172 Van Duzer Realty Corp., Respondent,v.Globe Alumni Student Assistance Association, Inc., et al., Appellants.BriefN.Y.November 19, 2014State of New York Court of Appeals BRIEF FOR DEFENDANTS-APPELLANTS DICK BAILEY SERVICE (212) 608-7666 (718) 522-4363 (516) 222-2470 (914) 682-0848 Fax: (718) 522-4024 1-800-531-2028 Supreme Court, New York County, Index No. 113137/2009 172 VAN DUZER REALTY CORP., Plaintiff-Respondent, -against- GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC. and GLOBE INSTITUTE OF TECHNOLOGY, INC., Defendants-Appellants. TO BE ARGUED BY: LINDA M. BROWN TIME REQUESTED: 15 MINUTES COURT OF APPEALS NO. APL-2013-00284 HERZFELD & RUBIN, P.C. Attorneys for Defendants-Appellants Globe Alumni Student Assistance Association, Inc. and Globe Institute of Technology, Inc. 125 Broad Street New York, New York 10004 (212) 471-8514 Fax: (212) 344-3333 lbrown@herzfeld-rubin.com OF COUNSEL: DAVID B. HAMM LINDA M. BROWN Date Completed: January 17, 2014 f>> <_,-T?-1EZ@'5@7=_>\} <1; APL-2013-00284 COURT OF APPEALS STATE OF NEW YORK _________________________________________________________X 172 VAN DUZER REALTY CORP., Plaintiff-Respondent, —against- GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC. and GLOBE INSTITUTE OF TECHNOLOGY, INC., Defendants-Appellants. _____________________________________________________________X DISCLOSURE STATEMENT PURSUANT TO RULE 500.1(1): Defendants-Appellants Globe Alumni Student Assistance Association, Inc and Globe Institute of Technology, Inc. have no parents, subsidiaries or affiliates Dated: January 16, 2014 Respectfully submitted, HERZFELD & RUBIN, P.C. Attorneys for Defendants-Appellants Globe Alumni Student Assistance Association, Inc. and Globe Institute of Technology, Inc. 125 Broad Street New York, New York 10004 (212)471-8514 /)2 .»~ \ -i ma: 1 / f itM1 LINDA l\/I. BROWN APL-2013-00284 COURT OF APPEALS STATE OF NEW YORK _________________________________________________________X 172 VAN DUZER REALTY CORP., Plaintiff-Respondent, —against- GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC. and GLOBE INSTITUTE OF TECHNOLOGY, INC., Defendants—Appellants. _____________________________________________________________X STATEMENT PURSUANT TO RULE 500.13(a): Upon information and belief, as of the date of the completion of this Brief, there is no related litigation pending before any court. Dated: January 16, 2014 Respectfully submitted, HERZFELD & RUBIN, P.C. Attorneys for Defendants-Appellants Globe Alumni Student Assistance Association, Inc. and Globe Institute of Technology, Inc. 125 Broad Street New York, New York 10004 (212)471-8514 . / ,1 .,.A . /- . /1 : /§>/{If-/I J Kg 37 . , iti/Q!)/iii‘),/L!/izfx .~* ,5”,"§11‘-"*,~z,r?”‘~’ LINDA M. BROWN i TABLE OF CONTENTS TABLE OF AUTHORITIES……………………………………………………iii PRELIMINARY STATEMENT…………………………………………………1 JURISDICTIONAL STATEMENT…………………………………………… 3 QUESTIONS PRESENTED……………………………………………………..5 STATEMENT OF FACTS A. Factual Background………………………………………………...6 B. Plaintiff’s Summary Judgment Motion…………………………….8 C. The Order and Judgment of Supreme Court, New York County….10 D. The Appellate Division, First Department’s Order ……………….11 POINT I THE APPELLATE DIVISION’S DECISION CONFLICTS WITH PRECEDENT FROM THIS COURT AND FROM OTHER DEPARTMENTS OF THE APPELLATE DIVISION, WHICH HOLD THAT AN ACCELERATION CLAUSE SHOULD NOT BE ENFORCED WHEN THE LANDLORD TERMINATES THE LEASE AND REPOSSESSES THE PROPERTY.………………………………………………………………12 ii POINT II THE APPELLATE DIVISION’S DECISION CONFLICTS WITH PRECEDENT FROM THIS COURT AND FROM THE OTHER DEPARTMENTS OF THE APPELLATE DIVISION, WHICH HOLD THAT AN ACCELERATION CLAUSE WILL NOT BE ENFORCED WHEN IT IS DISPROPORTIONATE TO THE PLAINTIFF’S PROBABLE LOSS……………………………………………………….21 POINT III THE ACCELERATION PROVISION IS UNENFORCEABLE FOR THE FURTHER REASON THAT THERE IS NO CORRESPONDING OF THE LANDLORD TO MITIGATE………………………………….28 POINT IV PLAINTIFF’S CLAIMS ARE BARRED BY RES JUDICATA…………………………………………………… 39 A. Plaintiff’s Claim for Past Due Rent is Barred by Res Judicata……………………………………………39 B. Plaintiff’s Claim for Accelerated Rent is Also Barred by Res Judicata………………………………………41 CONCLUSION………………………………………………………………....45 iii TABLE OF AUTHORITIES Case Page 186-90 Joralemon Assocs. v. Dianzon, 161 A.D.3d 329 (1st Dept. 1990)………. 18 1422 Corp. v. Rosenfeld, 44 A.D.3d 451 (1st Dept. 2007)……………………….40 American Capital Access Service Corp. v. Muessel, 28 A.D.3d 395 (1st Dept. 2006)……………………………………………29 Bank One, N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943 (N.D. Texas 1995)………………………………………34 Benderson v. Poss, 142 A.D.2d 937 (4th Dept. 1988)…………………….15-16, 24 Colonial Plaza Corp. v. Steele, 13 Misc.3d 1230A (Justice Court, Town of Hyde Park, Dutchess County 2006)…………… 19 Dart Associates v. Ste-Con Corp., 66 A.D.2d 973 (3d Dept. 1978)………………44 Delvecchio v. Bayside Chrysler Plymouth Jeep Eagle, Inc., 271 A.D.2d 636 (2d Dept. 2000)…………………………………………..29 European American Bank & Trust Co. v. Boyd, 131 A.D.2d 629 (2d Dept. 1987)…………………………………………..44 Fairfield Lease Corp. v. Marsi Dress Corp., 60 Misc.2d 363 (Civ. Ct., N.Y. County 1969)………………………………………………17 Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (1979) …………………………… 12-13, 15-16, 19-20, 22 Frenchtown Square Partnership v. Lemstone, Inc., 99 Ohio St.3d 254, 2003 Ohio 3648, 791 N.E.2d 417 (Ohio 2003)………………………33 Frontier Leasing Corp. v. Griffin Petroleum Inc., 172 F. Supp.2d 1172 (S.D. Iowa 2001)…………………………………..27 Gotlieb v. Taco Bell Corp., 871 F. Supp. 147 (E.D.N.Y. 1994)……………16, 25 iv Heller Financial, Inc. v. Burry, 633 F. Supp. 706 (N.D. Ill. 1986)…………….. 27 Holy Properties Limited, L.P., 87 N.Y.2d 130 (1995)…………..18-19, 29, 32, 33 In re Lapke, 2008 Bankr. LEXIS 182 (D. Neb. 2008)………………………….34 In re Winston Mills, Inc., 6 B.R. 587 (Bankr. S.D.N.Y. 1980)…………………27 International Pubs. v. Matchabelli, 260 N.Y. 451 (1933)………………16, 25, 36 Jones v. Gianferante, 305 N.Y. 135 (1953)…………………………………… 40 Kabro Associates of Woodbury v. Off-Campus of Woodbury, Inc., 1992 N.Y. Misc. LEXIS 698, 208 N.Y.L.J. 95 (App. Term, 9th and 10th Jud. Districts 1992)……………………………29 Key Equipment Finance, Inc. v. Simos Cartage Co., Inc., 2007 U.S. Dist. LEXIS 89011 (N.D. Ill. 2007)………………………….27 Licini v. Graceland Florist, Inc., 32 A.D.3d 825 (2d Dept. 2006)………….42, 43 Matter of Hunter, 4 N.Y.3d 260 (2005)…………………………………… 40, 42 Olim Realty Corp. v. Big John’s Moving, Inc., 250 A.D.2d 744 (2d Dept. 1998) ……………………………………………………..19, 20 Parsons & Whittemore, Inc. v. 405 Lexington L.L.C., 299 A.D.2d 156 (1st Dept. 2002)……………………………………… 18 Rand v. Conklin, 1994 N.Y. Misc. LEXIS 714, 211 N.Y.L.J. 5 (App. Term, 9th and 10th Jud. Districts 1994)……………28 Ring v. Printmaking Workshop, Inc., 70 A.D.3d 480 (1st Dept. 2010)…………17 Ross Realty v. V&A Iron Fabricators, Inc., 5 Misc.3d 72 (App. Term, 2d Dept. 2004)…………………………………………….28 Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246 (2d Dept. 2007)………42 v Schneiker v. Gordon, 732 P.2d 603 (Colo. 1987)……………………………….31 Silver v. Brody, 1993 N.Y. Misc. LEXIS 640, 209 N.Y.L.J. 77 (App. Term, 9th and 10th Jud. Districts 1993)……………………………………28 Southwest Park Outpatient Surgery Ltd. v. Chandler Leasing Div., 572 S.W.2d 53 (Tex. Civ. App. 1978)…………………………………….34 Stats, LLC v. Elevation, Inc., 2008 NY Slip Op 32449U, 2008 N.Y. Misc. LEXIS 9622 (Sup. Ct., N.Y. County 2008)…………….17 The Gallery at Fulton Street, LLC v. Wendnew LLC, 30 A.D.3d 221 (1st Dept. 2006)……………………………………… 18, 19 The Marketplace v. Smith, 181 Misc.2d 440 (Justice Court, Town of Henrietta, Monroe County 1999)………………………………..19 Truck-Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977)………………………………………………….21-23 Vanguard Commercial Leasing Corp. v. Dayanzadeh, 147 A.D.2d 557 (2d Dept. 1989)…………………………………………..16 STATUTES CPLR 5501(b)…………………………………………………………………….4 CPLR 5602(a)…………………………………………………………………….3 New York Civ. Ct. Act §204…………………………………………………….40 OTHER AUTHORITIES Dawn R. Barker, Commercial Landlords’ Duty upon Tenants’ Abandonment – To Mitigate?, 20 Iowa J. Corp. L. 627 (Summer 1995)…………………………………………………………33, 35 vi Jeremy K. Brown, Comment: A Landlord’s Duty to Mitigate in Arkansas: What it Was, What it is, and What it Should Be, 55 Ark. L. Rev. 123 (2002)……………………………………………… 38 Oliver Wendell Holmes, The Path of Law, 10 Harv. L. Rev. 457 (1897)………. 38 Sarajane Love, Landlord’s Remedies When the Tenant Abandons: Property, Contract, and Leases, 30 U. Kan. L. Rev. 533 (1981-2)………30-31, 34-35 Sateesh Nori, Outside Counsel, “Does a Landlord Have a Duty to Mitigate? No, but Maybe”, NYLJ 8/30/2012…………………………….36 Note, Why There Should be a Duty to Mitigate Liquidated Damages Clauses, 38 Hofstra L. Rev. 285 (2009)…………………………………………….31 Robert E. Parella, Survey: Real Property, 49 Syracuse L. Rev. 703 (1999)……………………………… 13-14, 20-21 Restatement (Second) of Contracts § 350 (1981)………………………………. 32 Restatement (Second) of Property (Landlord Tenant) §12.1 comment k………..26 David C. Skinner, Gambling With Remedies: Rent Acceleration and Mitigation Of Damages In Alabama, 45 Ala. L. Rev. 275 (1993)…14-15, 23, 26, 30, 37 COURT OF APPEALS STATE OF NEW YORK ---------------------------------------------------------X 172 VAN DUZER REALTY CORP., Plaintiff-Respondent, -against – GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC. and GLOBE INSTITUTE OF TECHNOLOGY, INC., Defendants-Appellants. -------------------------------------------------------------X APPELLANTS’ BRIEF PRELIMINARY STATEMENT This Brief is respectfully submitted on behalf of defendants-appellants Globe Alumni Student Assistance Association, Inc. (“the Association”) and Globe Institute of Technology, Inc. (“Globe”), in support of their appeal from the Order of the Appellate Division, First Department, entered January 22, 2013 (R5-R9). 1 The Appellate Division’s Order: (1) affirmed the Judgment of Supreme Court, New York County (Hon. Carol Edmead, J.) entered June 20, 2011, which awarded plaintiff the amount of $1,488,604.66 (R16-R21); and (2) affirmed the prior Order of the same Court and Justice 1 Numbers in parentheses preceded by the letter “R” refer to pages of the Record on Appeal. 2 entered December 6, 2010, which granted plaintiff summary judgment on liability (R22-R36). The Appellate Division, First Department’s enforcement of the onerous, indeed crushing, rent acceleration clause involved here, notwithstanding that plaintiff landlord also obtained a judgment of possession of the premises, conflicts with established decisional law of this Court and with other departments of the Appellate Division, under which the acceleration clause, where coupled with the award of possession, constitutes an unenforceable penalty. As shown infra, the confluence of three factors makes the acceleration clause here unenforceable: (1) plaintiff terminated the lease and took possession of the building; (2) the lease does not provide for the landlord’s accounting for mitigation upon re-leasing the premises; and (3) plaintiff nevertheless has obtained a judgment providing payment up front of all rent payments due under a multi-year lease, which is grossly disproportionate to the landlord’s probable loss. Having terminated the lease, obtained possession of the property and having no contractual duty to mitigate, the landlord can rent out the property at will to others without having to make any accounting to defendants for the rent obtained. The ability to “double-dip” – to receive a judgment for accelerated rent up front for a multi-year lease and to rent the property to 3 others as well – is not just compensation, it is a windfall which renders the acceleration a penalty. The acceleration clause here further imposes a vicious “double whammy” upon defendants. Defendants are required to immediately pay all rents that would accrue under the lease until the year 2016, even though plaintiff has obtained a Warrant of Eviction and repossessed the building, and defendants therefore have no ability to generate any income from the building. The acceleration clause thus imposes a backbreaking burden and penalty upon defendants of nearly $1.5 million dollars, while simultaneously endowing plaintiff with an enormous unearned and unjustified windfall. As further shown infra, plaintiff’s claims for past due rent and accelerated rent in the Judgment were barred in any event by the doctrine of res judicata, as they were raised or could have been raised in a prior proceeding. The Order of the Appellate Division should accordingly be reversed and vacated, and the Complaint dismissed. JURISDICTIONAL STATEMENT This Court has jurisdiction over this appeal pursuant to CPLR §5602(a). The Order of the Appellate Division, First Department, which affirmed the Judgment in favor of plaintiff and the prior Order granting plaintiff summary judgment as to liability, was a final determination of this 4 case. The questions raised on appeal are questions of law and are reviewable pursuant to CPLR 5501(b). This action originated in Supreme Court, New York County (R80- R92). In its Order entered December 6, 2010, the Court granted plaintiff summary judgment on liability (R22-R36). The Court subsequently issued the Judgment entered June 20, 2011, which awarded plaintiff the sum of $1,488,604.66 (R16-R21). Defendants timely appealed the Judgment to the Appellate Division, First Department by Notice of Appeal dated June 22, 2011, thereby bringing up for review the prior Order entered December 6, 2010 (R14-R15). By Order entered January 22, 2013, the Appellate Division affirmed the Judgment and Order (R6-R8). The Appellate Division’s Order was served with Notice of Entry dated February 6, 2013 (R5-R9). By Notice of Motion dated February 20, 2013, defendants timely moved at the Appellate Division for reargument of and/or leave to appeal to this Court from the Appellate Division’s Order entered January 22, 2013. By Order entered May 14, 2013, the Appellate Division denied the motion for reargument/leave to appeal. Defendants timely moved for leave to appeal to this Court by Notice of Motion dated May 31, 2013. By Order entered October 10, 2013, this Court granted leave to appeal (R3-R4). 5 QUESTIONS PRESENTED 1. Did the Appellate Division, First Department err as a matter of law and public policy in enforcing a “liquidated damages” clause (i.e., acceleration clause) in a commercial lease, where: (1) the plaintiff landlord terminated the lease and the lessee is not in possession of the premises; (2) enforcement of the accelerated rent provision would provide plaintiff with damages which are grossly disproportionate to plaintiff’s probable loss; and (3) the lease contains no provision requiring the landlord to mitigate damages by, inter alia, attempting to relet the premises? These issues were fully raised in Supreme Court, New York County (R120-R123), and in the Appellate Division (see Defendants’ Main Brief at the Appellate Division, Point I). 2. Did the Appellate Division err as a matter of law in declining to dismiss plaintiff’s claims on the grounds of res judicata, where plaintiff’s claims were or could have been raised and determined in a prior proceeding? This issue was fully raised in Supreme Court, New York County (R122), and in the Appellate Division (see Defendants’ Main Brief at the Appellate Division, Point II). 6 STATEMENT OF FACTS A. Factual Background Plaintiff landlord claims that it is entitled to damages as a result of an alleged breach of a lease by its tenant, the Association (R39-R40). The Association, a not-for-profit corporation, leased the premises, located at 172 Van Duzer Street in Staten Island, as a dormitory for students of defendant Globe, which prior to October 2007 operated as a for-profit educational institution (R40; R112). Globe was the source of funds used by the Association to pay the rent (R112). Plaintiff sued Globe, as well as the Association, claiming that Globe signed a guarantee of the Association’s performance of its lease obligations (R80-R92). The lease, executed on September 1, 2006 and extending to August 31, 2007 (R47-R71) (“the initial lease”), was thereafter extended and modified to provide for a term of 9 years, from 2007 into 2016 (“the lease extension”) (R47-R72; R111). At the end of October 2007, all of Globe’s assets were sold to an entity called 878 Education, LLC (“878 Education”), pursuant to an Asset Purchase Agreement between the parties (R112). As Globe had done in the past, 878 Education was supposed to provide funds for the Association to pay the rent, and would assume Globe’s responsibilities under the guarantee (R111-R112). 7 After the sale of Globe’s assets, 878 Education continued to operate the educational institution formerly owned by Globe, and continued to use the name Globe Institute of Technology as the name for that institution (R112). From the date of the sale forward, Globe had no dealings with either 878 Education or the Association (R112). It is undisputed that 878 Education did provide the Association with the funds to pay the rent for a period of time (R42; R112). Plaintiff conceded that "[s]ubsequent to a change in ownership of the tenant, in or about December of 2007 the tenant paid to plaintiff the monthly rent owing for October, November, and December 2007" (R42). Plaintiff also conceded that the tenant paid the rent for January, 2008 (R42). According to plaintiff, in February 2008 the tenant vacated the premises, and informed plaintiff that no further rent would be paid (R43). It is undisputed that the lease was terminated by plaintiff on March 24, 2008 (R43; R76; R113). Plaintiff obtained a judgment against the Association from the Civil Court of the City of New York County of Richmond, awarding plaintiff possession of the premises in August, 2008, but awarding money damages in the total amount of “0.00” (R43-R44; R77-R78). Plaintiff did not commence 8 this action for damages against the Association and Globe until more than a year later, in September 2009 (R80-R92). B. Plaintiff’s Summary Judgment Motion In September 2010, plaintiff moved for summary judgment on its claim against the Association for alleged breach of the lease and on its claim against Globe as Guarantor (R37-R38). Plaintiff asserted that it was entitled to judgment in the amount of: (a) unpaid rent during the term of the initial lease, (b) unpaid rent during the first year of the lease extension, and (c) rent for the balance of the years in the lease extension, i.e., to 2016, pursuant to a “liquidated damages” clause (acceleration clause) in the lease (R44-R45). Plaintiff argued that the tenant was obligated to immediately pay all rental installments through 2016, despite the fact that the lease was terminated by plaintiff and there was no provision in the lease requiring plaintiff to mitigate damages (R46). In opposition, Appellants argued that the acceleration clause, which would require defendants to immediately pay all of the rent which would accrue for the entire term of the lease until 2016, was unenforceable since plaintiff terminated the lease (R114; R119-R123). What is more, where, as here, the lease does not require the landlord to credit the tenant with the amounts received upon reletting the premises after recovering possession, 9 the accelerated rent clause is deemed to impose a penalty and is not enforceable (R121-R123). Appellants further argued that the Civil Court determination which granted plaintiff a judgment of possession but refused to award damages was res judicata. Plaintiff was therefore barred from seeking damages in the instant action (R122). In reply, plaintiff argued that a landlord has no obligation to mitigate after a commercial tenant has abandoned the premises, and that a lease provision imposing continued liability for rent after termination of the lease is enforceable (R130-R136). Plaintiff’s president Mr. Pustilnik submitted an affidavit dated November 18, 2010, in which he stated ambiguously that while he did not recognize any duty to mitigate damages, “I wish to state Plaintiff has attempted to locate new tenants without success” (R124). Mr. Pustilnik claimed that in order to lease the premises to the Association as a student dormitory, plaintiff had been required to file a Student Dormitory Restrictive Declaration with the New York City Department of Buildings stating that the premises would only be used as a student dormitory (R124). The Declaration had purportedly restricted plaintiff in its ability to find a tenant (R124). Mr. Pustilnik admitted, however, and the Declaration itself states, 10 that the Declaration could be modified or terminated upon obtaining consent from the Department of Buildings (R124; R127). Mr. Pustilnik did not state that plaintiff had ever sought termination of the Restrictive Declaration from the Department of Buildings. Nor did plaintiff provide any details of the efforts it allegedly made to relet the premises. Plaintiff further argued that since Globe was not a party to the Civil Court action against the Association, the doctrine of res judicata did not bar plaintiff’s claims against Globe (R136). C. The Order and Judgment of Supreme Court, New York County In its Order entered December 6, 2010, Supreme Court, New York County (Hon. Carol D. Edmead, J.) granted summary judgment to plaintiff on the issue of liability (R22-R36). While noting that other Departments of the Appellate Division have held that acceleration clauses are not enforceable when the landlord terminates the lease and the lease does not require that the landlord relet the premises, the Court opined that precedent from the Appellate Division, First Department conflicted with that precedent (R32). The Court held that the doctrine of res judicata did not apply to Globe, which was not a party in the Civil Court action (R35). What is more, defendants allegedly failed to establish that the issue of the amounts due and 11 owing under the liquidated damages clause was “necessarily decided” in the Civil Court action (R35). While granting summary judgment to plaintiff on the issue of liability, the Court stated that “It is unclear whether the plaintiff relet the premises” (R34). A hearing was therefore necessary to determine plaintiff’s damages (R35). At the hearing, the parties stipulated to the amount to be entered as the amount of the Judgment after deduction of the amount recovered as rent (R16-R17; R86). The Court entered Judgment awarding plaintiff the amount of $1,488,604.66 (R16-R21). D. The Appellate Division, First Department’s Order The Appellate Division, First Department affirmed in the Order from which Appellants seek review from this Court. The Appellate Division stated in pertinent part: “Plaintiff made a prima facie showing of its entitlement to accelerated rent, pursuant to the express terms of the lease, which also provided that the obligation to pay rent was to continue in the event of termination of the lease (see Ring v Printmaking Workshop, Inc., 70 AD3d 480, 481 [1st Dept 2010]). “In opposition, defendants failed to raise a triable issue of fact as to whether the liquidated damages provision was an unenforceable penalty (see Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420, 423-425 [1977]). The doctrine of res judicata does not bar plaintiff’s recovery under the acceleration 12 provision, as such damages were not recoverable in the summary proceeding brought in the Civil Court (see NY City Civ Ct Act §204; Ross Realty v. V &A Fabricators, Inc., 42 AD3d 246, 249-250 [2d Dept. 2007])” (R7-R8). As shown infra, the Order appealed from should be reversed and vacated, and the Complaint dismissed. The acceleration clause at issue is unenforceable, on multiple grounds, and plaintiff’s claims were in any event barred by the doctrine of res judicata. POINT I THE APPELLATE DIVISION’S DECISION CONFLICTS WITH PRECEDENT FROM THIS COURT AND FROM OTHER DEPARTMENTS OF THE APPELLATE DIVISION, WHICH HOLD THAT AN ACCELERATION CLAUSE SHOULD NOT BE ENFORCED WHEN THE LANDLORD TERMINATES THE LEASE AND REPOSSESSES THE PROPERTY._______ The Appellate Division’s decision in this case is manifestly inconsistent with this Court’s decision in Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (1979) (“Fifty States”). Pursuant to Fifty States, the acceleration clause is unenforceable because it is undisputed that plaintiff terminated the lease and obtained a judgment of possession and a warrant of eviction (R43-R44; R77-R78). In Fifty States, this Court repeatedly noted that, as a condition to the landlord’s enforcement of an acceleration clause, the tenant must be in 13 possession of the premises or must be entitled to possession of the demised premises upon payment of the rent reserved for the balance of the lease term (see, e.g., 46 N.Y.2d at 575 [“As the tenant is entitled to possession of the demised premises upon payment of the rent reserved for the balance of the lease term…the agreement of the parties must be enforced in accordance with its terms”]; 46 N.Y.2d at 578 [the acceleration clause constituted a “contractual option to receive the rental payments reserved for the remainder of the lease as a condition of defendant’s continued occupancy” (emphasis added)]; 46 N.Y.2d at 578 [enforcement of the acceleration clause “presumes…that the tenant would be entitled to possession upon payment” (citations omitted)]). Here, in contrast, defendants are not in possession and would not have possession of the premises upon payment of the accelerated rent demanded by plaintiff, as it is undisputed that plaintiff terminated the lease in March 2008 and was awarded a judgment of possession by Civil Court in August 2008, at which time a warrant of eviction was issued. Professor Robert E. Parella of St. John’s University School of Law has observed that in Fifty States, “[T]he tenant remained in possession and the Court built that fact into its holding.” Parella, Survey: Real Property, 49 Syracuse L. Rev. 703, 710 (1999). Professor Parella further observes that “if 14 rent acceleration clauses are to be enforced at all, their enforcement should be limited to cases in which the tenant remains in possession.” Ibid, at p. 711. Commentators have observed that a rent acceleration provision which purports to become applicable when the lease is terminated and the tenant is evicted from the building is not a true rent acceleration provision and will not be enforced by most courts. “Briefly stated, a rent acceleration provision is a liquidated damages clause which, as a result of a material breach or failure of condition, mandates that the rent for the balance of the lease term be paid immediately….A rent acceleration clause often appears as a provision providing the landlord with the option to call due the rent for the remainder of the lease period. Ostensibly, this neither causes a termination of the lease nor hinders the tenant’s right to occupy the premises provided that the tenant tenders the accelerated rent to the landlord. This, the most genuine form of accelerated rent, will be called `type one’. A rent acceleration clause may also take the form of a lease term providing for liquidated damages payable to the landlord only upon termination of the leasehold. This is not a true rent provision because termination of the lease is required to trigger it. This will be called `type two’. However, to the credit of the courts, more often than not type two provisions are found to be unenforceable as written.” David C. Skinner, Gambling with Remedies: Rent Acceleration and Mitigation of Damages in Alabama, 45 Ala. L. Rev. 275, 276-280 (1993) (footnotes omitted). 15 Notably, Mr. Skinner, citing Benderson v. Poss, 142 A.D.2d 937 (4th Dept. 1988) (discussed infra), observed that “The New York courts have properly noted that type one acceleration provisions are enforceable if the lease is not terminated and the provision does not work as a forfeiture or an exploitative overreaching.” (45 Ala. L. Rev. 275 at 286; footnote omitted). The comments by Mr. Skinner fit perfectly with this Court’s decision in Fifty States. There, this Court observed that an acceleration clause is a bargained-for contractual device by which the landlord is afforded the option, upon the tenant’s default in making rental payments, to receive the rental payments reserved for the remainder of the lease term “as a condition of defendant’s continued occupancy” (46 N.Y.2d 573 at 578; emphasis added). That is a genuine acceleration clause – Skinner’s “type one”. The clause propounded by plaintiff here, which purports to allow the landlord to immediately receive the entire balance of the rent payments for the remainder of the lease upon the landlord’s termination of the lease, is not a true acceleration clause within the purview of this Court’s decision in Fifty States, but is rather an over-reaching penalty which should not be enforced. The Appellate Division’s decision here not only conflicts with this Court’s determination in Fifty States, it is also in direct conflict with the decision of the Appellate Division, Fourth Department in Benderson v. Poss, 16 supra, 142 A.D.2d 937, as the lower Court recognized (R32). In Benderson, the Fourth Department held that plaintiff’s election to terminate the lease upon defendant’s default resulted in forfeiture of plaintiff’s right to accelerated future rents, as enforcement would essentially provide plaintiff with a windfall. Said the Court: “An acceleration clause in a lease is a device intended to secure the tenant’s obligation to perform a material element of the bargain and, in the absence of fraud, exploitive overreaching or unconscionable conduct, its enforcement works no forfeiture (Fifty States Mgt. Corp. v. Pioneer Auto Parks, 46 NY2d 573, 577-578). `This, of course, presumes that the sum reserved for liquidated damages is no greater than the amount the tenant would have paid had it fully performed and that the tenant would be entitled to possession upon payment’ (Fifty States Mgt. Corp. v Pioneer Auto Parks, supra, at 578). Here, the defendant tenant was locked out of the leased premises and the lease relationship terminated. Thus, plaintiffs were not entitled to collect, as rents, subsequent installments thereof due under the lease (see, International Publs. v. Matchabelli, 260 NY 451, 453).” See also, Gotlieb v. Taco Bell Corp., 871 F. Supp. 147, 155 (E.D.N.Y. 1994) (holding that “plaintiffs have forfeited their rights to all future rents as damages because plaintiffs terminated the lease” [emphasis added]); Vanguard Commercial Leasing Corp. v. Dayanzadeh, 147 A.D.2d 557 (2d Dept. 1989) (where plaintiff lessor repossessed vehicle after lessee’s default in payment, provision in lease which required that lessee pay entire unpaid 17 rental for the balance of the lease period constituted a penalty which would not be enforced); Stats, LLC v. Elevation, Inc., 2008 NY Slip Op 32449U, 2008 N.Y. Misc. LEXIS 9622 (Sup. Ct., N.Y. County 2008) (whether viewed as liquidated damages clause or acceleration clause, provision in lease which permitted lessor to both terminate lease upon default and demand all unearned, future monthly fees was unenforceable penalty); Fairfield Lease Corp. v. Marsi Dress Corp., 60 Misc.2d 363 (Civ. Ct., N.Y. County 1969) (lease provision which gave lessor not only right to repossess machine but also right to accelerate all of the unaccrued rent upon lessee’s failure to pay rent was unenforceable penalty). The Appellate Division asserted in its decision here that the lease provided that the obligation to pay rent was to continue in the event of termination of the lease, and cited to its prior decision in Ring v. Printmaking Workshop, Inc., 70 A.D.3d 480 (1st Dept. 2010), as purported precedent for enforcing the acceleration clause. However, Ring did not involve an acceleration clause. The decision in Ring mentions nothing about an acceleration clause, and pages 15-16 of the Record on Appeal in Ring indicate that the lease provision at issue (paragraph 18) provided that upon default, re-entry, expiration and/or dispossess, rent would become due thereupon and be paid up to the time of such re-entry, dispossess and/or 18 expiration. The lease further provided that the owner could re-let the premises, and the tenant would be responsible for any deficiency between the new rent obtained and that for which the tenant had contracted. The lease explicitly provided that such “liquidated damages” must be paid in monthly installments by tenant on the rent day specified in the lease and any suit brought to collect the amount of the deficiency for any month would not prejudice the rights of the owner to collect the deficiency for any subsequent month by a similar proceeding. Thus, Ring did not involve a clause that purported to accelerate the rent for the entire term of the lease, as is the situation here. In its Respondent’s Brief submitted to the Appellate Division, plaintiff cited to, among others, Holy Properties Limited, L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130 (1995); The Gallery at Fulton Street, LLC v. Wendnew LLC, 30 A.D.3d 221 (1st Dept. 2006); Parsons & Whittemore, Inc. v. 405 Lexington L.L.C., 299 A.D.2d 156 (1st Dept. 2002); and 186-90 Joralemon Associates v. Dianzon, 161 A.D.2d 329 (1st Dept. 1990), for the proposition that “While 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” (see Plaintiff’s Resp. Br. at the Appellate Division, p. 15). Plaintiff’s reliance upon those cases is 19 misplaced. Those cases, which do not involve an acceleration clause, concern the landlord’s right to sue for recovery of rent deficiencies as they accrue pursuant to a survival clause in the lease, not any purported right to accelerate damages so as to demand immediate payment of several years’ worth of rental payments.2 Olim Realty Corp. v. Big John’s Moving, Inc., 250 A.D.2d 744 (2d Dept. 1998), also cited by plaintiff, is, quite simply, incorrectly decided. In Olim, the tenant defaulted on rent, abandoned the property and thereafter the landlord terminated the lease and locked the tenant out of the premises. The Appellate Division’s holding that the landlord was entitled to enforce the acceleration clause is inconsistent with this Court’s holding in Fifty States which requires that the tenant either be in possession of the premises or be entitled to possession of the premises upon payment of the rent due. Further, Olim cites to Holy Properties, supra, 87 N.Y.2d 130 as purported authority for its holding, despite the fact that Holy Properties did not involve an acceleration clause.3 This Court in Fifty States manifestly indicated that a 2 In The Gallery, plaintiff did not seek immediate payment of future rents under the acceleration clause provision in the lease, but only sought payment of already accrued arrears under other provisions of the lease. 3 Other courts have similarly erroneously assumed that Holy Properties involved an acceleration clause (see, e.g., Colonial Plaza Corp. v. Steele, 13 Misc.3d 1230(A) [Justice Court, Town of Hyde Park, Dutchess County 2006]; The Marketplace v. Smith, 181 Misc.2d 440 [Justice Court, Town of Henrietta, Monroe County 1999]). It did not. 20 tenant’s right of possession is necessary for application of an acceleration clause. Plaintiff argued below that this Court’s holding in Fifty States should not apply where the tenant abandoned the property, as was the case in Olim. However, according to Professor Parella at St. John’s University School of Law, “[T]he issue is much more complex, in terms of sound analysis and sound policy”, than the terse memorandum decision in Olim suggests. 49 Syracuse L. Rev. 703, 709. Professor Parella observes: “By contrast with Fifty States, in Olim Realty Corp., the tenant had abandoned. That fact raises numerous analytical difficulties. If the landlord later relets, would the tenant who abandoned be entitled to such monies? Is there a mechanism or theory for recovering them? Should the landlord be under a duty to relet in these special circumstances? Can the tenant reenter after abandoning, assuming the judgment for accelerated rent is satisfied? Can the tenant assign in these special circumstances, even if the lease prohibited assignment? Finally, can we reconcile acceleration clauses with our statutory stay policy? When eviction is sought against a tenant who holds over after default in payment of rent, the tenant can pay the rent into court and effectively terminate the eviction proceeding. The statutory policy is that the tenant’s interest in preserving the lease outweighs the landlord’s interest in receiving the rent on the due date. That legislative policy seems at least inferentially opposed to enforcing such a problematic sanction – acceleration – against a tenant who does not pay the rent on the due date. In sum, if acceleration clauses are to be enforced at 21 all, their enforcement should be limited to cases in which the tenant remains in possession. If the tenant has abandoned, recovery of deficiencies as they accrue, under a properly drawn survival clause, would seem an adequate remedy.” (footnotes omitted and emphasis added; 49 Syracuse L. Rev. at 710-711). The Order of the Appellate Division which held that the acceleration clause is enforceable should accordingly be reversed and vacated, and the Judgment should also be vacated insofar as it awarded plaintiff accelerated rent. POINT II THE APPELLATE DIVISION’S DECISION CONFLICTS WITH PRECEDENT FROM THIS COURT AND FROM THE OTHER DEPARTMENTS OF THE APPELLATE DIVISION, WHICH HOLD THAT AN ACCELERATION CLAUSE WILL NOT BE ENFORCED WHEN IT IS DISPROPORTIONATE TO THE PLAINTIFF’S PROBABLE LOSS.______ As this Court noted in Truck-Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977), a liquidated damages provision in a lease constitutes the compensation which the parties have agreed should be paid in order to satisfy any loss or injury flowing from a breach of contract. It is in effect an estimate, made by the parties at the time they enter into the agreement, of the extent of the injury that would be sustained as a result of breach (41 N.Y.2d at 424). 22 While a liquidated damages provision in a contract may be enforced where it is neither unconscionable nor contrary to public policy, it will not be enforced if it is against public policy to do so. Public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority (41 N.Y.2d at 424). A provision which requires, in the event of contractual breach, the payment of a sum of money grossly disproportionate to the amount of actual damages provides for a penalty and is unenforceable. A liquidated damage provision has its basis in the principle of just compensation for loss. A clause which provides for an amount disproportionate to the landlord’s real damage would compel the promisor, out of fear of economic devastation, to continue performance and the promisee, in event of a default, would reap a windfall well above the actual harm sustained (41 N.Y.2d at 424). In Fifty States, supra, this Court held that acceleration clauses may be enforced where they do not effect a penalty, i.e., where amounts to be received are compensatory in purpose and not disproportionate to actual damages (Fifty States, supra, 46 N.Y.2d 573).4 Here, however, a penalty is exactly what results from enforcement of the acceleration clause. Here, the 4 Even the onerous lease provision here recites accelerated rent as one of the elements of damage “necessary to compensate Landlord for the detriment caused by tenant’s default.” (R62-R63). 23 landlord gets to eat his cake and have it too – he obtains a judgment for accelerated rent over a multiyear lease, yet, having terminated the lease, obtained possession of the property and having no contractual duty to mitigate, the landlord can rent out the property at will to others without having to make any accounting to defendants for the rent obtained. This ability to “double-dip” is a windfall which renders the acceleration a penalty. This Court has instructed that, when a liquidated damages provision is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., supra, 41 N.Y.2d at 423-425; Skinner, supra, Gambling with Remedies: Rent Acceleration and Mitigation of Damages in Alabama, 45 Ala. L. Rev. at 278 (“[R]ecovery under an acceleration provision is a payment in the present of that which is not due until the future. As such, this accelerated recovery represents a windfall which many argue the landlord does not deserve in any event” [footnotes omitted]). Plaintiff argued below that it would have difficulty re-renting the property because in order to lease the premises to the Association as a student dormitory, plaintiff was required to file a Student Dormitory Restrictive Declaration with the New York City Department of Buildings stating that the building would only be used as a student dormitory (R124- 24 R125). Plaintiff admitted, however, and the Declaration itself states, that the Declaration could be modified or terminated upon obtaining consent from the Department of Buildings (R124; R127). Plaintiff did not state that it ever sought termination of the Restrictive Declaration from the Department of Buildings. In any event, plaintiff’s argument that the Student Dormitory Restrictive Declaration has somehow crippled its ability to re-rent the premises, is clearly untrue. The Judgment itself reflects a deduction for rents received after the termination of the lease. At the hearing on damages which took place at Supreme Court, New York County on March 24, 2011, the parties stipulated to $1,439,327.33 as plaintiff’s damages, which included a deduction for the amount of rental income plaintiff had received after Appellants vacated the premises (R16-R17; R86). The Judgment appealed from reflects the stipulated amount of damages (R16-R17). The Appellate Division’s determination to enforce the acceleration clause in this case not only conflicts with this Court’s precedent, it also conflicts with the decision of the Appellate Division, Fourth Department in Benderson v. Poss, supra, 142 A.D.2d 937. There, the defendants defaulted approximately one and a half years into the five year term of a commercial lease. The Appellate Division, Fourth Department held that the accelerated 25 rent provision would not be enforced, as it would provide plaintiffs with damages which were grossly disproportionate to the probable loss: “Plaintiffs correctly argue that landlord and tenant may contract for the tenant’s continued liability after the termination of the landlord-tenant relationship (International Publs. v. Matchabelli, supra, at 454). However, what survives after the termination of a lease is not liability for rents, but a liability for damages (International Publs. v. Matchabelli, supra, at 454). `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’ (Truck Rent-A-Center v. Puritan Farms 2nd, 41 NY2d 420, 425). 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’ (Truck Rent-A-Center v. Puritan Farms 2nd, supra, at 425).” See also, Gotlieb v. Taco Bell Corp., supra, 871 F. Supp. 147, 155 (as plaintiffs were negotiating a new lease of the property at a higher rent than that contracted with defendants, an award of all future rents would be grossly disproportionate to the probable loss and result in a windfall; therefore plaintiffs were not entitled to future rents under the lease as liquidated damages). 26 Both courts and commentators have observed that rent acceleration clauses are not valid pre-breach estimates of actual loss. As one commentator has noted: “The validity of rent acceleration clauses in the various jurisdictions of the United States is, at best, questionable and the arguments against their enforcement are both numerous and compelling. Specifically, rent acceleration clauses are not valid pre-breach estimates of any cognizable harm which may befall landlords. They are invalid as rent provisions as they ignore the time value of money. Finally, such provisions are also invalid because they create contracts which cannot be breached by tenants.” Skinner, supra, Gambling with Remedies: Rent Acceleration and Mitigation of Damages in Alabama, 45 Ala. L. Rev. at 275). As observed by Mr. Skinner in his article, The Restatement of Property indicates that an acceleration provision without a discount for the present value of money may be unconscionable. See Skinner, supra at 291; Restatement (Second) of Property (Landlord Tenant) §12.1 comment k (1977). Mr. Skinner further observes that “[T]he situations in which a payment of the undiscounted balance of the rent is a legitimate effort to approximate actual damages in advance are few indeed”, as the landlord will always be capable of some mitigation. Skinner, supra, at 282. The courts have similarly concluded that an acceleration clause cannot be a genuine effort to approximate damage, particularly where the clause 27 fails to discount for the present value of money. The Court in In re Winston Mills, Inc., 6 B.R. 587 (Bankr. S.D.N.Y. 1980), in holding that the creditor’s claim for accelerated payment of rent pursuant to a lease had to be discounted to present value, observed as follows: “A reduction of an award to present value is necessitated by the fact that money presently in hand is always more useful than staggered payments in the future. To allow a full recovery would, in effect, overcompensate the claimants by the interest earning power of the money in their hands now.” Id. at 599-600 (citation omitted). See also, Frontier Leasing Corp. v. Griffin Petroleum Inc., 172 F. Supp.2d 1172 (S.D. Iowa 2001) (acceleration clause must account for present value of money); Key Equipment Finance, Inc. v. Simos Cartage Co., Inc., 2007 U.S. Dist. LEXIS 89011 (N.D. Ill. 2007); Heller Financial, Inc. v. Burry, 633 F. Supp. 706 (N.D. Ill. 1986) (lease provision which provides for the acceleration of all future rents on default without any discount for the present value of money is a penalty provision). As the acceleration provision in the lease is plainly disproportionate to any loss that plaintiff may sustain, this Court should decline to enforce it (Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., supra, 41 N.Y.2d at 424). 28 POINT III THE ACCELERATION CLAUSE IS UNENFORCEABLE FOR THE FURTHER REASON THAT THERE IS NO CORRESPONDING DUTY OF THE LANDLORD TO MITIGATE. The Appellate Division held in this case that the acceleration clause is enforceable, even though the lease does not impose a corresponding duty on the landlord to mitigate damages by attempting to relet the premises. That decision conflicts with the holdings of several other New York courts, which have held that an acceleration clause in a commercial lease will not be enforced where the lease does not require the landlord to mitigate damages, as such an acceleration clause would constitute an unenforceable penalty. See, e.g., Ross Realty v. V&A Iron Fabricators, Inc., 5 Misc.3d 72, 787 N.Y.S.2d 602 (App. Term, 2d Dept. 2004) (“[W]here, 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. Accordingly, the District Court did not err in refusing to award the landlord the accelerated rent sought” [citations omitted]); Rand v. Conklin, 1994 N.Y. Misc. LEXIS 714, 211 N.Y.L.J. 5 (App. Term, 9th and 10th Jud. Districts 1994); Silver v. Brody, 29 1993 N.Y. Misc. LEXIS 640, 209 N.Y.L.J. 77 (App. Term, 9th and 10th Jud. Districts 1993) (in the absence of a provision requiring the landlord to re- rent, an award to landlord of possession as well as of the rent due for the unexpired remainder of the term would be unconscionable and would penalize tenant by requiring him to pay damages disproportionate to the probable loss; therefore acceleration provision would not be enforced); Kabro Associates of Woodbury v. Off-Campus of Woodbury, Inc., 1992 N.Y. Misc. LEXIS 698, 208 N.Y.L.J. 95 (App. Term, 9th and 10th Jud. Districts 1992). Plaintiff relied upon Holy Properties, supra for the proposition that plaintiff as a commercial landlord has no duty to mitigate. Holy Properties, however, did not concern an acceleration clause. Nothing in Holy Properties states that there is no duty on the part of a commercial landlord to mitigate damages when an acceleration clause is sought to be enforced. Research has revealed no case from this Court which holds that there is no duty to mitigate where a liquidated damages clause is involved, although some Appellate Division cases have so held, without providing any discernible rationale (see, for example, American Capital Access Service Corp. v. Muessel, 28 A.D.3d 395 [1st Dept. 2006]; Delvecchio v. Bayside Chrysler Plymouth Jeep Eagle, Inc., 271 A.D.2d 636 [2d Dept. 2000]). 30 Plaintiff may argue that it did re-rent the property after obtaining possession in 2008 until February 2011, and that the Judgment appealed from reflects the rent that plaintiff received during that period. However, that does nothing to alleviate the fact that plaintiff obtained a Judgment for accelerated rent until 2016, and that the Judgment did not take into account the fact that the landlord would be able to retain all rent, without accounting for mitigation of its losses, from March 2011 to 2016. Prohibiting the landlord from seeking to enforce a rent acceleration clause without a concomitant duty to mitigate damages by attempting to relet the premises promotes important policy interests of avoiding economic waste, preventing the non-breaching party from obtaining windfall or double profits, and preventing the penalization of the breaching party by requiring payment greater than that which is required for compensation. See Skinner, supra, Gambling with Remedies: Rent Acceleration and Mitigation of Damages in Alabama, 45 Ala. L. Rev. 275; Professor Sarajane Love, Landlord’s Remedies When Tenant Abandons: Property, Contract, and Leases, 30 U. Kan. L. Rev. 533, 556 (1981-2) (“The principal argument in favor of adopting the avoidable consequences rule in lease law is that there is simply no persuasive reason for excepting the lease transaction from the operation of a rule that has the salutary policy goal of discouraging 31 economic waste.”); Note, Why There Should be a Duty to Mitigate Liquidated Damages Clauses, 38 Hofstra L. Rev. 285, 295- 317 (2009); see also, Schneiker v. Gordon, 732 P.2d 603, 610 (Colo. 1987) (“[I]t is generally in the interests of society that property be put to practical use so far as is economically feasible. Usually, no economic value is obtained from property if a landlord allows it to remain idle. At the same time, the possibility of physical damage to the property through accident or vandalism is increased. The rules for awarding damages in the context of abandonment and breach by the tenant should discourage, rather than encourage, economical and physical waste” [citations omitted]). As observed by Professor Love, who is currently Professor of Law at University of Georgia School of Law: “The avoidable consequences rule is based on a very pervasive policy against economic waste. It is a doctrine `designed not only to prevent and repair individual loss and injustice but to protect and conserve the economic welfare and prosperity of the whole community.’ By discouraging an injured party from passively suffering avoidable losses, it decreases the dissipation of private resources to repair or replace such losses.” (30 U. Kan. L. Rev. at 556; footnotes omitted). Plaintiff argued below that requiring a commercial landlord to show efforts to mitigate when seeking to enforce an acceleration clause would impose a grievous burden. To the contrary, the mitigation doctrine, 32 otherwise known as the doctrine of avoidable consequences, imposes an entirely reasonable obligation. The mitigation doctrine states that “damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.” Restatement (Second) of Contracts § 350(1) (1981). The non-breaching party need not take any steps that would be inconvenient, burdensome, or expensive, and need only make an effort that is “reasonable” and “appropriate in the circumstances.” Restatement (Second) of Contracts §350, comments b and g. There is no requirement that the non-breaching party be successful in its efforts to mitigate, but that party is required to try. Restatement (Second) of Contracts § 350(2). In Holy Properties Limited, L.P. v. Kenneth Cole Productions, Inc., supra, 87 N.Y.2d 130, which did not involve an acceleration clause, this Court held that the landlord had no duty to mitigate damages after its commercial tenant abandoned the property and was subsequently evicted. This Court noted that the law imposes upon a party subjected to injury from breach of contract the duty of making reasonable exertions to minimize the injury. This Court held, however, that leases are not subject to this general rule, for, unlike executor contracts, leases have been historically recognized as a present transfer of an estate in real property (87 N.Y.2d at 133). 33 Respectfully, since this Court decided Holy Properties nearly two decades ago, there has been a sea-change in how the law (and contracting parties) views commercial leases, as noted by the Court in Frenchtown Square Partnership v. Lemstone, Inc., 99 Ohio St.3d 254, 2003 Ohio 3648, 791 N.E.2d 417 (Ohio 2003). There, the Ohio Supreme Court held that a landlord has a duty to mitigate damages caused by a tenant who breaches a commercial lease and abandons the leasehold. In so holding, the Court acknowledged that historically, a lessor bore no obligation to mitigate damages when a lessee abandoned the leasehold. A duty to mitigate did not exist because leases were viewed as transfers of property interests by which the lessee owned an abstract portion of the land, albeit for a limited duration, and rent was a fixed obligation (791 N.E.2d at 419). Conversely, contract law acknowledges that mitigation may justly place an injured party in as good a position had the contract not been breached at the least cost to the defaulting party (Id.). The Court noted that a “modern trend” is eroding the common-law approach of treating leases strictly as conveyances of real property (Id.). The modern trend is to impose a duty to mitigate upon both commercial and residential lessors (Id. at 420, citing numerous cases). See also, Dawn R. Barker, “Commercial Landlords’ Duty upon Tenants’ Abandonment – To Mitigate?” 20 Iowa J. Corp. L. 627, 629, 634 (Summer 34 1995) (modern trend is for courts to impose upon landlord duty to mitigate damages when commercial tenant abandons leased premises); In re Lapke, 2008 Bankr. LEXIS 182, *10 (D. Neb. 2008) (under Nebraska law, acceleration clause in commercial contract was subject to landlord mitigation; “The landlord cannot receive a windfall under Nebraska law”); Southwest Park Outpatient Surgery Ltd. v. Chandler Leasing Div., 572 S.W.2d 53, 56-57 (Tex. Civ. App. 1978) (acceleration of rents without crediting lessee for resale or reletting of property violates just compensation and is void as penalty); Bank One, N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943, 967 (N.D. Texas 1995) (under Texas law, a landlord is obligated to mitigate his damages and thus simple acceleration of future rents may not be proper). As observed by Professor Love: “No other area of private law has undergone as much radical change in the last decade as has the law governing the lease relationship. The most consistent theme of that change has been the incorporation into the landlord-tenant relationship of principles developed in contract law. The application of contract principles to disputes between parties to a lease has been universally regarded as appropriate because lease agreements typically contain many promises between the landlord and tenant, thereby transcending the simple function of conveying an interest in property to the tenant…. 35 “The property remedy that permits the landlord to stand by and do nothing, suing for the full rent as or after it accrues, has no counterpart in contract law. Indeed, it is anomalous in the entire remedies field. Nowhere else is an injured party allowed to recover for harm suffered if he could have taken reasonable steps to prevent such harm. The avoidable consequences rule, often referred to as the duty to mitigate damages, has been steadily making inroads on the landlord’s remedial options.” Love, supra, Landlord’s Remedies When Tenant Abandons: Property, Contract, and Leases, 30 U. Kan. L. Rev. at 533, 550; footnotes omitted). As observed by Dawn R. Barker (now Professor Dawn Barker Anderson of University of Iowa College of Law) in her article: “[T]he essential nature of leases has evolved since the adoption of the traditional common law rule. The similarities between a modern commercial lease and other contracts require the conclusion that landlords should have a duty to mitigate damages similar to that of the nonbreaching party in other contracts. In modern times—as opposed to historically when leasehold interests were made for the use of the underlying land and reflected the agrarian nature of society-- `covenants in leases have become more numerous and complex, reflecting the growing importance of structures on the land and the burgeoning complexities of an increasingly urban society.’ ….The increasing importance of covenants in commercial leases emphasizes that a modern commercial lease is predominantly an exchange of promises….As in other types of contracts, the obligation to mitigate flows naturally and logically from the implied covenant of fair dealing and good faith that exists in contracts. Thus, because a modern lease is 36 essentially a contract and because under contract doctrine the nonbreaching party has a duty to mitigate damages, the modern commercial lessor should have a duty to mitigate damages when a tenant abandons the leased commercial premises.” (Dawn R. Barker, supra, “Commercial Landlords’ Duty upon Tenants’ Abandonment – To Mitigate?” 20 Iowa J. Corp. L. 627, 629, 643-644; citations and footnotes omitted). The trend to view leases as contractual obligations has not been ignored in New York. See Sateesh Nori, Outside Counsel, “Does a Landlord Have a Duty to Mitigate? No, but Maybe”, NYLJ, 8/30/2012 (“[S]ince 2008, contract principles have become employed with higher frequency, and the language used in the context of residential leases has begun to resemble more and more the language used in contract cases. Concepts such as equitable estoppel – precluding a landlord from avoiding mitigation where it has taken affirmative steps to mitigate – and unjust enrichment have crept into the courts’ vocabulary).” This Court has noted that what survives after the termination of a lease is not liability for rents, but a potential liability for contractual damages (International Publs. v. Matchabelli, 260 N.Y. 451 at 454 [1933]). A landlord who seeks to enforce an acceleration clause after terminating the lease is therefore seeking a contractual remedy, and it would be unjust not to 37 require the landlord to mitigate damages (if, in fact, the acceleration clause can be enforced post-termination at all [see Point I supra]). As noted by Mr. Skinner in his article: “In `type two’ situations, the landlord places a provision in the lease that allows for liquidated damages in the amount of the difference between the rent reserved in the lease and the rent tendered by the tenant and accepted by the landlord prior to the termination of the lease. The provision is only effective upon termination of the tenancy and, therefore, cannot be rent. As such, the recovery is not one in rent, but one in damages similar to those due the landlord at common law following a breach – the value of the rents yet to be paid. However, these damages are liquidated and are not subject to mitigation to the extent of any rents collected from a subsequent tenant during the term of the original lease or any savings which the landlord realizes as a result of the tenant’s absence….[A]ny such clause which exacts a penalty by denying the right to, and duty of, mitigation should be held invalid. Further, the situations in which a payment of the undiscounted balance of the rent is a legitimate effort to approximate actual damages in advance are few indeed.” (Skinner, supra at 281-282; footnotes omitted). One of the justifications touted for refusing to impose a duty to mitigate upon the landlord in the commercial setting is that a commercial tenant is more sophisticated and better able to defend his or her interests. This argument ignores the fact that not all commercial leases involve large corporations. Many “mom-and-pop” stores and local businesspersons must 38 also enter into commercial leases. See generally, Jeremy K. Brown, Comment: A Landlord’s Duty to Mitigate in Arkansas: What it Was, What it is, and What it Should Be, 55 Ark. L. Rev. 123, 129 (2002). As the historical rationales for treating commercial leases as conveyances rather than contracts no longer hold much validity, and the landlord’s demand for accelerated rent after termination of the lease is in the nature of contractual damages rather than rent, this Court should hold that the landlord is subject to a duty to mitigate (if this Court holds that an acceleration provision is enforceable at all after the landlord’s termination of the lease [see Point I supra]). As stated by one eminent jurist: “It is revolting to have no better reason for a rule than that it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.” Oliver Wendell Holmes, The Path of Law, 10 Harv. L. Rev. 457, 469 (1897). Finally, the Appellate Division’s decision, which in essence holds that a landlord is entitled to enforce an accelerated rent clause even where the lease has no provision requiring mitigation and the landlord has repossessed the property and obtained a warrant of eviction, fails to adequately recognize the challenging economic times in which we live. A commercial tenant may find that it is unable to thrive at a particular location because the premises 39 are unsuitable for its purposes or because the location is not conducive to its particular business, or for other reasons which are not blameworthy. To force a struggling business which has defaulted on a rent payment to immediately pay the balance of the rent due under the entire term of the lease, while that tenant has been dispossessed from the building and the landlord claims no duty to mitigate, will in many cases simply result in forcing that business into bankruptcy. At a minimum, the premises will be permitted to remain idle while draining funds from the evicted tenant, which funds could have been used more profitably by the tenant to create a viable business elsewhere. This Court should accordingly reverse and vacate the Appellate Division’s Order, and vacate the Judgment insofar as it awarded accelerated rents to plaintiff. POINT IV PLAINTIFF’S CLAIMS ARE BARRED BY RES JUDICATA. A. Plaintiff’s Claim for Past Due Rent Is Barred by Res Judicata._______ Plaintiff’s claim for past due rent is barred by the doctrine of res judicata, in light of the fact that the issue of past due rent was raised and determined in the Civil Court proceeding in which plaintiff obtained a judgment of possession. It is undisputed that plaintiff’s Petition dated 40 March 26, 2008 filed with the Civil Court requested not only a final judgment of eviction and possession of the premises, but also past rent due in the sum of $27,440.00, plus fair value use and occupancy and legal fees (see Main Brief at the Appellate Division, p. 19). The Civil Court awarded plaintiff possession of the premises, but awarded plaintiff a money judgment of “$0.00” (R77). Thus, any claim for unpaid rent is barred by res judicata (see, e.g., Matter of Hunter, 4 N.Y.3d 260, 269 [2005]). Supreme Court, New York County asserted in its decision that the Civil Court’s Order indicates that the underlying action involved a holdover claim and cited Jones v. Gianferante, 305 N.Y. 135 (1953) for the proposition that the only issue before the court would be the landowner’s right of possession (R35). To the contrary, a holdover proceeding in Civil Court can determine not only a request for eviction, but also a request for money damages for rent due (N.Y. City Civ. Ct. Act section 204; see also, 1422 Corp. v. Rosenfeld, 44 A.D.3d 451 [1st Dept. 2007]). Jones v. Gianferante, supra, 305 N.Y. 135, a case dating from 1953, concerns a holdover proceeding pursuant to “Article 83 of the Civil Practice Act”, which is no longer extant. In its Brief submitted to the Appellate Division, plaintiff did not dispute that its claim for unpaid rent allegedly accrued prior to its 41 termination of the lease was barred by res judicata. Plaintiff admitted that the Civil Court had jurisdiction to consider rental installments that came due prior to lease termination (see Resp. Br. at App. Div., p. 29). Plaintiff argued only that its claim for accelerated rents was not barred by res judicata (Id., pp. 29-30). The Appellate Division did not address plaintiff’s failure to dispute defendants’ showing that the claim for past rent due is barred under the doctrine of res judicata. Instead, the Court focused solely on plaintiff’s claim for accelerated damages (R7-R8). As plaintiff did not dispute that its claim for past rent due is barred by res judicata, the Appellate Division clearly erred in failing to vacate the Judgment insofar as it includes amounts for past due rent, and that part of the Judgment which reflects amounts for past rent due must be vacated. B. Plaintiff’s Claim for Accelerated Rent is Also Barred by Res Judicata.___________ Supreme Court, New York County held that res judicata did not bar plaintiff’s claims under the liquidated damages clause because “defendants failed to establish, as a matter of law, that the issue of the amounts due and owing under the liquidated damage clause was necessarily decided in the underlying Civil Court action” (R35). It is well settled, however, that res judicata applies not only to claims actually litigated and decided in the prior 42 action, but also to any claims arising out of the same transaction which could have been raised. See, e.g., Matter of Hunter, supra, 4 N.Y.3d 260, 269; Licini v. Graceland Florist, Inc., 32 A.D.3d 825 (2d Dept. 2006) (doctrine of res judicata “operates to preclude the renewal of issues actually litigated and resolved in a prior proceeding as well as claims for different relief which arise out of the same factual grouping or transaction and which should have or could have been resolved in the prior proceeding” [citation omitted]). That plaintiff failed to press for a money judgment encompassing his claim for liquidated damages does not alter the fact that he could have done so at the time he requested the warrant of eviction and money damages for past rent due. In its decision, the Appellate Division cited Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246 (2d Dept. 2007) for the proposition that the Civil Court had no jurisdiction under section 204 of the New York City Civil Court Act to adjudicate plaintiff’s claim for accelerated rent (R7-R8). The Second Department in Ross held that accelerated rent does not fall within the definition of “rent due”, but rather constitutes contractual damages. If accelerated rent does indeed constitute contractual damages, then the Appellate Division’s failure here to find that plaintiff had a duty to mitigate damages warrants reversal (see Point III supra). 43 In any event, the Appellate Division ignored the fact that plaintiff itself chose to litigate in a court of (allegedly) limited jurisdiction. The fact that plaintiff originally chose the Civil Court in which to litigate does not give it the right to sue for additional damages later in a different court. See e.g., Licini v. Graceland Florist, Inc., 32 A.D.3d 825 (2d Dept. 2006) (the fact that plaintiff had chosen and originally litigated in the Yonkers City Court, which had a jurisdictional limit of $15,000, did not give her the right to sue for additional damages later in the Westchester Supreme Court; the Court noted that res judicata “operates to preclude the renewal of issues actually litigated and resolved in a prior proceeding as well as claims for different relief which arise out of the same factual grouping or transaction and which should have or could have been resolved in the prior proceeding” [citation omitted]). Contrary to Supreme Court, New York County’s assertion, the doctrine of res judicata bars plaintiff’s claims against both the Association and Globe. The Guarantee provides that the Guarantor guarantees the performance by the Lessee of “all of the obligations of the Lessee under said Lease, including but not limited to payment of rent and all other charges required to be paid and performed by Lessee under the terms of said Lease” (R73). Since a guarantor “stands in the shoes” of the principal, it can avail 44 itself of those defenses available to the principal (see, e.g., European American Bank & Trust Co. v. Boyd, 131 A.D.2d 629 [2d Dept. 1987]; Dart Associates v. Ste-Con Corp., 66 A.D.2d 973 [3d Dept. 1978]). The Civil Court determined that the Association is not liable for plaintiff’s claims for unpaid rent under the lease. What is more, the issue of whether liquidated damages are recoverable from the Association could have and should have been raised in that prior litigation, and is barred by res judicata. As there is no legal basis for plaintiff to collect damages from the Association, there is no basis for plaintiff to collect under the Guarantee. CONCLUSION For the reasons set forth herein, this Court should reverse and vacate the Order of the Appellate Division, First Department entered January 22, 2013 and dismiss the Complaint, together with such other and further relief as this Court deems just and proper in the premises. Dated: January 16, 2014 Respectfully submitted, HERZFELD & RUBIN, P.C. Attorneys for Defendants-Appellants Globe Alumni Student Assistance Association, Inc. and Globe Institute of Technology, Inc. 125 Broad Street New York, New York 10004 (212) 471—8514 lbrown@h,erzfeld-rubin.com . /' ~ ,.~.--.,;\£,.»m,,/ ,7 \.\ , . , ,x J I ; ..v\ .-" \, , . . . . ». r W, , ..! / .4//M. ,;"J;'-fir ~"r;..¢f~‘La:.t,. ~" ~’ 5%’ £.m.»<;/‘~"~ LINDA M. BROWN DAVID B. HAMM LINDA M. BROWN Of Counsel 45