Civil Court of the City of New York, Kings County, July 23, 2024

Collins Dobkin Miller for respondents.

Edelman Schwartz, PLLC for petitioner.

Procedural Posture and Background

This is a summary nonpayment proceeding commenced against the unregulated tenants of record, Fernando Gomez and Wesley Haynes (respondents). (NY St Cts Elec Filing [NYSCEF] Doc No. 1, petition.) Petitioner seeks rent arrears accruing at the monthly rental amount of $3,200. (Id. ¶ 6.) Petitioner originally pleaded that the premises are not subject to rent regulation due to substantial rehabilitation of the property after{**84 Misc 3d at 757} January 1, 1974. (Id. ¶ 7.) A stipulation was later so ordered, in which the petition was amended to indicate that the premises were deregulated due to "high rent decontrol." (NYSCEF Doc No. 6, stipulation ¶ 7.)

Respondents filed an answer without the assistance of counsel alleging a general denial, breach of the warranty of habitability, and rent overcharge. (NYSCEF Doc No. 3, answer.) Thereafter, respondents retained counsel who filed an amended answer, without objection from petitioner. (NYSCEF Doc No. 7.) Respondents include in the amended answer that petitioner has not obtained a proper certificate of occupancy, and that respondents have been constructively evicted. Respondents also claim rent overcharge and add a counterclaim for an award of treble damages, as well as for attorney fees. Respondents have moved pursuant to CPLR 408 for leave to conduct discovery on their rent overcharge claim, reaching back in time to 2001. (NYSCEF Doc No. 8, notice of mot [seq 1]; NYSCEF Doc No. 9, respondents' attorney's affirmation in support; NYSCEF Doc No. 10, Gomez aff.)

Petitioner opposes and cross-moves for use and occupancy pursuant to Real Property Actions and Proceedings Law § 745 (2). (NYSCEF Doc No. 17, notice of cross-mot [seq 2].) In opposition to respondents' motion in chief, petitioner states that respondents are barred from seeking discovery beyond the base date because there is no evidence of fraud:

"[E]ven if the DHCR's rent registrations for the subject apartment are properly under [*2]review by this Court, such records do not provide evidence of fraud in this matter. See Grimm v DHCR, supra, 15 NY3d 358, 367, 912 NYS2d 491 (2010). The Court of Appeals in Grimm and Regina has expressly stated landlords are not required to provide documentation back beyond the base date unless the Respondent has produced evidence of a fraudulent scheme to deregulate. A large rent increase on its own is not evidence of fraud." (NYSCEF Doc No. 18, petitioner's attorney's affirmation ¶¶ 25-26.)

In addition to Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal (35 NY3d 332 [2020]), and Matter of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off. of Rent Admin. (15 NY3d 358 [2010]), petitioner cites to Thornton v Baron (5 NY3d 175 [2005]), and argues that in Thornton "the Court of Appeals created the one and only exception to the 4-Year Interrelated Rule, i.e., a common{**84 Misc 3d at 758} law fraud exception where a fraudulent scheme to deregulate an apartment can be established." (Id. ¶ 27.) Petitioner also cites to Conason v Megan Holding, LLC (25 NY3d 1 [2015]), as creating the standard for piercing the base date. Nevertheless, petitioner seeks to have this court narrowly hold the definition of a "colorable claim" to the specific facts of those cases. (Id. ¶¶ 31, 33.) Petitioner further argues that it will be unduly burdensome to provide the documents demanded as the building changed hands several times before it was purchased by petitioner:

"Respondent seeks discovery dating back to 2001, more than 23 years ago yet fails to explain why these would be relevant. Petitioner only became an owner of the subject premises in 2013. According to ACRIS there have been four (4) prior owners since 2001. Thus, it is virtually impossible that Petitioner would be able to obtain any of the records requested. This is especially onerous in relation to Respondent's request for documents received 'by Petitioner from each former owner.' " (Id. ¶ 42.)

In reply, respondents advance that petitioner has ignored long-standing, controlling case law permitting discovery past the lookback period to determine regulatory status. (NYSCEF Doc No. 22, respondents' attorney's reply affirmation ¶ 3.)

The court gleans the following from the DHCR (Division of Housing and Community Renewal) rent history: In 2002, the registered rent was $634.59. The subject premises were registered as vacant in 2003, and no registration was filed in 2004. In 2005, the apartment was registered for the 2004 registration year as vacant with the legal regulated rent amount missing and registered for the 2005 registration year with a rent of $1,003 due to a purported two year vacancy lease that commenced October 1, 2004, and expired September 30, 2006. No registration was filed in 2006 or 2007; in 2008, the premises were registered for the 2007 registration year at $1,425 pursuant to a two year lease with "D. Graves"—a different tenant than the one registered in 2005 for the lease at $1,003—which commenced July 15, 2005, and expired July 14, 2007. The apartment was not registered for the 2008 registration year. In 2009, the premises were registered as vacant with a rent of $0.00. In 2010, the premises were registered as "EXEMPT" due to a high rent vacancy and with "VAC/LEAS—IMPRVT" listed as the reason for the difference. In 2011, the premises were registered as "EXEMPT APARTMENT—REG NOT REQUIRED." In 2012, the apartment was registered as {**84 Misc 3d at 759}rent-stabilized with a rent of $2,400, $100 below the deregulation threshold in effect at the time. Thereafter, no registration statement was ever filed. (NYSCEF Doc No. 13, respondents' exhibit C, DHCR rent history.)

Respondents argue in their motion for discovery that because 2001 was "the last time that [*3]the DHCR registrations are reliable," there is ample need to review the rent history back to 2001. (NYSCEF Doc No. 22, respondents' attorney's reply affirmation ¶ 10.)^[FN1] Respondents' further justification for leave to demand documents from 2001 is that they need to know how the increases from 2001 were calculated to determine the validity of petitioner's claim that the premises were lawfully deregulated in 2010. (Id.)

Notably, neither petitioner nor the respondents address the Chapter Amendments (L 2023, ch 760, as amended by L 2024, ch 95, § 4), despite the fact that the new law was in effect at all times during litigation of the motions before the court. While petitioner cites to Regina, it is only to argue that Regina follows Thornton, Grimm, and Conason. In so doing, petitioner implicitly accepts that the relevant Chapter Amendment has returned us to a standard of pleading fraud explicated in the foregoing controlling authorities, a standard that is notably distinct "in the regulatory context."^[FN2] Regardless, petitioner does not invoke the argument that respondents are required to plead with specificity the elements of a common-law fraud claim, and that they have failed to meet this heightened standard.{**84 Misc 3d at 760}

Applicable Law

On March 1, 2024, after debate on the Senate floor,^[FN3] the Governor signed into law 2024 NY Senate Bill S8011, 2024 NY Assembly [*4]Bill A8506 (the Chapter Amendments), which amended Laws of 2023, chapter 760, § 1, part B, § 2. The following amendment is relevant herein:

"2-a. When a colorable claim that an owner has engaged in a fraudulent scheme to deregulate a unit is properly raised as part of a proceeding before a court of competent jurisdiction or the state division of housing and community renewal, a court of competent jurisdiction or the state division of housing and community renewal shall issue a determination as to whether the owner knowingly engaged in such fraudulent scheme after a consideration of the totality of the circumstances. In making such determination, the court or the division shall consider all of the relevant facts and all applicable statutory and regulatory law and controlling authorities, provided that there need not be a finding that all of the elements of common law fraud, including evidence of a misrepresentation of material fact, falsity, scienter, reliance and injury, were satisfied in order to make a determination that a{**84 Misc 3d at 761} fraudulent scheme to deregulate a unit was committed if the totality of the circumstances nonetheless indicate that such fraudulent scheme to deregulate a unit was committed." (L 2023, ch 760, § 1, part B, § 2, as amended by L 2024, ch 95, § 4 [emphasis added].)

The Chapter Amendments "shall take effect immediately and shall apply to any action or proceeding in any court or any application, complaint or proceeding before an administrative agency on the effective date of this act." (L 2024, ch 95, § 5.) Thus, the amended version is effective as of December 23, 2023, the date the Governor signed the original bill (L 2023, ch 760) into law.^[FN4]

In order to raise a fraudulent overcharge claim, the Chapter Amendments require a tenant to "properly" raise "a colorable claim" of "a fraudulent scheme to deregulate a unit." (See 41-47 Nick LLC v Odumosu, 85 Misc 3d 290, 295 [Civ Ct, NY County 2024].) This terminology—"a colorable claim" of fraud—has persisted in every iteration of the law prior to [*5]the Housing Stability and Tenant Protection Act of 2019 (HSTPA),^[FN5] in Regina,^[FN6] and today.^[FN7] "A colorable claim is a {**84 Misc 3d at 762}plausible legal claim. This means that the claim is 'strong enough' to have a reasonable chance of being valid if the legal basis is generally correct and the facts can be proven in court."^[FN8] That the legislature chose to employ this deep-rooted diction should come as no surprise and requires little interpretation beyond the guidance provided in the controlling authorities of Thornton, Grimm, and Conason, cited favorably by the Regina Court in reaching its conclusion. The "requisite factors" of a properly raised colorable claim of fraudulent deregulation are cogently distilled from Grimm in Matter of Pehrson v Division of Hous. & Community Renewal of the State of N.Y. (34 Misc 3d 1220[A], 2011 NY Slip Op 52487[U], *2 [Sup Ct, NY County 2011]).

In Pehrson, the tenant filed a CPLR article 78 proceeding to challenge DHCR's denial of an overcharge complaint. The Supreme Court found that the facts and circumstances alleged by the tenant "support[ed] the requisite factors set forth in Grimm [and] trigger[ed] DHCR's duty to ascertain whether those allegations of fraud in the record, in turn, warrant[ed] the use of the default formula in calculating any rent overcharge." (Pehrson, 2011 NY Slip Op 52487[U], *2.) The Pehrson court set out three categories of factors set forth in Grimm, which together can demonstrate sufficient indicia of fraud, to wit:

"(1) The tenant alleges circumstances that indicate the landlord's violation of the Rent Stabilization Law (RSL) and Rent Stabilization Code (RSC) in addition to charging an illegal rent. (2) The evidence indicates a fraudulent scheme to remove the rental unit from rent regulation. (3) The rent registration history is inconsistent with the lease history." (Id.)

Applying these factors, the Supreme Court found that "the evidence in the record establishes a colorable claim of the landlord's fraud." (Id. [capitalization and italics omitted].) Accordingly, that proceeding was remanded to DHCR as the obligation to investigate the fraud claim had been triggered.{**84 Misc 3d at 763}

The court finds that the Chapter Amendments are consistent with pre-Regina precedent, and with the second sentence of Regina, footnote 7, which qualifies the first sentence.^[FN9] Accordingly, considering these controlling authorities and the law now in effect, the following principles can be extracted to govern the analysis of a claim of fraudulent overcharge:[*6]

There is no need for the legislature to pass a law stating that a tenant may look at the rent history as far back as necessary to determine the regulatory status of their apartment, as the law is well settled in this regard.^[FN10] However, when a tenant does raise a rent overcharge claim based upon a "properly raised" claim of a fraudulent deregulation, then a court, or DHCR, is bound to investigate whether fraud actually exists.^[FN11] If the court determines that—based on the totality of the circumstances—the landlord did, in fact, engage in a fraudulent scheme to deregulate the unit in contravention of public policy, then the court may turn its attention to calculation of damages.^[FN12] If the landlord does not rebut the presumption that it deliberately and intentionally overcharged the tenant, then the default formula is employed to calculate the overcharge award, if any, and the landlord is subject to treble damages.^[FN13] Moreover, petitioner's argument that Thornton and Grimm must be{**84 Misc 3d at 764} narrowly interpreted is belied by the decision in Conason, which relied on Thornton and Grimm. The Court of Appeals in Conason opined:

"[In Grimm,] DHCR argued that Thornton should be limited to 'the narrow set of circumstances described in that case . . . involving illusory tenancies.' We disagreed, and held that 'where the overcharge complaint alleges fraud . . . DHCR has an obligation to ascertain whether the rent on the base date is a lawful rent,' and that DHCR had not met this obligation because 'there existed substantial indicia of fraud on the record,' yet DHCR 'blindly us[ed] the rent charged on the date four years prior to the filing of the rent [*7]overcharge claim'." (Conason, 25 NY3d at 15 [emphasis added and citations omitted].)

The Chapter Amendments are not as lawless a construct as many may fear. If the post-Regina, pre-Laws of 2024, chapter 95, § 4 jurisprudence teaches us anything, it is that properly raising a colorable claim of fraudulent deregulation is of the utmost importance, not only to discourage baseless claims, but also to form a basis to conduct discovery reaching beyond the base date in order to further investigate a tenant's claim of fraudulent rent overcharge.^[FN14]

Certain concepts are widely accepted and can be applied to claims of fraudulent overcharge to ameliorate the concern that parsing the construct of fraud in the regulatory context—embodied in the Chapter Amendments—will develop in the eyes of judges as a "feeling."^[FN15] For example, "a mere allegation of {**84 Misc 3d at 765}fraud alone, without more, will not be sufficient to require DHCR [or a court] to inquire further." (Grimm, 15 NY3d at 367.) Quantity is no substitute for quality, i.e., a tenant cannot simply list numerous speculative allegations in the hopes that a court or DHCR will conclude that fraud might exist.^[FN16] A cognizable claim must be specifically pleaded to put the landlord on notice of the transactions and occurrences that evince a fraudulent scheme to deregulate. (CPLR 3013, 3014.) A fraudulent scheme to deregulate will not be inferred solely from evidence of "an increase in rent and failure to register the apartment with [DHCR]." (Ampim v 160 E. 48th St. Owner II LLC, 208 AD3d 1085, 1085-1086 [1st Dept 2022], citing Grimm, 15 NY3d at 367 ["Generally, an increase in the rent alone will not be sufficient to establish a 'colorable claim of fraud' "].) The Pehrson factors, set forth supra, provide additional guidance to courts regarding Grimm-like colorable claims of fraudulent deregulation.

Here the respondents' answer states, "As and for a first defense: . . . The apartment is subject to the Rent Stabilization Law. Petitioner has asserted that it is exempt due to 'high rent decontrol.' Upon information and belief, based upon the DHCR rent history, the apartment could not have been subject [*8]to 'high rent decontrol.' " (NYSCEF Doc No. 7, amended answer ¶¶ 9-11 [internal paragraph numbering and capitalization omitted].)

Respondent further claims as a fifth defense and second counterclaim:

"The DHCR rent registration history is incomplete it is not possible to specify the amount of the correct legal regulated rent absent discovery. Upon information and belief the rent charged to Respondents ($3,200.00 per month) is in excess of the legal regulated rent. Under NYC Admin. Code § 26-516 (a) and (b), an owner cannot charge or collect any rent in excess of the Legal Regulated Rent." (Id. ¶¶ {**84 Misc 3d at 766}26-28 [internal paragraph numbering and capitalization omitted].)

Respondents' amended answer is insufficient to properly raise a colorable claim of fraud. Nowhere do respondents even claim "fraud."^[FN17] Respondents have not specifically pleaded a claim that is " 'strong enough' to have a reasonable chance of being valid if the legal basis is generally correct and the facts can be proven in court."^[FN18] Nor is the sparse affidavit submitted by respondents adequate to rehabilitate their answer. (NYSCEF Doc No. 10, Gomez aff.) Under the pre-HSTPA law, an overcharge resulting from improper, but not fraudulent, deregulation is limited by the standard lookback provisions. "[T]here is no indication that, under the pre-HSTPA law, an overcharge resulting from improper (but non-fraudulent) luxury deregulation warranted anything but the application of the standard lookback provisions." (Regina, 35 NY3d at 360.) Regardless, it remains petitioner's burden to prove at trial that the deregulation of respondents' apartment was proper. (Ampim, 208 AD3d at 1086 ["To be sure, it will be defendant's burden at trial to show that the apartment was properly deregulated" (citation omitted)].) This alone could result in a significant benefit to respondents, specifically a declaration that respondents are entitled to the protections of the Rent Stabilization Law. Towards this end, the court finds that leave to conduct discovery is warranted from 2006 forward; not for the purposes of calculating an overcharge but only for the purpose of respondents' challenge to the regulatory status of the apartment.

Whatever the authority of the legislature to "return" us to the universe of Thornton, Grimm, and Conason, or to interpret those seminal decisions, it is the province of this court to interpret the new law. Consequently, the court has referred to pre-HSTPA law, the Regina decision, and the plain language of Laws of 2024, chapter 95, § 4. The court finds that these laws and controlling authorities can be reconciled and read together to reach the result herein.{**84 Misc 3d at 767}

Petitioner's Motion for Use and Occupancy

In opposition to petitioner's motion for use and occupancy, respondents correctly argue that a judge shall not award prospective use and occupancy if certain enumerated defenses have been raised. RPAPL 745 (2) provides that the court cannot order deposit or payment of use and occupancy where the respondent can establish to the court's satisfaction that it has properly [*9]interposed certain defenses. Here, respondents have interposed defenses which preclude a prospective award of use and occupancy, to wit, failure to procure a valid certificate of occupancy, and constructive eviction. (RPAPL 745 [2] [a] [ii] [C]; [vi].)

Accordingly, it is ordered that respondents' motion to conduct discovery via document demands is granted only to the extent that petitioner must respond to respondents' documents demands with available documentation from 2006 forward, within 45 days of this amended decision and order; and it is further ordered that petitioner shall provide a Jackson affidavit upon completion of document production by filing same on NYSCEF;^[FN19] and it is further ordered that petitioner's cross-motion for prospective use and occupancy is denied; and it is further ordered that the proceeding may be restored upon completion of document production by notice of motion for respondents to show ample need to depose an agent of petitioner, or for appropriate motion practice pursuant to article 31 of the CPLR, or for trial.

"We now follow in the footsteps of the Legislature, which passed the Rent Regulation Reform Act of 1997 and clarified the law on overcharges. These amendments make clear that [Burrows v 75-25 153rd St., LLC (215 AD3d 105 [1st Dept 2023])] is no longer good law, and are returned to the Thorton [sic], Grimm, Connison [sic] line of cases." (Assembly Member Rosenthal, NY Assembly Debate on Senate Bill S08011, Assembly Bill A08506, Feb. 13, 2024, tr at 33, available at https://www2.assembly.state.ny.us/write/upload/transcripts/2023/2-13-24.pdf#search="8011 [last accessed July 3, 2024]; see also Assembly Mem in Support of 2023 NY Assembly Bill A06216B [same-as bill to 2023 NY Senate Bill S2980C, enacted as L 2023, ch 760], available at https://nyassembly.gov/leg/?default_fld=%0D%0A&leg_video=&bn=A06216A&term=&Actions=Y&Memo=Y [last accessed July 3, 2024] ["This amendment will help clarify and codify the standard for applying a fraud exception to the four-year rule that was in place before HSTPA was enacted, in light of Burrows v. 75-25 153rd Street"].)

The Burrows court held that a tenant cannot demonstrate justifiable reliance at the pleading stage as a matter of law because the DHCR printout is publicly available. (Burrows, 215 AD3d at 109.)

Footnote 4: Indeed, in the first appellate decision since the Chapter Amendments took effect, the Appellate Term, First Department in St Nicholas 24 LLC v Chavez-Lujan (83 Misc 3d 128[A], 2024 NY Slip Op 50755[U] [App Term, 1st Dept 2024]) upheld the trial court which applied the default formula and assessed treble damages against the landlord for fraudulent overcharge without reference to common-law fraud.