Federal Court Says New York’s Guaranty Law Violates the United States Constitution… But in a Recent Footnote, One New York State Court Hits Pause on the Enforcement of Guarantees
By: William J. Halkias, Esq.
In May 2020, the New York City Council enacted NYC Local Law No. 55 of 2020, also known as the “Guaranty Law,” as part of a panoply of legislatives actions aimed at responding to the Covid-19 pandemic and easing the concomitant financial strain impacting the city’s local and small businesses. The Guaranty Law, as codified in New York City Administrative Code § 22-1005, relieved certain guarantors from their financial obligations arising from March 7, 2020, through June 30, 2021 (the “Covid Period”). However, as with many of the swift and well-intended legislative responses to the pandemic, the Guaranty Law came with significant negative externalities. One such negative externality of the Guaranty Law was the reallocation of substantial financial burdens arising out of the pandemic upon commercial landlords. Specifically, as a result of the Guaranty Law, many landlords across the City found themselves unable to enforce the so-called “guaranty clauses” that they bargained for at the inception of certain commercial leases. Thus, the Guaranty Law effectively left landlords without any recourse or compensation as to rent defaults that occurred during the Covid Period. The Guaranty Law drew immediate and well-deserved scrutiny.
In Melendez, et al., v. The City of New York, et al., the plaintiffs, a group of New York City landlords, sued The City of New York in federal court challenging the Guaranty Law. The landlords argued, among other things, that the Guaranty Law violated the Contracts Clause of the United States Constitution (“no State shall…pass any…law impairing the obligation of contracts…”). U.S. Const. art. I, §10, cl. 1. When the City moved to dismiss the plaintiffs’ complaint, the District Court agreed, finding that the plaintiffs’ complaint failed to state a claim; the Court also denied the plaintiffs’ motion for preliminary injunctive and declaratory relief. The dismissal, however, was short lived.
Plaintiffs successfully appealed the dismissal to the U.S. Court of Appeals for the Second Circuit, which reversed the District Court’s dismissal, in part, and remanded the case for further consideration. Then, on March 31, 2023, on remand from the Second Circuit, United States District Judge Ronnie Abrams found that the City failed to establish that the Guaranty Law was a reasonable means of achieving the policy goals of combatting the adverse effects of the pandemic. In a well-reasoned decision, Judge Abrams held that New York City’s Guaranty Law violates the United States Constitution’s Contracts Clause. This decision is a significant victory for landlords and carries significant implications for landlords and their tenants.
NOT SO FAST, says one State Supreme Court judge in New York County. On April 21, 2023, less than a month after the Melendez decision, New York State Supreme Court Judge Gerald Lebovits issued a decision in Mansion Realty LLC v. 656 6th Ave Gym LLC, in which the Court states, in a footnote, that the Melendez decision “does not bind the courts of New York State…”
In December 2019, landlord Mansion Realty LLC, and tenant 656 6th Ave Gym LLC, entered into a commercial lease; a guarantor simultaneously executed a guarantee of the tenant’s obligations under the lease. When the tenant stopped paying rent in June 2020, the landlord sued the tenant for breach of contract seeking unpaid rent that accrued through October 2020. Then, in September 2022, landlord moved to amend its complaint to add claims for all rent through September 2022 (i.e., rent during the Covid Period, as well as outside the Covid Period), and to add the individual guarantor of the lease as a defendant. As part of its motion to amend the compliant, the landlord asserted that the Guaranty Law should be disregarded, as unconstitutional.
In deciding the landlord’s motion, Supreme Court Judge Lebovits, New York County, held, in part, that the Guaranty Law does not prohibit the addition of landlord’s claim against the guarantor for unpaid rent accruing outside the Covid Period, but denied the motion for rent accruing during the Covid Period. Regarding the constitutionality of the Guaranty Law, the Court oddly stated, in a footnote no less, and without providing any legal reasoning, “The U.S. District Court for the Southern District of New York held that violated the Contract Clause of the U.S. Constitution. That decision does not bind the courts of New York State so as to alter this court’s analysis of landlord’s claim for rent accruing .”
The story does not end there. In support of its decision in Mansion Realty, Judge Lebovits cited another case – 45-47-49 Eighth Avenue LLC v Joseph Conti – in which the same judge – Judge Lebovits – considered and rejected a similar claim against a guarantor for rent accruing during the Covid Period, finding that the Guaranty Law “pursued the legitimate public purpose of protecting individual guarantors to limit the economic and social damage caused to the city by COVID-19,” and that “limiting enforceability of certain personal guarantees is not an inappropriate means to achieve this goal. Therefore, does not violate the Contracts Clause .” In other words, Judge Lebovits’ decisions and his reasoning in Mansion Realty and Conti are in direct conflict with the decision by Judge Ronnie Abrams in Melendez.
Judge Lebovits’ decision in Conti was appealed and is currently being considered by the Appellate Division, First Department, which has not yet decided the question. We are monitoring the Appellate Division’s docket for their decision in Conti, which we anticipate will resolve the conflict between the Federal and State Courts on this issue.
Ultimately, although Judge Lebovits denied Mansion Realty’s claim against the guarantor for rent accruing during the Covid Period, the claim was denied “without prejudice to its renewal should the First Department hold unconstitutional .” We anticipate the Appellate Division, First Department, will join United States District Judge Ronnie Abrams in holding the Guaranty Law unconstitutional, thus permitting claims against guarantors for rent accruing during the Covid Period.
As a result of the highly anticipated and consequential Melendez decision, and in anticipation of the forthcoming decision by the Appellate Division, First Department in Conti, owners should reevaluate the viability of their claims against guarantors for unpaid rent during the Covid Period (March 7, 2020, through June 30, 2021).