“Nightmare” for landlords: Court OK’s class action against Harlem owner

Landlord, tenant reps say decision in Harlem fraud suit will have far-reaching implications

A New York court’s greenlight of a class action against Big City Realty could change the dynamic of class action suits. (Credit: iStock)
A New York court’s greenlight of a class action against Big City Realty could change the dynamic of class action suits. (Credit: iStock)

New York’s highest court on Tuesday cleared the way for a group of tenants to pursue a class action lawsuit against a Harlem landlord accused of wrongfully inflating rents on stabilized apartments.

Both landlord and tenant representatives say the latest decision will have far-reaching implications for similar class action lawsuits going forward.

In a 4-3 decision, the state’s Court of Appeals ruled that a trial court shouldn’t have dismissed a 2016 lawsuit filed against Big City Realty, which accused the landlord of misrepresenting the costs of individual apartment improvements, inflating preferential rents and falsely certifying that apartments were rent stabilized under the J-51 tax break program. The Court of Appeals affirmed the appellate division’s July 2018 decision, which found that a lower court had prematurely dismissed the tenants’ “allegations of a methodical attempt to illegally inflate rents.”

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While state statute doesn’t prohibit a court from tossing a class action complaint, even very early on, Big City’s efforts to dismiss the case hinged on the idea that the tenants didn’t properly represent a class. The landlord argued that because the lawsuit involved more than 20 apartment buildings — owned by different LLCs — and made allegations of different types of fraud that would result in varying damages, it didn’t qualify as a class action.

But the Court of Appeals ruled that the lawsuit’s claims addressed “harm effectuated through a variety of approaches but within a common systematic plan.”

“As plaintiffs note, to focus on potential idiosyncrasies within the class claims — distinctions that speak to damages, not to liability — at this juncture would potentially be to reward bad actors who execute a common method to damage in slightly different ways,” Associate Judge Eugene Fahey wrote in Tuesday’s decision.

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Big City had also argued that the tenants failed to prove any wrongdoing related to IAI improvements. Fahey notes that because the motion to dismiss was filed before any discovery in the case occurred, tenants were never able to procure information “with respect to those improvements.” Tenants presumably wouldn’t be able to provide details on the actual costs of these improvements until later in the case, if at all, as landlords under the former rent stabilization law weren’t required to provide receipts to the state’s housing regulator.

“This is a precedent-setting decision that will take rent stabilization fraud out of the shadows and into the light,” said Aaron Carr, head of Housing Rights Initiative, which organized the Big City lawsuit and has led several others involving alleged IAI fraud. “Tenants in these types of cases will now be entitled to discovery, which is consequential, given the state’s finding that 40 percent of landlords could not justify their individual apartment improvement claims.”

(According to a 2014 New York Times story, 1,100 audits conducted by the state’s Division of Homes Community and Renewal’s Tenant Protection Unit found that in 40 percent of cases, landlords couldn’t provide proof of apartment improvement costs. An investigation by The Real Deal last year found flaws in the system, which is often subjective and puts the onus on tenants to determine if they are being overcharged.)

Lucas Ferrara of Newman Ferrara, attorney for the tenants, called Tuesday’s decision a “significant win for rent stabilized tenants.” An attorney for Big City didn’t return calls seeking comment.

Landlord attorney Adam Leitman Bailey called the decision a “nightmare for landlords.” He said that while it’s important that the court specified that motions to dismiss could still be filed, finding that Big City’s lawsuit was improperly dismissed will likely lead to lengthier and costlier cases.

In his dissenting opinion, Associate Judge Michael Garcia wrote that the decision will lead to the denial of “motions to dismiss even the most inadequate of class allegations.”

“That outcome invites parties to file class allegations — even if a class could never be certified — knowing that they can force opposing parties to bear the costs of class discovery and certification proceedings,” Garcia wrote. “The effect will be to diminish the power of the court to prevent abuse of the class action process.”