Opinion
086814/2003.
Decided December 19, 2003.
Wachtell Masyr, LLP, New York City (Steven J. Cohen of Counsel), for petitioner.
Finder Novick Kerrigan Anderson Palitz, LLP, New York City (Stephen H. Palitz of counsel), for respondent.
In well-briefed papers, both sides move for summary judgment in this nonpayment proceeding, with each side arguing fact, inferences, and law in the double, triple, and quadruple alternative. But the issues are simple, and their resolution straightforward, when the layers of legal argument are peeled to their essentials and the facts are reduced to those not in dispute.
Respondent has been a rent-stabilized tenant in his apartment since 1985. The building converted to a cooperative in 1990, and the sponsor, 270 West 11th Joint Venture, retained the shares of those appurtenant to respondent's apartment. 270 West 11th Joint Venture sued respondent in 1991 for not paying rent. Respondent defended on the basis that petitioner breached the warranty of habitability and overcharged him rent. After a trial, respondent was awarded a judgment on December 30, 1993, for $61,510.76. None of that sum, which continues to accrue interest at nine percent a year, has been paid, and respondent has not paid rent since then. Instead, respondent both entered the judgment and, by crediting judgment interest alone against his modest rent, offset his rent against his then-landlord.
On June 2001, petitioner was the high bidder at a foreclosure sale — an auction — for the apartment's proprietary lease and its appurtenant shares. The closing took place in March 2002. Petitioner now seeks rent from respondent from March 2002. Conversely, respondent seeks to hold petitioner liable for the judgment against the prior owner. The ultimate issue before the court is whether petitioner, as a successor owner, has assumed the prior owner's debt under a theory of carryover liability.
To consider that ultimate issue, the court must first consider petitioner's contention that the court need not reach the issue of carryover liability. According to petitioner, the successor-liability provisions in Rent Stabilization Code (RSC) (9 NYCRR) § 2625.1 (f) (2) (I) apply only if a tenant enters a judgment against a landlord or offsets rent not exceeding 20 percent of the current rent. Petitioner urges that because respondent entered judgment against the prior owner — his former landlord — he may not offset rent owed to petitioner, the current landlord. The court disagrees.
In E. 7th St. Dev. Corp. v. Miller ( 138 Misc 2d 345 [Hous Part, Civ Ct, NY County 1988]), the court applied Emergency Tenant Protection Act (ETPA) (McKinney's Uncons Laws of NY § 8632 [e]) § 12 (a) (1) (b) (iii) (e) (L 1974, ch 576, § 4, as amended]) to find that a tenant has two alternatives to recoup an overcharge penalty awarded in a Division of Housing and Community Renewal (DHCR) order: The tenant may file and enforce the DHCR order in the same manner as a judgment, or the tenant may offset rent due the owner at 20 percent a month, but the tenant may not do both. ( Id. at 347.) The court found that by entering a judgment against the prior landlord, the tenant was no longer able to offset rent owed to the current landlord. ( Id.) As the court explained, "Respondent is bound by his choice of remedy." ( Id.)
Unexplained in East 7th Street Development is that ETPA § 12 (a) (1) (b) (iii) (e) provides that a tenant is bound by the choice of remedy only to file and enforce judgment or to offset rent. The court did not discuss whether the tenant tried to enforce the judgment. All the tenant appeared to do was file, or enter and docket, the judgment, an act the court found could "result in a double recovery for the tenant." ( 138 Misc 2d at 347.) But there can be no double recovery if a judgment is not enforced, and if there can be because a satisfaction of judgment need not be filed against the prior owner even if the tenant offsets rent from what is due the current owner, the same problem arises whenever a tenant seeks carryover liability — or, indeed, whenever a judgment is entered and docketed against more than one person or entity.
Given that the Legislature did not speak for nothing in enacting in § 12 (a) (1) (b) (iii) (e) a tenant's option to file and enforce or deduct rent, this court respectfully disagrees with the East 7th Street Development's conclusion. Section 12 (a) (1) (b) (iii) (e) prohibits a tenant from both filing and enforcing or offsetting, not simply filing or offsetting.
In any event, East 7th Street Development and the statutes on which it relies apply only to DHCR orders, not to court judgments. As such, that case is distinguishable from this one, which involves no DHCR order. ETPA § 12 (a) (1) (b) (iii) (e) contains language similar to the language of the provisions that control here, RSC § 2526.1 (e) and NYC Rent Stabilization Law (RSL) (Admin. Code of City of N.Y.) § 26-516 (a) (5), all of which outline the available, alternative remedies — file and enforce judgment or offset rent by 20 percent a month — for a rent-stabilized tenant to recoup overcharge penalties the DHCR awarded. Petitioner argues that §§ 2526.1 (e) and 26-516 (a) (5) foreclose respondent, who has filed the judgment, from using it to obtain an offset against rent due and also to enforce that judgment against him, as respondent wants to do in asserting, respectively, his first and second counterclaims.
Numerous authorities support petitioner's contention that "[a] tenant who elects to proceed on an overcharge complaint before the administrative agency [DHCR] and who receives a favorable determination has the option of either taking an offset against the monthly rent or filing the order in the same manner as a judgment * * * *" ( Bowen v. E. 13th Realty Co., 182 Misc 2d 99, 100 [App Term, 1st Dept 1999, per curiam]; accord Crimmons v. Handler Co., 249 AD2d 89, 91 [1st Dept 1998, mem].) But these authorities, like East 7th Street Development and many others, hold that RSC § 2526.1 (e), RSL § 26-516 (a) (5), and ETPA § 12 (a) (1) (b) (iii) (e) apply to judgments that originated as agency orders and then were converted to judgments. ( See e.g. 351 E. 152nd St. Assocs. v. Torres, NYLJ, Nov. 1, 1995, at 33, col 1 [Hous Part, Civ Ct, Bronx County] [noting that alternative remedies apply to "[a] tenant who is awarded a D.H.C.R. overcharge order"]; Black v. Davis, NYLJ, Apr. 26, 1995, at 32, col 2 [Sup Ct, Kings County] ["§ 26-516 (a) (5) permits an order of DHCR finding a rent overcharge to be `enforced in the same manner as a judgment.'"], overruled sub silentio on other grounds by Crimmons v. Handler; Andrew Scherer, Residential Landlord-Tenant Law in New York § 4.2679, at 4-128 [2004 ed.] ["The Rent Stabilization Code permits the tenant to recover a rent overcharge penalty that has been established by DHCR by deducting it from rent * * * *"].) Sections 2526.1 (e), 26-516 (a) (5), and § 8632 (e) by their terms do not cover trial judgments; they cover DHCR orders.
The alternative-recovery possibility pertains, therefore, only to administratively obtained overcharges, not to overcharge judgments that originated entirely in the judicial forum like the one here, which emanated after the 1993 Housing Court trial and the December 1993 judgment.
The reason a DHCR award can be enforced as a judgment or as a rent offset is that tenants need an expansive way after an administrative adjudication to protect themselves from landlords guilty of overcharging them. The reason the law sets out the remedy in the alternative, however, is that tenants should not be allowed to collect more than once on the same DHCR order. A judgment after a trial in court is different. After a nonpayment trial in which a tenant successfully asserts an overcharge counterclaim, the court will award the tenant a judgment if the overcharge exceeds the rent owed. Necessarily in that scenario a court after trial both offsets rent and awards a judgment — something an administrative agency cannot do. Trial-judgment creditors must be allowed to pursue various options to enforce a judgment so long as they do not collect twice. To rule differently would make a court's judgments subservient to rules that apply only to the DHCR by their very terms, would limit the powers of a court to those of an administrative agency in how judgments may be enforced, and would eviscerate the right of a tenant who has lawfully won a money judgment for a rent overcharge to obtain a rent offset against a successor landlord the minute the building is sold. And that last result would contravene the clear mandate of Rent Stabilization Code (9 NYCRR) § 2625.1 (f) (2) (I), which sets out the rules for carryover liability.
Having disposed of petitioner's threshold argument, the court next deals with whether petitioner assumed the prior owner's debt when he bought the proprietary lease and the shares appurtenant to the apartment at the foreclosure sale. RSC § 2625.1 (f) (2) (I) makes a current owner responsible for a prior owner's rent overcharges unless (1) the current owner bought the apartment at a judicial sale; (2) no records were available at the sale from which the purchaser could ascertain the legally regulated rent; and (3) the prior and current owners had no relationship or colluded with one another. The parties argue about each of these three elements.
In their motion and cross-motion for summary judgment, the parties raise issues of fact about the second and third elements. In his averments, petitioner swears that before the sale, he did not know who owned the shares to the apartment, he had no relationship with the prior owner, he was given no records about the apartment's rent, and he knew nothing about the amount of rent. He swears, in sum, that although his father, the building's superintendent, told him about the foreclosure sale, he did not collude with the prior owner to defeat respondent's rights.
Respondent, on the other hand, vigorously disputes petitioner's averments and offers facts and inferences to show collusion between petitioner and the prior owner and that petitioner knew the legally regulated rent. Among the facts and inferences are the following. Respondent notes that petitioner suspiciously redacted from the memorandum of sale dated June 7, 2001, the price petitioner paid for the apartment but that he bid $5800, or "at least 10% of the amount of the bid," according to the memorandum of sale. That means that petitioner acquired for no more than $58,000 a two-bedroom West Village apartment the parties agree is worth between $300,000 and $400,000 and for which the current maintenance is $1413.50 for an apartment on which petitioner can collect only $355.71 in rent. Respondent contends that "this glaring discrepancy further confirms that petitioner was well-aware of the overcharge at the time of the foreclosure sale." (Palitz Supplemental Affirmation of Nov. 18, 2003, at 2, ¶ 6.)
Respondent also asserts that petitioner must have know about the December 1993 judgment, and thus what the legally regulated rent is, because petitioner's father testified at the 1993 trial and because respondent's counsel submitted to the DHCR and to the prior owner and apartment corporation a mountain of documents, mostly available from the DHCR in the form of easily obtainable orders and records. Based on that, respondent challenges "petitioner's efforts to feign complete ignorance of the rent overcharge prior to the sale." (Palitz Affirmation in Reply of Oct. 20, 2003, at 4, ¶ 15.)
All these assertions and counter-assertions raise issues of fact that preclude summary judgment for either side on whether records were available at the sale from which the purchaser could ascertain the legally regulated rent and on whether the prior and current owners colluded or had no relationship. But RSC § 2625.1 (f) (2) (I) makes a current owner responsible for a prior owner's rent overcharges unless the current owner bought the apartment at a judicial sale. And whether the sale was judicial is a question of law.
The uncontroverted facts show that 270 West 11th Street Owners Corporation, the cooperative corporation that owns the building in which the subject apartment is located, foreclosed on the proprietary lease and the shares as a result of a default. An auction, conducted by an auctioneer, took place on June 7, 2001, at which four prospective buyers, including petitioner, appeared and bid.
There was no judgment in foreclosure, judgment of sale, or judicial directive, order, or authorization for the sale. No court proceeding underlay the sale. Nor need there have been a judicial sale in this cooperative unit. Uniform Commercial Code "Article 9 permits nonjudicial sales of the collateral" of a cooperative." (Vincent Di Lorenzo, New York Condominium and Cooperative Law § 11:10 [2d ed.] [citing New York UCC §§ 9-503, 9-504].) Collateral — the proprietary lease and shares — may be disposed of in a nonjudicial sale in favor of a secured party against the interests in a cooperative apartment after a default on the part of an owner of the cooperative interest under UCC §§ 9-604 (e) and 9-601 (a) if done in a commercially reasonable manner, and thus without resort to any judicial proceeding, if the proprietary lease gives the cooperative corporation the authority to foreclose on the unit and sell the shares. Here, paragraphs 31 and 32 (a) and (c) of the proprietary lease provide for the sale of shares following the termination of a shareholder's lease by virtue of specified, enumerated defaults. These paragraphs from the proprietary lease allow a foreclosure sale and do not require that any judicial or court-ordered sale precede the cancellation of the lease, issuance of new stock certificates, and sale of shares.
As has been often observed, "[a] UCC foreclosure, unlike a judicial foreclosure of real property, can be a quick and efficient method of realizing on the security of a sponsor loan [because] there is no involvement with the judicial process * * * *" (Harold A. Lubell and Rand Boyers, Loans Secured By Unsold Cooperative Shares: A Lender's Options Upon Default, ALI-ABA CLE 579, 583 [1994].)
The Court of Appeals examined § 2625.1 (f) (2) (I) in Matter of Gaines v. NYS Div. Housing Comm. Renewal ( 90 NY2d 545). The Gaines Court agreed with the DHCR that a current owner is exempt from carryover liability only after a judicial sale: "DHCR's extension of the judicial sale exemption to a successor purchaser who did not have rental records sufficient to establish the legal regulated rent is both reasonable and consistent with the underlying purposes of the regulation." ( Id. at 551.) The Court of Appeals in Gaines emphasized that the purpose of its rule was to promote judicial sales and protect innocent purchasers — those who do not and cannot know about an overcharge claim against a prior landlord if "`no records sufficient to establish the legal regulated rent were provided at [the] judicial sale.'" ( Id., quoting § 2625.1 (f) (2) (I) [alteration and emphasis in Gaines].) The Court noted that it would be (1) "inequitable to impose carryover liability in the context of a judicially ordered sale, because the debtor/owner would have no incentive to furnish records to the purchaser; and (2) imposing such liability on judicial sale purchasers would have an adverse impact on marketability in such sales." ( Id. at 549.)
The rules set out in Gaines and its progeny relate only to judicial sales. The rules do not apply to nonjudicial sales, at which purchasers can ascertain information about the premises and the tenant's rent and defeat carryover liability through unknowable and unprovable fraud and collusion. The auction here was a typical UCC nonjudicial sale. As a matter of law, therefore, petitioner, the owner's successor-in-interest, must assume its predecessor's debt.
Petitioner's motion for summary judgment is denied. Respondent's cross-motion for summary judgment is granted. A hearing is ordered on one limited issue: to determine what petitioner owes respondent. This proceeding is adjourned to January 12, 2004, for that hearing.
This opinion is the court's decision and order.