Consolidated Indem. & Ins. Co., 287 NY 34 (1941)).
The latter is precisely the situation presented here. The relationship between landlord and
tenant has been changed by General Obligations Law § 7-103 "from [that of]
debtor-creditor to trustee-cestui que trust" (In re Perfection Technical Servs. Press, Inc., 22
AD2d 352, 256 NYS2d 166 (2d Dep't 1965), aff'd, 18 NY2d 644, 273 NYS2d 71
(1966)). In other words, the obligation of Defendant Landlord to refrain from commingling
Plaintiffs' security deposit and Plaintiffs' contractual obligations pursuant to the Lease lack the
requisite mutuality to permit an offset; the former asserted by trust beneficiaries [Plaintiffs]
seeking the return of their security deposit and the latter by a creditor [Defendant] seeking
enforcement of contractual obligations under the Lease (See generally Fore Improvement Corp.
v. Selig, 278 F.2d 143 (2d Cir. 1960)).
The Appellate Division, Second Department addressed this issue in In re Perfection
Technical Servs. Press, Inc., supra . In that case, the Court, in reversing the Appellate Term, held
that a landlord who commingled the tenant's security deposit could not subsequently use those
funds as an offset for unpaid rent when the assignee for the creditors sought to recover the
commingled security deposit (Id., 22 AD2d at 356, 256 NYS2d at 170). The Court held:
The inability of the commingling landlord to set off claims against the deposit flows
from the change [*4]in his legal status. He does not owe a debt as
he once did; he owes a duty not to commingle the deposit with his own funds. Upon a breach of
that duty, he forfeits his right to avail himself of the deposit for any purpose. To allow him to set