The following e-filed documents, listed by NYSCEF document number (Motion 003) 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 152, 153, 154 were read on this motion to/for DISMISS. The following e-filed documents, listed by NYSCEF document number (Motion 004) 144, 145, 146, 147, 148, 149, 150 were read on this motion to/for DISMISSAL. DECISION + ORDER ON MOTION In this commercial landlord-tenant action between plaintiff-landlord 513 West 26th Realty LLC (plaintiff, or landlord) and defendant-tenant George Billis Galleries Inc. (tenant) and defendant-guarantor George Billis (Billis, or guarantor) the Appellate Division, First Department remanded the case for the record to be developed and a determination made on whether Administrative Code (NYC Admin Law) §22-1005 (the guaranty law) violates the Contracts Clause of the United States Constitution in light of the recent decision in Melendez v. City of New York finding the guaranty law unconstitutional (668 F Supp 3d 13 [SDNY 2023]).1 BACKGROUND The Guaranty Law In March 2020, in response to the outbreak of the COVID-19 pandemic, the governor of New York issued several executive orders that, inter alia, required non-essential businesses to follow in-person limitations, close to the public, or cease operations altogether (NYSCEF Doc No 97). “Since the State-mandated closures reduced or eliminated the ability of many commercial businesses to generate revenue in the short term, affecting their ability to pay rent, business owners who had executed personal guaranties faced personal financial ruin or bankruptcy, not because their business was failing, but because they were legally prohibited from operating” (NYSCEF Doc No 142). In response, the New York City Council proposed the guaranty law, which prevented commercial landlords from holding personal guarantors liable for a business tenant’s default in rent payments during the State-mandated closure period. The guaranty law was jointly sponsored by Council Speaker Corey Johnson and Council Member Carlina Rivera. In introducing the legislation on April 22, 2020, Rivera stated that its purpose was to “ensure [that] city business owners don’t face the loss of their businesses and personal financial ruin or bankruptcy as a result of this state of emergency” (NYSCEF Doc No 100, 51:4-11). She stated that the law was necessary because, as a result of the state’s closure and reduced capacity orders, “businesses are closing and losing weeks of income through no fault of their own and allowing small business owners to keep their spaces will be integral to the city’s ability to recover[] after the virus” (id.). Rivera expressed that the guaranty law aimed to “ensur[e] that one day [business owners] may be able to return and relaunch or create a new thriving business in our neighborhoods” (NYSCEF Doc No 102, 30:2-9 [transcript of April 29, 2020 remote hearing before the committee on small business and committee on consumer affairs and business licensing]). She further stated that constituents had reported some landlords using lease guaranties to “go[] after small business owner[s'] life savings and personal assets,” with one restaurant owner “getting rent due notices and threats from his landlord that the personal liability clause in his lease will soon be acted upon” (id., 30:10-20). In considering whether the bill should be enacted, the City Council received input from guarantors, business groups and community organizations, and others involved in small businesses. Robert Bookman, an attorney working with small businesses, testified that “nothing [was] keeping small business owners awake at night more than…personal guaranties on commercial leases,” and “no one ever contemplated this situation where [tenants] are technically in possession but the government says we cannot operate or only minimally operate” (id., 153:13-24). Bookman urged that business owners were faced with “deciding, should they give the keys back and permanently go out of business or risk another month of personal liability,” and thus the guaranty law was critical to prevent “our commercial strips in every neighborhood [from] turn[ing] into ghost towns” (id. at 152:2-4, 154:6-10). Business owners stated that enforcement of personal guaranties would cause them to “not only lose [their] business, [] livelihoods and [] investments[], but also spend every other dollar [they] have on commercial rent on a space that is unusable” (NYSCEF Doc No 103, p. 13 [Joseph Conti, Owner of Shuraku Restaurant]; see also pp. 107 [Gabriel Stulman, CEO & Founder of Happy Cooking Hospitality stating: "If this bill does not pass, I am at risk of not only losing my restaurants and my income, but beyond that, I am at risk of losing the entirety of my life savings and any and all assets I have until I am personally bankrupt"]). The legislative record also indicated that other individuals and groups opposed the guaranty law. Constituents wrote, inter alia, that the bill: “upend[s] the organic solutions that businesses and property owners are engaging in [] and artificially select[s] winners or losers when almost all parties need relief”; “transfer[s] the loss from [guarantors] to [landlords]“; “will set into motion a [] disaster for building owners who will be destroyed by not being able to pay their real estate taxes if a tenant is paying no rent and no tax relief for the building owner is forthcoming”; and should be revised to “take into account the health and financial well-being of both landlords and tenants in crafting legislation,” “make it incumbent on tenants to show that they are unable to pay their rent due to COVID-19,” and “make arrangements for them to catch up when the economic situation improves” (id.). On May 13, 2020, the Council passed the guaranty law, which provides: A provision in a commercial lease or other rental agreement involving real property located within the city that provides for one or more natural persons who are not the tenant under such agreement to become, upon the occurrence of a default or other event, wholly or partially personally liable for payment of rent, utility expenses or taxes owed by the tenant under such agreement, or fees and charges relating to routine building maintenance owed by the tenant under such agreement, shall not be enforceable against such natural persons if the conditions of paragraph 1 and 2 are satisfied: 1. The tenant satisfies the conditions of subparagraph (a), (b) or (c): a. The tenant was required to cease serving patrons food or beverage for on-premises consumption or to cease operation under executive order number 202.3 issued by the governor on March 16, 2020; b. The tenant was a non-essential retail establishment subject to in-person limitations under guidance issued by the New York state department of economic development pursuant to executive order number 202.6 issued by the governor on March 18, 2020; or c. The tenant was required to close to members of the public under executive order number 202.7 issued by the governor on March 19, 2020. 2. The default or other event causing such natural persons to become wholly or partially personally liable for such obligation occurred between March 7, 2020 and September 30, 2020, inclusive. NYC Admin Law §22-1005. The guaranty law was twice extended so that in its final iteration, it encompassed defaults occurring between March 7, 2020 and June 30, 2021 (the statutory period). In applying these extensions, the Council reiterated its determination that without the law, “the economic and social damage caused to the city will be greatly exacerbated” (NYSCEF Doc No 128 [Local Law 98-2020]). It further noted that the restrictions were likely to “continue for the foreseeable future,” and thus extensions were needed to give businesses “a reasonable recovery period…to not only survive but also to generate sufficient revenues to defray owed financial obligations” (NYSCEF Doc No 141 [Local Law 50-2021]). The Melendez Decisions On November 25, 2020, the Southern District Court of New York considered a challenge to the constitutionality of the guaranty law (Melendez v. City of New York, 503 F. Supp. 3d 13 [SDNY 2020]) (Melendez I). Specifically, plaintiff-landlord Bochner argued, inter alia, that the law violated the Constitution’s Contracts Clause, which provides that “no State shall…pass any…Law impairing the Obligations of Contracts” (US Const Art 1 §10). The court applied a three-part test to determine whether the Contracts Clause has been violated, evaluating: “(1) [whether] the contractual impairment [is] substantial and, if so, (2) [whether] the law serve[s] a legitimate public purpose such as remedying a general social or economic problem and, if such purpose is demonstrated, (3) [whether] the means chosen to accomplish this purpose [are] reasonable and necessary” (Sullivan v. Nassau Cty. Interim Fin. Auth., 959 F3d 54, 64 [2nd Cir 2020], quoting Buffalo Teachers Fed’n v. Tobe, 464 F3d 362, 368 [2nd Cir 2006]; see also Energy Reserves Grp. v. Kan. Power & Light Co., 459 US 400 [1983]). The court determined that the guaranty law is constitutional, holding that “despite [the] showing of substantial impairment” to the underlying contracts at issue, “the Guaranty law is reasonable, necessary, and passed to advance a legitimate public interest,” namely, “to prevent New York’s small business owners from being ‘pushed into both business and personal bankruptcy,’ which would eliminate their ability to ‘remain[] in or return[] to microentrepreneurship,’ and would ‘further exacerbat[e] the ongoing economic crisis’ for the entire City” (Melendez I at 33, 36). The Second Circuit Court of Appeals reversed the Southern District Court of New York’s decision (Melendez v. City of New York, 16 F.4th 992 [2nd Cir 2021]) (Melendez II). Applying the principles of Home Bldg. & Loan Ass’n v. Blaisdell, 290 US 398 [1934], and its progeny, which “replac[ed] a strict textual view of the Contracts Clause with one that relied on a balancing principle” (Melendez II at 1022), the court identified five features of the guaranty law “that preclude[d] dismissal of the Contracts Clause Claim,” specifically: (1) the guaranty law was not a temporary or limited impairment of contract; (2) the record was insufficient to support three assumptions upon which the guaranty law was based2; (3) the burden of the guaranty law was placed exclusively upon landlords; (4) the City did not condition the application of the guaranty law on need; and (5) the guaranty law does not compensate landlords for damages or losses sustained as a result of their guaranties’ impairment (id. at 1038-46). The Second Circuit therefore “remand[ed] the case to the district court for it to allow the parties to develop the record further on issues identified in this opinion as well as any other matters relevant to the claim” (id. at 1047). On remand, by decision and order entered on March 31, 2023, the Southern District held “that the City has been unable to adduce record evidence demonstrating that the Guaranty Law is reasonably tailored to accomplish its legitimate policy goals,” and therefore found that the guaranty law violates the Contracts Clause (Melendez v. City of New York, 668 F Supp 3d 184, 189 [SDNY 2023]) (Melendez III). The court found that the City failed to adequately address each of the five concerns identified by the Second Circuit, noting: (1) “landlords are forever barred from recovering rent to which they are entitled from a guarantor during that 16-month period if a tenant is left unable to pay”; (2) “the City cannot demonstrate that it had before it evidence supporting [the assumption] that shuttered small businesses are usually owned by the individuals guaranteeing their leases — nor that it considered evidence justifying why it need not condition the relief of the Guaranty Law on guarantors owning shuttered businesses”; (3) the City’s assertions “that similar government pandemic assistance was not accessible to small business tenants” and that “guarantors would have any incentive based on the Law to enter negotiations with landlords regarding unpaid rent” were unsupported; (4) the City enacted the guaranty law without properly tailoring it, even though “a hardship requirement [] was plainly an evident and more moderate course”; and (5) “[t]he fact remains that Plaintiffs here were damaged [] and have not been compensated” (id. at 200-06 [internal citations and quotation marks omitted]). The Instant Action Plaintiff is the owner of the building located at 525-527 West 26th Street, New York, NY 10001 (NYSCEF Doc No 1 2). By lease dated July 2015, plaintiff leased the lower level of the building to the tenant, an art exhibition space, for a ten-year term expiring on August 31, 2025 (id.
