FULLAN v. 142 E 27TH ST ASSOC

• Decision Date: 22 December 2003
• Citation: 802 N.E.2d 1105,770 N.Y.S.2d 707,1 N.Y.3d 211
• Parties: SEAN FULLAN et al., Respondents, v. 142 EAST 27TH STREET ASSOCIATES et al., Defendants, and 27 REALTY, LLC, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

1 N.Y.3d 211

802 N.E.2d 1105

770 N.Y.S.2d 707

SEAN FULLAN et al., Respondents, v. TH STREET ASSOCIATES et al., Defendants, and 27 REALTY, LLC, et al., Appellants.

Court of Appeals of the State of New York.

Argued November 19, 2003.

Decided December 22, 2003.

Kaufman Friedman Plotnicki & Grun, LLP, New York City (Howard Grun of counsel), for appellants.

Law Offices of Mitchell Merlis, New York City (Mitchell Merlis of counsel), for respondents.

Chief Judge KAYE and Judges G.B. SMITH, ROSENBLATT, GRAFFEO and READ concur.

OPINION OF THE COURT

CIPARICK, J.

This appeal requires us to determine whether a current owner may be held liable for a fair market rent appeal (FMRA) award for excess rents collected by a previous owner, where the current owner was not a party to the FMRA and did not have an opportunity to participate in the FMRA process. We conclude that, under these circumstances, a current owner cannot be held liable for the FMRA award.

Plaintiffs Sean Fullan and Peggy Bates are tenants in a rent stabilized apartment in a building currently owned by defendant 27 Realty, LLC. When plaintiffs signed their lease in 1985— setting the monthly rent at $775—the property was owned by Dobro Corporation. In 1991, plaintiffs filed an FMRA with the Division of Housing and Community Renewal (DHCR), alleging that their monthly rent was in excess of fair market value. Two years later, DHCR issued an order determining that the fair market rent for the subject apartment was $434.34 per month, rather than $775, and adjusting the initial regulated rent to reflect that amount. As a result, DHCR found that a refund in the amount of $37,480.05 was due plaintiffs.

In October 1993, Dobro filed a petition for administrative review (PAR), appealing the FMRA award. However, DHCR did not issue its order denying the PAR until January 1997.¹ At no time was a lien recorded against the building in connection with this award. In 1995, while the PAR was pending, Dobro transferred the building to 142 East 27th Street Associates (Associates). Approximately a month after the PAR was denied, Associates conveyed the building to the present owner without providing notice of the FMRA award. Neither Dobro nor Associates refunded or credited any of the excess rent due to plaintiffs as directed by DHCR.

Plaintiffs then commenced this plenary action in December 1998 against the current owner and its managing agent (27 Realty), as well as Associates, its managing agent and individual partners, to collect a money judgment in the amount of the FMRA award with interest and attorneys' fees. 27 Realty moved for summary judgment dismissing the complaint against it on the ground that it was not a party to the FMRA and thus as a matter of law could not be held liable for the excess rent. Plaintiffs asked Supreme Court to search the record and grant summary judgment in their favor. Supreme Court denied 27 Realty's motion and determined that, although plaintiffs established their entitlement to recover the excess rents from 27 Realty, they were not entitled to summary judgment at that time since 27 Realty would likely prevail on their cross claims against Associates at trial.² The Appellate Division modified by granting plaintiffs summary judgment against 27 Realty on the issue of liability for the FMRA award and attorneys' fees, and remanding for additional proceedings. The Court found plaintiffs were entitled to summary judgment because "a current successor landlord is generally liable for overcharges collected by a predecessor landlord . . ." (282 AD2d 275, 275 [2001]). In addition, the Court found that 27 Realty could have avoided liability through the exercise of due diligence. On remand, Supreme Court determined that plaintiffs were entitled to the FMRA award with interest, attorneys' fees, costs and disbursements and entered a judgment in the amount of $95,158.90. We now reverse.

Discussion

Two types of DHCR proceedings are relevant to this appeal— fair market rent appeals and rent overcharge cases. A fair market rent appeal to determine the proper initial rent is generally available only to the first tenant to occupy the premises as of April 1, 1984, and is governed by section 2522.3 of the Rent Stabilization Code (9 NYCRR). A rent overcharge case, governed by section 2526.1 of the Rent Stabilization Code, is not limited to the first tenant and is brought to recover rents charged by owners that exceed the legal regulated rent.³ Here, plaintiffs, as the first tenants after the apartment became rent stabilized, properly brought an FMRA proceeding.

The Rent Stabilization Code allows for "an appeal of the initial rent on the ground that it exceeds the fair market rent for the housing accommodation" (9 NYCRR 2522.3 [a]). The section further provides that when an appeal has been decided, "[t]he order shall direct the affected owner to make the refund of any excess rent to the tenant . . . and to the extent the present owner is liable for all or any part of the refund, such present owner may credit such refund against future rents . . ." (Rent Stabilization Code [9 NYCRR] § 2522.3 [d] [1] [emphasis added]). The language of the provision does not direct, or even create a presumption, that the current owner will be liable for the entire FMRA.

In Polanco v Higgins (175 AD2d 729 [1st Dept 1991]), the Appellate Division determined that a DHCR decision to apportion liability for an FMRA between current and former owners was irrational where the current owner was aware of the FMRA and had submitted an answer in the proceeding. In response to that decision, DHCR issued Policy Statement 93-1 concerning a current owner's liability for excess rent determined by an FMRA (see DHCR Policy Statement 93-1, issued Aug. 20, 1993, reissued July 1995). The Policy Statement lists the three situations in which a current owner will be deemed a party to an FMRA: (1) if the current owner was served with a copy of the FMRA by DHCR and had a chance to submit an answer, (2) if the current owner actually answered, or (3) if the current owner failed to...