JM Holdings 1 LLC v. Quarters Holding GmbH

Background

JM Holdings 1 LLC and Cedar Holdings, LLC sued Quarters Holding GmbH over a planned lease of a multifamily property at 251 DeKalb Avenue in Brooklyn, New York. The plaintiffs alleged breach of contract and related claims. They had agreed to lease the property to Medici 251 DeKalb LLC, described as a shell company controlled by Quarters. Quarters guaranteed Medici’s performance and payment obligations under the lease, which contemplated a ten-year term.

The plaintiffs agreed to renovate the property for Quarters’s planned co-living operation. The lease identified an anticipated delivery date in October 2019 and an outside delivery date of November 30, 2019. It also gave Medici certain rights if the property was not ready by November 30, including the right to terminate the lease or receive rent reductions for delays. The lease did not, in the court’s reading, require delivery by a fixed date.

Renovation delays continued into 2020. According to the complaint, Quarters continued to tell the plaintiffs that it intended to occupy the property and encouraged further investment in the project. When the plaintiffs requested an estoppel certificate for financing purposes in March 2020, Quarters allegedly refused to sign unless the certificate stated that the landlords had defaulted. Quarters allegedly proposed that it would instead sign a certificate stating that there were no uncured defaults if the plaintiffs signed a separate letter stating the opposite. Medici then notified the plaintiffs on April 15, 2020, that it was terminating the lease based on the missed November 30, 2019 date.

Motions and analysis

Quarters moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which concerns subject-matter jurisdiction; Rule 12(b)(6), which concerns whether a complaint states a legally sufficient claim; and Rule 12(b)(7), which concerns failure to join a required party. Quarters also moved for sanctions under Rule 11.

Standing and subject-matter jurisdiction

Quarters argued that Cedar lacked standing because it was not a party to the lease or guaranty. The court rejected that argument. It noted that the other landlords, Roth Innovations LLC and LPC Properties LLC, had assigned all rights and causes of action concerning the matter to Cedar. Because there was no suggestion that the assignment was invalid, the court held that Cedar could sue in their place and denied the motion under Rule 12(b)(1).

Breach-of-contract claims

The plaintiffs alleged that Quarters was liable under its guaranty for two breaches by Medici: terminating the lease on April 15, 2020, and refusing to provide the required estoppel certificate.

As to the termination, the court held that the plaintiffs had adequately alleged their own performance. The lease contained an anticipated delivery date and an outside delivery date, but it did not unconditionally require delivery by a specific date. The lease also contemplated that the property might not be delivered by November 30, 2019 and described the tenant’s rights in that event.

The court declined to decide at the pleading stage whether Medici exercised its termination right within a reasonable time. Because the lease did not state a deadline for exercising that right, New York law implied a reasonable time, and determining reasonableness depended on the facts and circumstances. The court also held that the lease’s general no-waiver provision did not automatically prevent a waiver. Quarters’s conduct after November 30, 2019—including communications about the renovations, encouragement to obtain additional financing, and public statements about the Brooklyn site—could support an inference that Medici waived its termination right. Whether Medici intended to waive that right was a factual question.

The court also declined to reject the plaintiffs’ damages allegations. It held that determining the proper form or amount of damages was premature on a motion to dismiss, and that the complaint plausibly alleged an entitlement to damages. The breach-of-contract claim based on the lease termination therefore could proceed.

Regarding the estoppel certificate, the court found that the plaintiffs plausibly alleged a breach. The lease required Medici to sign and deliver an estoppel certificate within fifteen business days after a request. Quarters’s argument that the plaintiffs had defaulted depended on the premise that delivery by November 30, 2019 was unconditionally required. Because the court had rejected that premise at this stage, it denied dismissal of the estoppel-certificate claim as well.

Implied covenant of good faith and fair dealing

The plaintiffs separately alleged that Quarters breached the implied promise of good faith and fair dealing that accompanies a contract. They claimed that Quarters publicly and privately represented that it would open the Brooklyn location while allegedly treating the plaintiffs as being in default, and that Quarters proposed a side letter containing statements that contradicted an estoppel certificate for a bank.

The court held that this claim was not necessarily duplicative of the contract claims. A fact finder could determine that Quarters acted in bad faith by depriving the plaintiffs of the benefit of their agreement, even if the conduct did not technically breach the lease. The court therefore denied dismissal of this claim.

Promissory estoppel

The plaintiffs pleaded promissory estoppel in the alternative, based on alleged promises that Quarters would open at the property and honor the lease. They alleged that these promises led them to spend more than $1 million on renovations.

The court recognized that promissory estoppel generally applies when no valid and enforceable contract governs the dispute. But because the plaintiffs pleaded it only as an alternative theory, the court declined to dismiss it at this stage. It therefore denied dismissal of the promissory-estoppel claim.

Failure to join other parties

Quarters argued that Roth Innovations LLC, LPC Properties LLC, and Medici 251 DeKalb LLC were required parties. The court disagreed. Roth and LPC had assigned all their rights and causes of action concerning the matter to Cedar, making them unnecessary for resolving the dispute. Medici was described as a shell company controlled by Quarters, with no independent personnel, offices, or operations and no assets other than the lease. Because Quarters had guaranteed the lease and Medici had no separate interest requiring protection, the court held that none of the three entities was a required party. It denied the Rule 12(b)(7) motion.

Sanctions

Quarters sought sanctions under Rule 11, arguing that the plaintiffs’ legal claims were baseless, that they deliberately made false allegations about the estoppel certificate, and that they sued for an improper purpose. The court denied the motion. It found that the plaintiffs’ claims were not so clearly lacking in legal or factual support as to warrant sanctions. It also found that the disagreement over what was said during a phone call presented a factual dispute that did not justify sanctions at this early stage. Finally, because Quarters had not shown that the claims were frivolous, the alleged improper motive did not independently support sanctions.

The court also denied the plaintiffs’ request for reimbursement of attorney’s fees incurred in opposing the sanctions motion.

Disposition

The court denied Quarters’s motion to dismiss and denied Quarters’s motion for sanctions. It directed Quarters to answer the complaint by March 29, 2021. The order resolved motions at the pleading and sanctions stages; it did not enter a final ruling on the ultimate liability claims.