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By Patrick McCormick

In 2010, the First Department, in dismissing a claim by commercial tenants that electric charges were unconscionable,  held that the plaintiffs had failed to establish “a lack of meaningful choice, and noted that the commercial tenants were free to not rent from the defendant and go elsewhere.”[i]

Thus, when I represented a commercial landlord in a non-payment proceeding against a law firm tenant earlier this year, it was unclear where a court within the Second Department – in this case, the First District Court in Nassau County – would fall on the issues of a five percent late charge and electric charges to which the tenant objected.[ii]  The landlord’s rent demand sought $2,531.70 including a five percent late charge plus electric charges of $993.52, as well as taxes and attorneys’ fees for an unrelated proceeding.

Turning first to the late charge, the tenant argued that the charge was “illegal” in that it was usurious and “does not in any way even remotely apply to damages actually sustained and is an unconscionable penalty.”  In response, we argued on behalf of the landlord that the late fees were not usurious, as the fees existed in connection with a commercial lease, not a loan or forbearance, nor were they unconscionable, as they were negotiated by sophisticated business people specifically for a commercial lease.

Regarding the electric charges, the tenant argued that because it occupied only a small part of the commercial premises, the sum of $993.52, which was a fixed amount set forth in the lease, was “disproportionate” to their actual electricity consumption.  The parties disagreed over whether the landlord was obligated to furnish an accounting of the actual electric usage and bills; the landlord pointed out that the tenant had paid the monthly electric charge – which the landlord did not dispute was not based on actual usage – for over a decade.

The tenant commenced an action in Nassau County Supreme Court seeking reimbursement of the “excess” electricity payments and a return of funds withheld from a security deposit as determined by a prior summary proceeding in District Court.  The tenant argued that the Supreme Court had jurisdiction over the entire dispute (even that piece pending in District Court) as the tenant was seeking a declaratory judgment and equitable relief, for which the District Court lacks jurisdiction.  Upon Landlord’s motion, the Supreme Court dismissed the Complaint.  The Supreme Court found that “[t]o the extent plaintiff claims that the electric charge is exorbitant, it is what he agreed to, and nothing more…The fact that a landlord may make a profit on the payments for electricity, is no defense to a tenant.”[iii]  The Court reached a similar conclusion regarding the late fee, noting that “[a]side from the fact that it constitutes a negotiated provision of a commercial lease between sophisticated parties, there [is] nothing exorbitant about such a provision calling for a 5% late fee.”[iv]

Ultimately, the District Court disagreed with the jurisdictional issue: “[T]his court can determine all issues in an expeditious manner,” wrote Judge Fairgrieve.  “The purpose of summary proceedings is to quickly resolve cases.”  The District Court then granted summary judgment to our client.

Citing the First Department’s Accurate Copy, the Court noted that a sophisticated party such as the law firm tenant in this case “had a meaningful choice to walk away and rent elsewhere.”  Accurate Copy had rejected an unconscionability claim on the grounds of the plaintiffs’ failure to allege and prove a lack of meaningful choice, as well as claims that electric charges were illegal on the basis that the plaintiffs did not allege failure by the landlord to enforce a lease’s electric charge provisions in conformance with their terms.  The Accurate Copy court declined to upset the commercial leases at issue in that case for the “purpose of alleviating a hard or oppressive bargain.”  Looking to this First Department case, this District Court within the Second Department agreed.

[i] Accurate Copy Service of America, Inc. v. Fisk Bldg., 72 A.D.3d 456, 899 N.Y.S.2d 157 (1^st Dep’t 2010) (quotation from Old Country Road Realty, LP v. Zisholtz & Zisholtz, LLP, 53 Misc.3d 1203(A), 2016 WL 5396005).

[ii] Zisholtz, supra. 

[iii] Zisholtz & Zisholtz, LLP, v. Old Country Road Realty, L.P., Nassau County Index No. 602616-16 (Murphy, J.), entered September 13, 2016.

[iv] Id. 

Clients embroiled in litigation are often very concerned with the overwhelming costs of discovery, especially when document production can involve sorting through thousands upon thousands of emails and other electronically stored documents to respond to the opposing party’s requests.  Generally speaking, litigants are responsible for their own discovery costs in litigation.  However, certain circumstances call for the shifting of those costs.  A recent decision out of the Commercial Division in Monroe County discussed the various factors courts will evaluate in determining whether to shift discovery costs to the party requesting the discovery.

Wade v. McConville, 53 Misc.3d 1216(A) (Sup. Monroe 2016) (J. Rosenbaum) dealt with legal malpractice claims in connection with Defendants’ representation of Plaintiff regarding a commercial transaction.  After the case was commenced, the parties exchanged significant discovery, including electronically stored information (“ESI”).  In connection with their production, Defendants produced their complete file regarding their representation of Plaintiff.  Following that production, Plaintiff requested that Defendants produce their “Case Management System Entries” as well as other electronic calendar entries, appointments, and other related entries.  After investigating the cost associated with having to produce this additional ESI, Defendants made a motion for a protective order conditioning the production of further ESI on Plaintiff’s payment of all costs associated with the production.

In its decision, the Court noted that, with the increasing prevalence of ESI, courts have been divided in determining when, if at all, to shift costs for discovery.  Despite the general rule that the producing party must typically bear its own costs in responding to discovery requests, the Court cited to a decision in Nassau County where it was determined that the requesting party should bear the entire cost for retrieving and producing discovery that includes ESI.  Lipco Elec. Corp. v. ASG Consulting Corp., 4 Misc.3d 1019(A)(Sup. Nassau 2004).  Notwithstanding the Lipco decision, many courts in New York follow the standard articulated in Zubulake v. UBS Warburg, LLC, 217 F.R.D. 309 (S.D.N.Y. 2003), a federal case holding that the producing party is initially responsible for the costs of searching, retrieving, and producing ESI unless the producing party can establish that a shift of the cost burden onto the requesting party is warranted.  To do so, the Court will evaluate: (1) the extent the request is tailored to discover relevant information; (2) the availability of the information from other sources; (3) the cost of production compared to the amount in controversy; (4) the cost of production compared to the party’s resources; (5) the relative ability of each party to control costs; (6) the importance of the issues in the litigation; and (7) the relative benefits to the parties obtaining the information.  Id.

In this case, the Court noted that despite Defendants’ claim that the production of the additional ESI would cost them $9,000, they did not provide a copy of the estimate/invoice or an affidavit from Defendants or an e-discovery vendor to substantiate this claim. Defendants also failed to analyze the Zubulake factors at all in requesting to shift costs to Plaintiff.  Given that the Court had already determined that the information sought by Plaintiff was relevant, Defendants had provided no support to obtain a protective order.  As such, the motion was denied.

Although Defendants in this case made a fairly poor attempt to shift the costs involved with the further production of ESI, the Court did provide some important findings as to what it would be looking for to support such a cost shift.  In particular, had Defendants actually provided a copy of the proposal indicating the costs involved with the ESI production and/or an affidavit from Defendants themselves or the electronic discovery vendor who estimated the costs, Defendants may have had a chance in this case.  The Court also noted it was important for Defendants to have analyzed the applicability of the Zubulake factors to the production of ESI, which they completely failed to do.  While the law regarding cost-shifting is continuing to evolve, it is important to be aware of how this very important tool can be utilized in litigation, either in your favor or to protect against it being used against you.