Court of Appeals Authorizes Class Action to Recover Rent Overcharges

Does Rent Stabilization Law section 26-516, which entitles tenants to treble damages for most rent overcharges, constitute a “penalty” within the meaning of CPLR 901(b), which provides that, subject to an exception, no action to recover a penalty may be maintained as a class action? The Court of Appeals addressed that question in Borden v. 400 East 55th Street Associates, L.P., (NYLJ 11/25/14, p. 22., col. 1), and held that so long as tenants waived the right to recover treble damages, tenants could use the class action mechanism to recover rent overcharges.

The Facts

In Roberts v. Tishman Speyer Props., Ltd., the Court of Appeals held that landlords who accepted tax benefits for a building pursuant to New York City's J-51 program could not deregulate any apartment in the building pursuant to the luxury decontrol laws. The court's holding in Roberts rejected DHCR's view that landlords were entitled to use the luxury decontrol laws if the tenant's unit was subject to rent stabilization separate and apart from landlord's acceptance of J-51 benefits. As a result, many landlords, in reliance on DHCR's position, had invoked the luxury decontrol laws to increase rents in apartments held by well-off tenants. In light of Roberts , landlords were not entitled to these increased rents.

In Borden and two companion cases, tenants brought class actions to recover overcharges collected by landlords. The landlords contended that these class actions were precluded by CPLR 901(b), which permits use of the class action to recover a penalty only when the statute creating the penalty expressly authorizes class actions. The landlords also invoked the language of Rent Stabilization Law section 26-516, which provides expressly that a landlord who is found to have collected an overcharge,”shall be liable to the tenant for a penalty equal to three times the amount of such overcharge.” Tenants, however, had waived their right to recover treble damages under the Rent Stabilization Law, and argued that CPLR 901(b) was no longer applicable because tenants were now seeking to recover only compensatory damages ' the amount of the overcharge ' and not a penalty.

In each case, the Appellate Division agreed with the tenants, and certified the question to the Court of Appeals.

The Court's Analysis

The Court of Appeals affirmed in an opinion by Chief Judge Jonathan Lippman, joined by Judges Victoria Graffeo and Jenny Rivera. The court started by noting that CPLR 901 focuses not on whether the applicable statute creates a penalty, but on whether the action brought is an action to recover a penalty. He then concluded that the Rent Stabilization Law's use of the word “penalty” should not, in any event, be dispositive.

The court then turned to the substance of Rent Stabilization Law section 26-516 and concluded that one-third of the treble damages award was designed to make the tenant whole, and was therefore compensatory. Only the other two-thirds of the award was designed to be punitive.

The court rejected the landlords' argument that tenants could not waive the right to a portion of the treble damages award. The landlords had invoked section 2520.13 of the Rent Stabilization Code, which prohibits any agreement waiving any provision of the Rent Stabilization Law. The court, however, distinguished between a prohibited agreement to waive rent stabilization protections and the unilateral waiver that occurred in this case. The court indicated that in this case, there was no evidence that the tenant was being coerced into a waiver.

Finally, the court turned to whether class certification was appropriate. The court started by noting that the size of the class involved in each action (53 to over 500) exceeded the numerosity threshold contemplated by the legislature. The court also concluded that the difference in damages suffered by each tenant did not preclude class action treatment, because the statute contemplates class actions when the amount of damages differs, so long as the legal or factual issues involving liability are common.

The Dissent

Judge Robert Smith, dissenting for himself and Judge Eugene Pigott, relied on the express language of section 26-516 in concluding that the statutory remedy constitutes a penalty, even without trebling of damages. He noted the statutory exception for overcharges that are not willful, and quoted the statutory language that in such cases, DHCR “shall establish the penalty as the amount of the overcharge plus interest.” In the dissent's view, the legislature's language made it clear that the entire amount of the overcharge was a penalty, and the statutory language should be dispositive.

The dissent went on to explain that the statutory characterization of the entire overcharge remedy as a penalty was amply justified. Judge Smith argued that the tenants who rented market rate apartments in landlords' buildings were beneficiaries ' not victims ' of the landlords' overcharges. He noted that if the landlord had rented the apartments at stabilized rates, current tenants would have had to compete with a broader array of tenants who could afford the stabilized rents, but not the market rents. Because the landlords engaged in overcharges, the tenants had to compete only with other tenants who could afford market rent apartments, making it far more likely that tenants would end up with these apartments than would have been the case if landlords had not engaged in overcharges. As a result, in the dissent's view, the overcharge remedy provided by section 26-516 was not compensatory, but was instead a penalty imposed to defer landlords from engaging in overcharges. Therefore, CPLR section 902 precluded tenants from seeking relief through the class action mechanism.

Conclusion

The class action device was particularly valuable to tenants in the Borden case because tenants were not giving up very much by “waiving” their claim for treble damages. Because landlords who invoked luxury decontrol provisions did so in reliance on DHCR guidance, landlords would likely have proven that any overcharges were not willful, and that tenant were not therefore entitled to treble damages. In the more typical rent overcharge situation, tenants are unlikely to make use of the class action device if the consequence is loss of the treble damage remedy. As a result, the impact of the court's opinion in Borden may be limited.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

Does Rent Stabilization Law section 26-516, which entitles tenants to treble damages for most rent overcharges, constitute a “penalty” within the meaning of CPLR 901(b), which provides that, subject to an exception, no action to recover a penalty may be maintained as a class action? The Court of Appeals addressed that question in Borden v. 400 East 55th Street Associates, L.P., (NYLJ 11/25/14, p. 22., col. 1), and held that so long as tenants waived the right to recover treble damages, tenants could use the class action mechanism to recover rent overcharges.

The Facts

In Roberts v. Tishman Speyer Props., Ltd., the Court of Appeals held that landlords who accepted tax benefits for a building pursuant to New York City's J-51 program could not deregulate any apartment in the building pursuant to the luxury decontrol laws. The court's holding in Roberts rejected DHCR's view that landlords were entitled to use the luxury decontrol laws if the tenant's unit was subject to rent stabilization separate and apart from landlord's acceptance of J-51 benefits. As a result, many landlords, in reliance on DHCR's position, had invoked the luxury decontrol laws to increase rents in apartments held by well-off tenants. In light of Roberts , landlords were not entitled to these increased rents.

In Borden and two companion cases, tenants brought class actions to recover overcharges collected by landlords. The landlords contended that these class actions were precluded by CPLR 901(b), which permits use of the class action to recover a penalty only when the statute creating the penalty expressly authorizes class actions. The landlords also invoked the language of Rent Stabilization Law section 26-516, which provides expressly that a landlord who is found to have collected an overcharge,”shall be liable to the tenant for a penalty equal to three times the amount of such overcharge.” Tenants, however, had waived their right to recover treble damages under the Rent Stabilization Law, and argued that CPLR 901(b) was no longer applicable because tenants were now seeking to recover only compensatory damages ' the amount of the overcharge ' and not a penalty.

In each case, the Appellate Division agreed with the tenants, and certified the question to the Court of Appeals.

The Court's Analysis

The Court of Appeals affirmed in an opinion by Chief Judge Jonathan Lippman, joined by Judges Victoria Graffeo and Jenny Rivera. The court started by noting that CPLR 901 focuses not on whether the applicable statute creates a penalty, but on whether the action brought is an action to recover a penalty. He then concluded that the Rent Stabilization Law's use of the word “penalty” should not, in any event, be dispositive.

The court then turned to the substance of Rent Stabilization Law section 26-516 and concluded that one-third of the treble damages award was designed to make the tenant whole, and was therefore compensatory. Only the other two-thirds of the award was designed to be punitive.

The court rejected the landlords' argument that tenants could not waive the right to a portion of the treble damages award. The landlords had invoked section 2520.13 of the Rent Stabilization Code, which prohibits any agreement waiving any provision of the Rent Stabilization Law. The court, however, distinguished between a prohibited agreement to waive rent stabilization protections and the unilateral waiver that occurred in this case. The court indicated that in this case, there was no evidence that the tenant was being coerced into a waiver.

Finally, the court turned to whether class certification was appropriate. The court started by noting that the size of the class involved in each action (53 to over 500) exceeded the numerosity threshold contemplated by the legislature. The court also concluded that the difference in damages suffered by each tenant did not preclude class action treatment, because the statute contemplates class actions when the amount of damages differs, so long as the legal or factual issues involving liability are common.

The Dissent

Judge Robert Smith, dissenting for himself and Judge Eugene Pigott, relied on the express language of section 26-516 in concluding that the statutory remedy constitutes a penalty, even without trebling of damages. He noted the statutory exception for overcharges that are not willful, and quoted the statutory language that in such cases, DHCR “shall establish the penalty as the amount of the overcharge plus interest.” In the dissent's view, the legislature's language made it clear that the entire amount of the overcharge was a penalty, and the statutory language should be dispositive.

The dissent went on to explain that the statutory characterization of the entire overcharge remedy as a penalty was amply justified. Judge Smith argued that the tenants who rented market rate apartments in landlords' buildings were beneficiaries ' not victims ' of the landlords' overcharges. He noted that if the landlord had rented the apartments at stabilized rates, current tenants would have had to compete with a broader array of tenants who could afford the stabilized rents, but not the market rents. Because the landlords engaged in overcharges, the tenants had to compete only with other tenants who could afford market rent apartments, making it far more likely that tenants would end up with these apartments than would have been the case if landlords had not engaged in overcharges. As a result, in the dissent's view, the overcharge remedy provided by section 26-516 was not compensatory, but was instead a penalty imposed to defer landlords from engaging in overcharges. Therefore, CPLR section 902 precluded tenants from seeking relief through the class action mechanism.

Conclusion

The class action device was particularly valuable to tenants in the Borden case because tenants were not giving up very much by “waiving” their claim for treble damages. Because landlords who invoked luxury decontrol provisions did so in reliance on DHCR guidance, landlords would likely have proven that any overcharges were not willful, and that tenant were not therefore entitled to treble damages. In the more typical rent overcharge situation, tenants are unlikely to make use of the class action device if the consequence is loss of the treble damage remedy. As a result, the impact of the court's opinion in Borden may be limited.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.