January 16, 2004.
Appeal from two orders of the Civil Court of the City of New York, Kings County (Eric Irving Prus, J.), entered July 23, 1999 and January 5, 2000, and a judgment of that court (Geoffrey D. Wright, J.), entered June 27, 2001. Cross appeal from the order entered July 23, 1999. The order entered July 23, 1999 denied petitioner's cross motion for summary judgment and denied respondents' motion for summary judgment dismissing the petition. The order entered January 5, 2000, insofar as appealed from, upon renewal, denied petitioner's motion to supplement the petition, grant summary judgment based on the supplemented facts, and dismiss respondents' fourth affirmative defense of waiver. The judgment, entered in favor of respondents, dismissed the petition.
Kossoff, Alper Unger, New York City ( Edward Paul Alper of counsel), for appellant-respondent.
Mishaan, Dayon Lieblich, New York City ( Saul A. Mishann and Kenneth M. Lieblich of counsel), for Bensonhurst Real Estate, Ltd., respondent-appellant.
Present: PESCE, P.J., and RIOS, J., concur; GOLIA, J., concurs in a separate memorandum.
OPINION OF THE COURT
On the court's own motion, appeals consolidated for the purpose of disposition.
Final judgment of possession affirmed without costs.
Appeals and cross appeal from the orders entered July 23, 1999 and January 5, 2000 dismissed.
The right to appeal from the intermediate orders terminated with the entry of the final judgment ( see Matter of Aho, 39 NY2d 241, 248). The issues raised on appeal from said orders are brought up for review on the appeal from the final judgment ( see CPLR 5501 [a] ).
Petitioner instituted this commercial holdover proceeding in December 1998 on the ground that respondent Bensonhurst Real Estate, Ltd. had assigned or sublet the premises to respondent David's Sportswear, Inc. in violation of the lease. Bensonhurst currently occupies the subject premises pursuant to a settlement agreement dated April 13, 1989 between Burger King Corporation, the former holder of the net lease for the subject premises, and its subtenant, respondent H.J.A. Holding Corporation. In 1998, Burger King assigned its interest in the net lease for the entire premises to petitioner, the owner of the premises. It should be noted that Bensonhurst was dissolved by proclamation of the Secretary of State on September 29, 1993 for nonpayment of franchise taxes. Thereafter the principals of Bensonhurst formed a new corporation bearing the same name (Bensonhurst II). Near the time of trial, Bensonhurst II was dissolved and Bensonhurst (or Bensonhurst I) was reinstated.
Prior to trial, respondents' motion to dismiss the proceeding for failure to state a cause of action was denied by order entered March 16, 1999. Respondents then moved for summary judgment dismissing the proceeding on the ground that the court lacked subject matter jurisdiction, as the alleged default was a condition subsequent of the lease rather than a conditional limitation and that the lease had never been properly terminated. Petitioner cross-moved for summary judgment on the ground that the sublet and/or assignment to David's was a violation of a conditional limitation thereby terminating the lease. The motion and cross motion were denied by order entered July 23, 1999.
Thereafter, petitioner sought leave to renew its cross motion for summary judgment and, upon the granting of renewal, leave to amend the verified petition so as to allege that Bensonhurst's dissolution by proclamation of the Secretary of State on September 29, 1993 (although subsequently reinstated) for failure to pay franchise taxes, constituted a violation of a conditional limitation contained in the lease, thereby terminating said lease, and granting petitioner summary judgment on the amended verified petition. The court, in its order entered January 5, 2000, granted the motion for renewal and, upon renewal, denied petitioner's application for amendment of the verified petition and summary judgment thereon.
The matter then proceeded to trial. After trial, the court dismissed the petition finding, in part, that Bensonhurst did not assign the leasehold in contravention of the lease.
On this appeal, petitioner in essence contends that its cross motion for summary judgment should have been granted since the conditional limitation applicable to transfers of the lease agreement applied not only to both full and partial assignments, but to sublets as well. Petitioner further contends that the court should have permitted it to amend the petition and granted summary judgment in its favor on its motion for renewal as the dissolution of Bensonhurst terminated the lease pursuant to the conditional limitation clause contained therein.
We note that the lease afforded the tenant a valuable option to purchase the subject property which would have become void if the lease were terminated.
Paragraph 8.1 (a) of the agreement states that each of the following events is a default or breach of the lease by the lessee: "(a) If lessee files a petition in bankruptcy, insolvency, dissolution or for reorganization or arrangement under the laws of the United States or of any state, or voluntarily takes advantage of any such law or act or is dissolved or makes an assignment for the benefit of creditors."
Paragraph 8.1 (d) of the lease provides that a default or a breach of the lease occurs if the lease or estate of the lessee is transferred to any person or party, except in a manner permitted by the terms of the lease.
Paragraph 12.2 of the agreement provides that the lessee shall not assign, in whole or in part, or sublet the premises, in whole or in part, or permit the premises or any portion of it to be used or occupied by others, without the prior written consent of lessor in each instance, and lessor's consent shall not be unreasonably withheld.
Paragraph 8.1 further provides that in the event of a default under subparagraph (a) or (d), the term of the lease shall automatically terminate without additional notice to the lessee.
Assuming arguendo that the lease contained conditional limitations applicable to violations of said provisions of the lease, a conditional limitation is subject to strict scrutiny so as to avoid a forfeiture of the lease and will not be enforced for minor breaches or where no substantial injury occurs ( see Doney Corp. v. Project 61 Assoc., NYLJ, Mar. 5, 1997, at 26, col 2 [Sup Ct, NY County]). In order for a forfeiture clause to be enforced: (1) the right to declare a forfeiture must be distinctly reserved, (2) the proof of the happening of the event in which the right is to be exercised must be clear, (3) the party entitled to do so must exercise its right promptly, and (4) the result of enforcing the forfeiture must not be unconscionable (2 Dolan, Rasch's Landlord and Tenant — Summary Proceedings § 23:39 [4th ed]).
In the case at bar, the forfeiture provisions of the lease should not be enforced, thereby terminating the tenancy and precluding Bensonhurst from exercising its right to purchase the subject premises at a price negotiated at the inception of the agreement, where the default, if any, was de minimis in light of the fact that the entities involved in the complained of transfers were, for all intents and purposes of the parties involved, identical, a withholding of consent by the lessor would have been unreasonable, the dissolved corporation was subsequently reinstated nunc pro tunc, petitioner had the benefit of receiving the full amount of the rent during the term of the lease, and there has been no apparent prejudice to petitioner. In view of the foregoing, the final judgment appealed from should be affirmed ( see Bensonhurst Real Estate v. Helsam Realty Co., 1 AD3d 302; Duen v. Canton Taste, 16 HCR 410; 1 Dolan, Rasch's Landlord and Tenant — Summary Proceedings §§ 9:93, 9:95 [4th ed]).
In view of the Appellate Division, Second Department's decision in Bensonhurst Real Estate v. Helsam Realty Co. ( 1 AD3d 302), I am now reluctantly constrained to concur with the other members of this panel.
However, because Mr. Ishay, the principal owner of the respondent corporations is a person of dubious veracity who employs deception to willfully avoid paying his taxes and manipulates the law to subvert the law, I am likewise constrained to voice my dissent in the opinions expressed by the majority.
The real problem in this case is that they overlook the true purpose of Mr. Ishay's actions which was to utilize the provisions of the New York State statutes to defeat the purpose of such statutes so as to permit him to remain in possession through his various corporate entities, of which he is the principal, and exercise a valuable option to purchase the subject premises contained in the lease. Using the law to defeat the law should never be countenanced by any court.
Section 203-a of the New York State Tax Law provides a very detailed procedure whereby the Secretary of State is directed to issue a proclamation declaring an existing corporation to be dissolved upon receiving notice from the tax commission that such corporation has failed to pay and/or file tax returns for no less than the last two consecutive years. It also provides a window of protection for that corporation and prohibits anyone else from incorporating under the same or similar name for a period of three months.
Mr. Ishay is no stranger to that section in that he was the officer of approximately seven corporations that were dissolved by proclamation. He is also not a stranger to the section of the statute that provides that after three months of such proclamation the name of the dissolved corporation is available to be used as the name of a new corporation. Indeed he has filed for a new corporation, utilizing the exact same name as a previously dissolved corporation, no less than four times. In each of those instances the dissolved corporations were ones of which he was a principal owner.
In addition, Bensonhurst Real Estate, Ltd. failed to inform its bank of the dissolution inasmuch as it has continued to use the same bank account and checkbook that were issued to the prior dissolved corporation. This not only violated banking rules and corporation law, but also served to mislead any company with which it was doing business, as well as the public at large, into believing that the "original" corporation continued to exist to their detriment.
Mr. Ishay's sister-in-law, Ms. Estelle Ishay, testified that Mr. Ishay owned several corporations and if "one store did [not] have funds, funds from another store's account would be used to pay the bills . . . Henry Ishay would look at the bills and tell them which checks to write." It is clear that Mr. Ishay treats his several corporations with their multiple identities that flicker in and out of existence as a single cash register to accumulate money and pay those whom he chooses. He apparently never chooses to pay his corporate taxes.
Mr. Philip Cohen, C.P.A., testified that he had performed accounting work for Mr. Ishay and that Bensonhurst Real Estate, Ltd., in addition to failing to pay any state taxes, did not file federal tax returns from 1989 through 1999. He also testified that Mr. Ishay chose not to reinstate Bensonhurst Real Estate, Ltd. because it would cost a lot more money than forming a new corporation, and that Mr. Ishay had done the same thing with other corporations.
Despite that testimony, Mr. Ishay testified that he simply did not realize that he was creating new corporations while failing to pay any taxes for the existing ones. His incredible explanation was "I'm not a lawyer and I'm not an accountant. I'm a corporation going along." The record does not address the issue as to whether or not he was similarly oblivious to the requirement that the corporations he ran were obligated to pay taxes and file tax returns.
It is clear to me that the veracity of Mr. Ishay's testimony is very suspect and his willingness to pay any corporate taxes is nonexistent. I do not, however, predicate this writing solely upon Mr. Ishay's apparent lack of candor nor his lack of desire to pay his taxes.
It is uncontroverted that in 1989 Burger King Corp. and its former subtenant H.J.A. Holding Corporation (an Ishay company) placed Bensonhurst Real Estate, Ltd. (an Ishay company) into possession of the subject premises. Thereafter, on September 29, 1993, Bensonhurst Real Estate, Ltd. was dissolved by proclamation due to nonpayment (or nonfiling) of franchise taxes.
There is no evidence that either Burger King, as the holder of the net lease, or the petitioner, who is the owner of the building and subsequent holder of the net lease by assignment in 1998, was ever informed that the "original" Bensonhurst Real Estate, Ltd. had been dissolved in September of 1993. Some months later, Mr. Ishay formed a "new" corporation using the exact same name and utilizing the same checking account of the "original," then defunct, Bensonhurst Real Estate, Ltd.
Inasmuch as the "new" Bensonhurst Real Estate, Ltd. continued to use the same checkbook and incorporated under the same name as the "original" Bensonhurst Real Estate, Ltd., there was no way for Burger King or the petitioner to know that the "new" Bensonhurst Real Estate, Ltd. was not the "original."
This action by Mr. Ishay bears repeating. He did not merely suffer the "forced" dissolution of his corporation for failure to pay his taxes as occurs with many small corporations. He willfully chose to not pay or file returns and when his corporation was dissolved by proclamation, he incorporated a "new" company with exactly the same name in order to willfully mislead his business associates, his bank, and the public.
It should be noted at this juncture that section 301 of the Business Corporation Law establishes rules concerning permissible names for corporations. Like section 203-a of the Tax Law, it addresses itself to preventing the confusion or fraud which may result from the use of the same or similar names of existing corporations. The "original" Bensonhurst Real Estate, Ltd. was not an existing corporation at the time. For if it was, he would not have been able to incorporate a "new" corporation under the same name. The clear import of this Business Corporation Law section, which limits the use of corporate names, is to protect the public and to prevent deception and confusion ( see Matter of Jervis Corp. v. Secretary of State of State of N.Y., 43 Misc 2d 185).
It is inconceivable to me that the purpose of section 203-a of the Tax Law is to provide a vehicle by which a corporation can choose not to pay its taxes, be dissolved by proclamation, thereafter reincorporate under the same name, and continue to fail to pay taxes and not be accountable for the "prior" corporation's tax obligation. Nevertheless, that is exactly what was done by Mr. Ishay in the case of Bensonhurst Real Estate, Ltd. as well as several other corporations of which he was a principal.
Inasmuch as the "original" Bensonhurst Real Estate, Ltd. had become a subtenant pursuant to the agreement of April 13, 1989 and was thereafter dissolved by proclamation as of September 29, 1993, the lease terminated as of that date pursuant to paragraph 8.1 of the lease. Said paragraph provides that each of the following events constitutes a default or breach of lease: "(a) If lessee files a petition in bankruptcy, insolvency, dissolution or for reorganization or arrangement under the laws of the United States or of any state, or voluntarily takes advantage of any such law or act or is dissolved or makes an assignment for the benefit of creditors" (emphasis supplied).
Paragraph 8.1 further provides that in the event of a default under subparagraph (a), the term of the lease shall automatically terminate without additional notice to the lessee thereby creating a conditional limitation.
According to the clear language of paragraph 8.1, the subject lease automatically terminated on September 29, 1993 when Bensonhurst Real Estate, Ltd. was dissolved by proclamation.
In addition since Mr. Ishay chose to incorporate a new entity under the same name, he could not reinstate the "original" Bensonhurst Real Estate, Ltd. under its original name as it would be prohibited by both section 203-a of the Tax Law and section 301 of the Business Corporation Law. This created a dilemma for Mr. Ishay who is now seeking to exercise the option to purchase under the terms of the lease and thereby reap a windfall. What did he do to resolve this dilemma? The same thing he always does.
Subsequent to the commencement of the underlying action, and fearful that he might not be successful therein, Mr. Ishay dissolved the "second" Bensonhurst Real Estate, Ltd. Then by utilizing the provisions of Tax Law § 203-a, with which he is quite familiar, he reinstated the "original" Bensonhurst Real Estate, Ltd. The audacity of Mr. Ishay is apparently without bounds inasmuch as he would have been unable to reinstate the "original" Bensonhurst Real Estate, Ltd. had that name been taken by anyone other than himself. I note that in his attempt to enforce his right to exercise the valuable option to purchase the premises and thereby obtain a substantial windfall, there is no indication as to whether he paid the taxes that were incurred by the "second" Bensonhurst Real Estate, Ltd. when he paid his back taxes attributable to the "original" Bensonhurst Real Estate, Ltd. These back taxes were not now too onerous compared to the windfall.
Taxes as an investment rather than an obligation is a unique concept.
Indeed, the sole function of a dissolved corporation is "winding up" the affairs of the corporation pursuant to section 1005 of the Business Corporation Law. It is not to continue to function in a willful manner to mislead and confuse the public and its business associates to their detriment.
I do not find that section 203-a of the Tax Law is applicable under the facts herein, inasmuch as Mr. Ishay began the reinstatement process under said law well after this proceeding was instituted, the lease already having been terminated pursuant to the conditional limitations contained therein.
The unclean hands of Mr. Ishay who manipulated the law to defeat the law is such that we should not sanction and reward those, who like Mr. Ishay, abuse the letter of the law. Certainly, this is a matter for the Legislature to address.
It is important to note that the cases cited by the majority are equally applicable to this writing. In addition, the penultimate holding of the majority that the fraud committed by the respondents as against the landlord, the bank and the public at large were "de minimis" is inconsistent with the facts as set forth herein. Indeed, the respondents' acts were prejudicial to the landlord and the respondents' bank, but most importantly they were prejudicial to the public for whom the laws of this state are written to protect. Clearly, if any acts were unreasonable and unconscionable, they were the willful acts of the respondents herein.