Trs. of Columbia Univ. in N.Y. v. D'Agostino Supermarkets, Inc.

• Decision Date: 24 November 2020
• Docket Number: No. 40,40
• Citation: Trs. of Columbia Univ. in N.Y. v. D'Agostino Supermarkets, Inc., 36 N.Y.3d 69, 162 N.E.3d 727, 138 N.Y.S.3d 498 (N.Y. 2020)
• Parties: The TRUSTEES OF COLUMBIA UNIVERSITY IN the CITY OF NEW YORK, Appellant, v. D'AGOSTINO SUPERMARKETS, INC., Respondent.
• Court: New York Court of Appeals Court of Appeals

36 N.Y.3d 69

162 N.E.3d 727

138 N.Y.S.3d 498

The TRUSTEES OF COLUMBIA UNIVERSITY IN the CITY OF NEW YORK, Appellant,

v.D'AGOSTINO SUPERMARKETS, INC., Respondent.

No. 40

Court of Appeals of New York.

November 24, 2020

OPINION OF THE COURT

RIVERA, J.

This appeal requires that we consider the propriety of a liquidated damages provision in a Surrender Agreement between two New York City icons: Columbia University, one of the City's premier universities, and D'Agostino Supermarkets, a family-owned food market chain founded in 1932. As a general matter, "parties are free to agree to a liquidated damages clause provided that the clause is neither unconscionable nor contrary to public policy" ( 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc., 24 N.Y.3d 528, 536, 2 N.Y.S.3d 39, 25 N.E.3d 952 [2014] [internal quotation marks omitted] [citation omitted]). The damages sought here were grossly disproportionate to the amount due upon full performance of the Surrender Agreement. Therefore, the courts below properly struck the provision as an unenforceable penalty in contravention of public policy. We affirm.

I.

Plaintiff The Trustees of Columbia University and defendant D'Agostino Supermarkets, Inc., entered a 15–year commercial lease for defendant's rental of the ground floor and basement levels of a building owned by plaintiff. Thirteen years into the tenancy, with defendant facing financial difficulties, the parties entered a Surrender Agreement that terminated the lease in exchange for defendant's surrender of the premises and a staggered payment of $261,751.73.

The Surrender Agreement provides, in relevant part,

"In consideration of Landlord entering into this Surrender Agreement, Tenant shall pay to Landlord (i) concurrently herewith an amount equal to Forty–Three Thousand and 00/100 Dollars ($43,000.00) (the ‘Initial Surrender Payment’), (ii) on or before June 1, 2016, an additional amount equal to Forty–Three Thousand and 00/100 Dollars ($43,000.00) (the ‘Second Surrender Payment’ ) and (iii) on the first day of each month during the period commencing on July 1, 2016, and ending on and including May 1, 2017, Fifteen Thousand Nine Hundred Seventy–Seven and 43/100 Dollars ($15,977.43) (each such monthly payment described in this clause (iii), a ‘Monthly Surrender Payment’ )."

In the event of defendant's default or failure to timely cure upon notice, the Surrender Agreement further provides,

"the aggregate amount of all Fixed Rent, additional rent or other sums and charges due and payable during the term of the Lease shall immediately thereafter come due and payable by Tenant to Landlord and [ ] Tenant shall no longer be entitled to be released and relieved from and against any Released Claims.... TIME SHALL BE OF THE ESSENCE with respect to the dates set forth in this Section."

As agreed by the parties, defendant vacated and surrendered the premises to plaintiff within days of signing the Surrender Agreement and timely made the two $43,000 surrender payments. Plaintiff relet the premises one month after the surrender.

Defendant failed to timely pay the first four monthly surrender payments, from July to October 2016, despite plaintiff's notice to cure. In November 2016, plaintiff commenced the underlying action to enforce the damages provision in the Surrender Agreement. After defendant answered, plaintiff moved for summary judgment on the complaint seeking future payments under the terminated lease, i.e., $1,020,125.15, plus interest and other taxes and costs provided for under the lease.¹ Plaintiff rejected defendant's December 2020 tender of $175,751.73, which represented overdue and early payments of the remaining surrender installments.² Defendant cross-moved for summary judgment striking the damages provision and seeking entry of judgment against itself for $175,751.73—the outstanding amount due under the Surrender Agreement—along with accrued interest as of October 14, 2016, or, in the alternative, denying plaintiff's motion and ordering discovery on the issue of damages and mitigation based on the new lease.

Supreme Court denied plaintiff's motion for summary judgment and granted defendant's cross-motion for summary judgment for the requested amount and interest. The Appellate Division affirmed (168 A.D.3d 594, 92 N.Y.S.3d 34 [1st Dept. 2019] ). We granted plaintiff leave to appeal ( 33 N.Y.3d 904, 100 N.Y.S.3d 706, 124 N.E.3d 256 [2019] ).

II.

A.

Plaintiff argues that the Surrender Agreement was a practical resolution of defendant's breach of their commercial lease and so plaintiff's damages should be measured against defendant's default on the lease. In the alternative, plaintiff requests that we remand for a hearing to determine plaintiff's actual damages. Defendant counters that the liquidated damages provision is grossly excessive and effectively a late fee of over 2000% per annum for failure to timely pay the monthly installments. Defendant also contends that plaintiff's actual damages were readily calculable and accounted for when the parties entered into the Surrender Agreement.

We conclude that the damages here are properly measured against defendant's breach of the Surrender Agreement and not, as plaintiff and the dissent maintain, against the breach of the terminated lease. Viewed in that light, we further conclude that the liquidated damages provision is an unenforceable penalty because it is plainly disproportionate to the damages for the only contractual breach at issue in this appeal, i.e., overdue payment of the monthly surrender installments.

On a motion for summary judgment, the moving party must "make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" ( Xiang Fu He v. Troon Mgt., Inc., 34 N.Y.3d 167, 175, 114 N.Y.S.3d 14, 137 N.E.3d 469 [2019], quoting Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324, 508 N.Y.S.2d 923, 501 N.E.2d 572 [1986] ). If the moving party proffers the required evidence, the burden shifts to the nonmoving party "to establish the existence of material issues of fact which require a trial of the action" ( Vega v. Restani Constr. Corp., 18 N.Y.3d 499, 503, 942 N.Y.S.2d 13, 965 N.E.2d 240 [2012], quoting Alvarez, 68 N.Y.2d at 324, 508 N.Y.S.2d 923, 501 N.E.2d 572 ). Applying that standard here, because the damages provision is unenforceable, Supreme Court properly denied plaintiff summary judgment and properly granted defendant's motion, entering judgment for the unpaid amount under the Surrender Agreement plus interest.

B.

In accordance with the parties' commercial tenancy, in the event of a breach, plaintiff had two options: (1) allow defendant to maintain possession of the property for the full lease term and hold defendant liable for past and future rent, or (2) reenter the premises and collect all rent due up to the time of reentry. If it chose to reenter, plaintiff could relet the premises and defendant would be liable for any deficiency in rent and other related expenses. Instead of suing for a breach of the lease, the parties negotiated and entered into the Surrender Agreement, which provided that, on the date of surrender, the lease "and the term thereof and all rights of [defendant] thereunder shall expire and terminate." It further relieved defendant of its obligations under the lease, including payment of future rent and costs, in exchange for defendant's payments of certain fixed amounts totaling $261,751.73 and its surrender of the premises to plaintiff.

In other words, and as is commonly understood of these arrangements, the Surrender Agreement constituted a new contract between the parties that terminated the lease and all prospective obligations flowing from the tenancy (see Holy Props. v. Cole Prods., 87 N.Y.2d 130, 133–134, 637 N.Y.S.2d 964, 661 N.E.2d 694 [1995] ; 52 CJS Landlord & Tenant § 206 ; 74A N.Y. Jur.2d Landlord and Tenant § 939 ; 49 Am Jur 2d Landlord and Tenant § 606 ). This new contract also included a liquidated damages provision.³ Liquidated damages are "an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement" ( Truck Rent–A–Ctr. v. Puritan Farms 2nd, 41 N.Y.2d 420, 424, 393 N.Y.S.2d 365, 361 N.E.2d 1015 [1977] ). "A liquidated damage provision has its basis in the principle of just compensation for loss" ( id., citing Restatement of Contracts § 339, and Comment thereon). "Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable. A provision which requires damages ‘grossly disproportionate to the amount of actual damages provides for [a] penalty and is unenforceable’ " ( Van Duzer, 24 N.Y.3d at 536, 2 N.Y.S.3d 39, 25 N.E.3d 952 [citation omitted], quoting Truck Rent–A–Ctr., 41 N.Y.2d at 424, 393 N.Y.S.2d 365, 361 N.E.2d 1015 ).

Defendant, as the party seeking to avoid payment of liquidated damages, has the burden of establishing that the damages for breach of the Surrender Agreement were disproportionate to the foreseeable losses and "in fact, a penalty" (see JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373, 380, 795 N.Y.S.2d 502, 828 N.E.2d 604 [2005] ). Defendant met that burden.

The question here distills to whether the liquidated damages provision in the Surrender Agreement is so disproportionate to the anticipated harm to plaintiff from defendant's failure to timely pay the monthly installments that the provision constitutes a penalty. The damages provision effectively reinstated defendant's future rent liabilities under the terminated lease, to the tune of $1,020,125.15, plus interest and other prospective taxes and costs due under the lease, even though those damages did not flow from a breach of the Surrender Agreement. Those damages were 7½ times what plaintiff would have received, if defendant had fully complied with the Surrender Agreement. Plai...