49 Bleecker Inc

OCR transcription for search; preserved printed pages are authoritative

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

In re : Chapter 11
49 BLEECKER INC., Case No. 21-10312 (MEW)
Debtor.
x
DECISION AFTER TRIAL

APPEARANCES:

ALTER & BRESCIA, LLP

New York, New York

Attorneys for Debtor 49 Bleecker, Inc.
By: Bruce Alter

FARBER SCHNEIDER FERRARI LLP
New York, New York
Special Counsel for Debtor 49 Bleecker, Inc.
By: Michael Farber
Daniel Schneider

BELKIN BURDEN GOLDMAN, LLP
New York, New York
By: Lewis Lindenberg
Jay Solomon

HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE

This chapter 11 bankruptcy case was filed on February 16, 2021. The debtor, 49
Bleecker Inc. (the “Debtor’’), is the lessee of the third floor of a building located at 49 Bleecker
Street in Manhattan. The lease (“Lease’’) is dated December 14, 2012 and was entered into
between the Debtor and the prior owner of the building, Rogers Investments NV LP (“Rogers
NV”). The building currently is owned by Rogers Investments NY, LLC (“Rogers NY”), which

apparently is an affiliate of Rogers NV.

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Section 2.4 of the Lease provides the Landlord with an option to declare an early
termination. Rogers NY contends that the early termination option was properly exercised in
2017 by Rogers NV (which owned the building at the time) and that the Lease terminated as of
December 31, 2018. The Debtor denies that proper notices were sent in accordance with the
requirements of the Lease, denies that the notices were received, and asserts a number of other
defenses that I will review.

There was a considerable amount of litigation between these parties in the New York
State courts that preceded the bankruptcy filing. Rogers NY filed an action in the Civil Court of
the City of New York in 2019, seeking possession of the premises. The Civil Court issued a
decision holding that it lacked jurisdiction. As I will explain later the parties disagree over the
interpretation and the implications of the Civil Court’s decision.

Rogers NY then filed suit in the Supreme Court of the State of New York. At some point
in early 2020 the state court decided that a hearing would be held to determine whether a proper
notice of early termination had been sent in accordance with section 2.4 of the Lease. The
parties have not provided the Court with a detailed history of the state court litigation but for one
reason or another that hearing was never held. A November 2020 hearing date was postponed
apparently because the Debtor wished to change counsel, and then a January 11 hearing date was
postponed because the Debtor did not appear with counsel. We have been informed by the
parties that the New York State Court scheduled a final hearing date of February 17, 2021, but
the Debtor filed its bankruptcy petition on February 16, 2021, thereby invoking the automatic

stay and preventing the state court hearing from going forward.!

' Until recently the docket in this bankruptcy case reflected a filing date of February 18, but

the Clerk’s office has investigated and confirmed that the filing occurred on February 16,
and the docket entry for the Petition has been corrected.

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Rogers NY promptly filed a motion seeking relief from the automatic stay on March 15,
2021. [Dkt. No. 9.] The Debtor opposed the motion and argued that any issues over the
purported Lease termination should be resolved by me and not by the state court. [Dkt. No. 19.]
The motion came on for hearing on April 20, 2021. At that time I noted that it was clear that the
Debtor’s claimed rights, as well as the stay relief motion and other issues that would inevitably
arise in the bankruptcy case (such as the application of deadlines in the Bankruptcy Code for the
assumption or rejection of leases involving nonresidential real property), all depended on
whether the Lease had validly been terminated before the filing of the bankruptcy case. I further
noted that some of those matters (such as the 120-day acceptance/rejection deadline under
section 365(d)(4)) made it appropriate to obtain a prompt resolution of these issues and that the
matter had been pending for some time in the state court without resolution. The Debtor had
urged me to decide the issues, and I said that if it were agreeable to the parties I would schedule
the matter for a prompt trial on the merits to decide whether the Lease had terminated or whether
it remained in effect. The parties consented, and we scheduled a trial date of June 7, 2021.

During the last week in May and the first week of June the Debtor made several requests
to postpone the scheduled trial, arguing that the Debtor wished to retain more specialized
landlord/tenant counsel and that counsel would need additional time to prepare. I approved the
retention of additional counsel but I denied the requests for an adjournment. The Debtor had had
plenty of time since April 20, 2021 to retain specialized counsel if that was needed, not to
mention the many months during which the Debtor could (and should) have hired counsel during
the prior state court proceedings. I ruled that any difficulties that new counsel might have due to
their late hiring was attributable to the Debtor’s own delays and that I would not postpone the

scheduled trial.


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election, in Landlord’s sole and absolute discretion to terminate this Lease
without penalty prior to the Expiration Date, but only upon the delivery of a
written notice (the “Early Termination Notice”) to Tenant at least twelve (12)
months prior to the effective date of such early termination. In the event the
Landlord shall exercise such right of early termination, the Tenant shall quit
and surrender possession of the Demised Premises on or before the date
specified in the Early Termination Notice (the “Early Termination Date’).
Between the date Landlord shall give the Early Termination Notice and the
Early Termination Date, Tenant shall continue to be obligated under the
terms of this Lease ... Upon any such early termination by Landlord, then,
provided Landlord promptly returns Tenant’s Security Deposit (if Tenant is
not then in default) this Lease and the Term and estate hereby granted shall
terminate at noon of such Early Termination Date specified in the Early
Termination Notice as if such Early Termination Date were the Expiration
Date of the Term. In the event of Early Termination by Landlord as provided
herein, Tenant shall be required to deliver the Demised Premises to Landlord
in broom clean condition subject to reasonable wear and tear.”

The Lease also contains certain provisions governing notices to the parties. Section 25.1,
entitled “Notices,” provides as follows:

Whenever any notice is required or permitted hereunder, such notice shall be
in writing and shall be: (1) delivered by hand; (ii) delivered by a nationally
recognized commercial overnight delivery service; or (111) mailed postage
prepaid by registered or certified mail, return receipt requested. Such notices
shall be effective: (a) in the case of hand deliveries when received; (b) in the
case of an overnight delivery service, on the next business day after being
placed in the possession of such delivery service, with delivery charges
prepaid; and (c) in the case of registered or certified mail, upon delivery or
refusal. All such notices shall be directed as follows: if to Tenant: at the
address listed herein in Article I; if to Landlord: at the address listed herein in
Article I, with a simultaneous copy sent in like manner to Oved & Oved LLP,
401 Greenwich Street, New York, NY 10013, Attn: Terrence A. Oved, Esq.
Notices from either party may be given by its respective attorney.

Article I of the Lease listed the “Tenant” as “49 Bleecker Inc.” and the Tenant’s Address as “49
Bleecker Street, Third Floor, New York, NY 10012.”

The evidence at trial demonstrated that Rogers NV was the Landlord under the Lease
until April 2018. In November 2017, Rogers NV prepared a notice purporting to exercise the
early termination option granted by section 2.4 of the Lease. A copy of the notice was

introduced into evidence as Landlord’s Exhibit B. The notice was dated November 28, 2017 and

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stated that the Landlord had elected to terminate the Lease effective December 31, 2018. There
is no dispute that the notice was issued during the fifth year of the term of the Lease. There is
also no dispute that the specified early termination date (December 31, 2018) was more than
twelve months after the date of the notice. The Debtor argues, however, that notice was not in
proper form and also was not properly delivered.

A. The Debtor’s Name and Address

The Debtor first argues that pursuant to the Lease any notice of early termination had to
be addressed to “49 Bleecker, Inc.” at 49 Bleecker Street, Third Floor, New York, NY 10012.
The actual notice in this case was addressed as follows:

Mr. Doron Zabari

49 Bleecker Inc.

49 Bleecker Street, Third Floor

New York, NY 10012
The Federal Express airbill that was prepared and used similarly identified the individual
“recipient” as “Doron Zabari,” the “company” as “49 Bleeker Inc.” and the address as “49
Bleecker St., 3"! Floor, NY, NY 10012.”

The Debtor contends that as the result of the inclusion of Mr. Zabari’s name the notice
actually was sent “to” Mr. Zabari as though he were the Tenant, and that it was not sent “to” 49
Bleecker Inc. See Debtor’s Post-Trial Submission [Dkt. No. 50] at 1. The Debtor argues that the
notice therefore was not in strict compliance with the Lease and was not effective.

The Debtor’s complaints about the form of notice are without merit. The name “49
Bleecker Inc.” plainly appears in the notice itself and on the Federal Express address label. Mr.
Zabari acknowledged, during his testimony, that he was the sole owner, sole officer and sole

employee of 49 Bleecker Inc. Mr. Zabari unquestionably knew that it was 49 Bleecker Inc. who

was the Tenant, and it was unquestionably clear that the notice was directed to 49 Bleecker Inc.


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wholly unreasonable under the circumstances. There is nothing in the notice that identifies Mr.
Zabari personally as the “Tenant.” Although the text of the notice refers to “your” rights under
the Lease, there is nothing in the notice or otherwise in the record that supports the Debtor’s
contention that this constituted an assertion that it was Mr. Zabari personally (and not 49
Bleecker Inc.) who was the Tenant. The appearance of Mr. Zabari’s name in other internal
records of the managing agent similarly is not evidence that the Landlord actually thought that
Mr. Zabari (and not the Debtor) was the Tenant. I find that the addition of the name of Mr.
Zabari (the sole owner, officer and employee of the Debtor) may have had the effect of calling
his attention to the notice on behalf of the Debtor, but it did not mean that the notice somehow
treated Mr. Zabari as though he (and not the Debtor) were the Tenant. The Debtor’s name and
address for notice purposes was not a computer password, such that any addition of letters
somehow rendered the notice ineffective. The notice was directed “to” the Debtor as Tenant,
notwithstanding the addition of the name of the Debtor’s sole owner, sole officer and sole
employee. If the notice really had been addressed only Mr. Zabari individually (on the theory
that he was the real Tenant and the Debtor was not), then there would have been no reason for
the Debtor’s name to be included in the notice.

“Strict” interpretation of a contract, or any other legal document or statute, does not call
for blind literalism, and does not mean that a court should endorse absurd interpretations that
defy common sense. Cf Cent. States, S.E. & S.W. Areas Pension Fund v. Lady Baltimore Foods,
Inc., 960 F.2d 1339, 1345 (7" Cir. 1992) (“the interpreter is free (we would say compelled) to
depart in the direction of sense” where strict interpretation would yield absurd results). The
purpose of strict compliance with contractual notice terms is to ensure that parties’ legitimate

contract rights are protected. It is ridiculous to suggest that these parties intended that if a notice


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The Debtor argues that the date on which the notice was “effective” is different from the
date on which the delivery of the notice was “completed,” and contends that the Landlord must
prove that the notice was actually delivered to (and received by) 49 Bleecker Inc. in order for the
notice to be given effect. Rogers NY has disagreed. It notes that the beginning of section 25.1
of the Lease states that notice may be “delivered” by hand or by overnight delivery service or by
registered or certified mail, but that the next sentence of Section 25.1 of the Lease then plainly
states the circumstances under which “delivery” or “receipt” is a condition to the effectiveness of
a notice. Section 25.1 states that notices are effective “when received” if they are served by
hand-delivery, or by “delivery” or “refusal” if they are sent by certified or registered mail.
However, there is no “delivery” or “receipt” requirement to the effectiveness of notices sent by
Federal Express or other recognized overnight delivery services.

I am inclined to agree with Rogers NY’s interpretation of section 25.1, but I need not
decide that issue, because as a factual matter I reject the Debtor’s contentions that the notice was
not actually delivered to the Debtor and received by the Debtor. The evidence at trial showed
convincingly that the package actually was delivered to 49 Bleecker Inc. at its designated
address. The somewhat cryptic Federal Express records include a code showing the item was
left at the “front door,” and the Debtor speculated (with no supporting evidence) that the
envelope may have been left outside of the building or in an open vestibule at the entrance to the
building. The Debtor also speculated (again with no evidence) that someone might have stolen
the package. However, the Federal Express records also contained another more specific code
that Mr. Budd interpreted as meaning that the package had been left at the door of 49 Bleecker
Inc. on the third floor of the building at 2:53 p.m. on November 30, 2017. I have considered all

of the testimony, exhibits and argument about these points. I find that the Federal Express

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delivery was properly delivered to the door of 49 Bleecker Inc. on the third floor of the building
at 49 Bleecker Street on November 30, 2017 at 2:53 p.m.

Mr. Zabari testified that any office that the Debtor had on the third floor at 49 Bleecker
Street was only occasionally occupied and otherwise was locked. The Debtor argues that if, as a
result, a package was left by the front door — where someone might have stolen it — then I should
find that the “delivery” never actually occurred. But I find that the package actually was
“delivered” to the address that the Debtor specified. Even if the Debtor’s own failure to maintain
personnel at the site had exposed the package to a risk of theft, and even if the package had been
stolen, the risk of theft after the delivery of the package was a risk that the Debtor created and
assumed by not occupying its designated office and by not supplying a more secure address to
which deliveries should be made. The Debtor’s assertion that the package should be treated as
though it was not actually “delivered” at all, based on the fact that the Debtor’s conduct may
have left it exposed to others, is not reasonable and I reject it.

More importantly, I reject the Debtor’s unfounded speculations about a possible theft of
the Federal Express package, and I find that in fact the Debtor and Mr. Zabari actually received
it. I note that during the course of the trial Mr. Zabari denied receiving the Federal Express
package; denied receiving a separate copy of the notice of early termination that was sent by
certified mail (described below); denied receiving another copy of the notice that was sent by
regular mail; and denied receiving other correspondence relating to the early termination. If he
were to be believed, he never received any of the relevant notices and letters that were sent to
him. His denials were self-serving and were not credible. I find after considering the Federal
Express records and other evidence, and after evaluating the credibility of the witnesses, that in

fact the Federal Express envelope containing the notice of early termination was actually

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delivered to the Debtor at the address specified in the Lease and that the Debtor and Mr. Zabari
actually received it on or about November 30, 2017.
C. The Notice Sent by Certified Mail
The evidence shows that Livingston Management sent an additional copy of the early
termination notice on December 21, 2017, this time by certified mail, return receipt requested.
The envelope was addressed as follows:
Doron Zabari
49 Bleecker Street
34 Floor
New York, NY 10012
The formal notice that was included in the envelope, however, was addressed as follows:
Mr. Doron Zabari
49 Bleecker Inc.
49 Bleecker Street, Third Floor
New York, NY 10012
For the reasons stated above I have already held that the notice of early termination referred
expressly to 49 Bleecker Inc. and that the inclusion of Mr. Zabari’s name did not render the
notice ineffective. I also find that the omission of “49 Bleecker Inc.” from the mailing address
on the outside of the envelope for the certified mail notice is an inconsequential omission in light
of the inclusion of that information on the notice itself, particularly given the fact that Mr. Zabari
admittedly is the sole owner, officer and employee of 49 Bleecker Inc., so that there was no
possibility that a notice addressed to him would somehow escape the attention of the Debtor.
As noted above, Mr. Zabari also denied receipt of the copy of the early termination notice
that was sent by certified mail. Rogers NY introduced into evidence a signed certified mail

receipt, but Mr. Zabari denied that the signature was his. No handwriting expert was offered as a

witness and the only other signature by Mr. Zabari set forth in the documents in evidence is his

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signature on the Lease. There are some similarities but also some possible differences between
the signature on the Lease and the signature on the certified mail receipt. On the whole,
however, I did not find Mr. Zabari’s denial of receipt of the notice to be credible. I cannot state
for certain if he had someone else sign for the notice, or if he varied his signature in some way,
but I find based on the evidence (and my evaluations of the witnesses’ credibility) that Mr.
Zabari actually received the notice that was sent by certified mail. It is therefore not necessary
for me to address the parties’ separate contentions regarding the presumption (under New York
law) that an item sent by certified mail has actually been delivered.

D. The Contents of the Notice

In its post-trial submission, the Debtor has argued that the notice sent by the Landlord
allegedly did not conform to standards that would have been applicable if the Landlord had
sought to terminate the Lease and to evict the Debtor based on a payment default. But in this
case the termination of the Lease is based on the exercise of an early termination option. That
early termination option was available to the Landlord without regard to the existence of a
default. A default may be relevant in deciding whether a security deposit had to be returned once
the early termination date was reached at the end of 2018 (as discussed below), but when the
early termination notice was sent in late 2017 the Landlord was exercising a contractual option
and was not purporting to terminate the Lease based on a payment default. The Debtor’s various
arguments about the procedural prerequisites that allegedly would have applied if the Landlord
had sought to terminate the Lease based on a payment default, or as to what a notice of such a
default might have needed to say if termination were being sought on that basis, rest on a faulty

premise and raise issues that are not relevant.

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For the foregoing reasons, I find that Mr. Zabari received a notice of early termination
that was in proper form pursuant to section 2.4 of the Lease; that the notice was properly
addressed and delivered (both by Federal Express and by certified mail); that 49 Bleecker Inc.
and Mr. Zabari actually received the Federal Express notice on November 30, 2017; that the
Debtor and Mr. Zabari actually received the notice sent by certified mail on December 23, 2017;
and that the Debtor’s complaints about the form of the notice, and the manner of service, are
without merit.

IL. Whether Other Conditions Were Met

Section 2.4 of the Lease provides that upon an early termination the Landlord is required
to return the Tenant’s security deposit if the Tenant is not then in default:
Upon any such early termination by Landlord, then, provided Landlord
promptly returns Tenant’s Security Deposit (if Tenant is not then in default)
this Lease and the Term and estate hereby granted shall terminate at noon of
such Early Termination Date specified in the Early Termination Notice as if
such Early Termination Date were the Expiration Date of the Term. In the
event of Early Termination by Landlord as provided herein, Tenant shall be
required to deliver the Demised Premises to Landlord in broom clean
condition subject to reasonable wear and tear.
Lease, § 2.4. Rogers NY argues that 49 Bleecker Inc. was in default for nonpayment of rent both
at the time the notice of early termination was sent and also as of December 31, 2018, and that
49 Bleecker Inc. has never relinquished the Demised Premises as it is required to do. The Debtor
contends that the Landlord was required to return its security deposit and that this condition to
the termination of the Lease has never been met.
A. Whether the Civil Court Decided This Issue
In 2019, Rogers NY attempted to obtain an ejectment order from the Civil Court of the

City of New York. Various rules (unique to state court practice) determine whether the Civil

Court has jurisdiction over an issue or whether an action must be brought in the Supreme Court.

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Arcane distinctions under state law between “conditions subsequent” and “conditional
limitations” are often decisive in resolving that jurisdictional question.

Rogers NY apparently contended in the Civil Court that the termination of the Lease was
automatic once the notice of early termination was sent. The Civil Court noted, however, that
under the Lease the termination is effective “provided Landlord promptly returns Tenant’s
Security Deposit (if Tenant is not then in default).”” The Civil Court further held that this
provision therefore required something other than the mere passage of time for the termination to
take effect — namely, the landlord had to decide whether the tenant was in default and whether
the security deposit needed to be returned. The Court therefore decided that the provision
operated as a “condition” and dismissed for lack of jurisdiction.

The Debtor has repeatedly argued that the Civil Court somehow decided that the
Landlord actually owed the security deposit to the Tenant, or that the Tenant was not then in
default, or that that the termination of the Lease never took effect and will not take effect until
future conditions are satisfied. I have now on several occasions ruled that the Civil Court held
no such thing. The Civil Court did not (as Debtor suggests) hold that there was no default, or
that in fact the return of the security deposit was actually required under the circumstances of this
case. It simply noted that because of the provision in the Lease the Civil Court had no
jurisdiction to decide whether the return of the security deposit was required, or whether the
Debtor was in default, and that such issues had to be resolved elsewhere. That is quite clear from
reading pages 4 through 6 of the Civil Court’s decision. At page 4, for example, the Civil Court
observed, after describing the last sentences of section 2.4 of the Lease:

That is, upon Landlord’s twelve-month notice to terminate, then — if Tenant is
not in default (apparently at Landlord’s sole determination)—Landlord must

“promptly return” Tenant’s security deposit. In other words, the termination
is not self-executing; termination requires additional decision-making and

15


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contended that the termination of the Lease was automatic and that the Civil Court had held
instead that the effective date of the termination depended on whether or not the Landlord was
required to return the security deposit. The Debtor argues as though the Civil Court actually held
that the Landlord was obligated to return the security deposit and that the termination was not yet
effective, but that interpretation of the Civil Court decision is plainly wrong. The Civil Court
expressly stated that “whether there was a default or not — a point contested by the parties — that
issue cannot be addressed here” because the very existence of that issue deprived the Civil Court
of jurisdiction. Ex. 1 at 4-5. Nothing in the order purported to resolve the disputed question of
whether a default existed and whether any part of the security deposit had to be returned.

B. Whether the Debtor Was in Default

The evidence at trial showed convincingly that the Debtor was in default for nonpayment
of rent at virtually all times. As of November 2017 (when the notice of early termination was
sent) the Debtor was in default by more than $278,000. See Landlord’s Ex. E. As of the
designated early termination date (December 30, 2018), the Debtor was in default by more than
$423,000. Id.

Mr. Zabari disputed the existence of the default, but he did so only by offering vague
testimony to the effect that he “often” or “regularly” made rent payments and that he believed
full payments had been made, and that if anything less than full payments had ever been sent it
must have been because Mr. Rogers (the deceased former owner of Rogers NV) had agreed to
accept lesser payments. No specifics as to any such agreement, or any documentation of any
such agreement, were ever identified. Mr. Zabari claimed to have collected bank records and
other payment records for his attorneys, but the Debtor offered no evidence of actual payments

that differed in any way from the payment records that were introduced into evidence.

17


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sent) or in December 2018 (before the termination took effect or immediately when it took
effect). Those arguments are contrary to the plain language of the Lease.

Certainly no return of the security deposit was required in November 2017, when the
notice of early termination was sent. The Lease only speaks of the possible return of the deposit
“upon” the early termination (1.e., at the end of 2018), and not “upon” the mere notice that the
Landlord has decided to exercise the early termination right.

Section 2.4 provides that the leasehold estate shall terminate at noon on the Early
Termination Date provided that the Landlord “promptly” returns the security deposit, but it
cannot reasonably be said that this required a return of the deposit before the Debtor had even
returned the premises, and before the condition of the premises could even be assessed. In fact,
the Debtor’s interpretation of section 2.4 is contrary to the plain language of the last sentence of
section 3.4(a) of the Lease, which states:

In the event that Tenant shall fully and faithfully comply with all of the
terms, provisions, covenants and conditions of this lease, the security shall be
returned to Tenant within thirty (30) days after the expiration or earlier

termination of this Lease after delivery of entire possession of the demised
premises to Landlord.

Lease, § 3.4(a). In context, the requirement of that the security deposit be “promptly” returned,
provided the Debtor was not in default, simply meant that the return be made 30 days after the
termination and surrender of the premises, as section 3.4(a) of the Lease specified.

Section 3.4 of the Lease also gave the Landlord the right to “use, apply or retain the
whole” of the security deposit upon the Debtor’s failure to cure a default, and section 2.4 stated
plainly that the return of the security deposit is not required if the Tenant is in default. Lease,

§§ 2.4, 3.4. The Debtor’s contention that the Landlord was required to return the security deposit

at the time of the early termination — notwithstanding the existence of prior payment defaults and

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notwithstanding the Debtor’s failure to surrender the premises — is contrary to the plain language
of the Lease.

D. Whether the Effectiveness of the Termination Notice Was Delayed Until
Disputes Over the Existence of a Default Could Be Determined

In its submissions the Debtor has also argued as though the early termination of the Lease
could not take effect until after a conclusive resolution, by a court, of disputes as to whether a
default existed and whether the return of all or some portion of the security deposit was required.
The Debtor also has argued as though any dispute over the existence of a default should have
proceeded just as though the Landlord were seeking to terminate the Lease based upon a
payment default. The Debtor elicited testimony at trial, for example, to the effect that the
Landlord did not send notice of payment defaults and did not send notices of termination of the
Lease based on the nonpayment of rent. The Debtor also has argued in its post-trial submission
that any effort to terminate the Lease based on payment defaults should be barred for lack of
notice and based on laches. There are a number of reasons why the Debtor’s arguments are
without merit.

First, as explained above the termination of the Lease that is at issue in this proceeding is
a termination based on the exercise of an early termination option pursuant to section 2.4 of the
Lease. The Debtor’s default may be relevant in determining whether a security deposit had to be
returned. However, the Landlord (in this proceeding) is not invoking a right to terminate based
on the payment defaults themselves. Whether those defaults could have justified a termination
of the Lease (in the absence of the exercise of the early termination right) therefore is irrelevant.
Similarly, any procedural prerequisites to a termination that is based on the existence of a
payment default have nothing to do with exercise of the early termination option and the

assessment of whether the security deposit needed to be returned.

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Second, the Lease makes clear (as most commercial leases do) that the failure to make
timely rent payments is automatically a default and does not require “notice” in order to
constitute a default. See Lease, § 18.1 (“Each of the following shall be an Event of Default . . .
(a) Tenant shall fail to pay within ten (10) days Fixed Rent, Rent or any other Additional Rent
required to be paid by Tenant under this Lease any three (3) times in any 12-month period . . .””)
The only default provisions in the Lease that require “notice” are those set forth in section
18.1(b) of the Lease, regarding the Tenant’s failure to observe or perform any other term of
condition of the Lease. Accordingly, there is no “notice” prerequisite to the existence of a
default that may be considered in deciding whether the terms of section 2.4 required a return of
the security deposit.

Third, section 2.4 of the Lease provides that an early termination is effective as of the
date set forth in the early termination notice. The return of a security deposit is only a condition
to the effectiveness of that termination if the Debtor is not in default. The Debtor disputed the
existence of such a default, but the Debtor’s opposition does not mean that the effectiveness of
the termination was delayed.

If the Debtor had prevailed on the disputed default issue at trial, and if the Debtor had
demonstrated that it was entitled to a return of a security deposit, then there might have been
merit to the Debtor’s contention that the termination would not be effective until the security
deposit were returned. But the evidence at trial showed plainly that the Debtor is wrong. The
Debtor’s payment defaults greatly exceeded the amount of the security deposit, so that nothing
was owed to the Debtor with respect to the security deposit. The trial before me therefore has
confirmed that the Landlord had no obligation to return the security deposit as of the specified

early termination date. No court ever entered any order that prevented the termination from

21


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assert rights as a Landlord under the Lease, Rogers NY would still have the right to show that the
Debtor’s rights were terminated by Rogers NV due to the delivery of a proper notice of early
termination and due to the fact that the Debtor was in default of its obligations under the Lease at
the time of termination. As explained above, Rogers NY has made such a showing.

The Debtor also is wrong in its contentions that Rogers NY is barred from asserting any
rights of the “Landlord” under the Lease. The Debtor bases its argument on section 248 of the
New York Real Property Law, which provides:

An attornment to a grantee is not requisite to the validity of a conveyance of

real property occupied by a tenant, or of the rents or profits thereof, or any

other interest therein. But the payment of rent to a grantor, by his tenant,

before notice of the conveyance, binds the grantee; and the tenant is not liable

to such grantee, before such notice, for the breach of any condition of the

lease.
N.Y.R.P.L. § 248. The Debtor argues that the last clause in section 248 should be interpreted as
meaning that the tenant has no liability of any kind to a grantee, no matter what the
circumstances, until properly notified that property has been transferred. However, in context all
that section 248 says is that a tenant who pays rent to the original owner, before being notified of
a transfer, is not liable to the new owner to make a duplicate payment of that same rent. This
limited applicability of section 248 is made clear upon consideration of section 223 of the Real
Property Law, which states (in relevant part):

The grantee of leased real property, or of a reversion thereof, or of any rent,

the devisee or assignee of the lessor of such a lease, or the heir or personal

representative of either of them, has the same remedies, by entry, action or

otherwise, for the nonperformance of any agreement contained in the

assigned lease for the recovery of rent, for the doing of any waste, or for

other cause of forfeiture as his grantor or lessor had, or would have had, if the

reversion had remained in him. A lessee of real property, his assignee or

personal representative, has the same remedy against the lessor, his grantee or

assignee, or the representative of either, for the breach of an agreement
contained in the lease, that the lessee might have had against his immediate

23


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the provision to all successor Landlords under all circumstances would turn the prior language
into mere surplusage and would be contrary to the plain language of the provision.

Section 21.2(b) was designed to deal with the special situation of foreclosures, in which a
tenant’s interest might be extinguished along with the interest of an owner. Section 26.12 of the
Lease more generally provides as follows:

As used in this Lease, the term “Landlord” shall mean only the Landlord, so

that in the event of any sale of the Building or of the Land and the Building

or of said Lease in the event of a lease of the Building or of the Land and the

Building said Landlord shall be and hereby is entirely freed and relieved of

all covenants and obligations of Landlord hereunder thereafter to be

performed or observed, and it shall be deemed and construed without further

agreement between the parties or their successors in interest, or between the

parties and any such purchaser or lessee, that such purchaser or lessee has

assumed and agreed to performed /sic] and observe any and all covenants

and obligations of Landlord hereunder first arising from and after the

effective date of such transfer.
Lease, § 26.12. Section 26.12 plainly contemplates that in the event of a sale, the new owner
takes over the position of Landlord without the need for any further agreement among the parties
to the Lease, which is precisely what section 223 of the New York Real Property Law also
contemplates.

For each of the foregoing reasons, the Debtor’s “standing” arguments are without merit.
IV. The Presence of a Protected Residential Tenant

Mr. Zabari testified that at the time the Lease was executed a portion of the third floor
space was occupied by Jen Gatien, who apparently was understood by the parties to be a
commercial tenant under the name DeerJen LLC. Mr. Zabari testified that in January 2013 Ms.
Gatien informed 49 Bleecker Inc. that she intended to move out soon and offered a payment of
one month rent before doing so. Thereafter, Ms. Gatien apparently obtained a ruling that she is a

residential tenant who is entitled to continue to live in the space pursuant to the terms of the New

York Loft Law, codified in Article 7-C of the New York Multiple Dwelling Law.
26

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The Debtor has made a large number of arguments at trial and in its post-trial
submissions about the purported consequences of Ms. Gatien’s tenancy, and I have attempted to
address each of those arguments separately.

A. Alleged Misrepresentations/Alleged Deprivation of Quiet Enjoyment

In its post-trial submissions the Debtor argues that the very existence of Ms. Gatien as a
tenant deprived the Debtor of “unencumbered possession” of the premises and therefore deprived
the Debtor of its right to quiet enjoyment of the property. The Debtor also argued that Rogers
NV made misrepresentations about Ms. Gatien’s tenancy and that these misrepresentations
created defenses to the Debtor’s payment obligations. However, the only issue regarding Ms.
Gatien’s tenancy that the Debtor actually designated as a relevant issue for trial in the Joint
Pretrial Order was the Debtor’s contention that Ms. Gatien’s status as an IMD tenant barred the
Landlord from collecting rent and barred the Landlord from contending that the Debtor was in
default. The Joint Pretrial Order clearly states that the parties’ prior pleadings were “deemed
amended’ to embrace “only” the contentions listed therein. Issues regarding alleged
misrepresentations, “quiet enjoyment,” and allegations that the Debtor was entitled to rent offsets
due to alleged failures to deliver “unencumbered” rights to the third floor were not properly
identified as issues for trial in accordance with this Court’s pretrial order requirements and
therefore were not matters that the Debtor preserved the right to assert.

The belated claims also are contrary to the express provisions of sections 5.1 and 26.7 of
the Lease, which confirmed that the Debtor had inspected the premises, that the Landlord had
made no representations regarding the premises or their permissible use, and that the Debtor
accepted the premises “as is.” Section 26.7 states:

Neither Landlord nor Landlord’s advisors or agents have made any
representations or promises with respect to the physical condition of the

27


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See Debtor’s Post-Trial Submission [Dkt. No. 50] at 8. In fact, however, no evidence was
offered at trial to support the allegations regarding the duration of Ms. Gatien’s tenancy, or as to
whether another residential occupant preceded her, or as to the alleged residential tenants in
other parts of the building. Furthermore, with the exception of the effect of Ms. Gatien’s tenancy
the listed items were not even identified in the parties’ Joint Pretrial Order as contentions that the
Debtor intended to pursue at trial. As a result the Debtor would not have been permitted to
pursue those contentions at trial even if it had offered any proof in support of them.

C. Whether the Absence of a Permanent Certificate of Occupancy for Ms.
Gatien’s Unit Excused the Debtor from All of Its Rent Obligations

The Debtor argues in its post-trial submission that no permanent Certificate of
Occupancy was in place for Ms. Gatien’s unit and that her occupancy therefore is in violation of
section 301 of the Multiple Dwelling Law. No proof was offered to support this contention.* On
the other hand, the parties appeared to be in agreement at trial that Ms. Gatien had been certified
as the occupant of a unit in an “Interim Multiple Dwelling” (or an “IMD”), and the Petition filed
by Rogers NY in the state court includes an acknowledgment that Ms. Gatien had that protected

status. By definition, an IMD is a non-residential building that has been occupied as a residential

In its post-trial submission the Debtor has belatedly urged me to take judicial notice of a
large collection of certificate of occupancy records available on the New York Buildings
Information System. However, the records were not offered at trial and the evidentiary
record was closed. No timely request was made that I take judicial notice of them, so they
are not properly part of the evidentiary record. In addition, the records themselves do not
plainly disclose information of a kind for which judicial notice would be proper. The cited
web-site does not include any clear disclosure as to a particular fact or circumstance.
Instead, the Debtor has invited me personally to comb through a byzantine collection of
records and to come to my own conclusions (unguided by witnesses) as to what a massive
collection of building department records might show. The proposed records also do not
include records of applications to the Loft Board and rulings by the Loft Board, and
therefore would not even be a complete set of relevant applications or orders. The Debtor’s
request that I embark on my own unsupervised fact-finding mission on these points is not a
proper or timely request for judicial notice and I decline the request.

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building without a certificate of occupancy for residential apartments. I will presume, therefore
(based on the apparent concession that Ms. Gatien is an IMD tenant) that the building properly is
subject to the provisions of the Article 7-C of the Multiple Dwelling Law, and that at least at
some point the building did not have a certificate of occupancy for residential units.

The Debtor contends that the absence of a permanent certificate of occupancy bars
Rogers NY from collecting any rents, citing section 302 of the Multiple Dwelling Law.
However, section 285 of the Multiple Dwelling Law makes clear that, notwithstanding the
provisions of section 302, the owner of an interim multiple dwelling may recover rent payable
from residential occupants so long as the owner is in compliance with the provisions of Article 7-
C. Again, the Debtor offered no proof whatsoever as to the status of the Landlord’s compliance
with Article 7-C and therefore no proof that section 302 is applicable. Nor did the Debtor offer
proof as to what efforts had been made to obtain a permanent certificate of occupancy, the time
periods when such efforts were made, or as to whether or not the Debtor had complied with any
of the various sub-parts to section 284 of the Multiple Dwelling Law. At least one New York
court has held that the prohibitions against the collection of rent that are set forth in section 302
of the Multiple Dwelling Law do not apply so long as a party has complied with its obligation
under section 284 of the Multiple Dwelling Law to take reasonable action to pursue a certificate
of occupancy. See Cromwell v. Le Sannom Bldg. Corp., 171 A.D.2d 458, 459 (1' Dep’t 1991)
(“Despite the provisions of MDL 302, and despite any possible contrary interpretation of our
recent decision in County Dollar (supra), we find that compliance with MDL 284 is sufficient to
entitle the owner to collect rent or use and occupancy.”’)

Given the failure of proof, I ordinarily would rule that the Debtor had failed to establish

that section 302 is even applicable to the disputes before me. However, the parties also appear to

31


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against four separate tenants, at least one of whom admittedly was subject to the protections
under the Multiple Dwelling Law. The Civil Court held in Tysons that since at least some of the
respondents were protected tenants, the landlord needed to allege and prove its compliance with
the MDL. The limited scope of the 7ysons decision was made clear in a later decision by the
Civil Court in 1990. See Spring St. Assocs. v. Reardon, 146 Misc. 2d 888 (Civ. Ct. N.Y. Cty.
1990). In Spring Street, the Civil Court noted that the New York Court of Appeals had
previously held, in a 1985 decision, that “even if a portion of a building is an interim multiple
dwelling, nonresidential space in the building is exempt from article 7-C.” See Matter of Lower
Manhattan Loft Tenants v. New York City Loft Board, 66 N.Y .2d 298, 305 (1985). The court in
Spring Street therefore held that compliance with section 284 of the MDL was not relevant in an
action against a commercial tenant and did not constitute a defense to the commercial tenant’s
rent obligations. The court distinguished Tysons as merely holding that if one or more of the
named respondents was a protected tenant, compliance with section 284 needed to be alleged.
The decision in 455 Second Ave. is the most recent authority we have found on this point,
and that decision (and the decision in Spring Street) are the most persuasive. I must also note
that the more extreme position that the Debtor has taken on this issue in its post-trial submission
is flatly at odds with other positions the Debtor has taken in this bankruptcy case, including
statements made during the June 7 trial. During the trial, counsel for the Debtor argued that rent
could not be collected from Ms. Gatien, and that this prohibition somehow ran “vertically” to the
Landlord so that the Landlord could not collect an equivalent amount of rent from the Debtor.
However, counsel denied that the Debtor was contending that the Landlord was barred from
collecting any rents at all. The asserted defense, at trial, was limited to amounts attributable to

Ms. Gatien’s space.

34


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2d Dep’t 1986) (where landlord made no covenant to obtain a certificate of occupancy and the
commercial tenancy was undisturbed the tenant was obligated to pay rent). Nor did the Debtor
have any right to a rent offset under the Lease. Section 3.1 of the Lease provides that the Debtor
must pay rent “without any deduction or set off whatsoever, except as expressly provided for in
this Lease,” and the Lease does not provide for any deduction or offset based on an inability to
collect rent from sub-tenants.

Mr. Zabari contended vaguely at trial that he might have had a conversation with Mr.
Rogers about reducing rent payments in light of Ms. Gatien’s tenancy, but as noted above the
testimony was entirely vague and not credible, and I find that no such agreement existed.

In addition, even if section 302 could be interpreted as excusing the Debtor from some
portion of its rent obligation (a portion attributable to the space occupied by Ms. Gatien), or if
the Debtor had otherwise been entitled to such a reduction, the Debtor should have offered proof
of the uncollected amounts if the Debtor wished to prove an offset to its rent obligations. The
Debtor did not do so. Mr. Zabari testified generally that he received a rent payment from Ms.
Gatien in January 2013 and no further rent payments, but he never said what amounts she owed
or what proportion of the third floor she occupied. The Debtor has argued in its post-trial papers
that the inability to collect rents from Ms. Gatien cost the Debtor “several thousands of dollars
monthly” over a course of five years, but no evidence was offered at trial to support this
contention.

Furthermore, even if the Court were to assume that the Debtor’s post-trial reference to
“several” thousand dollars meant a monthly rent of as much $4,000 (an amount higher than
“several” thousand dollars), the maximum amount payable by Ms. Gatien from February 2013

through the early termination date would have been approximately $284,000. Even if that

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rights of intermediate tenants such as 49 Bleecker Inc. The Debtor does not contend that it is
residential tenant or that the Debtor has any rights of its own under the Multiple Dwelling Law.
There is nothing about Ms. Gatien’s tenancy that prevented the Landlord from exercising the
early termination right with respect to the Debtor’s separate tenancy, or that prevented the
Debtor’s payment defaults from being treated as “defaults” in determining whether the return of
the security deposit was required, or that required that the Debtor’s intermediate tenancy remain
in effect.

The Debtor has also argued that in prior notices the Landlord sought to extinguish all of
the Debtor’s interests in the Premises under the Lease. In the Debtor’s view, this can only mean
that the Landlord was also seeking to evict Ms. Gatien, with the result that the early termination
notice allegedly was illegal. But the early termination of the Debtor’s Lease (which is what the
Landlord sought) just eliminates the Debtor’s own interests in the property. Sub-tenants have
whatever rights they have by way of their own leases or by virtue of state law. The Debtor’s
own interests can be fully extinguished without regard to whether that does or does not affect
sub-tenants. The Debtor cannot latch onto those parties’ separate rights to try to hold onto
property interests to which the Debtor itself is not entitled.

Conclusion

For the foregoing reasons, I hold that a proper notice of early termination was sent to the
Debtor and was received by the Debtor; that the Debtor was in default for nonpayment of rent
and was not entitled to a return of its security deposit; that the Lease terminated as of December
31, 2018; that Rogers NY has standing to seek the removal of the Debtor from the premises and
to raise the issues addressed in this Decision; and that the Debtor’s other defenses are without

merit. The Debtor is a holdover tenant with no rights to possession under the terminated Lease.

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The parties are directed to appear before the Court on June 17, 2021 at 10:00 a.m. to discuss any
further proceedings or rulings that may be appropriate with regard to Rogers NY’s request for
relief from the automatic stay and with regard to the Debtor’s pending motion for an extension of
time to assume or reject the Lease.

Dated: New York, New York
June 15, 2021

/s/ Michael E. Wiles
HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE

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