Casey v. Whitehouse Estates, Inc.

• Decision Date: 05 August 2021
• Docket Number: Index No. 111723/11,595472/17,Case No. 2020–03001,13969 & [M–1379]
• Citation: 153 N.Y.S.3d 6,197 A.D.3d 401
• Parties: Kathryn CASEY et al., Plaintiffs–Respondents, Pamela Renna et al., Plaintiffs–Intervenors, v. WHITEHOUSE ESTATES, INC., et al., Defendants–Appellants. Whitehouse Estates, Inc., et al., Third–Party Plaintiffs–Appellants, v. Roberta L. Koeppel et al., Third–Party Defendants.
• Court: New York Supreme Court — Appellate Division

197 A.D.3d 401

153 N.Y.S.3d 6

Kathryn CASEY et al., Plaintiffs–Respondents,

Pamela Renna et al., Plaintiffs–Intervenors,

v.WHITEHOUSE ESTATES, INC., et al., Defendants–Appellants.

Whitehouse Estates, Inc., et al., Third–Party Plaintiffs–Appellants,

v.Roberta L. Koeppel et al., Third–Party Defendants.

13969 & [M–1379]

Index No. 111723/11

595472/17

Case No. 2020–03001

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

ENTERED August 5, 2021

Rosenberg & Estis, P.C., New York (Howard W. Kingsley of counsel), for appellants.

Himmelstein, McConnell, Gribben, Donohue & Joseph LLP, New York (Ronald S. Languedoc of counsel), for respondents.

Manzanet–Daniels, J.P., Gische, Webber, Kennedy, JJ.

Order, Supreme Court, New York County (Gerald Lebovits, J.), entered March 28, 2017, which, insofar as appealed from as limited by the briefs, granted plaintiffs’ motion for summary judgment declaring that their legal regulated rent should be calculated according to the Rent Stabilization Code's default formula and denied defendants’ cross motion to determine the amount of use and occupancy, affirmed, with costs.

From 1991 through 2014 (the J–51 period), defendants’ building located at 350 East 52nd Street, New York, New York, received certain tax benefits from New York City's J–51 Tax Abatement and Exemption Program under Administrative Code of City of N.Y. § 11–243, authorized by Real Property Tax Law § 489. During the J–51 period, defendants deregulated 78 rent-stabilized apartments under the now-repealed high-rent vacancy deregulation provisions of Rent Stabilization Law (RSL [Administrative Code of City of NY]) § 26–504.2.

In 2009, the Court of Appeals decided Roberts v. Tishman Speyer Props., L.P., 13 N.Y.3d 270, 890 N.Y.S.2d 388, 918 N.E.2d 900 (2009), which held that rent-regulated apartments could not be removed from rent stabilization while the building received J–51 benefits ( id. at 280, 890 N.Y.S.2d 388, 918 N.E.2d 900 ). Later, in 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] ), decided on August 18, 2011, this Court determined that Roberts applied retroactively.

By letter dated September 28, 2011, the president of defendant Whitehouse, informed the tenants whose apartments were deregulated that the rent registrations for their apartments would be amended and any overcharges reimbursed. By letter dated October 20, 2011, defendants’ consultant Stephen K. Trynosky wrote to the tenants in the building, enclosing their Division of Housing and Community Renewal (DHCR) "rent filings for the past several years" and stating that although a rent recalculation was required, "this usually does not affect the actual collectable rent paid" and that if the actual rent was lower than defendants’ calculation, it was considered a "preferential rent."

In October 2011, plaintiffs commenced this class action for a declaration that their apartments were subject to rent stabilization, and for related injunctive relief, rent overcharges, and attorneys’ fees. Defendants’ affirmative defenses asserted compliance with the law at the time, good faith, and compliance with DHCR's guidelines during the relevant period. By March 2012, following the commencement of this action, defendants had purported to recalculate the legal regulated rent for the apartments and filed rent registrations with DHCR reflecting defendants’ rent calculations for approximately 72 apartments for the years 2007 through 2011.

By notice dated December 8, 2015, plaintiffs moved for summary judgment to the extent of granting a declaratory judgment regarding the rent-stabilized status of plaintiffs’ tenancies; calculating their legal regulated rents under the default formula; freezing their rents based on defendants’ failure to properly register their apartments; and calculating the amount of refund due to each plaintiff. Plaintiffs argued that some review outside the four-year lookback period was available for establishing the base date under Rent Stabilization Code (RSC) (9 NYCRR) § 2526.1(a)(2)(ix), and that defendants otherwise had failed to establish a reliable base date rent for the apartments, warranting application of the default formula and the freezing of their rents.

The court granted the motion for summary judgment. The court determined that under tests set forth in Thornton v. Baron, 5 N.Y.3d 175, 800 N.Y.S.2d 118, 833 N.E.2d 261 (2005) and Matter of Grimm v. State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin., 15 N.Y.3d 358, 912 N.Y.S.2d 491, 938 N.E.2d 924 (2010), plaintiffs had made a colorable claim of fraud because defendants’ 2012 retroactive registration of the improperly deregulated apartments was an attempt to avoid the court's adjudication of the issues and to impose their own rent calculations rather than face a determination of the legal regulated rent within the lookback period.

It further reasoned that because this conduct fulfilled the Grimm test and defendants’ calculations were unreliable, the default formula applied and as such, it directed a special referee to hear and report on the proper calculations for the 78 apartments applying that formula.

Defendants’ primary argument on appeal is that the motion court erred in determining that the default formula applied, and instead the court should have used defendants’ calculations of what the base date rent was in October 2007, because those calculations were made in good faith. Defendants note that the motion court's determination relied heavily on 72A Realty Assoc. v. Lucas, 101 A.D.3d 401, 955 N.Y.S.2d 19 (1st Dept. 2012), which has been overturned by the Court of Appeals and deemed a "deviation," as recourse to the default formula was inappropriate there because "the court did not find a colorable claim of fraud" ( Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal, 35 N.Y.3d 332, 357, 130 N.Y.S.3d 759, 154 N.E.3d 972 [2020] ).

Although defendants are correct that the Court of Appeals’ decision in Regina held that Lucas erred in applying the default formula, the facts of this case differ significantly from those in Lucas and other typical post- Roberts cases.

Specifically, in Regina, the Court of Appeals rejected recourse to the default formula in cases like Lucas, in which the holding was based on the landlord's failure to maintain repair records from 2001, around seven years before the original holdover proceeding in which deregulation of the apartment was challenged, and more than a decade before this Court's decision ( Lucas, 101 A.D.3d at 402, 955 N.Y.S.2d 19 ). Here, however, after commencement of the action, defendants, without court approval, unilaterally registered rents from the base date forward that were not the rents actually paid, and instead registered rents far higher, without explanation. While these intentional misstatements of fact, which were intended to artificially increase the legal regulated rent, constitute fraud under Grimm, RSC 2522.6(b)(2) also calls for application of the default formula where "(i) the rent charged on the base date cannot be determined; or (ii) a full rental history from the base date is not provided." Both of those scenarios apply here, and differ from situations in which the base date rent is known ( Regina, 35 N.Y.3d at 359, 130 N.Y.S.3d 759, 154 N.E.3d 972 ["the alternative methods proposed by the tenants ... reflected in the regulations ... are available only ‘[w]here the rent charged on the base date cannot be established’ "]). Here, the base date rent cannot be established because defendants failed to provide leases showing what the actual rent charged on the base date was, or whether the actual rent was known; rather, without explanation, they registered rents much higher than the actual rent. In such cases, under RSC 2522.6(b)(2), the default formula applies.

We find that the motion court correctly determined that plaintiffs’ legal regulated rent should be calculated according to the default formula set forth in RSC ( 9 NYCRR) § 2522.6(b). Although defendants may have been following the law in deregulating apartments during the period before Roberts was decided (see Regina, 35 N.Y.3d at 356, 130 N.Y.S.3d 759, 154 N.E.3d 972 ), their 2012 retroactive registration of the improperly deregulated apartments was an attempt to avoid the court's adjudication of the issues and to impose their own rent calculations rather than face a determination of the legal regulated rent within the lookback period.

Moreover, in Montera v. KMR Amsterdam LLC, 193 A.D.3d 102, 107, 142 N.Y.S.3d 24 (1st Dept. 2021), this Court noted that " Regina does not grant an owner carte blanche in post- Roberts / Gersten cases to willfully disregard the law by failing to re-register illegally deregulated apartments, enjoying tax benefits while continuing to misrepresent the regulatory status of the apartments, and taking steps to comply with the law only after its scheme is uncovered."

Although defendants maintain that they provided evidence showing the legal regulated rent on the base date on which the motion court should have relied, the DHCR rent history for the apartments within the four-year lookback period shows that the rents beginning in 2007, four years before the complaint was filed, were registered in 2012, based on defendants’ unilateral calculations and not the actual rent charged. Plaintiffs also assert that the Trynosky letter demonstrates that in some cases, defendants converted plaintiffs’ actual rents to "preferential rents" in order to justify registering significantly higher rents with DHCR. That evidence, combined with defendants’ failure to produce leases for the class within the lookback period, showing the actual rent paid, does not adequately establish the base date rent by a preponderance of the evidence under RSC 2526.1(3)(i).

As properly found by the motion court, this conduct fulfilled the Court of...