On April 2, 2020, the New York State Court of Appeals issued a split decision (4-3) on a string of four rental overcharge cases in the Matter of Regina Metro Co. v. New York State Div. of Hous. & Community Renewal, 2020 NY Slip Op 02127, holding that the retroactive application of the newly enacted rent overcharge provisions (Part F) of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) offended traditional notions of substantial justice embodied in the Due Process Clause. In particular, the Regina court ruled that the HSTPA's mandate compelling owners to produce their entire rental history—from the beginning of time—in connection with defending against rental overcharge claims would be fundamentally unfair because owners only had a legal obligation to maintain such records for a period of four years under the prior law. See former Rent Stabilization Law (RSL) §26-516[g]; see also Rent Stabilization Code (RSC) §2523.7[b]. Consequently, Regina has now lifted the chill that had been imposed over the purchase and sale of rent-regulated buildings under the HSTPA's radical expansion in opening the review of an apartment's entire rental history. Massimo D'Angelo, "Sweeping Reforms to Rent Overcharge Under New Rent Laws," New York Law Journal (Dec. 13, 2019).

The Doctrine of Judicial Review

As Chief Justice of the Supreme Court of the United States John Marshall enunciated over 200 years ago in the landmark case Marbury v. Madison, 1 Cranch 137 (1803), which established the doctrine of judicial review:

It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases, must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide on the operation of each.

Therefore, although the Legislature is charged with making new laws and modifying existing laws, it is equally axiomatic that it is within the sole province of the judiciary to void laws when they are found to be repugnant to the Constitution. People v. LaValle, 3 N.Y.3d 88, 128 (2004).

Contemporary Framework for Due Process Challenges. In Landgraf v. USI Film Products, 511 U.S. 244 (1994), the Supreme Court molded a modern framework for analyzing retroactivity in the context of a due process challenge. Procedurally, while Landgraf's appeal dismissing her sexual harassment claims under Title VII of the Civil Rights Act of 1964 (Title VII) was pending, the Legislature passed the Civil Rights Act of 1991 (the Act), which provided an additional avenue to recover compensatory and punitive damages not otherwise available under Title VII. However, the Landgraf court ruled that in the absence of explicit congressional intent, the Act could not be applied retroactively because it would offend fundamental elements of "fair notice and repose" that are specifically protected under the Due Process Clause. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976). Conversely, where the Legislature makes its intention clear, it aids in ensuring that the Legislature itself has determined that the benefits of retroactivity outweigh the potential for disruption and unfairness. Landgraf, 511 U.S. at 268.

There are certain actionable retroactive claims which do not offend notions of due process such as those of sick plaintiffs who were unable to diagnose their personal injuries due to latency between exposure and the manifestation of their condition and child sex abuse victims. Matter of World Trade Ctr. Lower Manhattan Disaster Site Litig., 30 N.Y.3d 377 (2017); see also Hymowitz v. Eli Lilly and Co., 73 N.Y.2d 487 (1989); the New York Child Victims Act (NY State Senate Bill S2440).

Rational Basis Scrutiny. It is well-settled that in order to comply with the requirements of due process, retroactive application of newly enacted legislation must be buttressed by "a legitimate legislative purpose furthered by rational means." General Motors v. Romein, 503 US 181, 191 (1992); see also Pension Benefit Guaranty v. R.A. Gray & Co., 467 U.S. 717 (1984). What is also well established is that legislative guidance regarding the scope of a statute carries a presumption of constitutional validity, and the party challenging that imprimatur bears the burden of showing the absence of a rational basis justifying application of the statute retroactively. Ferguson v. Skrupa, 372 U.S. 726 (1963); see also Williamson v. Lee Optical Co., 348 U.S. 483 (1955).

Notably, the U.S. Supreme Court has made it crystal clear that it is much easier to satisfy the rational basis test over a statute's constitutional validity for prospective, as opposed to retroactive application because the elements of notice and surprise are naturally dispensed with. See Pension Benefit Guaranty, 467 U.S. at 730.

The Court of Appeals in the Matter of Replan Dev. v. Department of Hous. Preserv. & Dev. of City of N.Y., 70 N.Y.2d 451 (1987), denoted specific factors to be utilized when it analyzed a taxpayer's due process challenge seeking retroactive eligibility for a §J-51 tax exemption based upon an amendment to the tax code. Specifically, the Replan court noted that when evaluating the legislation under rational basis scrutiny, the court needed to determine whether retroactive application was "harsh and oppressive," utilizing a balancing of the equities test. People ex rel. Beck v. Graves, 280 N.Y. 405 (1939); Holly S. Clarendon Trust v. State Tax Commn., 43 N.Y.2d 933 (1978). The most important factors in this balancing test are the forewarning as to the change in the legislation, the reasonableness of reliance on the old law, and the length of the retroactive period, the more excessive of which will help tip the scales towards securing repose. U.S. v. Hudson, 299 U.S. 498 (1937); Matter of Lacidem Realty v. Graves, 288 N.Y. 354 (1942); Matter of Chrysler Props. v. Morris, 23 N.Y.2d 515 (1969).

'Regina'

At the time when the Court of Appeals granted leave in the four rental overcharge cases consolidated under Regina, the RSL required that absent a showing a fraud, an overcharge claim would be calculated through utilization of the rent charged on the date four years prior to the filing of the overcharge complaint. Grimm v. New York State Division of Housing and Community Renewal, 15 N.Y.3d 358 (2010). This four-year period over which the "base rent," together with applicable legal increases set by the Rent Guidelines Board was calculated became known as the "lookback period," and the difference between the rent that an owner was legally permitted to charge and the rent actually charged established the overcharge. Under the previous law, review of the rental history prior to the four-year lookback period was prohibited unless a tenant showed fraudulent conduct on the part of the owner.

While the appeals on the Regina cases were pending at the Court of Appeals, the New York State Legislature enacted the HSTPA which implemented sweeping changes to the RSL, especially with regard to Part F, inter alia, extending the statute of limitations for rental overcharge cases from four to six years, altering the method for establishing the legal regulated rent for overcharge purposes, and radically expanding the nature and scope of owner liability in rent overcharge cases. See L 2019, ch 36, Part F. In particular, the HSTPA permitted tenants to review the entire rental history for an apartment since the dawn of time when suing an owner for rental overcharge even though owners were only legally mandated to keep such records for four years under the prior statutory framework.

It is undisputed that the Legislature's purpose in enacting the HSTPA was to mitigate the affordable housing shortage that it deemed rationally related to meeting that objective, but the Court of Appeals in Regina found a critical distinction in the due process analysis of prospective versus retroactive legislation. Despite the blistering dissent penned by the minority, the majority opinion in Regina ruled that to hold owners liable for conduct which occurred years prior to the enactment of the HSTPA would violate fundamental notions of substantial justice espoused in the Due Process Clause. Specifically, such retroactive application of the overcharge calculation pursuant to the HSTPA rental overcharge amendments would substantially expand owners' financial liability for conduct that in certain instances occurred decades before or even earlier, well prior to the enactment of the HSTPA, for which the previous statutory scheme provided owners with clear repose.

Thus, since this application to past conduct contravened the longstanding prevailing authority on retroactivity, the Regina court decided that the retroactive application of the HSTPA's rental overcharge amendments violated due process. However, the Court of Appeals did not find that the prospective application of HSTPA's rental overcharge amendments were unconstitutional, meaning that prospectively, tenants' rental overcharge claims will be guided by the relevant amendments contained in Part F of the HSTPA.

Conclusion

The Regina decision will have significant reverberations for the real estate market going forward, as it will unfreeze the chill over the purchase and sale of rent-regulated buildings. Since the ruling dispensed with a substantial universe of damages flowing from retroactive rental overcharge claims, purchasers can now buy rent-regulated buildings with some peace of mind and comfort in understanding the possible extent of their exposure. This will now reinvigorate a market that was essentially at a standstill since the enactment of the HSTPA. Fortunately, for owners currently battling rental overcharge litigation, it provides them with some much needed respite. Perhaps the Legislature will step in to impose some form of stopgap on the review of prior rental history records so that the retroactive review period passes constitutional muster, but at least for now, owners and purchasers of rent-regulated buildings can transact without fear of the unknown.

Massimo F. D'Angelo is a partner at Adam Leitman Bailey, P.C.