No Guarantee NY's Guaranty Law Survives Constitutional Scrutiny

By Claude G. Szyfer and Daria D. Anichkova

As part of the suite of laws seeking to provide protections to commercial tenants during the pandemic, the City Council passed N.Y.C. Admin. Code §§22-902(a)(14) and 22-1005, which prohibited enforcement of personal guaranties for tenant defaults occurring between March 7, 2020 and June 30, 2021 (the “Guaranty Law”). After nearly four years of litigation, the Second Circuit held recently that a small commercial landlord lacked standing to seek declaratory relief against the City of New York challenging the Guaranty Law under the Contracts Clause of the U.S. Constitution, Bochner, et al., v. City of New York, et al., 118 F.4th 505 (2d Cir. 2024) (Bochner). Importantly, the Court rejected the City’s request to vacate its prior decision where the Second Circuit identified five major areas of concern that weigh against the Guaranty Law’s constitutionality. Melendez v. City of New York, 16 F.4th 992 (2d Cir. 2021) (Raggi, J.) (Melendez II). Although Bochner put an end to the landlord plaintiff’s action against the City, it does not preclude Mr. Bochner and other commercial landlords from challenging the Guaranty Law’s constitutionality in suits against guarantors. Nor does it disturb the Court’s Contracts Clause analysis in Melendez II. Following Bochner, Melendez II remains a vital roadmap for commercial landlords seeking to enforce personal guaranties extinguished by the Guaranty Law.
In Melendez II, the Second Circuit reversed the District Court’s earlier dismissal of plaintiffs’ Contracts Clause claim (Melendez v. City of New York, 503 F. Supp. 3d 13 (S.D.N.Y. 2020) (Melendez I)). In a comprehensive opinion tracing the history of Contracts Clause jurisprudence, Judge Raggi identified “five serious concerns” relating to the reasonableness of the Guaranty Law as a means to serve the City’s stated public purpose of mitigating the economic effects of the pandemic. Melendez II at 1047. First, Judge Raggi found the Guaranty Law “is not a ‘temporary’ or ‘limited’ impairment of contract.” Id. at 1038. The Guaranty Law “does not simply defer guaranty obligations” — “it permanently and entirely extinguishes them.” Id. at 1039. Second, the Guaranty Law failed to condition relief on a business’s continued operation or reopening — it applied regardless of whether a business sought to continue operations. Id. at 1041. Third, the Guaranty Law reallocated the burden of preserving neighborhoods squarely on the “few shoulders of commercial landlords.” Id. at 1042 (quotation omitted). Fourth, the Guaranty Law was “not conditioned on need,” and instead “permanently absolves all small-business lease guarantors of any responsibility for up to sixteen months of rent arrears regardless of their ability to pay.” Id. at 1043. And last, the Guaranty Law failed to compensate landlords or their principals for losses sustained as a result of their guaranties’ impairment. Id. at 1045. With regard to Mr. Bochner, the facts demonstrated he was unable to recover $110,000 in unpaid rent on his commercial property, and was forced to transfer $35,000 from another business account to pay property taxes.
The Second Circuit directed the City to develop the evidentiary record on remand to address Judge Raggi’s five concerns. After remand, the parties engaged in discovery and then cross-moved for summary judgment. After searching the record and allowing the City multiple opportunities to address each area of concern at oral argument, Judge Ronnie Abrams found that the City failed to “meaningfully articulate[] a record-based position” or to adduce new evidence. Melendez v. City of New York, 668 F. Supp. 3d 184, 207 (S.D.N.Y. 2023) (Melendez III). Even “with the benefit of significant time to address this discrete concern raised by the Circuit, the City … relied upon the same record evidence it cited at the motion to dismiss stage” and failed to adduce any new evidence to address the Second Circuit’s five concerns. Id. Finding nothing in the voluminous record to demonstrate the Guaranty Law is a “reasonable and appropriate means of advancing” the City's public purpose, the District Court found the Guaranty Law unconstitutional. Id.
Faced with the unassailable record on summary judgment, on appeal, the City never challenged Judge Abrams’ substantive decision and instead appealed solely on the grounds of standing. In short, the City argued because it did not enforce the Guaranty Law, Bochner had failed to show an imminent redressable injury from the City’s enforcement such that he had standing to bring suit against the City. In light of the City’s complete disavowal of enforcement, the Second Circuit concluded that Bochner had failed to meet the redressability requirement for standing at the summary judgment stage, vacating the District Court’s judgment in Melendez III and remanding for dismissal for lack of subject matter jurisdiction. Bochner at 522-26.
Notably, the Second Circuit panel unanimously denied the City’s request to vacate Melendez II for lack of jurisdiction, holding that Bochner had sufficiently demonstrated standing to challenge the Guaranty Law at the pleadings stage, where the City had not challenged the presumption of standing, and had actually conceded standing. Id. at 519-22.
Following Bochner, the constitutional analysis of Melendez II and its five major concerns still stands. This result has significant implications for New York City commercial landlords whose personal guaranties were rendered permanently unenforceable by the Guaranty Law, and is particularly important for commercial landlords with cases currently pending in New York State Court. Although the Guaranty Law remains on the books for now, Melendez II still provides commercial landlords seeking to bring an enforcement action against guarantors a crucial roadmap to challenge the constitutionality of the Guaranty Law. Indeed, New York state courts have already followed Melendez II in litigation involving the Guaranty Law and its analysis remains essential, sound, and supportable. See, e.g., 124 E36 St. NYC, LLC v. Piao, 209 A.D.3d 516 (1st Dep’t 2022) (remanding to allow “the parties … the opportunity to develop the record as to constitutionality” and citing Melendez II).