The big guys have been going bankrupt, but the real carnage is yet to come:. Among America’s small businesses. Potential creditors need to get organized for the fight which appears to have been kicked off in New York this month with a fascinating case.
We have seen the big names going down including JC Penney, J. Crew, Neiman Marcus. Many were weak anyway but some that just could not survive being shut down completely for months. The list is at Forbes.com.
But what about the smaller businesses that seemed to be doing fine before this happened? And what of their landlords that the businesses hope will help absorb the losses?
For those of us who get involved in asset identification before and during litigation, these are important concerns. Now, a case that could set a precedent for businesses looking to get out of their leases is before a federal judge in New York. It was reported in The New York Times.
An art gallery paying $54,000 a month moved out early when New York shut down in March. It claimed the lease was rendered null and void and that it should have its deposit back, on the basis of frustration of purpose or impossibility of performance.
The case is Venus Over Manhattan Art LLC v. 980 Madison Owner LLC, 1:20-cv-03838, U.S. District Court for the Southern District of New York, filed May 18, 2020.
The gallery claims it cannot have the 500-person openings it needs to because of the shutdown – therefore it is impossible to operate its business. Alternatively, it argues that the purpose of the lease has been frustrated by government edicts, and that it should be released from its contract. It also wants its $365,000 deposit back.
There are a number of possible outcomes:
- The case could easily settle. If the gallery wants to survive, it could accept a new lease for less money and apply some of the deposit seized by the landlord to a new deposit, with the rest of the money being used as credit for the new lower rent. This seems like the most likely.
- Tenant wins. If a government shutdown because of a pandemic means any business that was closed can get out of a lease, it is a crisis for commercial landlords all over the state (a crisis even bigger than the cash flow one they already have, that is). Landlords could follow some of their larger tenants into chapter 11 bankruptcies.
- Landlord wins. If the landlord is content to keep the deposit and rent the space out to someone else, that is one thing. If the landlord decides to hold the tenant to the terms of the lease, it will need to be able to seize or garnish assets that the tenant has. What assets does an art gallery have? You need to investigate.
Also at issue in the case is that in addition to the obligation of the tenant, there was a personal guarantee that the rent would be paid. The lawsuit does not specify who gave the guarantee, but if the landlord wins, he will not only be able to go after the gallery but also that guarantor. What the guarantor has is also something to be investigated.
The time to look for assets is now. Of course, under the concept of fraudulent conveyance, once the tenant sues the landlord, the tenant cannot transfer assets out of his company in the event that he loses and needs to hand them over. If he loses, those assets can be taken back by the court if he transferred them around the time he sued to get out of the lease. This is called a constructive trust.
Still, it is easier to identify assets now, before he can transfer them to a different name.
As for the guarantor, he may be able to plead that he had no notice of the lawsuit and that his assets are freely transferable. That is an argument that could work. But if it does not, a forward-thinking landlord would want to be able to identify the assets now in the event he needs to go after them to collect.
For more on asset searches, check out our firm’s other blog, The Divorce Asset Hunter.