United States: 2020 May Be Over, But Litigation Regarding The Pandemic And Private Party Rights Is Not

As we enter the New Year, the end is not yet in sight for litigation related to COVID-19. Five recent decisions, summarized below, highlight the still developing legal implications of the pandemic on private party rights as we begin 2021. These decisions touch on: potential university liability to refund students for pandemic-caused changes to their education, in what circumstances a buyer can walk away from a merger and acquisition because of COVID-19, and circumstances where New York Courts have been willing to grant pandemic-related injunctive relief regarding performance of commercial lease obligations.

Two Lawsuits Involving COVID-19 University Closures and Tuition Refunds Survive Motions to Dismiss

Two recent federal court decisions allowed college students to proceed with claims against their universities regarding COVID-19-related closures. In both cases, the students claimed their universities failed to partially refund tuition after shutting down campuses and holding classes remotely.¹

In Gibson v. Lynn University Incorporated, a student, on behalf of a purported class,² alleged that the university breached an implied contract with students or, alternatively, was unjustly enriched, after it switched to remote learning in March 2020, but refused to refund any portion of the tuition.³ The Southern District of Florida found that the plaintiff sufficiently alleged the existence of an implied contract based upon the university's statements in publications, policies, invoices, which emphasized the importance of in-person instruction and access to campus facilities and activities.⁴ The court also permitted the plaintiff to proceed with his alternative theory of unjust enrichment.⁵ In addressing the university's defenses, the court determined that additional factual development was necessary to determine the scope of the contract and whether the university's performance was excused by force majeure, impossibility of performance, or frustration of purpose defenses.⁶

A similar class action was filed by Rensselaer Polytechnic Institute students in the Northern District of New York. In addition to claims for breach of contract and unjust enrichment, the students asserted claims for conversion, promissory estoppel and deceptive practices under New York General Business Law Sections 349 and 350.⁷ The students alleged they were deprived of in-person learning and on-campus housing, activity and meal expenses when remote learning began in March 2020 and, as such, entitled to partial tuition refunds.⁸ The court denied the college's motion to dismiss the students' breach of contract, unjust enrichment and promissory estoppel claims.⁹ It found that the students sufficiently alleged a breach of contract, but the court rejected the students' argument that an implied contract for on-campus education existed based solely upon the parties' dealings, noting that "breach of contract actions between a student and a school must be grounded in a text[.]"¹⁰ The court also dismissed the students' New York State deceptive act claims finding, in relevant part, that "[n]o reasonable consumer would expect a university to remain open for in-class instruction in the face of a pandemic and a state-mandated shutdown, regardless of whether the school advertised on-campus learning as a strength."¹¹ It also dismissed plaintiffs' claims for conversion finding that "plaintiffs have failed to allege that their tuition and fee payments still exist as a 'specific, identifiable fund' that defendant could have converted."¹²

Termination of Agreement to Purchase Company Owning Luxury Hotels Permitted:  Based on Ordinary Course Covenant

In AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, the Delaware Chancery Court issued an opinion regarding a failed merger transaction.¹³ Pursuant to a purchase agreement dated September 10, 2019, a buyer was to purchase a company owning 15 luxury hotels for $5.8 billion.¹⁴ The purchase agreement included both a "material adverse event" clause and an "ordinary course" provision which required "the business of the [seller to] be conducted only in the ordinary course of business consistent with past practice in all material respects."¹⁵ After the pandemic hit, the hotel industry was severely impacted and the buyer refused to close on the transaction.¹⁶ The seller initiated a lawsuit seeking specific performance of the purchase agreement.¹⁷ After a weeklong trial, the court issued a lengthy opinion analyzing whether the buyer was entitled to walk away from the deal on two pandemic-related grounds.

First, the court evaluated and, ultimately rejected, the buyer's argument that COVID-19-related changes to the seller's business constituted a material adverse event that would allow the buyer to terminate the purchase agreement.¹⁸ The material adverse event clause in the purchase agreement provided a general definition and a list of exceptions that did not qualify as material adverse events.¹⁹ Although "pandemics" were not expressly included in the list of exceptions, "natural disasters and calamities" were.²⁰ The court held that COVID-19 constituted a "calamity" and, also, arguably fit within the definition of a "natural disaster".21 Because "calamity" and "natural disaster" were excluded from the definition of a material adverse event, the court held that the buyer was not excused from performance under this particular clause.²²

However, the Court ultimately ruled that the buyer could terminate the deal pursuant to the ordinary course covenant.²³ The Court rejected the seller's argument that the ordinary course clause merely required the seller to operate "in the ordinary course of business based on what is ordinary during a pandemic."²⁴ The Court found that this clause required a determination of whether the company departed significantly from its routine operations when acting in response to the pandemic.²⁵ The Court held that the seller departed from its ordinary course of business during the pandemic, noting that: (1) the seller entirely closed two hotels and the severely limited the operations of the 13 others;²⁶ (2) "over 5,200 full-time-equivalent employees [were] laid-off or furloughed" and the "remaining employees saw their work weeks shortened, were encouraged to take vacation or paid time off, and had any pay increases deferred until further notice;"²⁷ and (3) marketing and capital expenditures were minimized or placed on hold."²⁸

Two New York Restaurants are Granted Yellowstone Injunctions Related to the Pandemic

Real estate litigation over the pandemic and related executive orders has continued in New York state courts. In two recent pandemic-related decisions, New York courts provided injunctive relief to commercial tenants based upon the New York Yellowstone injunction standard for commercial leases, the requirements for which are more relaxed than those for usual preliminary injunctions.

For example, a court in Warren County recently granted injunctive relief to a restaurant tenant (ironically, situated in a hospital) after it cited to various COVID-19 executive orders impacting its business.²⁹ In July 2020, the restaurant's landlord served a notice of default claiming the tenant: (1) failed to operate for the minimum hours required by the lease; and (2) owed rent for five months in 2020.³⁰ The tenant thereafter initiated a lawsuit seeking a declaratory judgment that its performance under the lease was excused pursuant to the force majeure clause and various COVID-19-related executive orders.³¹ It simultaneously filed a motion for a Yellowstone injunction.³² In granting the injunction, the Court cited to the tenant's argument that "it has been 'hindered in or prevented from' making rental payments and maintaining required hours of operation by a 'cause[] not within [its] control' — namely, the ongoing COVID-19 pandemic — and as such, the defaults must be excused" under the lease.³³ The court also held that the fact that the hospital could not initiate any eviction proceedings until at least January 31, 2021, pursuant to COVID-19-related executive orders, did not render the issues raised in the Yellowstone motion moot.³⁴

A New York City restaurant similarly was granted a Yellowstone injunction after citing to various COVID-19-related executive orders that impacted its operations.³⁵ In that case, the landlord, without notice, had withdrawn money from the tenant's security deposit to pay outstanding rent and, thereafter, served a notice that the tenant must replenish the security deposit or face eviction.³⁶ The tenant filed a lawsuit claiming that it was unable to fulfill certain obligations under the lease in light of various pandemic-related governmental restrictions and simultaneously sought the Yellowstone injunction, which the court granted.³⁷ Among other things, the court held that the lease provided that the tenant's rent would be reduced or abated in the event of a "fire or other casualty."³⁸ The court stated that the term "casualty" is "generally defined as an 'accident' or an 'unfortunate occurrence,' something other than a common occurrence."³⁹ The court held, under the "likelihood of success" standard applicable on an injunction motion, that the COVID-19 pandemic could fit this definition.⁴⁰

The court's decision at the preliminary injunction stage is seemingly contrary to a decision rendered by a different judge in New York County at the summary judgment stage, which we wrote about here. These decisions indicate that not only are the specific lease provisions and facts and circumstances critical, but that the stage of the proceedings may be an important factor as well: courts may reach one conclusion based on a limited record at the preliminary injunction stage (particularly in the New York specific Yellowstone context), but could reach a different conclusion based on a more developed record at the summary judgment stage.

Takeaways:

These cases suggest there will be continued pandemic-related commercial litigation as we enter 2021. It is important for individuals, especially those in industries such as real estate, hospitality and education, to stay apprised of the evolving legal landscape and new decisions that may expose them to potential liability. These cases also provide guidance on how parties entering into new contracts should draft contract language to protect themselves from continued pandemic-related issues.

Footnotes

1.  Gibson v. Lynn Univ., Inc., Case No. 9:20-CIV-81173-RAR, 2020 U.S. Dist. LEXIS 222214 (S.D. Fla. Nov. 29, 2020); Ford v. Rensselaer Polytechnic Inst., 1:20-CV-470, 2020 U.S. Dist. LEXIS 236692 (N.D.N.Y. Dec. 16, 2020).

2.  The class has yet to be certified and Lynn disputes the appropriateness of a class action.

3.  Id. at *2.

4.  Id. at *3, 7-8.

5.  Id. at *18-20.

6.  Id. at *11-14.

7.  Ford, 2020 U.S. Dist. LEXIS 236692, at *6.

8.  Id.

9.  Id. at *30-31.

10.  Id. at *10-11.

11.  Id. at *28.

12.  Id. at *27.

13.  C.A. No. 2020-0310-JTL, 2020 Del. Ch. LEXIS 353 (Del. Ch. Nov. 30, 2020).

14.  Id. at *2-3.

15.  Id. at *132, 280-81.

16.  Id. at *3.

17.  Id.

18.  Id. at *67.

19.  Id. at *147.

20.  Id.

21.  Id. *152, 154-55

22.  Id. at *67.

23.  Id. at *132, 280-81.

24.  Id. at *172,

25.  Id. at *179, 191-92.

26.  Id. at *192.

27.  Id. at *192-93.

28.  Id. at *193.

29.  Healthy Choice Concepts Inc. v. Glens Falls Hosp., 2020 NY Slip Op 20337, 2020 N.Y. Misc. LEXIS 10484 (Warren Cnty. Sup. Ct. Dec. 16, 2020)

30.  Id. at *2.

31.  Id. at *3-4.

32.  Id.

33.  Id. at *6-7.

34.  Id. at *3.

35.  188 Ave. A Take Out Food Corp. v. Lucky Jab Realty Corp., No. 653967/2020, 2020 WL 7629597, at *6 (N.Y. Cnty. Sup. Ct. Dec. 21, 2020).

36.  Id. at *1.

37.  Id. at *2.

38.  Id. at *3.

39.  Id.

40.  Id.

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