COVID-19 and The Doctrines Of Frustration Of Purpose and Impossibility of Performance — Part III

• Posted on: Aug 8 2022

By: Jeffrey M. Haber 

Previously, this Blog examined the doctrines of frustration of purpose and impossibility of performance in the context of Covid-19 (See here, here, and here).  Because the Covid-19 pandemic and these doctrines continue to work their way through the courts, we do so again today. 

In McLearen Square Shopping Center Herndon, Va. L.P. v. BadaNara, LLC, the plaintiff, a commercial landlord, brought suit against defendant BadaNara, LLC (“BadaNara”)¹ and its members, defendants Hae-Chan Park and Kyunghwa Park for, inter alia, the failure to pay rent during the pandemic.  Defendants operated a restaurant that they rented from plaintiff pursuant to a commercial lease. The individual defendants guaranteed BadaNara’s obligations under the lease (the “guarantor defendants”). Plaintiff asserted a cause of action against BadaNara for breach of contract for failure to pay rent, a cause of action against the guarantor defendants seeking to recover on the guaranty based on BadaNara’s breach of the lease, and a cause of action against all defendants seeking attorneys’ fees and expenses. 

Plaintiff moved for summary judgment on, inter alia, the complaint and sought an order striking BadaNara’s answer for failure to appear by an attorney as required by CPLR § 321(a). The motion court struck BadaNara’s answer and entered a default judgment against it, granted those parts of plaintiff’s motion seeking summary judgment on the causes of action against the guarantor defendants, awarded plaintiff $380,949.90 in damages with statutory interest of nine percent from April 1, 2020, and ordered that plaintiff could submit an application for the recovery of attorneys’ fees. 

Defendants appealed.

The Appellate Division, Fourth Department modified the motion court’s order by vacating that portion of the order awarding interest and, as modified, affirmed the order.

In an action upon a guaranty, a plaintiff must establish “the existence of the guaranty, the underlying debt and the guarantor’s failure to perform under the guaranty”.² If the plaintiff does so, “the burden shifts to the defendant to establish, by admissible evidence, the existence of a triable issue with respect to a bona fide defense”.³ The Court of Appeals has explained that when a party executes an “absolute and unconditional” guaranty, courts have found that the absolute and unconditional guaranty precludes “guarantors from asserting a broad range of defenses”.⁴ 

The Court held that plaintiff met its initial burden by submitting the guaranty executed by the guarantor defendants, the underlying lease, and evidence of BadaNara’s and the guarantor defendants’ nonpayment of rent.⁵ The guarantor defendants, said the Court, failed to establish, by admissible evidence, the existence of a triable issue of fact with regard to the defenses raised. In that regard, the guarantor defendants claimed that they and BadaNara were excused from payment because of the Covid-19 pandemic. 

First, the guarantor defendants asserted the defense of frustration of purpose. “In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”⁷ The Court found that the temporary pandemic-related governmental restrictions imposed on BadaNara’s business operations did not implicate that defense because BadaNara “was not completely deprived of the benefit of its bargain”.⁸ The Court explained that “although the governmental restriction at issue here precluded BadaNara from offering in-person dining services, it expressly permitted restaurants such as BadaNara to offer take-out or delivery services.”⁹ The Court concluded that  “frustration of purpose is not implicated by temporary governmental restrictions on in-person operations, as the parties’ respective duties were to pay rent in exchange for occupying the leased premises”.¹⁰ 

Second, the guarantor defendants asserted the defense of impossibility of performance. The doctrine of impossibility of performance “excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible”.¹¹ 

The Court held that, “for essentially the same reasons” as above (i.e., the frustration of purpose defense), “the temporary restrictions on in-person dining did not render BadaNara’s performance under the lease objectively impossible.”¹² The Court explained that “the pandemic, while continuing to be ‘disruptive for many businesses,’ did not render [BadaNara’s] performance impossible, even if its ability to provide a [dining] experience was rendered more difficult, because the leased premises were not destroyed”.¹³ 

However, the Court agreed with the guarantor defendants that the motion court erred to the extent that it directed statutory interest to run from April 1, 2020, i.e., the earliest date that the lease was breached. CPLR § 5001(b) provides that “[w]here such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date”.¹⁴ Thus, concluded the Court, the motion court “incorrectly calculated the amount of prejudgment interest . . . based on the entire principal balance measured from [the earliest date of breach], rather than upon the accumulating balance as remaining [rent payments and other payments] became due.”¹⁵ Consequently, the Court vacated that portion of the fourth ordering paragraph awarding interest from April 1, 2020, and remitted the matter to the motion court to calculate the interest in accordance with CPLR § 5001(b).¹⁶

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

1. 2022 N.Y. Slip Op. 04864 (4th Dept. Aug. 4, 2022) (here). 
2. Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 N.Y.3d 485, 492 (2015).
3. Id.
4. Id.
5. Slip Op. at *2 (citations omitted).
6. Id. (citations omitted).
7. Warner v. Kaplan, 71 A.D.3d 1, 6 (1st Dept. 2009), lv. denied, 14 N.Y.3d 706 (2010) (internal quotation marks omitted); see also Shmaltz Brewing Co., LLC v. Dog Cart Mgt. LLC, 202 A.D.3d 1349, 1352 (3d Dept. 2022).
8. Slip Op. at *2-*3, quoting Gap, Inc. v. 170 Broadway Retail Owner, LLC, 195 A.D.3d 575, 577 (1st Dept. 2021) (internal quotation marks omitted); see also Arista Dev. LLC v Clearmind Holdings, LLC, 2022 N.Y. Slip Op. 04451, at *3 (4th Dept. 2022). 
9. Id.
10. Id. at *3, quoting Valentino U.S.A., Inc. v. 693 Fifth Owner LLC, 203 A.D.3d 480, 480 (1st Dept. 2022).
11. Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902 (1987).
12. Slip Op. at *3.
13. Id., quoting Valentino U.S.A., 203 A.D.3d at 480; see also Gap, 195 A.D.3d at 577.
14. CAS Mktg. & Licensing Co. v. Jay Franco & Sons, Inc., 188 A.D.3d 522, 523 (1st Dept. 2020).
15. Slip Op. at *3, quoting State Farm Fire & Cas. Co. v. Browne, 43 A.D.3d 1149, 1150 (2d Dept. 2007) (internal quotation marks omitted).
16. Id.