| Conason v Megan Holding, LLC |
| 2013 NY Slip Op 05956 [109 AD3d 724] |
| September 24, 2013 |
| Appellate Division, First Department |
| Julie Conason et al., Respondents, v MeganHolding, LLC, et al., Appellants. |
—[*1] Fishman & Mallon, LLP, New York (James B. Fishman and Susan K. Crumiller ofcounsel), for respondents.
Orders, Supreme Court, New York County (Joan M. Kenney, J.), entered October 16,2012 and October 17, 2012, which, inter alia, granted plaintiffs' motion for summaryjudgment and denied defendants' motion for summary judgment dismissing thecomplaint, unanimously affirmed, without costs.
Plaintiff Julie Conason signed a rent-stabilized lease commencing in November 2003for apartment 3 in defendant landlord Megan Holding's building at a monthly rent of$1,800, and signed renewal leases in 2005 and 2007 at rents of $1,899 and $1,955.97,respectively. Although the lease was for a rent-stabilized apartment, there was norent-stabilized rider attached to it.
In December 2003, after plaintiffs had commenced occupancy, Megan registered theapartment with the New York State Division of Housing and Community Renewal(DHCR). The registration showed that the monthly rent for the previous tenant, OkiSuzuki, was $1,000 per month, and the monthly rent paid by the tenant preceding Suzukiwas $475.24. In 2009, Megan brought a nonpayment summary proceeding againstplaintiffs in Civil Court. Plaintiffs' answer alleged harassment, breach of the warranty ofhabitability, and rent overcharges, and sought attorneys' fees pursuant to Real PropertyLaw § 234.
After trial,[FN1] the court found that Megan had fraudulently listed Suzuki, a nonexistent tenant, as theprior occupant, and claimed nonexistent improvements to the apartment to inflate therent. The court also found that the base rent for the rent overcharge claim was affected bythe fraud. However, the court dismissed the rent overcharge claim without prejudicebecause plaintiffs had not proved the amount of the legal regulated rent; they failed tosubmit evidence of [*2]the rent for any other apartment inthe building on the base date. The court awarded plaintiffs judgment for an abatement ontheir breach of the warranty of habitability claim, and, after a further hearing, attorneys'fees by separate judgment.
In June 2011, plaintiffs commenced this action against Megan and its principal, Ku,in Supreme Court to recover the rent overcharges, treble damages pursuant to RentStabilization Code (RSC) (9 NYCRR) § 2526.1 (a) (1), and attorneys' feespursuant to the lease, Real Property Law § 234, Rent Stabilization Law (RSL)(Administrative Code of City of NY) § 26-516 (a) (4), and RSC § 2526.1(d). Plaintiffs alleged that defendants had falsely registered the apartment as occupied byfictitious tenant Suzuki. They further alleged that Ku was liable because he had abusedthe corporate form by intermingling the assets of his numerous companies, includingMegan, with his personal assets. Plaintiffs then moved for summary judgment based onthe collateral estoppel effect of the factual finding of Civil Court that defendants hadcommitted fraud. They submitted a copy of the certified DHCR rent roll to show, forovercharge calculations, the lowest rent charged for a rent-stabilized apartment with thesame number of rooms in the same building as the subject apartment, which was$180.92. As to Ku's liability, plaintiffs submitted evidence to show that Ku used hisnumerous LLCs interchangeably, listed the subject building as solely owned by him, anddid in fact own 99% of it, had sold the building from one of his other LLCs to Megan fornominal consideration, and used the building as collateral for a mortgage loan to bothMegan and another LLC.
Defendants cross-moved for summary judgment dismissing the complaint on theground that the rent overcharge claim accrued from the first overcharge in 2003 and wasthus barred by the four-year statute of limitations (CPLR 213-a).
We are not persuaded that plaintiffs' overcharge claim is barred by the four-yearstatute of limitations. As we noted in Matter of Grimm v State of N.Y. Div. of Hous. & CommunityRenewal Off. of Rent Admin. (68 AD3d 29, 32 [2009], affd 15 NY3d358, 366 [2010] [citation omitted]), "while the applicable four-year statute of limitationsreflects a legislative policy to 'alleviate the burden on honest landlords to retain rentrecords indefinitely,' and thus precludes us from using any rental history prior to the basedate, where there is fraud . . . , the lease is rendered void," and the legal rentis to be determined by the default formula (see also Thornton v Baron, 5 NY3d 175, 180-181 [2005]).We went on to note that "[s]anctioning the owner's behavior on a statute of limitationsground 'can result in a future tenant having to pay more than the legal stabilized rent for aunit, a prospect which militates in favor of voiding agreements such as this in order toprevent abuse and promote enforcement of lawful regulated rents' " (Matter ofGrimm, 68 AD3d at 32, quoting Drucker v Mauro, 30 AD3d 37, 40 [2006], appealdismissed 7 NY3d 844 [2006]; see also Thornton, 5 NY3d at 181 ["anunscrupulous landlord . . . could register a wholly fictitious, exorbitant rentand, as long as the fraud is not discovered for four years, render that rentunchallengeable"]). We thus hold that the four-year statute of limitations is not a bar in arent overcharge claim where there is significant evidence of fraud on the record (cf. Matter of Grimm v State ofN.Y. Div. of Hous. & Community Renewal Off. of Rent Admin., 15 NY3d 358[2010]).[FN2][*3]
Supreme Court correctly found that defendantswere collaterally estopped from arguing that no fraud existed (Matter of Abady, 22 AD3d71, 83-84 [1st Dept 2005]) since "Megan was represented by counsel during most ofthe trial, was afforded the opportunity to acquire new counsel when its lawyer withdrewfor ethical reasons, failed to obtain successor counsel, declined to present a defense,submitted a post-trial brief, and failed to appeal the determination." Supreme Court alsoproperly determined the base rent based on the default formula (see Grimm, 15NY3d at 366), and deferred the determination of the amount of the overcharge for ahearing.
The court properly pierced the corporate veil (James v Loran Realty V Corp., 20 NY3d 918 [2012]).There is evidence that Ku abandoned the corporate form. For instance, in a loanapplication Ku claimed 16 LLC properties, including the subject building, as his ownproperty. There is also evidence of the habitual transfer of funds to and from Ku'sindividual account, which indicates the intermingling of funds. Ku also used personalfunds for Megan expenditures and used Megan funds for expenditures by other LLCs.There is also evidence that, through Megan, Ku fraudulently set a rent for plaintiffs'apartment and that plaintiffs were financially injured thereby (Matter of Morris vNew York State Dept. of Taxation & Fin., 82 NY2d 135, 141 [1993]).
Supreme Court properly awarded treble damages and attorneys' fees. Defendantsfailed to prove by a preponderance of the evidence that the rent overcharge was notwillful (see 9 NYCRR 2506.1 [a] [1]). Nor were they able to show thatrespondents are not entitled to an award of attorneys' fees pursuant to Real Property Law§ 234, RSL § 26-516 (a) (4) and RSC § 2526.1.Concur—Acosta, J.P., Renwick, Richter and Feinman, JJ. [Prior Case History:2012 NY Slip Op 32625(U).]
Footnote 1: Completion of the trialwas delayed by the withdrawal of Megan's counsel and Megan's failure to retain newcounsel during a seven-week adjournment for that purpose. Although Megan's principal,defendant Ku, testified as the tenants' witness, Megan rested without presenting anyevidence on its own behalf; new counsel submitted a posttrial memorandum on itsbehalf.
Footnote 2: To the extent that Direnna v Christensen (57AD3d 408 [1st Dept 2008]), decided two years before Grimm, isinconsistent with our ruling today we choose not to follow it inasmuch as there was noevidence of fraud on the record in Direnna.