The Real Deal New York

Plaintiffs united

A look at the industry’s class-action lawsuits — from Hurricane Sandy litigation to the Stuy Town case — that are expected to have a real estate ripple effect

February 01, 2013
By Hayley Kaplan

The epic class-action lawsuit between the residents of Stuyvesant Town and Peter Cooper Village and their former landlords began in 2007. But a November settlement of nearly $150 million in the suit — in which the residents claimed the owners illegally deregulated thousands of rent-stabilized apartments — has brought the case back into the spotlight.

Indeed, tenants in other residential buildings are now filing similar lawsuits against their landlords, citing the landmark case.

But the Stuy Town case isn’t the only class-action lawsuit to significantly affect the New York City real estate industry.

In fact, plaintiffs have banded together to file lawsuits against Goldman Sachs, developers TF Cornerstone and Extell Development, the real estate data website Zillow and a number of other real estate players. Observers have noted that those suits will all have their own ripple effect within the industry.

“Whatever the result [of a class-action case], it’s going to make an impact because it’s several hundred or thousands of people,” said real estate attorney Adam Leitman Bailey. “[Certain class-action lawsuits have] caused developers to change the way they [will] build their next building.”

This month, TRD looked at several significant, industry-related class-action lawsuits that are currently in play and how they will impact the real estate world in the coming years.

Stuy Town

Amy Roberts  v. Tishman Speyer and MetLife

Amy Roberts

After a five-year battle, the dramatic lawsuit involving Stuy Town, the massive Manhattan rental complex, is finally wrapping up.

Indeed, a November settlement reached between residents, current owner CWCapital Asset Management and former owners MetLife and Tishman Speyer is expected to be officially approved by the New York Supreme Court in early April.

Resident Amy Roberts filed the action on behalf of the tenants in 2007, seeking $215 million in rent overcharges. The residents argued MetLife and Tishman Speyer — which paid $5.4 billion for the complex in 2006 — improperly deregulated the rent-stabilized apartments while simultaneously taking J-51 tax benefits. (Landlords can only receive J-51 breaks if they are providing rent-stabilized housing.)

The settlement calls for the approximately 6,160 current and former tenants who lived in the 4,311 improperly deregulated apartments in question to receive approximately $146.85 million for rent overages. And as part of the settlement, CWCapital, which took control of the complex after the owners defaulted on their debt, agreed to keep the apartments rent-stabilized through June 2020 — when the development’s J-51 tax benefits expire.

The settlement concluded nearly 18 months of negotiations between the parties.

TRD and others have closely covered the lawsuit, a landmark case at a massive and iconic New York housing development, that was also expected to have broader impact on the industry. That impact is evidenced by the “copycat” suits that have followed.

For example, in one recent copycat case, Kathryn Casey v. Whitehouse Estates, tenants at the 137-unit apartment building at 350 East 52nd Street are essentially making the same claims that their counterparts at Stuy Town did. They argue that Whitehouse, the owner, improperly deregulated 72 of the building’s units beginning in 1993 when it started taking J-51 tax benefits.

The suit — which is seeking an unspecified amount in damages — cited Stuy Town’s 2009 Court of Appeals decision, which stated all apartments in buildings receiving J-51 tax benefits are subject to rent-stabilization laws.

Still, some industry experts said the Stuy Town case hasn’t had as pronounced an impact as they expected.

“I think the case has had a dramatic impact, but in a much smaller sphere than it could have,” said Alexander Schmidt of the law firm Wolf Haldenstein Adler Freeman & Herz, who represented the residents in the Stuy Town case.

So far, he said, there have been “only a handful” of similar J-51 lawsuits, despite the fact that  many landlords are in violation of J-51 regulations.

Schmidt said prior to Stuy Town most landlords believed that taking J-51 benefits while deregulating apartments was legal. That, he said, was because the law was unclear before the Roberts decision.

Still, sources say the decision has meant lower offers by investors in some cases for pre-1974 buildings, which are primarily affected by J-51.

“Every deal is different, but it will impact an offer,” said Timour Shafran, a managing partner at real estate investment firm Citicore.

Evan Richards, Jose Hernandez-Ortiz and Kevin Sardelli v. TF Cornerstone

1 West Street in the Financial District

Of the many class-action suits filed since Hurricane Sandy, few are as bitter as the battle being waged by tenants at the TF Cornerstone–owned buildings 2 Gold Street and the adjacent 201 Pearl Street, which were badly damaged by the storm.

Residents in both buildings have so far been told they won’t be able to move back into their apartments until March 1.

On Nov. 19, tenants led by Michael Cashwell and David Barker (who have since been replaced by Evan Richards, Jose Hernandez-Ortiz and Kevin Sardelli) filed a class-action suit in New York Supreme Court alleging that TF Cornerstone was negligent because it failed to adequately secure the buildings before and after Hurricane Sandy. According to the attorney for the tenants, Hunter Shkolnik, the group of plaintiffs now includes upwards of 500 residents from both buildings.

Evan Richards

The lawsuit alleges that TF Cornerstone, which is headed by brothers Thomas Elghanayan and Frederick Elghanayan, ignored the National Hurricane Center and the city’s repeated warnings about the storm. The suit argues that the landlord failed to use sandbags and take other proactive measures to prevent damage, despite the fact that there had been flooding in the buildings in the past.

Residents also alleged in court documents the company’s employees abandoned the properties — which have 650 and 189 units, respectively — after the storm, which led to looting at both buildings.

Late last month, Shkolnik’s firm — Napoli Bern Ripka Shkolnik — also filed a class-action case against the Moinian Group and Douglas Elliman Property Management on behalf of an undisclosed number of residents at Ocean Luxury Residences, a rental at 1 West Street in the Financial District.

The plaintiffs, who are being led by resident Yin Hou, outlines similar allegations as the TF Cornerstone suit regarding the lack of hurricane preparedness. Although the building reopened on Nov. 30, the tenants noted in court documents that there have been two fires since and complained of power outages and the smell of diesel fuel, which they believe is caused by the generators powering the building.

Thomas Elghanayan

The Moinian Group declined to comment, and Douglas Elliman did not respond to requests for comment.

Shkolnik said he hopes the two cases will set a new precedent in regards to what landlords in flood zones must do to prepare for future storms.

“Other landlords in the flood zone will take steps to protect their buildings in a greater fashion [as a result of the lawsuits],” he predicted. “You’re not going to see garages with open space entryways without sandbag protection.”

Bailey — who is not involved with this case, but said he’s been retained by several landlords for storm-related cases since Sandy — noted that the lawsuit will determine what preventative measures property owners must take during a natural disaster. He added that he will be keeping tabs on the case because it could impact other Sandy-related suits.

“Any ruling that a judge makes [in the TF Cornerstone case] will have an impact on other cases,” he said.

TF Cornerstone did not respond to requests for comment.

Jonathan Reinschmidt v. Zillow

Spencer Rascoff

On Nov. 6, Zillow’s stock plunged 39 percent — a dramatic drop that spurred a class-action lawsuit from investors in the online real estate company.

A group of those who purchased Zillow’s common stock between Feb. 15 and Nov. 6 of last year are alleging that the company made false and misleading statements about its finances and business practices.

The group — which is being led by investor Jonathan Reinschmidt and has not yet disclosed how many members it has or how much it’s seeking in damages — is contending that Zillow’s stock was traded at artificially inflated prices, reaching as much as $46.17 a share in September. With the stock at its apex, Zillow employees, including some of its executives, sold off some 3.1 million of their personal shares, worth about $115 million, according to court documents.

The stock price collapsed on the heels of Zillow’s release of its third-quarter earnings, which were lower than analysts had anticipated. In addition, the company at that time revealed that it had lost a major advertiser on its website.

For Zillow, a class-action case means diverting limited resources away from the company and into the lawsuit, which could distract it from running its business, explained Terrence Oved, of the Manhattan-based law firm Oved & Oved, who is not involved in Zillow’s case. In addition, a class-action may end up depressing the company’s stock price, he said.

Zillow’s story could be a cautionary tale for other real estate start-ups looking to go public, said Doug Perlson, CEO of online brokerage and listings consultant RealDirect.

“If [companies are] lucky enough to get to the public markets, then you need to be very careful about disclosures and how you describe your business to the public,” he said. “Whether you’re a start-up or a more established company, you’re going to need to manage your investors carefully, and you want to be as open and transparent about your business as you can possibly be.”

Oved agreed that the class-action case against Zillow could impact other real estate websites.

For real estate websites that aren’t publicly traded, like, say, listings website StreetEasy and data provider PropertyShark, Oved said the Zillow case could deter them from opting to go public because it highlights the intensity of providing disclosures to investors.

David Walton of the law firm Robbins Geller Rudman & Dowd, who is representing the plaintiffs, stressed that the more transparency the better.

“If [companies] gave out as much information as they had to [their] investors, you’re going to see less dramatic stock movements, and investors wouldn’t have anything to complain about.”

“The allegations in the [Zillow] complaint are that the investors weren’t given the full story,” he added.

Zillow, which is headed by CEO Spencer Rascoff, declined to comment on the case. Lawyers at Perkins Coie, which is representing Zillow, also did not respond to phone calls seeking comment.

In recent months, Zillow’s IPO has put it in acquisition mode — with the firm purchasing three companies during October and November: home search and sharing website Buyfolio, the mortgage software company Mortech and, for $16 million cash, the map-based real estate search website HotPads. (The terms of the Mortech and Buyfolio deals were not disclosed.)

“For a newly public company, they’re executing on a time-proven strategy to use newly public stock as a currency to acquire [other] businesses,” Perlson explained. Zillow was founded in 2005 by former executives at the travel website Expedia, formerly an arm of Microsoft. Zillow began trading on the NASDAQ in July 2011.

As to whether the case against Zillow will hold up in court, Oved said it is too early to predict. However, he said, cases like these are often filed with the intention to settle quickly.

NECA-IBEW Health & Welfare Fund v.  Goldman Sachs

Lloyd Blankfein

Several class-action lawsuits filed against mortgage companies after the 2008 financial crisis have recently wrapped up following landmark settlements. However, one case has seen a major court victory recently, which could impact future mortgage lending in the real estate market.

In 2008, investors in 17 mortgage-backed securities — led by a pension fund of electrical workers called NECA-IBEW Health & Welfare Fund — sued Goldman Sachs, which underwrote the investment.

The investors claimed that they were given false and misleading information about the guidelines of the mortgage loan originators before deciding to invest. That information, they claimed, influenced their decisions to invest.

The case was dismissed by a New York district court judge in 2010, but an appeals court panel overturned that decision this past September. Under the leadership of CEO Lloyd Blankfein, Goldman Sachs is taking an aggressive stance and now petitioning the U.S. Supreme Court to hear the case. If the court sides with the investment bank, it would avoid the fate of settling a massive suit for millions of dollars. Such a ruling could also embolden other banks.

The investors allege that the loan originators in this case — which included Countrywide Home Loans, Wells Fargo and Washington Mutual, among other banks — issued loans without determining whether the homeowners who were borrowing money from them could repay it, court documents said.

Those actions, the plaintiffs alleged, put their investments in serious jeopardy.

The decision could have a significant impact on the future of mortgage-backed securities pools of residential real estate loans.

“Litigation is harmful to any business, including this business, to the extent that it makes [securitizing] more risky,” said Charles Davidow of the law firm Paul, Weiss, Rifkind, Wharton & Garrison, who represents NECA.

He said the suit could impact all mortgage lenders.

“[The lawsuit] can depress securitization [further], which in turn can mean less funds available to lend,” he said.

And since the appeals and district court reached different decisions in the case, the law, in regards to what needs to be revealed to mortgage-backed securities investors, is currently murky.

“That kind of uncertainty, where the law’s unsettled, is certainly bad for the market, it’s bad for plaintiffs, it’s bad for everybody,” Davidow said.

Lawyers at Robbins Geller Rudman & Dowd, who represent Goldman Sachs, declined to comment on the case.

But in the last year, several other major mortgage companies have settled class-action lawsuits over post-2008 mortgage securities investments.

Bank of America, for example, reached a massive $2.43 billion settlement in September with several pension funds that invested in the bank’s mortgage-backed securities between September 2008 and January 2009. The investors alleged that BofA made false statements in connection with the bank’s $50 billion purchase of now-defunct rival Merrill Lynch.

Melissa Cohn, an executive vice president at mortgage lender Guaranteed Rate, explained that BofA pretty much pulled out of the mortgage-lending market after the class-action case was filed in 2009. However, she said, the bank is getting back into the mortgage game.

“Obviously, when you pull out of a lending channel, it’ll mean the brokers [and investors] have fewer venues to go to,” she explained.

Meanwhile, in June, a New York judge approved a $75 million settlement between former mortgage lender Wachovia — now owned by Wells Fargo — and class members (including several New York pension funds) who purchased its common stock between May 2006 and September 2008. The stockholders alleged the bank weakened its credit quality by selling nontraditional mortgage loans to buyers with low credit scores.

Bruce Maasbach, the managing director of the Manhattan division of mortgage bank Luxury Mortgage, explained that a lot of mortgage banks, like BofA, take themselves out of the mortgage game after settling a class-action suit. The banks are then replaced by new mortgage lenders, which can cause problems industry-wide, he explained.

“When you have new players replacing some of the lenders that got burned, they drive your [borrowers] crazy,” Maasbach said, noting that new lenders often have more stringent requirements because they are learning the ins and outs of the market.

“To have new lenders replace seasoned lenders is not apples to apples,” he said.

Musikant Deutsch and Caroline Stern  v. Extell Development, Lend Lease Construction and Pinnacle Industries II

It’s one of the most enduring images of Hurricane Sandy: On Oct. 29, a crane collapsed at Extell Development’s under-construction condo One57, currently Manhattan’s tallest residential tower.

For six days, the crane “hovered like a dagger over 57th Street,” according to a class-action lawsuit filed by local business owners and residents against Extell, construction contractor Lend Lease and crane operator Pinnacle Industries II.

The three-block area around the One57 construction site was evacuated, and residents and business owners were not allowed to return until Nov. 4.

The class-action case was filed in November by dentists Barry Musikant and Caroline Stern. The group of plaintiffs — which so far has more than 100 members and is seeking more than $5 million in damages — alleges that the evacuation caused local businesses and local buildings to delay in reopening after the hurricane. That, they argue, led to substantial losses of income for the businesses and substantial out-of-pocket expenses for the residents, who needed to find (and pay for) alternative accommodations.

However, some sources noted that most companies have business interruption insurance that would cover these sorts of expenses.

Indeed, Alfred Tobin, managing principal at insurance brokerage Aon, said business interruption insurance usually kicks in a day or two into an evacuation. (It’s unclear whether the plaintiffs in this case had the insurance.)

The suit claims that Extell, Lend Lease and Pinnacle failed to properly prepare and secure the crane before the storm, as well as to safely maintain and operate it.

It cites numerous city fines issued in the months leading up to the incident. In April, Pinnacle was fined twice for operating the crane in an unsafe manner and for failing to safeguard the property. Then, in August, Pinnacle was fined again because the crane was leaking hydraulic fluid, court documents said.

The complaint said that the crane collapse forced the office to close for the first time in 30 years. It did not specify how much business was lost.

Court documents also state that Musikant’s personal hotel bill at the New York Athletic Club totaled $3,400 because he was also forced to evacuate his nearby home.

Joseph Marchese of the law firm Bursor & Fisher, who represents the dentists, said that although the case is still in its early stages, he believes the real estate industry will follow it closely.

James Fenniman, an executive vice president at Bollinger Insurance, said these kinds of lawsuits “put more pressure on the insurance market [because] it blows away underwriters’ willingness to participate [in future construction projects involving cranes].”

Insurance carriers, he explained, become hesitant to cover crane operators and contractors when cases are filed. That, in turn, means that contractors have to take “very high deductibles” at the outset of their projects to ensure that they have adequate coverage, he said. And insurance costs are already very high, Fenniman explained. On construction sites, insurance costs for cranes can cost millions of dollars, he said.

However, Fenniman said developers, contractors and crane operators won’t necessarily see insurance rates rise because of the One57 incident. There would have been more of an impact on insurance rates industry-wide if the incident had happened on “a dry, clear day,” Fenniman said.

Bailey — who has no connection to this case — said the case against One57 is “ridiculous” and “gives a bad name to lawyers.” He predicted it would settle quickly and the insurance companies, not the developers, would end up eating the settlement payment.

Lend Lease declined to comment on the lawsuit, while Extell and Pinnacle did not respond to requests for comment.

MENU

Subscribe to our email newsletters

New York Real Estate News
South Florida Real Estate News