Case Title: In the Matter of Sylvie Grimm v. State of New York Division of Housing and Community Renewal Office of Rent Administration

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2010-10-19T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 171  
In the Matter of Sylvie Grimm,
           Respondent,
            v.
State of New York Division of 
Housing and Community Renewal 
Office of Rent Administration,
           Appellant,
151 Owners Corp.,
           Intervenor-Appellant.
Martin B. Schneider, for appellant.
Magda L. Cruz, for intervenor-appellant.
Edward J. Josephson, for respondent.
Rent Stabilization Association of NYC, Inc.; Community
Housing Improvement Program of New York, Inc., amici curiae.
CIPARICK, J.:
On this appeal, we are asked to determine whether the
rationale employed in Thornton v Baron (5 NY3d 175 [2005]), which
allowed the parties to look back farther than four years, applies
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in a situation where it is alleged that the standard base date
rent is tainted by fraudulent conduct on the part of a landlord. 
We conclude that it does, and that such base date rent may not be
used as a basis for calculating subsequent regulated rent if
fraud is indeed present.
 I.
In 1999, prior to the tenancy of petitioner Sylvie
Grimm, the rent-stabilized apartment at issue here was registered
with the Department of Housing and Community Renewal ("DHCR") at
a monthly rent of $587.86.  In 2000, upon a vacancy in the
apartment, rather than using the required rent-setting formula to
determine the rent that it could legally charge the next tenants
of the apartment, the owner notified prospective tenants that the
rent for the subject apartment was $2,000 per month.  However,
the owner informed the prospective tenants that, if they agreed
to make certain repairs and improvements to the apartment at
their own expense, the rent would be reduced to $1,450.  Both
sums were unlawful because of the rent-stablized status of the
apartment.  The tenants accepted the offer, and signed a written
lease agreement without a rent stabilized lease rider.  The owner
apparently did not provide those tenants with a statement showing
the apartment was registered with DHCR. 
In 2004, petitioner moved into the apartment, agreeing
to the rental rate of $1,450.  Her initial lease did not specify
that the apartment was rent stabilized.  Thereafter, in July
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2005, petitioner filed a rent overcharge complaint with DHCR. 
The landlord, intervenor 151 Owners Corp., soon after receiving
the overcharge complaint, sent petitioner revised versions of her
2004 and 2005 leases which advised that the apartment was subject
to rent stabilization.  In its answer to the overcharge
complaint, 151 Owners Corp. admitted that the apartment had not
been registered with DHCR since 1999.  At the same time it filed
the answer to the overcharge complaint, 151 Owner's Corp. filed
registration statements with DHCR for the years 2001 through
2005.  
In an order dated June 21, 2006, the DHCR Rent
Administrator denied petitioner's overcharge complaint on the
ground that the rent on the "base date" -- i.e., the date four
years prior to the filing of the complaint --  was $1,450, and
the rent adjustments subsequent to the base date had been lawful. 
The Rent Administrator did not address the issue whether the
registration statement in effect on the base date was reliable or
set forth a lawful rent.  DHCR denied petitioner's request for
administrative review of the Rent Administrator's determination,
and denied her request for reconsideration.  
Petitioner thereafter commenced this CPLR article 78
proceeding challenging DHCR's determination denying
administrative review.  The petition sought (1) a declaration
that she was the legal rent-stabilized tenant of the apartment
and (2) remand to DHCR "with the direction that the rent for the
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subject apartment should be frozen at the 1999 amount, because
owner failed to register the subject apartment for 2000, and
computing the rent overcharge amount." 
Supreme Court granted the petition, vacated DHCR's
determination and "remanded the matter for reconsideration in
accordance with [the court's] decision."  Supreme Court noted
that DHCR's determination simply calculated the rent by assuming,
without actually determining, that the registration in effect on
the base date was reliable.  The court also noted that DHCR did
not specifically reject petitioner's allegations of fraud.  The
court reasoned, under Thornton v Baron (5 NY3d 175, 181 [2005]),
that DHCR's failure to consider petitioner's allegations of fraud
and the reliability of the rent charged on the base date
warranted remand to the agency for de novo review of the
overcharge complaint. 
DHCR and 151 Owners Corp. separately appealed.  The
Appellate Division affirmed, with two Justices dissenting (Matter
of Grimm v State of N.Y. Div. of Hous. & Community Renewal Off.
of Rent Admin., 68 AD3d 29 [1st Dept 2009]).  The court reasoned:
"Given the specific facts of this case, DHCR
should not be allowed to turn a blind eye to
what could be fraud and an attempt by the
landlord to circumvent the Rent Stabilization
Law . . . [W]here, as here, there is an
indication of possible fraud that would
render the rent records unreliable, it is an
abuse of discretion for DHCR not to
investigate it" (id. at 33).
  
The two dissenting Justices voted to reverse and "would [have
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found] that [DHCR] acted rationally in complying with the
legislative intent expressed in the statute of limitations set
forth in CPLR 213-a and [the] Rent Stabilization Law" (id. at 34
[Buckley, J., dissenting]).
DHCR and 151 Owners Corp. appealed by permission of the
Appellate Division, which certified the following question: "Was
the order of Supreme Court, as affirmed by this Court, properly
made?"  We now affirm and answer the certified question in the
affirmative. 
II.
As we have previously explained, rent overcharge claims
are generally subject to a four-year statute of limitations. 
Specifically, Rent Stabilization Law of 1969 (Administrative Code
of City NY) § 26-516 (hereinafter "Rent Stabilization Law"), as
amended by the Rent Regulation Reform Act ("RRRA") of 1997,
states:
"[A] complaint under this subdivision shall
be filed with [DHCR] within four years of the
first overcharge alleged and no determination
of an overcharge and no award or calculation
of an award of the amount of an overcharge
may be based upon an overcharge having
occurred more than four years before the
complaint is filed . . . [t]his paragraph
shall preclude examination of the rental
history of the housing accommodation prior to
the four-year period preceding the filing of
a complaint pursuant to this subdivision"
(Rent Stabilization Act § 26-516 [a]; see
also CPLR 213-a).
The RRRA "clarified and reinforced the four-year statute of
limitations applicable to rent overcharge claims . . . by
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limiting examination of the rental history of housing
accommodations prior to the four-year period preceding the filing
of an overcharge complaint" (Thornton, 5 NY3d at 180, citing
Matter of Gilman v New York State Div. of Hous. & Community
Renewal, 99 NY2d 144, 149 [2002]; see also Matter of Cintron v
Calogero, __ NY3d __ [decided today]; Governor's Approval Mem, L
1997, ch 116).  To effectuate the purpose of the four-year
limitations period, in rent overcharge cases DHCR regulations, as
relevant here, set the "legal regulated rent" as the rent charged
on the "base date," which is the "date four years prior to the
date of the filing of [the overcharge] complaint" plus any
subsequent lawful increases (9 NYCRR 2520.6 [e], [f]; 9 NYCRR
2526.1 [a] [3] [I]).     
The four-year limitations period was explained in our
decision in Thornton (5 NY3d 175), where we held that a lease
provision purporting to exempt an apartment from the Rent
Stabilization Law in exchange for an agreement not to use the
apartment as a primary residence was void as against public
policy (see id. at 179-180).  Our ruling was made in connection
with a scheme between a landlord and an illusory tenant to agree
that an apartment would not be used as the named tenant's primary
residence, resulting in the elimination of the rent stabilized
status of the apartment.  Acknowledging that the apartment's
prior rental history could not be examined, and that the
stabilized rent before the fraudulent scheme was of no relevance,
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No. 171
1  The default formula "uses the lowest rent charged for a
rent-stabilized apartment with the same number of rooms in the
same building on the relevant base date" (Thornton, 5 NY3d at 180
n 1; Levinson, 22 AD3d at 400-401).
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we nonetheless rejected the owner's contention that "the legal
regulated rent should be established by simple reference to the
rental history" on the date four years prior to the commencement
of the overcharge action (id. at 180-181).  We explained that the
lease was "void at its inception" because its "circumvent[ion of]
the Rent Stabilization Law" violated public policy (id. at 181). 
As a result, the rent registration statement in effect on the
base date "listing the illegal rent was also a nullity" (id.). 
Rather than using the registration statement to ascertain the
rent on the base date, we instructed DHCR to use the so-called
default formula to calculate the rent on the base date, as it
does when no reliable records are available (see id.; see also
Levinson v 390 W. End Assocs., LLC, 22 AD3d 397, 400-401 [1st
Dept 2005]).1    
DHCR contends that our holding in Thornton should be
constrained to the narrow set of circumstances described in that
case and that we should limit its application to cases involving
illusory tenancies.  We disagree and conclude 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.  Accordingly, here, as the Appellate Division
concluded, DHCR acted arbitrarily and capriciously in failing to
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No. 171
2  The Rent Stabilization Code requires that, for each
vacancy or renewal lease for premises subject to the Rent
Stabilization Law, the landlord "shall furnish to each tenant
signing a vacancy or renewal lease, a rider in a form promulgated
or approved by the DHCR, in larger type than the lease,
describing the rights and duties of owners and tenants as
provided for under" the Rent Stabilization Law (Rent
Stabilization Code [9 NYCRR] 2522.5 [c] [1]).
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meet that obligation where there existed substantial indicia of
fraud on the record.  
In particular, here it is alleged that the tenants
immediately preceding petitioner paid significantly more than the
previously registered rent, and were not given a rent stabilized
lease rider.2  Moreover those tenants were informed that their
rent would be higher, but for their performance of upgrades and
improvements at their own expense.  Almost simultaneously with
the substantial increase in the rent for the affected unit, the
owner ceased filing annual registration statements (see Rent
Stabilization Code [9 NYCRR] 2528.3 [a] [requiring annual
registration statements be filed with DHCR]) and later filed
several years' registration statements retroactively after
receiving petitioner's overcharge complaint.  Finally,
petitioner's initial lease did not contain a rent stabilized
rider.  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.  
Our holding should not be construed as concluding that
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fraud exists, or that the default formula should be used in this
case.  Rather, we merely conclude that DHCR acted arbitrarily in
disregarding the nature of petitioner's allegations and in using
a base date without, at a minimum, examining its own records to
ascertain the reliability and the legality of the rent charged on
that date.          
DHCR also argues that, under the Appellate Division's
holding, any "bump" in an apartment's rent -- even those
authorized without prior DHCR approval, such as rent increases
upon installation of improvements to an apartment (see Rent
Stabilization Law § 26-511 [c] [13]) -- will establish a
colorable claim of fraud requiring DHCR investigation.  Again, we
disagree.  Generally, an increase in the rent alone will not be
sufficient to establish a "colorable claim of fraud," and a mere
allegation of fraud alone, without more, will not be sufficient
to require DHCR to inquire further.  What is required is evidence
of a landlord's fraudulent deregulation scheme to remove an
apartment from the protections of rent stabilization.  As in
Thornton, the rental history may be examined for the limited
purpose of determining whether a fraudulent scheme to destabilize
the apartment tainted the reliability of the rent on the base
date.  
In sum, the Appellate Division correctly applied
Thornton to this rent overcharge proceeding and properly
concluded that DHCR has an obligation to ascertain whether
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petitioner's allegations of fraud warrant the use of the default
formula when calculating any rent overcharge that may have
occurred.  Accordingly, the order of the Appellate Division
should be affirmed, with costs, and the certified question
answered in the affirmative.
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Matter of Sylvie Grimm v State of New York Division of Housing
and Community Renewal Office of Rent Administration
No. 171
SMITH, J. (dissenting):
In Thornton v Baron (5 NY3d 175 [2005]) and Matter of
Cintron v Calogero (decided today), the Court carved out
exceptions to the command of the Rent Regulation Reform Act of
1997 that a rent charged more than four years before a tenant
complains may not be considered in deciding an overcharge claim. 
But in this case, the majority goes far beyond making an
exception.  The majority has, in substance, largely repealed the
statute -- or, perhaps, has turned it into a source of endlessly
complex litigation.  I am not sure which it has done, and I am
not sure which is worse. 
The statute, and the regulations implementing it, are
unequivocal.  "[N]o determination of an overcharge and no award
or calculation of an award of the amount of an overcharge may be
based upon an overcharge having occurred more than four years
before the complaint is filed . . . .  This paragraph shall
preclude examination of the rental history of the housing
accommodation prior to the four-year period preceding the filing
of a complaint pursuant to this subdivision" (Rent Stabilization
Law [RSL] of 1969 [Administrative Code of the City of NY] § 26-
516 [a] [2]; see also id., § 26-516 [a] ["Where the amount of
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rent set forth in the annual rent registration statement filed
four years prior to the most recent registration statement is not
challenged within four years of its filing, neither such rent nor
service of any registration shall be subject to challenge at any
time thereafter"]; Rent Stabilization Code [9 NYCRR] § 2526.1 [a]
[2]).
Thornton and Cintron presented special situations in
which, for understandable reasons, a majority of the Court
decided that this language should not be taken literally. 
Thornton involved an elaborate fraudulent scheme, in which
illusory leases containing false representations were created,
collusive lawsuits brought and a court misled into entering
orders that made it possible to collect illegal rents; the Court
held that such an extreme form of misconduct should not be
protected by the four-year time bar. Cintron presented the
problem of how to reconcile the four-year limitation with another
section of the statute providing for rent reduction orders of
indefinite duration. 
But this is a garden-variety overcharge case -- perhaps
the paradigm of the situation for which the four-year limitation
was intended.  The landlord charged an illegal rent, and the
illegality went undetected for more than four years.  The statute
says plainly that in such a case, the rent charged four years
previously "shall not be subject to challenge."  But the majority
holds that a challenge is allowed. 
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The majority's justification for this result is that
"the overcharge complaint alleges fraud" and that there are
"indicia of fraud" -- consisting essentially of allegations that
the landlord lied to previous tenants about what the legal
maximum rent was (majority op at 7-8).  In other words, the
majority seems to equate "fraud" with a wilful overcharge -- as
though the four year limit were applicable only to landlords who
overcharge by mistake.  In fact, the statute contains its own
remedy for wilful overcharges: treble damages (RSL § 26-516 [a]). 
It does not make the four-year limitation inapplicable in wilful
overcharge cases -- cases which, as the Legislature certainly
knew, are a large number of the cases to which the limitation on
its face applies. 
The majority seemingly tries to temper its holding by
saying that "an increase in the rent alone will not be sufficient
to establish a 'colorable claim of fraud'" and that "a mere
allegation of fraud alone, without more, will not be sufficient
to require DHCR to inquire further" (majority op at 9).  But
obviously it does not take much "more" than an allegation of
fraud -- there is practically nothing more in this case.  The
majority adds that what DHCR is supposed to "inquire" about is
whether there was a "fraudulent scheme to destabilize the
apartment" (id.).  It does not say what it takes to prove such a
"fraudulent scheme."  Simply a wilful overcharge?  A wilful
overcharge coupled with the hope that the overcharge will
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eventually result in the apartment's escape from rent
stabilization?
If the majority opinion does not simply nullify the
four-year limit in every case where the overcharge was not a
good-faith error, it requires DHCR to undertake an inquiry that
the majority leaves wholly undefined.  And what if DHCR's inquiry
shows that, though there was a wilful overcharge, there was no
"fraudulent scheme"?  Does this mean that, if the landlord has
been charging an illegal rent for more than four years, it may
continue to do so?
The majority opinion can be read to mean either that
the four-year limitation has largely ceased to exist, or that any
case to which the limit applies on its face must lead to a mini-
litigation, in which DHCR tries to figure out whether the
overcharge was "fraudulent" enough to escape the time limit.  If
the former, the majority has simply tossed aside the
Legislature's command.  If the latter, I do not envy DHCR its
task. 
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order affirmed, with costs, and certified question answered in
the affirmative.  Opinion by Judge Ciparick.  Chief Judge Lippman
and Judges Pigott and Jones concur.  Judge Smith dissents in an
opinion in which Judges Graffeo and Read concur.
Decided October 19, 2010