By Nidhi Patel, Esq.
The Court held that res judicata barred re-litigation of personal liability for the owner of a restaurant that failed to pay rent during the COVID-19 pandemic, and the Court further held that the doctrine of frustration of commercial purpose did not bar enforcement of the personal guarantee of the owner of the unpaid rent by the corporate tenant because the guaranty was intended to ensure payment of rent, not commercial operation of the restaurant.
Opinion By: J. Friedman
Peking Palace signed a lease agreement on January 28, 2020 to build and run a restaurant in Westfield Mall, agreeing to construct the restaurant and pay rent based on various factors. Due to the COVID-19 pandemic, delays occurred, the construction of the restaurant did not even begin, and Peking Palace did not pay rent. The landlord filed an action in the Circuit Court for Montgomery County against Peking Palace for breach of lease and Liu for breach of the rental guaranty. Additionally, the landlord filed a separate action in District Court for Montgomery County for summary ejectment against Peking Palace, which resulted in a judgment of $159,640. Peking Palace didn’t appeal this judgment.
In the Circuit Court, the landlord argued that the District Court’s judgment conclusively established liability and damages against Peking Palace and damages against Liu. The landlord argued that the only thing remaining for the Circuit Court to do was find Liu in breach of the guaranty and enter judgment against him in the same amount as the judgment entered in the District Court against Peking Palace. However, the circuit court disagreed and found that the COVID-19 pandemic had caused a frustration of purpose and excused Liu’s obligation to pay on the guaranty, except for rent due for a certain, limited period. The landlord appealed this decision, challenging both the liability finding and the amount of the judgment.
The Appellate Court of Maryland held that the District Court judgment precluded the Circuit Court from deciding whether there was a breach of lease against Peking Palace due to res judicata or claim preclusion. In holding so, the Appellate Court looked at the following elements of res judicata: (1) the parties in the present litigation are the same or in privity with the parties to the earlier action; (2) the claim in the current action is identical to the one determined in the prior adjudication; and (3) there was a final judgment on the merits in the previous action. Powell v. Breslin, 430 Md. 52, 63-64 (2013). When these three elements are present, “the first claim is merged into the judgment and bars the second claim.” Boyd v. Bowen, 145 Md. App. 635, 655 (2002).
The Appellate Court also held that the District Court judgment precluded relitigating whether Liu owed an obligation under the guaranty and the amount of his liability for Peking Palace’s default, as a result of collateral estopped or issue preclusion, thereby finding that Liu had an obligation due under the guaranty in the amount of the District Court judgment.
Liu argued that the COVID-19 pandemic frustrated the purpose of the guaranty, but the Appellate Court found that the Circuit Court accepted this defense in error. The commercial frustration of purpose doctrine doesn’t apply as a defense to a breach of guaranty claim, as the guaranty’s purpose was to ensure the lease, not the restaurant’s operation. The commercial frustration of purpose doctrine applies “where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance.” Critzos v. Marquis, 256 Md. App. 684, 692 (2023). The COVID-19 pandemic did not render Liu’s performance under the guaranty impossible and thus did not frustrate the purpose of the guaranty.
Nidhi Patel is a business law attorney at Stein Sperling, where she counsels clients through the life cycle of their business – from assisting with corporate formation and governance to working on merger and acquisition transactions and establishing succession plans.