Toys “R” Us and its counsel, Sills Cummis & Gross, were harshly criticized by a state judge last week for using litigation as a tactic in negotiating a new lease for the toy retail giant’s Times Square store.

Manhattan Supreme Court Justice Charles Ramos (See Profile) on Jan. 2 dismissed Toys “R” Us v. 44-45 Broadway Realty, 651403/12, a lawsuit in which Toys “R” Us tried to recover 12 years of property taxes it paid its landlord as part of its lease on its Times Square flagship store.

“Counsel and their clients are admonished to consider that the citizens of this State pay a considerable sum to finance the operations of the Unified Court System,” Ramos wrote. “The record reveals that this action was commenced in the midst of lease renewal negotiations. Litigation, with its expense and uncertainty, has been used from time to time, as part of a negotiating strategy in circumstances similar to this case. If such a strategy was being utilized here, it would represent an abuse of the judicial process and to the taxpayers of this State, to add insult to injury.”

In its suit, Toys “R” Us claimed that a provision in its lease with 44-45 Broadway Realty requiring it to pay signage taxes assessed by the city on its own signs exempted it from paying a proportionate share of its real estate taxes for the entire building, according to the opinion.

The clause requiring it to pay taxes on its own signs explicitly states that Toys “R” Us is exempt from paying taxes on any other tenants’ signs. The store noted that the total real estate taxes for the building were calculated by the building’s total income, including income derived from other tenants’ signs. Thus, it claimed, requiring it to pay a proportionate share of the property tax was effectively requiring it to pay taxes on other tenants’ signs.

Ramos rejected that argument, saying the retailer was “conflating income derived from signs with taxes charged by the City.”

The judge found that the lease was “unambiguous” in requiring Toys “R” Us to pay the real estate taxes. He noted that the retailer had paid the taxes for 12 years without objection, and that the lease had been negotiated between two “highly sophisticated” parties who would have clearly exempted the toy store from the property taxes if they had intended to.

Much of Ramos’ opinion was given over to a sharp criticism of Toys “R” Us and its counsel for filing a complaint that “approaches frivolity” while the two parties were in the midst of negotiating a new lease.

“This State’s finances are in a deplorable condition,” the judge continued. “Its resources are being stretched thin to the point where the needs of its citizens are imperiled. If counsel and their clients in this case are litigating in bad faith, they are depriving others far less well off of a proportionate share of the services the public relies on…health care, education, fire protection, police protection…the list goes on and on.”

Ramos also said that the toy store’s counsel, Sills Cummis, bore some of the blame for allowing the suit to be filed.

“The Bar is hereby reminded that this Court and the Unified Court System as a whole, rely on counsel to act as gate-keepers to prevent meritless claims from frittering away this State’s ability to meet its more pressing needs,” he said.

Todd Soloway, a partner at Pryor Cashman who represents the landlord, said, “Toys ‘R’ Us was seeking to rewrite the lease and to recover tens of millions of dollars of voluntarily paid back taxes, and the court properly recognized that the claims were without merit and never should have brought in the first place.”

Toys “R” Us is represented by Jonathan Jemison, of counsel at Sills Cummis. A spokeswoman for the firm declined to comment on the decision.

@|Brendan Pierson can be contacted at bpierson@alm.com.