In Re NTS W. USA Corp. ( 2022 )

21-2240-bk
In re NTS W. USA Corp.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit,
held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the
City of New York, on the 18th day of October, two thousand twenty-two.
PRESENT:
JOHN M. WALKER, JR.,
RICHARD J. SULLIVAN,
Circuit Judges,
MARY KAY VYSKOCIL,*
District Judge.
_____________________________________
IN RE: NTS W. USA CORP.,
Debtor.
_____________________________________
NTS W. USA CORP.,
Debtor-Appellant,
v. No. 21-2240
605 FIFTH AVENUE PROPERTY OWNER, LLC,
Appellee. †
_____________________________________
* Judge Mary Kay Vyskocil, of the United States District Court for the Southern District of New
York, sitting by designation.
† The Clerk of Court is respectfully directed to amend the caption as reflected above.
FOR DEBTOR-APPELLANT: JAMES H. HULME, ArentFox
Schiff LLP, Washington, DC.
FOR APPELLEE: JAY B. SOLOMON, Belkin Burden
Goldman, LLP, New York, NY.
Appeal from a judgment of the United States District Court for the Southern
District of New York (Cathy Seibel, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is
AFFIRMED.
NTS W. USA Corp. (“DUSA”) appeals from a judgment of the district court
affirming the bankruptcy court’s dismissal of DUSA’s adversary complaint
against 605 Fifth Property Owner, LLC (the “Landlord”). On appeal, DUSA
argues that due to the COVID-19 pandemic and the government-ordered
restrictions on retail businesses, its rental obligations to the Landlord were excused
or abated pursuant to New York’s doctrines of frustration of purpose and
impossibility. We assume the parties’ familiarity with the underlying facts,
procedural history, and issues on appeal.
DUSA distributes clothing, accessories, and other fashion products through
retail and wholesale channels in the United States. On January 17, 2020, DUSA
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executed a three-year commercial lease (the “Lease”) for retail space at 605 Fifth
Avenue in Manhattan (the “Property”). Under the Lease, the parties agreed that
the Landlord would deliver the Property to DUSA “on or about May 1, 2020, and
in no event earlier than April 1, 2020,” with DUSA’s obligation to pay rent waived
for the first sixty days. App’x at 71–72.
Like many commercial leases, the Lease contemplated events that could
impair DUSA’s use and enjoyment of the Property. Pertinently, section 5.05 of
the Lease – titled “Interruption of Access, Use[,] or Services” – contemplated that
“natural occurrences,” changes to “Applicable Law,” or “any other condition
beyond Landlord’s reasonable control” could prevent DUSA from accessing or
using the Property. Id. at 106–07. In such cases, the Lease expressly preserved
DUSA’s obligation to pay rent.
In March 2020, the spread of COVID-19 prompted then–New York
Governor Andrew Cuomo to issue a series of executive orders that shuttered all
non-essential in-person businesses in the state. On March 25, while these
shutdown orders were in effect, the Landlord advised DUSA of its intent to deliver
the Property on April 1. DUSA responded with a letter that declined to accept
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delivery, citing the pandemic-related restrictions that prohibited it from operating
its retail business.
In June 2020, the Governor issued a new set of Executive Orders that
permitted retail stores to re-open, albeit with certain COVID-19 safety protocols in
place. Notwithstanding these orders, DUSA still refused to assume occupancy,
and, when the sixty-day free-rent period ended, DUSA defaulted on its rental
obligations. Shortly thereafter, DUSA filed for bankruptcy. During the
bankruptcy proceeding, DUSA brought this action against the Landlord seeking,
among other relief, a declaratory judgment that, due to the pandemic and resulting
government shutdown orders, its obligation to pay rent under the Lease was
excused or abated pursuant to New York’s doctrines of frustration of purpose and
impossibility. The bankruptcy court disagreed, concluding that neither doctrine
applied because the Lease contemplated events, like the pandemic, that could
impact DUSA’s ability to access or use the Property. The district court affirmed.
“A district court’s order in a bankruptcy case is subject to plenary review,
meaning that this Court undertakes an independent examination of the factual
findings and legal conclusions of the bankruptcy court.” In re Duplan Corp.,
212 F.3d 144, 151 (2d Cir. 2000). We review a bankruptcy court’s findings of fact
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for clear error and its legal conclusions, including its interpretation of a contract,
de novo. In re Kalikow, 602 F.3d 82, 91 (2d Cir. 2010).
Under the frustration-of-purpose doctrine, a defendant may be excused
from a contractual obligation when “a virtually cataclysmic, wholly unforeseeable
event renders the contract valueless to one party.” United States v. Gen. Douglas
MacArthur Senior Vill., Inc., 508 F.2d 377, 381 (2d Cir. 1974). In such cases,
“performance by party X,” though possible, “would no longer give party Y what
induced him to make the bargain in the first place. Thus frustrated, Y may
rescind the contract.” Id. But the doctrine “is not available where the event
which prevented performance was foreseeable and provision could have been
made for its occurrence.” Rebell v. Trask, 632 N.Y.S.2d 624, 627 (2d Dep’t 1995)
(citing 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 282 (1968)).
Impossibility, on the other hand, excuses a defendant from a contractual
obligation when performance is impossible due to “the destruction of the means
of performance by an act of God, vis major, or by law.” Savoy, 23 N.Y.2d at 281.
Economic hardship, even to the brink of insolvency, does not excuse performance.
Id. at 282. To establish impossibility, the inability to perform must arise from “an
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unanticipated event that could not have been foreseen or guarded against in the
contract.” Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987).
DUSA’s frustration-of-purpose and impossibility claims fail for the same
reason: the terms of the Lease allocated the risk of events like the COVID-19
pandemic and ensuing government shutdown orders to DUSA. Under
section 5.05 of the Lease, DUSA had an obligation to pay rent even if a “condition
beyond Landlord’s reasonable control” interfered with its use and enjoyment of
the Property. App’x at 107. Surely, the COVID-19 pandemic and the related
government shutdown orders fall into this category. In fact, we recently
interpreted a nearly identical contractual provision – addressing “circumstances
beyond our or your reasonable control” – to encompass “the COVID-19 pandemic
and the orders issued by New York’s governor that restricted how nonessential
businesses could conduct their affairs during the pandemic.” JN Contemp. Art
LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 123–24 (2d Cir. 2022). We see no
reason to depart from that interpretation here. Furthermore, the Lease required
DUSA to pay rent even if “natural occurrences” or changes to “Applicable Law”
interfered with its use of the Property. App’x at 70, 107. We find that the
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COVID-19 virus and the resulting government shutdown orders fit squarely into
these categories as well.
DUSA argues repeatedly that the facts of this case are “unique” because
COVID-19 arrived in the United States after the Lease was signed, but before the
Landlord delivered the Property. Perhaps. But DUSA fails to explain why this
timing should eclipse the “plain meaning” of the Lease, which, as explained above,
unmistakably requires DUSA to pay rent in such circumstances. Eternity Glob.
Master Fund Ltd. v. Morgan Guar. Tr. Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004)
(internal quotation marks omitted). Because we must “give effect to the
expressed intentions of the parties,” the doctrines of frustration of purpose and
impossibility are inapplicable here. Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d
1017, 1019 (2d Cir. 1985).
We have considered DUSA’s remaining arguments and find them to be
without merit. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
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