| 525-527 W 135 LLC v Morales |
| 2023 NY Slip Op 23212 [80 Misc 3d 922] |
| July 18, 2023 |
| Bacdayan, J. |
| Civil Court of the City of New York, New York County |
| Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. |
| As corrected through Wednesday, November 22, 2023 |
| 525-527 W 135 LLC, Petitioner, v Ana Morales, Respondent. |
Civil Court of the City of New York, New York County, July 18, 2023
Northern Manhattan Improvement Corporation (Madeline R. Passaro of counsel) for respondent.
Novick Edelstein Pomerantz, P.C. (Micheli I. Perez of counsel) for petitioner.
This is a nonpayment proceeding commenced against Ana Morales (respondent), the rent-stabilized tenant of record. Respondent has resided in the premises since September 2008 when she took occupancy pursuant to a vacancy lease which indicated a preferential rent of $1,463, and a higher legal regulated rent (LRR) of $1,582.62. (NY St Cts Elec Filing [NYSCEF] Doc No. 11, Morales aff ¶¶ 2-3.) Respondent filed an answer in response to the petition alleging improper service of the notice of petition and petition, that part of the rent claimed had been paid, conditions in the apartment in need of repair, and a general denial. (NYSCEF Doc No. 4, self-represented answer.)
Upon retaining counsel, respondent moved to amend her answer to include additional defenses including laches, defective predicate notices and pleadings, a more detailed breach of the "warranty of habitability" affirmative claim, and a fraudulent rent overcharge defense and counterclaim. (NYSCEF Doc No. 9, notice of mot [seq 1]; NYSCEF Doc No. 12, proposed amended answer.) With regard to respondent's fraudulent overcharge claim, respondent proposes to plead that petitioner knowingly made material misrepresentations about the lawful rent upon which respondent relied to her injury; that petitioner registered a significant rent increase of 60% between vacatur of the former tenant and her tenancy; that the former tenancy and respondent's tenancy overlapped; that the apartment did not look as though the landlord had made any improvements to the premises prior to her taking occupancy; that the landlord charged the former tenant and respondent preferential rents; and that there are discrepancies on the face of the Division of Housing and Community Renewal (DHCR) rent registration history, including three years of no registrations prior to respondent's tenancy. (NYSCEF Doc No. 12, proposed amended answer ¶¶ 17-20.) In support of her argument, respondent attaches{**80 Misc 3d at 924} a copy of the DHCR registration which documents that petitioner assessed a 60% increase in rent between [*2]the tenancy of the immediately preceding tenant and that of respondent, which respondent surmises could only be "justifiable . . . if the landlord completed an Individual Apartment Improvement ('IAI')."[FN1] (NYSCEF Doc No. 11, Morales aff ¶ 6; NYSCEF Doc No. 10, respondent's atty affirmation ¶ 38.)
This motion was fully briefed. At oral argument, the court sought supplemental briefing regarding a recently issued Appellate Division, First Department case, Burrows v 75-25 153rd St., LLC (215 AD3d 105 [1st Dept 2023]), which had not been cited by either party. It is undisputed that, as in Burrows, the law in effect prior to the passage of the Housing Stability and Tenant Protection Act (HSTPA) applies to the facts of this proceeding, as some of the alleged overcharges occurred prior to the commencement of the HSTPA.[FN2] The parties submitted their supplemental affirmations, and oral argument was held on July 11, 2023.
Burrows v 75-25 153rd St., LLC (215 AD3d 105 [1st Dept 2023])
In Burrows, all of the subject building's owners had benefitted from Real Property Tax Law § 421-a, which provides certain tax abatements for new construction in exchange for certain consideration. Important here is that the apartments in a building subject to RPTL 421-a must be subject to rent stabilization so long as the owner is receiving benefits under the program. Under Rent Stabilization Code (RSC) (9 NYCRR) § 2521.1 (g), the initial LRR of an apartment in a building receiving section 421-a tax benefits is required to "be the initial adjusted monthly rent charged and paid." (Burrows at 111.) Each of the tenants received leases which stated that their rent was a preferential rent, which was what they{**80 Misc 3d at 925} had been paying, and informed them of a higher LRR.[FN3], [FN4] Each lease had a rider attached to it, signed [*3]by the parties, which acknowledged that the LRR was the higher amount registered with DHCR, and that the tenant would be charged a lower preferential rent, plus allowable increases, for the duration of their tenancy. The tenants argued that according to RSC, the rent registered as the LRR should have been the lower preferential rent charged and paid. (RSC § 2521.2 [b].) The landlord did not dispute this point. However, because the landlord calculated increases based on an illegally inflated rent, the tenants argued that each subsequent increase that was charged and paid was an unlawful, and fraudulent, overcharge. As such, the tenants posited that the landlord could not be insulated by the four-year statute of limitations and four-year look-back period. (CPLR 213-a, as amended by L 2019, ch 36, § 1, part F, § 6.)
The Burrows tenants relied on the "fraud exception" to the four-year look-back rule as clarified in Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal (35 NY3d 332, 355 [2020] ["(U)nder the prior law, review of rental history outside the four-year lookback period was permitted only in the limited category of cases where the tenant produced evidence of a fraudulent scheme to deregulate . . . ."]). The Regina Court explicated that fraud in the context{**80 Misc 3d at 926} of overcharge claims is none other than common-law fraud and, accordingly, "[f]raud consists of evidence [of] a representation of material fact, falsity, scienter, reliance and injury." (Id. at 355 n 7 [internal quotation marks and citations omitted].) The Burrows Court stressed the heightened pleading standard for all elements of common-law fraud as elucidated in Regina, a standard which is now universally accepted by the appellate courts in both the First and Second Departments. Specifically, in Burrows, the Court focused on the need to demonstrate, at the pleading stage, a tenant's justifiable reliance on a landlord's misrepresentation, and injury as a result.
In Burrows, the landlord disputed that the overcharge was fraudulent. The Court agreed:
"Plaintiffs' reliance on the fraud exception is unavailing because the record, and plaintiffs' own admissions in their complaint, establish that there was no such fraudulent scheme in this case. As previously noted, DHCR's rental histories of the subject apartments . . . document that the registrations in question identified both a higher legal regulated rent and a lower preferential rent that the tenant actually paid. It is undisputed that this rental history has been available for public inspection at all relevant times. Thus, the inflation of the legal regulated rents was evident from the face of the registration statements on which plaintiffs' claims are based." (Burrows, 215 AD3d 105, 112.)
In addition to the publicly available DHCR registration history, the Court noted that each of the tenants' leases "directly and expressly notified them" of both the higher LRR, and their lower preferential rent. (Id. at 112.) A rider attached to each lease, and signed by each tenant, informed them of what the LRR would be, but that the landlord would accept a reduced amount " 'representing a preferential rent.' " (Id. at 113.) However, the Court emphasized, without reference to the aforementioned leases and riders which are not publicly available, that "as a matter of law, neither [the complaining tenants] nor any of their predecessors could have reasonably relied on the inflated legal regulated rent figures that appeared on the face of the registration statements." (Id. [internal quotation marks and citation omitted].) Again, without reference to the leases and riders, the Court held that "the undisputed disclosure in the publicly [*4]available rental histories of the discrepant figures for legal regulated rent and preferential rent negates any inference of fraud as a matter of law." (Id.)
{**80 Misc 3d at 927}Burrows leaves almost no room for consideration of differing levels of sophistication between seasoned property owners,[FN5] and tenants who initially rent apartments without advice of counsel. Indeed, in Burrows, as is the case here and at almost any lease signing, the tenants had no benefit of counsel when they signed their original leases. In Burrows, as here, additional specialized knowledge would have been required to understand that the lease or rent registration history misrepresented a material fact. Nevertheless, Burrows stands squarely for the proposition that where the DHCR records are publicly available, a tenant cannot claim justifiable reliance upon the landlord's knowing misrepresentation when advancing the "fraud exception."
In 310 E. 74 LLC v Mirea (2023 NY Slip Op 32226[U] [Sup Ct, NY County, June 29, 2023]), the only published decision thus far to substantively discuss Burrows and to rely on it for its decision, the tenants claimed that the landlord improperly assessed a vacancy increase when they succeeded to the apartment, and that the landlord unlawfully revoked their preferential rent. The court found that the landlord "accurately reflected the rent increases in both the leases it provided to defendants and in the DHCR rent registrations, which shows that preferential rent was revoked in 2008 . . . Accordingly, this Court finds that defendants did not establish the reasonable reliance element of a fraud claim." (Id. at *2.) The court also found that the respondents could not rely on a purportedly unlawful rent increase in 2001, because the increase was "also accurately documented in the rental history filed with DHCR." (Id. at *3.) Explaining further, the court held, "[t]hat means that defendants cannot now claim, twenty years later, that their initial rent was improper and part of a fraudulent scheme because publicly filed information put defendants on notice about their potential claims long ago." (Id.)
Application of Burrows to the Facts of This Proceeding
Respondent's argument that the instant case is distinguishable from Burrows is unavailing. Respondent suggests that here, as opposed to the facts in Burrows, petitioner engaged in{**80 Misc 3d at 928} additional surreptitious conduct not plain on the face of the DHCR registrations, i.e., an unexplained, fraudulent, and significant increase in rent which can only be supported by proof of an Individual Apartment Improvement increase. Respondent asserts that "the proposition Burrows actually stands for . . . is that a tenant cannot establish reliance only when every aspect of the landlord's alleged fraud is apparent on the face of the rent history, without resort to any extrinsic evidence." (NYSCEF Doc No. 26, respondent's atty supp mem of law at 2 [emphasis added].) Thus, respondent argues that she must be granted leave to amend her answer to assert a fraudulent overcharge claim, and is entitled to discovery reaching [*5]back to 2005 based on ample need related to a cognizable cause of action.[FN6], [FN7]
Even under pre-HSTPA and pre-Regina law, a significant increase in rent alone was not sufficient to pierce the statute of limitations. However, a significant, unexplained increase in rent, coupled with additional suspicious irregularities in the rent registration and lease history, could potentially indicate fraud. Prior to Regina and Burrows, respondent's claim of fraudulent overcharge may have passed muster. However, here there is a significant increase in rent explained and documented on the DHCR registration history as due to a "vacancy."[FN8] (NYSCEF Doc No. 15, respondent's exhibit D, DHCR rent registration history.) As in Burrows, respondent's initial vacancy lease documented a preferential rent and a higher LRR. As in Burrows{**80 Misc 3d at 929}, this increase, as well as the preferential rent and higher LRR, is also documented on the face of the DHCR registration history, as were the other irregularities to which respondent cites, e.g., missing registrations for three years prior to the prior tenant's occupancy.[FN9] Indeed, every irregularity to which respondent cites was at all times "publicly filed information [which] put [respondent] on notice about [her] potential claims long ago." (Mirea at *3; Burrows at 113.)[FN10]
The one remaining factor which potentially distinguishes this instant case from Burrows and Mirea is that respondent "[does] not recall having a rider to [her] lease explaining [her] rent amount." (NYSCEF Doc No. 11, Morales aff ¶ 3.) In any case, the strong emphasis in both Burrows and Mirea on the publicly available registration histories which would have alerted the tenants to their claims, considered together with petitioner's expectation of repose,[FN11] constrains this court to find that respondent has not satisfied the justifiable reliance element of a claim sounding in common-law fraud.[FN12]
Respondent's reliance on case law is also unavailing. Citing to Sherman v Eisenberg (267 AD2d 29 [1st Dept 1999]), respondent urges that Burrows should be interpreted narrowly and limited to its facts, and further cautions against an "expansive" interpretation of the holding. (NYSCEF Doc No. 26, respondent's atty supp mem of law at 7.) The facts of that case, however, are readily distinguishable. In Eisenberg, the plaintiff sued, within the applicable statute of limitations, to rescind a settlement agreement which had been fraudulently procured by the defendants. The plaintiff knew that documentary proof of her claims existed, but could not locate the papers and therefore could not prove her claim; thus, her attorney recommended that she settle the case. After the case settled, the documents were discovered. Ultimately, the settlement was set{**80 Misc 3d at 930} aside on the basis that both the defendants and their attorneys knowingly misrepresented that they were unaware of the existence of the relevant documents. Eisenberg is not apropos.
Next, respondent argues that an overly broad reading of Burrows would effectively nullify the holding in Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin. (15 NY3d 358 [2010]). Under Grimm, the Court of Appeals held that indicia of fraud must be shown to consider the rent history of an apartment more than four years prior to the interposition of an overcharge claim. Respondent correctly notes that in Housing Court, such a showing is required in order to obtain leave for discovery. Respondent explains:
"[T]he only evidence tenants have available at the initial stages of any case must be publicly available—such as the DHCR rent history and public records. Thus . . . Burrows [creates a] catch-22 for tenants—in order to seek discovery, they must gather whatever evidence is publicly available, yet by gathering publicly-available evidence, they would be barred from asserting fraud for [justifiable] reliance. This interpretation would effectively render Grimm's holding a dead letter, as no tenant would ever be able to show evidence of fraud without defeating the 'reliance' element of the common-law fraud test." (NYSCEF Doc No. 26, respondent's atty supp mem of law at 8.)
Burrows most certainly raises the bar on demonstrating justifiable reliance in order to pierce the four-year rule, and essentially requires a tenant to review publicly available records within four years of signing a lease. It is not irrational to conclude that this holding could result in an insurmountable challenge for renters who do not know that they are able to seek records from DHCR. Moreover, even if a lessee reviews the records within the four-year statute of limitations, the average tenant is likely not to understand the intricacies of the Rent Stabilization Law well enough to review the DHCR printout in an informed light. Nevertheless, the ruling is clear, and consistent with Regina and its other progeny. Burrows further expounds upon the Regina Court's embrace of the definition of fraud in the context of overcharge claims and finds that the essential element of justifiable and reasonable reliance on a landlord's misrepresentation cannot be shown if the errors, inconsistencies, and/or illegalities would be apparent on the face of a publicly available document.{**80 Misc 3d at 931}
Accordingly, it is ordered that respondent's motion to amend her answer to include the defense and counterclaim of overcharge, fraudulent or otherwise, is denied; and it is further ordered that upon consideration of petitioner's other arguments in opposition to respondent's motion to amend the answer, the court finds them unavailing and that the proposed amendments except as set forth above are not devoid of merit, and respondent's motion to amend her answer, other than claims sounding in overcharge, is granted in this court's discretion; and it is further ordered that respondent shall serve petitioner with an amended answer which comports with this decision and order within 10 business days.
"[i]n particular, plaintiffs did not establish that defendants made any misrepresentation of material fact in connection with the rent increases for these units. That the increases were not justified by any major capital improvements (MCI) or individual apartment improvements (IAI) does not establish fraud, as there is no evidence that defendants ever made a statement justifying the increases based on any MCI or IAI." (Id. at 587 [citations omitted].)Footnote 9:Notably, respondent does not point to any other unlawful increases to her rent after she took occupancy; nor does she point to any inconsistencies between her leases and the DHCR registration history.