Reliastar Life Insurance Company of New York v. Home Depot U.S.A., Inc. ( 2009 )

07-0087-cv
Reliastar Life Insurance Company of New York v. Home Depot U.S.A., Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_____________________
August Term, 2007
(Argued: March 25, 2008 Decided: June 29, 2009)
Docket No. 07-0087-cv
_____________________
Reliastar Life Insurance Company of New York, a New York Corporation
Plaintiff-Counter-Defendant-Appellee,
-v.-
Home Depot U.S.A, Inc., a Delaware Corporation,
Defendant-Counter-Claimant-Third-Party-Plaintiff-Appellant,
G&S Investors/Willow Park, L.P.,
Third-Party-Defendant.
_______________________
BEFORE: JACOBS, Chief Judge and HALL, Circuit Judge.*
Appellant Home Depot appeals from a judgment in favor of appellee ReliaStar in a suit
brought by ReliaStar seeking payments owed pursuant to a lease and a recognition agreement. We
conclude that: 1) New York's Uniform Commercial Code does not prohibit Home Depot from
asserting constructive eviction as a defense to ReliaStar’s claims arising from the lease; 2) if Home
Depot was unaware of the faulty condition of the building pad when it executed the parties’
*
Judge Wilfred Feinberg, originally a member of the panel, recused himself
subsequent to oral argument. Because the remaining members of the panel are in agreement,
we decide this case in accordance with § 0.14(b) of the rules of this Court.
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recognition agreement and its lack of awareness was reasonable at the time, the estoppel certificate in
the recognition agreement does not bar Home Depot’s constructive eviction defense; and 3) if Home
Depot was constructively evicted, the lease was terminated and Home Depot was relieved of its
obligation to pay “rents” under the “hell or high water” clause of the parties’ recognition agreement.
Accordingly, we VACATE the judgment and REMAND the case for further proceedings.
______________________
FOR APPELLANT: John H. Gross, (Matthew J. Morris, on brief),
Proskauer Rose LLP, New York, NY.
FOR APPELLEE: Anthony M. Piccione, (John A. Bougiamas, on
brief), Otterbourg, Steindler, Houston & Rosen,
P.C., New York, NY.
PER CURIAM:
Appellant Home Depot U.S.A., Inc. (“Home Depot”) appeals from the December 20, 2006
judgment of the United States District Court for the Eastern District of New York (Platt, J.) in favor
of appellee ReliaStar Life Insurance Company of New York (“ReliaStar”) in a suit brought by
ReliaStar seeking payments owed pursuant to a lease and a recognition agreement (the “Recognition
Agreement”). See Home Depot U.S.A., Inc. v. G&S Investors/Willow Park, L.P., No. 98-CV-6719,
2005 WL 3018701 (E.D.N.Y. Nov. 7, 2005). Although the district court’s decision addressed
several claims against various parties, the only claims on appeal here are those made by ReliaStar
against Home Depot. For the reasons that follow we conclude that: 1) New York's Uniform
Commercial Code (U.C.C.) does not prohibit Home Depot from asserting constructive eviction as a
defense to ReliaStar’s claims arising from the lease; 2) if Home Depot was unaware of the faulty
condition of the building pad when it executed the parties’ Recognition Agreement and its lack of
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awareness was reasonable at the time, the estoppel certificate in the Recognition Agreement does not
bar Home Depot’s constructive eviction defense; and 3) if Home Depot was constructively evicted,
the lease was terminated and Home Depot was relieved of its obligation to pay “rents” under the
“hell or high water” clause of the parties’ Recognition Agreement.
BACKGROUND
On February 27, 1989, Home Depot entered into a lease with landlord G&S Investors/Willow
Park L.P. (“G&S”) for premises in Farmingdale, New York, upon which Home Depot planned to
construct a home improvement center. Under the terms of the lease, G&S was obligated to provide a
“building pad,” while Home Depot was responsible for building on the site. An earthen building pad
was provided by G&S, on which Home Depot constructed a store which opened on December 27,
1990.
On October 19, 1993, G&S mortgaged the Farmingdale property to North Atlantic Life
Insurance Company of America, to which ReliaStar is a successor in interest. The mortgage was
guaranteed by an assignment of lease agreement (the “Assignment Agreement”), by which G&S
assigned “[a]ll rents, income, contract rights, leases and profits now due or which may hereafter
become due under or by virtue of any lease” to ReliaStar, including its lease with Home Depot. The
Assignment Agreement further provided that the lessee (Home Depot) was required to recognize the
assignment of the lease and to make all payments directly to the mortgagee.
In accordance with its obligations to recognize assignments as provided for in the lease, on
October 19, 1993, Home Depot executed the Recognition Agreement, drafted by ReliaStar,
acknowledging the assignment of Home Depot’s lease with G&S to ReliaStar. The Recognition
Agreement included a “hell or high water” clause in its paragraph 7(a). The “hell or high water”
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clause provided that:
Tenant understands that a substantial inducement for Mortgagee to
purchase the Notes is the continuing existence of the Lease, the income
stream payable therefrom and the direct payment to the Mortgagee of all
rents and other payments due under the Lease and that in furtherance
thereof the Mortgagor has by the Assignment assigned its interest in the
Lease, the rents and all other payments due under the Lease to Mortgagee
as security for repayment of the Note. Tenant agrees that notwithstanding
anything in the Lease or this Agreement contained to the contrary, until
Mortgagee notify [sic] tenant that the Assignment has been released,
Tenant shall be unconditionally and absolutely obligated to pay to
Mortgagee in accordance with the Assignment all rents, purchases
payments and other payments of whatever kind described in the Lease
without any reduction, set off, abatement, or diminution whatever.
(Emphases added). The agreement also included an estoppel certificate in its paragraph 8, which
stated:
CERTIFICATION OF TENANT. Tenant represents to Mortgagee as follows:
...
d. Tenant has fully inspected the Premises and found the same to be as
required by the Lease, in good order and repair, and all conditions under the
Lease to be performed by the landlord have been satisfied; including but not
limited to payment to Tenant of any landlord contributions for Tenant
improvements and completion by landlord of the construction of any leasehold
improvements to be constructed by the landlord;
....
f. As of this date, the Mortgagor, as landlord, is not in default under any of the
terms, conditions, provisions or agreements of the Lease and Tenant has no
offsets, claims or defenses against the Mortgagor, as landlord with respect to
the lease;
Home Depot contends that in late 1995 or early 1996 it detected cracks in its store walls.
Home Depot’s building on the Farmingdale lot began to settle unevenly, allegedly as a result of a
defective building pad. After G&S refused to make necessary structural repairs, Home Depot made
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its own temporary repairs at a cost of $750,000. But the uneven settling continued and, in August
1999, Home Depot vacated the premises on the advice of its structural engineers. Home Depot
stopped paying rent in August 1999 and notified G&S that the building pad failure resulted in its
constructive eviction from the premises.
In September 1999, ReliaStar brought a claim in the United States District Court for the
District of Minnesota against Home Depot seeking all monies owed under the assignment of lease
agreement and the Recognition Agreement. On January 13, 2000, the court granted Home Depot’s
motion for a transfer of venue. See ReliaStar Life Ins. Co. of N.Y. v. Home Depot U.S.A., Inc., No.
99-1394 (D. Minn. Jan. 13, 2000) (order granting change of venue). The case then shifted to the
Eastern District of New York where it was consolidated with other cases related to Home Depot’s
alleged constructive eviction from the Farmingdale property.
On November 7, 2005, the district court granted ReliaStar’s motion for summary judgment
against Home Depot, concluding that paragraph 7(a) of the Recognition Agreement constituted an
enforceable “hell or high water” clause that estopped Home Depot from asserting constructive
eviction. In granting the motion, the district court found that the language of the “hell or high water”
clause in paragraph 7(a) was “unambiguous on its face.” See Home Depot U.S.A., Inc. v. G&S
Investors/Willow Park, L.P., Nos. 98-cv-6719, 00-cv-676 (TCP), 2005 WL 3018701, at *7
(E.D.N.Y. Nov. 7, 2005). The court noted that such clauses are generally enforceable and that
“courts have found that a party is estopped from asserting any defenses against the clear obligations
outlined in such clauses.” Id.On appeal, Home Depot argues that neither the “hell or high water” clause in paragraph 7(a)
nor the estoppel certificate in paragraph 8 bars Home Depot from asserting constructive eviction as a
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grounds for voiding its obligation to pay rent to ReliaStar under the Recognition Agreement.
DISCUSSION
“We review a district court’s grant of summary judgment de novo and to determine whether
the court properly concluded that there was no genuine issue of material fact so that the moving party
was entitled to judgment as a matter of law.” Wells Fargo Bank, N.A. v. BrooksAmerica Mortgage
Corp., 419 F.3d 107, 110 (2d Cir. 2005). We also review a district court’s contract interpretation de
novo. Id.Under New York’s U.C.C., “[a]n agreement by parties that the contract can be assigned free
of any defenses which an account-debtor may have against the assignor is enforceable by a good-
faith, for-value assignee against ordinary defenses, not including fraud, duress or the like[.]” Id.(citing N.Y. U.C.C. § 9-403(c)) (emphasis added). As a good-faith assignee of G&S, ReliaStar took
free of many of the defenses that Home Depot might assert to defeat enforcement of the contract in
this case. The assignment of the lease to ReliaStar, however, does not preclude Home Depot from
asserting all defenses, specifically “fraud, duress or the like.”
We conclude that New York’s U.C.C. does not prohibit Home Depot from asserting
constructive eviction as a defense to ReliaStar’s claims arising from the lease. Constructive eviction
terminates a lease, Sears, Roebuck & Co. v. 9 Ave.-31 St. Corp., 274 N.Y. 388, 406 (1937), and New
York law provides that a constructively evicted tenant does not owe further rent to the landlord or his
assignees. Whalin v. White, 25 N.Y. 462, 465 (1862) (“There must be an eviction, actual or
constructive, before the rent becomes due, . . . to defeat an action for the rent at the suit of the
landlord or his assigns.”). Accordingly, constructive eviction is similar to the defenses of fraud and
duress in that it goes to the very existence of the agreement, rather than a failure to perform in
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accordance with the terms of the agreement. See, e.g., Gantell v. Friedmann, 197 N.Y.S.2d 605, 607
(N.Y. Sup. Ct. 1959) (“Where there is a mistake as to the character of an instrument, as defendant
alleges, which relates to its existence as a contract or legally operative document of any kind, there is
no mutual assent. If suc[h] a mistake occurs, whether induced by fraud or without it, no contract is
formed.”) (citations omitted). If Home Depot’s claim of constructive eviction is not estopped, and is
meritorious, then constructive eviction would defeat any claim G&S could bring against Home
Depot seeking to recover rent owed after August 1999. Similarly, as G&S’s assignee, ReliaStar’s
claims for rent owed after August 1999 would likewise be defeated by constructive eviction. See
Int’l Ribbon Mills, Ltd. v. Arjan Ribbons, Inc., 36 N.Y.2d 121, 126 (1975) (“It is elementary ancient
law that an assignee never stands in any better position than his assignor.”) ReliaStar prevails on its
claims for rent owed, however, if the defense of constructive eviction is barred either by the estoppel
certificate or by the “hell or high water” clause in the Recognition Agreement executed directly
between Home Depot and ReliaStar. We address these issues in turn.
The Estoppel Certificate
The first potential bar to Home Depot’s assertion of constructive eviction is the estoppel
certificate contained in paragraph 8 of the Recognition Agreement. Home Depot does not contest
that it agreed to the terms of the estoppel certificate at the time that the agreement was executed.
Home Depot is thus bound by the representations it made in the contract. See Quantum Corporate
Funding Ltd. v. L.P.G. Assoc., Inc., 667 N.Y.S.2d 702, 705 (N.Y. App. Div. 1st Dep’t 1998)
(“Unless (1) there is an equitable basis to invalidate the certificate, such as duress, or (2) the assignee
took with knowledge of some defect in the manner in which the certificate was obtained, neither of
which is claimed in this matter, [the party making the representations] is bound to honor its
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representation, and the Court will give it effect.” (citations omitted)).
In the estoppel certificate, Home Depot represented that it had “fully inspected the Premises”
and found them in “good order and repair.” On appeal, Home Depot argues that it never made any
representation to ReliaStar about the condition of the building pad because “the Premises” included
only the store, the attached garden center and storage area, and not the building pad and soil
underneath.
Home Depot’s limited definition is not supported by the language of the Recognition
Agreement or the Lease.1 In paragraph 8(d) of the Recognition Agreement, Home Depot
acknowledges that “all conditions under the Lease to be performed by the landlord have been
satisfied; including . . . completion by landlord of the construction of any leasehold improvements to
be constructed by the landlord.” Article II of the lease provides that “Landlord shall commence to . .
. compact the building pad.” Home Depot’s certification that the “leasehold improvements to be
constructed by the landlord” are complete therefore includes G&S’s construction of the building pad.
Home Depot cannot now argue that its certification contained in the Recognition Agreement – that
the Premises had been inspected and were in “good order and repair” – does not also apply to the
building pad. See id.Although the building pad is part of the Premises, it does not necessarily follow that the
estoppel certificate bars Home Depot’s defense of constructive eviction. The language of the
estoppel certificate and the lease provision relating to the certificate do no more than express Home
Depot’s knowledge at the time the certificate was executed. Section 18.13 of the Lease, which
1
The Recognition Agreement specifically defines “the Premises” in paragraph B as
“certain real property more fully described in Exhibit ‘A’ attached . . . .” Exhibit A provides
the coordinates of the parcel of land.
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outlined Home Depot’s obligations with respect to the estoppel certificate, requires Home Depot to
certify, upon the Landlord’s request, “whether there are then existing defaults by Landlord in the
performance of its obligations under this Lease.” (Emphasis added). As for the estoppel certificate
itself, paragraph 8(f) warrants that “[a]s of this date,” the landlord is not in default and that Home
Depot “has no offsets, claims or defenses against the Mortgagor, as landlord, with respect to the
Lease.” The estoppel certificate speaks in the present tense. It makes no warranties about present or
future conditions that were not known when it was executed. “This is consistent with the general
purpose of an estoppel certificate, which is to assure one or both parties to an agreement that there
are no facts known to one and not the other that might affect the desirability of entering into the
agreement, and to prevent the assertion of different facts at a later date.” Lawyers Title Ins. Corp. v.
Honolulu Fed. Sav. & Loan Ass’n. 900 F.2d 159, 163 (9th Cir. 1990) (citing Black’s Law Dictionary,
5th ed. (1979)).
Home Depot asserts that it did not discover the defective building pad until at least two years
after the execution of the Recognition Agreement. As long as Home Depot inspected the building
pad before building improvements on it, and was unaware of the faulty condition of the building pad
when it executed the Recognition Agreement (and if its lack of awareness was reasonable at the
time), the estoppel certificate does not bar Home Depot’s constructive eviction defense.
The “Hell or High Water” Clause
Under the Assignment Agreement, ReliaStar obtained only those rights possessed by G&S
under the lease — rights that we hold would terminate in the event of constructive eviction. The
Recognition Agreement, however, contains an additional clause which expanded upon the rights
assigned by G&S, and obligated Home Depot to continue making payments to ReliaStar
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“unconditionally and absolutely.” Under New York law, “hell or high water” clauses are generally
enforceable. See BrooksAmerica Mortgage Corp., 419 F.3d at 110 (“[U]nder New York law, ‘hell or
high water’ clauses are enforceable in the context presented here, i.e., by good faith assignees against
sophisticated parties.”). The courts that have previously considered the use of “hell or high water”
clauses have been concerned generally with their use in finance leases or equipment leases, see, e.g.,
Rhythm & Hues, Inc. v. Terminal Mktg. Co., No. 01 Civ. 4697(AGS), 2002 WL 1343759 (S.D.N.Y.
June 19, 2002), rather than with their use in the context of leasing real property.
The language in this “hell or high water” clause that “Tenant shall be unconditionally and
absolutely obligated to pay [ReliaStar]. . . all rents, purchase payments and other payments of
whatever kind described in the Lease without any reduction, set off, abatement, or diminution
whatever” could create an unconditional guarantee by Home Depot to continue to make all described
payments to ReliaStar irrespective of any defenses that Home Depot might have. The main force of
the guarantee, however, is the payment of “all rents” and the description of “rents” as “due under the
Lease.” (Emphasis added). As discussed above, under New York law, it is well established that a
party who has been constructively evicted is relieved of its obligation to pay rent, see Johnson v.
Cabrera, 668 N.Y.S.2d 45, 46 (N.Y. App. Div. 2d Dep’t 1998), because that constructive eviction
terminates the lease, see Sears, Roebuck & Co. v. 9 Ave.-31 St. Corp., 274 N.Y. at 406. Accordingly,
if Home Depot was constructively evicted, the lease was terminated and Home Depot was relieved of
its obligation to pay “rents” under the “hell or high water” clause of the Recognition Agreement.
CONCLUSION
For the reasons stated above, the judgment of the district court is VACATED AND
REMANDED for further proceedings in accordance with this opinion.
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