CARRYOVER LIABILITY -- JUDICIAL SALE -- SUCCESSOR LIABILITY -- RENT CONTROL
JUDICIAL SALE EXCEPTION INCORPORATED INTO THE OVERCHARGE PENALTY PROVISION
OF THE NEW YORK RENT STABILIZATION CONTROL CODE APPLIES TO A CURRENT OWNER
WHO HAS TAKEN TITLE FROM A PREVIOUS OWNER WHO PURCHASED THE PROPERTY AT
A JUDICIALLY ORDERED SALE
] | [ISSUE & DISPOSITION
| [AUTHORITIES CITED
] | [COMMENTARY
Petitioner Respondent Germaine Gaines filed a complaint with the Appellant
New York Division of Housing and Community Renewal (DHCR) alleging that
her current landlord had overcharged her for rent. While this claim was
pending, the Bankruptcy Court of the Southern District of New York approved
the sale of the property from the current owner, Cornelia Associates (Cornelia),
to the holder of the mortgage, Home Savings Bank of America (Home Savings).
The property was then sold by Home Savings to ACB Realty Corporation (ACB).
Thereafter, DCHR determined that Gaines had been overcharged by Cornelia
and was due the amount of the overpayments but did not allow the liability
to carryover to Home Savings or to ACB.
The New York Rent Stabilization Control Code authorizes the New York
State Division of Housing and Community Renewal (DHCR) to assess monetary
penalties against any owner of a rent stabilized apartment building who
overcharges tenants for monthly rent. N.Y. Comp. Codes R. & Regs. tit.
9, § 2526.1(f)(2) (1987). Current owners are liable for all rent overcharges,
including those by previous owners, except where the current owner purchased
the apartment building upon a judicially ordered sale. Id.
The trial court upheld the DCHR's decision. The Appellate Division reversed,
reasoning that nothing in the regulation requires that the judicial sale
exception be applied to successor purchasers. Plaintiff appeals.
ISSUE & DISPOSITION
Whether the judicial sale exception to carryover liability for overcharges
may be applied to owners who purchased the property subsequent to a judicial
Yes, because it is consistent with the language of the regulation and its
Cases Cited by the Court
State Assn. of Life Underwriters, Inc. v. New York State Banking Dep't,
83 N.Y.2d 353 (N.Y. 1994).
Realty Co. v. New York State Div. of Hous. & Community Renewal,
76 N.Y.2d 325 (N.Y. 1990).
Ansonia Residents Ass'n v. New York State Div. of Hous. & Community
Renewal, 75 N.Y.2d 206 (N.Y. 1989).
Salvati v. Eimicke, 72 N.Y.2d 784 (N.Y. 1988).
Howard v. Wyman, 28 N.Y.2d 434 (N.Y. 1971).
Charles H. Greenthal Co., Inc. v. New York State Div. of Hous. &
Community Renewal, 484 N.Y.S.2d 445 (N.Y. Sup. Ct. 1984).
Coulston v. Singer, 384 N.Y.S.2d 74 (N.Y. Sup. Ct. 1976).
Turner v. Spear, 512 N.Y.S.2d 335 (N.Y. Civ. Ct. 1987).
Other Sources Cited by the Court
11 U.S.C. §§
N.Y. Comp. Codes R. & Regs. tit. 9, § 2526.1(f)(2) (1987).
Webster's Third New Int. Dictionary 2517 (1981).
Victor Bach & Sherece Y. West, Community Serv. Soc'y of N.Y., Housing
on the Block: Disinvestment and Abandonment Risks in New York City Neighborhoods
Trump-Equitable Fifth Ave. Co. v. Gliedman, 57 N.Y.2d 588
Krochta v. Green, 467 N.Y.S.2d 995 (City Ct. N.Y. 1983).
State of the Law Before Gaines
New York courts have consistently held that a purchaser must include protective
provisions in the sales contract to avoid liability for rent overcharges
by the preceding landlord. Coulston v. Singer
, 384 N.Y.S.2d 74,
75 (N.Y. Sup. Ct. 1976). Successor liability has been traditionally based
on the principle of holding a landlord liable for the wrongdoings of his
predecessor. Turner v. Spear
, 512 N.Y.S.2d 335 (N.Y. Civ. Ct. 1987).
The concern in these situations is that limiting the liability of the current
landlord to the amount actually received by them would lead to transfers
motivated solely by a desire to avoid liability for rent overcharges. See
at 75. The right of a tenant to seek redress for rent
overcharges survives even a foreclosure sale of the rental property where
the tenant had no notice of the foreclosure proceeding. Turner, supra
at 335, citing Krochta v. Green
, 467 N.Y.S.2d 995 (City Ct. N.Y.
1983). The courts' reasoning in each of these cases was that the burden
of recovering from the prior landlord should not be placed on the tenant,
who was not a party to the transfer and may not know the whereabouts of
the prior owner. Id.
The New York courts have given special deference to the DHCR's construction
of its own regulation if that construction was not unreasonable or irrational.
In keeping with this, deference has not been accorded to agency decisions
that "extend the meaning of the statutory language to apply to situations
not intended to be embraced within the statute". Trump-Equitable Fifth
Ave. Co. v. Gliedman, 57 N.Y.2d 588, 595 (N.Y. 1982). Upon review,
New York courts consider not only whether an administrative decision was
unreasonable or irrational but also whether it is supported by "substantial
evidence on the record." Salvati v. Eimicke, 72 N.Y.2d 784 (N.Y.
Effect of Gaines on Current Law
, the Court of Appeals extends the judicial sale exception
to successor purchasers. The court bases its interpretation on both the
plain meaning and the underlying policy of the statute. The applicable
regulation provides that "where no records sufficient to establish the
legal regulated rent were provided at a judicial sale, a current owner
who purchases upon such a judicial sale shall be liable only for his or
her portion of the overcharges." N.Y. Comp. Codes R. & Regs. tit. 9,
§ 2526.1(f)(2). The court maintains that the judicial sale exception
is not limited exclusively to purchasers at a judicial sale but may also
apply where sufficient rent records were unavailable.
The ability of successor purchasers to shield themselves from liability
for previous owners' rent overcharges through protective sales contract
clauses and the corresponding inability of a judicial sale purchaser to
utilize similar clauses further inhibits the marketability of rent stabilized
apartment buildings at judicial sales. The judicial sale exception is based
on a recognition that in the context of a judicial sale, the debtor/owner
has no incentive to furnish appropriate rental records from which a prospective
purchaser could ascertain any overcharges in advance. The court notes that
to hold the successor purchaser liable for pre-judicial sale rent overcharges
where a full rental history had been unavailable would be inequitable.
In addition, imposing liability on judicial sale purchasers would adversely
impact the marketability of rent stabilized apartment buildings in judicial
The court in Gaines
notes that an exception from the so-called "carryover
liability" for rent overcharges had been created to prevent liability where
a judicial sale had occurred. This exception was predicated on the notion
that adequate records are often unavailable when such a sale occurs. The
court also assumes that successor purchasers will not have access to adequate
records and therefore extends the exception to those purchasers. Except
for a vague reference to "deference" for the DCHR's decision-making process,
the scope of the exception in undefined. Is there a limit to the number
of successor purchasers who will qualify for the exception?
Although the court notes that the original owner who is subject to a
judicial sale has no incentive to provide adequate records to the purchaser,
the court does not address the question of whether these incentives should
be provided. Assuming that the prior landlord is judgment proof, this decision
leaves the tenant without any form of legal redress for the loss of over
$13,500. What justification is there for protecting sophisticated investors
and purchasers over tenants whom the rent control statute was created to
In addition, the court fails to address how other courts should apply
this exception. For example, is the existence of a judicial sale enough
to trigger the exception, or is an actual finding that no records were
available at the sale required? What if the records actually were available
at the judicial sale? What if the records were available at the subsequent
Survey of the Law in Other Jurisdictions
There are many rent control and rent stabilization jurisdictions other
than New York (e.g., Santa Monica, Cal., Cambridge, Mass., Miami Beach,
Fla.). However, none of them seem to have focused on the issue of successor
liability for previous rent overcharges subsequent to a judicial sale.
Sarah E. Buffett, '99
Jason E. Murtagh, '99
Phillip M. Pippenger, '98
Barbara Raben, '98
Spencer F. Robert, '98
Justin M. Zamparelli, '99