Landlord-Tenant—J-51— ‘Roberts v. Tishman Speyer’—Overcharge, Fraud and Abatement Claims Rejected—Tenant Was Undercharged Rather Than Overcharged—”Complex Legal Environment Created by the Changing Law” Affected This Case—Warranty of Habitability

A landlord commenced a summary nonpayment proceeding seeking to recover rent and late fees. The tenant interposed “affirmative defenses of breach of the warranty of habitability,” “rent overcharge and fraud and counter-claims for treble damages and harassment.”

The tenant took occupancy on March 1, 2009, pursuant to an unregulated lease at a monthly rental of $2,200. Her next lease, also unregulated, ended Feb. 28, 2011, at the same monthly rent. The tenant signed a third unregulated lease ending Feb. 28, 2012, at the rate of $2,250 per month. On Jan. 4, 2012, the landlord advised the tenant that because of the recent Roberts v. Tishman Speyer decision, 13 N.Y.3d 270 (2009) (Roberts), the tenant “was now a rent-stabilized tenant, would soon receive a new, rent-stabilized lease renewal, and that based on its recalculation of the rent in light of [the Roberts] case, she had been overcharged $0.50 for a period of eleven months…totaling $5.50, for which a check in that amount was remitted.”

The landlord also sought rent arrears of approximately $27,612.32, exclusive of late fees. The landlord had mailed the tenant a rent-stabilized renewal lease, offering her “a choice of a one-year lease at the rate of $2,333.86/month or a two-year lease at the rate of $2,412.59/month, based on the rent guideline increases…on a legal regulated rent of $2,249.50.” The tenant neither signed nor returned the rent-stabilized lease renewal.

The issues were whether the landlord had overcharged the tenant, and if so, was it done willfully and whether the landlord committed fraud such that the court had to look beyond the four-year statute of limitations and review the entire rental history in making a determination. The court found that the tenant had not been overcharged and the landlord had not committed fraud.

The landlord’s prior motion for partial summary judgment had been granted. The court had dismissed the tenant’s rent overcharge defense “considering the base date to be four years prior to the interposition of the rent overcharge defenses and counterclaims, applied the relevant Rent Guidelines Board [RGB] increases and found that the rent…charged…did not exceed the permissible amount.” Based upon the law that existed at the relevant time, the court found that the evidence did not “rise to the level of fraud found to justify an inspection of the rent history of the apartment prior to the base date….”

During the trial of this case, the tenant had moved to reargue in light of the Appellate Division’s decision in 72A Realty Assoc. v. Lucas, 101 A.D.3d 401 (1st Dept., 2012). The court had reversed its decision, finding that there were triable issues of fact precluding summary judgment. Thus, the court reinstated the tenant’s “defenses and counterclaims sounding in rent overcharge.”

A mistrial had been declared and a second trial was commenced. A third decision clarified that:

the only issue…that the Court has ruled on is whether Respondent’s rent overcharge defenses and counterclaims should be dismissed. The court has ultimately denied that motion…. In advance of the trial, the Court will not make a determination as to what evidence Respondent may or may not introduce to rebut Petitioner’s case or establish her affirmative defenses and/or counterclaims, which is best left with the sound discretion of the trial court, except to reiterate that the Court interpreted the holding of 72A Realty, supra to warrant examination of the entire rent history.

Following the trial, the court held that the landlord had “neither overcharged” the tenant “nor committed any fraud.” The last lease rent of $2,249.50 was supported by the evidence and was not an “improper rent from which to calculate the rent stabilized lease renewal.” Moreover, the court found that the tenant had in fact been “undercharged, rather than overcharged, based on the comparison of rent charged her to the legal regulated rent.”

The court opined that the landlord had “acted well within the law at every step of the complex legal environment created by the changing law affecting this case.” In so holding, the court cited Roberts and Gersten v. 56 7th Ave., LLC, 88 A.D.3d 189 (1st Dept. 2011), which held that Roberts is to be applied retroactively. Roberts and Gersten had “completely changed what had long been the law, holding that as long as a building participated in a J-51 program, all its tenants would be given rent stabilized status, regardless of a previously legal deregulation of a unit, such as the case here, and such effect would not only be prospective under Roberts, but retroactive under Gersten.”

There was no evidence that the landlord had decontrolled the unit “pursuant to some fraudulent scheme.” Rather, there had been a “deliberative process by which DHCR permitted such decontrol based on its own interpretation of the controlling statutes.”

The tenant’s breach of the warranty claims were based on alleged noise from the landlord’s construction in another apartment during a three-to-four-month period, the landlord’s preventing the tenants’ association from using a community room, a reduction in “package retrieval hours” and interference with “package and delivery services.” The tenant had provided “no evidence” that she had notified the petitioner of the noise problem pursuant to the written notice provisions of the lease. The managing agent testified that no other tenants had complained of the noise. The tenant produced pictures of some cracks in the ceiling, but did not demonstrate that the cracks “impacted her health and safety” or otherwise “interfered with her ability to enjoy the apartment.” Moreover, the contractor was instructed to drill by hand in order to minimize the noise, work was done between 9 a.m. and 4 p.m. and the tenant never complained to the NYC Dept. of Housing, Preservation and Development, nor were there any noise violations.

The court held that even if there had been a lack of access to a community room for tenant association meetings, such would not constitute a breach of the Warranty. Additionally, such issue had previously been ruled upon by DHCR. DHCR determined that tenants were not entitled to a reduction in rent for reduction of services “where tenants waited longer than four years from the date they were last given use of this room.” The court also stated that requiring tenants to use the service entrance and service elevator for package delivery and moving large items, was not a breach of the Warranty, even if that had occurred.

Finally, the court also rejected the tenant’s procedural arguments. Here, the tenant was afforded “ample opportunity to present her case, testimony, witnesses and evidence before she rested.” Accordingly, the court awarded the landlord a judgment of possession, with the warrant to be stayed for five days.

Comment: Joseph Burden, of Belkin Burden Wenig & Goldman, attorney for the landlord, stated that “[t]he proceeding was important because prior to Roberts and the 72A v. Lucas decisions, it was unclear what the scope of analysis was to determine if there was an overcharge and if there was fraud. This court found that there was no evidence of fraud because the owner had merely followed the regulations in effect at the time. When Roberts charted a new path, the owner recognized the tenant as stabilized and recalculated the rent.”

Rossmil Associates v. Macneal, Civ. Ct., Housing Part, New York Co., Civ. Ct., Housing Part, New York Co., Index No. 54330/12, Hahn, J.

Foreclosures—Home Affordable Modification Program (HAMP)—New York GBL Section 349—Discovery on the Merits and the Characteristics of the Putative Class Will Proceed—Allegations That Lender Delayed Deciding on Applicants’ Permanent Loan Modifications Well After 3 Month HAMP Trial Period—Lender Allegedly Accepted Trial Period Payments After Trial Period Despite Program Language Suggesting That Lender, Following Trial Period, Would Either Grant a Permanent Modification or State Reasons for Denying a Modification—Plaintiffs Allegedly Lulled Into Not Pursuing Other Options for Saving Their Home—HAMP Language Confusing or “Outright Misleading”—Lender Allegedly Engaged in “Policy of Delay and Obfuscation”

This decision involved the federal government’s HAMP program, which was created to “help stabilize the economy and mitigate the impact of falling home prices and rising unemployment.” One court had previously described the HAMP program as “ineffectual” and the “principal auditor responsible for oversight of HAMP opined that the program ‘unleashed a new wave of misery on home owners.’”

The plaintiffs had applied to modify their home mortgage through HAMP. They alleged that the lender had “deceived them by first enrolling them in the trial phase of HAMP, then delaying a determination on their application and, eventually, denying their HAMP modification without cause.” The plaintiffs claimed that “other New York borrowers suffered a similar fate after applying for a HAMP modification from [the defendant lender],” and sought “to form a class of such purported victims.” The defendant moved “to ‘bifurcate’ discovery, limiting an initial round of discovery to the named plaintiffs’ claim only.” Alternatively, the lender requested that the initial class discovery be limited “only to the existence and scope of a putative class.” The lender argued that it intended to move for summary judgment and a decision in its favor would disqualify the plaintiffs “as adequate class representatives, and thereby obviate the need for expensive and time consuming class discovery.” The court denied the defendants’ motion and granted the plaintiffs leave to proceed with discovery “related to their claims and certification of the class.”

Pursuant to the HAMP program, participating mortgage servicers were required to identify HAMP-eligible homeowners and gather “financial and personal data from the candidate borrower to evaluate eligibility….” If a borrower is deemed eligible, the lender imposes “a temporary mortgage modification with reduced monthly payments.” Borrowers are to make “three modified monthly payments during this ‘trial period.’” If the borrower remained current after 90 days and submitted the required documentation, “the borrower is supposed to be offered a permanent modification.”

Some participating loan servicers were struggling “to manage the increased volume of documents submitted from borrowers” and were suffering from “inadequate training on modifying mortgages.” A Special Inspector General explained how the design of HAMP could potentially reward servicers who “lost documents.” Specifically:

[I]t could be more profitable for a servicer to drag out trial modifications and eventually foreclose than to award the borrowers quick permanent modifications…. Treasury allowed mortgage servicers to charge and accrue late fees for each month that borrowers were in trial modifications, even if the borrowers made every single payment under the trial plans…. If the modifications were made permanent, Treasury required the servicer to waive the fees, but if the servicer canceled the modifications (say, for example, for the borrowers’ alleged failure to provide the necessary documents), the servicer could typically collect all of the accrued late fees once the homes were sold through foreclosure…. Treasury [also] gave the servicers permission to take all the preliminary legal steps necessary to foreclose at the exact same time that they were supposedly processing the trial modifications.

There were also complaints that some lenders misrepresented HAMP’s requirements by, e.g., “convincing homeowners that default on their mortgage is a prerequisite to eligibility.”

In the subject case, the lender had offered the plaintiffs a HAMP Trial Period Plan (TPP). The lender’s letter stated that if the plaintiffs qualified under the HAMP program and complied with the TPP, “we will modify your mortgage loan and you can avoid foreclosure.” The “TPP itself contained similar representations….” The plaintiffs asserted that they provided all of the requested documentation, had complied with “multiple requests for the same documents” and had “made timely, reduced monthly payments under the TPP.” Nevertheless, the lender allegedly failed to modify the mortgage at the end of the 90-day trial period and more than nine months had expired before the lender notified the plaintiffs.

Plaintiffs alleged that the denial was “unjustified” and even worse, the lender “continued to verbally encourage plaintiffs to pursue the HAMP process even after formally denying their application.” The plaintiffs then commenced the subject action. The lender’s motion to dismiss had previously been granted in part and denied in part. “The surviving claim alleges unfair and deceptive practices under New York [GBL] Section 349.”

The complaint cited “alleged deceptive acts,” including “routine requests that homeowners resubmit financial information on pretextual grounds; misleading telephone communications; routine violations of the terms of the [TPP]; refusal to permanently modify the terms of the loan, despite plaintiffs’ fulfillment of the terms of the [TPP]; and failing to update records to reflect completed loan modifications.” A trial court had previously held that, “if proven,” these allegations “could establish a materially-misleading, consumer-oriented practice.” Thus, the plaintiffs had “sufficiently alleged that Defendant’s policy of delay and obfuscation misled Plaintiffs as to the status of their loan modification application.”

The Federal Rules of Civil Procedure (FRCP) require courts to “determine whether to certify an action as a class action ‘[a]t an early practicable time after a person sues or is sued.’” Therefore, “[d]iscovery may be necessary in order to appraise the adequacy of representation” and discovery on the prerequisites of FRCP 23 “must be permitted very early in the litigation.”

The Second Circuit Court of Appeals has ruled that courts should “question whether delaying certification will actually lead to a more expedient outcome. ‘[C]ourts in this Circuit refuse certification only when confronted with a sufficiently clear showing that a defense unique to the representative plaintiff’s claims will in fact defeat those claims.’” Moreover, courts “must be wary of a defendant’s efforts to defeat representation of a class on grounds of inadequacy when the effect may be to eliminate any class representation.” The “same logic could only apply with greater force when it comes to applications for discovery as to the class.”

Here, the court found that the lender had failed to “substantiate its assurances that summary judgment is likely to resolve the matter and, hence, that bifurcated discovery will do anything but delay a decision on the merits.” The lender had not represented that it possessed the “proverbial ‘smoking gun;’ rather, defendant made the much more cautious prediction that ‘discovery…could establish’ the basis for a dispositive motion.” The court opined that “[s]uch equivocal predictions do not appear to justify delaying certification, much less discovery related thereto.”

The court was reluctant to extend the discovery timeline because of “the additional delay that bifurcated discovery would impose, should defendant fail to win on summary judgment.” The court also considered “the potential expenses associated with its determination here” and noted that the purported class would include approximately 550 applicants and that seemed to be a “manageable corpus.” Moreover, the court opined that the lender’s “true concern may not be economic cost, but litigation risk” and such “litigation risk is not properly considered in measuring the burden of discovery.”

Finally, the court cited “the interests of justice in determining the most appropriate structure for discovery.” The allegations “portray routine, if not serial, misdirection and delay in the HAMP loan modification process.” The court found that the plaintiffs had “sufficiently alleged that Defendant’s policy of delay and obfuscation misled Plaintiffs as to the status of their loan modification application.” Although the court acknowledged that such “allegations are as yet unproven,” it viewed the allegations as “hardly surprising, given the larger environment surrounding HAMP.” The court noted that “federal courts have seen no shortage of complaints alleging unscrupulous conduct in the processing of HAMP applications….” At least seven such cases had been filed in the Eastern and Southern districts of New York and the subject lender had been a named defendant in a California case involving the subject type of litigation.

The court also found it “ironic” that the lender “accused of ‘routinely ask[ing] homeowners to resubmit financial information on pretextual grounds; mislead[ing] homeowners over the phone; and ignor[ing] completed loan modifications in what is fairly read to be a series of steps designed to string along loan modification applicants,’…now seeks to establish procedural hurdles that may fairly be read to string along the adjudication of plaintiffs’ legal action. The proposed path appears neither just nor fair.”

Moreover, “the named plaintiffs’ claims, even on their own, require discovery into the scope of the harm [lender] allegedly worked on other homeowners.” A plaintiff asserting a GBL Section 349 claim “must demonstrate that the acts or practices have a broader impact on consumers at large” and “private contract disputes between the parties do not fall within the ambit of the statute.” Thus, the plaintiffs must demonstrate that the lender “misled other New York homeowners during the HAMP application process in order to survive summary judgment” and “such evidence may likely be available only through discovery into [lender's] records of other HAMP applications.” Thus, the court believed that limiting discovery to the merits of the plaintiffs’ individual claim, “could be tantamount to deciding the case in favor of defendant.” The court emphasized that the plaintiffs “not only have the right, but an obligation, to conduct discovery concerning the merits of other potential plaintiffs merely to establish the bona fides of their own claim.”

Finally, the court warned that the subject decision “is not a license to pursue discovery however [the plaintiffs] see fit.” The plaintiffs are obligated “to move for class certification at an early practicable time, and the parties’ discovery requests should be tailored as such.”

Pandit v. Saxon Mortgage Services, CV 11-3935, NYLJ 1202603324622, at *1 (EDNY, Decided June 5, 2013), Brown, J. (Magistrate).

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.