April 4, 2023
No Longer Guaranteed:
What the Recent Southern District of New York
Melendez v. The City of New York Means Going Forward
Introduction:
On March 31, 2023, in an ongoing case remanded by the Second Circuit Court of Appeals, a federal judge in the Southern District of New York ruled that Section 22-1005 of the New York City Administrative Code (the “Guaranty Law”), a Covid-19 measure which prohibited the enforcement of personal guaranties in certain commercial leases, was unconstitutional. This article explores the background of this decision and what it means for commercial landlords, tenants and guarantors in New York City faced with claims.
Background:
In early 2020, as the Covid-19 pandemic began impacting New York City, Mayor Bill de Blasio signed a bill put forward by the New York City Counsel aimed at helping small businesses affected by the Covid crisis. The law barred the enforcement of personal guaranties of certain retail leases for a tenant’s default between March 7, 2020 and June 30, 2021.
The Guaranty Law quickly became the subject of much controversy and litigation. Commercial landlords throughout the city argued that the law was overbroad, offered no recourse to landlords and was ultimately in violation of the Contracts Clause in the United States Constitution.
What Happened in Melendez v. The City of New York:
In 2020, several landlords brought an action against the City of New York, seeking to declare the Guaranty Law unconstitutional. New York City moved to dismiss the landlords’ claims, and the federal district court granted the City’s motion to dismiss, concluding that the law was constitutional. See Melendez v. City of New York, 503 F. Supp. 3d 13, 19 (S.D.N.Y. 2020), aff'd in part, vacated in part, rev'd in part, 16 F.4th 992 (2d Cir. 2021).
The Plaintiff-landlords appealed the decision, and in 2021, the Second Circuit Court of Appeal reversed the lower court’s decision regarding Plaintiffs’ constitutional challenge. See Melendez v. City of New York, 16 F.4th 992, 995 (2d Cir. 2021). The Second Circuit raised several specific concerns regarding whether the Guaranty Law was reasonable and appropriate, and remanded the action back to the trial court for further proceedings, with specific instructions that the City answer the constitutional concerns raised.
On March 31, 2023, Judge Ronnie Abrams of the Southern District issued a decision, finding that New York City was unable to justify the constitutional concerns raised by the Second Circuit, and holding that the Guaranty Law was violative of the Contracts Clause of the U.S. Constitution. See Melendez v. The City of New York, 2023 WL 2746183 (S.D.N.Y. 2023)
What This Means Going Forward:
The recent Melendez decision shifts the landscape for New York City commercial landlords and guarantors who are litigating, or may litigate, rent claims for the period of March 2020 through June 30, 2021. It remains to be seen if New York City will appeal this decision, and/or request a stay of the decision until the appeal’s resolution. However, as it currently stands, the Guaranty Law is no longer enforceable. This may affect the following situations:
- If you are a commercial landlord and:
- You held off on bringing a breach of contract claim against a guarantor, the time may now be ripe to reconsider.
- You did bring a claim against a guarantor and had that claim denied due to the Guaranty Law, you should look into the logistics of reopening or appealing (time permitting) that claim/action;
- If you are a commercial guarantor who was previously protected by the Guaranty Law:
- You should prepare for the possibility that your landlord may attempt to bring or revive a breach of guaranty claim.
If you have any questions or believe that this decision may affect you, either as landlord or guarantor, please do not hesitate to reach out.
By: Alan D. Zuckerbrod, Esq.
azuckerbrod@wilkauslander.com
Arielle H. Wasserman, Esq.
awasserman@wilkauslander.com