Suing a Good Guy Guarantor of a Restaurant Tenant Post-Possession
On January 16, 2019, Michelle Itkowitz taught an accredited continuing legal education (CLE) program for the Clear Law Institute, entitled “How to Handle Frequent Defaults Under Restaurant Leases”. Here is a full link to the materials.
Here is an interesting excerpt from the program:
Suing a Restaurant Tenant Guarantor Post-Possession – Often a Huge Waste of Time
I like to say that one of the reasons I do so well practicing landlord and tenant litigation in New York City is because I spend 80% of my time talking potential litigants out of litigating. I have been at the law in this area for twenty-five continuous years, and I can say with a perfectly straight face that most plenary lawsuits [fn1] are simply not worth bringing. Most lawyers are not going to tell you that. It is not in their interests to do so. To a hammer – everything is a nail. To a litigator, everything is a lawsuit. In any event, I offer you the following words of wisdom regarding post-possession, tenant-guarantor actions:
1. Most guarantors are just as broke as the single-asset restaurant corporation that was the defunct tenant.
Most guarantors are just as broke as the single-asset restaurant corporation that was the defunct tenant. I do not know why this is, but it has been my frequent observation. I always begin my work on a post-possession guaranty lawsuit by running a credit report on the guarantor. I cannot possibly tell you how often the report produces a long list of judgments that are ahead of my client in time and priority. Sometimes the would-be-debtor owns a family home, with a spouse by the entirety, that is heavily mortgaged. Maybe via a bank account search run by my licensed private investigator, I discover that the would-be-debtor has $212.13 in a bank account somewhere in New Jersey. I fully understand that “someday” the would-be-debtor might have attachable assets. Many things might happen someday. Personally, I question whether a landlord who has just lost a bunch of money on a defaulting restaurant tenant should incur more legal fees to obtain a worthless judgment.
2. If the guarantors are not broke, the amount owed is not worth pursuing in a New York Court if it is under $100,000.
If the guarantors are not broke, the amount owed is not worth pursuing in a New York Court if it is under $100,000.
There is no case worth bringing in a New York City or State Court for less than $100,000. Court is a black hole for resources – time, money, mental energy. You have to go back again and again and again. So, even using a bad, cheap lawyer will eventually stop making economic sense for the less than 6-figure case. Actually, it is especially the bad, cheap lawyer that makes the typical morass even longer and harder.
3. Questioning the Wisdom of a Post-Possession Collection Effort Against the Guarantors
A money judgment is just a piece of paper unless you can collect on it, and collecting on judgments is very difficult.
Let’s say you pursue the case with all vigor, and win. Now what do you get? You get a judgment, which is a piece of paper, unless you turn the judgment into money. How do you get the judgment debtor to pay the judgment? The answer is longer than what I have said so far. In essence, collecting a judgment is a whole other legal case – a longer and harder one. If you have done business in New York for any length of time, you know I speak the truth.
Recently, I have had several landlord clients who have had defaulting restaurant tenants, where the leases were guaranteed by Foreign Nationals. That, in my opinion, is a useless guaranty.
Unless your guarantor is local and you are certain she has attachable assets, and you feel confident that she will remain local and continue to have such assets, then seeking to get a judgment against a guarantor is often waste of time.
How a Guaranty Can Be Used Effectively
In light of the questionable wisdom of a post-possession collection effort against the guarantors, what utility can a guaranty have?
I like to begin collection efforts against guarantor while the tenant is still in possession and relatively early into the default. This achieves two things.
First, it puts to guarantors on notice that tenant is in default. Sometimes the guarantor is not the restaurant’s principal and would not otherwise know of the default situation. Often enough, this alone gets my landlord client paid.
Second, if the restaurant tenant’s principal is the guarantor, it puts intense pressure on that individual to deal with the situation. Sometimes the restaurant has trouble getting its revenue to where it wants and, as a result, lags behind on the rent. If a landlord has tolerated this for a period of time, the restaurant tenant begins to see landlord as her bank. A complacency that a simple rent demand might not wake tenant’s principal out of. A guarantor lawsuit, however, is a wake-up call.
I have had a lot of success in situations where I simultaneously combine a nonpayment proceeding with a guarantor action, while tenant is still in possession.
For other advice on doing Good Guy litigation successfully, see my recent blog post in the Our Stories blog.
For other advice on doing Good Guy litigation successfully, see my recent blog post in the Our Stories blog.
[1] Black’s Law Dictionary defines a “plenary action” as a “full hearing or trial on the merits, as opposed to a summary proceeding.” When we use that word in New York we are referring to a regular action in Supreme Court, one that includes discovery and where the court is one of original jurisdiction, as opposed to a special summary proceeding for the recovery of real property, pursuant to RPAPL Article 7 and CPLR Art. 4, in a local court of limited jurisdiction.
