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

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

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While the Tishman defendants have pursued a settlement, MetLifefiled a motion to dismiss, arguing that a 2009 Court of Appealsruling overturning the conversion of rent-stabilized apartments tomarket rates created a new legal principle, which should not beapplied retroactively. MetLife argued that it had relied in goodfaith on a 1996 advisory letter issued by the New York StateDivision of Housing and Community Renewal , which concluded thatowners could seek luxury decontrol of housing units receiving J-51tax abatements, so long as the receipt of the benefits was not theonly reason the units were subject to rent regulation.

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Tishman Speyer and PCV ST purchased the complex from MetLife in2006 for $5.4 billion. They were not parties to the motion todismiss.

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On Thursday, Manhattan Supreme Court Justice Richard B. Lowe IIIheld that the Court of Appeals’ decision in Roberts v. TshmanSpeyer Properties “merely interpreted” the Rent RegulationReform Act of 1993 “in accordance with the Legislature’s intent atthe time the statute was enacted. “Therefore, the retroactiveapplication of the Decision is neither ‘unexpected and indefensibleby reference to the law as it existed’…nor an ‘arbitrary change inthe law'."

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

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But Mitchell Posilkin, general counsel for the RentStabilization Association of New York, which was involved in thecase as an amicus, calls the impact of the decision “potentiallydevastating. There has been wholesale reliance on the luxuryderegulation provisions and the interpretation of those provisionsby the DHCR and HPD [New York City Department of HousingPreservation and Development] by owners, lenders and the entirereal estate community.”

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Posilkin says that “over the years, even the attorneys fortenants acquiesced to this interpretation.” He added, “We arestunned that the court could come to the conclusion that it did.” Aspokesman for MetLife says the insurer is “studying the opinion inorder to determine our next steps.”

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In January ‘07, a group of tenants sued Tishman Speyer and PCVST, which bought the complex from Metropolitan Tower Life InsuranceCo., a codefendant and the successor by merger to defendantMetropolitan Insurance and Annuity Company. Tenants claimedthat more than 25% of the units, which have been subject to theRent Stabilization Law since 1974, had been illegallyderegulated.

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

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

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

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

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On Thursday, Justice Lowe said that argument was “undermined” bythe Roberts court’s reliance on statements made by thesponsor of the Rent Regulation Reform Act at the time of the law’spassage. “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 thatDHCR’s 1996 interpretation of the luxury decontrol statute had been“consistent and unchallenged.”

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

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Schmidt, the plaintiffs’ attorney, says in an interview that theTishman Speyer defendants are in the process of negotiating a dealwith the Stuy-Town plaintiffs. He says an independent consultant isin the process of calculating rent overcharges and what the currentlegal 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 finalsettlement of the case.”

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He disagrees with Posilkin’s claim that the ruling would have adevastating effect on the real estate industry. “The Court ofAppeals’ decision has never had the citywide impact that theindustry predicted, and neither will this decision,” saysSchmidt.

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

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A spokesman for Tishman Speyer declined to comment.

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

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