8-31-22 WOODS OVIATT LLP HELPS SECURE RARE FEDERAL COURT SUMMARY JUDGMENT AGAINST URBAN OUTFITTERS’ SUBSIDIARY FREE PEOPLE
Apparel retailer liable for $13 million for four and a half years of rent remaining on lease, plus attorneys’ fees
Buffalo, NY, August 30, 2022 – Woods Oviatt Gilman along with Rosenberg & Estis P.C. and Duke Holzman Photiadis & Gresens, LLP have secured summary judgment in the U.S. District Court for the Southern District of New York against Urban Outfitters’ subsidiary Free People for a rent default at 58-60 Ninth Avenue in Manhattan’s Meatpacking District. The decision leaves Free People, a member of the URBN family of brands, liable for $13 million in rent.
The case involved the Free People’s tenancy in a 6,800-square-foot ground-floor space at 58-60 Ninth Avenue, a building owned by a subsidiary of Delshah Capital, a New York City integrated real estate investment, development and management firm. Final damages are set to be decided during an inquest hearing later this year.
On the Delshah case, Woods Oviatt Gilman LLP attorneys William F. Savino, Partner, and Bernard Schenkler, Of Counsel, were lead counsel with co-counsel Robert C. Carbone, Partner at Duke Holzman Photiadis & Gresens, LLP, and Bradley S. Silverbush, Partner at Rosenberg & Estis. Free People was represented by Faegre Drinker Biddle & Reath LLP, a 1,200-attorney firm with offices nationwide.
The action was removed from New York State Supreme Court to U.S. District Court by a Notice of Removal filed by the defendant’s attorneys. Delshah and its counsel made a strategic decision not to oppose removal because the Southern District offered the potential for a swifter and more favorable decision.
After removal and discovery, Woods Oviatt along with Duke Holzman and Rosenberg & Estis sought summary judgment. The primary issues raised by the Woods Oviatt, Duke Holzman, and Rosenberg firms were: (1) whether Free People breached the lease by failing to pay April and May 2020 rent; and (2) whether the “taking” clause of the lease provided a defense to non-payment of 100% of the rent during the months during which the Governor’s pandemic-related Executive Orders temporarily restricted in-person retail sales.
After due consideration, U.S. Magistrate Judge Sarah L. Cave recommended granting Woods Oviatt Gilman LLP and the co-counsel firms motion for summary judgment, adjudging that Free People beached the terms of its 10-year lease by failing to make payments of rent for April and May of 2020. Specifically, the magistrate judge recommended rejecting Free People's “taking,” frustration and impossibility affirmative defenses.
In addition, Her Honor recommended rejecting Free People’s unjust enrichment cause of action (for allegedly mistaken rent payments because those payments were governed by the contract between the parties), and she recommended rejecting Free People's counterclaim asserting that Delshah, itself, breached the contract.
After objections by Faegre Drinker were filed and due consideration of both sides’ arguments, Federal Judge Jesse M. Furman wholly adopted the guidance provided by Magistrate Judge Cave’s Report and Recommendation.
Judge Furman granted summary judgment to Delshah, upholding the plaintiff’s breach-of-contract claim, while dismissing Free People’s breach-of-lease and unjust enrichment claims. Judge Furman also dismissed Free People’s remaining affirmative defenses and counterclaims due to the defendant’s unpersuasive assertion of offset, failure of consideration, illegality, and unconscionability/mistake arguments. The District Court Judge ordered an inquest on Delshah’s claim for damages later this year.
“Free People claimed to have lost possession of the premises from the Executive Orders limiting shopper access but it ignored its storage, display, and signage in the space and use of the premises to fulfill online sales,” Savino said. “The tenant bet wrong on how this and other courts would treat retailers hurt by Covid-19.”
Delshah initially sued Free People in June 2020 in state Supreme Court shortly after serving a default notice when Free People failed to make rent payments in April and May of 2020. The remainder of Free People’s 10-year lease, worth $1.4 million annually, was due to expire in January 2027.
Delshah’s suit sought back rent plus “all rent that would have been due for the remainder of the lease term,” or nearly $11 million. Judge Furman’s decision holds Free People responsible for the lease’s roughly four and a half years of remaining rent and a portion of Delshah’s legal fees.
Free People unsuccessfully claimed it had no obligation to pay rent between March and June of 2020 because the premises were subject to a “taking,” as per the lease’s terms, due to the retailer's supposed inability during the pandemic to use its space normally. Woods Oviatt, Duke Holzman, and Rosenberg & Estis established Free People continued to use the store for offices, storage, display, fulfillment of online orders, curbside pickups, and promotion of the brand through its physical presence in the chic neighborhood.
Woods Oviatt along Robert Carbone and Rosenberg & Estis had secured two previous favorable decisions against Free People, with all of the aforementioned Buffalo attorneys also acting as co-counsel.
The firms secured the first favorable decision for Delshah against Free People in October 2017 in a state Supreme Court in New York County case involving rent credits and the late delivery of space. Free People, the plaintiff in that case, had claimed it was entitled to 825 days of free rent after Delshah delivered the store’s former Ninth Avenue space more than a year late.
Free People sought nearly $3.2 million in rent credits, asserting the delay caused the store to miss the 2015 holiday retail season and damaged its reputation and its stock price. Delshah successfully countered that Free People also contributed to the move-in delay, and that the store had radically overestimated how much it would earn in the location.
State Supreme Court Justice Barry R. Ostrager held it unjust to enforce a rent credits penalty that would have been grossly disproportionate to any financial harm Free People suffered from Delshah’s delay. The judge reduced Delshah’s rent credit payments by $2.5 million and ordered Free People to pay attorneys’ fees. Judge Ostrager's judgement was affirmed upon appeal.
About Woods Oviatt Gilman LLP
Woods Oviatt Gilman is a full-service law firm with headquarters in Rochester, NY and offices in Buffalo, NY and Phoenix, AZ, and they are a member of the Meritas global alliance. They represent a broad spectrum of clients, from publicly traded corporations and financial institutions; from high-technology and industrial enterprises to construction firms, and more.
