The Demise of the Four-Year Rule?

Enacted as part of the Rent Regulation Reform Act of 1997, CPLR 213-a provides that “[a]n action on a residential rent overcharge shall be commenced 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 any overcharge may be based upon an overcharge having occurred more than four years before the action is commenced. This section shall preclude examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of the action.” In Conason v. Megan Holding, LLC, NYLJ 2/25/15, p. 22., col. 1., the Court of Appeals affirmed a rent overcharge determination when the first overcharge alleged occurred more than four years before tenant's assertion of the overcharge complaint, affording tenant a remedy against an unscrupulous landlord despite the language of the statute.

The Conason Case

In October 2003, landlord rented the subject apartment to tenant at a monthly rent of $1800. The lease specified that the apartment was rent-regulated, but omitted the Rent Stabilization Rider required for vacancy leases on rent-stabilized apartments. Tenant renewed the lease twice, once for a two-year period beginning Nov. 1, 2005 at a rent of $1899, and then for a one-year period beginning Nov. 1, 2007 at a rent of $1955.97. Tenant paid rent until May 2008, but continued in possession after that date. In April 2009, landlord brought a summary nonpayment proceeding. Tenant counterclaimed, asserting both a breach of the warranty of habitability, and a rent overcharge.

The proceedings in Civil Court were marred by delays caused by repeated substitution of counsel for landlord, including a withdrawal by counsel on the last day of trial, with landlord's principal on the witness stand. The trial judge permitted counsel to withdraw based on the belief that counsel believed “in good faith that he cannot ethically continue.” as landlord's counsel.

Ultimately, Civil Court dismissed tenant's overcharge claim, without prejudice, for tenant's failure to prove the amount of the legal regulated rent and the amount of the overcharge. The court did conclude, however, that tenant had proved that an overcharge occurred. In particular, although landlord had registered a lease beginning April 1, 2003, at $1,000 a month, the court concluded that there was no evidence to support landlord's contention that the supposed tenant, purportedly named Oki, had ever lived in the apartment. No utility records substantiated the tenancy, and the building's superintendent and a neighbor had testified that the apartment was vacant after expiration of the lease of a prior tenant, one Rivera. DHCR's rent records established that the legal regulated rent in 2002, when Rivera occupied the apartment, was $475.24.

The court concluded that landlord's testimony was entirely credible, and that tenant had established landlord's fraud in inventing a fictitious tenant to justify increasing the rent from $475.24 to $1800. But, because tenant had not produced evidence of the lowest regulated rent of a comparable apartment in the same building on the base date ' the date four years before tenant's complaint ' the court concluded that it could not award judgment on the overcharge claim. The court did, however, award tenant a judgment for breach of the warranty of habitability.

Tenant then brought this action in Supreme Court seeking treble damages for the rent overcharge. Tenant established ' without contest by landlord ' that the lowest regulated rent for a comparable apartment on the “base date” (April 2005) was $180.92. Supreme Court nevertheless conducted a hearing to determine damages, but held that landlord was collaterally estopped by the earlier Civil Court proceeding from challenging the determination that landlord had committed a fraud, and that the base date for determining the rent was April 9, 2005. The court concluded that tenant was entitled to treble damages, and was entitled to pierce the corporate veil to hold landlord's principal personally liable for the damages. The Appellate Division unanimously affirmed. Landlord appealed, arguing that CPLR 213-a barred the overcharge claim because tenant had not brought the claim within four years of the time tenant first paid the overcharge ' November 2003.

The Court of Appeals Decision

In a 4-1 decision, the Court of Appeals modified, holding that questions of fact remained about whether landlord's corporate veil should be pierced, but otherwise affirmed. In an opinion by Judge Susan Read, the court rejected landlord's construction of CPLR 213-a, relying on two of its previous decisions ' Thorton v. Baron, 5 N.Y.3d 175, and Grimm v. DHCR, 15 N.Y.3d 358 ' which had previously narrowed, if not eviscerated, section 213-a's four-year rule.

In Thornton v. Baron, landlord had rented the subject apartment to a tenant at a rate substantially in excess of the legal regulated rent. The lease recited that tenant would not use the premises for as his primary residence. The “illusory tenant” never took possession of the apartment, but instead sublet the apartment to subtenants at a still higher rent, also purportedly for purposes other than a primary residence. Landlord then brought a declaratory judgment action against tenant to establish the validity of the main lease; tenant, cooperating in the scheme, stipulated to the entry of a consent judgment upholding the terms of the lease agreement.

The subtenants, who had represented that they would not use their apartment as their primary residence, then brought an action against tenant for a rent overcharge. Subtenants did not, however, amend their complaint to name the landlord as a defendant until long after four years from the date of the initial overcharge.

The Court of Appeals held that because of landlord's fraud, the lease and the sublease were invalid. The court indicated, however, tenant was not entitled to consideration of rent records from periods more than four years prior to the complaint against landlord. Instead, rent was to be set using DHCR's default formula ' the lowest rent for a comparable apartment on the base date.

In Grimm v. DHCR, a sharply divided court rejected DHCR's effort to limit Thornton to the “illusory tenancy” context. Landlord rented the apartment to tenant's predecessor in 2000 for $1450. Tenant moved into the apartment in 2014 paying the same rent, and entered into a renewal lease in 2015. She later filed an overcharge proceeding contending that the landlord had acted fraudulently in setting the 2000 rent, because the 1999 registered rent had been only $578.86. DHCR declined to look into tenant's allegations because they involved periods more than four years before tenant's complaint, but the Court of Appeals remanded to the agency, holding that DHCR could not ignore tenant's allegations of fraud. The court emphasized that it was not concluding that fraud existed in the case, and purported to emphasize that an increase in rent alone would not be sufficient to establish a colorable claim of fraud.

Conclusion

After Thornton and Grimm, one might reasonably have concluded that the four-year rule was dead. But, last year in Boyd v. DHCR, 23 N.Y.3d 999, the Court of Appeals, in a one-sentence memorandum, reversed the First Department and held that tenant, who had claimed that landlord fraudulently misrepresented the cost of improvements made to the apartment, “had not set forth sufficient indicia of fraud to warrant consideration of the rental history beyond the four-year statutory period.” Boyd undoubtedly left observers ' and landlord's lawyer in this case ' wondering when the four-year rule would still apply, and the court's opinion in Conason does little to resolve the issue: The court attempted to distinguish “generalized claims of fraud,” which do not warrant departure from the four-year rule, from “colorable claims of fraud within the meaning of Grimm,” which do warrant departure. Precisely where the court will draw the line remains to be seen.

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

Enacted as part of the Rent Regulation Reform Act of 1997, CPLR 213-a provides that “[a]n action on a residential rent overcharge shall be commenced 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 any overcharge may be based upon an overcharge having occurred more than four years before the action is commenced. This section shall preclude examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of the action.” In Conason v. Megan Holding, LLC, NYLJ 2/25/15, p. 22., col. 1., the Court of Appeals affirmed a rent overcharge determination when the first overcharge alleged occurred more than four years before tenant's assertion of the overcharge complaint, affording tenant a remedy against an unscrupulous landlord despite the language of the statute.

The Conason Case

In October 2003, landlord rented the subject apartment to tenant at a monthly rent of $1800. The lease specified that the apartment was rent-regulated, but omitted the Rent Stabilization Rider required for vacancy leases on rent-stabilized apartments. Tenant renewed the lease twice, once for a two-year period beginning Nov. 1, 2005 at a rent of $1899, and then for a one-year period beginning Nov. 1, 2007 at a rent of $1955.97. Tenant paid rent until May 2008, but continued in possession after that date. In April 2009, landlord brought a summary nonpayment proceeding. Tenant counterclaimed, asserting both a breach of the warranty of habitability, and a rent overcharge.

The proceedings in Civil Court were marred by delays caused by repeated substitution of counsel for landlord, including a withdrawal by counsel on the last day of trial, with landlord's principal on the witness stand. The trial judge permitted counsel to withdraw based on the belief that counsel believed “in good faith that he cannot ethically continue.” as landlord's counsel.

Ultimately, Civil Court dismissed tenant's overcharge claim, without prejudice, for tenant's failure to prove the amount of the legal regulated rent and the amount of the overcharge. The court did conclude, however, that tenant had proved that an overcharge occurred. In particular, although landlord had registered a lease beginning April 1, 2003, at $1,000 a month, the court concluded that there was no evidence to support landlord's contention that the supposed tenant, purportedly named Oki, had ever lived in the apartment. No utility records substantiated the tenancy, and the building's superintendent and a neighbor had testified that the apartment was vacant after expiration of the lease of a prior tenant, one Rivera. DHCR's rent records established that the legal regulated rent in 2002, when Rivera occupied the apartment, was $475.24.

The court concluded that landlord's testimony was entirely credible, and that tenant had established landlord's fraud in inventing a fictitious tenant to justify increasing the rent from $475.24 to $1800. But, because tenant had not produced evidence of the lowest regulated rent of a comparable apartment in the same building on the base date ' the date four years before tenant's complaint ' the court concluded that it could not award judgment on the overcharge claim. The court did, however, award tenant a judgment for breach of the warranty of habitability.

Tenant then brought this action in Supreme Court seeking treble damages for the rent overcharge. Tenant established ' without contest by landlord ' that the lowest regulated rent for a comparable apartment on the “base date” (April 2005) was $180.92. Supreme Court nevertheless conducted a hearing to determine damages, but held that landlord was collaterally estopped by the earlier Civil Court proceeding from challenging the determination that landlord had committed a fraud, and that the base date for determining the rent was April 9, 2005. The court concluded that tenant was entitled to treble damages, and was entitled to pierce the corporate veil to hold landlord's principal personally liable for the damages. The Appellate Division unanimously affirmed. Landlord appealed, arguing that CPLR 213-a barred the overcharge claim because tenant had not brought the claim within four years of the time tenant first paid the overcharge ' November 2003.

The Court of Appeals Decision

In a 4-1 decision, the Court of Appeals modified, holding that questions of fact remained about whether landlord's corporate veil should be pierced, but otherwise affirmed. In an opinion by Judge Susan Read, the court rejected landlord's construction of CPLR 213-a, relying on two of its previous decisions ' Thorton v. Baron , 5 N.Y.3d 175, and Grimm v. DHCR , 15 N.Y.3d 358 ' which had previously narrowed, if not eviscerated, section 213-a's four-year rule.

In Thornton v. Baron, landlord had rented the subject apartment to a tenant at a rate substantially in excess of the legal regulated rent. The lease recited that tenant would not use the premises for as his primary residence. The “illusory tenant” never took possession of the apartment, but instead sublet the apartment to subtenants at a still higher rent, also purportedly for purposes other than a primary residence. Landlord then brought a declaratory judgment action against tenant to establish the validity of the main lease; tenant, cooperating in the scheme, stipulated to the entry of a consent judgment upholding the terms of the lease agreement.

The subtenants, who had represented that they would not use their apartment as their primary residence, then brought an action against tenant for a rent overcharge. Subtenants did not, however, amend their complaint to name the landlord as a defendant until long after four years from the date of the initial overcharge.

The Court of Appeals held that because of landlord's fraud, the lease and the sublease were invalid. The court indicated, however, tenant was not entitled to consideration of rent records from periods more than four years prior to the complaint against landlord. Instead, rent was to be set using DHCR's default formula ' the lowest rent for a comparable apartment on the base date.

In Grimm v. DHCR, a sharply divided court rejected DHCR's effort to limit Thornton to the “illusory tenancy” context. Landlord rented the apartment to tenant's predecessor in 2000 for $1450. Tenant moved into the apartment in 2014 paying the same rent, and entered into a renewal lease in 2015. She later filed an overcharge proceeding contending that the landlord had acted fraudulently in setting the 2000 rent, because the 1999 registered rent had been only $578.86. DHCR declined to look into tenant's allegations because they involved periods more than four years before tenant's complaint, but the Court of Appeals remanded to the agency, holding that DHCR could not ignore tenant's allegations of fraud. The court emphasized that it was not concluding that fraud existed in the case, and purported to emphasize that an increase in rent alone would not be sufficient to establish a colorable claim of fraud.

Conclusion

After Thornton and Grimm, one might reasonably have concluded that the four-year rule was dead. But, last year in Boyd v. DHCR , 23 N.Y.3d 999, the Court of Appeals, in a one-sentence memorandum, reversed the First Department and held that tenant, who had claimed that landlord fraudulently misrepresented the cost of improvements made to the apartment, “had not set forth sufficient indicia of fraud to warrant consideration of the rental history beyond the four-year statutory period.” Boyd undoubtedly left observers ' and landlord's lawyer in this case ' wondering when the four-year rule would still apply, and the court's opinion in Conason does little to resolve the issue: The court attempted to distinguish “generalized claims of fraud,” which do not warrant departure from the four-year rule, from “colorable claims of fraud within the meaning of Grimm ,” which do warrant departure. Precisely where the court will draw the line remains to be seen.

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