Court Rejects Prior Standard Used to Determine Apartment Deregulation Fraud

Landlord sued to evict unregulated tenant for nonpayment of rent owed in the amount of $1,800 per month. Tenant claimed that her apartment was improperly deregulated and that she'd been overcharged. Tenant later sought to amend her answer to include an overcharge counterclaim based on a claimed common law fraudulent scheme to deregulate the unit. Landlord had bought the building in 2007 but hadn't filed any registration statements for the apartment until 2016. The 2016 registration statement indicated the apartment was vacant but also reflected a vacancy increase above the allowable increase at the time for a two-year lease. Landlord also had stopped registering the apartment altogether after 2018, without ever filing any registration statement explaining how, if at all, the apartment was exempt from rent stabilization. And tenant disputed in detail the scope-of-work document prepared by landlord's contractor in connection with claimed IAIs. 

The court ruled for tenant, finding that she had properly raised a colorable claim of a fraudulent scheme to deregulate the apartment and granted pre-trial discovery as to tenant's claims. The court discussed recent amendments to the Rent Stabilization Law and the standard for determining fraud to deregulate an apartment at some length. The court found that the Court of Appeals decision in Regina Metro. Co. LLC v. DHCR had been incorrectly interpreted in previous court decisions. The court held that the "famous" footnote 7, when read in total, actually distinguished common law and its elements from fraud in the regulatory context. The court found the totality of the circumstances test more appropriate, determining that common law fraud should no longer be the standard for pleading or proving fraudulent deregulation of an apartment. 

Landlord argued that the recent amendments to the rent stabilization law maintained the requirement that a tenant specifically plead common law fraud as required by CLPR 3016(b). Landlord also claimed that tenant hadn't alleged fraud under either the common law fraud standard or the totality of the circumstances test. The court rejected landlord's arguments and found that the holding in Regina can be reconciled with both pre-HSTPA law and the new law. The court found that each element of the common law fraud claim no longer must be pleaded or proven, as stated by the Legislature, which had now adopted the more flexible totality of the circumstances test. 

1532-1609 Ocean Ave LLC v. Hertzan: Index No. 312517-23, 2024 NY Slip Op 32430(U), NYLJ 7/16/24, p. 17, col. 3 (Civ. Ct. Kings; 6/21/24; Bacdayan, J)