Matter of 333 E. 49th Partnership, LP v. New York State Div. of Hous. & Community Renewal

Citation: 2018 NY Slip Op 5735Docket: 101608/15 6608

Court: Appellate Division of the Supreme Court of the State of New York; August 9, 2018; New York; State Appellate Court

Original Court Document: View Document

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The Appellate Division of the Supreme Court, in the case Matter of 333 E. 49th Partnership, LP v. New York State Division of Housing and Community Renewal, addressed an appeal regarding a rent overcharge complaint. Petitioners, 333 East 49th Partnership, LP, appealed an order from the Supreme Court of New York County that denied their petition seeking to reverse a determination made by the Division of Housing and Community Renewal (DHCR) related to the complaint. The core issues included whether DHCR had the authority to vacate a nonfinal order under the Rent Stabilization Code and whether DHCR's conclusion that the owner was responsible for refunding the overcharge collected by the prime tenant was rational and not arbitrary.

The background involved the rental of an apartment at 333 East 49th Street to Dennis Dziena Associates, with a series of rent-stabilized leases from 1995 onward. A lease in December 2003 transferred the apartment to Joseph Lombardo at a significantly higher rent than the regulated amount. Following a notification from DHCR indicating the tenant of record and legal rent, Lombardo filed a rent overcharge complaint claiming that the prime tenant was an "illusory tenant" and had overcharged him. The Rent Administrator subsequently found in favor of Lombardo, ruling that the prime tenant had indeed overcharged him and ordered a substantial refund with treble damages. However, the owner's claim that they had not received excess rent was not contested, leading to the dismissal of the illusory tenancy claim.

Dziena LLC's counsel indicated that Madeleine held a controlling interest in the LLC, leading the Rent Administrator (RA) to determine that both she and the LLC were jointly and severally liable for a rent overcharge. On January 12, 2010, the RA announced he would reconsider a previous order regarding Madeleine's liability after a prime tenant's application sought her removal from responsibility. Subsequently, on September 24, 2010, the RA reversed his initial ruling, concluding that Madeleine was not liable, as the rent had been paid to the LLC, and found Dziena LLC solely responsible for the overcharge. Lombardo filed a petition for administrative review (PAR) on October 22, 2010, arguing that both the owner and managing agent should also be liable due to their involvement in illegal sublets, alongside Madeleine.

The Deputy Commissioner granted the PAR in part on April 19, 2012, stating that there was insufficient evidence to support the prior absolution of Madeleine and ordered further fact-finding. The Commissioner noted that neither the prime tenant nor the subtenant demonstrated that the owner profited from the arrangement, asserting that the prime tenant alone was responsible. On August 8, 2013, the DHCR, on its own initiative, reopened the April 2012 order, finding inconsistencies and revoking its previous determinations, including the conclusion that the owner had not profited from the arrangement.

On June 18, 2014, the RA issued a new order, finding the owner jointly and severally responsible with the prime tenant for the overcharge of $263,942.29, which included treble damages. The RA characterized the tenancy as illusory, ruling that the arrangement violated tenants' rights and should not be considered valid, thereby applying a default rent-setting method. The owner contested this order through a PAR, arguing that it had rented to Dziena Associates, not Dziena LLC, and contended that any wrongdoing was committed by the prime tenant or Madeleine, who allegedly used the LLC to evade liability. The owner maintained that it had not engaged in any collusion, was unaware of the overcharge, and did not profit from it, asserting that its lease was valid and thus the default formula for rent setting and treble damages were inappropriate.

DHCR denied the owner's PAR and the prime tenant's separate PAR on July 1, 2015, concluding that Dziena Associates and Dziena LLC were indistinguishable. The agency rejected the owner's claim of no relationship with the LLC and found inadequate evidence to support that Madeline was the LLC's alter ego. DHCR upheld the RA's determination of the owner's joint and several liability for rent overcharges, citing Matter of Avon Furniture Leasing v Popolizio as precedent. The agency noted that the prime tenant leased multiple apartments without intent to occupy them, and the owner had constructive knowledge of illegal subleases. The RA's invalidation of the owner's lease and determination of the base rent using the Thornton formula were deemed correct, as the illusory tenancy compromised the reliability of the base rent. The owner was subject to treble damages, having failed to counter the presumption of willfulness. 

Subsequently, the owner initiated an Article 78 proceeding, arguing DHCR's July 1, 2015 decision was arbitrary. The Supreme Court dismissed the petition. On appeal, the owner raised a new argument regarding the impropriety of the Commissioner's sua sponte reopening of the matter on August 8, 2013. However, the court stated that issues not presented during the administrative hearing cannot be considered on appeal. If the argument were to be considered, the court would find the reopening proper under Section 2529.9 of the Rent Stabilization Code, which allows the Commissioner to modify or revoke orders upon discovering irregularities, fraud, or illegality, provided parties are notified. This authorization is an exception to the norm of administrative finality, which generally prevents reopening finalized administrative decisions solely to allow for new arguments.

To challenge an administrative determination, it must be final and binding on the petitioner, meaning the agency has taken a definitive stance that causes concrete injury, which cannot be substantially remedied through further administrative actions (Matter of East Ramapo Cent. Sch. Dist. v King, 29 NY3d 938, 939 [2017]). DHCR's sua sponte determination from August 8, 2013, was not final, as it merely remanded the matter for further determination of the owner's liability and did not impose obligations or create legal relationships. The owner had the opportunity to contest the subsequent determination of liability through a PAR before initiating an article 78 proceeding.

An administrative agency's interpretation of its own regulations is generally given substantial deference unless deemed irrational or unreasonable (Samiento v World Yacht Inc., 10 NY3d 70, 79 [2008]). DHCR’s definition of 'irregularity in a vital matter' includes failures to accurately calculate rent or comply with procedural rules. The Court found that DHCR acted rationally in its determination regarding an irregularity.

The text also addresses the issue of illusory tenancies, which occur when a prime tenant rents an apartment solely to profit from re-leasing it, undermining rent stabilization laws (RSL). Such tenancies are protected under rent stabilization rules, and a landlord may be held accountable for creating an illusory tenancy if they had constructive knowledge of the arrangement, even without evidence of collusion (Primrose Mgt. Co. v Donahoe, 253 AD2d 404, 405 [1st Dept 1998]). The determination of an illusory tenancy does not require proof of collusion; knowledge of the subleasing arrangement by the landlord suffices.

DHCR's conclusion that the owner is liable for rent overcharges is justified and not arbitrary. The agency is not limited to assessing whether the owner overcharged the subtenant but can also consider the owner's awareness of the prime tenant's actions and the benefits gained from them. Evidence of the prime tenant renting 22 or 23 apartments suggests the owner's constructive knowledge of an illegal profit scheme. The owner's reference to the Manocherian case is incorrect, as it dealt with a nonprofit hospital's lawful subletting under the Rent Stabilization Law (RSL), which does not apply to the prime tenant in this case. Unlike the scenarios in other cited cases involving nonprofits, the prime tenant here intended to profit from the leases, violating the RSL. Additional evidence, including staff knowledge of the sublets and attempts by the owner to profit by seeking luxury decontrol of apartments, supports DHCR's findings. The owner’s claim that DHCR improperly relied on agency records is unfounded, as such records are integral to the agency's determinations. Moreover, a letter from the owner's counsel indicates attempts to deregulate rents, validating DHCR's findings regarding luxury deregulation.

The Supreme Court upheld the decision of the Division of Housing and Community Renewal (DHCR) that the property owner is liable for treble damages due to overcharging a subtenant. Under RSL 26-511(c)(12)(e), subtenants are entitled to triple damages for any overcharge, and RSC 2525.6(b) specifies that any surcharge exceeding 10% for furnished sublets also warrants treble damages. The court rejected the owner's argument that liability is limited to the amount collected, referencing the Appellate Term's ruling in Schreibman v. Wiske, which asserted that a subtenant's sole remedy for overcharging is against the tenant; however, DHCR is not bound by this decision since it did not involve an agency review.

The court further clarified that subtenants may seek relief beyond the tenant, countering the owner's reliance on earlier case law. RSL 26-516(a) establishes that an owner found to have overcharged may face penalties, and if the overcharging is deemed non-willful, DHCR can adjust the penalty accordingly. The court noted that mere presence of illusory tenancies does not exonerate landlords from responsibility. Evidence indicated that the building staff was aware of subletting activities, supporting DHCR's finding of constructive knowledge regarding the prime tenant's actions. The owner failed to prove that the overcharges were not willful. 

While DHCR's interpretation of the statutes to impose treble damages on the owner was deemed rational and deserving of deference, the court found that DHCR incorrectly applied the default method from Thornton to determine the stabilized rent. Moreover, it stated that rent overcharge complaints are subject to a four-year statute of limitations.

The New York Rent Regulation Reform Act (RRRA) of 1997 amended the Rent Stabilization Law (RSL) to limit the examination of rent history to a four-year period before a rent overcharge complaint is filed. The legal regulated rent for determining overcharges is based on the rent charged on the "base date," defined as four years prior to the complaint date, plus lawful increases (9 NYCRR 2526.1(a)(3)(i), 2520.6). However, if there are substantial indicators of fraud, the Division of Housing and Community Renewal (DHCR) may consider rental history prior to this four-year look-back, as established in *Matter of Grimm* and *Matter of Boyd*.

In *Thornton*, the Court of Appeals ruled that a lease provision exempting an apartment from RSL was void, and the default formula for determining base rent, used when reliable rent records are absent, should apply. This formula uses the lowest rent for a comparable rent-stabilized apartment. The court emphasized that no wrongdoer should benefit from illegal actions. In *Grimm*, the court clarified that allegations of fraudulent deregulation warrant an investigation into the legality of the base date rent.

In the current case, the rent-stabilized lease between the owner and the prime tenant was legal and did not include improper provisions, although it facilitated the prime tenant's fraud through a sublease. The base date rent was correctly established at $1,524.32 based on the lease renewal effective on February 27, 2005. The Supreme Court erred by ruling that Madeleine Dziena was not personally liable, as the initial lease and renewals were with Dziena Associates, not Dziena LLC, which was formed later and did not exist during the initial lease. There was no indication that the owner recognized Dziena LLC's existence during the lease agreements, thus it could not be considered the prime tenant.

Dziena LLC's status as a limited liability company cannot protect its member, Madeleine Dziena, from liability. The Supreme Court of New York County, under Justice Margaret A. Chan, issued an order on July 19, 2017, which denied a petition to reverse a DHCR determination regarding a rent overcharge complaint and dismissed a CPLR article 78 proceeding. This order has been modified to hold Madeleine Dziena personally liable and to vacate the DHCR's improper use of the Thornton default method for determining the stabilized rent. The base date rent is set at $1,524.32, and the case is remanded for damage recalculation, while the rest of the order is affirmed without costs. The decision was rendered by Justice Singh, with concurrence from Justices Acosta, Tom, Mazzarelli, and Kern. The official order was entered on August 9, 2018.