LeRoy v. Sayers

• Citation: 635 N.Y.S.2d 217,217 A.D.2d 63
• Parties: Warner LeROY, Plaintiff-Respondent-Appellant, v. Theodore SAYERS, Defendant-Appellant-Respondent.
• Decision Date: 14 December 1995
• Court: New York Supreme Court Appellate Division

Page 217

635 N.Y.S.2d 217

217 A.D.2d 63

Warner LeROY, Plaintiff-Respondent-Appellant, v. Theodore SAYERS, Defendant-Appellant-Respondent.

Supreme Court, Appellate Division First Department.

Dec. 14, 1995.

Michael F. Fitzgerald, of counsel, New York City (Scolari, Brevetti, Goldsmith & Weiss, P.C.), for plaintiff-respondent-appellant.

William Power Maloney, of counsel, Riverhead (Esseks, Hefter & Angel), for defendant-appellant-respondent.

Before SULLIVAN, J.P., and ROSENBERGER, ROSS, ASCH and NARDELLI, JJ.

SULLIVAN, Justice.

On February 28, 1992, plaintiff entered into a standard form written lease agreement with defendant for the rental of defendant's East Hampton premises consisting of an "oceanfront house with separate pool house, pool and tennis court" for the period from July 1, 1992 to September 8, 1992 for $135,000, of which $50,000 was paid at the lease signing and the balance, $85,000, was to be paid by June 28, 1992. The house contained valuable artwork, antique furniture and rugs and a variety of unique personal effects.

The lease required plaintiff to deposit $13,500 with defendant as security and pay a $13,500 broker's commission, conditions with which plaintiff complied. The lease also provided that "[i]f Tenant should default on this agreement prior to taking possession, Tenant shall lose his initial payment which shall be considered Landlord's liquidated damages". Significantly, the lease, at the insistence of plaintiff, who suffered from severe allergies, provided that "Landlord agrees ... to remove all plants from house prior to lease period."

On March 19, 1992, almost three weeks after the lease was signed and three and one-half months before plaintiff was to take occupancy, a portion of the house was damaged by fire, causing substantial damage to the interior and its contents as well as the electrical and air-conditioning systems. Much of the damage, as to which defendant received $745,324 from his fire insurer, was smoke related. Aside from the reconstruction of the damaged portion of the house, extensive painting and cleaning were required in virtually every room "due to the extremely heavy soot and smoke damage." The grounds required replanting; much of the artwork was lost forever.

While defendant immediately began to repair the damage and prepare the house for July 1, 1992 occupancy, plaintiff, after visiting the premises to survey the damage, telephoned defendant to advise him of his concerns and, on April 6, 1992, wrote to request that he be released from the lease agreement. Citing his severe allergies to paint and smoke, plaintiff complained that he would be putting his health at risk. Receiving no response, plaintiff's attorneys wrote to defendant on April 14, 1992 to advise him that the fire had made performance of the lease impossible and that it was accordingly deemed cancelled.

Defendant's attorneys responded on April 21, 1992, rejecting the attempted cancellation of the lease and advising plaintiff that he had breached the agreement and that his $50,000 deposit would be retained as liquidated damages. By this time, plaintiff had rented other East Hampton premises for the 1992 summer season. In May, after completion of the repair and restoration, defendant rented the subject premises to a third party for the 1992 summer season for $150,000, less a $15,000 real estate brokerage commission, which defendant paid. Defendant claims that he was required to purchase additional furnishings to satisfy the substitute tenant at a cost of $26,224 and that he had incurred and will incur further legal expenses as a result of plaintiff's breach.

Plaintiff thereafter commenced this action against defendant to recover his $50,000 advance rent payment and the $13,500 security deposit, alleging six causes of action: a violation of Real Property Law § 227 based on defendant's refusal to return the funds; a breach of the lease's provisions regarding the apportionment of rent in the event of extensive damage to the premises; a breach of fiduciary duty under General Obligations Law § 7-103, which requires a landlord to deposit security funds and a rent advance payment in a segregated bank account in trust for the tenant; a request for a declaration that the lease's provision for the retention of the rent advance as liquidated damages constitutes a penalty and is unenforceable as a matter of law; a claim for money had and received; and for unjust enrichment. Aside from asserting his right to retain the $50,000, defendant also asserted in a counterclaim alleging breach of contract that he expended moneys to adapt the premises to the requirements of the substitute tenant and incurred legal fees.

After joinder of issue and limited discovery, plaintiff moved for partial summary judgment as to his claims for breach of fiduciary duty under General Obligations Law § 7-103 and declaratory relief with respect to the liquidated damages clause. Plaintiff's motion with respect to the violation of the statutory fiduciary duty was based on defendant's failure to deny the complaint's allegations that plaintiff's funds were commingled with other funds held by defendant, that defendant failed to pay interest on said funds, as required, and that defendant failed to notify plaintiff in writing of the name and address of the bank in which the funds were deposited. Defendant cross-moved for summary judgment on his counterclaim for breach of contract.

The IAS court granted plaintiff's motion to the extent of declaring that the liquidated damages provision constituted an unenforceable penalty. It denied the motion as to the statutory fiduciary duty claim, finding that the alleged unanswered complaint allegations had in fact been denied and that defendant had deposited the moneys advanced by plaintiff in a special account and thus complied with the statute. The court granted defendant's cross-motion for summary judgment on his counterclaim for breach of contract. Without explanation, it found that plaintiff had breached the lease agreement and referred the matter to a referee to hear and report on damages.

The parties cross-appeal, plaintiff from the determination that defendant had not violated General Obligations Law § 7-103 and, given, as plaintiff contends, the existence of factual issues with respect thereto, the award of summary judgment to defendant on his breach of contract claim; defendant appeals from the adverse declaration concerning the liquidated damages clause. We modify to grant plaintiff summary judgment on his claim based on defendant's breach of duty under General Obligations Law § 7-103 and to deny defendant's cross-motion for summary judgment on his counterclaim for breach of contract.

In pertinent part, General Obligations Law § 7-103 provides:

1. Whenever money shall be deposited or advanced on a contract or license agreement for the use or rental of real property as security for performance of the contract or agreement or to be applied to payments upon such contract * * * such money, with interest accruing thereon, if any, until repaid or so applied, shall continue to be the money of the person making such deposit or advance and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal moneys or become an asset of the person receiving the same * * *.

2. Whenever the person receiving money so deposited or advanced shall deposit such money in a banking organization, such person shall thereupon notify in writing each of the persons making such security deposit or advance, giving the name and address of the banking organization in which the deposit * * * is made * * *.

3. Any provision of such a contract or agreement whereby a person who so deposits or advances moneys waives any provision of this section is absolutely void.

Subdivisions 1, 2 and 3 of section 7-103 are derived from Real Property Law former § 233, which "changed the legal relationship between [landlord and tenant] from debtor-creditor to trustee-cestui que trust. * * * [The landlord] does not owe a debt as he once did; he owes a duty not to commingle the deposit with his own funds. Upon a breach of that duty, he forfeits his right to avail himself of the deposit for any purpose." (Matter of Perfection Tech. Servs. Press, 22 A.D.2d 352, 356, 256 N.Y.S.2d 166, affd. 18 N.Y.2d 644, 273 N.Y.S.2d 71, 219 N.E.2d 424; see, Mallory Associates, Inc. v. Barving Realty Co., 300 N.Y. 297, 301-302, 90 N.E.2d 468.) A tenant has an immediate right to the funds in the event of a commingling. (Sommers v. Timely Toys, Inc., 209 F.2d 342 [2nd Cir.1954].) Nor is the tenant's non-compliance with the lease terms a defense to a landlord's breach of his duty in this regard. (See, Hartzell v. Burdick, 91 Misc.2d 758, 760, 398 N.Y.S.2d 649.) Thus, there is no merit to defendant's argument that plaintiff's alleged repudiation of the lease agreement "relieved [him] of any obligation to maintain [advance] rent and security deposits in a segregated account". Subdivision 2-a of General Obligations Law § 7-103 requires that security for deposits and advances on the payment due on a contract for the rental of real property be placed in an interest bearing account.

Contrary to the IAS court's finding, defendant, in his answer, failed to respond to plaintiff's allegations of commingling and his failure to notify plaintiff of the name and address of the banking organization into which the required deposit of funds was made. Thus, as a pleading...