Court Ruling Could Affect Stuy Town, Peter Cooper

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

NEW YORK CITY-A state appellate panel has found that the Court of Appeals' landmark ruling in Roberts v. Tishman-Speyer, which barred rent deregulation for an apartment in a building receiving J-51 tax benefits, applies retroactively. But the panel also ruled that if an apartment was deregulated by order of a city agency and remained with the same tenants, the order is final and cannot be challenged.

The Appellate Division, First Department's unanimous opinion in Gersten v. 56 7th Ave. LLC, was written by Justice Dianne T. Renwick and joined by Justices Peter Tom, John W. Sweeny Jr., Rolando T. Acosta and Sallie Manzanet-Daniels.

The suit was brought in 2009 by Bernard Gersten and Cora Cahan Gersten, who began renting an apartment in the West Village in 1968. The apartment was subject to mandatory rent stabilization under the city's rent stabilization law. The couple subsequently signed leases for two other rent-stabilized apartments on their floor and combined them into a single apartment.

In 1990, the owner of 56 Seventh Avenue began participating in the J-51 program, under which landlords receive tax credits in exchange for making their apartments rent-stabilized when they otherwise would not be. Beginning in the 1990s, some landlords began deregulating apartments in J-51 buildings under the luxury decontrol law, which allows an apartment whose rent climbs to more than $2,000 and whose tenants make more than $175,000 to be deregulated. In return, the landlords claimed a proportionately lesser tax credit. The city's Division of Housing and Community Renewal approved of this practice.

The Gerstens' landlord deregulated their apartment in 1999. Landlords usually deregulate apartments unilaterally when they become vacant, but they may also deregulate them while their tenants remain if they obtain an order from the DHCR. The Gerstens' landlord did so, and the couple did not challenge the order.

In Roberts, the Court of Appeals in March 2009 ruled that a landlord could not deregulate an apartment in a building that was still receiving J-51 benefits. Since the ruling, numerous tenant groups have sued their landlords for rent overpayments, alleging that their apartments should never have been deregulated.

The Court left open the question of whether the decision should be applied retroactively. In June, the Appellate Term, First Department, in an unrelated case, 72A Realty Associates v. Lucas, ruled that Roberts should apply retroactively.

The Gerstens argued that Roberts rendered the order deregulating their apartment void.

Their landlord argued that Roberts did not apply retroactively; that even if it did, the Gerstens' suit would be barred by the statute of limitations; and that the suit was barred by collateral estoppel, which prevents litigation of previously-decided issues, since the Gerstens had an opportunity to challenge the DHCR's 1999 decision and did not do so.

The majority found for the Gerstens on the first two challenges.

Justice Renwick said the Court of Appeals' decision must be applied retroactively, because it is well-settled that a court does not create a new legal principle when it interprets an existing law.

"A contrary ruling would essentially allow landlords throughout the City to collect rent in excess of those allowed by the [rent stabilization law] based upon a faulty statutory interpretation," Justice Renwick wrote.

The Gerstens' suit was not barred by the statute of limitations, the court said, because the conditions of a lease are a continuous circumstance, and therefore "a tenant should be able to challenge the deregulated status of an apartment at any time during the tenancy."

However, the court agreed with Manhattan Supreme Court Justice Louis B. York on the issue of collateral estoppel and dismissed the case, finding that the Gerstens had an opportunity to challenge the DHCR's decision with an Article 78 proceeding but did not do so.

"[I]t is abundantly clear that plaintiffs here had ample opportunity to challenge the prior owner's application for luxury decontrol as being precluded by the receipt of J-51 benefits," she said.

Ronald S. Languedoc of Himmelstein, McConnell, Gribben, Donoghue & Joseph, an attorney for the Gerstens, says that he was disappointed about the collateral estoppel part of the ruling. However, he says, it would "not affect the vast majority of tenants," because most deregulations take place without an order from DHCR, and most tenants suing their landlords for overpayment in light of Roberts were not occupying their current apartments when they were deregulated.

The First Department's holdings on retroactivity and the statute of limitations are "both victories for tenants," he says.

William J. Gribben of the Himmelstein firm also represented the Gerstens. He and Mr. Languedoc are representing groups of tenants in several other lawsuits filed after the Roberts decision.

The landlord was represented by Magda L. Cruz of Belkin Burden Wenig & Goldman, who could not be reached for comment.

Brendan Pierson can be reached at bpierson@alm.com.