Sczesnik v MB Landau, LLC
Attorneys and Parties
Brief Summary
Residential landlord-tenant and rent stabilization dispute involving alleged rent overcharges and claimed fraudulent deregulation of apartments in a building that participated in the J-51 tax benefit program.
The Supreme Court, Queens County, denied the tenants' motion for summary judgment on liability, denied dismissal of the landlords' counterclaim for attorneys' fees, and denied dismissal of the landlords' first, seventh, ninth, and twelfth affirmative defenses.
The Appellate Division modified the order only to dismiss the landlords' counterclaim for attorneys' fees; it otherwise affirmed the denial of summary judgment on liability and the denial of dismissal of the affirmative defenses.
The tenants did not make a prima facie showing that the landlords knowingly engaged in a fraudulent scheme to deregulate under the retroactively applicable standard. But the landlords had no contractual, statutory, or rule-based basis to recover attorneys' fees in a rent overcharge action, and the lease fee provisions applied only to actions enforcing lease rights.
Background
The plaintiffs, tenants in a Flushing apartment building, brought a class action in 2018 seeking damages for rent overcharges under Rent Stabilization Law of 1969, Administrative Code of City of New York section 26-512 [prohibits rent overcharges for rent-stabilized apartments], and declaratory relief. They alleged that while the building received J-51 tax benefits, the original landlord failed to re-register certain apartments as rent stabilized with the New York State Division of Housing and Community Renewal after those units had been improperly deregulated, and that this was part of a fraudulent deregulation scheme. Later owners, including MB Landau, LLC, were substituted or added as defendants. The tenants moved for summary judgment, arguing that overcharges should be calculated under Rent Stabilization Code former 9 NYCRR 2522.6(b)(3) [default formula for setting legal regulated rent where the base date rent is tainted], based on former 9 NYCRR 2522.6(b)(2)(iii) [permits use of the default formula when the base date rent is the product of a fraudulent scheme to deregulate].
Lower Court Decision
The lower court denied the tenants' motion insofar as it sought summary judgment on liability, dismissal of the landlords' counterclaim for attorneys' fees, and dismissal of the first, seventh, ninth, and twelfth affirmative defenses.
Appellate Division Reversal
The Appellate Division held that the 2024 amendment to the 2023 legislation governing fraudulent deregulation allegations applied retroactively, and under that standard the tenants had to show that the landlords knowingly engaged in a fraudulent scheme to deregulate under the totality of the circumstances. Because the tenants failed to make that prima facie showing, summary judgment on liability was properly denied. The tenants also failed to establish entitlement to dismissal of the challenged affirmative defenses. However, the court ruled that the landlords' attorneys' fees counterclaim should have been dismissed because, under the American rule, fees are recoverable only when authorized by agreement, statute, or court rule, and the lease provisions cited by the landlords did not apply to a statutory rent overcharge action.
Legal Significance
This decision reinforces two points. First, in rent overcharge cases alleging fraudulent deregulation, courts will apply the retroactive standard requiring proof that a landlord knowingly participated in a fraudulent deregulation scheme under the totality of the circumstances, not merely that registration errors or improper deregulation occurred. Second, lease-based attorneys' fee clauses are strictly construed and will not support a fee claim in a statutory rent stabilization action unless the clause clearly covers that type of lawsuit.
Tenants alleging rent overcharges tied to fraudulent deregulation must prove knowing fraud to win summary judgment, but landlords cannot recover attorneys' fees in such cases unless a contract, statute, or rule clearly authorizes it.