Julie Conason, et al., Respondents,v.Megan Holding, LLC, et al., Appellants.BriefN.Y.January 13, 2015COURT OF APPEALS OF THE STATE OF NEW YORK ----------------------------------------------------------------x APL- 2013-00352 JULIE CONASON and GEOFFREY BRYANT Index No. 106560/11 Plaintiff-Respondents, -against- MEGAN HOLDING, LLC and EMMANUEL KU, Defendants–Appellants. -----------------------------------------------------------------x BRIEF OF AMICI CURIAE ASSOCIATION FOR NEIGHBORHOOD AND HOUSING DEVELOPMENT, LEGAL AID SOCIETY, LEGAL SERVICES NYC, & NEW YORK STATE TENANTS & NEIGHBORS COALITION, IN SUPPORT OF PLAINTIFF-RESPONDENTS LEGAL SERVICES NYC EDWARD JOSEPHSON, Of Counsel 105 Court Street Brooklyn, NY 11201 Attorneys for Amici Curiae ejosephson@lsny.org (718) 237-5538 (718) 855-0733 (fax) ADRIENE HOLDER, Attorney in Charge, Civil Practice ELLEN DAVIDSON, ESQ., of counsel THE LEGAL AID SOCIETY 199 Water Street New York, New York 10038 December 19, 2014 Tel.: (212) 577-3339 TABLE OF CONTENTS Page TABLE OF AUTHORITIES 1 PRELIMINARY STATEMENT 3 INTEREST OF AMICI CURIAE 4 ARGUMENT: I. THE APPELLATE DIVISION CORRECTLY APPLIED THIS COURT’S HOLDING IN GRIMM V. DHCR WHEN IT REMANDED THE PROCEEDING BELOW TO DHCR TO INVESTIGATE THE LEGALITY OF THE BASE DATE RENT. 7 II. REVERSAL OF THE HOLDING BELOW WOULD ENCOURAGE EVASION OF THE RENT LAWS AND CONTRIBUTE TO LOSS OF AFFORDABLE HOUSING IN LOW AND MODERATE INCOME COMMUNITIES IN NEW YORK CITY. 17 CONCLUSION: 21 TABLE OF AUTHORITIES Cases Clearwater Realty Co. v. Yonac, 8 Misc.3d 115, 800 N.Y.S.2d 268 (App. Term 1st Dep’t 2005) 12 506 West 150th St., LLC v. Prier, 36 Misc.3d 1201(A) 953 N.Y.S.2d 549 (Civ. Ct. N.Y. Co. 2012) 10 Grimm v. DHCR, 15 N.Y.3d 358 (2010) 4, 9, 10, 16 Heller v. Middagh St. Assoc., 4 A.D.3d 332, 771 N.Y.S.2d 533 (2nd Dep’t 2004) 15 Jemrock Realty Co. LLC v. Krugman, 72 A.D.3d 438, 899 N.Y.S.2d 161 (1st Dep’t 2010) 12 Martin v. Broadway Sky, LLC, 2012 WL 171017 (Sup. Ct. N.Y. Co. 2012) 10 Pehrson v. DHCR, 34 Misc.3d 1220(A), 946 N.Y.S.2d 68 (Sup. Ct. N.Y. Co. 2011) 16 Roberts v. Tishman-Speyer Properties, LP, 13 N.Y.3d 270 (2009) 15 Ruiz v. Chwatt Assoc., 247 A.D.2d 308, 669 N.Y.S.2d 47 (1st Dep’t 1998) 15 Sage Franklin, LLC v. Cameron, 10 Misc.3d 1069(A), 814 N.Y.S.2d 565 (Civ. Ct. Kings Co. 2005) 10 Thornton v. Baron, 5 N.Y.3d 175 (2005) 7, 8, 9,13 Statutes and Regulations N.Y. State Register, April 24, 2013 at 13, http://docs.dos.ny.gov/info/register/2013/april24/pdf/rulemaking.pdf 18 Reports and Studies Association for Neighborhood and Housing Development, 18 The $20,000 Stove: How Fraudulent Rent Increases Undermine New York’s Affordable Housing. January 2009. (Available at http://www.anhd.org/resources/the$20,000stovereport.pdf.) Community Service Society, Making the Rent, 2005 to 2011, (available at http://www.cssny.org/publications/entry/ making-the-rent-before-and-after-the-recessionJune2012) 18 Furman Center, State of New York City’s Subsidized Housing: 2011, available at http://furmancenter.org/files/publications/ SHIPReportFinal.pdf 17 Make the Road New York, Rent Fraud: Illegal Rent Increases and the Loss of Affordable Housing in New York City. August 2011. (Available at http://www.maketheroad.org/pix_reports/DHCR%20Report.pdf) 19, 20 PRELIMINARY STATEMENT Through a scheme involving egregious fraud, Defendants-Appellants Emmanuel Ku and Meghan Holding LLC (hereinafter “Ku”) inflated the rent for the subject apartment from the $475 charged to the prior tenant Jacob Rivera to the $2000 stated in Plaintiff-Respondent’s lease – an increase of 421 per cent. The record established that Ku invented a wholly fictitious tenant named Suzuki Oki whose tenancy he registered two months after Julie Conason and Geoffrey Bryant took occupancy. In the Civil Court trial, whose findings were properly given estoppel effect below, Ku’s own building superintendent testified that the apartment was completely vacant between the tenancies of Mr. Rivera and Ms. Conason, and his testimony was confirmed by the utility records showing no active account during that time period. Ku, testifying in the Civil Court, produced no lease or proof of rent payments for Ms. Oki, nor did he submit proof of any vacancy improvements that would have justified Ms. Oki’s rent of $1000 (had she been real) or the $2000 rent in Ms. Conason’s lease. Properly relying on this Court’s holdings in Grimm v. DHCR, 15 N.Y.3d 358 (2010), and Thornton v. Baron, 5 N.Y.3d 175 (2005), the Appellate Division below correctly held that given the “significant evidence of fraud in the record,” the four year statute of limitations did not bar a challenge to the base date rent, which the trial court properly established pursuant to the DHCR default formula. Reversal of the decision below would sanction the type of brazen fraud exemplified by Emmanuel Ku’s actions, render incoherent the body of case law that rests upon Grimm and Thornton, and open the doors to the wholesale subversion of the Rent Stabilization scheme. This Court should therefore affirm the decision of the Appellate Division below. INTERESTS OF AMICI CURIAE Association for Neighborhood Housing Development The Association for Neighborhood Housing Development (ANHD) is a membership group including over 90 community organizing and housing development groups in all five boroughs. ANHD and its members regularly assist tenants in contesting rent overcharges imposed by their landlords, and has authored numerous studies on the impact of unlawful rent overcharges on New York City’s affordable housing crisis. Legal Services NYC Legal Services NYC, through its 18 community-based offices and numerous outreach sites located throughout each of the city’s five boroughs, provides expert legal assistance to low income New Yorkers. Historically, Legal Services NYC’s key priority areas have included housing, government benefits and family law; in recent years, Legal Services NYC has litigated numerous cases related to projects with expiring State and federal subsidy contracts, and has first-hand experience with the displacement pressures experienced by their tenants. The Legal Aid Society The Legal Aid Society is the oldest and largest program in the nation providing direct legal services to low income families and individuals. Through a network of 10 neighborhood and courthouse-based offices in all five boroughs and 23 city-wide and special projects, the Civil Practice provides free direct legal assistance in thousands of matters annually. The Society’s legal assistance includes a full range of legal problems in the areas of immigration, domestic violence and family law, employment, housing and public benefits, foreclosure prevention, elder law, tax, community economic development, health law and consumer law. The Legal Aid Society has engaged in extensive litigation to prevent displacement of tenants from subsidized housing projects facing contract expiration, mortgage prepayment, or foreclosure. New York State Tenants & Neighbors Coalition: The NYS Tenants & Neighbors Coalition is the largest state-wide tenants’ rights organization in New York, with a thirty year record of helping tenants defend their homes, communities, and their rights. Tenants & Neighbors works to preserve at-risk affordable housing in New York State, including housing covered by state and federal housing programs, and to strengthen tenants’ rights at the local, state, and national level. I. THE APPELLATE DIVISION CORRECTLY APPLIED THIS COURT’S HOLDING IN GRIMM V. DHCR WHEN IT REMANDED THE PROCEEDING BELOW TO DHCR TO INVESTIGATE THE LEGALITY OF THE BASE DATE RENT. Although Defendant-Appellants indulge in a lengthy discussion of the legislative history and public policies underlying the Rent Stabilization Law, they cannot, and do not contest that this case must be decided within the framework established by this Court in Grimm v. DHCR, 15 N.Y.3d 358 (2010), and Thornton v. Baron, 5 N.Y.3d 175 (2005), in which this Court carefully weighed the legislative language and history that Emmanuel Ku rehearses in such great detail, as if he believed that this Court were now writing on a blank slate. In Thornton v. Baron, 5 N.Y.3d 175 (2005), this Court held that where no reliable rent records are available in overcharge cases due to the landlord’s fraudulent conduct, the “base date rent” charged four years prior to the tenant’s overcharge complaint is not immune to challenge. In Thornton, the owner of an apartment building took advantage of the statutory exemption for non-primary residences to create a scheme to remove apartments from the protections of rent regulation. Id. at 178. The owner and an illusory tenant stipulated that the apartments would not be used as primary residences, thereby allowing the owner to offer leases that charged far more than the legal stabilized rent. Id. The apartments were then leased to the actual occupants who were required to sign agreements that – contrary to fact – they would not use the apartments as their primary residences. Id. The owner used the courts to legitimize this fraudulent agreement by entering into consent judgments, which upheld the terms of the agreement. Id. The owner then filed annual rent registrations, and, using the agreed-upon rents, listed the apartments as exempt from rent stabilization. Id. at 178-79. Under these circumstances, this court found that prohibiting the tenant from challenging the fraudulent base date rent would violate the public policy of New York. Id. at 181. This court concluded that where a lease established an illegal rent, the rent registration that listed this illegal rent was a nullity and that in these circumstances, “the default formula used by DHCR to set the rent where no reliable rent records are available was the appropriate vehicle for fixing the base date rent....” Id. at 181. The Thornton court offered a compelling rationale for using the default formula where there are no reliable records available on the base date: The dissent would ignore the defendant’s fraudulent conduct and fix the rent at an amount likely soon to result in the apartment’s permanent removal from rent stabilization, thereby rewarding the owner’s wrongdoing. Under the dissent’s rule, a landlord whose fraud remains undetected for four years – however willful or egregious the violation – would, simply by virtue of having filed a registration statement, transform an illegal rent into a lawful assessment that would form the basis for all future rent increases. Indeed, an unscrupulous landlord in collusion with a tenant could register a wholly fictitious, exorbitant rent and, as long as the fraud is not discovered for four years, render that rent unchallengeable. That surely was not the intention of the Legislature when it enacted the RRRA. Its purpose was to alleviate the burden on honest landlords to retain rent records indefinitely … not to immunize dishonest ones from compliance with the law. Id. at 181 [emphasis added]. In Grimm v. DHCR, 15 N.Y.3d 358 (2010), this court reaffirmed its holding in Thornton, and upheld the order of the Appellate Division remanding an overcharge proceeding to DHCR for investigation of the tenant’s allegations of fraud. This court specifically rejected DHCR’s contention that the holding in Thornton “should be constrained to the narrow set of circumstances described in that case.” Id., at 366. The court emphasized that “where the overcharge complaint alleges fraud, as here, DHCR has an obligation to ascertain whether the rent on the base date is a lawful rent.” Id. In Grimm, the tenant set forth numerous “indicia of fraud”, including allegations “that the tenants immediately preceding petitioner paid significantly more than the previously registered rent, and were not given a rent-stabilized lease rider,” and that the prior tenants “were informed that their rent would be higher but for their performance of upgrades and improvements at their own expense.” In addition, the court noted irregularities in the rent registration history contemporaneous with the alleged fraud. In addition, Ms. Grimm’s initial lease did not contain a rent-stabilized rider. The court found that the “combination of these factors should have led DHCR to investigate the legality of the base date rent, rather than blindly using the rent charged on the date four years prior to the filing of the rent overcharge claim.” Id. In the instant case, the record was far more developed than it was in Grimm, and was replete with “indicia of fraud” that were, if anything, more compelling. Emmanuel Ku invented a wholly fictitious tenant in an attempt to justify a rent increase of 421 per cent, personally giving false testimony in the Civil Court trial that was contradicted by his own employee and by the utility records pertaining to the apartment. Notably, although Julie Conason was not charged more than $1800 when she took occupancy, Ku’s fraudulent drafting of her lease to set forth a “legal rent” of $2000 and a “preferential rent” of $1800 laid the foundation for Ku to later claim that the apartment had been deregulated pursuant to the high rent decontrol provision of Rent Stabilization Law § 26-504.2. (R. 74, 81.) Ku’s actions below were thus similar to the “fraudulent deregulation scheme to remove an apartment from the protections of rent stabilization” that under Grimm constitutes grounds to permit a challenge to the base date rent. Id., 15 N.Y.3d at 367.1 The Appellate Division was therefore correct in finding that DHCR failed to properly investigate the tenant’s allegations of fraud as mandated by this court’s decision in Grimm, and in remanding the proceeding for DHCR to develop a full record with respect to the legality of the base rent. DHCR’s persistent pattern of turning a blind eye to clear indications of fraud encourages evasion of the rent laws and exacerbates the City’s affordable housing crisis. This court should therefore affirm the Appellate Division’s holding below, and direct DHCR to perform the investigation mandated by Grimm and Thornton. 1 To the extent that Conason was challenging the unlawful deregulation of her apartment based on a lease that facially triggered the decontrol provisions of RSL § 26-504.2, such a challenge did not trigger the four year statute of limitations applicable to overcharge claims. II. REVERSAL OF THE HOLDING BELOW WOULD ENCOURAGE EVASION OF THE RENT LAWS AND CONTRIBUTE TO LOSS OF AFFORDABLE HOUSING IN LOW AND MODERATE INCOME COMMUNITIES IN NEW YORK CITY. New York City’s affordable housing crisis has continued to worsen since the recession that began in 2008. The city’s median monthly rent rose by 18 percent between 2000 and 2009, while incomes have remained nearly stagnant. Furman Center, State of New York City’s Subsidized Housing: 2011, Furman Center, State of New York City’s Subsidized Housing: 2011, at 11 (available at http://furmancenter.org/files/publications/SHIPReportFinal.pdf). In 2009, 49 percent of New York tenants paid more than 30 percent of their household income on rent, compared to 41 percent in 2000. Id. For residents with household incomes below 50 percent of the New York City Median Income, only 18 percent of all rental units (and 4% of market rate rental units) were affordable in 2009, compared to 27 percent of units in 1990. Id. The median rent burden for low-income tenants without federal housing assistance was 49% of household income in 2011. For the very poor, burdens were substantially higher – 65 percent of income. By 2011, virtually half of low income families were paying over half their income as rent, while among the poor, the increase over the last 5 years in families paying over 50 percent of income was astronomical, from 66 to 80 percent. Community Service Society, “Making the Rent, 2005 to 2011”at 7 (available at http://www.cssny.org/publications/entry/ making-the-rent-before-and-after-the-recessionJune2012). DHCR has acknowledged that Individual Apartment Improvements increases upon vacancy make up one the largest components of increases under the Emergency Tenant Protection Act. N.Y. State Register, April 24, 2013 at 13, http://docs.dos.ny.gov/info/register/2013/april24/pdf/rulemaking.pdf. However, DHCR provides no review of these increases unless a tenant files a rent overcharge complaint. Id. This lack of oversight has led to a system where landlords raise rents illegally with impunity. Landlords have been aided in this effort by DHCR’s failure to examine rents even when there are clear indications of fraud. Amicus, The Association for Neighborhood and Housing Development (ANHD) examined the Individual Apartment Increase program and found that this lack of oversight by DHCR has led to widespread fraud and a significant loss of affordable housing. See, Association for Neighborhood and Housing Development, The $20,000 Stove: How Fraudulent Rent Increases Undermine New York’s Affordable Housing, January 2009 (available at http://www.anhd.org/resources/the$20,000stovereport.pdf.) The report found that there is no regulatory oversight over this program and landlords are allowed to unilaterally impose IAI rent increases without prior approval, or even documentation. Id. at 4. As a consequence, fraud is increasingly common. Interestingly enough, one of the case studies described in this report, the tenant contacted her landlord’s management company to understand how it was possible that $42,100 was spent in her small and shabby apartment. The tenant was told that her landlord assessed a IAI on every vacant apartment in her building based on $42,000, even though that amount was not actually spent. Id. at 6. The consequences of this fraudulent activity in a system with no oversight, is that thousands of units of affordable housing have been lost. Id. at 10. Amicus Make the Road NY issued a similar report that examined illegal rent increases found that 62% of rent fraud occurred following a period of apartment vacancy. See, Make the Road New York, Rent Fraud: Illegal Rent Increases and the Loss of Affordable Housing in New York City at 5, August 2011 (available at http://www.maketheroad.org/pix_reports/DHCR%20Report.pdf). In this report, Make the Road New York found that tenants who move into vacant apartments are usually unfamiliar with the unit’s prior rent or improvement history, and are therefore particularly susceptible to fraudulent rent increases. The report studied 200 rent histories selected randomly from across the city. Id. at 4. The report found that rent overcharges are endemic. Id. at 5. Those rent overcharges are more likely to be occur after a vacancy lease and when there is fraud or irregularity in one unit, there is most likely irregularities in other units in the same building. Of the buildings with illegal rents, 65% had two or more units with suspicious rent increases. Id. at 5. DHCR’s failure to examine tenant complaints about landlord fraud has encouraged evasion of the rent laws and has contributed to the loss of affordable housing in low and moderate income communities in New York City. In recent years, it has been the Courts that have urged DHCR to examine rent histories and enforce the law. Reversal of the decision below would grant landlords impunity to illegally increase rents and deregulate affordable units and would provide DHCR the incentive to avoid its mandate of enforcing the rent laws. CONCLUSION For all the above reasons, this court should affirm the below holding of the Appellate Division, First Department. Dated: December 19, 2014 Brooklyn, New York Respectfully submitted, LEGAL SERVICES NYC EDWARD JOSEPHSON, Of Counsel 105 Court Street Brooklyn, NY 11201 Attorneys for Amici Curiae (718) 237-5538 ejosephson@lsny.org ADRIENE HOLDER, Attorney in Charge, Civil Practice ELLEN DAVIDSON, ESQ., of counsel THE LEGAL AID SOCIETY 199 Water Street New York, New York 10038 Tel.: (212) 577-3339 ebdavidson@legal-aid.org