This story, in slightly different form, originally appeared in the New York Law Journal.

NEW YORK CITY-A state judge has handed tenants a major victory by refusing to dismiss claims against the former owner of the massive Stuyvesant Town and Peter Cooper Village complex. Tenants in 2007 brought the $215-million class action suit against the current owners of the complex, Tishman Speyer Properties LLP, and its general partner, PCV ST Owner LP, as well as its former owner, MetLife.

While the Tishman defendants have pursued a settlement, MetLife filed a motion to dismiss, arguing that a 2009 Court of Appeals ruling overturning the conversion of rent-stabilized apartments to market rates created a new legal principle, which should not be applied retroactively. MetLife argued that it had relied in good faith on a 1996 advisory letter issued by the New York State Division of Housing and Community Renewal , which concluded that owners could seek luxury decontrol of housing units receiving J-51 tax abatements, so long as the receipt of the benefits was not the only reason the units were subject to rent regulation.

Tishman Speyer and PCV ST purchased the complex from MetLife in 2006 for $5.4 billion. They were not parties to the motion to dismiss.

On Thursday, Manhattan Supreme Court Justice Richard B. Lowe III held that the Court of Appeals’ decision in Roberts v. Tshman Speyer Properties “merely interpreted” the Rent Regulation Reform Act of 1993 “in accordance with the Legislature’s intent at the time the statute was enacted. “Therefore, the retroactive application of the Decision is neither ‘unexpected and indefensible by reference to the law as it existed’…nor an ‘arbitrary change in the law'."

The ruling affects some 4,400 deregulated units, according to Alexander Schmidt of Wolf Haldenstein Adler Freeman & Herz, who represents the tenant plaintiffs. He says the result was “gratifying” for the “thousands of present and former Stuyvesant Town and Peter Cooper Village residents who paid excessive rents for many years.”

But Mitchell Posilkin, general counsel for the Rent Stabilization Association of New York, which was involved in the case as an amicus, calls the impact of the decision “potentially devastating. There has been wholesale reliance on the luxury deregulation provisions and the interpretation of those provisions by the DHCR and HPD [New York City Department of Housing Preservation and Development] by owners, lenders and the entire real estate community.”

Posilkin says that “over the years, even the attorneys for tenants acquiesced to this interpretation.” He added, “We are stunned that the court could come to the conclusion that it did.” A spokesman for MetLife says the insurer is “studying the opinion in order to determine our next steps.”

In January ‘07, a group of tenants sued Tishman Speyer and PCV ST, which bought the complex from Metropolitan Tower Life Insurance Co., a codefendant and the successor by merger to defendant Metropolitan Insurance and Annuity Company.  Tenants claimed that more than 25% of the units, which have been subject to the Rent Stabilization Law since 1974, had been illegally deregulated.

In addition to seeking rent overcharges for four years, the tenants are seeking a declaration that their units will continue to be subject to rent stabilization, so long as the defendants receive J-51 benefits. Since 1992, MetLife and Tishman Speyer have received approximately $24.5 million in J-51 tax breaks.

Under the Rent Regulation Reform Act, units are excluded from rent regulation in certain circumstances, including when the legal regulated rent is $2,000 or more or if household income exceeds $175,000 for two years in a row. However, the decontrol exclusions do not apply to units that became rent regulated “by virtue of receiving” tax benefits, such as abatements under the J-51 program.

The Court of Appeals held last year that the rent reform statute “carved out an exception to luxury decontrol” for units receiving tax breaks. In June, Bruce E. Yannett, an attorney for MetLife from Debevoise & Plimpton, argued before Justice Lowe that the ruling should not be applied retroactively.

He asked the judge to distinguish Roberts from the Court of Appeals’ 1982 ruling in Gurnee v. Aetna Life and Cas. Co., which held that a judicial decision interpreting a state insurance law should be applied retroactively to plaintiffs who sued after being injured in motor vehicle accidents. The Gurnee court held that the judicial decision had been “foreshadowed” by a definitional section in the statute. In contrast, the Roberts ruling was not foreshadowed, Yannett argued.

On Thursday, Justice Lowe said that argument was “undermined” by the Roberts court’s reliance on statements made by the sponsor of the Rent Regulation Reform Act at the time of the law’s passage. “In other words, the Decision was more than foreshadowed; it was expressly acknowledged at the inception of the statute,” Justice Lowe wrote. He also took issue with MetLife’s claim that DHCR’s 1996 interpretation of the luxury decontrol statute had been “consistent and unchallenged.”

The judge noted that prior to its 1996 advisory opinion, DHCR issued a 1995 operation bulletin stating that the deregulation of high-rent housing units “shall not apply to housing accommodations which are subject to rent regulation by virtue of receiving tax benefits pursuant to sections 421-a or 489 of the Real Property Tax Law, until the expiration of the tax abatement period. “This too foreshadowed the Decision,” he wrote.

Schmidt, the plaintiffs’ attorney, says in an interview that the Tishman Speyer defendants are in the process of negotiating a deal with the Stuy-Town plaintiffs. He says an independent consultant is in the process of calculating rent overcharges and what the current legal rents should be for the 4,400 units that were deregulated. “Once that it is done, we will sit down with the Tishman Speyer [defendants] and hopefully MetLife as well to negotiate a final settlement of the case.”

He disagrees with Posilkin’s claim that the ruling would have a devastating effect on the real estate industry. “The Court of Appeals’ decision has never had the citywide impact that the industry predicted, and neither will this decision,” says Schmidt.

Meanwhile, Posilkin says the courts will next have to determine the period of retroactivity. “Does retroactivity mean that we go back to the original enactment” of the Rent Regulation Reform Act or “do we go back four years because there is a four-year statute of limitations on rent overcharges?” he asks.

A spokesman for Tishman Speyer declined to comment.

Noeleen G. Walder can be reached at [email protected].