hearing with sufficient time and adequate procedure in which the scope of change, if any, can be evaluated and crafted. POINT III APPELLANTS’ OWN LEGAL AUTHORITY SHOWS THAT PLAINTIFF’S CLAIM IS NOT BARRED BY RES JUDICATA Appellants alternatively argue that Plaintiff’s claim for unpaid rent is barred by res judicata because (a) the issue of unpaid rent was actually raised and determined in a prior summary proceeding for possession of the Premises in 2008 or (b) Plaintiff could have raised the liquidated damages claim in that proceeding but did not do so. Among other authority Appellants cites to Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246 (2d Dep’t 2007)(“Ross Realty II”). To the contrary, this decision actually makes short work of their argument. Ross Realty II was a decision in an appeal from a Supreme Court action between the parties appearing in Ross Realty, an appeal from a District Court summary possession proceeding. 54 Ross Realty II explains that the landlord took no further appeal from the decision in Ross Realty, and then commenced a new action for future rents in the Supreme Court. The Court held that plaintiff landlord’s claims in the Supreme Court were not barred by res judicata and that the District Court had no subject matter jurisdiction over claims for post-lease termination contract damages since they could not be recovered in a summary proceeding. (The jurisdictional provision for summary proceedings in section 204 of the New York Uniform District Court Act is essentially identical to section 204 of the New York City Civil Court Act.) 42 A.D.3d at 250. Patchogue Associates v. Sears, Roebuck and Co., 108 A.D.3d 659 (2d Dep’t 2013) and Burke v. Aspland, 56 A.D.3d 1001 (3rd Dep’t 2008) stand for the same principle. There is no distinction between the arguments in Ross Realty II and Appellants’ argument here. After the Lease terminated and Plaintiff reentered the Premises, the Association had no further liability for rent. Since the Civil Court’s jurisdiction is limited to rental installments that came due prior to lease termination and Plaintiff sought contract damages post-lease termination (measured as the amount of future rent), the Civil Court could not entertain that claim. Accordingly, since the claim could not have been adjudicated in the prior 55 summary possession proceeding, Appellants’ argument must be rejected.15 Last but not least, there can be no res judicata as to Globe because it was not party to the summary proceeding. Ruth v Shalom Brothers, 276 A.D.2d 408 (1st Dept 2000). Appellants’ authority does not require a different conclusion. Appellants cite Matter of Hunter, 42 N.Y.3d 260 (2005) for the principle that any claim for past rent was barred by res judicata it because could have been litigated in Civil Court. However, this decision is not factually relevant to litigation in Civil Court: it is an estate accounting. It simply defines the doctrine of res judicata. 1422 Corp. v Rosenfeld, 44 A.D.3d 451 (1st Dep’t 2007) did not address whether an action for liquidated damages was available after a summary proceeding in civil court awards possession and disposes of the claim for accrued rent. Res judicata is no obstacle to enforcement of the liquidated damages provision. CONCLUSION Ultimately the issues before the Court on this appeal are very simple. New York employs a simple two-part test to identify a penalty clause in a contract. In opposition to Plaintiff’s motion for summary judgment Appellants failed to meet their burden of proof. Appellants request that this Court abandon the test and 15 None of the authority to which Appellants cites is more on point than Ross II. reverse the burden of proof, potentially introducing extreme uncertainty into New York contract law. Appellants have shown no good reason why New York's longstanding law of liquidated damages is inadequate and certain the requested change is inappropriate on the facts of this case. The order of the Appellate Division affirming judgment for Plaintiff should be affirmed. Dated: New York, New York April 9, 2014 56 Steven D. Skolnik Sanford Hausler