Aras v. B-U Realty Corp.

221 A.D.3d 5

197 N.Y.S.3d 148

Leisa ARAS, et al., Plaintiffs-Appellants-Respondents,

Catherine Schwartz, et al., Plaintiffs,

v.B-U REALTY CORP., et al., Defendants-Respondents-Appellants.

Appeal No. 16846

Index No. 161448/14

Case No. 2022-01126

Supreme Court, Appellate Division, First Department, New York.

Entered: October 3, 2023

Ephron-Mandel & Howard, L.L.P., New York (Damon P. Howard of counsel), for appellants-respondents.

Sidrane, Schwarz-Sidrane, Perinbasekar & Littman, LLP, Rockville Centre (Michael Littman of counsel), for respondents-appellants.

Cynthia S. Kern, J.P., Ellen Gesmer, Tanya R. Kennedy, Saliann Scarpulla, Julio Rodriguez III, JJ.

KENNEDY, J.

The issues presented on this appeal are (1) what is the appropriate base date rent for calculating damages and (2) whether the record before us sets forth evidence of a fraudulent scheme to deregulate the subject apartments to permit use of the default formula pursuant to Rent Stabilization Code (RSC) (9 NYCRR) § 2526.1(g).

As relevant herein, plaintiffs are current and former tenants of the residential apartment building located at 945 West End Avenue in Manhattan as follows: Leisa Aras (apartment 11B); Robert Arnot (formerly apartment 11C); Sarah Barish-Straus (apartments 2C and 9D); James Gladstone and Kathleen Campana (formerly apartment 10B); Patricia Lederer (apartment 8D); Albert Panozzo and Georgia Marantos (apartment 1B); John Menapace and Karen Menapace (apartment 8A); and Peter Kane and Paulina Perera-Riveroll (apartment 10D). Defendant B-U Realty Corp. is the building's owner, and defendant Paul Bogoni is B-U's managing member and agent.

By summons and complaint dated November 18, 2014, plaintiffs commenced this action, and by amended complaint dated November 15, 2016, plaintiffs Arnot, Barish-Straus, and Lederer joined the action, asserting claims for, inter alia, rent overcharges. Defendants denied the material allegations in the amended complaint and asserted affirmative defenses, including offset and accord and satisfaction. The note of issue was filed in September 2020, certifying that discovery was complete.

Plaintiffs moved for partial summary judgment, arguing that the evidence established a building-wide fraudulent scheme, requiring application of the default formula in calculating damages. Specifically, plaintiffs argue that the following facts demonstrate fraud: (1) Bogoni testified at a deposition in Pascaud v. B-U Realty , 2017 N.Y. Slip Op. 31482[U] at *4, 2017 WL 2998843 (Sup. Ct., N.Y. County 2017) that he heard about Roberts v. Tishman Speyer Props., L.P. , 13 N.Y.3d 270, 890 N.Y.S.2d 388, 918 N.E.2d 900 (2009) by 2011;¹ (2) in ( Kreisler v. B-U Realty Corp. , 164 A.D.3d 1117, 83 N.Y.S.3d 442 [1st Dept. 2018], lv dismissed 32 N.Y.3d 1090, 90 N.Y.S.3d 636, 114 N.E.3d 1089 [2018] ), this Court found that these same defendants engaged in a building-wide fraudulent scheme to deregulate the building; (3) on or about July 14, 2014, Assemblymember Daniel O'Donnell wrote to the Bureau Chief of the Tenant Protection Unit of the New York State Division of Housing and Community Renewal (DHCR) concerning defendants deregulating apartments while in receipt of J51 benefits;² (4) on or about August 14, 2014, DHCR directed the landlord to register eight apartments (including 8A, 9D, and 10D); and (5) after receiving that letter, defendants filed amended registrations in 2015 and in some instances 2017.

Although defendants conceded certain overcharges in opposition, they maintained that damages should be calculated under Rent Stabilization Law (RSL)(Administrative Code of City of NY) § 26 -516 and RSC 2526.1(a)(3)(i), rather than the default formula because the overcharges resulted from error and not fraud.

The motion court granted summary judgment as to plaintiffs Aras (apartment 11B), Panozzo & Marantos (apartment 1B), Kane & Perera-Riveroll (apartment 10D), the Menapaces (apartment 8A), Barish-Straus (apartment 9D) and Lederer (apartment 8D), and found that fraud was established, determining that the default formula would be used to calculate damages. The court denied the motion as to Arnot and his wife, Ellen Hirsch (apartment 11C) and Barish-Straus (apartment 2C) and held the claims in abeyance as to Gladstone and Campana (apartment 10B). For the reasons that follow, we conclude that the record before us did not establish evidence of a fraudulent scheme to deregulate the subject apartments as a matter of law, and that it was improper to utilize the default formula to calculate damages, and further modify the order as set forth herein.

As a threshold matter, the base date for all plaintiffs is November 18, 2010, four years before the filing of the original complaint on November 18, 2014. Prior to the enactment of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) (L 2019 ch 36), CPLR 213-a and RSL 26-516(a)(2) provided for a strict "lookback" period, permitting recovery of rent overcharges four years prior to the filing of a tenant's complaint. Defendants here, however, were on notice of plaintiffs’ claims before this action was commenced – specifically, since at least August 14, 2014, when the Tenant Protection Unit of DHCR informed them that every apartment in the building was subject to rent stabilization by virtue of defendants’ receipt of J51 benefits from 2005 through 2019. Thus, plaintiffs Arnot, Barish-Straus, and Lederer, who joined the action in the amended complaint, are entitled to application of the relation-back doctrine ( CPLR 203[f] ; see Matter of Century Tower Assoc. v. State of N.Y. Div. of Hous. & Community Renewal , 83 N.Y.2d 819, 822, 611 N.Y.S.2d 491, 633 N.E.2d 1095 [1994] ; cf. Thornton v. Baron , 5 N.Y.3d 175, 180 n.2, 800 N.Y.S.2d 118, 833 N.E.2d 261 [2005] [rejecting relation-back doctrine as applied to new defendant where "defendants were not united in interest within the meaning of CPLR 203(b)"]).

The history of the complex statutory and factual framework surrounding rent overcharge claims in buildings deregulated while receiving J51 benefits has led to the development of precedent upon which our decision now rests. Most notably, the Court of Appeals’ decisions in Roberts v. Tishman Speyer Props., L.P. , 13 N.Y.3d at 280, 890 N.Y.S.2d 388, 918 N.E.2d 900, Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal , 35 N.Y.3d 332, 130 N.Y.S.3d 759, 154 N.E.3d 972 (2020) and Casey v. Whitehouse Estates, Inc. , 39 N.Y.3d 1104, 186 N.Y.S.3d 599, 207 N.E.3d 565 (2023) provide an evolving roadmap to resolve these cases.

In 2009, the Roberts Court clarified that contrary to an opinion which DHCR issued, luxury decontrol of apartment units was unavailable in any building receiving J51 benefits ( 13 N.Y.3d at 285–287, 890 N.Y.S.2d 388, 918 N.E.2d 900 ). In 2011, this Court held that Roberts applied retroactively ( Gersten v. 56 7th Ave. LLC, 88 A.D.3d 189, 928 N.Y.S.2d 515 [1st Dept. 2011], appeal withdrawn 18 N.Y.3d 954, 944 N.Y.S.2d 482, 967 N.E.2d 707 [2012] ).

The rent overcharge claims before us are governed by the former provisions of the RSL and the RSC, the latter of which are regulations that DHCR sets and administers.³ These rent overcharges are to be calculated based upon the "legal regulated rent" (RSL 26-516), which "shall be deemed to be the rent charged on the base date, plus in each case any subsequent lawful increases and adjustments" (RSC 2526.1 [a][3][i]; see also 2520.6 [e]).

Under the RSL and RSC, overcharge claims were subject to a four-year statute of limitations and "examination of the rental history of the housing accommodation prior to the four-year period preceding" was precluded (RSL 26–516[a][2]; see also former CPLR 213–a, as amended by L 1997, ch 116). Section 2526.1(a)(2) of the RSC, set forth a "fraud exception" which provided, in pertinent part:

(iv) in a proceeding pursuant to this section the rental history of the housing accommodation pre-dating the base date may be examined for the limited purpose of determining whether a fraudulent scheme to destabilize the housing accommodation ... rendered unreliable the rent on the base date (emphasis added).

A tenant's overcharge complaint, if proven, requires landlords to pay treble damages "equal to three times the amount of [an] overcharge" or "[i]f the owner establishes by a preponderance of the evidence that the overcharge was not willful" then the amount of the overcharge plus interest (RSL 26-516; RSC 2526.1[a][1]).

Finally, RSC 2526.1(g) permits use of the default formula to establish the "legal regulated rent," only when, in pertinent part, "[(1)] the rent charged on the base date cannot be determined, [(2)] a full rental history from the base date is not provided, or [(3)] the base date rent is the product of a fraudulent scheme to deregulate the apartment" (see also RSC 2522.6[b]).

In Regina , 35 N.Y.3d 332, 130 N.Y.S.3d 759, 154 N.E.3d 972, the Court of Appeals affirmed the foregoing statutory framework and held that: (1) a tenant's overcharge claim is limited to the amount actually charged on the base date, four years prior to the filing of the complaint, plus any permitted increases; (2) review of the rental history outside of the lookback period is limited only to determine whether a fraud to deregulate the apartment occurred; and (3) if a fraudulent scheme to deregulate is established, only then may the rent charged be deemed unreliable to permit use of the default formula. Thus, Roberts cases (where deregulation occurred during receipt of J51 benefits), generally do not support fraud because deregulation is usually based upon a misunderstanding of the law at that time. Moreover, regardless of fraud, the Court of Appeals expressly rejected the notion that the base date rent can be reconstructed ( Regina , 35 N.Y.3d at 358, 130 N.Y.S.3d 759, 154 N.E.3d 972 ).

The issue was again reviewed and reaffirmed by the Court of Appeals in Casey v. Whitehouse Estates, Inc. , 39 N.Y.3d at 1106, 186 N.Y.S.3d...