DECISION, ORDER AND JUDGMENT AFTER TRIAL The plenary trial of this action took place on the mornings of April 23 and 24 and most of the day on April 25, 2019. The underlying facts governing the relationship between the parties were not in serious dispute and were confirmed by documents admitted into evidence at the trial.Plaintiff Bliss World LLC (“Bliss”) commenced operating a spa on the 3rd floor at 10 West 57th Street in Manhattan pursuant to a ten-year lease with the predecessor owner of 10 West 57th Street dated December 12, 2006 (the “Lease”). The Lease granted Bliss the option to renew the Lease for two consecutive five-year periods. The present Landlord, defendant 10 West 57th Street Realty LLC, acquired the building in which the demised premises are located on March 20, 2012. On September 15, 2016, the present Landlord renewed the Lease effective January 1, 2017 for a period of five years on the same terms and conditions as set forth in the Lease through December 31, 2021. Some time thereafter, the Landlord determined that it wished to terminate all the tenancies in the building in order to demolish the building and construct a new building that would provide a greater economic return to the Landlord.The dispute between the parties has been ongoing since at least June 14, 2017 when the Landlord sent Bliss an “Eighteen (18) Month Notice of Termination of Lease” pursuant to Paragraph 69 of the Lease between the parties. That Paragraph, entitled “Cancellation for Development,” set forth a detailed procedure pursuant to which the Landlord could seek to terminate the Lease based on a plan to “demolish or substantially renovate the entire Building,” and the Tenant in exchange could seek a Termination Fee pursuant to the formula set forth in the Lease once a new Bliss premises had been located elsewhere.Rather than proceed pursuant to Paragraph 69, the Landlord, on November 2, 2017, sent Bliss a Twenty (20) Day Notice to Cure alleging that Bliss was illegally operating a spa without the requisite special permit from the Board of Standards and Appeals and that Bliss had not “reasonably diligently attempted to locate a New Bliss Premises.” The testimony adduced at trial established that prior to November 2, 2018, Bliss did, with the assistance of representatives of the Landlord, seek alternative locations, including in buildings owned by the Landlord.Bliss initiated this action on November 20, 2017, asserting that the June 14, 2017 Notice of Termination was invalid. Over the Landlord’s objection that Bliss’ permit to operate a spa could not be renewed because Bliss had converted itself from a Delaware limited liability company to a Florida limited liability company, Bliss secured a valid permit to operate a spa from the Board of Standards and Appeals. Bliss sought a Yellowstone injunction from this Court, which was granted on condition that Bliss post a bond which was mistakenly fixed at $5 million and later corrected to be $500,000. (See transcripts of proceedings dated January 29, 2018 and February 22, 2018).Dismayed by the outcome of the proceedings relating to the Yellowstone injunction, the Landlord sent Bliss a second Twenty (20) Day Notice to Cure dated February 8, 2018, alleging that Bliss had failed to maintain appropriate insurance for the benefit of the Landlord pursuant to Article 42 of the Lease and that Bliss had also violated provisions in Article 45 of the Lease limiting any right of Bliss to assign or transfer its Lease or effect a “take-over.” The claimed violation of this provision of the Lease was based on the conversion of Bliss World LLC from a Delaware limited liability company to a Florida limited liability company. Bliss promptly moved for the continuation of the Yellowstone injunction, which this Court granted in a Decision and Order dated March 26, 2018. The Court found that the existing insurance policies maintained by Bliss complied with Bliss’ obligations under the Lease and noted that the Landlord had been on notice of Bliss’ existing coverage and was at all times satisfied with the insurance coverage that Bliss had in place until the Landlord’s multiple attempts to cause Bliss to vacate the premises so the Landlord could demolish the building.On March 6, 2018 Bliss advised the Landlord that “Tenant has located a New Bliss Premises located at 49 West 57th Street as evidenced by the enclosed letter of intent dated March 2, 2018 signed by the Landlord of the New Bliss Premises”. Consistent with the terms of Paragraph 69 of the Lease, Bliss provided the Landlord with Bliss’ calculation of the termination fee, which aggregated $7,701,381. However, the March 6 letter also stated: “By sending this New Bliss Notice, Tenant is not waiving, but rather reserving all of its rights to challenge the validity of the 18 Month Notice.”The Landlord did not respond to Bliss’ March 6, 2018 letter. The Landlord appealed this Court’s Yellowstone order and on January 18, 2019 also filed an Article 78 Petition against the Board of Standards and Appeals of the City of New York challenging the Board’s determination that Bliss was entitled to a renewal of its permit to operate a spa. (10 West 57th Street Realty, Inc. v. Board of Standards and Appeals of the City of New York, Index No. 150485/18). That proceeding is pending before another Justice of this Court. On June 29, 2018, Bliss explicitly asserted by letter that it considered the Eighteen (18) Month Notice of Termination of Lease void ab initio by reason of the Landlord’s failure to pay the termination fee pursuant to the Lease and that “Bliss intends to remain as a tenant under the Lease.”On March 5, 2019 the First Department dissolved the Yellowstone injunction on the grounds, inter alia, that the Tenant’s alleged failure to maintain adequate insurance and the claimed improper assignment of the Lease, if proven, were “not susceptible to cure” retroactively. However, the First Department did not find that Bliss had failed to maintain adequate insurance or improperly assigned the Lease, and it remanded the case to this Court with the following guidance:There is an ongoing dispute between the parties regarding whether the landlord’s claimed defaults are meritorious, either because they are not really defaults or they are not sufficiently substantial. We do not resolve those disputes. The denial of a Yellowstone injunction does not resolve the underlying merits of disputes about whether there is any default warranting termination of the lease in the first instance… A reversal in this case does not relieve the landlord of proving the bona fides of the claimed default or prevent the defendant from defending itself. These disputes will be resolved either in connection with the complaint and counterclaim in this action or in a subsequently commenced commercial holdover proceeding….In any event, no injunction is needed to preserve the status quo because the landlord cannot evict the tenant unless and until there is a determination of the merits in the landlord’s favor. If the tenant prevails, then there will be no eviction.170 A.D. 3d 401, 402.Upon remand, this Court scheduled a plenary trial limited to three outstanding issues: (1) whether the Landlord can show by a preponderance of the evidence that Bliss materially and substantially breached the Lease when, in 2013, the tenant converted from a Delaware limited liability company to a Florida limited liability company; (2) whether the Landlord can show by a preponderance of the evidence that Bliss materially and substantially breached the Lease, which required Bliss to maintain insurance not less than $5 million per occurrence; and (3) whether any of the Landlord’s conduct constituted a breach of the Lease and/or the duty of good faith and fair dealing that gives rise to compensable damages in favor of Bliss. The trial was so limited because all other issues previously raised by the parties had been resolved.With respect to the first issue, the testimony adduced at trial established that the 2013 conversion of Bliss from a Delaware limited liability company to a Florida limited liability company was a ministerial act that in no way constituted a take-over, transfer or assignment. Bliss retained the same federal tax identification number, retained the same offices for a significant period of time, and maintained the same bank account for periods of time before and after the conversion. There is no provision in the Lease that prohibits this type of re-domestication and, at all times, vis-a-vis the Landlord, Bliss has remained the same entity. The conversion does not violate the anti-assignment provisions in Articles 11 and 45 of the Lease. Consequently, the Landlord has failed to show by a preponderance of the evidence, that Bliss materially and substantially breached the Lease when it converted from a Delaware limited liability company to a Florida limited liability company.With respect to the insurance issue, the Lease provides in relevant part (with emphasis added):42. Insurance…. Tenant covenants and agrees that prior to entering upon the Demised Premises for the purpose of doing any work therein, or for any other purpose, or prior to Tenant’s taking possession of the Demised Premises, whichever shall occur first, Tenant shall immediately secure and give Landlord evidence of, and thereafter maintain in full force, during the Term of this Lease, at its own cost and expense, commercial general liability insurance coverage of not less than $5,000,000 combined single limit on a per occurrence basis for all general liability, personal injury and property damage. Such insurance policy shall contain broad additional insured endorsement and shall name Landlord (and any other parties having an insurable interest in the Demised Premises as are designated by Landlord) as additional insureds…. Tenant’s insurance obligations under this Lease may be satisfied under a blanket and/or an umbrella insurance policy.It is undisputed that from the commencement of Bliss’ tenancy, Bliss had primary commercial general liability insurance providing $1 million of coverage per occurrence and $2 million aggregate coverage. Bliss also had a blanket umbrella policy that provided $10 million of aggregate coverage. The effect of the blanket umbrella coverage is to provide the Landlord with $11 million of per occurrence coverage subject to an aggregate cap of $10 million of umbrella coverage.Thus, Bliss had $11 million of per occurrence coverage. This insurance coverage complied with the literal terms of the Lease, requiring not less than $5 million per occurrence, and this coverage was maintained without complaint from either the Landlord or the predecessor landlord for more than a decade.The Landlord argues that, because Bliss operates multiple facilities, it is theoretically possible for Bliss’ insurance coverage to be exhausted by claims from these other Bliss facilities. But, it is undisputed that the Landlord was aware that Bliss operated other facilities and it is clear from exhibits introduced at trial that Bliss provided the Landlord with its insurance arrangements to the Landlord’s apparent satisfaction prior to the service of the second Notice to Cure. The Lease includes no prohibition on aggregate caps to coverage. And, while the Landlord could have bargained for a policy that exclusively related to the Landlord’s building, the Lease expressly provides that “Tenant’s insurance obligations under this Lease may be satisfied under a blanket and/or umbrella insurance policy.” Thus, the Lease implicitly recognizes that the per occurrence limits are satisfied by an umbrella policy that would be applicable to other operations of the insured. Indeed, expert testimony adduced at trial established that since the late 1980′s standard general liability insurance cannot be purchased without aggregate caps. No other insurance-related issues were preserved for trial, and Bliss’ provision of primary and umbrella coverage with aggregate limits of $11 million per occurrence does not constitute a default by Bliss under the terms of the Lease as written warranting the termination of a valuable leasehold.Finally, testimony adduced at trial established that during the period between the Landlord’s issuance of its Eighteen (18) Month Notice of Termination of Lease and the time the Landlord issued its first Twenty (20) Day Notice to Cure, Bliss did look for additional space with the assistance of the Landlord, including space in buildings owned by the owner of the Landlord. Bliss offered no testimony to support its damage claims, but documents in evidence support damages of at least $25,000, which is the amount the Court awards Bliss on its Second Cause of Action.Accordingly, it is herebyADJUDGED AND DECLARED, pursuant to plaintiff’s First Cause of Action, that:(i) Bliss is not in breach of the terms and conditions of the Lease between the parties;(ii) The Twenty (20) Day Notices to Cure dated November 2, 2017 and February 8, 2018 are invalid and not sufficient to terminate the Lease; and(iii) The Eighteen(18) Month Notice of Termination of Lease dated June 14, 2017 is invalid and not sufficient to terminate the Lease; and it is furtherORDERED that plaintiff’s Second Cause of Action for breach of the Covenant of Good Faith and Fair Dealing implied in the Lease is granted and the Clerk is directed to enter judgment in favor of plaintiff Bliss World LLC against Defendant 10 West 57th Street Realty LLC in the amount of $25,000 with interest at the statutory rate of 9 percent per annum as of the date of this decision.; and it is furtherADJUDGED AND DECLARED, pursuant to defendant’s First Counterclaim, that:a. Plaintiff’s conversion from a Delaware LLC into a Florida LLC does not constitute a violation of Article 45 of the Lease; andb. Plaintiff’s conversion from a Delaware LLC into a Florida LLC did not trigger defendant’s right under Article 45E of the Lease to terminate the Lease and recover possession of the Premises; andc. Any failure by plaintiff to notify defendant and/or request defendant’s written consent prior to the LLC conversion does not constitute a material and incurable breach of Article 45 of the Lease entitling defendant to terminate the Lease and recover possession; andd. Defendant is not entitled to a judgment of ejectment; and it is furtherADJUDGED AND DECLARED, pursuant to defendant’s Second Counterclaim, that:a. The Lease was properly renewed by plaintiff as a Florida LLC; andb. Plaintiff is entitled to continue in possession;c. Defendant has no right to immediate possession of the Premises or to recover use and occupancy beyond the rent and additional rent defined in the Lease; andd. Defendant is not entitled to a judgment of ejectment; and it is furtherORDERED that defendant’s Third Counterclaim for money damages and attorneys’ fees is dismissed.Date: April 26, 2019
