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

NEW YORK CITY-A Manhattan judge has shot down an attempt by the owner of a Chelsea apartment complex to dismiss a class action brought by tenants trying to recover rent overcharges in the wake of the Court of Appeals’ 2009 landmark ruling in Roberts vs. Tishman Speyer. Supreme Court Justice Lucy Billings rejected an argument by the landlord, London Terrace Gardens, that the dispute should be decided by the state’s Division of Housing and Community Renewal and refused to dismiss the suit.

Dugan vs. London Terrace Gardens centers on the state’s J-51 program, which entitles landlords to tax breaks on buildings in which they adhere to certain rent-stabilization rules. Under the rent-stabilization statute that went into effect in 1993, landlords routinely ended rent stabilization for apartments in J-51 buildings under New York City’s luxury decontrol rules, which allow rent-stabilized apartments to go to market rent if the stabilized rent and the tenants’ income exceed certain thresholds. Landlords then claimed a proportionately smaller J-51 tax benefit for these buildings.

The Court of Appeals ruled in Roberts that this practice was illegal and said a building receiving J-51 benefits could not contain any market-rate apartments. The ruling triggered a number of lawsuits by tenants in J-51 buildings claiming past overpayment of rent, including the one against London Terrace.

The plaintiffs in London Terrace are seeking return of their apartments to rent-stabilized status and reimbursement for the excess rent they have paid since their units were deregulated. In addition to overcharging, the plaintiffs are claiming deceptive business practices, promissory estoppel and reformation of their rental contracts.

London Terrace maintains that Roberts did not make landlords liable retroactively for rent overcharges. It also moved to dismiss the tenants’ case on the grounds that it should be heard by DHCR, the administrative body handling landlord-tenant rent-stabilization disputes. Alternatively, it asked Justice Billings to stay the case and refer it to the state agency. Before Roberts, DHCR had advised landlords that it was legal to deregulate some apartments in J-51 buildings and receive proportionately lesser benefits.

In rejecting London Terrace’s argument, Justice Billings said that while the DHCR might be fair to both sides, sending the case there could delay its resolution, causing prejudice to the tenants. “While DHCR’s resolution of the issue through rulemaking well might consider all stakeholders’ interests, defendant concedes that DHCR in over 18 months still has not amended its rules to conform to Roberts,” the judge wrote. “Were the court to grant a stay, plaintiffs might lose their apartments without rent regulation while waiting indefinitely for DHCR to act. For these reasons alone, such an indefinite stay would be inequitable, denying plaintiffs a prompt and permanent adjudication of their claims.”

Justice Billings also noted that DHCR could not create legal precedent by deciding the dispute or recognize class status for the plaintiffs, and that the agency lacked the expertise needed to address the legal questions underlying the dispute. While she did not address the issue of retroactivity, the judge criticized London Terrace’s argument that forcing landlords to repay past overcharges would be bad public policy, since it could seriously damage the finances of affected landlords and their investors.

“However magnanimous defendant’s concern for other property owners, prospective owners, lenders, and governmental tax revenues, yet again, the only interests to be considered here are defendant’s financial constraints if required to repay years of high overcharges to many tenants,” she wrote. “Defendant’s interests of course are balanced against the protection of tenants intended to be protected over that time from rent increases above the regulated levels.”

Justice Billings said the fact that Roberts did not overturn precedent on which London Terrace might have relied, but simply interpreted the existing law, “will militate in favor of retroactive application when the retroactivity issue is reached.” On the other hand, she said, London Terrace’s reliance on DHCR’s incorrect interpretation of the law before Roberts could be used to show that London Terrace’s overcharges were not intentional, so that it would not have to pay damages on top of refunding rent overpayments.

“I think it’s an excellent decision,” says William Gribben of Himmelstein, McConnell, Gribben, Donoghue & Joseph, who represented the tenants. “Well thought out, well-reasoned, certainly right on the mark in terms of precedent.” Robert Goldstein of Borah, Goldstein, Altschuler, Nahins & Goidel, who represented London Terrace, said the landlord would appeal the decision.

Last month, London Terrace lost a separate suit against New York City in which it asked to unwind its participation in J-51 by returning all tax benefits it had received. It is also appealing that decision.

Brendan Pierson can be reached at [email protected].