Scott E. Mollen

Landlord-Tenant—Rent Stabilization—Appellate Division Held That Landlord Substantiated Claim That it Made Sufficient Expenditures for Individual Apartment Improvements Warranting Apartment's Exemption From Rent Stabilization—Invoices—Checks—Photographs—Dissent Contended Landlord Failed To Meet Its Burden of Proof

This appeal involved the issue of whether the “record sufficiently demonstrates” whether an owner of a NYC apartment building had spent “an amount in qualified individual apartment improvements (IAIs) (to the subject apartment), sufficient to render that apartment exempt from rent stabilization.” If the landlord had not spent a sufficient amount of money to deregulate the apartment, the court had to consider whether the rent overcharge supported a finding of “willfulness” and an award of treble damages.

The Appellate Division (court) found that the landlord had “substantiated their claims that they had made sufficient expenditures for IAIs performed in the apartment to warrant exemption from rent stabilization” and there was no rent overcharge. Thus, the court did not determine whether the rent overcharge was willful.

The apartment had been registered as a rent stabilized apartment between 1984 and June 2009. The registered monthly rent had been $1,450.70. The landlord alleged that in 2009, renovations were made to the apartment, including “general contracting, plumbing and electrical work.” In September 2009, the parties entered into one-year lease at a monthly rent of $2,300, plus an air conditioning charge. On July 1, 2010, the landlord declared that the apartment had been permanently exempted from rent stabilization due to “high rent vacancy.” In October 2010, the lease was renewed for an additional year at monthly rent of $2,415, plus the air conditioning charge. In November 2010, the landlord sold the building to the current landlord.

In August 2011, the plaintiff (tenant) filed a complaint which asserted a rent overcharge. She claimed that the stabilized rent was $1,450.70 and the apartment had been improperly removed from rent stabilization. She alleged that the rent overcharge was willful and the landlord's July 2010 DHCR filing was “false and fraudulent.”

A non-jury trial was held. The parties stipulated that the landlord would have had to spend $21,972 on the apartment in order to be entitled to the subject rent increase. The landlord claimed that in 2009 it spent $82,015.27 on IAIs, including $60,000 for renovations performed by its general contractor (GC), $16,365.27 for plumbing work and $5,650 for electrical work.

The trial court found that the landlord failed to substantiate the GC's invoice for $60,000. The trial court found that there was “no trial testimony from any witness,” including the property manager (manager) and part owner of the building in 2009 and a principal of the GC, “with personal knowledge that the work described in the invoice was actually completed as claimed.” Neither the manager who had no recollection of the work set forth an invoice nor the principal of the GC, who had never visited the work site, “had performed a personal inspection of the work performed at the apartment.”

The trial court also found that a Dec. 16, 2009 check for $63,097.81 payable to the GC was “insufficient to substantiate defendants' claims, and there is no indication on the check itself that it was payment for the work set forth in the invoice and the check was for an amount greater than $60,000.” The trial court further held that the landlord failed to show that the IAIs it had claimed were performed in the apartment in 2009 were not “duplicative of IAIs performed in the same apartment in 1995 and 1998, or that the earlier work had outlasted it's useful life.”

Additionally, the trial court held that owners had “failed to substantiate” that the “plumbing work had been performed…in 2009.” The trial court had declined to admit into evidence plumbing invoices for kitchen and bathroom renovations. The trial court found the check payable to the plumber did not substantiate the landlord's claim, because the check did not indicate that it was payment for work done in the apartment.

The trial court found that a “certificate of capital improvement” describing the plumbing work did not substantiate the claim because it “did not list the cost or the final price of the work described.” The manager could not recall what plumbing work he had requested for the apartment and did not know if the $16,365.27 check was for work solely done in the apartment. The trial court did not “mention” that the deceased plumber's wife had authenticated two plumbing invoices for the work.

The tenant had introduced photographs that she had taken in 2016, which showed what appeared to be “new flooring, new tiling, a new bathtub and sink in the bathroom, as well as new appliances and cabinets in the kitchen.” The trial court had not mentioned the photographs.

The sole IAI claim found by the trial court to have been substantiated was landlord's claim that the $5,650 in electrical work had been performed in the apartment. Based on that claim only, the trial court held that landlord was entitled to a monthly rent increase of 1/40^th of the cost of the electrical work, or $141.25. Thus, the trial court found that the post IAI legal rent was $1,591.25, which was below the $2,000 threshold required for removal of the apartment from rent stabilization. The trial court held that the landlord was entitled to a rent stabilized lease and damages for overcharges in the amount of $77,700. Since the trial court found that the landlord failed to rebut the presumption that their overcharges were willful, the trial court awarded treble damages in the amount of $233,100, plus reasonable attorney's fees.

The Appellate Division explained that review of a “judgment following a nonjury trial,” vests the court with authority that is “broad as that of the trial court” and the court may “render the judgment it finds warranted by the facts, taking into account in a close case the fact that the trial judge had the advantage of seeing the witnesses….” Thus, the court will conduct a “de novo assessment on whether the weight of the evidence supports the determination….” The court's majority noted that the dissent in this case contended that the it “should not disturb the trial court's findings of fact.” The court considered the dissent's reliance on certain cases to be “misplaced” and cited judicial precedent which held:

Limiting appellate review to the fair interpretation of the evidence approach may be appropriate where the findings rest predominately on credibility determinations, because such determinations are entitled to substantial deference. However, it is not appropriate when the trial court's findings rest largely on inferences drawn from established facts and verifiable assertions. In that case, there is no valid rationale for precluding the appellate court from finding facts…

The court noted that the trial court had not stated that it found any of the landlord's witnesses less than “credible.” “Rather, the trial court found the evidence to be legally insufficient, based on landlord's witnesses' lack of recall or lack of personal knowledge, not upon the witnesses' creditability. The evidentiary facts were undisputed, and the controversy was confined to what legal conclusions could be drawn from those facts.” The court viewed this case as not a “'close case' where there is any 'valid rationale for precluding (this court) from finding facts based in part upon inferences drawn from facts established in the record and verifiable assertions….”

The court then held that the “invoices and checks proffered … at trial when read together, and in conjunction with the testimony of the defense witnesses, more than sufficiently demonstrate that the cost of the 2009 IAIs well exceeded the $21,972 threshold needed for exemption of the apartment from rent stabilization.”

The court explained that the $63,097.81 check to the GC should have been accorded more weight because the manager explained that it was his common practice to pay all outstanding invoices in a single check, and the trial court should have considered “the temporal proximity of the invoice to the payment.”

The court also cited the photographs of what appeared to be “new flooring, new tiling and new bathtub and sink in the bathroom, as well as new appliances and cabinets in the kitchen.” The tenant had confirmed that the photographs fairly accurately “reflected the condition of the apartment when plaintiff moved into it in 2009….” It reasoned that the photographs, together with the documentary and testimonial evidence “and all surrounding circumstances,” establish the work that was done by (the GC) on the apartment and the IAIs.

The court gave weight to the photographs that were taken 2016 because the tenant had confirmed that the photographs fairly and accurately reflected the condition of the apartment at the time when she moved in and because the photographs were consistent with the work described in the invoices. The manager had testified his routine practice was to inspect the work before paying an invoice and although he lacked the specific recollection with respect to subject apartment, he testified that he would not have paid for $60,000 of work without conducting a prior inspection. Thus, the court held that the weight of the evidence substantiated the $60,000 general contracting expense. It distinguished cases cited by the dissent wherein “insufficient or no documentary proof was offered….”

Additionally, the court found that two plumbing invoices that were excluded should have been admitted into evidence and the weight of the evidence demonstrated that the owners had paid at least $13,251.95 for plumbing work done in the apartment. The landlord's claim that it had spent $5,650 on electrical work for the apartment was undisputed.

The trial court reasoned that certain testimony was insufficient to establish the IAI claim on the grounds that the witnesses “lacked personal knowledge” that work was done in the apartment. However, the court noted that there is no “requirement of such proof.” Rather, the law required “such documentary proof as 'bills from a contractor…or records of payment for the claimed improvements'.” Moreover, since the work was done when the apartment was vacant, the tenant's consent for the IAI rent increase was not required.

The court rejected tenant's arguments with respect to duplication and useful life. The complaint did not mention the IAIs that she thereafter claimed had been performed in 1995 and 1998. She failed to amend her complaint to include such factual allegations. It noted that the landlord was “prejudiced by plaintiff's delay in raising this issue, although she could have done so by amending her complaint.” Moreover, the landlord was “not required to include in the DHCR registration forms descriptions of any IAIs performed in 1995, 1998 or 2009 or to adhere to a useful life schedule in performing IAIs.”

The court further reasoned that it did not make sense that the landlord “would incur more than $78,000 in expenses if all that was needed was $21,972 in IAIs to qualify the apartment … for exemption from rent stabilization, unless the expenses were necessary to address an emergency situation, such as water damage to the apartment.” The manager had testified that there was “extensive water damage to some of the apartments in the building prior to the 2009 renovations of those apartments.”

Since the court found that there was no rent overcharge, it did not address the issue whether there should be treble damages bases on the willful overcharge. Thus, it reversed, vacated the judgment and dismissed the complaint.

The Dissent

A dissenting opinion argued that the “majority usurps (trial court's) authority to make factual findings.” The dissent asserted that “contrary to caselaw, in essence the majority has improperly placed the burden of proof on the tenant to establish that the apartment was illegally deregulated based on alleged individual apartment improvements made by the landlord.”

The dissent acknowledged that the court may “review factual findings of the trial court,” but stated that its power was “not limitless.” It argued that where the findings of fact are predicated upon the creditability of witnesses, the Court of Appeals has held that

[t]he decision of the fact-finding court should not be disturbed upon appeal unless it is obvious that the court's conclusions could not be reached under any fair interpretation of the evidence, especially when the findings of fact rest in large measure on considerations relating to the creditability of witnesses.

The dissent noted, inter alia, that the manager had testified “based entirely on the invoice in front of him, which was not in evidence” and “he did not recall the specific apartment, but 'assumed' that everything was ripped out back to the original and redone.” Although he stated that it was “highly unlikely” that a “gut renovation” had been done to the apartment in 1995 and 1998, he did not remember and could not recall “whether or not he paid the invoice in front of him.” The dissent further noted that the landlord failed to produce “DHCR forms that would have supported such improvements for the relevant years….” The dissent also argued that the landlord “failed to adduce any testimony from (the manager) verifying that (tenant's) photographs corroborated the 2009 improvements.”

The dissent also asserted that the owner of the GC testified that its invoice did not “break down the price of individual items of the job and there was no way to determine the cost of each component.” That witness “never saw the construction and relied on information provided to him by his workers.” He also admitted that he and his company had “pled guilty to a commercial bribery scheme where he kicked back 10 percent of his fees to employees of a management company in order to obtain work.” The GC “no longer had invoices for the materials he used in the job because of a flood in his office.” However, “he had not filed an insurance claim for the damage to his office.”

After reviewing the evidence, the dissent noted that the trial court had admonished the manager “for not having a recollection of the alleged improvements made” to the apartment and for providing “testimony based only on the document shown to him on the stand.” The dissent stated that the trial court had “found that the documentary evidence did not establish the claimed improvements.”

The dissent emphasized “that the trial court conducted a fact-intensive inquiry to determine whether (the landlord) met its burden to establish that they made (IAIs) in a sum exceeding $21,972” and was in the “best position to assess the evidence and creditability of the witnesses.” The dissent noted that the trial court gave “little weight to the testimony” of these witnesses since “they lacked personal knowledge of the work performed” in the apartment and the “documentary evidence” did not verify that the improvements were made in the apartment.

The dissent opined that the trial court's findings were not “contrary to the weight of the evidence” to the extent that it was not “obvious that the court's conclusions could not be reached under any fair interpretation of the evidence….” The dissent believed that the majority's conclusions “that the checks, photographs and testimony 'overwhelmingly supports the amount of work done in the apartment',” was not “supported by the record as no legal conclusions could be drawn from the documents in the record without witness testimony connecting them to the work allegedly performed” in the apartment.

The dissent also argued that the tenant's “useful life” argument was not waived. The dissent contended that the tenant did not have the burden of proof to establish useful life and therefore she was not required to plead it in her complaint. Furthermore, the landlord had not argued that it was prejudiced by the tenant's failure to timely raise the argument in her pleading at trial or on the appeal. The dissent also argued that the useful life schedule abided in 9 NYCRR 2522.4(2)(d) is applicable to subject improvements.

Additionally, the dissent asserted that the trial court could look back beyond four years with respect to an overcharge claim if there was evidence of a fraudulent scheme. The dissent believed that the tenant had advanced a “colorable claim of fraud” and there was substantial evidence that the landlord “engaged in the scheme to set an illegal rent” to remove the apartment from stabilization. The dissent concluded that the trial court correctly found that (the landlord) failed to demonstrate that the useful life of the improvements in (the apartment) in 1995 and 1998 had been exceeded entitling them to rent increase for the claimed 2009 improvements.”

Finally, the dissent argued that the record supported the trial court's finding that the rent overcharges were willful. The dissent emphasized that the landlord had “failed to substantiate the improvements or that they paid the sums on the claimed invoices. No evidence was adduced as to (landlord's) good-faith belief that the rent overcharges were justified.” Accordingly, the dissent would have affirmed the trial court decision.

Comment: This case is of interest because even with the recently enacted rent legislation which permits, inter alia, rent increases based on Individual Apartment Improvements, parties, lawyers and courts will still need to address issues involving the burden of proof, evidence and appellate review.

DiLorenzo v. Windermere Owners LLC, Appellate Division, 1st Dept., Case No. 110053/11, decided June 13, 2019, Friedman, J.P., Sweeny, Jr., Kapnick, Kahn, Singh, JJ., Opinion by Kahn, J. All concur except Kapnick and Singh, JJ. who dissent in an Opinion by Singh, J.

Scott E. Mollen is a partner at Herrick, Feinstein.