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CHOICE ASSOCIATES LLC, Petitioner, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Respondent.
In this Article 78 proceeding, Choice Associates LLC (“owner” and “petitioner”) seeks to annul the determination by respondent New York State Division of Housing and Community Renewal (“DHCR”), that the tenants residing at Apartment 7 at 53 Ludlow Street, are entitled to treble damages on their rent overcharge complaint against petitioner. The apartment is subject to the Rent Stabilization Law. DHCR is the agency charged with administering the Rent Stabilization Law and Rent Stabilization code. DHCR opposes the petition.
On October 21, 2015, tenants Kiet Kevin Phong and Zou Li filed a rent overcharge complaint with DHCR alleging that the rent charged in their vacancy lease ($1,650) constituted an overcharge as it was nearly double what they paid in 2013-2014 ($806.03). On December 14, 2015, DHCR served notices and copies of the complaint on petitioner and its managing agent. The Notice gave the petitioner 30 days to respond to the complaint. Petitioner was asked to substantiate the rent it charged the tenants by submitting a lease history going back four years from the filing of the date of the complaint with any additional documentation needed to justify the rent increases taken.
On or about January 12, 2016, petitioner requested a 30-day extension to answer the complaint. Petitioner stated that it needed additional time to search its records for the rental history in order to respond to the tenants' complaint. Petitioner, however, did not answer after its initial request for an extension, but rather sent nine other letters requesting 30-day extensions of time. Notably, DHCR granted all ten, 30-day extensions of time to respond to the tenants' complaint (petitioner's exhibit H “Order and Opinion Denying Petition for Administrative Review” [PAR Order dated February 23, 2018] at 2).
By letter dated October 31, 2016, DHCR notified petitioner that no further extensions would be granted. The letter further stated that petitioner was required to submit the requested lease documentation within 21 days.
By letter dated November 15, 2016, petitioner responded that the documentation pertaining to improvements done at the subject apartment prior to the tenants' occupancy was not available as it was not “turned over at closing by the prior owner” (petitioner's exhibit B). The letter also stated that petitioner had recalculated and reduced the rent from $1,650.00 to $1,025.67. Petitioner informed DHCR that it issued the tenants a refund in the amount of $8,250.52, which represented the total amount of overpayments collected by the prior owner for the period of March 2015 through February 2016, plus statutory interest. The letter further stated that petitioner had not collected rent from the tenants from February 2016 to November 2016 and noted that all rent checks for that period had been returned to the tenants.
Shortly thereafter, DHCR again requested that petitioner submit a lease history for the four-year period prior to the tenants' filing of their complaint. Petitioner responded and stated that it did not have the leases as it had not received any prior rental records from the seller.
In response, DHCR requested the following information from petitioner: 1) if the refund check was cashed; 2) whether the owner was accepting the tenants' rent payments; and 3) whether the tenants' lease was renewed. On March 28, 2017, petitioner stated that 1) the tenants were month-to-month tenants with no current stabilized lease; 2) the owner had not collected any rent from the tenants after February 2016; and 3) whether or not the refund check had been cashed was “not relevant.”
On April 19, 2017, DHCR sent a “Final Notice to Owner-Imposition of Treble Damages on Overcharge” (Final Notice) to petitioner. The Final Notice advised petitioner that it was not an order and that it contained proposed findings. DHCR informed petitioner that its proposed findings were that there had been a rent overcharge and that it was contemplating a penalty of treble damages unless petitioner was able to establish by a preponderance of the evidence that the overcharge was not willful. Notably, the notice stated that petitioner's acknowledgment of the overcharge complaint and refund offer for $8,250.52, dated November 15, 2016, was untimely. The Final Notice also included an “Overcharge, Interest and Treble Calculation Worksheet” listing a monthly overcharge of $642.33 for a twelve-month period which totaled $7,491.96, treble damages in the amount of $14,983.84. The Worksheet also listed an excess security deposit of $624.33, for a total proposed overcharge amount of $23,100.21.
By letter dated April 24, 2017, petitioner responded to DHCR, largely making the same arguments that it makes in this Article 78 petition. Specifically, petitioner stated that the overcharge was not willful; that the prior owner caused and collected the overcharge; that none of the extension requests were denied; that the answer was submitted within the timeframe given in the DHCR letter dated October 21, 2016; and that it refunded all excess rent including interest within the time period granted to it by the DHCR to answer and prior to the issuance of the Rent's Administrator's Order.
Rent Administrator's Order (“RA Order”)
On May 12, 2017, DHCR's Rent Administrator issued an “Order Finding a Rent Overcharge.” The RA imposed treble damages to the overcharge beginning two years before the tenants' complaint because petitioner did not establish that the overcharge was not willful. It directed the petitioner, inter alia, to roll back the rent, recompute it, and make a full refund to the tenants. The RA found that the tenants were due $23,100.21, which included treble damages. In addition, the RA directed petitioner to offer the tenants a renewal lease within 30 days. The RA Order also informed petitioner that it had the right to file a Petition for Administrative Review and the procedures for doing so.
Petition for Administrative Review (“PAR”)
Subsequently, petitioner filed a PAR, objecting only to the RA's imposition of treble damages. Petitioner argued that it showed lack of willfulness because it made a timely refund in accordance with DHCR precedent and DHCR Policy Statement 89-2. Specifically, petitioner asserted that prior DHCR administrative decisions have held that a refund with statutory interest, before an order is issued in a matter, will serve to eliminate a finding of treble damages. Petitioner cited to several prior DHCR orders in support of its contention.1 Petitioner maintained that its requests for extensions were not denied and it made a full refund with interest within the time period to answer. Further, petitioner pointed to the Final Notice and subsequent RA Order wherein the RA determined that an overcharge of $7,491.96 was owed to the tenants. Petitioner emphasized that it had refunded that exact amount, plus statutory interest, which came out to $8,250.52.
On February 23, 2017, DHCR Deputy Commissioner Woody Pascal issued an order and opinion denying the PAR, finding that petitioner's offer of a rent refund was untimely as it was beyond the 30-day period prescribed in Policy Statement 89-2. The Commissioner found no extenuating circumstances to make an exception to the 30-day period. The Commissioner concluded that the RA had properly imposed treble damages because the petitioner failed to rebut the statutory presumption that the overcharge was willful. The Commissioner stated in relevant part:
“The petitioner herein contends that since it offered the tenants a refund before the Rent Administrator's order was issued, it served to eliminate any finding of treble damages. The Commissioner disagrees. In most cases, the refund must be offered [to] the tenant prior to the time for the owner to interpose an answer, although the Rent Administrator has discretion to extend the time depending on the particular circumstances of that proceeding. In this case, that would mean under the general rule that the owner would have had to refund the overcharges by January 2016, unless the Rent Administrator found special facts to extend the time to make the refund” (petitioner's exhibit H “Order and Opinion Denying Petition for Administrative Review” [PAR Order dated February 23, 2018] at 3).
Under the Rent Stabilization Law, if DHCR finds that a landlord, after a reasonable opportunity to be heard, has collected rent in excess of the authorized amount, the landlord is liable to the tenant for a penalty equal to three times the amount of the overcharge, unless the landlord establishes by a preponderance of evidence, that the overcharge was not willful (NYC Admin Code § 26-516 [a] ); 508 Realty Assocs. v. New York State Division of Housing & Community Renewal, 61 A.D.3d 753, 754, 877 N.Y.S.2d 392 [2d Dept. 2009]. DHCR Policy Statement 89-2 contains a regulatory exception known as the “safe harbor,” which provides that a landlord can meet its burden of proof to establish “the lack of willfulness,” and “therefore, the treble damages penalty is not applicable [w]here an owner adjusts the rent on his or her own within the time afforded to furnish DHCR with an initial response when initially served with the overcharge complaint initiated by the tenant, and submits proof to the DHCR that he or she has tendered, in good faith, to the tenant, a full refund by check or cash of all excess rent collected, plus interest” (DHCR Policy Statement 89-2). It further states that “[r]efunds tendered after the initial period in which to respond will be reviewed in conjunction with other evidence to determine the issue of willfulness” (Id.).
Thereafter, petitioner timely commenced the instant Article 78 proceeding, seeking to annul DHCR's PAR Order to the extent it awarded treble damages and modify the RA's Order so as to eliminate the treble damages. Petitioner alleges that DHCR abused its discretion in imposing treble damages and that the imposition of treble damages is shocking to one's sense of fairness. Petitioner reiterates the challenges made to DHCR during its review and appeals process.
In opposition, DHCR maintains that treble damages were properly awarded as petitioner failed to meet its burden of establishing that its overcharges were not willful. DHCR points out the deferential standard of review that courts must apply. DHCR asserts that petitioner's refund was not made within Policy Statement 89-2's 30-day period. It states that petitioner's interpretation of Policy Statement 89-2 is irreconcilable with DHCR's strict application of the regulatory exception as upheld by the courts (citing to Abro Mgmt. Corp. v. New York State Division of Hous. & Community Renewal, 2011 WL 3533949 [N.Y. County Sup. Ct., August 3, 2011]; 554 W. 181 LLC v. DHCR, 30 Misc.3d 1233 [A], 2011 WL 833794 [N.Y. County Sup. Ct., January 26, 2011]; 900 Riverside Drive LLC v. DHCR, 2018 WL 1927585 [N.Y. County Sup. Ct., April 24, 2018];) DHCR emphasizes that petitioner chose not to refund expeditiously upon being initially served with the complaint and as such gave up the safe harbor under Policy Statement 89-2. Further, DHCR points out that the PAR Order found that petitioner failed to show any extenuating circumstances which would extend the time to refund. Likewise, DHCR notes that the Commissioner deemed petitioner's repeated requests for extensions of time to answer the complaint to be dilatory in nature. Further, DHCR contends that the administrative decisions cited by petitioner are inapposite to the facts of this case. Therefore, they state, petitioner fails to show that DHCR departed from its own precedent.
In reply, petitioner reiterates that the RA granted all ten requests for extensions of time to answer. Petitioner states that, the time frame within which to make a refund is not measured by whether or not it is “expeditious,” but whether it is made within the time afforded to submit an answer to the complaint. As such, petitioner concludes, it is improper for DHCR to read into that Policy Statement 89-2, which it promulgated, the word “expeditious” or the requirement that it be made within the initial 30-day answer period.
“The appropriate, well-established standard of judicial review of an administrative determination is whether the determination was arbitrary and capricious or without a rational basis in the administrative record” (Tockwotten Assoc., LLC v. New York State Div. of Housing and Community Renewal, 7 A.D.3d 453, 454, 777 N.Y.S.2d 465 [1st Dept. 2004] ). If the determination was rational, the court cannot overturn the decision (Id.; see Two Lincoln Square Assoc. v. New York State Div. of Housing and Community Renewal, 191 A.D.2d 281, 281, 594 N.Y.S.2d 755 [1st Dept. 1993] ). This same standard of reasonableness applies to DHCR's interpretation of “the statutes and regulations it administers” (Matter of Cipolla v. New York State Div. of Housing and Community Renewal, 153 A.D.3d 920, 922, 60 N.Y.S.3d 409 [2nd Dept. 2017]; see Terrace Court, LLC v. New York State Div. of Housing and Community Renewal, 18 N.Y.3d 446, 454, 940 N.Y.S.2d 549, 963 N.E.2d 1250  ). An agency determination “that runs counter to the clear wording of a statutory provision should not be accorded any weight (Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451, 459, 426 N.Y.S.2d 454, 403 N.E.2d 159  ).
Under Rent Stabilization Code § 2526.1 (f)(2) the current owner will be held responsible for its rent overcharges as well as those of the prior owner (Matter of DiMaggio v. Division of Hous. & Community Renewal, 248 A.D.2d 533, 535, 670 N.Y.S.2d 501 [2d Dept. 1998]. This carryover liability applies equally to the penalty of treble damages, as the Code expressly includes “overcharge penalties” (see S.E. & K Corp. v. DHCR, 239 A.D.2d 123, 657 N.Y.S.2d 601 [1st Dept. 1997] ). With respect to treble damages, courts determine whether it was rational to conclude that a landlord “failed to establish, by a preponderance of the evidence, that the ․ rent overcharges were not willful” (In re 426 3rd Ave. Realty Co. v. New York State Div. of Housing and Community Renewal, 29 A.D.3d 332, 333, 816 N.Y.S.2d 411 [1st Dept. 2006] ). As such, the owner or landlord bears the burden of rebutting the presumption that rent overcharges were willful (Matter of Bauer v. New York State Div. of Hous. & Community Renewal, 225 A.D.2d 410, 640 N.Y.S.2d 492 [1st Dept. 1996] ).
The Court has considered the record and the parties' arguments carefully. After this review, this Court grants the petition to the extent of remanding the matter to DHCR for reconsideration. For one thing the Commissioner arbitrarily overlooked the fact that the agency granted ten extensions to petitioner so that it could investigate and answer the complaint. This is significant as the primary focus of the PAR Order was the lateness of petitioner's actions. For another, petitioner duly refunded the tenants all collected overcharges, plus statutory interest.
DHCR's reliance on Abro Management Corp. v. New York State Division of Housing and Community Renewal, among other trial court cases, is misplaced. More significantly, in Bondham Realty Association, L.P. v. DHCR, 71 A.D.3d 477, 898 N.Y.S.2d 9 (1st Dept. 2010), the First Department held that remand to the DHCR was warranted, for reconsideration of whether treble damages should be imposed where the DHCR made an erroneous finding as to the timeliness of the refund and the perceived untimeliness was a factor in its finding of unwillingness. Here, like in Bondham, the Commissioner ignored the fact that DHCR granted petitioner's requests for extensions of time to file its answer, and that petitioner issued its refund prior to the final date granted to it to answer. Moreover, petitioner issued the tenants a full refund offer of $8,250.52, which was the exact amount determined by the Rent Administrator, further suggesting good faith attempts to rectify the overcharge error.
Based on the foregoing, the matter is remanded to DHCR for reconsideration as to whether the overcharges by petitioner were willful. The Court declines to modify the RA's Order so as to eliminate treble damages, but it requires DCHR to reconsider the imposition of treble damages consistent with the terms of this decision.
Accordingly, it is
ORDERED and ADJUDGED that the petition is granted to the extent that the proceeding is remanded to DHCR for reconsideration of whether the overcharge by Choice Associates LLC was willful; and it is otherwise denied.
1. Petitioner does not submit copies of the DHCR's administrative decisions.
Carmen Victoria St. George, J.
Response sent, thank you
Docket No: 100515/2018
Decided: December 27, 2018
Court: Supreme Court, New York County, New York.
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