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In the Matter of Germaine Gaines v. New York State Div. of Hous. and Community Renewal, 90 N.Y.2d 545 (Oct. 16, 1997).

CARRYOVER LIABILITY -- JUDICIAL SALE -- SUCCESSOR LIABILITY -- RENT CONTROL

JUDICIAL SALE EXCEPTION INCORPORATED INTO THE OVERCHARGE PENALTY PROVISION OF THE NEW YORK RENT STABILIZATION CONTROL CODE APPLIES TO A CURRENT OWNER WHO HAS TAKEN TITLE FROM A PREVIOUS OWNER WHO PURCHASED THE PROPERTY AT A JUDICIALLY ORDERED SALE

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

Petitioner Respondent Germaine Gaines filed a complaint with the Appellant New York Division of Housing and Community Renewal (DHCR) alleging that her current landlord had overcharged her for rent. While this claim was pending, the Bankruptcy Court of the Southern District of New York approved the sale of the property from the current owner, Cornelia Associates (Cornelia), to the holder of the mortgage, Home Savings Bank of America (Home Savings). The property was then sold by Home Savings to ACB Realty Corporation (ACB). Thereafter, DCHR determined that Gaines had been overcharged by Cornelia and was due the amount of the overpayments but did not allow the liability to carryover to Home Savings or to ACB.

The New York Rent Stabilization Control Code authorizes the New York State Division of Housing and Community Renewal (DHCR) to assess monetary penalties against any owner of a rent stabilized apartment building who overcharges tenants for monthly rent. N.Y. Comp. Codes R. & Regs. tit. 9, § 2526.1(f)(2) (1987). Current owners are liable for all rent overcharges, including those by previous owners, except where the current owner purchased the apartment building upon a judicially ordered sale. Id.

The trial court upheld the DCHR's decision. The Appellate Division reversed, reasoning that nothing in the regulation requires that the judicial sale exception be applied to successor purchasers. Plaintiff appeals.

ISSUE & DISPOSITION

Issue

Whether the judicial sale exception to carryover liability for overcharges may be applied to owners who purchased the property subsequent to a judicial sale.

Disposition

Yes, because it is consistent with the language of the regulation and its policy underpinnings.

AUTHORITIES CITED

Cases Cited by the Court

Other Sources Cited by the Court

RELATED SOURCES

COMMENTARY

State of the Law Before Gaines

New York courts have consistently held that a purchaser must include protective provisions in the sales contract to avoid liability for rent overcharges by the preceding landlord. Coulston v. Singer, 384 N.Y.S.2d 74, 75 (N.Y. Sup. Ct. 1976). Successor liability has been traditionally based on the principle of holding a landlord liable for the wrongdoings of his predecessor. Turner v. Spear, 512 N.Y.S.2d 335 (N.Y. Civ. Ct. 1987). The concern in these situations is that limiting the liability of the current landlord to the amount actually received by them would lead to transfers motivated solely by a desire to avoid liability for rent overcharges. See Coulston, supra at 75. The right of a tenant to seek redress for rent overcharges survives even a foreclosure sale of the rental property where the tenant had no notice of the foreclosure proceeding. Turner, supra at 335, citing Krochta v. Green, 467 N.Y.S.2d 995 (City Ct. N.Y. 1983). The courts' reasoning in each of these cases was that the burden of recovering from the prior landlord should not be placed on the tenant, who was not a party to the transfer and may not know the whereabouts of the prior owner. Id.

The New York courts have given special deference to the DHCR's construction of its own regulation if that construction was not unreasonable or irrational. In keeping with this, deference has not been accorded to agency decisions that "extend the meaning of the statutory language to apply to situations not intended to be embraced within the statute". Trump-Equitable Fifth Ave. Co. v. Gliedman, 57 N.Y.2d 588, 595 (N.Y. 1982). Upon review, New York courts consider not only whether an administrative decision was unreasonable or irrational but also whether it is supported by "substantial evidence on the record." Salvati v. Eimicke, 72 N.Y.2d 784 (N.Y. 1988).

Effect of Gaines on Current Law

In Gaines, the Court of Appeals extends the judicial sale exception to successor purchasers. The court bases its interpretation on both the plain meaning and the underlying policy of the statute. The applicable regulation provides that "where no records sufficient to establish the legal regulated rent were provided at a judicial sale, a current owner who purchases upon such a judicial sale shall be liable only for his or her portion of the overcharges." N.Y. Comp. Codes R. & Regs. tit. 9, § 2526.1(f)(2). The court maintains that the judicial sale exception is not limited exclusively to purchasers at a judicial sale but may also apply where sufficient rent records were unavailable.

The ability of successor purchasers to shield themselves from liability for previous owners' rent overcharges through protective sales contract clauses and the corresponding inability of a judicial sale purchaser to utilize similar clauses further inhibits the marketability of rent stabilized apartment buildings at judicial sales. The judicial sale exception is based on a recognition that in the context of a judicial sale, the debtor/owner has no incentive to furnish appropriate rental records from which a prospective purchaser could ascertain any overcharges in advance. The court notes that to hold the successor purchaser liable for pre-judicial sale rent overcharges where a full rental history had been unavailable would be inequitable. In addition, imposing liability on judicial sale purchasers would adversely impact the marketability of rent stabilized apartment buildings in judicial sales.

Unanswered Questions

The court in Gaines notes that an exception from the so-called "carryover liability" for rent overcharges had been created to prevent liability where a judicial sale had occurred. This exception was predicated on the notion that adequate records are often unavailable when such a sale occurs. The court also assumes that successor purchasers will not have access to adequate records and therefore extends the exception to those purchasers. Except for a vague reference to "deference" for the DCHR's decision-making process, the scope of the exception in undefined. Is there a limit to the number of successor purchasers who will qualify for the exception?

Although the court notes that the original owner who is subject to a judicial sale has no incentive to provide adequate records to the purchaser, the court does not address the question of whether these incentives should be provided. Assuming that the prior landlord is judgment proof, this decision leaves the tenant without any form of legal redress for the loss of over $13,500. What justification is there for protecting sophisticated investors and purchasers over tenants whom the rent control statute was created to protect?

In addition, the court fails to address how other courts should apply this exception. For example, is the existence of a judicial sale enough to trigger the exception, or is an actual finding that no records were available at the sale required? What if the records actually were available at the judicial sale? What if the records were available at the subsequent sale?

Survey of the Law in Other Jurisdictions

There are many rent control and rent stabilization jurisdictions other than New York (e.g., Santa Monica, Cal., Cambridge, Mass., Miami Beach, Fla.). However, none of them seem to have focused on the issue of successor liability for previous rent overcharges subsequent to a judicial sale.

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