Melendez v. The City Of New York

Background

New York City enacted Local Law No. 55 of 2020, called the Guaranty Law, during the COVID-19 pandemic. The law made certain provisions in commercial leases unenforceable against individual guarantors when the tenant’s business had been required to close or limit operations under specified state orders and the guarantor’s liability arose during the covered period. The law was later extended to cover unpaid rent through June 30, 2021.

The plaintiffs relevant to the remaining claim were Elias Bochner and 287 7th Avenue Realty LLC, described in the opinion as commercial landlords. Bochner’s commercial tenant stopped paying full rent in January 2020 and gave notice of an intent to surrender the premises on March 20, 2020. Because the Guaranty Law prevented enforcement of the lease’s personal guaranty, the plaintiffs said they could not recover approximately $110,000 in rent owed between March 20 and September 20, 2020. The court also discussed approximately $35,000 in property taxes paid by Bochner, describing the plaintiffs’ overall uncompensated damage as approximately $150,000.

Procedural history

The plaintiffs challenged the Guaranty Law under the Contracts Clause of the U.S. Constitution, which generally prohibits state laws that impair contractual obligations. They also brought separate challenges to amendments concerning harassment of residential and commercial tenants, but those claims had already been dismissed and were not part of the remaining dispute.

The district court had initially dismissed the Contracts Clause challenge. The U.S. Court of Appeals for the Second Circuit reversed that portion of the earlier ruling and directed the City to develop the record concerning whether the Guaranty Law was a reasonable and appropriate way to serve its stated public purpose. On remand, both sides moved for summary judgment. Summary judgment is a decision without a trial when the court determines that no genuine dispute over an important fact requires a jury’s decision.

Standing

The City argued that the plaintiffs lacked standing because they had not shown a sufficient injury caused by the Guaranty Law. The court rejected that argument. It found that the law permanently barred the plaintiffs from collecting more than $100,000 in unpaid rent from the guarantor, creating a concrete financial injury. The court also found that the injury was traceable to the City’s law and could be remedied by a ruling allowing enforcement of the guaranty clause. The court likewise rejected the City’s related argument that the dispute was not ready for review.

Contracts Clause analysis

The court applied the three-part Contracts Clause analysis used by the Second Circuit: whether the law substantially impaired contractual rights; whether it served a legitimate public purpose; and whether the means chosen were reasonable and necessary to achieve that purpose.

The court held that the Guaranty Law substantially impaired the plaintiffs’ contracts. The law eliminated enforcement of personal guaranties for rent obligations during the covered period rather than merely delaying enforcement. The court relied on the importance of the guaranty provisions to the commercial leases, the disruption of the landlords’ reasonable contractual expectations, and the permanent nature of the impairment.

The court also held that the City had a legitimate public purpose. It accepted that the City was attempting to address the serious economic effects of the COVID-19 pandemic and to help small businesses avoid personal and business bankruptcy.

The court nevertheless found that the law was not a reasonable means of advancing that purpose. It addressed five concerns identified by the Second Circuit:

1. The impairment was permanent. The law did not temporarily postpone guaranty obligations. It permanently eliminated the ability to recover covered rent from guarantors.

2. The City lacked evidence supporting an important assumption. The City did not provide record evidence showing that shuttered small businesses were usually owned by the people guaranteeing their leases. It also did not explain why relief was not limited to guarantors who owned the affected businesses, had financial need, or intended to reopen them.

3. The law placed the burden exclusively on landlords. The City did not use public funds or otherwise distribute the cost of the relief across the broader public. The court found no record evidence that commercial landlords caused the economic crisis the law sought to address.

4. The law was not conditioned on financial need. Guarantors received the benefit regardless of whether they could pay the rent arrears or had suffered financial hardship. The court found that a need requirement would have been an evident and more moderate alternative.

5. The law did not compensate landlords. The Guaranty Law provided no compensation for landlords’ lost rent or other losses. The court found that the City had not shown, through the record, why imposing that uncompensated loss on landlords was reasonable and appropriate.

Disposition

Judge Ronnie Abrams concluded that the Guaranty Law violated the Contracts Clause because it rendered guaranty clauses in the plaintiffs’ commercial leases unenforceable for unpaid rent during the covered period. The plaintiffs’ motion for summary judgment was granted, and the City’s motion for summary judgment was denied. The Clerk of Court was directed to terminate the pending motions and close the case.