Elisa Downing, et al., Respondents, v, First Lenox Terrace Associates, et al., Appellants.

Brief

N.Y.October 14, 2014

To be Argued by: MATTHEW D. BRINCKERHOFF (Time Requested: 30 Minutes) APL-2013-00314 New York County Clerk’s Index No. 100725/10 Court of Appeals of the State of New York   ELISE DOWNING, LOIS HENRY, LARRY MCMILLAN, LYNDA STEWART, ALBERT TAYLOR, MARY WHITE, TEZ BOIS, BARBARA JONES, JERILYN MABRY, VANESSA MACDONNA, RISA SCHNEIDER, GEORGE STARCKEY, and YVONNE STONE, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Respondents, – against – FIRST LENOX TERRACE ASSOCIATES, SECOND LENOX TERRACE ASSOCIATES, THIRD LENOX TERRACE ASSOCIATES, FOURTH LENOX TERRACE ASSOCIATES, FIFTH LENOX TERRACE ASSOCIATES, SIXTH LENOX TERRACE ASSOCIATES, and ROC-CENTURY ASSOCIATES, LLC, THE TRUST U/W/O ROBERT S. OLNICK, ROBERT S. OLNICK and SYLVIA OLNICK IRREVOCABLE TRUST, THE MILTON SCHUMER TRUST, LFI MARINA, LLC, MEREDITH LANE VERONA, NANCY OLNICK SPANU, RUTH FEINBERG and TOBETTE FEINBERT, Defendants-Appellants. BRIEF FOR PLAINTIFFS-RESPONDENTS EMERY CELLI BRINCKERHOFF & ABADY LLP 75 Rockefeller Plaza, 20th Floor New York, New York 10019 Tel.: (212) 763-5000 Fax: (212) 763-5001 – and – HIMMELSTEIN MCCONNELL GRIBBEN DONOGHUE & JOSEPH 15 Maiden Lane, 17th Floor New York, New York 10038 Tel.: (212) 349-3000 Fax: (212) 587-0744 Attorneys for Plaintiffs-Respondents Date Completed: March 26, 2014 i STATUS OF RELATED LITIGATION Pursuant to this Court’s Rule of Practice 500.13(a), Respondents hereby inform the court of the status of related litigation as of the date this brief is completed. Two other related cases from Supreme Court, New York County, are simultaneously on appeal to this Court from the First Department of the Appellate Division: Gudz v Jemrock Realty Co., LLC (Index No. 2013-00313), and Borden, et al. v. 400 E. 55th St. Assocs., L.P. (Index No. 2013-00312). This case and the two related cases are all purported class actions in which plaintiffs are tenants who rely on this Court’s decision in Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d 270 (2009), to allege that the defendant landlords wrongfully deregulated rent-controlled and rent-stabilized apartments while receiving J-51 benefits. In the two related cases, the defendant landlords appeal from decisions of the First Department, each of which affirms a ruling by the Supreme Court granting the plaintiff tenants class certification. In this case, the defendant landlords appeal from a decision by the First Department reversing the Supreme Court’s dismissal of the plaintiff tenants’ individual and purported class complaints prior to a motion for class certification. Appellants’ briefs were filed in Gudz on January 14, 2014 and in Borden on January 21, 2014. Respondents’ briefs in both Gudz and Borden were filed on March 21, 2014. ii TABLE OF CONTENTS STATUS OF RELATED LITIGATION .................................................................... i PRELIMINARY STATEMENT ............................................................................... 1 FACTS ....................................................................................................................... 4 PROCEDURAL HISTORY ....................................................................................... 7 I. Trial Court Proceedings ............................................................................ 7 II. Appellate Division Proceedings ................................................................ 9 RELATED CASES .................................................................................................. 11 LEGAL STANDARDS ........................................................................................... 13 ARGUMENT ........................................................................................................... 14 I. Plaintiffs May Forgo the Class-Wide Pursuit of Treble Damages Under RSL § 26-516(a) ........................................................... 16 A. Requesting Limited Relief as a Plaintiff Does Not Constitute an Impermissible “Waiver” ..................................................... 19 B. RSL § 26-516(a) Provides for Recovery of Actual Damages ............................................................................. 24 II. CPLR 901(b) Does Not Prohibit Plaintiffs’ Class Action ...................... 26 III. Allowing This Action to Proceed Furthers the Policies of RSL § 26- 516(a) and Article 9................................................................................. 32 A. Denying Certification Would Turn RSL § 26-516(a)’s Incentive for Plaintiffs Into a Handicap .................................. 33 B. Opt-Out Provisions and Issue Certification, Combined with Rule 901(b), Fully Protect the Rights of All Parties ............... 36 1. Opt-Out Preserves Every Tenant’s Right to Forge an Individual Trial Strategy…………………………........…………36 iii 2. Issue Certification Under CPLR 906(1) Preserves Tenants’ Rights to Seek Treble Damages in Individual Actions………………………………………………..…………38 CONCLUSION ........................................................................................................ 41 iv TABLE OF AUTHORITIES State Cases 390 W. End Assocs. v. Harel, 298 A.D.2d 11 (1st Dep’t 2002) ........................................................................... 20 72A Realty Assocs. v. Lucas, 101 A.D.3d 401 (1st Dep’t 2012) ......................................................................... 34 85 E. Parkway Corp. v. DHCR, 297 A.D.2d 675 (2d Dep’t 2002).......................................................................... 21 Amerelay, Inc. v. Directomat, Inc., 7 A.D.2d 388 (1st Dep’t 1959) ............................................................................. 18 Asher v. Abbott Labs, 290 A.D.2d 208 (1st Dep’t 2002) .................................................................... 9, 25 Borden, et al. v. 400 E. 55th St. Assocs., L.P., 105 A.D.3d 630 (1st Dep’t 2013 ............................................................. 11, 12, 39 Chem. Specialties Mfrs. Ass’n v. Jorling, 85 N.Y.2d 382 (1995) ........................................................................................... 25 City of N.Y. v. Maul, 14 N.Y.3d 499 (2010) .................................................................................... 13, 38 Commonwealth of N. Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55 (2013) ............................................................................................. 26 Cox v. Microsoft Corp, 8 A.D.3d 39 (1st Dep’t 2004) ............................................................................... 29 Draper v. Georgia Properties, Inc., 230 A.D.2d 455 (1st Dep’t 1997) ......................................................................... 20 Drucker v. Mauro, 30 A.D.3d 37 (1st Dep’t 2006) ............................................................................. 20 Estro Chem. Co. v. Falk, 303 N.Y. 83 (1951) .................................................................................. 19, 21, 24 v Extell Belnord LLC v. Uppman, 113 A.D.3d 1 (1st Dep’t 2013) ............................................................................. 19 Friar v. Vanguard Holding Corp., 78 A.D.2d 83 (2d Dep’t 1980) ................................................................. 35, 36, 38 Gudz, et al. v. Jemrock Realty Co., LLC, 105 A.D.3d 625 (1st Dep’t 2013) ...................................................... 11, 12, 13, 37 H.O. Realty Corp. v. State of N.Y. Div. of Hous. & Cmty. Renewal, 46 A.D.3d 103 (1st Dep’t 2007) ........................................................................... 16 Hill v. Wek Capital Corp., 4 A.D.2d 616 (1st Dep’t 1957) ................................................................ 17, 23, 24 In re N.Y., Lackawanna & W. R.R. Co., 98 N.Y. 447 (1885) ............................................................................................... 18 Jacobs v. Macy’s E., Inc., 17 A.D.3d 318 (2d Dep’t 2005) ............................................................................ 30 Jazilek v. Abart Holdings, LLC, 10 N.Y.3d 943 (2008) ........................................................................................... 21 Leon v. Martinez, 84 N.Y.2d 83 (1994) ............................................................................................. 13 Lex 33 Assocs., L.P. v. Grasso, 283 A.D.2d 272 (1st Dep’t 2001) ......................................................................... 18 Liechtung v. Tower Air, Inc., 269 A.D.2d 363 (2d Dep’t 2000)................................................................... 13, 33 Livbros LLC v. Vandenburgh, 179 Misc. 2d 736 (Civ. Ct., Kings Cnty. 1999) ................................................... 22 Matinzi v. Joy, 60 N.Y.2d 835 (1983) ........................................................................................... 23 Mitchell v. N.Y. Hosp., 61 N.Y.2d 208 (1984) .................................................................................... 18, 24 vi Mohassel v. Fenwick, 5 N.Y. 3d 44 (2005) .............................................................................................. 32 Park W. Mgmt. Corp. v. Mitchell, 47 N.Y.2d 316 (1979) ........................................................................................... 21 Pesantez v. Boyle Envtl. Services, 251 A.D.2d 11 (1st Dep’t 1998) .................................................................... 29, 37 Pierpoint v. Hoyt, 260 N.Y. 26 (1932) ............................................................................................... 18 Pruitt v. Rockefeller Ctr. Props., 167 A.D.2d 14 (1st Dep’t 1991) .............................................................. 33, 36, 41 Ridge Meadows Homeowners’ Ass’n, Inc. v. Tara Dev. Co., Inc., 242 A.D.2d 947 (4th Dep’t 1997) ........................................................... 29, 30, 37 Riverside Syndicate, Inc. v. Munroe, 10 N.Y.3d 18 (2008) ................................................................................ 19, 23, 24 Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d. 270 (2009) ........................................................................... 6, 7, 27, 34 Small v. Lorrilard, 94 N.Y.2d 43 (1999) ............................................................................................. 35 Sperry v. Crompton Corp., 8 N.Y.3d 204 (2007) ..................................................................................... passim Stellama v. Vantage Press, Inc., 109 A.D.2d 423 (1st Dep’t 1985) ......................................................................... 41 Super Glue Corp. v. Avis Rent A Car Sys. Inc., 132 A.D.2d 604 (2d Dep’t 1987)............................................................. 29, 30, 37 Todd v. Pearl Woods, Inc., 20 A.D.2d 911 (2d Dep’t 1964) ............................................................................ 17 Weinberg v. Hertz Corp., 116 A.D.2d 1 (1st Dep’t 1986) ...................................................................... 29, 30 vii Federal Cases Ansoumana v. Gristede’s Operating Corp., 201 F.R.D. 81 (S.D.N.Y. 2001) ............................................................................ 32 Archibald v. Marshalls of MA, Inc., No. 09 CV 2323 (LAP), 2009 WL 3817404 (S.D.N.Y. Nov. 12, 2009) ............. 31 Brzychnalski v. Unesco, Inc., 35 F. Supp.2d 351 (S.D.N.Y. 1999) ..................................................................... 32 Burns v. Volkswagen of Am., 118 Misc.2d 289 (Sup. Ct. Monroe Cnty. 1982) .................................................. 30 Cohen v. Gerson Lehrman Grp., Inc., 686 F. Supp.2d 317 (S.D.N.Y. 2010) ................................................................... 31 de la Cruz v. Gill Corn Farms, Inc., No. 03-CV-1133, 2005 WL 5419056 (N.D.N.Y. Jan. 25, 2005) ......................... 32 Dugan v. London Terrace Gardens, LP, 34 Misc. 3d 1240(a) (N.Y. Sup. 2011) ................................................................. 34 Freeman v. Hoffmann-LaRoche, Inc., No. 07-1503, 2007 WL 4440875 (D.N.J. Dec.18, 2007) ..................................... 31 Gonzalez v. Nicholas Zito Racing Stable Inc., No. 04 CV 22 SLT AKT, 2008 WL 941643 (E.D.N.Y. Mar. 31, 2008) ............. 31 Hinterberger v. Catholic Health, No. 08-CV-380S, 2008 WL 5114258 (W.D.N.Y. Nov. 25, 2008) ...................... 31 Iglesias-Mendoza v. La Belle Farm, Inc., 239 F.R.D. 363 (S.D.N.Y. 2007) .......................................................................... 31 In re Nassau Cnty Strip Search Cases, 461 F.3d 219 (2d Cir. 2006) ................................................................................. 39 Klein v. Ryan Beck Holdings, Inc., No. 06 CIV. 3460 WCC, 2007 WL 2059828 (S.D.N.Y. July 13, 2007) ...... 31, 38 Krebs v. Canyon Club, Inc., 22 Misc. 3d 1125(A) (Sup. Ct. Westchester Cnty. 2009) .................................... 29 viii Krichman v. J.P. Morgan Chase & Co., No. 06 cv 15305, 2008 WL 5148769 (S.D.N.Y. Dec. 8, 2008) ........................... 31 Lamarca v. Great Atlantic & Pacific Tea Co., Inc., No. 601973/04, 16 Misc. 3d 1115(A) (Sup. Ct. N.Y. Cnty. 2007) ...................... 29 Lee v. ABC Carpet & Home, 236 F.R.D. 193 (S.D.N.Y. 2006) .......................................................................... 32 Leider v. Ralfe, 387 F. Supp.2d 283 (S.D.N.Y. 2005) ................................................................... 32 Lewis v. Nat’l Financial Sys., Inc., No. 06-1308, 2007 WL 2455130 (E.D.N.Y. Aug. 23, 2007) .............................. 32 Mascol v. E & L Transp., Inc., No. CV-03-3343 CPS, 2005 WL 1541045 (E.D.N.Y. June 29, 2005) ................ 32 Mendez v. The Radec Corp., 260 F.R.D. 38 (W.D.N.Y. 2009) .......................................................................... 31 Niemiec v. Ann Bendick Realty, No. 1:04-cv-00897-ENV-KAM, 2007 WL 5157027 (E.D.N.Y. Apr. 23, 2008) . 31 Noble v. 93 Univ. Place Corp., 224 F.R.D. 330 (S.D.N.Y. 2004) .......................................................................... 32 Shady Grove Orthopedic Associates v. Allstate Insurance Co., 559 U.S. 393 (2010) ............................................................................................. 31 Smellie v. Mount Sinai Hosp., No. 03 Civ. 805, 2004 WL 2725124 (S.D.N.Y. Nov. 29, 2004) .................. 17, 32 Torres v. Gristede’s Operating Corp., No. 04 Civ. 3316, 2006 WL 2819730 (S.D.N.Y. Sept. 29, 2006) ....................... 32 Toure v. Cent. Parking Sys. of New York, No. 05 Civ. 5237(WHP), 2007 WL 2872455 (S.D.N.Y. Sept. 28, 2007) ............ 31 Westerfield v. Washington Mut. Bank, No. 6-CV-2817, 2007 WL 2162989 (E.D.N.Y. July 26, 2007) ........................... 32 ix State Statutes and Regulations CPLR § 901(a) .................................................................................................. 10, 12 CPLR § 901(b) ................................................................................................. passim CPLR § 902 .............................................................................................................. 12 CPLR § 906(1) .................................................................................................. 14, 39 CPLR § 907 .............................................................................................................. 39 CPLR 3211 .......................................................................................................... 8, 13 General Business Law § 340(5), ("Donnelly Act") ............................................ 9, 25 General Business Law § 349(h) ........................................................................ 30, 33 Labor Law § 198 ...................................................................................................... 10 Real Property Tax Law § 489 ("J-51 Law" ...................................................... 5, 6, 7 Rent Act of 2011, (L. 2011, ch. 97) ........................................................................... 5 Rent Stabilization Law § 26-516(a) ................................................................. passim N.Y.C. Admin. Code § 11-243 .................................................................................. 6 N.Y.C. Admin. Code § 26-403 .................................................................................. 5 N.Y.C. Admin. Code § 26-504 .................................................................................. 5 9 NYCRR § 2520.13 ............................................................................. 20, 22, 23, 33 Legislative History Empire State Chamber of Commerce Mem., Bill Jacket, L. 1975, ch. 207 ................................................................................. 27 Gov. Hugh Carey’s Mem. on Approving Law, Bill Jacket, L. 1975, ch. 207 ............................................................................ 1, 27 Sponsor’s Mem., Bill Jacket, L. 1975, ch. 207 ................................................. 27, 28 x State Consumer Prot. Bd.’s Mem., Bill Jacket, L. 1975, ch. 207 ................................................................................. 28 Treatises and Law Review Articles 6 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 18:7 (4th ed. 2002) ........................................................................................... 39 7AA Wright & Miller, Federal Practice & Procedure § 1790 (3d ed.2005) .............................................................................................. 39 Homburger, State Class Actions and the Federal Rule, 71 Colum. L. Rev. 609 (1971) .............................................................................. 37 McLaughlin, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, CPLR C901:11 ..................................................................................... 31 McLaughlin, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, CPLR C901:7 ....................................................................................... 30 1 PRELIMINARY STATEMENT In this putative class action on behalf of hundreds of tenants, Plaintiffs-Respondents were unlawfully charged inflated rents by Defendants- Appellants. They now seek to be made whole for several years’ worth of overcharges and to enjoin similar overcharges going forward. Two statutes, the Rent Stabilization Law (“RSL”) and CPLR Article 9, offer an assortment of tools for pursuing those objectives. Among the “weapon[s in] the consumer protection arsenal” created by these statutes is the ability, under Article 9, for persons similarly situated to “pool their resources and collectively seek relief” for their injuries Gov. Hugh Carey’s Mem. on Approving Law, Bill Jacket, L. 1975, ch. 207. Also among them is the availability, under RSL § 26-516(a), of full compensation and, in some cases, treble damages. As the Appellate Division recognized, Plaintiffs are entitled to choose from among these weapons, as long as they do not seek to recover treble damages in the context of a class action. Under CPLR § 901(b), “an action to recover a penalty . . . may not be maintained as a class action.” But beyond this limitation preventing the recovery of penalties in class action lawsuits, nothing in either Article 9 or the RSL inhibits Plaintiffs from selecting among the various remedies and mechanisms they offer, or seeking certification for all purposes except for the recovery of penalties. The relief that Plaintiffs have chosen to pursue on a class 2 basis are actual damages, pre-judgment interest, attorneys’ fees, and injunctive and declaratory relief. The Appellate Division concluded correctly that Article 9 permits Plaintiffs to proceed by way of class action to pursue these remedies because they do not include recovery of any penalty. The Appellate Division further concluded correctly that actual damages are available to Plaintiffs under RSL § 26-516(a), which allows every overcharged tenant to recover at least “the amount of the overcharge plus interest.” Section 26-516(a) also contemplates that, in some circumstances—namely, when overcharges were willful—tenants may be entitled to treble damages. But Plaintiffs have elected not to pursue treble damages as a class remedy. Because they do not seek to maintain an “action to recover a penalty . . . as a class action,” CPLR 901(b) does not apply, and the class action must be allowed to proceed. The purposes of both Article 9 and the RSL are furthered when tenants like Plaintiffs are allowed to craft a litigation strategy that they deem most effective for redressing their injuries and bringing statutory violators to account. Plaintiffs’ choice is a well-considered strategy designed to efficiently and effectively procure relief for Plaintiffs and all others similarly situated. While the allure of treble damages may seem at first glance difficult to resist, Defendants forcefully argue that their overcharge violations were made in good faith. If Defendants’ good-faith argument were to prevail, putative class members would 3 not be entitled to recover treble damages even if they were sought in individual actions. In electing to pursue a class action, class members are choosing to forgo as a class remedy a penalty that may be wholly illusory in any context. Tenants for whom the possibly chimerical promise of treble damages is nonetheless worth the risk and expense of individual lawsuits can bring such individual actions, notwithstanding certification of Plaintiffs’ putative class action. Depending on how Plaintiffs ultimately choose to pursue class treatment, and subject to the sound discretion of the trial court, tenants wishing to bring individual actions for treble damages may be required to first opt out of the class action. Alternatively, a class may be certified for the purposes of resolving particular issues, excluding willfulness and the propriety of treble damages, leaving class members free to adjudicate the excluded issues in individual lawsuits even if they participate in the class action. In either event, the mechanisms of Article 9 afford putative class members a low-risk opportunity to recover illegally excessive rents, secure protection from future abuses, and hold defendants accountable for their violations of the Rent Stabilization Law. The order of the Appellate Division should be affirmed. The complaint should be reinstated in the Supreme Court, thus allowing Plaintiffs to proceed with a motion for class certification. 4 FACTS This putative class action seeks relief on behalf of hundreds of current and former tenants who were improperly treated as residents of deregulated apartments for several years. Plaintiffs are thirteen tenants of Lenox Terrace, a privately-owned residential rental development in Harlem. R-72, 73-76, 77 (¶¶ 2, 5-17, 20). Defendants are related entities and individuals who own, operate, and/or manage Lenox Terrace. R-76-77 (¶¶ 18-19). Each of the Plaintiffs resides or resided in an apartment at Lenox Terrace that is both (i) subject to the Rent Stabilization Law (“RSL”) or the Rent Control Law (“RCL”) and (ii) has unlawfully been treated as unregulated subject to “luxury decontrol,” despite Defendants’ receipt of J-51 tax abatement benefits. R-72-73 (¶¶ 2-3). As a result of this misclassification, each Plaintiff has been charged—and continues to be charged—more than the maximum legal rent for his or her apartment. Id. Plaintiffs bring this action on behalf of themselves and hundreds of current, former, and future tenants of Lenox Terrace who have been, or may be in the future, wrongfully charged rates exceeding the legal maximum under the RSL or RCL, notwithstanding Defendants’ receipt of benefits under the J-51 Law (“the Putative Class”). R-72 (¶ 2.) Defendants’ wrongful acts are clear under the relevant statutory regime. In 1993, the New York State Legislature passed amendments to the RSL 5 and RCL, referred to as “Luxury Decontrol.” R-80 (¶ 37). One form of such Luxury Decontrol—called “High Rent/Vacancy Deregulation”—provides that certain units can be deregulated if they become vacant and the legal regulated rent or the legal maximum rent exceeded $2,000 per month. R-78-79 (¶ 28); N.Y.C. Admin. Code §§ 26-403 (k), 26-504.2(a); L. 1993, ch. 253, §§ 4, 6, effective July 7, 1993. Another form of luxury decontrol, referred to as “High Rent/High Income Deregulation,” provides that the Division of Housing and Community Renewal (the “DHCR”) can order deregulation of existing rent stabilized and rent controlled units if the legal regulated rent or the legal maximum rent exceeds $2,000 per month and the tenant’s household income exceeds a preset annual limit for two years.1 R-79 (¶ 29); N.Y.C. Admin. Code §§ 26-403 (j), 26-504.1; L. 1993, ch. 253, §§ 4, 6, effective July 7, 1993.2 The deregulation of such units is also limited by a separate regulatory scheme. Under Real Property Tax Law (“RPTL”) § 489, cities throughout New York State are authorized to promulgate local laws that provide multiple dwelling owners with certain tax incentives. R-78 (¶ 24); RPTL § 489. In exchange, the law allows cities to impose rent regulation on building owners as a quid pro quo 1 When the legislation was initially passed, this level was set at $250,000. L. 1993, ch. 253 §§ 4, 6. In 1997, the statute was amended to lower the level to $175,000 per year. L. 1997, ch. 116, §§ 12, 14, effective Jan. 1, 1997; N.Y.C. Admin. Code §§ 26-403.1, 26-504.1. 2 Pursuant to the Rent Act of 2011, the thresholds for deregulation were changed to $2,500 in rent and $200,000 in annual income (L. 2011, ch. 97). 6 for receiving tax benefits. Under the codification of New York City’s RPTL § 489 program, referred to as “the J-51 Law,” benefits are available only to dwellings that are subject to rent control or rent stabilization. R-78 (¶ 25); N.Y.C. Admin. Code § 11-243. In accordance with the 1993 luxury decontrol amendments, Defendants began deregulating apartments subject to the RCL and RSL prior to their receipt of J-51 benefits in 1996. But they did not then return deregulated units to rent regulation once they began receiving J-51 benefits, and in fact continue to unlawfully deregulate units and rent regulated units as unregulated market apartments. R-80 (¶ 35). The practical effect of such deregulation is to remove a tenant from the various protections of the RCL and RSL. R-79 (¶ 30). But since July 1, 1996, Defendants have reaped substantial tax benefits under the J- 51 program at all six Lenox Terrace buildings. R-72, 77 (¶¶ 3, 21). Upon information and belief, the total tax abatement is $790,200. R-78 (¶ 23). As confirmed by this Court in Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d. 270 (2009) , the plain language of the Luxury Decontrol amendments expressly does not apply to owners who receive benefits under RPTL § 489 or its enabling local laws, including J-51. In Roberts, this Court affirmed “that building owners who receive J-51 benefits forfeit their rights under the luxury decontrol provisions even if their buildings were already subject to the RSL.” 13 7 N.Y.3d at 283. Therefore, once they began receiving J-51 benefits in 1996, Defendants were obligated to restore units to regulation that had been previously deregulated via Luxury Decontrol through that date. R-80 (¶¶ 32, 35). They did not. Id. In addition, though it was prohibited by the plain language of the J-51 law, Defendants continued to deregulate units pursuant to Luxury Decontrol, and continued to do so through, at least, the initiation of this action. R-80 (¶ 35). Upon information and belief, Defendants have improperly deregulated and/or failed to restore to regulation approximately 20 to 30 percent of the 1,714 apartments at Lenox Terrace. R-77 (¶ 22). By deregulating these apartments, Defendants deprived the putative class members of the many benefits associated with the RSL and RCL. Plaintiffs are entitled to—and have been entitled to since 1996—these protections. PROCEDURAL HISTORY I. TRIAL COURT PROCEEDINGS Plaintiffs commenced this action on January 19, 2010. On February 17, 2010, Plaintiffs filed their Amended Verified Class Action Complaint (“the Amended Complaint”), bringing claims under the Rent Stabilization Law, and seeking to recover declaratory, injunctive, and monetary relief. On April 19, 2010, Defendants filed a motion to dismiss the Amended Complaint pursuant to CPLR 8 3211 (a)(1), (a)(5), and (a)(7). Plaintiffs filed a cross-motion for a preliminary injunction and pre-class certification discovery in June 2010. On January 27, 2011, the Supreme Court, (Ramos, J.), denied both Defendants’ motion to dismiss and Plaintiffs’ cross-motion for a preliminary injunction without prejudice, and sua sponte stayed the action pending the resolution of appeals in three related cases. On March 24, 2011, Defendants filed a motion to vacate the stay of proceedings and renew their motion to dismiss. Plaintiffs filed a cross-motion to renew their cross-motion for a preliminary injunction and pre-class certification discovery on April 21, 2011. On July 26, 2011, the parties appeared before Justice Ramos for oral argument on Defendants’ motion to dismiss. In the course of argument, Justice Ramos focused on the issue of whether CPLR 901(b) precluded certification of a class in the case. Justice Ramos stated “We’ve got a penalty situation here. It is not waiveable [sic],” R-40 (27:21-22), and “The motion to dismiss is granted. Thank you very much. There is no stay. You can bring your Housing Court action,” R-42 (30:11-13). On October 25, 2011, the Supreme Court issued a short form order, dated October 13, 2011, stating, in its entirety: The short form order entered on August 1, 2011 is hereby vacated. The motion to renew is denied and the 9 complaint is dismissed for the reasons stated in the transcript. The plaintiff [sic] may re-file its [sic] action in Housing Court if so advised. R-6. On October 31, 2011, Justice Ramos “so ordered” a Notice of Settlement of Transcript of the July 26 Argument, submitted by Defendants. R-42. II. APPELLATE DIVISION PROCEEDINGS On November 11, 2011, Plaintiffs appealed the ruling of the Supreme Court, seeking reinstatement of Plaintiffs’ individual complaint and the putative class action. The First Department granted the appeal on April 25, 2013. Writing for the court, Justice Richard T. Andrias held that the “Supreme Court erred when it dismissed the putative class action pursuant to CPLR 901(b) and the individual claims on the ground that they should be brought before the Division of Housing and Community Renewal (DHCR).” R-499. Citing a long line of Appellate Division authority, the court held, first, that “CPLR 901(b) is inapplicable where the class representative seeks to recover only actual damages” and forgoes and statutory penalties. R-500. The court then rejected Defendants’ argument that treble damages cannot be waived under RSL § 26-516(a). In this respect, the court noted, RSL § 26-516(a) differs from New York General Business Law (“GBL”) § 340(5), which the First Department had previously held in Asher v. Abbott Labs could not be enforced by class action. 290 A.D.2d 208 (1st Dep’t 2002). Under GBL § 340(5), unlike RSL § 26-516(a), 10 “treble damages are [automatically] awarded upon a finding of liability” without regard to defendants “willfulness or bad faith.” R-501. The Appellate Division deemed RSL § 26-516(a) more akin to Labor Law § 198(1-a), under which liquidated damages are contingent upon the defendants’ willfulness, and under which plaintiffs have uniformly been permitted to pursue class actions for actual damages. R-501. The Appellate Division also concluded that a tenant’s unilateral decision to forgo a statutory remedy, unlike an agreement between a landlord and a tenant to waive the benefits of the RSL, is permissible under the Rent Stabilization Code (“RSC”), as it “would not frustrate the RSC’s purpose of avoiding situations whereby the landlord attempts to circumvent the RSC’s benefits.” R-502 (internal quotation marks and alterations omitted). Finally, the Appellate Division recognized that reimbursement of rent overcharges plus interest is not a penalty within the meaning of CPLR 901(b). R-503. Accordingly, the Appellate Division held that Plaintiffs “should be allowed to proceed by way of a class action to recover their actual damages plus interest, provided class members are allowed to opt out and pursue individual actions, and plaintiffs otherwise satisfy the criteria of CPLR 901(a).” R-505. Justice Leland G. DeGrasse concurred in the result. He agreed that the Supreme Court had erred in dismissing Plaintiffs’ complaint but, in his view, 11 the error was procedural. Justice DeGrasse contended that the complaint should be reinstated because it had been prematurely dismissed. He therefore declined to address the merits of the issues now before this Court. R-507-10. Defendants now appeal only that part of the Appellate Division’s ruling that reinstated the putative class action. RELATED CASES Also presently on appeal in this Court are two additional rulings issued on April 25, 2013 by the First Department in related cases Borden, et al. v. 400 E. 55th St. Assocs., L.P., 105 A.D.3d 630 (1st Dep’t 2013), and Gudz, et al. v. Jemrock Realty Co., LLC, 105 A.D.3d 625 (1st Dep’t 2013), in which it affirmed decisions of the Supreme Court certifying class actions under RSL § 26-516(a). The facts of both Borden and Gudz are substantially similar to the facts of this case: defendants are alleged to have wrongfully deregulated rent-controlled and rent-stabilized apartments while continuing to receive J-51 benefits. But this appeal, unlike the appeals in Borden and Gudz, is from a motion to dismiss Plaintiffs’ class allegations as a matter of law. Borden and Gudz are appeals from orders granting plaintiffs’ motions for class certification. In Borden, as in this case, the Appellate Division reasoned that CPLR 901(b) does not apply to claims under RSL § 26-516(a) where plaintiffs do not seek treble damages. The court also held that certification was proper under CPLR 12 901(a) and 902, as “[t]he issues of when defendant received J-51 benefits, whether defendant deregulated apartments while receiving those benefits, which tenants resided in those apartments during those time periods, and whether defendants wrongfully charged market rents while accepting J-51 benefits are common issues that ‘predominate.’” 105 A.D.3d at 630-31. Finally, the court ruled that “Plaintiff’s 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 therefor.” Id. at 631. The court’s decision in Borden was unanimous. Once again, in Gudz, the Appellate Division held that a rent overcharge claim for actual damages is not governed by CPLR 901(b), and that, under RSL 26-516(a), “treble damages are not the sole measure of recovery.” 105 A.D.3d at 625. As in Borden, the Gudz court concluded that the requirements of the class action statute were satisfied. Justice Sallie Manzanet-Daniels dissented, joined by Justice Karla Moskowitz. Justice Manzanet-Daniels did not contest the Appellate Division’s conclusion that a class action may be brought under a statute authorizing a penalty as long as recovery of a penalty is not allowed. However, Justice Manzanet-Daniels contended that treble damages are mandatory under RSL § 26-516(a) for willful violations, and that plaintiffs are without power to forgo 13 them. Finally, Justice Manzanet-Daniels wrote that a class action for actual damages under § 26-516(a) arguably violated due process because class members would not “presume” that they would lose their opportunity to pursue treble damages if they did not opt-out, and that the decision to forgo treble damages rendered plaintiff an inadequate class representative. Id. at 629 (Manzanet- Daniels, J., dissenting). LEGAL STANDARDS On an appeal from the grant of a motion to dismiss pursuant to CPLR 3211, appellate courts are to afford pleadings “a liberal construction” and “accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory.” Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). “Generally, CPLR article 9 is to be liberally construed and any error should be resolved in favor of allowing the class action.” Liechtung v. Tower Air, Inc. 269 A.D.2d 363, 364 (2d Dep’t 2000); see also City of N.Y. v. Maul, 14 N.Y.3d 499, 513 (2010) (article 9 “should be broadly construed” because, inter alia, “it is apparent that the Legislature intended article 9 to be a liberal substitute for the narrow class action legislation that preceded it”). 14 ARGUMENT Rent Stabilization Law § 26-516(a) entitles every tenant who has been overcharged in violation of the RSL to recover at least the amount of the overcharge plus interest. Where an overcharge was willful, tenants are also entitled to recover treble damages. But nothing in RSL § 26-516(a) prevents a tenant who has been overcharged from conceding non-willfulness or otherwise forgoing the statutory penalty. And nothing in Article 9 of the CPLR requires that a class action be certified for all purposes. Rather, CPLR 906(1) expressly provides that the trial courts have discretion to certify particular issues for class treatment but not others. Plaintiffs have elected not to pursue treble damages as a class remedy in this case. In Sperry v. Crompton Corp., 8 N.Y.3d 204, 215 (2007), this Court declined to address “whether [plaintiffs] may maintain a class action . . . by forgoing treble damages in favor of actual damages.” But the plain language of CPLR 901(b) makes clear that only class actions “to recover a penalty” are prohibited. Moreover, the legislative history manifests a clear intent to allow class actions to proceed as long as plaintiffs do not seek to recover penalties on a class- wide basis. Every department of the Appellate Division that has considered the issue has held that a class action can be maintained where recovery of a penalty is not among the remedies sought, even if plaintiffs, proceeding individually, can 15 pursue penalties for defendants’ conduct. That unanimous conclusion furthers the purposes of CPLR 901(b) and should be affirmed. Allowing plaintiffs to bring class actions for relief excluding penalties also furthers the purposes of the statutes that provide the penalties. The class action mechanism and the availability of penalties are designed to serve a similar function: to encourage consumer lawsuits against defendants who inflict widespread social costs but insufficient costs on any one plaintiff to make an individual suit for actual damages worthwhile. However, sometimes, even the possibility of a statutory penalty may not be enough to make individual consumer actions worth the cost. Individual damages may be so small that, even trebled, they are dwarfed by the costs of litigation. Or, as here, an award of treble damages may be contingent upon a factual finding that plaintiffs cannot be certain the courts will make. In such circumstances, allowing consumers the flexibility to choose between joining a class action that can recover only actual damages and immediately striking out alone in the hopes of securing a statutory penalty protects consumer interests without placing defendants at excessive risk. That is precisely the balance that the drafters of Article 9 intended. 16 I. PLAINTIFFS MAY FORGO THE CLASS-WIDE PURSUIT OF TREBLE DAMAGES UNDER RSL § 26-516(A) Like all enforcement statutes, RSL § 26-516(a) sets out the remedies available to a plaintiff who has been wronged, and it allocates burdens of proof. A landlord who overcharges its tenant is “liable to the tenant for a penalty equal to three times the amount of such overcharge,” as long as the overcharge was willful and did not occur more than two years prior to the commencement of suit. RSL § 26-516(a), (a)(2)(i). For all non-willful overcharges, and for all overcharges occurring more than two years but not more than four years prior to the commencement of suit, the landlord is liable to the tenant for no more than the amount of the overcharges plus interest. Id. at § 26-516(a), (a)(2). Once a landlord “is found to have charged an unlawful rent, it is presumed to have acted badly and the burden is placed upon it to establish by a preponderance of the credible evidence that it did not know the rent it was charging was unlawful.” H.O. Realty Corp. v. State of N.Y. Div. of Hous. & Cmty. Renewal, 46 A.D.3d 103, 107 (1st Dep’t 2007). In other words, the statute provides that overcharged tenants will sometimes be allowed to recover treble damages, and at other times will be limited to actual damages, depending on the evidence put before the court. Nothing in the statute prevents a tenant from deciding the scope of the injuries he will endeavor to prove and the remedies he will seek to recover. For strategic reasons turning on 17 such factors as the strength of his proof or the expense of litigation, a tenant may forgo some of the avenues of relief arguably open to him. For instance, he may decide to pursue compensation for some but not all rent overcharges, or he may concede non-willfulness. See Hill v. Wek Capital Corp., 4 A.D.2d 616, 618 (1st Dep’t 1957) (affirming tenant’s right, in the interest of speedily resolving his dispute with his landlord, to concede that his apartment had been decontrolled), abrogated on other grounds by Todd v. Pearl Woods, Inc., 20 A.D.2d 911 (2d Dep’t 1964). Similarly, while RSL § 26-516(a) entitles a plaintiff to treble damages in some circumstances, nothing in the statute requires that he pursue them, and nothing in Article 9 of the CPLR requires that all possible issues be certified for class treatment. Citing authority for the proposition that tribunals must award treble damages to tenants who successfully avail themselves of the presumption of willfulness, see Appellants’ Br. at 33, Defendants confuse a tenant’s right to treble damages in some circumstances with a tenant’s obligation to pursue them. See Smellie v. Mount Sinai Hosp., No. 03 Civ. 805, 2004 WL 2725124, at *5 n.12 (S.D.N.Y. Nov. 29, 2004) (holding that “nothing” in a statute mandating the award of treble damages upon a determination of willfulness “indicates that a plaintiff cannot chose to forego [sic] the opportunity to prove willfulness”). 18 “A plaintiff is not bound to pursue all remedies open to him.” Amerelay, Inc. v. Directomat, Inc., 7 A.D.2d 388, 390 (1st Dep’t 1959); see also Pierpoint v. Hoyt, 260 N.Y. 26, 30 (1932) (“While other remedies were open to [the plaintiff], he was not bound to pursue them . . . .”). Indeed, a plaintiff “may stipulate away statutory, and even constitutional rights.” Mitchell v. N.Y. Hosp., 61 N.Y.2d 208, 214 (1984); accord In re N.Y., Lackawanna & W. R.R. Co., 98 N.Y. 447, 453 (1885). And if he “does not choose to seek [some] available . . . remedies, they cannot be forced upon him.” Amerelay, Inc., 7 A.D.2d at 390. Appellants’ arguments that this case is different from all others—that plaintiffs bringing claims under RSL § 26-516(a) should not, like every other litigant, be “free to chart their own litigation course” and “fashion the basis upon which a particular controversy will be resolved,” Mitchell, 61 N.Y.2d at 214—are unconvincing. See Lex 33 Assocs., L.P. v. Grasso, 283 A.D.2d 272, 273 (1st Dep’t 2001) (“Plaintiff had the right to chart its own procedural course, a choice of strategy and forum . . . .”). Rent Stabilization Law § 26-516(a) contemplates recovery of different types of damages in different situations, and public policy requires that tenants be permitted to pursue the remedies that they believe they can most effectively and efficiently secure. 19 A. Requesting Limited Relief as a Plaintiff Does Not Constitute an Impermissible “Waiver” Defendants counterintuitively mischaracterize Plaintiffs’ efforts to enforce their statutory rights as an impermissible waiver of statutory protections. A plaintiff who, in a genuine effort to protect his interests, strategically pursues some possible remedies while forgoing others does not impermissibly waive statutory protections, as Defendants suggest, because he does not ask the court to “enforce [any] agreements” designed “to circumvent the Rent Stabilization Law,” Extell Belnord LLC v. Uppman, 113 A.D.3d 1, 11 (1st Dep’t 2013) (internal quotation marks omitted). This Court recognizes the difference between a litigant who pursues some but not all avenues of possible relief in a good faith effort to efficiently “resolve a dispute about what the law permit[s],” and a tenant who colludes with his landlord—willingly or under coercion—“to achieve something the law undisputedly . . . does not permit.” Riverside Syndicate, Inc. v. Munroe, 10 N.Y.3d 18, 23-24 (2008). The latter is against public policy. The former, which describes one avenue open to Plaintiffs here, affords tenants the flexibility required to seek out the most effective and efficient means of ensuring that “a landlord . . . cannot escape liability for excess payments of rent.” Estro Chem. Co. v. Falk, 303 N.Y. 83, 86-87 (1951). For two reasons not implicated here, the courts may not enforce any “agreement” between a landlord and tenant in which the “tenant . . . waive[s] the 20 benefit of any provision of the [Rent Stabilization Law or] Code.” 9 NYCRR § 2520.13; see also Drucker v. Mauro, 30 A.D.3d 37, 41 (1st Dep’t 2006) (noting that case law “prohibit[s] landlords and tenants from making private agreements to effectively deregulate applicable housing units.” (internal quotation marks omitted)). This prohibition addresses two risks not presented by this case. First, it denies landlords and tenants the ability to contract out of the rent stabilization scheme to their own benefit but the public’s detriment. Because a purportedly private agreement between a landlord and tenant can “effectively deregulate applicable housing units” and cause “diminution of the rent stabilization regime” for the public at large, courts have consistently denied landlords and tenants the ability, “acting together, [to] basically jettison the statutory scheme.” 390 W. End Assocs. v. Harel, 298 A.D.2d 11, 15-16 (1st Dep’t 2002) (emphasis added); see also Drucker, 30 A.D.3d at 40 (“Permitting parties to a rent-stabilized lease to stipulate to a rent that exceeds the statutory lawful regulated amount can adversely affect both the legal rent and the regulated status of the dwelling unit for future occupants.”); Draper v. Georgia Props., Inc., 230 A.D.2d 455, 459 (1st Dep’t 1997) (declining on public policy grounds to enforce a lease that would “illegally deregulat[e] a stabilized housing unit”). Second, courts’ refusal to enforce agreements that displace the statutory scheme denies landlords the ability to impose contracts of adhesion upon 21 tenants who might otherwise be coerced into releasing claims and signing away rights. Cf. Park W. Mgmt. Corp. v. Mitchell, 47 N.Y.2d 316, 324-25 (1979) (“[S]hortages of low- and middle-income housing in many of our urban centers has placed landlords in a vastly superior bargaining position, leaving tenants virtually powerless to compel the performance of essential services.”). Therefore, when a tenant comes to court seeking to enforce a right under the Rent Stabilization Law that the landlord insists the tenant has previously waived, the tenant will be able to proceed with his claim despite the purported waiver. See Jazilek v. Abart Holdings, LLC, 10 N.Y.3d 943 (2008) (allowing tenant suit to enforce rent stabilization protections over landlord’s objection that tenant had entered a stipulation waiving those protections); Estro Chem. Co., 303 N.Y. at 86-87 (allowing tenant suit to recover overcharges over landlord’s objection that tenant contracted away his right to the return of the overcharged amounts); 85 E. Parkway Corp. v. DHCR, 297 A.D.2d 675, 676-77 (2d Dep’t 2002) (same). Neither concern is present here. Plaintiffs ask the courts to enforce only their right to recover rent overcharges under the Rent Stabilization Law. They do not seek to enforce an agreement with Defendants that purports to supplant the rent stabilization scheme to the detriment of the public. Nor has anyone sought enforcement of an agreement purporting to deny Plaintiffs access to statutory relief that they would otherwise want to pursue. Instead, as the Appellate 22 Division recognized below, Plaintiffs “seek a declaration that their apartments are subject to rent stabilization and the rent regulatory provisions of the Rent Stabilization Law,” R-502 (emphasis added), and they seek the award of certain damages to which they are statutorily entitled on a class-wide basis. As a strategic litigation decision designed to enhance the effectiveness of their lawsuit, Plaintiffs have refrained from seeking other class-wide relief— relief to which they and other class members might not be entitled in any event, and pursuit of which would prohibit class treatment, thus relegating Plaintiffs and all others similarly situated to vindicate their rights in individual actions only. A purely self-imposed “unilateral decision” by Plaintiffs not to seek this more elusive remedy in the present action is not “an agreement between the parties” under 9 NYCRR § 2520.13 and is therefore “clearly” not a prohibited “wavier of benefits under the Rent Stabilization Code.” Livbros LLC v. Vandenburgh, 179 Misc. 2d 736, 738-39 (Civ. Ct., Kings Cnty. 1999). If a unilateral decision to file a lawsuit seeking only some available forms of relief were a prohibited waiver of benefits, tenants would be required to always file suit whenever their rights under the Rent Stabilization Law were arguably violated, and would be required to pursue each claim and seek each possible remedy until finally granted or denied by the highest tribunal available. But this Court has always recognized that a tenant may freely choose not to pursue, 23 or may abandon, challenges to alleged violations of the rent control law, as long as they are not bound to do so by potentially coercive agreements with landlords purporting to block their access to statutory remedies. For example, in Matinzi v. Joy, this Court approved a stipulation in which a tenant agreed to surrender possession of an apartment to facilitate resolution of a bona fide dispute with his landlord, even though such surrender entailed abandoning a claim that the landlord had obtained an order of decontrol by fraud. 60 N.Y.2d 835, 836-37 (1983). Similarly, in Hill v. Wek Capital Corp., the First Department permitted a tenant to concede that the apartment at issue had been decontrolled, even though “a litigable issue [regarding the apartment’s status] would have been presented” had the concession not been made. 4 A.D.2d at 618. Indeed, the Rent Stabilization Code itself allows for tenants to “withdraw, with prejudice, any complaint pending before the DHCR,” if such withdrawal is made pursuant to court-approved settlement designed to resolve a bona fide dispute between the parties. 9 NYCRR § 2520.13 See also Riverside, 10 N.Y.3d at 23 (tenants may compromise on some of their rights as “a bona fide settlement of the parties’ dispute”). That a tenant “is not permitted to waive the requirements” of the Rent Stabilization Laws “does not prevent the tenant, acting on the advice of his counsel, from agreeing in open court before a judge of competent jurisdiction that 24 his landlord has met the requirements of the statute” and deciding not to seek certain remedies arguably available to him. Hill, 4 A.D.2d at 619. A tenant’s informed, uncoerced, unilateral decision not to pursue all remedies in a given lawsuit in the interests of more efficiently resolving a dispute with his landlord “does not constitute the kind of waiver which the statute was designed to prohibit.” Id. Granting tenants the flexibility to forgo aspects of claims and remedies that they deem not worth pursuing serves to “insure the fair and prompt compensation of an injured party,” and “effectuate[s], rather than affront[s], the public policy of this state.” Mitchell, 61 N.Y.2d at 214. Far from “violat[ing] the fundamental policies and purposes of the statutory rent regulation scheme,” Plaintiffs have devised a litigation strategy designed “to resolve a dispute about what the law permit[s],” Riverside Syndicate, 10 N.Y.3d at 22-23, and ensure that their landlords “cannot escape liability for excess payments of rent,” Estro Chem. Co., 303 N.Y. at 86-87. Nothing in the Rent Stabilization Law or Code precludes them from pursuing this strategy. B. RSL § 26-516(a) Provides for Recovery of Actual Damages Plaintiffs’ prerogative to determine the claims they will assert and the remedies they will seek allows them to pursue actual damages under RSL § 26- 516(a), while forgoing any claim to treble damages within the context of a class 25 action. Resisting this conclusion, Defendants inaptly compare RSL § 26-516(a) to the Donnelly Act, GBL § 340(5), inaccurately suggesting that the former statute does not authorize plaintiffs to seek awards of only compensatory damages. The comparison only renders more obvious what Defendants seek to deny: that RSL § 26-516(a) not only allows plaintiffs to pursue actual damages awards, but in some cases mandates that awards be limited to such damages. The Donnelly Act, unlike RSL § 26-516(a), does not contemplate actual damages as an available remedy. The Donnelly Act provides that “any person who shall sustain damages by reason of any violation of this section, shall recover three-fold the actual damages sustained thereby.” GBL § 340(5). Treble damages under the Donnelly Act “are mandatory, i.e., not discretionary or contingent upon a finding of bad faith.” Asher v. Abbott Labs, 290 A.D.2d 208, 209 (1st Dep’t 2002). They are the only damages contemplated by the statute. Arguably, a plaintiff hoping to recover actual damages under the Donnelly Act would therefore have to “amend [the] statute by inserting words that are not there [or] read into [the] statute a provision which the Legislature did not see fit to enact,” Chem. Specialties Mfrs. Ass’n v. Jorling, 85 N.Y.2d 382, 394 (1995). A plaintiff seeking to recover actual damages under RSL § 26-516(a), by contrast, need only choose among the several remedies provided for by the Legislature, establishing the facts and making the concessions necessary to obtain 26 the relief he seeks. That is what Plaintiffs have chosen to do in this putative class action: to seek the actual damages available under § 26-516(a) and forgo pursuit of the separate, divisible, and contingent remedy of treble damages that are prohibited from being recovered on a class-wide basis because of CPLR 901(b). II. CPLR 901(B) DOES NOT PROHIBIT PLAINTIFFS’ CLASS ACTION Because the class remedies that Plaintiffs seek do not include any penalties, CPLR 901(b) does not apply. Under Rule 901(b), “an action to recover a penalty . . . may not be maintained as a class action.” The prohibition applies to certain remedies—namely, penalties—not, as Defendants suggest, to entire statutes, see Br. at 20. Plaintiffs have chosen to forgo any claim to treble damages as a class remedy. The class action at issue is therefore not “an action to recover a penalty” and does not fall within Rule 901(b)’s purview. If the Court is “to give effect to the plain meaning of the words used” in Rule 901(b), Commonwealth of N. Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55, 60 (2013) (internal quotation marks omitted), it must deny Defendants’ effort to stretch the provision to bar a class action in which no penalty is sought, simply because the Plaintiffs could have sought a penalty under the statute on which the action is premised. Rule 901(b)’s language prohibits a class action only if it in fact seeks “to recover a penalty.” Faithfulness to that language both comports with this Court’s approach to statutory interpretation and 27 upholds the Legislature’s intent. See Roberts, 13 N.Y.3d at 286 (“When construing a statute, we seek to discern and give effect to the Legislature’s intent, and the starting point for accomplishing this is the statute’s language.” (citation omitted)). Article 9 was adopted to provide “an effective, flexible and balanced group remedy” to enable plaintiffs to seek relief “in vital areas of social concern.” Sponsor’s Mem., Bill Jacket, L. 1975, ch. 207. Class actions and penalties often serve a similar purpose: They provide alternate “means of encouraging suits where the amounts involved might otherwise be too small.” Id. Recognizing that these two tools are designed to achieve a similar end, and “that recoveries beyond actual damages could lead to excessively harsh results, particularly where large numbers of plaintiffs [are] involved,” Sperry, 8 N.Y.3d at 211, the drafters of Rule 901(b) declined to allow plaintiffs to “pool[] their resources to collectively seek relief” for their injuries, if that relief was in the form of a penalty, Gov. Hugh Carey’s Mem. on Approving Law, Bill Jacket, L. 1975, ch. 207. See Sponsor’s Mem., Bill Jacket, L. 1975, ch. 207 (“Where a class action is brought, [the] additional encouragement [of penalties] is not necessary.”); Empire State Chamber of Commerce Mem., Bill Jacket, L. 1975, ch. 207 (“A class action statute should limit any monetary recovery sought to the actual damages sustained,” as “[s]tatutory penalties . . . which are necessary in individual actions are not necessary in class actions, where 28 the aggregate damage claims are large and sufficient, in and of themselves, to support litigation.” (emphasis added)). Thus, Rule 901(b) was adopted to “prohibit class action plaintiffs from being awarded a statutorily-created penalty, or a minimum measure of recovery.” Sperry, 8 N.Y.3d at 211 (emphasis added). But, as the Rule’s sponsor emphasized, as long as class action plaintiffs choose to forgo recovery of any statutory damages as a class remedy, “[a] statutory class action for actual damages [will] still be permissible.” Sponsor’s Mem., Bill Jacket, L. 1975, ch. 207 (emphasis added); accord State Consumer Prot. Bd.’s Mem., Bill Jacket, L. 1975, ch. 207 (“Of course, if the members of a class who would be entitled to a penalty sue only for their actual damages, they may do so in a class action.”). Faithfully applying the language and intent of Rule 901(b), the Appellate Division has unanimously and repeatedly applied the statute to bar only class actions in which statutory penalties are actually sought. Correspondingly, under the law of every department of the Appellate Division to have considered the issue, where a statute contemplates recovery of both actual damages and either a penalty or minimum damages, plaintiffs may pursue a class action by forgoing the penalty or minimum damages and seeking only actual damages as relief in the class action. 29 Prior to rendering the three decisions now on appeal, the First Department held in Cox v. Microsoft Corp. that plaintiffs could pursue class action claims under GBL § 349 notwithstanding a $50 minimum damages provision. 8 A.D.3d 39 (1st Dep’t 2004). The First Department explained that CPLR 901(b) was “inapplicable,” since the plaintiffs were not seeking to recover that statutory minimum. Id. at 40 (citing Ridge Meadows Homeowners’ Ass’n, Inc. v. Tara Dev. Co., Inc., 242 A.D.2d 947, 947 (4th Dep’t 1997); Super Glue Corp. v. Avis Rent A Car Sys. Inc., 132 A.D.2d 604, 606 (2d Dep’t 1987)). The First Department has also allowed certification of a wage and hour action under the Labor Law, which includes a nearly identical penalty provision to the one at issue here. See Pesantez v. Boyle Envtl. Services, 251 A.D.2d 11, 12 (1st Dep’t 1998) (citing Super Glue Corp., 132 A.D.2d at 606 and Weinberg v. Hertz Corp., 116 A.D.2d 1, 4 (1st Dep’t 1986)). See also Krebs v. Canyon Club, Inc., 22 Misc. 3d 1125(A) (Sup. Ct. Westchester Cnty. 2009) (certifying class under Labor Law, and noting “‘the correct rule’ is that, if the named plaintiff waives the statutory penalty, the action may be maintained as a class action as long as class members are afforded the [option] of opting out so that they may pursue all statutory remedies”); Lamarca v. Great Atlantic & Pacific Tea Co., Inc., No. 601973/04, 16 Misc. 3d 1115(A) (Sup. Ct. N.Y. Cnty. 2007) aff’d, 55 A.D.3d 487 (1st Dep’t 2008) (certifying class claims and noting “the fact that the Labor Law provides that remedy of liquidated 30 damages does not preclude plaintiffs from seeking other relief under the statute, as a class. The courts have specifically held that a class action for actual damages may be maintained under the Labor Law so long as claims for liquidated damages are waived.” (internal marks omitted)); The Second and Fourth Departments have reached the same conclusion. In Super Glue Corp., the Second Department explained that, “[a]lthough CPLR 901(b) bars a class action to recover a penalty or minimum damages imposed by statute, where . . . the statute does not explicitly authorize a class recovery thereof, the named plaintiff in a class action may waive that relief and bring an action for actual damages only.” 132 A.D.2d at 606 (citing McLaughlin, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, (hereinafter “McKinney,”) CPLR C901:7, at 327-328; Burns v. Volkswagen of Am., 118 Misc.2d 289, 460 (Sup. Ct. Monroe Cnty. 1982), aff’d on other grounds, 97 A.D.2d 977 (4th Dep’t 1983); Weinberg v. Hertz Corp., Sup. Ct. N.Y. Cnty., Mar. 5, 1984, aff’d, 105 A.D.2d 1169 (1st Dep’t 1984); see also Jacobs v. Macy’s E., Inc., 17 A.D.3d 318, 320 (2d Dep’t 2005) (affirming certification of class under Labor Law despite availability of penalty in statute). In Ridge Meadows Homeowners’ Ass’n, 242 A.D.2d at 947, the Fourth Department held that CPLR 901(b) did not apply where plaintiffs chose not to pursue minimum and treble damages under GBL § 349(h), and thus their claim could be maintained as a class 31 action. See also Klein v. Ryan Beck Holdings, Inc., No. 06 CIV. 3460 WCC, 2007 WL 2059828, at *2 (S.D.N.Y. July 13, 2007) (“Although it has yet to be addressed by the New York Court of Appeals, the few courts to have addressed the issue have generally agreed that a plaintiff can avoid application of § 901(b) by waiving his right to liquidated or punitive damages.”). And although the federal courts no longer apply CPLR 901(b) in light of the United States Supreme Court’s decision in Shady Grove Orthopedic Associates v. Allstate Insurance Co., 559 U.S. 393, 408-10 (2010), prior to that decision, those courts uniformly held that CPLR 901(b) allows plaintiffs to pursue class actions under statutes that authorize penalties, so long as they decline to seek those penalties as relief in the class action. Krichman v. J.P. Morgan Chase & Co., No. 06 cv 15305, 2008 WL 5148769, at *2 (S.D.N.Y. Dec. 8, 2008) (“. . . CPLR § 901(b) only bars use of the class action device when a plaintiff “actually seeks to recover the penalty that a relevant statute allows.” (quoting McKinney C901:11))(collecting cases).3 3 See also Cohen v. Gerson Lehrman Grp., Inc., 686 F. Supp.2d 317, 323 (S.D.N.Y. 2010); Archibald v. Marshalls of MA, Inc., No. 09 CV 2323 (LAP), 2009 WL 3817404, at *4 (S.D.N.Y. Nov. 12, 2009); Mendez v. The Radec Corp., 260 F.R.D. 38, 55 (W.D.N.Y. 2009); Hinterberger v. Catholic Health, No. 08-CV-380S, 2008 WL 5114258, at *10 (W.D.N.Y. Nov. 25, 2008); Niemiec v. Ann Bendick Realty, No. 1:04-cv-00897-ENV-KAM, 2007 WL 5157027 at n. 2 (E.D.N.Y. Apr. 23, 2008); Gonzalez v. Nicholas Zito Racing Stable Inc., No. 04 CV 22 SLT AKT, 2008 WL 941643, at *4 (E.D.N.Y. Mar. 31, 2008); Iglesias-Mendoza v. La Belle Farm, Inc., 239 F.R.D. 363, 373-74 (S.D.N.Y. 2007); Freeman v. Hoffmann-LaRoche, Inc., No. 07- 1503, 2007 WL 4440875, at *4 (D.N.J. Dec.18, 2007); Toure v. Cent. Parking Sys. of New York, No. 05 Civ. 5237(WHP), 2007 WL 2872455, at *4 (S.D.N.Y. Sept. 28, 2007); Lewis v. Nat’l 32 To dismiss the class action complaint in this case simply because it invokes a statute that, under some circumstances, permits recovery of treble damages would be to disregard the statutory language, legislative history, and universal application of Rule 901(b). As the Appellate Division has unanimously determined, the question left open by this Court in Sperry—“whether [a plaintiff] may maintain a class action under [a statute that provides for treble damages] by forgoing treble damages in favor of actual damages,” 8 N.Y.3d at 215—should be answered in the affirmative. Because Plaintiffs do not seek any penalty as a class remedy, Rule 901(b) does not apply. III. ALLOWING THIS ACTION TO PROCEED FURTHERS THE POLICIES OF RSL § 26-516(A) AND ARTICLE 9 Rent Stabilization Law § 26-516(a) and Article 9 are complementary statutes. Both are designed to facilitate recoveries by individuals whose rights have been violated and to induce respect for consumer interests. See Mohassel v. Fenwick, 5 N.Y. 3d 44, 50 (2005) (RSL provisions are designed, “where a Financial Sys., Inc., No. 06-1308, 2007 WL 2455130, at *7 (E.D.N.Y. Aug. 23, 2007); Westerfield v. Washington Mut. Bank, No. 6-CV-2817, 2007 WL 2162989, at *3 (E.D.N.Y. July 26, 2007); Torres v. Gristede’s Operating Corp., No. 04 Civ. 3316, 2006 WL 2819730, at *17 (S.D.N.Y. Sept. 29, 2006); Lee v. ABC Carpet & Home, 236 F.R.D. 193, 202 (S.D.N.Y. 2006); Leider v. Ralfe, 387 F. Supp.2d 283, 293 (S.D.N.Y. 2005); Mascol v. E & L Transp., Inc., No. CV-03-3343 CPS, 2005 WL 1541045, at *827 (E.D.N.Y. June 29, 2005); de la Cruz v. Gill Corn Farms, Inc., No. 03-CV-1133, 2005 WL 5419056, at *2 (N.D.N.Y. Jan. 25, 2005); Noble v. 93 Univ. Place Corp., 224 F.R.D. 330, 341 (S.D.N.Y. 2004); Smellie v. Mt. Sinai Hosp., No. 03 Civ. 0805, 2004 WL 2725124, at *5 (S.D.N.Y. Nov. 29, 2004); Ansoumana v. Gristede’s Operating Corp., 201 F.R.D. 81, 95 (S.D.N.Y. 2001); Brzychnalski v. Unesco, Inc., 35 F. Supp.2d 351, 353 (S.D.N.Y. 1999). 33 violation occurs, to compensate the tenant”); 9 NYCRR § 2520.3 (intent of the RSL is “to prevent the exaction of unjust, unreasonable and oppressive rents . . . and to forestall profiteering . . . and other disruptive practices tending to produce threats to the public health, safety and general welfare.”); Pruitt v. Rockefeller Ctr. Props., 167 A.D.2d 14, 23-24 (1st Dep’t 1991) (“The class action is seen as a means of inducing social and ethically responsible behavior on the part of large and wealthy institutions which will be deterred from carrying out policies or engaging in activities harmful to large numbers of individuals.”). To create a tension between these statutes, as Defendants would have this Court do, would render each less effective and would undermine the policy of Article 9, “which is to favor the maintenance of class action and for a liberal interpretation.” Pruitt, 167 A.D.2d at 20 (internal quotation marks omitted); accord Liechtung, 269 A.D.2d at 364 (“Generally, CPLR article 9 is to be liberally construed and any error should be resolved in favor of allowing the class action.”). A. Denying Certification Would Turn RSL § 26-516(a)’s Incentive for Plaintiffs Into a Handicap The promise of statutory penalties is meant to “provide[] an aggrieved party with sufficient economic incentive to pursue a claim,” Sperry, 8 N.Y.3d at 211, but it does not always have that effect. In some cases, an individual’s potential recovery, even accounting for the penalty, will still be too small to make an individual lawsuit worthwhile. See, e.g., GBL § 349(h) (providing for a 34 minimum penalty of fifty dollars). In this case, the contingent nature of the treble damages remedy makes individual actions a risky proposition, even if the Court could assume—which it cannot—that an award of treble damages would be sufficient to render individual actions viable for all, or even most, class members. Defendants contend that they deregulated the apartments at issue in reliance on DHCR directives, which represented that deregulation was legal when indeed it was not. See Appellants’ Br. at 9. Those DHCR directives were invalidated by this Court in Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d. 270 (2009). If class certification were denied in this case, and individual plaintiffs were to seek treble damages in individual actions, Defendants could be expected to argue that any overcharges were assessed in good faith, were therefore not willful, and so should not give rise to awards of treble damages under RSL § 26-516(a). Similar arguments have gained traction in the trial courts. See, e.g., 72A Realty Assocs. v. Lucas, 101 A.D.3d 401, 402-03 (1st Dep’t 2012) (following Roberts, defendants’ showing of reasonable reliance on DHCR regulation can establish that an overcharge was not willful); Dugan v. London Terrace Gardens, LP, 34 Misc. 3d 1240(a), at *4 (Sup. Ct. N.Y. Cnty. 2011) (following Roberts, “Defendants’ reliance on DHCR’s erroneous interpretation still may be a consideration . . . in examining whether overcharges were intentional, warranting an award of treble damages”), aff’d, 101 A.D.3d 648 (1st Dep’t 2012). A putative 35 class member forced to litigate her claims individually thus faces a real possibility that she will not only lose the significant benefits of a class action lawsuit designed to recover the full amount of her actual damages and secure injunctive relief, but that she will also be denied treble damages.4 The potentially illusory nature of the treble damages allowed under RSL § 26-516 highlights the damage that would be done to both the RSL and Article 9 were tenants never permitted to bring a class action for actual damages under RSL § 26-516(a). If Plaintiffs were so prohibited, the very feature of RSL § 26-516(a) meant to enable tenant lawsuits and ensure landlord accountability— the potential for treble damages—would be transmuted in any case with even a colorable non-willfulness defense from an incentive to sue into a senseless barrier to suit under Article 9, the only realistic option for tenants in many cases. See Friar v. Vanguard Holding Corp., 78 A.D.2d 83, 94-95 (2d Dep’t 1980) (“[T]he class action mechanism affords many individuals a quasi-constitutional right to litigate—to participate meaningfully in the legal process—which they otherwise would not have.”). Where a statute allowing a penalty is potentially a toothless promise, either because the penalty is uncertain or because it is too small to sustain litigation, as in all other contexts, “[w]ithout the benefit of the class action,” “large 4 That fact alone distinguishes this case from Small v. Lorrilard, in which this Court affirmed the Appellate Division’s conclusion that a putative class representative was inadequate where he proposed to forgo on behalf of the class potentially staggering damages stemming from nicotine addiction to pursue only a minimal recovery. 94 N.Y.2d 43, 54 (1999). 36 and wealthy institutions” such as Defendants could “carry[] out policies or engag[e] in activities harmful to large numbers of individuals . . . with impunity . . . since, realistically speaking, our legal system inhibits the bringing of suits based upon small claims.” Pruitt, 167 A.D.2d 22-23 (internal quotation marks omitted). B. Opt-Out Provisions and Issue Certification, Combined with Rule 901(b), Fully Protect the Rights of All Parties Given the purpose of Article 9, “to infuse the pertinent law with a measure of practical flexibility and to accommodate pressing needs for an effective yet balanced group remedy in vital areas of social concern,” Friar, 78 A.D.2d at 91 (internal quotation marks omitted), Defendants’ dire warnings of class action abuse ring hollow. See Appellants’ Br. at 29-32. Rule 901(b)’s prohibition against the class-wide recovery of penalties fully protects class action defendants from the “excessively harsh results” that the Rule’s drafters feared if such damages were allowed, Sperry, 8 N.Y.3d at 211, and Article 9’s provision for issue certification and its opt-out procedures fully protect the interests of any tenant who wishes to pursue treble damages in an individual action. 1. Opt-Out Preserves Every Tenant’s Right to Forge an Individual Trial Strategy As the Appellate Division has consistently recognized, once a putative class premised on a commitment to forgo penalty-based damages for all time is certified, “[s]hould any class member wish to pursue his or her statutory 37 right to minimum and treble damages, he or she may opt out of the class and bring an individual action therefor.” Super Glue, 132 A.D.2d at 606; accord Pesantez v. Boyle Envtl. Svcs., 251 A.D.2d 11, 12 (1st Dep’t 1998) (“To the extent certain individuals may wish to pursue punitive claims pursuant to [statute], which cannot be maintained in a class action, they may opt out of the class action.” (citation omitted)); Ridge Meadows, 242 A.D.2d at 947 (“[A]ny class member wishing to pursue statutory minimum and treble damages . . . may opt out of the class and bring an individual action.”). Rule 904 of the CPLR provides for both notice and opt-out. It requires the court to give notice of the action to all members of the class, and it gives the court discretion as to the precise nature and contents of the notice and the scope of individuals’ ability to exclude themselves. According to Adolf Homburger, one of the chief architects of Article 9, the opt-out mechanism was specifically designed to enable courts to grant class action status even in cases where some plaintiffs might “have a significant practical interest in individually controlling the litigation.” Homburger, State Class Actions and the Federal Rule, 71 Colum. L. Rev. 609, 652 (1971). Provisions for robust notice and generous opt-out under Rule 904(b) fully address the concerns expressed in Justice Manzanet-Daniels’s dissent in Gudz v. Jemrock Realty, that “no rational class member would presume that a class representative . . . would be bound by any [treble damages] waiver and unable to 38 pursue a treble damages claim if he or she, like most absent class members, neglected to opt out.” 105 A.D.3d at 629 (Manzanet-Daniels, J., dissenting) (emphasis added). Class members need not—and will not—be left to guess about the respective implications of participating in the class action or opting out. “As long as potential plaintiffs are apprised of their right to pursue individual class actions and informed that their joining the class will forfeit their right to recover liquidated damages, no harm results from” the decision to forgo statutory penalties. Klein v. Ryan Beck Holdings, Inc., No. 06 CIV. 3460 WCC, 2007 WL 2059828, at *4 (S.D.N.Y. July 13, 2007). The putative class members—all current or former tenants in Defendants’ six buildings—are known and can be readily located and provided with whatever information the trial court deems necessary to protect their interests. Those who wish to assume the risk of pursuing treble damages in an individual action can opt out of the class. Those who have no such interest, or who lack the resources to commence their own proceedings, should be afforded the option to seek relief as part of the class. 2. Issue Certification Under CPLR 906(1) Preserves Tenants’ Rights to Seek Treble Damages in Individual Actions Article 9 “affords the trial court considerable flexibility in overseeing a class action” and many options for structuring both membership in a class and the issues to be litigated by the class. Maul, 14 N.Y.3d at 513; see also Friar, 78 A.D.2d at 91 (Article 9 was designed “to infuse the pertinent law with a measure of 39 practical flexibility” (internal quotation marks omitted)); see also, e.g., CPLR 907. The judicially well-settled method for accommodating class actions where a penalty remedy is theoretically available is for plaintiffs, and all those who choose not to opt out of the class action, to unequivocally forgo penalty-based damages. There is, however, another method for respecting CPLR 901(b)’s prohibition on class-wide assessments of monetary penalties, while also preserving the legislature’s intent in creating penalty-based remedies. Under CPLR 906(1), “an action may be brought or maintained as a class action with respect to particular issues.” In this case, should the Court decide for any reason that tenants may not completely forgo treble damages, Plaintiffs should be entitled to seek certification of a class solely for purposes of adjudicating all common issues, excluding entitlement to, and amount of, treble damages. See In re Nassau Cnty Strip Search Cases, 461 F.3d 219, 226-27 (2d Cir. 2006) (holding that provision of federal Rule 23 analogous to CPLR 906(1) can be used “to certify a class as to a specific issue where the entire claim” could not satisfy class certification requirements) (citing 7AA Wright & Miller, Federal Practice & Procedure § 1790 (3d ed.2005); 6 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 18:7 (4th ed. 2002)). For instance, Plaintiffs might seek certification of a class under CPRL 906(1) for the purpose of resolving the common issues identified by the First Department in Borden: “[t]he issues of when 40 defendant received J-51 benefits, whether defendant deregulated apartments while receiving those benefits, which tenants resided in those apartments during those time periods, and whether defendants wrongfully charged market rents while accepting J-51 benefits.” 105 A.D.3d at 631. After adjudicating those issues, the court could enter judgment awarding injunctive and declaratory relief, and compensatory damages, but then decertify the class so that the class representatives and absent class members could then, if they chose, pursue penalty based damages in individual actions. Because Defendants’ motion to dismiss was filed and granted before Plaintiffs had an opportunity to seek class certification, Plaintiffs have not yet been able to propose a structure for their purported class action, which could have been premised on this alternate, viable option for class certification. The trial court erred when it dismissed Plaintiffs’ purported class action without even considering this option, which now offers an alternate ground for affirming the unanimous decision of the First Department in this case. Where Plaintiffs have not yet had an opportunity to propose a class structure to the trial court, and the trial court has not yet had an opportunity to evaluate Plaintiffs’ proposal, it is, at best, “premature and inappropriate to make . . . a determination at this juncture” that Plaintiffs may not seek certification under CPLR 906(1) for the limited purpose of resolving discrete common issues. 41 Stellama v. Vantage Press, Inc., 109 A.D.2d 423, 426 (1st Dep’t 1985). The matter of whether certain issues should be resolved on behalf of a class and subject to class treatment, such as liability, compensatory damages and equitable relief, while deeming others inappropriate for class treatment, such as treble damages, is, in the first instance, “one of case management for the Trial Judge who should not be limited” by the order of an appellate court ex ante. Id. Accordingly, irrespective of whether this Court agrees, as it should, that a class action can be maintained whenever a plaintiff decides to completely forgo available statutory damages, it should, at minimum, not foreclose trial courts from considering the possibility of issue certification as an alternate method of accommodating CPLR 901(b)’s prohibition. “[A]ny error, if there is to be one, should be in favor of allowing the class action.” Pruitt, 167 A.D.2d at 21 (internal quotation marks omitted). CONCLUSION The ruling of the Appellate Division should be affirmed. The class action complaint should be reinstated. Dated: March 26, 20 14 New York, New York EMERY CELLI BRINCKERHOFF &ABADYLLP ~£!~ atthew D. Brinckerhoff 42 Hayley Horowitz 7 5 Rockefeller Plaza, 20th Floor New York, New York 10019 (212) 763-5000 HIMMELSTEIN, McCONNELL, GRIBBEN, DONOGHUE & JOSEPH William Gribben David Hershey-Webb Ronald S. Languedoc 15 Maiden Lane, 17th Floor New York, New York 10038 (212) 349-3000 Attorneys for Plaintiff-Respondents