Conason v. Megan Holding, LLC

• Decision Date: 24 February 2015
• Docket Number: No. 14,14
• Citation: 25 N.Y.3d 1,29 N.E.3d 215,6 N.Y.S.3d 206,2015 N.Y. Slip Op. 01553
• Parties: Julie CONASON et al., Respondents, v. MEGAN HOLDING, LLC, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

25 N.Y.3d 1

29 N.E.3d 215

6 N.Y.S.3d 206

2015 N.Y. Slip Op. 01553

Julie CONASON et al., Respondents

v.MEGAN HOLDING, LLC, et al., Appellants.

No. 14

Court of Appeals of New York.

Feb. 24, 2015.

Marino Partners LLP, White Plains (Umar A. Sheikh and Misha M. Wright of counsel), for appellants.

Fishman & Mallon, LLP, New York City (James B. Fishman and Susan K. Crumiller of counsel), for respondents.

Legal Services NYC, Brooklyn (Edward Josephson of counsel), and The Legal Aid Society, New York City (Adriene Holder

and Ellen Davidson of counsel), for Association for Neighborhood and Housing Development and others, amici curiae.

OPINION OF THE COURT

READ, J.

Julie Conason and Geoffrey Bryant (collectively, tenants) are the rent-stabilized tenants of an apartment in a residential building in Manhattan. Megan Holding, LLC is the building's owner and tenants' landlord. As described in this opinion, Conason asserted an overcharge claim against Megan in April 2009, almost 5 1/2 years after she occupied the apartment under a vacancy lease. The principal issue on this appeal is whether CPLR 213–a's four-year statute of limitations completely bars this claim. Because of the unrefuted proof of fraud in the record, we conclude that section 213–a merely limits tenants' recovery to those overcharges occurring during the four-year period immediately preceding Conason's rent challenge, and that the lawful rent on the base date must be determined by using the default formula devised by the New York State Division of Housing and Community Renewal (DHCR or the agency) (Thornton v. Baron, 5 N.Y.3d 175, 800 N.Y.S.2d 118, 833 N.E.2d 261 [2005, Smith and Read, JJ., dissenting]; 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, Smith, Graffeo and Read, JJ., dissenting] ).

I.

In October 2003, Conason signed a two-year lease, beginning on November 1, 2003, at a monthly rent of $1,800. The lease indicated that the legal regulated rent for the apartment was $2,000 per month, reduced to $1,800, “subject to any lawful adjustments,” by virtue of a temporary rent concession rider. The lease did not include a rent stabilization rider as an attachment. This rider, required for vacancy leases subject to the Rent Stabilization Code, does not modify or become part of the lease. Instead, it notifies the rent-stabilized tenant of the prior legal regulated rent and explains how the vacancy lease's rent was computed (see 9 NYCRR 2522.5 [c][1][i] ). Conason renewed the lease for two years, beginning November 1, 2005, at a monthly rent of $1,899; she signed another renewal lease for one year, beginning on November 1, 2007, at a monthly rent of $1,955.97. Conason paid rent in accordance with this lease for each month from November 2007 through May 2009.

The Summary Proceeding

On April 9, 2009, Megan commenced a summary proceeding against Conason in Civil Court, Housing Part, for nonpayment

of rent; by answer dated April 24, 2009, Conason counterclaimed, as relevant here, for breach of the warranty of habitability and rent overcharge. In a decision and order dated June 24, 2009, Civil Court dismissed the proceeding without prejudice,¹ retained the counterclaim for breach of the warranty of habitability and declined to entertain the counterclaim for rent overcharge; by decision and order dated October 30, 2009, however, the Judge granted tenants'² motion to reargue and concluded that the rent overcharge counterclaim was, in fact, properly before him. Additionally, he allowed tenants, now represented by counsel, to amend their answer to add a counterclaim for attorneys' fees, and scheduled a trial date of December 9, 2009.

When the parties appeared on December 9th before another judge, Megan sought an adjournment for its new attorney to prepare for trial. This attorney was at least the third lawyer to represent Megan in the summary proceeding. Over tenants' attorney's objection, the Judge granted the adjournment on condition that Megan pay tenants $1,125 to ameliorate the legal expenses they had incurred on account of the eve-of-trial substitution. She also ordered Megan to correct multiple housing violations in tenants' apartment before the new trial date, January 20, 2010. The Judge heard testimony on that date, and on March 3, April 19 and 29, and June 10 and 11, 2010. She then adjourned the trial until July 27, 2010.

After the last trial day in June, Megan's attorney moved to withdraw. He apparently had informed Megan of his intention to do so several months earlier. By order dated July 26, 2010, the Judge granted the motion, expressing confidence that “retiring counsel believes in good faith that he cannot ethically continue as [Megan's] counsel”; however, she denied his request to adjourn the trial for replacement counsel to be brought on board and up to speed. At the time, Emmanuel Ku, the 99% shareholder in Megan, was on the witness stand pursuant to tenants' subpoena.

Ku appeared on July 27th to resume his testimony, but Megan had not substituted counsel. Civil Court, at the request

of tenants' attorney, who wanted to avoid creating an appellate issue, then ordered a continuation of the trial for seven weeks, until September 15, 2010, to permit Megan time to engage a new lawyer. When Megan failed to do so, the Judge closed the record and set a date for posttrial briefs. An attorney described as Megan's “outside general counsel” submitted Megan's brief; this attorney had also appeared on July 26th to oppose Megan's then trial attorney's motion to withdraw.

In a decision and order dated April 8, 2011, Civil Court dismissed the overcharge claim, without prejudice, for failure of proof, commenting that “[a]lthough [tenants] established that an actionable overcharge occurred, they failed to prove the amount of the legal regulated rent and the amount of the overcharge.” The Judge then explained why she had concluded that “an actionable overcharge” was shown; specifically, although Megan registered someone named Suzuki Oki with DHCR as the apartment's occupant under a two-year lease running from April 1, 2003 through March 31, 2005 at a monthly rent of $1,000, tenants had presented “persuasive evidence” that no one named Suzuki Oki had ever lived in the apartment.

First, a witness from the utility company testified that an electricity and gas account in the name of Candida Vasquez was closed by the tenant on May 30, 2003, and there was no active account for the apartment until Conason opened one on November 1, 2003. Second, the building's superintendent in 2003 testified that the apartment's last occupants before Conason were Vasquez and Jacobo Rivera; that no one lived in the apartment between their departure and Conason's arrival; and that he did not know of any person named Suzuki Oki. A neighbor similarly testified that the apartment was vacant in the summer and fall of 2003. Additionally, DHCR records disclosed that Rivera was the registered tenant in 2002 under a lease expiring on September 30, 2003. As noted by the Judge later in her opinion, DHCR's rent registration records identify the legal regulated rent for tenants' apartment in 2002 as $475.24 a month. As for Ku, Civil Court summarized his testimony as follows:

“[Ku] ... testified that he had no records at all for Suzuki Oki. He had no lease, no rental application, and no evidence of payment by Suzuki Oki. He did not establish a security deposit account for Suzuki Oki and he claimed she paid him only in cash. He also claimed she remained in the apartment for only two months ... Finally, [Ku] testified that although Oki was in the apartment for only two months, he completely renovated the apartment and claimed a rent increase for individual apartment improvements both before her tenancy and after it.”

The Judge called Ku's testimony “entirely incredible.”

The Judge next commented that “[o]rdinarily” a rent overcharge claim is governed by a four-year statute of limitations. Further, “[t]he legal regulated rent is defined as the rent actually charged and paid on the base date, four years prior to the interposition of the overcharge claim, plus any legal increases taken thereafter.” Here, she opined, the claim was interposed on April 9, 2009, when the summary nonpayment proceeding commenced,³ which made April 9, 2005 the base date, and the evidence failed to show any impermissible rent increases after that date.

The Judge then cited Grimm for the proposition that “where the rent on the base date is affected by fraud, the DHCR (and, by implication, [Civil Court], which has concurrent jurisdiction with the DHCR over rent overcharge claims) has an obligation to investigate the legality of the base date rent.” She opined that Grimm “clearly ... appli[ed]” because Megan “created an entirely fictitious tenant [i.e., Suzuki Oki] and at least one entirely fictitious apartment renovation in 2003 in order to boost the regulated rent from $475.24 per month ... to $1[,]800.00.” Consequently, the “rent on the base date was obviously affected by [Megan's] fraud.”

Referring to Thornton, the Judge reiterated that she was required to dismiss tenants' overcharge claim without prejudice because they had not submitted proof of the lowest rent charged for a comparable apartment on the base date (Thornton, 5 N.Y.3d at 179–180, 180 n. 1, 800 N.Y.S.2d 118, 833 N.E.2d 261 [where no reliable rent history is available, the courts must apply DHCR's default formula and set the rent on the base date as the lowest rent charged

for a rent-stabilized apartment with the same number of rooms in the same building as the subject apartment] ). The Judge did, however, find “ample evidence” that Megan had breached the warranty of habitability from January 2004 through the time of trial. Accordingly, Civil Court awarded tenants damages in the principal sum of $23,249.76 in rent abatement, and ordered Megan to correct any remaining outstanding code violations...