Civil Court of the City of New York, New York County, November 10, 2021

Novick Edelstein Pomerantz, P.C., Yonkers (Marybeth Hotaling and Jason Klein Fuhrman of counsel), for petitioner.

Fischman & Fischman, New York City (Doreen J. Fischman of counsel), for respondent.

In this landlord-tenant nonpayment proceeding involving a commercial tenancy, petitioner landlord Ardalan Lahijani commenced this action by filing a notice of petition on September 10, 2021. On October 15, 2021, respondent tenant Madison Global LLC filed a COVID-19 hardship declaration, which stayed the instant proceeding to a date after January 15, 2022. Petitioner makes the instant order to show cause to challenge respondent's hardship declaration, find it invalid, lift the stay, and proceed with its nonpayment eviction action. Respondent submitted opposition and this court heard oral argument. The decision and order is as follows:

By way of background, on March 9, 2021, then New York State Governor Andrew Cuomo signed Laws of 2021, chapter 73, COVID-19 Emergency Protect Our Small Businesses Act of 2021 (CEPOSBA), into law with the intention to provide temporary eviction and foreclosure protections for small businesses that were experiencing a financial hardship as a result of the COVID-19 pandemic. CEPOSBA at that time created a stay on evictions through May 1, 2021. The stays were thereafter extended.

In June 2021, residential landlords sought a preliminary injunction of the stays set forth [*2]in the residential "sister statute" to CEPOSBA, the "COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020" (CEEFPA), before the Eastern District court (see Chrysafis v Marks, 544 F Supp 3d 241 [ED NY 2021], vacated and remanded 15 F4th 208 [2d Cir 2021]). The Eastern District denied the landlords' motion for a preliminary injunction (544 F Supp 3d 241). The landlords made an emergency application for injunctive relief to the United States Supreme Court (see Chrysafis v Marks, 594 US —, 141 S Ct 2482 [2021]).

In August 2021, the United States Supreme Court enjoined enforcement of the "hardship" stays set forth in CEEFPA, holding {**73 Misc 3d at 1027}that a self-certified and uncontestable hardship declaration was a "scheme" that "violates the Court's longstanding teaching that ordinarily 'no man can be a judge in his own case' consistent with the Due Process Clause" (594 US at —, 141 S Ct at 2482, quoting In re Murchison, 349 US 133, 136 [1955]).

Recognizing that this same rationale would apply to the virtually identical provisions of CEPOSBA, the New York State Legislature enacted certain amendments of the law. On September 2, 2021, the legislature modified and extended CEPOSBA to include a new right for landlords to challenge the validity of a tenant's hardship declaration (see L 2021, ch 417 [the amended CEPOSBA]). The legislature explicitly provides that its intent in creating the amended CEPOSBA is to address the lack of due process cited by the United States Supreme Court in Chrysafis (see L 2021, ch 417, § 2).

In this regard, on the subject of validity of hardship declarations, section 10 of the amended CEPOSBA states:

"1. Notwithstanding any other provision of this act, a stay under this part shall be granted or continued unless the court finds the respondent's or defendant's hardship claim invalid. A motion may be made by the petitioner or plaintiff, attesting a good faith belief that the respondent or defendant has not experienced a hardship, with notice to the respondent or defendant, and the court shall grant a hearing to determine whether to find the respondent's or defendant's hardship claim invalid.

"2. After any hearing, if the court finds the respondent's or the defendant's hardship claim valid, the court shall grant a stay or continue a stay pursuant to this act.

"3. After a hearing, if the court finds the respondent's or the defendant's hardship claim invalid, the proceedings shall continue to a determination on the merits." (Amended CEPOSBA, L 2021, ch 417, § 2, part B, § 1, subpart A, § 10.)

In evaluating same, the Chief Administrative Judge of the New York Courts, on September 8, 2021, issued Administrative Order AO/261/21, and an accompanying memorandum that clarified the approach of the state courts. The memorandum directs that a hearing must be held when petitioner attests to a good faith belief that a respondent's certified hardship does not exist (mem accompanying Admin Order of Chief Admin Judge of Cts AO/261/21 [B] [7], available at {**73 Misc 3d at 1028}https://www.nycourts.gov/whatsnew/pdf/Evictions-Memo.pdf [last accessed Nov. 10, 2021], cached at https://www.nycourts.gov/reporter/webdocs/EvictionsMemo.pdf).

The amended CEPOSBA, L 2021, ch 417, § 2, part B, § 1, subpart A, § 1 (5) defines "hardship" as follows: a business that is unable to pay the rent or other financial obligations under the lease in full or obtain an alternative suitable commercial property because of one or more of the following reasons and any public assistance the business received since the start of the COVID-19 pandemic has not fully made up for the business's loss of revenue or increased expenses: (a) significant loss of revenue during the COVID-19 pandemic; or (b) significant increase of necessary expenses related to providing personal protective equipment to employees or purchasing and installing other protective equipment to prevent the transmission of COVID-19 within the business; or (c) [*3]moving expenses and difficulty in securing an alternative commercial property make it a hardship for the business to relocate to another location during the COVID-19 pandemic.

The legislature's requirement for landlords to assert a good faith basis for a "validity" hearing is a low bar to obtaining the hearing. Landlords must "show a 'belief,' albeit one that has a good-faith basis" (Harbor Tech LLC v Correa, 73 Misc 3d 1211[A], 2021 NY Slip Op 50995[U], *3 [Civ Ct, Kings County, Oct. 25, 2021]).

Thus far, courts grant these validity hearings when a landlord can come forward with a reasonable expression of doubt as to the tenant's actual pandemic-related hardship (see e.g. Harbor Tech LLC v Correa, 2021 NY Slip Op 50995[U] [landlord granted a hearing due to tenant's social media posts reflecting activities that indicated he did not suffer a pandemic-related hardship]; Bitzarkis v Evans, 73 Misc 3d 827 [Civ Ct, Kings County, Oct. 20, 2021] [hearing granted where a landlord's claim that respondent's income, which was solely from public assistance, remained the same during the pandemic]; Sanchez-Tiben v Washington, 73 Misc 3d 721 [Civ Ct, Bronx County, Oct. 18, 2021] [hearing granted where landlord observed tenant coming and going from apartment consistent with his regular work schedule]; Diamond Ridge Partners LLC v Hanspal, 73 Misc 3d 607 [Nassau Dist Ct, Sept. 14, 2021] [hearing held when landlord attributed rental arrears to chronic, decades-long delinquency predating the pandemic]).

Here, in support of its request for a validity hearing, petitioner submits the affidavit of its managing agent who attests{**73 Misc 3d at 1029} that respondent's rental arrear balance is $2,044,261.65, through July 2021, and that the "tenant received $1,194,199.00 in PPP Loans" (NY St Cts Elec Filing [NYSCEF] Doc No. 6, petitioner's order to show cause at 4). Petitioner's good faith basis is limited to this statement alone. Petitioner does not provide the qualifications for a PPP loan. Petitioner makes no other claims regarding respondent's present business, observations of business activity at the subject premises, or anything else to indicate the health of respondent's business, which is a restaurant.

In opposition, respondent compellingly argues that to qualify for a PPP loan, the restaurant demonstrated that it suffered a loss of revenue because of the pandemic (NYSCEF Doc No. 8, respondent opp, Makkos aff). Respondent further explains that its business was and continues to be devastated by the pandemic. It suffered a 75% loss of revenue in 2020, and, to date, over a 60% loss for this year. Respondent claims that its PPP loan was distributed to its employees and that it did not profit from the loan. Respondent disputes the amount of rent paid over the last 20 months or so, and provides its own ledger indicating weekly payments well below the alleged lease terms. Respondent contends that petitioner's motion is frivolous and without merit.

At first blush, the PPP loan itself seems to bolster the claim that respondent suffered a pandemic-related hardship, not call it into question. However, even if inartfully composed, petitioner's claim suggests that respondent may have a windfall if the PPP loan is forgiven and rent goes unpaid. The basis for respondent's PPP loan application, its distribution of the funds received, and whether that loan was forgiven are facts within respondent's purview. That respondent received this benefit in the amount of $1,194,199, as it continues to claim a hardship, raises a good faith basis as provided in the amended CEPOSBA. To deny the hearing on the facts at hand would deprive petitioner of due process. Therefore, a hearing shall be held.

As to the hearing itself, this court agrees with the well-reasoned analysis provided in Harbor Tech LLC v Correa (2021 NY Slip Op 50995[U]), which discusses a validity hearing in a residential tenancy. CEEFPA is silent on the burden at the hearing, the order of proof, and so on. The Harbor Tech court discussed that placing the burden on the landlord to prove a tenant's lack [*4]of hardship where the facts at issue were within the tenant's knowledge and control failed to give rise to the{**73 Misc 3d at 1030} meaningful hearing contemplated by the legislature. Instead, the court reserved its "discretion to determine the sequence of the issues presented" at the hearing (Harbor Tech LLC v Correa, 2021 NY Slip Op 50995[U], *3, citing CPLR 4011).

Likewise, the amended CEPOSBA is not instructive on the mechanics of conducting a validity hearing. "A salient feature of our judicial system is that parties are accorded great latitude in how they conduct litigation and 'may to a large extent chart their own procedural course through the courts' " (see California Suites, Inc. v Russo Demolition Inc., 98 AD3d 144, 156 [1st Dept 2012], quoting Stevenson v News Syndicate Co., 302 NY 81, 87 [1950]). The parties are largely free to choose what controversies require judicial intervention, and then they are bound by the consequence of their choice (see id.). Even though the hardship declaration creates a rebuttable presumption of a prima facie case of validity, it also opens the door to scrutiny.

This court recognizes that in some cases the burden may fall on a petitioner to prove that a respondent has not suffered a pandemic-related hardship. In the case at bar, facts tending to prove or disprove respondent's hardship lie within respondent's domain, and thus, respondent shall offer proof first (see Harbor Tech LLC v Correa, 2021 NY Slip Op 50995[U]).

It is worth discussing here that after the passage of the amended CEPOSBA, the Chrysafis landlords continued to argue that the right to challenge the hardship declaration at a hearing does not satisfy their constitutional due process claims because, in part, they "lack an opportunity, prior to a hearing, to elicit information from a tenant to support their good faith belief" (Chrysafis v Marks, 15 F4th 208, 213 [2d Cir 2021]). The Second Circuit determined that the landlords' arguments were unavailing. Ultimately, it held that the constitutional challenges to the original statute which did not provide for a hearing were moot given that the legislature enacted an extended and modified law to remedy the lack of due process (see id.). In its reasoning the Second Circuit addressed the landlords' concerns when it mused that it "cannot be certain how the new procedures in [the amended CEPOSBA] will be implemented in practice in the state courts or what administrative steps the Chief Administrative Judge of those courts might think are necessary, if any, to mitigate the alleged due process deficiencies" (see id. at 215).

At oral argument of the instant order to show cause, a concern was raised about discovery and whether the court{**73 Misc 3d at 1031} would permit it. To date, there is no explicit guidance on whether discovery is permitted prior to a validity hearing.^[FN*] This presents an open question on the procedures available to claim a good faith belief to obtain a validity hearing and the evidence available to be adduced at the validity hearing.

In a summary proceeding, discovery is not available as a matter of right (see CPLR 408; New York Univ. v Farkas, 121 Misc 2d 643, 646 [Civ Ct, NY County 1983]). The party seeking the disclosure must demonstrate "ample need" for the requested information to support or deny a claim or defense (New York Univ. v Farkas, 121 Misc 2d 643, 644 [1983]). The seminal case of New York Univ. v Farkas laid out the factors a court must consider in response to discovery requests in a [*5]summary proceeding. They are whether: (1) the discovery would support an articulated claim or defense; it cannot be a "fishing expedition"; (2) the movant has demonstrated a need to determine "information directly related to the cause of action"; (3) the information requested is "carefully tailored and is likely to clarify the disputed facts"; (4) the discovery is prejudicial; (5) the court can alleviate the prejudice; and (6) the court can structure discovery to protect tenants, particularly self-represented tenants, against any adverse effects of a landlord's discovery requests (id. at 647). The trial court has discretion in determining whether discovery is warranted (see generally Roth v Pakstis, 13 AD3d 194 [1st Dept 2004]).

So too this court will exercise its discretion again on a case-by-case basis, to consider discovery requests prior to a validity hearing. There is a distinction here as to the concern expressed by the Chrysafis landlords at the Second Circuit. Landlords there sought information to support their motion for a good faith basis to request the validity hearing. This court's interpretation of the amended CEPOSBA prevents such a motion and/or request as matters are stayed until the petitioner comes forward with a good faith belief. Instead, this court recognizes the potential for discovery where a party can demonstrate ample need prior to the validity hearing (but after a court grants that such a hearing will take place).

Therefore, it is prudent that this court calendar a prehearing conference to hash out the issues to be explored at the validity{**73 Misc 3d at 1032} hearing. Any request for discovery must be made at that conference. The prehearing conference shall be held over the Microsoft Teams platform, before this court, Part 124, on November 23, 2021, at 2:30 p.m. Chambers will send the parties a link via email at least one day prior to the prehearing conference.

Accordingly, it is hereby ordered, petitioner's order to show cause for a validity hearing pursuant to the amended CEPOSBA is granted, and a prehearing conference shall be held as directed above.