Key Points

  • The Appellate Division, First Department, held 4-1 that New York City Administrative Code § 22-1005, the pandemic guaranty law, does not violate the federal Contracts Clause.
  • The majority found that the law substantially impairs affected guaranties but serves a legitimate public purpose and, under substantial deference to the City Council, is a reasonable and appropriate means of mitigating the pandemic's economic effects.
  • The court held that the trial court wrongly placed the burden on the city rather than on the landlord challenging the law, and that the Second Circuit's Melendez II concerns were persuasive but not binding.
  • The city was not collaterally estopped by the Southern District's vacated Melendez III judgment, and the landlord's claims for amounts outside the statutory period remained barred by the court's 2023 order.
  • Justice Friedman dissented, writing that the law permanently abrogates guaranties for the statutory period and that the majority reduced Contracts Clause review to rational basis review.

A divided New York appeals court on Tuesday upheld a New York City law that barred landlords from collecting pandemic-era rent from individuals who had personally guaranteed their commercial tenants' leases. The ruling reversed a Manhattan trial judge who had declared the law unconstitutional.

The Appellate Division, First Department, ruled 4-1 that the guaranty law, Section 22-1005 of the city's Administrative Code, does not violate the Contracts Clause of the U.S. Constitution. That clause bars states from passing any "Law impairing the Obligation of Contracts." Justice Llinét M. Rosado wrote for the majority, and Justices Peter H. Moulton, John R. Higgitt and Kelly O'Neill Levy concurred. Justice David Friedman dissented.

Under the ruling, personal guaranties signed by individuals remain unenforceable for rent, utilities, taxes and building maintenance charges that a tenant failed to pay between March 7, 2020, and June 30, 2021. The protection covers tenants that the governor's March 2020 executive orders forced to stop on-premises dining, limit in-person retail or close to the public. The tenant itself remains liable for the debt.

"For the reasons that follow, we conclude that the guaranty law does not violate the Contracts Clause," Rosado wrote. The court, she added, made "no judgment as to the wisdom of the guaranty law."

The case arose from a 10-year lease, signed in 2015, for space at 527 West 26th Street in Manhattan. Landlord 513 West 26th Realty LLC rented the space to George Billis Galleries Inc., an art gallery. George Billis, the gallery's principal, personally guaranteed its lease obligations in a "good guy" guaranty. The gallery stopped paying rent in March 2020, closed, and returned the keys on Dec. 7, 2020.

The landlord sued the gallery and Billis. The trial court initially dismissed the guaranty claims against Billis under the city law. In 2023 the First Department reversed in light of a federal district court ruling, Melendez v. City of New York, that had struck the law down, and it sent the case back for a fuller record and to let the city intervene. The Second Circuit later vacated the federal ruling for lack of standing. On remand, Justice Paul A. Goetz of Supreme Court, New York County, declared the law unconstitutional in an order entered on or about Dec. 31, 2024, and reinstated the claims against Billis.

The majority applied the U.S. Supreme Court's three-part Contracts Clause test, which asks whether a law substantially impairs a contract, whether it serves a legitimate public purpose, and whether its means are reasonable and appropriate. Rosado agreed that the law substantially impairs the affected guaranties, but wrote that "it is only the specific natural person guarantor who is temporarily relieved from liability for the statute's 16-month protection period."

On public purpose, the majority relied on City Council reports and hearings from 2020, including testimony that small businesses employed 26% of New Yorkers. It called the landlord's argument that the law benefits only commercial tenants "flatly incorrect and belied by the record."

The majority held that the trial court wrongly made the city defend the law, when the burden belonged to the landlord as the challenger. Because the law alters private contracts and was enacted during a declared emergency, Rosado wrote, the City Council was owed substantial deference. She wrote that the council chose the law not "on a whim, but rather through extensive consultation with experts, the collection of unemployment and business closure data, and numerous public hearings and testimony."

Rosado cited the law's limits as evidence of tailoring. It protects only individual guarantors, covers only tenants subject to certain executive orders, lasts 16 months, and leaves landlords free to sue tenants and apply security deposits. She noted that commercial landlords "are generally protected by the shield of limited liability."

The majority also took up five concerns the Second Circuit had raised in 2021 when it revived the federal challenge. They included the permanence of the impairment, record support for the assumption that shuttered small businesses are usually owned by their lease guarantors, and the absence of a needs test or compensation for landlords. Rosado wrote that the federal ruling came at the pleadings stage and does not bind the state court. "The Guaranty Law was not constructed on assumptions, but on extensive testimony and evidence," she wrote.

Friedman would have affirmed. He wrote that "for all increments of debt incurred under the lease during the statutory period, the law abrogates the guaranty permanently." He also found the ownership assumption unsupported. "After all, a guarantor who does not own the business he or she guarantees cannot reopen it," Friedman wrote.

Friedman faulted the majority for its approach to deference. "It is the majority, rather, that collapses the level of scrutiny applicable under the Contracts Clause to the rational basis review applied to legislative acts under the police power that do not impair existing contractual rights," he wrote. "This essentially writes the Contracts Clause out of the constitution." The majority responded that the dissent's focus on how the council might have better tailored the law "engages in such second-guessing" of difficult legislative choices.

The court also rejected the landlord's argument that the vacated federal judgment barred the city from relitigating the law's validity. It held that collateral estoppel does not apply because no merits judgment survived and, in any event, the question is purely legal. The panel also declined to revive claims for amounts outside the 16-month window, which its 2023 order had dismissed.

Lawyers for the gallery and Billis included James G. Marsh of James G. Marsh, P.C. The landlord was represented by Harry Shapiro of Smith & Shapiro. The city appeared through its Corporation Counsel's office.

The First Department reversed Goetz's order, vacated the declaration that the law is unconstitutional, and granted the motions by Billis and the city to dismiss.