Lorraine Borden, et al., Respondents,v.400 East 55th Street Associates, L.P., Appellant.BriefN.Y.October 14, 2014To be Argued by: JEFFREY TURKEL (Time Requested: 30 Minutes) APL-2013-00312 New York County Clerk’s Index No. 650361/09 Court of Appeals of the State of New York LORRAINE BORDEN, on behalf of herself and all others similarly situated, Plaintiff-Respondent, – against – 400 EAST 55TH STREET ASSOCIATES, L.P., Defendant-Appellant. BRIEF FOR DEFENDANT-APPELLANT 400 EAST 55TH STREET ASSOCIATES, L.P. JEFFREY TURKEL DANI SCHWARTZ Of Counsel ROSENBERG & ESTIS, P.C. Attorneys for Defendant-Appellant 733 Third Avenue New York, New York 10017 Tel.: (212) 867-6000 Fax: (212) 551-8484 Date Completed: January 17, 2014 RULE 500.1(d) STATEMENT 400 East 55th Street Associates, L.P. has no parents, subsidiaries, or affiliates. TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... ! STATEMENT OF JURISDICTION ......................................................................... 6 STATEMENT OF QUESTIONS PRESENTED ...................................................... 7 STATEMENT OF FACTS ........................................................................................ 9 A. The Parties ............................................................................................ 9 B. The Apartment and its Rental History .................................................. 9 C. Respondent Commences this Action and Files an Unverified Complaint. ........................................................................................... 10 D. Owner's Answer and Counterclaims .................................................. 11 E. Respondent's First Motion for Class Certification ............................. 11 F. Supreme Court Denies the First Certification Motion ....................... 13 G. Respondent's Motion to Renew the First Certification Motion ......... 14 H. Respondent's Deposition and the Question of Respondent's Adequacy as the Class Representative ............................................... 15 I. Owner Opposes the Renewal Motion ................................................. 18 J. Supreme Court Grants the Renewal Motion and Certifies the Class .................................................................................................... 18 DECISION OF THE COURT BELOW .................................................................. 19 POINT I RESPONDENT CANNOT EVADE CPLR 90l(b) BY PURPORTING TOW AIVE TREBLE DAMAGES UNDER RSL § 26-516(a) ................................................................................. 21 A. Existing Case Law Concerning Waiver of Statutory Damages Under CPLR 90l(b) ............................................................................ 21 B. CPLR 90l(b) and RSL § 26-516(a) .................................................... 23 - 1- C. The First Department's Criteria for Determining Whether a Particular Statute Allows Penalties to be Waived in Order to Evade CPLR 901 (b) are Simplistic and Ignore Legislative Intent ................................................................................................... 25 1. The Appropriate Criteria .......................................................... 26 a. Does the Statute Give the Plaintiff the Option of Waiving Statutory Penalties? ......................................... 26 b. Does the Statute Give the Court Discretion to Award a Penalty? ........................................................... 27 c. Does the Statute Impose the Burden on the Plaintiff to Establish that a Penalty is Warranted? ........ 29 d. Does the Statute Impose the Burden of Proof on the Defendant to Establish that the Penalty Should not be Imposed? ............................................................. 30 2. The First Department's Faulty Analysis .................................. 31 POINT II A TENANT'S ATTEMPT TO WAIVE A BENEFIT GRANTED UNDER THE RSL FOR ANY PURPOSE, INCLUDING EVASION OF CPLR 901(b), IS VOID AS AGAINST PUBLIC POLICY AND BARRED BY RSC § 2520.13 ............................................................................................ 34 A. The First Department's Ruling is Contrary to Public Policy ............. 34 B. The First Department's Ruling Violates RSC § 2520.13 ................... 40 1. The Limits ofRSC § 2520.13 .................................................. 40 2. The Courts have Broadly Interpreted RSC § 2520.13 to Protect the Integrity of the Rent Regulatory Scheme .......... 41 POINT III EVEN IF RESPONDENT IS ALLOWED TO WAIVE A BENEFIT GRANTED BY THE RSL, CLASS CERTIFICATION SHOULD HAVE BEEN DENIED BECAUSE RESPONDENT IS NOT AN ADEQUATE OR TYPICAL REPRESENTATIVE OF THE CLASS ........................... 48 -11- A. Respondent's Unauthorized Pre-Certification Waiver of Two-Thirds of All Class Members' Potential Recovery Renders Respondent an Inadequate Representative of the Class ....... 48 B. Respondent's Need to Defend Owner's Counterclaim for Substantial Arrears Renders her Atypical and an Inadequate Representative of the Class ................................................................. 52 POINT IV ALLOWING A PLAINTIFF TO WAIVE STATUTORY PENALTY DAMAGES TO EVADE CPLR 901(b), UNDER ANY CIRCUMSTANCE OR STATUTE, VIOLATES CPLR 901 (b) AND ITS LEGISLATIVE INTENT ....................................... 54 POINT V RESPONDENT CANNOT MEET THE REQUIRED COMMONALITY AND SUPERIORITY ELEMENTS ................... 58 CONCLUSION ....................................................................................................... 64 - 111- TABLE OF AUTHORITIES Page(s) Cases 390 West End Assoc. v Barel, 298 AD2d 11 (1st Dept 2002) ............................................................................ 36 430 Realty Corp. v New York State Div. of Housing and Community Renewal, 196 AD2d 725 (1st Dept 1993) .......................................................................... 45 47-40 41st Realty Corp. v New York State Div. of Housing and Renewal, 225 AD2d 547 (2d Dept 1996) ........................................................................... 45 508 Realty Assoc. v New York State Div. of Housing and Community Renewal, 61 AD3d 753 (2d Dept 2009) ............................................................................. 27 72A Realty Assoc. v Lucas, 101 AD3d 401 (1st Dept 2012) .......................................................................... 55 85 Eastern Parkway Corp. v New York State Div. of Housing & Community Renewal, 297 AD2d 675 (2d Dept 2002) ..................................................................... 46, 47 Ammon v New York State Div. of Housing and Community Renewal, 1997 WL 34826119 (Sup Ct New York County 1997) ..................................... 37 Asher v Abbott Labs., 290 AD2d 208 (1st Dept 2002) .................................................................... 22, 34 Eadem Bldgs. v Abrams, 70 NY2d 45 (1987) ............................................................................................ 36 Berkovich v Mostovaya, 22 Misc3d 91 (App T 2d Dept, 11th and 13th Jud Dists) .................................. 37 Borden v 400 E. 55th St. Assoc., L.P., 105 AD3d 630 (1st Dept 2013) ........................................................ 20, 24, 39,57 -IV- Burns v Volkswagen of America, Inc., 118 Misc2d 289 (Sup Ct Monroe County 1982) .......................................... 50, 54 City of Rochester v Chiarella, 65 NY2d 92 (1985) ............................................................................................ 48 CLC/CFI Liquidating Trust v Bloomingdale's, Inc., 50 AD3d 446 (1st Dept 2008) ............................................................................ 62 Cox v Microsoft Corp., 290 AD2d 206 (1st Dept 2002) .......................................................................... 22 Cox v Microsoft Corp., 8 AD3d 39 (1st Dept 2004) .......................................................................... 21, 32 Cvetichanin v Trapezoid Land Co., 180 AD2d 503 (1st Dept 1992), app. dismissed 79 NY2d 933 (1992) .................................................................. 37 Daniel v New York State Div. of Housing and Community Renewal, 179 Misc2d 452 (Sup Ct New York County 1998) ........................................... 61 Delano Village Companies v New York State Div. of Housing and Community Renewal, 245 AD2d 196 (1st Dept 1997) .......................................................................... 29 DeSilva v New York State Div. of Housing and Community Renewal, 34 AD3d 673 (2d Dept 2006) ............................................................................. 30 DiGiorgio v 1101-1113 Manhattan Ave. Partners, LLC, 102 AD3d 725 (2d Dept 2013) ........................................................................... 41 Downing v First Lenox Terrace Assoc., 107 AD3d 86 (1st Dept 2013) ..................................................................... passim Draper v Georgia Properties, Inc., 230 AD2d 455 (1st Dept 1997), aff'd94 NY2d 809 (1999) ............................................................................ 30, 36 Drucker v Mauro, 30 AD3d 37 (1st Dept 2006), lv. to appeal dismissed 7 NY3d 844 (2006) ..................................... 36, 41, 42,45 - v- Estro Chemical Co., Inc. v Falk, 303 NY 83 (1951) ....................................................................................... passim Extell Belnord LLC v Uppman, __ AD3d (lstDept2013) .................................................................. 45 Federal Home Loan Mtge. Corp. v New York State Div. of Housing and Community Renewal, 87 NY2d 325 (1995) .......................................................................................... 33 Gawez v Inter-Connection Elec., Inc., 9 Misc3d 1107(A) (Sup Ct Kings County 2005), aff d 44 AD 3d 898 (2d Dept 2007) .................................................................... 61 Globe Surgical Supply v Geico Ins. Co., 59 AD3d 129 (2d Dept 2008) ....................................................................... 52, 53 Gudz v Jemrock Realty Co., LLC, 105 AD3d 625 (1st Dept 2013) ................................................................... passim Gustafson v Bell Atlantic Corp., 171 F Supp 2d 311 (SDNY 2001) ...................................................................... 32 H. 0. Realty Corp. v New York State Div. of Housing and Community Renewal, 46 AD 3d 103 (1st Dept 2007) ...................................................................... 24, 27 In re Berry Estates, Inc. v State of New York, 812 F2d 67 (2d Cir 1987) ................................................................................... 35 Jazilek v Ahart Holdings LLC, 10 NY 3d 943 (2008) ................................................................................... passim Matinzi v Joy, 60 NY2d 835 (1993) .......................................................................................... 39 Mott v New York State Div. of Housing & Community Renewal, 202 AD2d 354 (1st Dept 1994) .......................................................................... 28 MQDC, Inc. v Steadfast Ins. Co., 2013 WL 6388624 (EDNY) ......................................................................... 37, 38 -VI- Nagobich v New York State Div. of Housing & Community Renewal, 200 AD2d 388 (1st Dept 1994) .......................................................................... 27 Norms Realty Corp. v Rodriguez, 108 Misc2d 124 (Civ Ct New York County 1981) ............................................ 37 Osarczuk v Associated Universities, Inc., 82 AD3d 853 (2d Dept 2011) ............................................................................. 62 Pesantez v Boyle Envtl. Serves., Inc., 251 AD2d 11 (1st Dept 1998) ................................................................ 21, 31,32 Pultz v Economakis, 10 NY3d 542 (2008) .......................................................................................... 28 Ridge Meadows Homeowners' Assn. v Tara Dev. Co., 242 AD2d 947 (4th Dept 1997) ......................................................................... 32 Rima 106 v Alvarez, 257 AD2d 201 (1st Dept 1999) .......................................................................... 44 Riverside Syndicate Inc. v Munroe, 10 NY3d 18 (2008) ..................................................................................... passim Roberts v Tishman Speyer Properties, L.P., 13 NY3d 270 (2009) ...................................................................................... 1, 36 Roberts v Tishman Speyer Properties, L.P., 62 AD3d 71 (1st Dept 2009) .................................................................... 2, 10, 36 Rosenfeld v A. H. Robins Co., Inc., 63 AD2d 11 (2d Dept 1978) ............................................................................... 62 Russo & Dubin v Allied Maintenance Corp., 95 Misc2d 344 (Sup Ct New York County 1978) ............................................. 49 Schatz v Cellco Partnership, 842 F Supp 2d 594 (SDNY 2012) ...................................................................... 38 Small v Lorillard Tobacco Co., Inc., 94 NY2d 43 (1999) ...................................................................................... 48, 49 - Vll- Sperry v Crompton, 8 NY 3d 204 (2007) ...................................................................................... 54, 56 Standard Fire Ins. Co. v Knowles, __ U.S. , 133 SCt 1345, 185 LEd2d 439 (2013) .......................... 50, 51 Steinberg v Steinberg, 18 NY2d 492 (1966) .......................................................................................... 40 Super Glue Corp. v Avis Rent-A-Car Sys., 132 AD2d 604 (2d Dept 1987) ........................................................................... 32 Sylvester v Bernstein, 283 AD 333 (1st Dept 1954), aff'd 307 NY 778 (1954) .................................................................................... 35 Tenants of Hyde Park Gardens v State Div. of Housing and Community Renewal, 73 NY2d 998 (1989), aft' g 140 AD2d 351 (2d Dept 1989) ............................................................ 28, 29 Wolfisch v Mailman, 182 AD2d 533 (1st Dept 1992) .......................................................................... 24 Statutes 28 u.s.c. § 1332(d)(2) ............................................................................................ 50 28 U.S.C. § 1332(d)(5)(B) ....................................................................................... 50 CPLR 3025 .............................................................................................................. 4 7 CPLR 5602(b)(l) ....................................................................................................... 6 CPLR 901(a)(2) ....................................................................................................... 58 CPLR 90l(a)(4) ............................................................................................... 4, 8, 48 CPLR 901(a)(5) ....................................................................................................... 58 CPLR 901 (b) .................................................................................................... passim CPLR 909 ........................................ , ....................................................................... 52 - Vlll- CPLR Article 9 ........................................................................................................ 56 Emergency Tenant Protection Act .......................................................................... 35 GBL § 340(5) .......................................................................................................... 22 GBL § 349(h) ........................................................................................ 21, 33, 37, 38 Labor Law§ 198(1-a) .................................................................................. 21, 31, 32 Omnibus Housing Act ....................................................................................... 36, 37 RSC § 2520.1l(r)(5)(i) .............................................................................................. 9 RSC § 2520.13 .................................................................................................. passim RSL § 26-504.2 ......................................................................................................... 9 RSL § 26-514 .................................................................................................... 28, 29 RSL § 26-516(a) ............................................................................................... passim Other Authorities DHCR Amended Policy Statement 89-2 (April26, 2013) ..................................... 30 Napolitano, Avoiding the Minefields in New York Practice, NYLJ, May 18,2009, at 57, col. 1 ............................................................... 55, 56 Rules 22 NYCRR § 600.14(b) ............................................................................................. 6 -IX- STATE OF NEW YORK COURT OF APPEALS --------------------------X LORRAINE BORDEN, on behalf of herself and all others similarly situated, Plaintiff-Respondent, -against- 400 EAST 55TH STREET ASSOCIATES, L.P., Defendant-Appellant. : --------------------------X Index No. 650361/09 BRIEF FOR DEFENDANT-APPELLANT 400 EAST 55TH STREET ASSOCIATES, L.P. PRELIMINARY STATEMENT Defendant-appellant 400 East 55th Street Associates, L.P. ("Owner") submits this brief in support of Owner's appeal from an order of the Appellate Division, First Department, entered on April 25, 2013 (R. 894-97).1 By its order, the First Department affirmed an order of the Supreme Court, New York County (Gische, J.), entered on April13, 2012, wherein Supreme Court granted the motion of plaintiff-respondent Lorraine Borden ("Respondent") for class certification and related relief (R. 18-26). This appeal arises from the aftermath of Roberts v Tishman Speyer Properties, L.P., 13 NY3d 270 (2009) ("Roberts"). The building in question first 1 Numbers in parentheses refer to pages in the Record on Appeal. obtained J-51 benefits in or about 1991. In accordance with DHCR's well publicized position, Owner believed that certain apartments in the building became luxury deregulated under the Rent Stabilization Law ("RSL") while J-51 benefits were in effect. Mter Roberts was decided, Lorraine Borden ("Respondent"), a single tenant m the subject building, commenced a putative class action, alleging rent stabilization coverage and demanding rent reductions and refunds. The complaint asserted that Owner was "liable to Plaintiff and the Class for a penalty equal to three times the overcharges ... " At some point, Respondent and her counsel realized that CPLR 901 (b) bars the maintenance of a class action where the underlying statute, here, RSL § 26-516(a), specifically authorizes the recovery of a penalty, but does not expressly permit such penalty to be recovered in a class action. Thus, Respondent, prior to class certification, purported to waive her demand for treble damages on behalf of herself and the putative class. Owner argued, inter alia, that any purported waiver of a benefit granted by the RSL is void as a matter of law and public policy, such that a class action could not be maintained under CPLR 901 (b). Supreme Court granted Respondent's motion for class certification, and the First Department affirmed. Citing two decisions it concurrently rendered in Downing v First Lenox Terrace Assoc., 107 AD3d 86 (1st Dept 2013) - 2- ("Downing"), and Gudz v Jemrock Realty Co., LLC, 105 AD3d 625 (1st Dept 2013) ("Gudz"), the First Department ruled that a rent stabilized tenant alleging rent overcharge and seeking class certification can evade CPLR 901 (b) through the expedient of "waiving" treble damages. This marked the first time in over 60 years of rent regulatory jurisprudence that a Court has allowed a tenant to waive a benefit granted by a rent regulatory statute. Owner respectfully submits that the First Department's ruling violates the public policy underlying the RSL, and establishes a dangerous precedent whereby landlords and tenants can "waive" statutory benefits under a rent regulatory scheme when such waiver serves their interests. The threshold question this Court must address -- which it has never addressed before -- is whether a plaintiff, under any statute or any circumstances, can evade CPLR 901(b) by waiving statutory penalties. Owner submits that such waivers violate CPLR 901(b). The Legislature, when authorizing a penalty in a given statute, is free to provide that such penalty may be sought in a class action. Where the Legislature, as here, has not seen fit to do so, the inquiry ends, and a "waiver" of statutory penalties should not be permitted to undermine legislative intent. Assuming that this Court determines that a plaintiffs ability to watve statutory penalties to evade CPLR 901 (b) depends upon the language and - 3 - legislative intent of the statute authorizing the penalty, this Court should rule that the RSL does not permit waivers of any kind. Beginning with Estro Chemical Co., Inc. v F alk, 303 NY 83 ( 1951 ), and continuing through Riverside Syndicate Inc. v Munroe, 10 NY3d 18 (2008) and Jazilek v Ahart Holdings LLC, 10 NY3d 943 (2008), this Court has consistently held that an attempt to waive benefits under a rent regulatory statute is void as against public policy. The public policy of this State, as embodied in the treble damages provision set forth in RSL § 26-516(a), is that tenants who allege rent overcharge have no right to pick and choose whether they are seeking treble damages, and that upon a finding of overcharge, treble damages are mandatory unless the landlord establishes that the overcharge was not willful. If the Legislature intended that tenants could waive treble damages, it would have so provided. Another issue this Court must determine is whether a party who waives treble damages is an "adequate" representative under CPLR 901(a)(4). Here, Respondent is not adequate because she has purported to waive two-thirds of the class's potential recovery. RSL § 26-516(a) authorizes treble damages to incentivize tenants to actively pursue claims of rent overcharge. The named representative must seek both compensatory and penalty damages in order to adequately represent the interests of the proposed class. -4- The First Department herein has permitted Respondent to invoke the overcharge provisions of the RSL to state a cause of action, while allowing Respondent to disavow the treble damages provision so as to evade CPLR 901 (b) and maintain the putative class action. The RSL is a statute expressing the public policy of New York State; it is not a menu that allows a party seeking to invoke its protection to seek judicial enforcement of only those provisions that party deems beneficial. Accordingly, the First Department's order should be reversed, and class certification should be denied. - 5- STATEMENT OF JURISDICTION This Court has jurisdiction to entertain the appeal and to review the questions raised. On April 26, 2013, Respondent served Owner with notice of entry of the Appellate Division's April25, 2013 order herein. By notice of motion dated May 23, 2013, Owner moved the Appellate Division pursuant to CPLR 5602(b)(l) and 22 NYCRR § 600.14(b) for leave to appeal the order to this Court. By order dated October 22, 2013, the Appellate Division granted Owner's motion (R. 893). - 6- STATEMENT OF QUESTIONS PRESENTED 1. Where a statute imposes a penalty and does not specifically authorize the recovery thereof in a class action, may a putative class representative waive such penalty for the sole purpose of evading the proscription set forth in CPLR 901(b)? Answer of the Court Below: The Court below answered this question in the affirmative. 2. Assuming that the ability to waive a penalty to evade CPLR 901(b) depends upon the language of the underlying statute and its legislative intent, is such waiver permissible where the statute (1) does not give the plaintiff the option of foregoing such penalty; (2) does not give the court discretion in awarding the penalty; (3) imposes no burden upon the plaintiff to prove that such penalty is warranted; and ( 4) imposes the burden of proof on the defendant to establish that such penalty is not warranted? Answer of the Court Below: The Court below answered this question in the affirmative. 3. Is a purported waiver of treble damages prohibited by the Rent Stabilization Law ("RSL"), public policy, and/or § 2520.13 of the Rent Stabilization Code ("RSC")? -7- Answer of the Court Below: The Court below answered this question in the negative. 4. Where a putative class representative, prior to certification, purports to waive on behalf of all putative class members a claim for treble damages under a statute, thus potentially depriving class members of two-thirds of their recovery, can that putative class representative be said to "fairly and adequately protect the interests of the class" as mandated by CPLR 90l(a)(4)? Answer of the Court Below: The Court below answered this question in the affirmative. 5. Where a tenant is the sole tenant in a building who owes substantial rent arrears (now totaling over $85,000), and (a) must devote substantial time and resources to defending a counterclaim seeking payment of such rent arrears, and (b) thus has an incentive to bargain away the rights of other class members to settle those arrears, is such tenant "typical of' all unknown class members and "adequate" to be appointed as class representative? Answer of the Court Below: The Court below answered this question in the affirmative. - 8- STATEMENT OF FACTS A. The Parties Respondent is the tenant of Apartment (the "Apartment") in the building located at in Manhattan (the "Building") (R. 35, 139). Owner is the owner and landlord of the Building (R. 35, 46, 285). B. The Apartment and its Rental History The Building obtained J-51 tax benefits for the period commencing on or about July 1, 1991 (R. 38). The minimal benefits that Owner received will expire in or about June, 2016. From 1956 until 2004, the Apartment was occupied by Edward Ballman, who became a rent stabilized tenant when the RSL was enacted in 1969 (R. 161, 186.1-186.8). The Apartment became vacant in 2004, at which time the stabilized rent was $813.50 per month (R. 161, 188). After Ballman vacated, Owner renovated the Apartment at a cost of almost $33,000, mostly relating to a new kitchen and bathroom (R. 162, 190-204). Owner believed, in accordance with § 2520.11 (r)(5)(i) of the Rent Stabilization Code ("RSC"), that the legal rent for the Apartment was now over $2,000 per month, such that the Apartment was luxury deregulated pursuant to RSL § 26-504.2 (R.161). Owner leased the Apartment to Gertrude Haber pursuant to a two-year deregulated lease commencing April 1, 2004 at a monthly rent of $2, 140 -9- (R. 160-61, 167-69). Haber thereafter renewed her lease for the two-year period commencing April 1, 2006 at a rent of $2,240 per month (R. 171). Respondent moved into the Apartment pursuant to a one-year lease commencing on November 1, 2006 at a rent of $2,650 per month (R. 161, 173-81). Respondent renewed her lease for a two-year period commencing November 1, 2007 at a monthly rent of $2,875 (R. 161, 183). Because of the present dispute between the parties, Respondent has never signed another lease, although Owner offered her a rent stabilized lease in 2010, which she refused to sign (R. 205-1 0). C. Respondent Commences this Action and Files an Unverified Complaint On or about June 16, 2009, just three months after the First Department decided Roberts v Tishman Speyer Properties, L.P., 62 AD3d 71 (1st Dept 2009), Respondent commenced this action by Summons with Notice (R. 139, 160). Respondent, on behalf of herself and all others similarly situated, raised allegations of rent stabilization coverage and rent overcharge (R. 139). On or about January 29, 2010, two months after this Court affirmed the First Department's decision in Roberts, Respondent filed an unverified complaint asserting two causes of action against Owner: the first for violation of the RSL, and the second for a declaration that Respondent and the other members of the putative class are entitled to all of the protections of the rent stabilization laws - 10- (R. 34-43). The complaint further alleges that Owner "is liable to Plaintiff and the Class for a penalty equal to three times the overcharges since [March 5, 2009, the date of the First Department's decision in Roberts]" (R. 41) (material in brackets supplied). D. Owner's Answer and Counterclaims Owner answered the Complaint on March 7, 2011 (R. 45-49). The Answer asserted numerous affmnative defenses to the Complaint, including Owner's fifth affirmative defense, as follows: "To the extent that the Complaint seeks treble damages, overcharges, and/or other penalties, such claims cannot be brought pursuant to Article 9 of the CPLR inasmuch as such claims seek to impose penalties upon [Owner]" (R. 46) (material in brackets supplied). Owner also asserted two counterclaims (R. 48-49). The first seeks a money judgment for Respondent's unpaid rent/use and occupancy (R. 48). The second seeks attorneys' fees incurred in connection with this action, pursuant to the terms of the parties' last lease (R. 49). E. Respondent's First Motion for Class Certification On or about May 6, 2011, Respondent moved to certify the class and for related relief (the "First Certification Motion") (R. 27-135). The First Certification Motion was not supported by an affidavit or statement of any kind from Respondent. - 11 - Because CPLR 901 (b) provides that an action may not be maintained as a class action where the underlying statute imposes a penalty, Respondent's attorneys -- but not Respondent -- purported to waive treble damages pursuant to RSL § 26-516(a) on behalf of all putative class members, and "abandon" the portions of the complaint seeking treble damages (R. 33). Specifically, the attorney's affirmation stated: "For this class action, Plaintiff Lorraine Borden waives her right to seek treble damages under [the RSL]. On behalf of herself and the proposed Class, she will seek actual damages against Defendant. Accordingly, she abandons, in their entirety, Paragraphs 5 and 36 of her Class Action Complaint, dated January 29, 2010, wherein she had sought treble damages" (id.) (material in brackets and emphasis supplied) (R. 33). Owner opposed Respondent's First Certification Motion, argumg that Respondent's failure to include an affidavit establishing her adequacy as class representative, or explaining her purported waiver of treble damages, was a fatal deficiency (R. 293-98). Owner also argued that as a matter of law, Respondent could not (1) waive treble damages, on behalf of herself and the entire putative class, to evade CPLR 901(b) (R. 296); or (2) waive a benefit granted under the RSL (R. 478-79). - 12- F. Supreme Court Denies the First Certification Motion By order entered November 10, 2012 (the First Order"), Supreme Court denied Respondent's First Certification Motion without prejudice to renew: "[I]t is important that the proposed class representative demonstrate that s/he possess [sic] an adequate understanding of the litigation, including a knowledge of the claims and progress of the litigation. This must be established through a tender of evidence and not conclusory statements. In this regard, the motion falls short. Respondent has neither provided her own affidavit nor has she verified the complaint. Whatever the court knows about her is only through the observations of counsel. This is completely inadequate. The court needs to hear from the representative herself in order to determine that she is [] willing and able to serve, that she has an adequate understanding of the claims in the litigation and that she is able to make decisions both in her individual capacity and fiduciary capacity for the class ... In the absence of, at base line, Borden's personal affidavit, the court cannot conclude that she is a proper class representative. * * * The motion for class certification is, therefore, denied, without prejudice to renew, upon proper papers, which at a minimum contain an affidavit from the plaintiff demonstrating that she is an adequate class representative" (R. 13-14) (citations omitted; emphasis supplied). Notwithstanding the foregoing, the First Order, in dicta, made numerous findings (the "Adverse Findings") consistent with granting the motion. Supreme Court stated that the CPLR 901 factors required for class certification (i.e., - 13- numerosity, commonality, typicality, and superiority of a class action) had all been met (R. 8-14). It is not clear why, upon denying Respondent's motion, Supreme Court elected to address these issues. With respect to Owner's argument that Respondent could not waive treble damages in order to evade CPLR 901(b), Supreme Court, despite having denied Respondent's motion, held: "Courts . . . permit a class representative to waive penalties and allow the claims for compensatory damages only to continue. Cox v. Microsoft Corp., 8 AD3d 39 (1st dept. 2004); Super Glue Corp. v. Avis Rent A Car System, 132 AD2d 604 (2nd dept. 1987). To the extent that the owner argues the waiver impinges on Borden's adequacy as a class representative, the court finds that should any class member wish to pursue a right to treble damages for willful overcharge, s/he may opt out and bring an individual action therefor. Wienberg v. Hertz Corp., 116 AD2d 1 (1st dept. 1987) affd. 69 NY2d 979 (1987)" (R. 12). G. Respondent's Motion to Renew the First Certification Motion On or about December 9, 2011, Respondent moved to renew (the "Renewal Motion") the First Certification Motion (R. 349-424 ). That motion essentially repeated and incorporated the First Certification Motion, but included an affidavit from Respondent (R. 421-24). As one of many vague and conclusory assertions of Respondent's adequacy as a class representative, Respondent stated in her affidavit: "I am qualified to - 14- make decisions in both my individual capacity and fiduciary capacity as class representative" (R. 423). Addressing her attorneys' prior waiver of treble damages on behalf of the putative class in the First Certification Motion, Respondent stated: "I am waiving my entitlement to seek penalty damages under the RSL in this action. I am only seeking actual damages against my landlord on behalf of myself and the members of the class" (R. 424). Respondent did not explain in her affidavit (1) why Respondent would waive two-thirds of her potential financial recovery; (2) why Respondent deemed it prudent to do so on behalf of the putative class; or (3) whether Respondent discussed or considered this critical decision with any member of the putative class (R. 421-24). H. Respondent's Deposition and the Question of Respondent's Adequacy as the Class Representative Owner deposed Respondent on January 19, 2012 (R. 484-630). When asked when she purportedly made the decision to waive treble damages on behalf of herself and the putative class, Respondent initially could not recall (R. 557). Respondent's recollection, however, was refreshed after she was shown her November 17, 2011 affidavit made in connection with the Renewal Motion, an affidavit made nearly six months after her attorneys had first purported to waive treble damages on behalf of the entire putative class in the First Certification Motion (R. 579-81). Respondent testified as follows: - 15- "Q: And did you communicate with anyone else in the building about that decision [to waive treble damages]? A: No. Q: Did you communicate with anyone who used to live in the building about that decision? A: No. Q: Did you communicate with anyone about that decision? A: My attorney. Q: Anyone other than your attorneys? A: No. (R. 558) (material in brackets supplied to provide clarity). * * * Q: Have you spoken to any tenants in the building about this case? [Objection] A: No. Q: Are you aware of whether any other tenants in this building are aware of this case? A: No. Q: Has anyone ever expressed any interest to you in joining the class? A: No. Q: Have you made any investigation as to others joining the class? - 16- A: No." (R. 609-10). When asked why she elected to waive treble damages on behalf of herself and the putative class members, Respondent's responses were glib and evasive: (R. 557 -58). (R. 561-62). "Q: And why did you decide to waive treble damages? A: Because I wanted it to re[main] a class action suit because I am a really good person. * * * Q: Did you consider pros and cons of the decision to waive treble damages? A: Yes. Q: And what were the cons? A: That it would take it away from being a class action suit. Q: And what were the pros? A I wanted it to stay a class action suit. Q: So is it fair to [say] that that was the sole criteri[ on] that you considered when deciding to waive treble damages? A: I decided on the recommendation of my attorney that -- no, I take that back. I don't remember. I really don't remember what motivated me at that time; sorry." - 17- I. Owner Opposes the Renewal Motion Owner opposed the Renewal Motion, arguing, inter alia, that a waiver of any benefit granted under the RSL is void as a matter of law (R. 444-45). J. Supreme Court Grants the Renewal Motion and Certifies the Class By order dated April 11, 2012 (the "Renewal Order"), Supreme Court (1) granted Respondent's Renewal Motion; (2) certified the class; (3) appointed Respondent as class representative; and ( 4) appointed her attorneys as class counsel (R. 18-26). Supreme Court purported to incorporate the Adverse Findings into the Renewal Order (R. 21), and also ruled as follows: "Since the time the [First Order] was made there has been no controlling appellate authority that would change any of the substantive findings and analysis made by the court at that time. The court, therefore, incorporates by reference the prior decision into this decision and fmds that [Respondent] has satisfied the CPLR article 9 requirements of numerosity, commonality, typicality and that a class action is superior to other available methods of adjudication. * * * The 'waiver' issue is less of a problem. It is premised on there being a right to collect treble damages in overcharge cases emanating from the Court of Appeals ruling in Roberts v. Tishman Speyer (13 NY3d 270 [20009]) [sic]. This right is at best, completely speculative, and in reality, virtually non-existent. .. Given all of these considerations, exactly when and why [Respondent] decided to waive this 'right' is of no moment to the issue of her adequacy" (R. 21, 24-25) (material in brackets and emphasis supplied). - 18- DECISION OF THE COURT BELOW On April 25, 2013, the Appellate Division, First Department issued an order affirming the Renewal Order in all respects (R. 894-97). The First Department ruled that Respondent could evade CPLR 901(b) by waiving treble damages on behalf of herself and the absent class members: "CPLR 901 (b), which prohibits a class action to recover a penalty or minimum damages imposed by statute where the statute does not explicitly authorize a class recovery thereof, does not bar plaintiffs putative class action. Plaintiff has waived her right to treble damages under [RSL] § 26-516(a), and individual class members will be allowed to opt out of the class to pursue their treble damage claims, should they believe there is a lawful basis for doing so (see Downing v First Lenox Terrace Assoc.,_ AD3d _; Gudz v Jemrock Realty Co.,_ AD3d _[decided simultaneously herewith]). Although plaintiff did not waive her right to reimbursement for alleged overcharges and interest, and for attorneys' fees, those claims do not render her action an action to recover a penalty for purposes of CPLR 901(b) (see Downing; Gudz). * * * Plaintiffs intent to waive treble damages on behalf of the class does not render her an inadequate representative, given that any class member who wishes to pursue a claim for treble damages for willful overcharge may opt out and bring an individual action therefore (see Gudz)" (material in brackets in original) (R. 894-97). The Court also affirmed Supreme Court's ruling that plaintiff had satisfied the CPLR 901 factors required for class certification, i.e., numerosity, commonality, typicality, and superiority (R. 895). - 19- On the same day that it issued the decision appealed from herein (hereinafter, "Borden"), the First Department also issued decisions in the related Downing and Gudz cases, wherein the Court similarly held that a tenant can waive treble damages in order to evade CPLR 90l(b). The First Department granted Owner leave to appeal to this Court in an order dated October 22, 2013 (R. 893). The First Department also granted leave to appeal in Downing and Gudz. Those decisions are discussed at greater length herein. -20- POINT I RESPONDENT CANNOT EVADE CPLR 90l(b) BY PURPORTING TO WAIVE TREBLE DAMAGES UNDER RSL § 26-516(a) This Court has never held that a plaintiff can waive a penalty to evade CPLR 901(b). In Point IV, supra, Owner argues that such a waiver undermines the legislative intent underlying CPLR 901(b), and should not be permitted. For purposes of Point I, however, Owner will assume, as did the First Department, that a plaintiffs right to waive a penalty to evade CPLR 901(b) depends upon the language and legislative history of the statute awarding such penalty. Under that analysis, the First Department erred when it determined that Respondent could waive her right to treble damages under RSL § 26-516(a). The First Department's error is especially egregious in light of well-settled authority holding that rights granted under a rent regulatory statute cannot be waived, even where such waiver benefits the tenant. See Point II, infra. A. Existing Case Law Concerning Waiver of Statutory Damages Under CPLR 90l(b) There is a line of Appellate Division authority holding that a plaintiff, with respect to at least certain statutes, can evade CPLR 901(b) by waiving a claim for statutory penalties. See e.g. Cox v Microsoft Corp., 8 AD3d 39 (1st Dept 2004) ("Cox If') (interpreting General Business Law § 349[h]); Pesantez v Boyle Envtl. Serves., Inc., 251 AD2d 11 (1st Dept 1998) ("Pesantez") (interpreting Labor Law - 21- § 198[1-a]). There is also Appellate Division authority holding that under other statutes, a plaintiff cannot waive penalty damages to evade CPLR 901(b). See e.g. Cox v Microsoft Corp., 290 AD2d 206 (1st Dept 2002) ("Cox f') (interpreting GBL § 340[5]); Asher v Abbott Labs., 290 AD2d 208 (1st Dept 2002) ("Asher") (same). In Asher, the First Department wrote: "Private persons cannot bring a class action under the Donnelly Act because the treble damages remedy provided in General Business Law§ 340(5) is a 'penalty' within the meaning of CPLR 901(b), the recovery of which in a class action is not specifically authorized and the imposition of which cannot be waived" (emphasis supplied, citations omitted). 290 AD2d at 208. In Gudz, the First Department majority attempted to distinguish the instant case from Asher, writing: "Plaintiffs rent overcharge claim did not seek a 'penalty' within the meaning of CPLR § 901 (b), because she waived her right to treble damages under the Rent Stabilization Law (RSL). The waiver was effective, since, unlike the mandatory penalty provided under the Donnelly Act (General Business Law § 340[5]; see Asher v. Abbott Labs.), treble damages are not the sole measure of recovery, and an owner found to have overcharged may submit evidence to overcome the statutory presumption of willfulness" (citations omitted). 105 AD3d at 625. In Downing, the First Department also attempted to distinguish Asher from the instant case, as follows: -22- " ... under General Business Law § 340(5), treble damages are awarded upon a finding of liability; the statute does not require a finding of willfulness or bad faith. In contrast, Rent Stabilization Law § 26-516(a) only requires treble damages where the landlord cannot demonstrate that it did not act willfully, and is analogous to Labor Law 198(1-a), under which plaintiffs have been allowed to waive their right to liquidated damages to preserve the right to maintain a class action, provided that putative class members are given the opportunity to opt out of the class in order to pursue their own liquidated damages claims (see Pesantez, 251 AD2d at 12, 673 NYS2d 659)." 107 AD3d at 89. As established herein, the First Department was wrong. Assuming waiver of statutory damages is ever permissible to evade CPLR 901(b) (see Point IV, infra), waiver is not permitted with respect to the treble damages penalty under RSL § 26- 516(a). B. CPLR 901(b) and RSL § 26-516(a) CPLR 901 (b) states in its entirety: "Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty or minimum measure of recovery created or imposed by statute may not be maintained as a class action." RSL § 26-516(a), the underlying statute at issue, states in relevant part: "Subject to the conditions and limitations of this subdivision, any owner of housing accommodations who, upon complaint of a tenant .. .is found by the state division of housing and community renewal, after a -23- reasonable opportunity to be heard, to have collected an overcharge above the rent authorized for a housing accommodation subject to this chapter shall be liable to the tenant for a penalty equal to three times the amount of such overcharge. * * * If the owner establishes by a preponderance of the evidence that the overcharge was not willful, the state division of housing and community renewal shall establish the penalty as the amount of the overcharge plus interest" (emphasis supplied).2 At the outset, it is undisputed that the Legislature, when amending the RSL to add treble damage penalties, did not authorize recovery thereof in a class action. It is also undisputed, as the First Department found in Borden, Downing, and Gudz, that treble damages constitute a "penalty" for purposes of CPLR 90l(b). As the First Department previously held in H.O. Realty Corp. v New York State Div. of Housing and Community Renewal, 46 AD3d 103, 108 (1st Dept 2007) ("H.O. Realty"): "By any reasonable measure, treble damages amount to a substantial penalty. It is punitive in nature and obviously designed to severely punish owners who deliberately and systematically charge tenants unlawful rents, while deterring other owners of stabilized premises who might be similarly inclined" (citation omitted). 2 Notwithstanding the statute's reference to the New York State Division of Housing and Community Renewal ("DHCR"), it is well settled that DHCR and the Courts have concurrent jurisdiction under RSL § 26-516(a) to determine overcharge complaints and to assess treble damages. See Downing, supra, 107 AD3d at 88; Wolfisch v Mailman, 182 AD2d 533 (1st Dept 1992). -24- C. The First Department's Criteria for Determining Whether a Particular Statute Allows Penalties to be Waived in Order to Evade CPLR 90l(b) are Simplistic and Ignore Legislative Intent The First Department held in the three cases at issue that penalty damages under a statute cannot be waived for purposes of CPLR 901(b) where such penalties are (1) "the sole measure of recovery," Gudz, 105 AD3d at 625, and (2) not dependent on "a finding of willfulness or bad faith," Downing, 107 AD3d at 89. The First Department found that Respondent could waive treble damages under RSL § 26-516(a) because the statute limits such penalty damages to those instances where "the landlord cannot demonstrate that it did not act willfully." Downing, id. Because this Court has never addressed the issue of when -- or whether -- statutory penalty damages can be waived to evade CPLR 901(b), the First Department was necessarily creating its own criteria for distinguishing among statutes. In fact, the First Department's methodology is simplistic, fails to accurately probe legislative intent, and leads to an erroneous result herein. Owner respectfully submits that the appropriate criteria are set forth below, and establish that the Legislature never intended that rent stabilized tenants could waive their rights to treble damages in order to evade CPLR 901 (b) and maintain a class action. -25- 1. The Appropriate Criteria a. Does the Statute Give the Plaintiff the Option of Waiving Statutory Penalties? A Court's first inquiry should be whether the statute authorizing the penalty gives the plaintiff the option of seeking penalty damages in addition to compensatory damages. The granting of such an option establishes the Legislature's intent that the penalty is not integral to the statutory scheme, and is designed to redress a private injury rather than a public wrong. Certainly, a legislative scheme that gives the plaintiff the option of declining to seek a penalty is not inconsistent with waiver. Here, RSL § 26-516(a) gives the tenant no option, and, in fact, gives the tenant no say in the matter. It provides that a tenant may allege rent overcharge, and once such overcharge is established, mandates imposing treble damages on the landlord unless the landlord proves that the overcharge was not willful. In short, the regulation does not permit the tenant to pick and choose his or her remedy. Thus, the Legislature intended that the Legislature itself -- not the tenant or the Courts -- would determine the measure of the damages sought. Where the underlying statute, as here, compels the plaintiff to seek penalty damages, there is no basis to permit waiver of statutory damages for purposes of evading CPLR 90l(b). Put another way, because the tenant has no option under RSL § 26-516(a), a complaint of rent overcharge is necessarily "an action to -26- recover a penalty or minimum measure of recovery," and thus "may not be maintained as a class action." CPLR 901(b). b. Does the Statute Give the Court Discretion to Award a Penalty? A Court's second inquiry should be whether the statute grants a tribunal the discretion to award a statutory penalty. Such discretion demonstrates that the Legislature intended that the penalty would redress a private injury rather than a public wrong, and is not inconsistent with permitting waiver. RSL § 26-516(a) gives a Court no discretion as to whether to award treble damages. If the owner does not attempt to rebut the required presumption of willfulness, or fails to sustain its burden of proving that the overcharge was not willful, "a penalty equal to three times the amount of the overcharge must be imposed." H.O. Realty, supra, 46 AD3d at 107 (emphasis supplied); see also 508 Realty Assoc. v New York State Div. of Housing and Community Renewal, 61 AD3d 753, 754 (2d Dept 2009). Where, however, the owner sustains its burden of proving that an overcharge was not willful, the Court has no discretion to award treble damages. See Nagobich v New York State Div. of Housing & Community Renewal, 200 AD2d 388 (1st Dept 1994) ("[u]nder these circumstances, petitioner has established that he did not have reason to know that the overcharge was unlawful, and treble -27- damages should not have been awarded"); Mott v New York State Div. of Housing & Community Renewal, 202 AD2d 354, 355 (1st Dept 1994). According to the First Department, where a tenant, as here, purports to waive treble damages, DHCR or the Court is forbidden from awarding treble damages, even where the owner fails to sustain its burden of proving that the overcharge was not willful. But the failure to impose treble damages in such circumstances violates the explicit language of RSL § 26-516(a) and its obvious legislative intent. "It is fundamental that a Court, in interpreting a statute, should attempt to effectuate the intent of the Legislature." Pultz v Economakis, 10 NY3d 542, 547 (2008) (citations omitted). Conversely, a statute should never be interpreted, as here, to empower a Court to violate the statute's plain terms and ignore legislative intent. The point is illustrated by this Court's ruling in Tenants of Hyde Park Gardens v State Div. of Housing and Community Renewal, 73 NY2d 998 (1989), aff'g 140 AD2d 351 (2d Dept 1989). There, DHCR interpreted RSL § 26-514 as giving the agency discretion as to whether to order a rent reduction upon a fmding that an owner had reduced building wide services. The Second Department, which this Court unanimously affirmed on the opinion below, held that the governing statute afforded DHCR no such discretion: "Finally, the Supreme Court was correct in remitting the matter of a rent reduction to the DHCR for computation -28- of the appropriate amount thereof. The agency's determination not to order a rent reduction constituted an exercise of discretion which that agency did not possess based upon the mandatory nature of the language in the Rent Stabilization Law of 1969 (Administrative Code § 26-514). When the agency determines that there has been a diminution of a 'required service', 'the commissioner shall so reduce the rent"' (citations omitted, italics in original). 140 AD2d at 352.3 As the dissent wrote in Gudz, supra, "[i]n allowing 'waiver,' the majority ... rewrites the RSL to provide for discretionary rather than a mandatory penalty." 105 AD3d at 629. The discretion which the First Department has manufactured and bestowed on Supreme Court violates RSL § 26-516(a) and mandates reversal. c. Does the Statute Impose the Burden on the Plaintiff to Establish that a Penalty is Warranted? A Court's next inquiry should be whether the underlying statute places the burden on the plaintiff to establish that a statutory penalty should be imposed. If so, waiver may be permissible, on the theory that a plaintiff should not be forced to submit evidence in support of a penalty it does not seek, and which it may be unable to prove. Also, imposing the burden of proof on the plaintiff establishes 3 Notably, in Delano Village Companies v New York State Div. of Housing and Community Renewal, 245 AD2d 196, 197 (1st Dept 1997), the First Department held that tenants were barred from waiving their right to seek a rent reduction under RSL § 26-514. -29- that the penalty is intended to redress a private injury to the plaintiff, rather than a public wrong. Here, it is undisputed that RSL § 26-516(a) does not require the tenant to prove that the overcharge was willful. Indeed, RSL § 26-516(a) imposes no burden of proof on the tenant whatsoever. The tenant need only prove a rent overcharge; thereafter, treble damages must be imposed unless the owner meets its burden to establish that the overcharge was not willful. See DeSilva v New York State Div. of Housing and Community Renewal, 34 AD3d 673, 674 (2d Dept 2006). d. Does the Statute Impose the Burden of Proof on the Defendant to Establish that the Penalty Should not be Imposed? RSL § 26-516(a) "creates a presumption of willfulness in rent overcharge cases that the owner/landlord must rebut by a preponderance of the evidence." Draper v Georgia Properties, Inc., 230 AD2d 455, 460 (1st Dept 1997), aff'd 94 NY2d 809 (1999) ("Draper"). See also DHCR Amended Policy Statement 89-2 (April 26, 2013). The presumption of willfulness, and the imposition of the burden of proof on the owner, establishes that the Legislature intended that the penalty would redress a public wrong, rather than a private injury. Such intent is inconsistent with waiver. -30- 2. The First Department's Faulty Analysis The First Department erred in determining that Respondent can evade CPLR 901(b) by purporting to waive treble damages under RSL § 26-516(a). In Downing, the First Department relied on Pesantez v Boyle Envtl. Servs., Inc., 251 AD2d 11 (1st Dept 1998) ("Pesantez"), for the proposition that a penalty may be waived to evade CPLR 901(b). Pesantez concerned Labor Law 198(1-a), which the First Department in Downing held was analogous to RSL § 26-516(a): " ... Rent Stabilization Law § 26-516(a) only requires treble damages where the landlord cannot demonstrate that it did not act willfully, and is analogous to Labor Law § 198(1-a), under which plaintiffs have been allowed to waive their right to liquidated damages to preserve the right to maintain a class action, provided that the putative class members are given the opportunity to opt out of the class in order to pursue their own liquidated damages claims (see Pesantez, 251 AD2d at 112)" (emphasis supplied). 107 AD3d at 89. The "analogous" provision in Labor Law § 198(1-a) upon which the First Department relied allows the defendant to avoid penalty damages where the defendant "proves a good faith basis to believe that its underpayment of wages was in compliance with the law." That provision, however, was not added to the statute until L. 2009, ch. 372, § 1. At the time the First Department decided Pesantez in 1998, Labor Law§ 198(1-a) stated in its entirety: - 31- "In any action instituted upon a wage claim by an employee or the commissioner in which the employee prevails, the Court shall allow such employee reasonable attorney's fees and, upon a finding that the employer's failure to pay the wage required by this article was willful, an additional amount as liquidated damages equal to twenty-five percent of the total amount of the wages found to be due." It is well-settled that under the pre-2009 version of Labor Law§ 198(1-a) at issue in Pesantez, the burden of proving willfulness was on the plaintiff-employee. See Gustafson v Bell Atlantic Corp., 171 F Supp 2d 311, 327 (SDNY 2001) ("plaintiff has failed to produce evidence sufficient to establish willfulness that would entitle him to liquidated damages under New York law"). As such, the right to waive penalty damages would not be inconsistent with the intent of the pre-2009 version of Labor Law § 198( 1-a) actually at issue in Pesantez. Thus, at the time Pesantez was decided, Labor Law § 198(1-a) placed the burden of proof on the plaintiff to establish willfulness and a concomitant entitlement to statutory liquidated damages. The statute at that time therefore gave the plaintiff the option of "waiving" liquidated damages by declining to pursue or prove entitlement to them. Consequently, the First Department's reliance on Pesantez is erroneous. The remaining cases permitting watver of statutory damages cited in Downing -- Cox II, Ridge Meadows Homeowners' Assn. v Tara Dev. Co., 242 AD2d 947 (4th Dept 1997), and Super Glue Corp. v Avis Rent-A-Car Sys., 132 -32- AD2d 604 (2d Dept 1987) -- all concerned GBL 349(h), which the Downing Court also held was analogous to RSL § 26-516(a). 107 AD3d 89. In fact, GBL 349(h), examined under the four relevant criteria, significantly differs from RSL § 26- 516(a). GBL § 349(h), as first enacted by L. 1980, ch. 346, § 1, and as amended by L. 1984, ch. 15, § 1, states in its entirety: "In addition to the right of action granted to the attorney general pursuant to this section, any person who has been injured by reason of any violation of this section may bring an action in his or her own name to enjoin such unlawful act or practice, an action to recover his actual damages or $50, whichever is greater, or both such actions. The court may, in its discretion, increase the award of damages to an amount not to exceed three times the actual damages up to one thousand dollars, if the court finds the defendant willfully or knowingly violated this section. The court may award reasonable attorneys' fees to a prevailing plaintiff' (emphasis supplied). With respect to the second and third criteria set forth above, GBL § 349(h), by its terms, (1) grants the Court discretion to award treble damages, and (2) imposes the burden of proving willfulness on the plaintiff. Thus, assuming that waiver can ever be permitted to evade CPLR 901(b), waiver would not be inconsistent with the legislative intent underlying GBL § 349(h). The RSL is a remedial statute and should be interpreted broadly to effectuate its intended purpose. See Federal Home Loan Mtge. Corp. v New York State Div. of Housing and Community Renewal, 87 NY2d 325, 332 (1995). The First - 33- Department, by allowing Respondent and absent class members to waive two- thirds of their potential overcharge awards, has done nothing to spread the benefits of the RSL. Based on the foregoing, Owner respectfully submits that this case falls within the Asher line of cases, wherein plaintiffs were barred from waiving treble damages in order to evade CPLR 90l(b). POINT IT A TENANT'S ATTEMPT TO WAIVE A BENEFIT GRANTED UNDER THE RSL FOR ANY PURPOSE, INCLUDING EVASION OF CPLR 901(b), IS VOID AS AGAINST PUBLIC POLICY AND BARRED BY RSC § 2520.13 The First Department's attempt to analogize the RSL to other statutes wherein waiver has been permitted for purposes of CPLR 90l(b) is particularly misguided given well-settled authority holding that waivers under rent regulatory statutes are void as against public policy and unenforceable. A. The First Department's Ruling is Contrary to Public Policy In the seminal case of Estro Chemical Co., Inc. v Falk, 303 NY 83, 87 (1951) ("Estro"), decided under a commercial rent control statute, the Court of Appeals refused to enforce a tenant's purported waiver of her right to recover excess rent: " ... we think that the express provision of the statute now under consideration and public policy require a holding in cases such as this, involving as it does excessive -34- payments of rent, that under no circumstances may tenants waive or release or otherwise settle by agreement their right to recover rent paid in excess of that permitted by law. This is in accord with holdings that a 'statutory right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenes the statutory policy"' (citations omitted, emphasis supplied). In In re Berry Estates, Inc. v State of New York, 812 F2d 67 (2d Cir 1987), the issue arose as to whether unclaimed excess stabilized rents collected by a landlord under the Emergency Tenant Protection Act (L. 1974, ch. 576, § 4) should be paid to the county clerk or refunded to the landlord. The Second Circuit ruled that the public policy underlying rent regulatory statutes prohibited the landlord from retaining the excess rents: "Because rent control statutes are police power statutes enacted for the benefit of the general public, landlords are not permitted to evade them, whether by subterfuge, mistake or otherwise. 'Knowledge on the part of the landlord that he cannot escape liability for excess payments of rents under any circumstances, tends to ensure compliance with the statute. The obtaining of excessive rents strikes at the very purpose of the act.' Estro Chemical Co., Inc. v. Falk, 303 N.Y. 83, 86-87, 100 N.E.2d 146 (1951) (emphasis in original). The public policy underlying rent control legislation militates against the collection or retention of such excess payments" (emphasis supplied). 812 F2d at 69; see also Sylvester v Bernstein, 283 AD 333, 338 (1st Dept 1954), aff'd 307 NY 778 (1954) (interpreting Emergency Housing Rent Control Law [L. 1946, ch. 274]). -35- Indeed, this Court has not hesitated to hold that public policy does not allow purported waivers of rights accorded under rent regulatory laws. See e.g. Jazilek v Ahart Holdings LLC, 10 NY3d 943, 944 (2008) ("Jazilek") (purported waiver of benefits "violates the Rent Stabilization Code and is void as against public policy") (citations omitted; emphasis supplied); Riverside Syndicate Inc. v Munroe, 10 NY3d 18, 23 (2008) ("Riverside") (purported waiver '"would violate the fundamental policies and purposes of the statutory rent stabilization scheme ... '" (citation omitted). In Eadem Bldgs. v Abrams, 70 NY2d 45, 52 (1987), this Court held that the RSL was enacted to meet a serious housing shortage and to prevent exactions of unjust, unreasonable and oppressive rents. See also Roberts v Tishman Speyer Properties, L.P., 62 AD3d 71, 76 (1st Dept 2009), aff'd 13 NY3d 270 (2009). More specifically, the First Department-- citing Estro -- has repeatedly held that the policy goal of preventing the exaction of excessive rents is central to the RSL. See Drucker v Mauro, 30 AD 3d 37, 45 (1st Dept 2006), lv. to appeal dismissed 7 NY3d 844 (2006) ("Drucker"); 390 West End Assoc. v Hare!, 298 AD2d 11, 15 (1st Dept 2002); Draper, supra, 23 AD2d at 457. To further implement that policy, the Legislature created the treble damages penalty under RSL § 26-516(a) pursuant to section 14 of the Omnibus Housing Act -36- (L. 1983, ch. 403) ("OHA"). OHA section one, constituting the Legislature's findings, stated in relevant part: "The legislature therefore declares that in order to prevent uncertainty, potential hardship and dislocation of tenants living in housing accommodations subject to government regulations as to rentals ... the provisions of this act are necessary to protect the public health, safety and general welfare. The necessity in the public interest for the provisions hereinafter enacted is hereby declared as a matter of legislative determination." Because the treble damages penalty plainly affects the public interest and is intended to redress a wrong against the public, it may not be waived or released. See Estro, supra, 303 NY at 87; Cvetichanin v Trapezoid Land Co., 180 AD2d 503, 504 (1st Dept 1992), app. dismissed 79 NY2d 933 (1992); Berkovich v Mostovaya, 22 Misc3d 91, 94 (App T 2d Dept, 11th and 13th Jud Dists); Ammon v New York State Div. of Housing and Community Renewal, 1997 WL 34826119 (Sup Ct New York County 1997) ("[i]t is well-established that, as a matter of public policy, a tenant may not waive the benefits to which he or she is otherwise entitled under the rent control laws"); Norms Realty Corp. v Rodriguez, 108 Misc2d 124, 126 (Civ Ct New York County 1981). Notably, in MQDC, Inc. v Steadfast Ins. Co., 2013 WL 6388624 (EDNY), decided on December 6, 2013, the Eastern District was called upon to determine the enforceability of a provision in an arbitration agreement requiring the plaintiffs to waive treble damages under GBL § 349(h). The Court held that the issue was to -37- be determined in the first instance by the arbitrator, but observed, citing Estro, that such waiver may in fact be impermissible: "Courts in New York have ... permitted plaintiffs to waive the right to treble damages under [GBL] section 349(h) in order to allow the plaintiffs to bring class action claims. * * * On the other hand, 'a statutory right conferred on a private party, but affecting the public interest, may not be waived or released if said waiver or release contravenes the statutory policy.' Estro Chern. Co. v. Falk, 303 N.Y.83, 86, 100 N.E.2d 146 (1951). Arguably, waiver of the right to seek treble damages would contravene the public interest in deterring businesses from engaging in deceptive practices. * * * Accordingly, there is no clear answer as to whether plaintiffs statutory right to punitive damages can be waived. Thus, the question of the enforceability of the waiver to plaintiffs statutory claim should be decided by the arbitrator." 2013 WL 6388624 at* 13 (material in brackets supplied).4 Similarly, in Schatz v Cellco Partnership, 842 F Supp 2d 594, 611-12 (SDNY 2012), the Southern District noted that (1) the ability to waive rights in order to evade CPLR 901 (b) depends upon the public policy of the statute under 4 In considering, without deciding, whether plaintiffs waiver of treble damages under GBL § 349(h) violated public policy, the Eastern District noted that "since treble damages are discretionary, they may not be essential to the statutory scheme." /d., at *13. Here, Owner has established that an award of treble damages under RSL § 26-516(a) is not discretionary. Seep. I(C)(l)(b), supra. -38- which the plaintiff seeks damages, and (2) rent regulatory statutes have been held to not permit such waiver: "Notably, courts in New York have permitted plaintiffs to waive their right to treble damages under New York General Business Law section 349(h) in order to allow the plaintiffs to bring their claims as class actions. [Citations omitted.] However, the ability to waive a statutory right is not unlimited. See Berkovich v. Mostovaya, 22 Misc.3d 91, 875 N.Y.S.2d 741, 744 (App. Term 2009) (' ' [A] statutory right conferred on a private party, but affecting the public interest, may not be waived or released if said waiver or release contravenes the statutory policy." (quoting Estro Chern. Co. v. Falk, 303 N.Y.83, 100 N.E.2d 146, 148 (1951)))" (material in brackets supplied). Borden, Downing and Gudz mark the first time in the 63 years since Estro that a Court has allowed a tenant to waive a right under a rent regulatory statute.5 By allowing Respondent to do so -- for the ignoble purpose of evading CPLR 90l(b) -- the First Department has ignored public policy, rewritten the RSL, and weakened tenant protections. In a world where individual litigants can apparently waive statutory rights for their own selfish purposes, there is no telling what havoc landlords and tenants will wreak up on the RSL, either bilaterally, or, as here, unilaterally. The three cases at issue here establish a dangerous precedent, and should all be reversed. 5 We note that courts have permitted waiver of benefits granted under rent regulatory statutes when such waiver was made pursuant to the tenant's permanent vacatur and surrender of a rent regulated apartment (see e.g. Matinzi v Joy, 60 NY2d 835 [1993]), but not, as here, when the tenant remains in the regulated apartment. -39- B. The First Department's Ruling Violates RSC § 2520.13 Instead of addressing the overarching issue of the public policy of rent regulatory statutes, as courts have done in Estro, Jazilek, Riverside, and in other cases, the First Department narrowly focused on whether Respondent's waiver violated RSC § 2520.13, holding that it did not. Downing, 107 AD3d at 89-90. That provision, first enacted in 1987, states in its entirety: "An agreement by the tenant to waive the benefit of any provision of the RSL or this Code is void, provided, however, that based upon a negotiated settlement between the parties and with the approval of the DHCR, or a court of competent jurisdiction, or where a tenant is represented by counsel, a tenant may withdraw, with prejudice, any complaint pending before the DHCR." 1. The Limits of RSC § 2520.13 Before discussing the First Department's interpretation of RSC § 2520.13, it is necessary to understand what that section does and does not do. As Owner has established, irrespective of anything RSC § 2520.13 may say, the rule in New York State is clear: "a 'statutory right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenes the statutory policy."' Estro, supra, 303 NY at 87. It is under that standard that Respondent's purported waiver of treble damages must be judged. It is well-settled that where the Legislature has spoken, the public policy of the State is what the Legislature says it is. See Steinberg v Steinberg, 18 NY2d 492, 497 (1966). Although the Legislature, in various statutes, has granted -40- plaintiffs the option of seeking or waiving penalty damages, it has determined that the public policy of New York State is that no such option exists with respect to treble damages under RSL § 26-516(a). DHCR could not-- and did not-- purport to alter that public policy when it enacted RSC § 2520.13. Accordingly, RSC § 2520.13 is, at most, a narrow and partial codification of the Estro doctrine. Indeed, in DiGiorgio v 1101-1113 Manhattan Ave. Partners, LLC, 102 AD3d 725, 730 (2d Dept 2013), the Second Department recognized that conduct under a rent regulatory statute can be impermissible for any number of independent reasons, and can violate both public policy and RSC § 2520.13: "The sixth, seventh, and eighth causes of action were sufficient to invoke the Supreme Court's power to render a declaration as to whether the transitional residency agreements were void pursuant to 9 NYCRR 2520.13, invalid as against public policy (See, Estro Chern. Co. v. Falk, 303 N.Y. 83, 87, 100 N.E.2d 146; Cvetichanin v. Trapazoid Land Co., 180 A.D.2d 503, 504, 580 N.Y.S.2d 23), and void as unconscionable contracts of adhesion ... " (emphasis supplied). 2. The Courts have Broadly Interpreted RSC § 2520.13 to Protect the Integrity of the Rent Regulatory Scheme The Courts of this State, including this Court, have broadly interpreted RSC § 2520.13 to insure that owners and/or tenants do not undermine the integrity of the RSC for their private ends. In Drucker, supra, the tenants sought to enforce a so-ordered stipulation they had entered into with the landlord whereby they had waived -- to their advantage -- various provisions of the RSL. The landlord argued -41- that RSC § 2520.13 barred enforcement of the stipulation. The tenants, urging a narrow reading of RSC § 2520.13, argued that the provision did not apply where the waiver benefited the tenant. The First Department rejected the tenants' narrow interpretation, focusing instead on the integrity of the statutory scheme: "It is well-settled that the parties to a lease governing a rent-stabilized apartment cannot, by agreement, incorporate terms that compromise the integrity and enforcement of the Rent Stabilization Law. * * * That it is the tenants who seek to gain advantage by enforcing the unlawful lease provision to evade the operation of the law and regulations is of no moment. * * * Were the intent of Rent Stabilization Code § 2520.13 to permit the tenant to avoid an agreement waiving statutory protection at its option, the regulatory language would undoubtedly so state. * * * Fairness requires that the Rent Stabilization Law be applied impartially. This Court has made it clear that a tenant may not avail himself of the advantages of the statute when it furthers his interests and decline to be bound by the statutory scheme when it proves detrimental to those interests ... " (emphasis supplied). 30 AD3d at 41. This Court has twice narrowly interpreted RSC § 2520.13 so as to uphold the RSL and its underlying public policy. In Riverside, supra, two rent stabilized tenants asked the Court to enforce an agreement whereby they consented to pay an -42- illegal rent in exchange for immunity from claims of non-primary residence. This Court, citing RSC § 2520.13, held that the tenants could not waive their right to pay a lawful rent. The Court did so by refusing to broadly interpret exceptions in RSC § 2520.13 relating to (1) the withdrawal of complaints pending before DHCR, and (2) negotiated settlements: "The application of this regulation to this case seems uncomplicated. The agreement is, on its face, one to 'waive the benefit' of rent stabilization, and is therefore void. It is not an agreement to withdraw a 'complaint pending before the DHCR,' and therefore the exception in the regulation does not apply. * * * The tenants . . . argue that settlements, especially court- approved settlements, should be encouraged, and therefore the exception in RSC § 2520.13 should be read broadly. Though the exception applies only to the withdrawal of a 'complaint pending before the DHCR,' the tenants say that the absence of any such complaint in this case is a meaningless formality; the tenants could easily have filed such a complaint, and withdrawn it as part of the settlement. Thus, the tenants argue in substance, this case is within the spirit though not the letter of the exception. We disagree. We find the agreement to be within neither the letter nor the spirit of the law, because it was not a bona fide settlement of the parties' dispute. * * * The obvious purpose of the settlement was not to resolve a dispute about what the law permitted, but to achieve something the law undisputably did not and does not permit." -43- 10 NY3d at 22, 23. Notwithstanding its focus on RSC § 2520.13, this Court's determination in Riverside was premised on the more basic concern that an agreement to allow a non-primary resident to occupy a rent stabilized apartment '"would violate the fundamental policies and purposes of the statutory rent stabilization scheme .... "' /d. at 23 (quoting Rima 106 v Alvarez, 257 AD2d 201, 204 [1st Dept 1999]). In Jazilek, supra, a former sub-tenant sought a declaration that a stipulation he entered into with the landlord was enforceable and did not waive protections granted by the RSL. This Court refused to countenance the tenant's waiver, citing both RSC § 2520.13 and public policy: "After tenant-of-record surrendered possession of a rent- stabilized apartment, landlord entered into a so-ordered stipulation with tenant, who had been subletting the apartment, for an unregulated lease purporting to fix a rent at a sum that exceeded the legal limit under the Rent Stabilization Code. Although the tenant was not 'of- record' upon entering the agreement, the so-ordered stipulation violates the Rent Stabilization Code and is void as against public policy. See Riverside Syndicate Inc. v. Munroe, 10 N.Y.3d 18, 853 N.Y.S.2d 263, 882 N.E.2d 875 [2008]; Rent Stabilization Code [9 NYCRR] § 2520.13" (emphasis supplied). 10 NY3d at 944. Here, the First Department -- ignoring public policy and exalting form over substance -- has allowed Respondent to invoke the jurisdictional and overcharge provisions of the RSL to state a cause of action against Owner, but disavow the -44- treble damage provisions of the RSL to evade CPLR 90l(b). As made clear in Riverside, Jazilek, and Drucker, supra, the RSL is not a legal menu under which a tenant gets to choose which provisions he or she wants a court to enforce. See also Extell Belnord LLC v Uppman, __ AD3d __ (1st Dept 2013); 430 Realty Corp. v New York State Div. of Housing and Community Renewal, 196 AD2d 725, 725 (1st Dept 1993); 47-40 41st Realty Corp. v New York State Div. of Housing and Renewal, 225 AD2d 547 (2d Dept 1996). Notwithstanding the courts' traditionally broad view of the anti-waiver provisions in RSC § 2520.13 in the three cases at issue herein, the First Department insisted on a narrow reading. In Downing, the First Department wrote: "Rent stabilization code (9 NYCRR) § 2520.13, which states that 'an agreement by the tenant to waive the benefit of the provision of the RSL or this Code is void,' does not require a different result. 'Plaintiffs are seeking to waive their entitlement to treble damages unilaterally, not through agreement. Thus, allowing the class action to proceed would not frustrate the RSC' s purpose of [avoiding] situations where the landlord attempts to circumvent the [RSC's] benefits"' (material in brackets in original, emphasis supplied). 107 AD 3d at 89-90. The dissent in Gudz appropriately rejected Downing's narrow view of RSC § 2520.13: "I am unpersuaded by the majority's reasoning that 9 NYCRR 2520.13 does not apply because the plaintiff purported to 'waive' the class members' rights to treble -45- damages, rather than agreeing to do so via lease or stipulation. Whether unilaterally or via agreement, the fact remains that plaintiff has agreed to give up the benefit of the statutory protection, i.e. the treble damages afforded by RSL § 26-516(a), on behalf of not only herself but the class - a far more profound impact than one individual purporting to agree to give up her rights via lease. We have previously held that an agreement 'which waives the benefit of a statutory protection is unenforceable as matter of public policy, even if it benefits the tenant' (Drucker, 30 A.D.3d at 38, 814 N.Y.S. 43 [emphasis added]). Since the effect of the waiver is to vitiate a provision integral to the RSL - the exaction of excessive rents by the landlord - I am compelled to conclude that it is void under 9 NYCRR 2520.13" (italics in original; underscoring supplied). 105 AD3d at 628. Notably, the Second Department does not share the First Department's view that RSC § 2520.13 permits ''unilateral" waivers of rights granted by the RSL. In 85 Eastern Parkway Corp. v New York State Div. of Housing & Community Renewal, 297 AD2d 675 (2d Dept 2002), a tenant submitted to DHCR a unilateral "notice of withdrawal," whereby he purported to withdraw rent overcharge and decreased service complaints he had filed with DHCR. The tenant later asserted that he had signed the notice of withdrawal under duress. DHCR declined to accept the notice of withdrawal, and the Second Department affirmed DHCR's order: "Here, there is a rational basis for the DHCR's determination concerning the merits of the intervenors' rent-overcharge complaint, and for its conclusion that the -46- rent-overcharge matter had not been effectively withdrawn. Rivera's purported withdrawal of the intervenors' complaint constituted a waiver of a benefit under the Rent Stabilization Code, and was invalid as a matter of public policy because it was not approved by the DHCR or a court of competent jurisdiction .... " 297 AD2d at 676-77 (emphasis supplied). The Second Department's decision does not refer to an "agreement," contract, or stipulation, but instead refers to a unilateral "notice of withdrawal." Accordingly, Respondent cannot waive treble damages under the RSL, either for herself or for anyone else. 6 6 The waiver of treble damages in this case is, additionally, an impermissible amendment of the complaint long after the time to do so as of right had expired pursuant to CPLR 3025, and contradicts Respondent's assertion in the (unamended) complaint that "any overcharges occurring after [the date of the Appellate Division's decision in Roberts] were willful" (R. 41). -47- POINT III EVEN IF RESPONDENT IS ALLOWED TO WAIVE A BENEFIT GRANTED BY THE RSL, CLASS CERTIFICATION SHOULD HAVE BEEN DENIED BECAUSE RESPONDENT IS NOT AN ADEQUATE OR TYPICAL REPRESENTATIVE OF THE CLASS CPLR 901(a)(4) requires the representative plaintiff to "fairly and adequately protect the interests of the class." Here, Respondent is not an adequate representative because (1) Respondent has purported to waive two-thirds of the class's potential recovery without their knowledge or consent, and (2) Respondent, at the expense of issues that may be common to the class, is likely to devote substantial time and effort to the defense of Owner's counterclaim for substantial rent arrears. A. Respondent's Unauthorized Pre-Certification Waiver of Two-Thirds of All Class Members' Potential Recovery Renders Respondent an Inadeguate Representative of the Class The class representative acts as a principal to the other class members and owes them a fiduciary duty to vigorously protect their interests. See City of Rochester v Chiarella, 65 NY2d 92, 100 (1985). Because Respondent has purported to waive two-thirds of all potential damages, both for herself and for absent class members, she is an inadequate representative as a matter of law. In the analogous case of Small v Lorillard Tobacco Co., Inc., 94 NY2d 43, 54-55 (1999) ("Small"), this Court held that class representatives who, as here, manipulate their damage claims solely to maintain a class action, are inadequate: -48- "The Appellate Division next considered whether the named representative parties would fairly and adequately protect the interests of the classes ( CPLR 901 [a] [ 4]). The Court concluded that plaintiffs had limited their claim for damages to the purchase price of cigarettes in order to shape a legally de minimis theory of the case: '[Plaintiffs] limit[ ed] their claims to losses incurred after 1980, even though defendants have allegedly been defrauding the public since the 1950's, for no other apparent reason than to make this a 'negative value' suit where each member's damages are so small that only a class action would be worth the expense of litigation.' * * * Because the named plaintiffs limited their theory in these significant ways, the Court concluded that plaintiffs' claims inadequately represented a putative class of all persons who purchased and smoked cigarettes in New York. The Appellate Division did not abuse its discretion nor did it commit an error of law in this regard." In Gudz, the dissent favorably cited Small for the proposition that the plaintiff-tenant therein was not an adequate plaintiff (105 AD3d at 629), and added: "Since the statute authorizes both actual (in the event the landlord rebuts the presumption of willfulness) and punitive damages, the named representative must seek both in order to adequately represent the interests of the proposed class (see Klapak, 79 AD2d at 602, 433 NYS2d 500)." !d. See also Russo & Dubin v Allied Maintenance Corp., 95 Misc2d 344, 348 (Sup Ct New York County 1978). -49- Ironically, in Burns v Volkswagen of America, Inc., 118 Misc2d 289 (Sup Ct Monroe County 1982), the case in which a Court first created the rule allowing a plaintiff to waive penalty damages to evade CPLR 901(b), the Court wrote: "The first and fifth causes of action are framed as requests for actual damages only and initially appear to be permissible. An action for actual damages only, however, carries with it a waiver of each class member's right to a minimum of recovery and treble damages. This may reflect adversely on the plaintiffs' fitness to represent the class" (emphasis supplied). 118 Misc2d at 293. In Standard Fire Ins. Co. v Knowles, __ U.S. __ , 133 SCt 1345, 185 LEd2d 439 (2013), the United States Supreme Court observed, without deciding, that a representative plaintiff who purports to waive substantial damages on behalf of the class may well be inadequate. There, the representative filed a proposed class action in Arkansas, and purported to "stipulate" that plaintiff and the class would seek to recover total aggregate damages of less than $5,000,000. The representative did so to evade provisions in the Class Action Certification Act ("CAFA") that give federal courts original jurisdiction over class actions where the matter in controversy exceeds $5,000,000. 28 U.S.C. § 1332(d)(2), (d)(5)(B). The Supreme Court held that the representative could not so "stipulate" to evade CAF A, and noted that: " ... a court might find that Knowles is an inadequate representative due to the artificial cap he purports to -50- impose on the class' recovery. E.g., Back Doctors Ltd. v. Metropolitan Property & Cas. Ins. Co., 637 F.3d 827, 830-831 (C.A. 7 2011) (noting a class representative's fiduciary duty not to 'throw away what could be a major component of the class's recovery')." 133 SCt at 1349. One more comment should be made about Respondent's adequacy. In opposition to Owner's motion for leave to appeal to the Court of Appeals, Respondent's attorneys wrote as follows at page 15 of the their supporting Memorandum of Law: "Further, treble damages are a nonissue in the instant case, since throughout this litigation, Landlord has maintained that, prior to this Court's decision in Roberts, it acted in good-faith reliance on overturned DHCR regulations in overcharging Class numbers. Borden concedes that the overcharges were therefore not willful, but rather were, at the time, compliant with the DHCR regulation that was declared invalid by the Roberts court" (emphasis supplied). Thus, Respondent not only purports to waive two-thirds of her fellow class members' potential damages, but even goes so far to concede in Owner's favor the as-yet unadjudicated factual and legal issues of whether any overcharges that might have been collected were willful. Apparently, Respondent will do or say anything to preserve the class action. This is precisely why she is inadequate. The First Department's willingness to overlook Respondent's waiver of two-thirds of the potential recovery of the entire class is especially troubling given -51- that Respondent has admitted that she failed to discuss this case or the waiver of two-thirds of the tenants' potential recovery with any putative class member (R. 609-10, 558). The only explanation is that the waiver of two-thirds of the tenants' potential recovery (initially made solely by attorney affirmation [R. 33]) was engineered by Respondent's attorneys in an attempt to obtain a potential award of attorneys' fees under CPLR 909. B. Respondent's Need to Defend Owner's Counterclaim for Substantial Arrears Renders her Atypical and an Inadequate Representative of the Class Where a named plaintiffs attempt to defend herself against a counterclaim would preoccupy her and detract from her representation of the class, such plaintiff is an inadequate class representative. In Globe Surgical Supply v Geico Ins. Co., 59 AD3d 129, 145 (2d Dept 2008), the Court noted that the attempt of the named plaintiffs principal "to defend himself against [a counterclaim] by GEICO would preoccupy him and detract from his representation of the class." In ruling that the named plaintiff "failed to show that it is an adequate representative of the class," the Court explained that "the representative's interest might not be aligned with those of the class, and the representative might devote time and effort to the defense at the expense of issues that are common and controlling for the class." !d. (citation omitted). Thus, "there is a danger that absent class members will suffer if -52- their representative is preoccupied with defenses umque to it." /d. (citations omitted). Here, Respondent owes Owner tens of thousands of dollars in unpaid rent (R. 438, 443). Thus, Respondent will necessarily have to spend time and legal resources defending against Owner's counterclaim. These substantial arrears put Respondent at a very real risk of eviction. Respondent is thus atypical of tenants in the subject building, as there is no other tenant with substantial rent arrears (R. 443). Given the pendency of the counterclaim, Respondent also has an incentive to bargain away rights of the putative class in order to reduce her liability for unpaid arrears. Considering that Respondent has already purported to "waive" the right to seek treble damages for all class members without their knowledge or consent (R. 557-58), this is a legitimate concern. -53- POINT IV ALLOWING A PLAINTIFF TO WAIVE STATUTORY PENALTY DAMAGES TO EVADE CPLR 901(b), UNDER ANY CIRCUMSTANCE OR STATUTE, VIOLATES CPLR 90l(b) AND ITS LEGISLATIVE INTENT In Points I-III herein, Owner has assumed, for the sake of argument, that at least under some statutes, a plaintiff may waive statutory penalty damages to evade CPLR 901(b). In Point IV, Owner asserts that such waivers should never be permitted under any circumstance. The Court of Appeals has never ruled on the issue of whether a plaintiff can ever waive statutory penalty damages to evade CPLR 90l(b). Certainly, CPLR 901(b) does not address, much less endorse, waiver. Instead, the waiver tactic is a purely judicial creation, apparently first fashioned by the motion court in Burns v Volkswagen of America, Inc., supra. In Sperry v Crompton, 8 NY3d 204, 213 (2007), however, this Court had occasion to examine and comment upon the legislative intent underlying CPLR 901(b): "By including the penalty exception in CPLR 901(b), the Legislature declined to make class actions available where individual plaintiffs were afforded sufficient economic encouragement to institute actions (through statutory provisions awarding something beyond or unrelated to actual damages), unless a statute expressly authorized the option of class action status. This makes sense, given that class actions are designed in large part to incentivize plaintiffs to sue when the economic benefit would otherwise be too small, particularly when taking -54- into account the court costs and attorneys' fees typically incurred" (emphasis supplied). Here, the Legislature provided for mandatory treble damages where a rent overcharge is found, unless the owner can establish that the overcharge was not willful. RSL § 26-516(a)~ see pp. 27-29, supra. The Legislature thus made certain that tenants -- like Respondent and the putative class members -- would be economically incentivized to pursue individual rent overcharge claims (1) before DHCR~ (2) in Supreme Court; or (3) in Civil Court, as a counterclaim or cause of action. See e.g. 72A Realty Assoc. v Lucas, 101 AD3d 401 (1st Dept 2012). Accordingly, without more, waiver should never be permitted to evade CPLR 901 (b) where the Legislature has seen fit to incentivize individual litigation. As one commentator has written: "Plaintiffs disclaiming statutorily provided damages in order to achieve class certification are arguably seeking an end-run around the Legislature's express purpose in placing a clear restriction on class actions. In enacting [CPLR] 90l(b), the Legislature intended to restrict the availability of class actions 'where individual plaintiffs were afforded sufficient economic encouragement to institute actions (through statutory provisions awarding something beyond or unrelated to actual damages ... ) "' (citing Sperry, 8 NY3d at 213). Napolitano, Avoiding the Minefields in New York Practice, NYLJ, May 18, 2009, at57,col. 1. -55- /d. Thus: "if opt-out rights are all that is required to circumvent CPLR 901(b), it may be argued that virtually any cause of action could be brought on behalf of a class, regardless of whether the legislature has specifically provided for a penalty or minimum measure of damages." Of course, the Legislature stated in CPLR 901 (b) that a plaintiff could seek penalty damages where a statute "creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action." In RSL § 26-516(a), the Legislature declined to provide such authorization, and that legislative intent cannot be overridden by self-serving waivers. In Sperry, this Court observed: "It is notable that the Legislature added the treble damages provision to the Donnelly Act shortly after having adopted CPLR 901(b). Clearly, the Legislature was aware of the requirement of making express provisions for a class action when drafting penalty statutes, and could have included such authorization in General Business Law § 340. In sum, it lies with the Legislature to decide whether class action suits are an appropriate vehicle for the award of anti-trust treble damages." 8 NY3d at 214. The same logic applies herein. CPLR Article 9 was enacted pursuant to L. 1975, ch. 207. The Legislature thereafter added the treble damages penalty set forth in RSL § 26-516(a). The Legislature could have, but did not, authorize -56- tenants to seek overcharge claims by way of a class action. As the dissent in Gudz wrote: "Since the enactment of RSL § 26-516(a) postdates that of CPLR 901(b), we must assume that the Legislature was aware that by denominating the treble damages award a 'penalty' it was foreclosing the maintenance of a class action suit [citations omitted]." 105 AD 3d at 627. Finally, the Courts in Borden, Downing, and Gudz all ruled that waivers are permissible to evade CPLR 901 (b) as long as class members are permitted to opt out of the class to pursue their punitive damage claims. In Gudz, the dissent eloquently explained why this "solution" is no solution at all: "I am similarly not persuaded 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. By allowing a class action to proceed seeking only actual damages, we permit the class to effectively rewrite RSL § 26-516(a) and undermine the Legislature's purpose in enacting the statute. Further, allowing waiver under these circumstances arguably does not satisfy due process. A putative class member would not assume that his or her rights might be compromised by waiver of potential claims for treble damages since CPLR 901(b) expressly forbids the maintenance of a class action seeking a penalty. Since an award of treble damages pursuant to RSL § 26-516(a) unequivocally constitutes a 'penalty,' no rational class member would presume that a class representative would have the right to waive these claims, and, more importantly, whether 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." -57- 105 AD 3d at 629. Accordingly, Owner respectfully asserts that this Court should hold that neither Respondent, nor any other party, may ever "waive" statutory penalty damages for purposes of evading CPLR 901 (b). POINTV RESPONDENT CANNOT MEET THE REQillRED COMMONALITY AND SUPERIORITY ELEMENTS As a predicate to granting class certification, CPLR 901(a)(2) requires the plaintiff to demonstrate that common questions of law or fact predominate over questions affecting only individuals. In addition, CPLR 901(a)(5) requires that a class action be superior to all other available methods of adjudicating the controversy. However, an April 18, 2011 letter from DHCR (the "DHCR Letter"), submitted to Supreme Court in the Roberts v Tishman Speyer litigation, raises serious doubt as to Respondent's claim that there is a predominance of common issues among the class (R. 239-41). Prior to the settlement that resolved the parties' dispute in Roberts, Supreme Court issued an Order of Referral, dated January 18, 2011, seeking guidance to help resolve the plaintiffs' rent claims by asking DHCR to provide an advisory opinion on the appropriate formula and method for establishing legal rents for each of the apartments at issue, and calculating past overcharges (R. 234-38). -58- The DHCR Letter establishes that a class action would be an inferior method of handling these cases, which, in light of the individual questions of fact and law present for each deregulated apartment, is likely to splinter into individual trials. The DHCR Letter provides a non-exhaustive list of nearly a dozen different examples of "unique facts" in which questions affecting only individuals will determine the outcome of that individual's legal rent (R. 240). The DHCR Letter states in relevant part: "Calculating the current legal regulated rent and any past rent overcharge remedies will require the application of both a complex set of statutory laws and regulations and equitable principles, which will require an understanding of facts that may be unique to each apartment... The rent stabilization laws authorize a set of rent increases applicable to rent-stabilized apartments, but application of these laws and applying equitable principles reqmres an investigation into the circumstances surrounding each lease and each subsequent rent increase for every apartment. The RSL and the RSC do not provide a formula for establishing rents for rent stabilized apartments but instead set forth specific criteria and circumstances that provide for both rent increases and rent decreases for each apartment. Equitable principles require the Court to consider whether application of RSL and RSC should apply. Examples of unique facts requiring consideration of legal and equitable principles may include, but are not limited to, whether the owner has maintained required services continuously during the tenancy, whether increases for Individual Apartment Improvements for a unit were properly documented and necessary, whether Major Capital Improvements were needed, completed properly, occurred prior to or subsequent to the beginning of the -59- tenancy, and whether the tenant was provided legal notice of such improvements, whether a preferential rent was properly set forth in a lease that reserved a higher legal rent and whether the higher rent complies with the law, whether a tenant occupied the unit as a primary residence, the material circumstances affecting vacancies of each unit, whether lease renewals were timely, whether the units were properly registered with DHCR, and whether the failure to register during the period prior to the Court's decision bars rent increases during that period. The Court may consider a number of factors to determine whether a rent increase is allowed and should be recognized for a particular apartment. See Gerard v. Clermont York Associates, LLC 2011 NY Slip Op. 1059. Each of these issues, in any combination, could impact the legal regulated rent differently for each apartment impacted by this complex litigation. Consequently, there is no general 'formula' that can be devised to arrive at an answer to the request posed by the Court's Order of Referral" (emphasis supplied) (R. 239- 240). Thus, the expert administrative agency charged with the duty of calculating regulated rents stated that individual application of both legal and equitable principles, as well as submissions of proof individual to each apartment at issue, predominate over common issues in determining Roberts-type disputes. Indeed: "Given the importance of the predominance of common issues of fact and law to a determination that class action status is warranted, courts generally will find that class action certification is inappropriate where a case-by-case analysis is necessary to ascertain the viability of individual membership in the class, the nature and extent of the damages suffered by each class member -60- and the defenses available to the defendant vis-a-vis each class member." Gawez v Inter-Connection Elec., Inc., 9 Misc3d 1107(A) (Sup Ct Kings County 2005), aff'd 44 AD3d 898 (2d Dept 2007). In the specific context of alleged rent stabilization overcharges, in Daniel v New York State Div. of Housing and Community Renewal, 179 Misc2d 452, 460 (Sup Ct New York County 1998), petitioner-tenants sought to annul DHCR's denial of various overcharge claims. The Court rejected the petitioners' request for class certification, holding: "there is no single issue of fact or law common to the proposed class which predominates over any questions affecting only individual members. The unique factual circumstances concerning the denials of the various overcharge complaints are not common to all members of the class." /d. (emphasis supplied). In fact, in order to reconstruct the allowable rent in the absence of luxury decontrol for any apartment at issue, Respondent's attorneys would require Supreme Court to evaluate, for each such apartment, the initial base rent applicable to the apartment under rent regulation, and for each relevant year, the rent increases and adjustments to which Owner was entitled, such as for individual apartment improvements and vacancies. Such process ordinarily entails scrutinizing voluminous invoices and cancelled checks evidencing improvements to an apartment, together with leases, rent ledgers, and other evidence of the - 61- apartment's rental history. This task would effectively foist onto Supreme Court the primary function of DHCR's on-staff administrative experts. The interests of judicial economy mandate that a class action is an inferior method of adjudicating this dispute. In Osarczuk v Associated Universities, Inc., 82 AD3d 853 (2d Dept 2011), the Court found that the questions of commonality and the superiority of a class action were, as here, inseparable. The Court denied class certification, holding that: "individualized investigation, proof, and determination would need to be made, not only on complicated questions such as the extent of damage, if any, to the numerous individual properties and their diminished market value, but as to causation... Accordingly, '[i]n view of the complicated issues of fact which must be resolved on an individual basis ... common questions of law and fact do not predominate in this action,' and the class action is not the superior method of adjudication of these claims" (internal citation omitted). See also Rosenfeld v A. H. Robins Co., Inc., 63 AD2d 11, 19 (2d Dept 1978); CLC/CFI Liquidating Trust v Bloomingdale's, Inc., 50 AD3d 446, 447 (1st Dept 2008). The same problems are present herein, and, therefore, the same rule should be applied. The task of calculating different rents for the apartments allegedly at issue herein -- each with different base rents, permissible increases, and other unique factors-- is simply not suitable for class-wide determination. -62- In light of the foregoing, the First Department erred when it held that Respondent met her burden of establishing the commonality and superiority elements required for certification of a class. -63- CONCLUSION THIS COURT SHOULD REVERSE THE RENEWAL ORDER AND ISSUE AN ORDER DENYING CLASS CERTIFICATION Dated: New York, New York January 17, 2014 JEFFREY TURKEL DANI SCHWARTZ Of Counsel Respectfully submitted, ROSENBERG & ESTIS, P.C. Attorne s for Defendant-Appellant By: chwartz 733 Third A venue New York, New York 10017 (212) 867-6000 -64-