Opinion
492 Index No. 160494/17 Case No. 2022–04910
06-20-2023
Michele E. HESS et al., Plaintiffs–Respondents, v. EDR ASSETS LLC et al., Defendants–Appellants.
Katsky Korins LLP, New York (Adrienne B. Koch of counsel), for appellants. Newman Ferrara LLP, New York (Roger A. Sachar of counsel), for respondents.
Katsky Korins LLP, New York (Adrienne B. Koch of counsel), for appellants.
Newman Ferrara LLP, New York (Roger A. Sachar of counsel), for respondents.
Webber, J.P., Oing, Gesmer, Gonza´lez, Pitt–Burke, JJ.
Order, Supreme Court, New York County (Frank P. Nervo, J), entered October 7, 2022, which, to the extent appealed from as limited by the briefs, granted plaintiffs' motion for summary judgment to the extent of directing application of the default formula for calculating the legal regulated rent of the apartments at issue under Rent Stabilization Code (RSC) § 2522.6(b), unanimously reversed, on the law, without costs, and the motion denied.
While plaintiffs presented documentary evidence that defendants delayed in re-registering apartments after Roberts v. Tishman Speyer Props., L.P. , 13 N.Y.3d 270, 890 N.Y.S.2d 388, 918 N.E.2d 900 (2009) was decided and applied retroactively, which we noted "may" support a finding of fraud ( Hess v. EDR Assets LLC, 200 A.D.3d 491, 492, 155 N.Y.S.3d 89 [1st Dept. 2021] ), they did not eliminate issues of fact as to whether defendants acted with the requisite scienter to support a finding of a fraudulent scheme and thus application of the default formula (see Casey v. Whitehouse Estates, Inc., 39 N.Y.3d 1104, 1106, 186 N.Y.S.3d 599, 207 N.E.3d 565 [2023] ; Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal, 35 N.Y.3d 332, 356, 130 N.Y.S.3d 759, 154 N.E.3d 972 [2020] ). Since deregulation of apartments often involves misinterpretations of the law, rather than willfulness which is a requirement of fraud, "the fraud exception to the lookback rule is generally inapplicable to Roberts overcharge claims" ( id. at 356, 130 N.Y.S.3d 759, 154 N.E.3d 972 ; see also Goldfeder v. Cenpark Realty LLC, 187 A.D.3d 572, 573, 135 N.Y.S.3d 13 [2020] ). A misinterpretation of the law on its own cannot form the basis of a fraudulent scheme to deregulate one or more apartments ( Casey, 39 N.Y.3d at 1106, 186 N.Y.S.3d 599, 207 N.E.3d 565 ). Further, an increase in rent in combination with a failure to register apartments, without more, is not sufficient indicia of a fraudulent scheme ( Tribbs v. 326–338 E 100th LLC, 215 A.D.3d 480, 188 N.Y.S.3d 18 [1st Dept. 2023] ). Rather, fraud requires "evidence of a representation of material fact, falsity, scienter, reliance and injury" ( Regina, 35 N.Y.3d at 356 n. 7, 130 N.Y.S.3d 759, 154 N.E.3d 972 ). However, "willful ignorance" of relevant law may support a finding of scienter necessary to establish a fraudulent scheme to deregulate ( Montera v. KMR Amsterdam LLC, 193 A.D.3d 102, 109, 142 N.Y.S.3d 24 [1st Dept. 2021] ).
Here, there is an issue of fact as to whether the scienter requirement for fraud is met. The evidence shows that defendants did not re-register all units in the building as rent stabilized for years after Roberts , 13 N.Y.3d 270, 890 N.Y.S.2d 388, 918 N.E.2d 900 and ( Gersten v. 56 7 th Ave. LLC , 88 A.D.3d 189, 928 N.Y.S.2d 515 [1st Dept. 2011] [determining that Roberts applies retroactively], appeal withdrawn 18 N.Y.3d 954, 944 N.Y.S.2d 482, 967 N.E.2d 707 [2012] ) were decided, and from 2013 to 2017, defendants entered into leases and renewal leases that purported to waive any protections of rent regulations. They did not change their behavior until September 2017, after three notices from DHCR. This evidence could support a finding of fraud. Conversely, the evidence submitted by defendants in opposition to plaintiffs' motion could support a finding that they had a reasonable good-faith belief that all apartments in the building did not have to be re-registered, since they had received only prorated J–51 benefits based upon the number of rent-regulated apartments at the time of their application and due to the confusingly drafted 2016 DHCR notice. Thus, summary judgment ordering application of the default formula based upon a fraudulent scheme to deregulate (RSC 2522.6[b][2][iii]) was not warranted, and it appears that the issue of scienter will have to be decided at trial.
We have considered plaintiffs' remaining arguments and find them unavailing.