As the years go by, you converse with fewer voices.
Almost a decade ago, I sat in the now-defunct Queen Diner in Dryden, NY with Dee Dee, the manager of my park in central New York and her now-ex-husband, Ben. We were going to pay the waitress, and Ben and I each had a ten-dollar bill in our hand. I pre-empted his attempt to pay by handing the waitress a credit card, and an awkward moment ensued. I broke the silence by saying, ‘How about we trade?’ I took the bill out of Ben’s hand and replaced it with the bill in mine. I said, ‘That is what we call a ‘currency swap’ on Wall Street.’
A real currency swap is a trade in which two parties agree to swap a specified number of units of different currencies on a specified date. The contractual provisions have teeth because a pound sterling is different from a dollar, and the value of each of the two currencies fluctuates independently from that of the other. Each dollar, by contrast, is exactly the same as every other dollar. You can enter into an agreement to exchange identical units of the same currency with a counterparty, but the contract would be vacuous. It would be like charging yourself and paying yourself simultaneously to change the oil in your car.
We call that fungibility, O Socrates. Fungibility raises problems whenever a stream of payments is made in exchange for more than one thing. Since every dollar is the same as every other dollar, parties sometimes disagree as to how to match dollars paid to dollars charged. In most cases, that is managed through accounting methods.
I could write a volume about accounting methods (actually, I could not write a book about accounting methods, because I don’t know much about them, but treatises have been written about them. Unless you are an accountant or a tax lawyer, I do not recommend that you read those books). The most commonly used methods are last-in-first-out (LIFO) and first-in-first-out (FIFO). Under a LIFO method, each payment is allocated to the newest charge to arise. Under a FIFO system, each payment is allocated to the earliest still-outstanding charge.
Accounting methods can be set contractually, by applicable law, or by generally accepted accounting principles. In certain cases, they can also be overridden if a payment is specifically earmarked for a specific item.
Accounting methods are important for park owners. Here’s why.
Assume you own a mobile home park in New York State. Residents are required to pay lot rent each month. They are also required to pay for water usage. If they pay late, they are required to pay late fees. If you perform certain services for which they are responsible (say, if you mow their lawn, install their heat-tape or replace a blown-out water riser), they are required to pay you for that, too.
In 2019, a law was passed that an influential blogger refers to as the nakba law. Inter multa alia, the nakba law eliminated holdover evictions in manufactured housing communities. A summary proceeding to evict a resident of a manufactured housing community may only be commenced if the petitioner can cite one of four specified causes of action. The most commonly-used of these is failure to pay rent. A summary proceeding may not be commenced for failure to pay non-rent items, such as water, late fees or repair bills.
(And, yes, evictions are horrific but they are also necessary, because they are the only enforcement mechanism that park owners have when dealing with recalcitrant residents. We need a rent insurance program that works and mediation with teeth. Until then, we need evictions.)
Back to the hypo. Assume that lot rent is $400 a month. In Month 1, you repair the water riser for a resident in your park that bursts due to his failure to install a heat tape. You charge him $350 for the repair. You also charge him $12.50 for water use. In Month 2, you charge him $11 for water use and $12 in late fees. In Month 3, you charge $15 for water and $12 for late fees.
In Month 1, the tenant pays you $412. When you ask him to reimburse you for the water riser repair, he tells you, using language not fit for a family-oriented blog, that he will never pay you for that, because he did not ask you to do it. He also pays you $412 in Month 2 and in Month 3.
You use a FIFO method of accounting. According to your calculations, at the end of Month 3, the resident has $361.50 in outstanding rent debt and $27.00 in outstanding non-rent debt. This is because a portion of Month 2’s payment was allocated to the charge for the water riser repair, which arose before the charge for Month 2 lot rent posted. Because a portion of that payment was allocated to non-rent items, a portion of the debt outstanding now is allocated to rent.
The resident uses a method of accounting whereby payments are allocated first to rent and then to other items. According to his calculations, he is square on rent because lot rent is $400 each month, he usually pays about $12 in water fees, and he has paid you $412 each month. When you confront him, he says that, even assuming arguendo that the $350 repair charge is an enforceable debt, it is not a rent debt for purposes of RPL 233(b)(2).
The tenant pays in cash, or online. None of his payments are specifically earmarked.
You serve him with a thirty-day notice for failure to pay lot rent. He says that there is no cause of action, because no rent charges are outstanding. Who is the judge going to believe?
Fortunately, there is some law on point. Here it is:[1]
- Absent an Earmark, Courts Defer to the Creditor The general rule is that the debtor may direct application of his or her payments, but if he or she fails to do so, then the creditor is permitted to apply payments as the creditor sees fit. Snide v. Larrow, 62 NY2d 633, 634 (1984). See, also, 3463 Third Ave. Realty LLC v. Vasquez, 2018 NY Slip Op 50674 (U) (2018); Boynton v. Law Offices of Burr & Reid, L.L.P., 294 A.D.2d 778 (2002).
- FIFO is the Default If the contractual arrangement is silent about accounting methods, FIFO is the default accounting method. See, e.g. 1325 Parkway Estates, LLC v. Weathers, N.Y.L.J. Jul. 23, 1997, p. 28, Col 5 : “The stipulation was silent as to future rent payments. Standard accounting methods use the FIFO method, first in, first out. Thus, the oldest debt is paid first with new money, before any newer debts”.[2] See, also, Snide v. Larrow, supra (“The presumption, however, is that a payment is to be applied to that portion of the debt first becoming due”).
- Specific Earmarks Trump A specific earmark trumps an accounting method. If a resident writes “May 2022 rent” on her check or money order, and if a charge for May 2022 rent is outstanding when that payment is tendered, that payment must be applied to that charge, regardless of the method of accounting for non-earmarked payments. Id.
So – how should the judge rule in the instant case? If she took the reasonable meds for breakfast, she would rule for the petitioner. The respondent did not earmark payments. Under the terms of the hypo, it is unclear whether the lease or the park rules specified that a FIFO method should be used. If either the lease or the regs specified that payments would be allocated using a FIFO method, the petitioner should have a very strong case. Even if the applicable documents were silent on the matter, a judge who chooses to follow the law would still hold for the petitioner, because courts defer to creditors’ accounting methods absent specific earmarks, FIFO is the default accounting method, and FIFO is not an outlandish accounting method or an ad-hoc scheme designed to produce unjust results.[3]
Now, let’s put a little hair on the hypo.
- Legal Fees Assume the facts are the same as above, except the $350 charge that posts in Month 1 is for legal fees charged to the resident (say fees paid by you to an attorney for an earlier debt-collection suit brought against the resident), rather than a repair charge. If you use a FIFO method of accounting, can you still take the position that, at the end of Month 3, the tenant still has $361.50 in outstanding rent debt? I think you can, but the tenant bar would disagree. I do not know of any law on point.
Under RPL 234-A, a landlord cannot assess a legal fee from a tenant unless the landlord has the authority to do so pursuant to a court order. Under one reading of the statute, this would mean that a legal charge cannot appear on a tenant’s statement unless a court has already issued a judgment for that charge in favor of the property owner. Under this reading, the respondent in the hypo will have $11.50 in unpaid rent, rather than $361.50, because the legal charge did not exist at the time when the payment that I would like to match to it was made.
Under another reading of the statute, the chargeback exists when it is placed on the resident’s statement, but it is not assessed (i.e., the owner does not have the right to collect it) until a court issues an order authorizing the charge. Under this reading, payments would be allocated to outstanding charges including the legal charge using the applicable accounting method. Any unpaid rent debt that arises as a result of this could be a cause of action for a nonpayment action. Once the parties get to court, the judge would have the opportunity to review the validity of the legal fee chargeback. If the judge did not authorize the chargeback, the case would be dismissed with prejudice. If the judge approved the charge, he or she could issue a court order authorizing the charge by holding for the petitioner and issuing a warrant of eviction.
I can hear the tenant bar from here rending their garments, tearing their hair and shouting, ‘That is bootstrapping! You are using an illegitimate charge to get into court!’ To which I would respond, ‘The legitimacy of the charge should be decided by a judge. Are you sure that the best way to promote justice is to keep a party from getting to court in the first place?’. I believe that the second argument is the better one, because it allows a court to rule on the substance of the charge-back, while the first is a procedural trick that bars a party seeking justice from the courthouse.
- Mr. Putin’s Law Assume your case comes before a results-oriented judge who doesn’t like the result you are arguing for. What happens then? We might look to A&E Tiebout Realty, LLC v. Johnson, 2010 NY Slip Op 50055(U) [26 Misc 3d 131(A)] for an answer. In that case, the court decided to ignore established precedent regarding the application of payments in order to hold for the respondent. Here’s the money quote:
[E]ven if respondent’s intentions regarding the application of her payments were unclear, petitioner would still not have an absolute right to direct application of those payments. The right of a creditor to apply payments is subject to the general limitation that the application must be equitable and not work an injustice to the debtor. (Belden v. State. See also Carson v. Federal Reserve Bank of New York, holding that “an application [of payments], usually appropriate, may be varied by the court when variance is necessary to promote the ends of justice.”) To permit petitioner to apply respondent’s payments to her past arrears to support its possessory claim would cause respondent—who is elderly and indigent—to lose her home of over 30 years. The court cannot countenance such a patently unjust result. [citations omitted]
Tiebout can be distinguished from cases that most park-owners bring because the respondent was quite sympathetic (good tenant, old lady who had paid rent on-time for over thirty years), and the petitioner sat on his rights for a long time before bringing the case, giving rise to a claim of laches by the respondent. Since the case was brought in New York City and the respondent was elderly, the petitioner might have been trying to de-control the respondent’s apartment before she died and passed it on to an heir. That is not discussed in the case, but it is a common, albeit unethical, practice in the city and, if true, it would be a significant factor in the respondent’s favor. There is no evidence that the parties agreed upon an accounting method up front; the petitioner simply decided unilaterally how he wanted to apply non-earmarked payments. That said, the language with which the judge chooses to abandon settled precedent should strike fear into anyone who cares about the rule of law; in his analysis, the judge effectively says, rules should be overturned when we don’t like their outcomes. You can have the most brilliant, exquisitely crafted argument in creation when you stand up on your hind legs in front of the bench. You can be right, for fuck’s sake, but if the judge decides to channel his or her inner Scalia or Putin, all you can do is bend over, grab your ankles and whimper, ‘Thank you, Your Honor. May I please have another? And can I please, please swap the ten-dollar bill in my hand for the two fives in yours?’
[1] Although I believe this to be an accurate summary of existing law, this should not be taken as legal advice.
[2] Note that, in Weathers, the court held for the respondent. By allocating payments to later-incurred items, the court held, the petitioner inflated past-due arrears. If the law were consistently applied, this would be a case where the tenant bar could be hoisted on its own petard.
[3] An over-zealous respondent’s attorney might attempt to distinguish the existing case law by arguing that the cases that deal with rent debt allow for accounting methods to match payments to differently-timed items, but not to items with different character. That should be a distinction without a difference, for two reasons. First, the non-rent cases do allow allocation between differently-characterized charges. Although those cases deal with debt outside the landlord-tenant context, the reasons advanced in these cases for respecting accounting methods is the same as that in rent-debt cases. Second, an accounting method is purely a timing device. Using a FIFO method of accounting, a creditor will allocate a payment to, say, a repair charge instead of to a lot rent charge because the repair charge occurred earlier than the lot rent charge, not because the two charges differ in character. Once you accept an accounting method that is based purely on timing, it must be applied consistently to every type of item with regard only to the timing of that item.