Waivers Clear Way for Approval of Rent Overcharge Class Action Lawsuits

Waivers Clear Way for Approval of Rent Overcharge Class Action Lawsuits
Brendan Pierson
New York Law Journal
April 26, 2013

Rent overcharge actions can be certified as class actions as long as tenants waive their right to collect treble damages and individual tenants are allowed to opt out, the Appellate Division, First Department, ruled in three decisions handed down yesterday.

One of those decisions, Downing v. First Lenox Terrace, 100725/10, overturned an October 2011 decision by Manhattan Supreme Court Justice Charles Ramos, who held that rent overcharge actions cannot be adjudicated as class actions. That case was argued before the First Department a year ago, on April 26, 2012. The opinion was signed by Justice Richard Andrias, joined by Justices Peter Tom , Dianne Renwick and Sheila Abdus-Salaam . Justice Leland DeGrasse dissented in part.

The other two cases, Gudz v. Jemrock Realty, 603555/09, and Borden v. 400 East 55th Street Associates, 650361/09, were argued more recently, on Jan. 16 and Jan. 24 of this year, respectively. Both decisions, which were unsigned, upheld trial court decisions certifying classes of tenants seeking rent overcharges.

The panel in Gudz was split 3-2, with Justices Tom, John Sweeny and Judith Gische in the majority and Justices Karla Moskowitz and Sallie Manzanet-Daniels dissenting. The panel in Borden, which consisted of Justices Andrias, Renwick, Helen Freedman and Paul Feinman, was unanimous.

All three putative class actions emerged from the aftermath of the Court of Appeals' 2009 ruling in Roberts v. Tishman Speyer, 13 NY3d 270, that apartments in buildings receiving tax abatements through New York's J-51 program must remain rent-stabilized as long as the tax abatement is in effect, even if they could otherwise be deregulated.

The ruling meant that thousands of tenants throughout the city, whose apartments had been illegally deregulated while their buildings continued to receive J-51 benefits, suddenly had rent overcharge claims against their landlords. Because their claims were so numerous, tenants in large J-51 buildings filed rent overcharge lawsuits, which were traditionally brought on an individual basis, as class actions.

Several of these lawsuits have already survived motions to dismiss and won class certification. The Roberts case itself, a class action, recently settled for $69 million (NYLJ, April 11).

Ramos' 2011 decision dismissing a putative class action against Harlem housing complex Lenox Terrace threatened to throw a wrench into all of those suits.

Ramos ruled that the suit must be dismissed under CPLR 901(b), which says that when a law imposes a penalty, such as treble damages, it cannot be adjudicated as a class action unless the law specifically says it can. The Rent Stabilization Law imposes a penalty of treble damages on a landlord found to have overcharged rent, unless the landlord establishes by a preponderance of the evidence that the overcharge was not willful. The law does not specifically provide for class actions. The plaintiffs said that they would waive their right to collect treble damages in order to go forward as a class, but Ramos said they could not.

In addition to ruling that the suit could not go forward as a class action, Ramos dismissed all the tenants' individual claims, ruling that they should be brought before the Division of Housing and Community Renewal first.

The First Department rejected both of those arguments.

Waiver of Treble Damages

The Rent Stabilization Law, Andrias wrote, is analogous to Labor Law 198(1-a), which awards liquidated damages to workers claiming underpayment of wages unless their employers can show they were acting in good faith. Plaintiffs have been allowed to waive their liquidated damages claims in Labor Law 198(1-a) cases as long as individual class members are allowed to opt out, he wrote, citing the First Department's 1998 decision in Pesantez v. Boyle Envtl. Servs., 251 AD2d 11.

Andrias added that "plaintiff's waiver of treble damages will not subvert a protection afforded by the rent stabilization scheme."

Andrias also said that courts and the DHCR have concurrent jurisdiction under the Rent Stabilization law, and the tenants are therefore not required to bring their claims before the DHCR.

DeGrasse, in his partial dissent, agreed that the case should not have been dismissed, but said that neither Ramos nor the First Department should have yet considered whether the case could go forward as a class action because the plaintiffs have not yet moved for class certification.

Unlike Downing, both of the unsigned opinions dealt with cases in which classes had already been certified. Manhattan Supreme Court Justice Eileen Rakower certified a class in Gudz in October 2011, and then-Manhattan Supreme Court Justice Gische certified the class in Borden in April 2012. As in Downing, the plaintiffs in both those cases waived their right to collect treble damages. The panels upheld class certification using essentially the same reasoning as the panel in Downing.

Manzanet-Daniels wrote the dissent in Gudz, joined by Moskowitz. She said that the named plaintiff in the case could not simply waive the penalty treble damages, and the case therefore could not proceed as a class action.

"Whether unilaterally or via agreement, the fact remains that plaintiff has agreed to give up the benefit of a statutory protection, i.e., the treble damages afforded by [the Rent Stabilization Law], on behalf of not only herself but the class­a far more profound impact than one individual purporting to agree to give up her rights via lease," she wrote.

"I am similarly unpersuaded by the majority's reasoning that there is no statutory violation because an individual class member may opt out of the class to pursue his or her treble damages claim," she wrote. "By allowing a class action to proceed seeking only actual damages, we permit the class to effectively rewrite [the Rent Stabilization Law] and undermine the Legislature's purpose in enacting the statute."

Even though other class members can theoretically opt out, Manzanet-Daniels wrote, "no rational class member would presume that a class representative would have the right to waive these claims, and, more importantly, that he or she would be bound by any such waiver and unable to pursue a treble damages claim if he or she, like most absent class members, neglected to opt out."

Attorneys on both sides of the cases agreed that it was important for all pending J-51 rent overcharge suits.

"It's a tremendous victory for the tenants at Lenox Terrace and for all tenants whose apartments were unlawfully deregulated while their apartments were receiving J-51 tax abatements," said David Hershey-Webb, a partner at McConnell, Gribben, Donoghue & Joseph, who represents the Lenox Terrace tenants. "It should permit tenants to move forward in adjusting rents to the proper levels and obtaining refunds of rent overcharges."

"We're pleased with the decision," Matthew Brinckerhoff, a partner at Emery Celli Brinckerhoff & Abady, who also served as counsel to the Lenox Terrace tenants on class action issues. "The decision's important because it confirms that all of the people who've been overcharged and have been injured financially, and there are thousands of them throughout the city, are going to be compensated financially. Without it, there would be hundreds if not thousands of tenants who would never be compensated."

"We're really pleased the court affirmed the class certification," said Christian Siebott, a partner at Bernstein Liebhard, who represented the tenants in both the Borden and Gudz cases. "We're looking forward to continuing with the litigation."

"We completely disagree with the court's logic" in all three decisions, said Michael B. Kramer, an attorney for Lenox Terrace.

Kramer was co-counsel to Lenox Terrace with David Rose of Pryor Cashman, who could not be reached for comment.

Jeffrey Turkel, a partner at Rosenberg & Estis, who represented the landlord in Borden, said he believed the decisions set a bad precedent in landlord-tenant law.

"There are certain articles of faith in this business," Turkel said. "One of the articles of faith is that parties can't waive parts of the Rent Stabilization Law that they don't like."

"What the Appellate Division said, in my case and in the other cases, is that tenants can in fact waive their right to treble damages," he continued. "What I find regrettable about the decision is that the Rent Stabilization Law has gone from being a statute, which governs the rights of tenants in New York whether they like it or not, to being a menu…where tenants can pick and choose what portions of that scheme they choose to be bound by."

Magda Cruz, a partner at Belkin Burden Wenig & Goldman, who represents the landlord in Gudz, similarly said that the decisions undermined the Rent Stabilization Law.

"There are rights that tenants have that the rent-stabilization law says clearly cannot be waived, and the majority says they can be waived," Cruz said. "We feel that there are very important issues that warrant further examination by the Court of Appeals."

Furthermore, Cruz said, rent overcharges are "just not susceptible to class adjudication" as a practical matter because the legal rent for a given apartment is specific to that apartment's rental history.

The attorneys for all three landlords said their clients had not yet decided whether to seek leave to appeal.