New York Law Review

Fullan v. 142 East 27th Street Associates, 1 N.Y.3d 211 (2003): Successor Landlord Liability for Rent Overcharges

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Fullan v. 142 East 27th Street Associates, 1 N.Y.3d 211 (2003)

A current property owner cannot be held liable for a fair market rent appeal (FMRA) award based on excess rents collected by a previous owner if the current owner was not a party to the FMRA and did not have an opportunity to participate in the FMRA process.

Summary

Fullan, tenants in a rent-stabilized apartment, filed a fair market rent appeal (FMRA) against the building’s then-owner, Dobro Corporation, alleging excessive rent. The DHCR ruled in favor of the tenants, ordering a rent reduction and refund. While Dobro’s appeal was pending, the building was sold twice, eventually landing with 27 Realty. 27 Realty was unaware of the FMRA. The tenants then sued 27 Realty to recover the FMRA award. The New York Court of Appeals held that 27 Realty was not liable because it was not a party to the original FMRA proceeding and had no opportunity to participate. This case clarifies the limited liability of successor landlords in FMRA cases under the Rent Stabilization Code.

Facts

Plaintiffs Fullan and Bates were tenants in a rent-stabilized apartment since 1985, paying $775/month. In 1991, they filed an FMRA with the DHCR against Dobro Corp, the owner at the time, claiming the rent exceeded fair market value. In 1993, DHCR determined the fair market rent was $434.34, resulting in a $37,480.05 refund owed to the tenants. Dobro filed a Petition for Administrative Review (PAR), which was denied in 1997. In 1995, Dobro sold the building to 142 East 27th Street Associates (Associates). Associates then sold the building to 27 Realty in 1997, shortly after the PAR denial. The tenants received no refund. 27 Realty was unaware of the FMRA award.

Procedural History

The tenants commenced a plenary action in December 1998 against 27 Realty and others to collect the FMRA award. Supreme Court denied 27 Realty’s motion for summary judgment. The Appellate Division modified, granting summary judgment to the tenants on liability, finding a successor landlord generally liable for prior overcharges. The Appellate Division remanded for calculation of damages. Supreme Court then awarded the tenants $95,158.90. 27 Realty appealed to the Court of Appeals.

Issue(s)

Whether a current owner of a rent-stabilized building can be held liable for a fair market rent appeal (FMRA) award for excess rents collected by a previous owner, where the current owner was not a party to the FMRA and did not have an opportunity to participate in the FMRA process.

Holding

No, because under the Rent Stabilization Code and DHCR policy, a current owner who did not have an opportunity to participate in the FMRA proceedings is not liable for an FMRA award based on excess rents charged by prior owners.

Court’s Reasoning

The court differentiated between FMRA proceedings (governed by 9 NYCRR 2522.3) and rent overcharge cases (governed by 9 NYCRR 2526.1). FMRAs are appeals of the initial rent, while rent overcharge cases involve rents exceeding the legal regulated rent. The Rent Stabilization Code § 2522.3(d)(1) directs “the affected owner” to make the refund, implying the current owner isn’t automatically liable for the entire FMRA award. The court cited DHCR Policy Statement 93-1, which outlines situations where a current owner is deemed a party to an FMRA (e.g., receiving notice and opportunity to answer). Here, 27 Realty had no opportunity to participate, purchased the property after the PAR denial, and charged legal rent. The court distinguished Matter of Gaines v New York State Div. of Hous. & Community Renewal, 90 NY2d 545 (1997), because that case dealt with rent overcharges under § 2526.1, which explicitly imposes liability on current owners for prior overcharges, but that section does not apply to FMRA proceedings under § 2522.3. The court rejected the argument that commencing a plenary action automatically subjects a party to liability they wouldn’t face in a DHCR proceeding. Absent evidence of fraudulent transfers to evade liability, 27 Realty, lacking the opportunity to participate in the FMRA, cannot be held liable. The court noted, “For liability to attach, the current owner had to have an opportunity to participate in the FMRA process; 27 Realty had no such opportunity.”

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