57 Elmhurst aLLC v. Morales

Recitation, as required by CPLR §2219(a), of the papers considered in the review of: (a.) Respondent’s motion to vacate the default judgment, dismiss the proceeding, and for sanctions against Petitioner for frivolous conduct (motion seq. #1): NYSCEF 5-11, 27-35; and (b.) The court’s own motion for sanctions against Petitioner: NYSCEF 11, 26-35, the court files in 57 Elmhurst LLC v. Beatriz Castillo, LT-303770-23/QU, 57 Elmhurst LLC v. Filpo, LT-312012-23/QU, 57 Elmhurst v. Guarin, LT-303792-23 and 57 Elmhurst v. Ruiz, LT-303801-23/QU. DECISION/ORDER Upon the foregoing cited papers, the decision and order on Respondent’s motion to dismiss and for sanctions, and the court’s own motion for sanctions is as follows: RELEVANT FACTUAL AND PROCEDURAL HISTORY Background In this summary nonpayment proceeding seeking $248 in rent that the Respondent Luz Elena Morales (“Respondent”) never owed, the court must determine whether to sanction Petitioner 57 Elmhurst LLC (“Petitioner”) for frivolous conduct in violation of 22 §NYCRR 130-1.¹ (“Rule 130″). Petitioner is the owner of the subject 164-unit rent-stabilized building located at 94-25 57th Avenue, Queens, New York (the “premises”), one of over forty buildings owned by its parent company Zara Realty Holding Company (“Zara”).1 Zara is not new to the residential real estate field. According to its website, it has been investing in rental housing in Queens since 1982.² Zara is well acquainted with the requirements of the New York City Rent Stabilization Law (NYC Admin. Code §26-501 et seq., hereinafter “RSL”), both by virtue of its portfolio of over 1,000 units and given its involvement in an enforcement action commenced by the New York Attorney General (“AG”) in 2019 under New York State Div. of Hous. & Community Renewal v. Zara Realty Holding Corp., NY Sup. Ct. Index No. 420245/2019. The AG suit accuses Zara of flouting the RSL by, among other things, charging illegal broker fees to affiliated entities to extract “key money,” imposing unlawful vacancy and late fees, and improperly charging tenants for copies of keys (id. at NYSCEF 1, Complaint 4).³ In the present matter, the conduct subject to potential Rule 130 sanctions involves the maintenance of meritless nonpayment proceedings against rent-stabilized tenants residing at the premises. The respondents-tenants often owed no rent and were merely exercising their right to deduct $50 per month following the issuance of a permanent rent reduction order (“RRO”) by the Division of Housing and Community Renewal (“DHCR”) as authorized by RSL §26-514. The RRO, entered under Docket Number JP110005OD on September 8, 2022, was based on DHCR’s determination that Petitioner reduced space in the building’s lobby to relocate the mailroom, and found that “in order to compensate the tenants for such decrease in service, the tenants’ rent shall be permanently reduced by $50.00 per month effective the first of the month following the issue date of this order” (i.e. October 1, 2022) (NYSCEF 9). Zara appealed the RRO via an administrative process called a Petition for Administrative Review (“PAR”) under Docket Number KV110008RO, which was recently denied by the DHCR Deputy Commissioner on April 5, 2024.⁴ According to DHCR’s rules as promulgated in the Rent Stabilization Code, the filing of the PAR operated to stay the collection of retroactive overcharge penalties but in no way stayed the prospective collection of rents during the appeal (see 9 NYCRRR (“Rent Stabilization Code”) §2529.12).⁵ Petitioner has cited the relevant DHCR regulations in this proceeding and prior cases (see, e.g., NYSCEF 32 at 5) and therefore knew, or certainly should have known, that it could not sue tenants for the $50 covered by the RRO after October 1, 2022, during the pendency of the PAR. Yet, in clear disregard of the law, Petitioner commenced a raft of nonpayment proceedings starting in March 2023 that did not disclose or give effect to the DHCR order, in some cases suing tenants for as little as $150 for “arrears,” that were entirely subsumed by the RRO.⁶ Petitioner continued to maintain these proceedings and charge tenants the $50 per month even after this court implored Petitioner and its counsel to stop, first orally during court appearances, and then by written order under threat of sanctions. Even today, after assuring this court in an affidavit by its principal Rajesh Subraj that it would cease this practice, it continues to litigate some of these cases without legal basis. The Court’s Initial Warning to Petitioner — 57 Elmhurst LLC v. Beatriz Castillo The first time this court learned of Petitioner’s failure to abide by the terms of the RRO was in the nonpayment proceeding 57 Elmhurst LLC v. Beatriz Castillo, LT-303770-23/QU. That petition, verified by Rajesh Subraj and filed by Zara’s long-time attorney Curtis Harger on March 2, 2023, sought $200 in rent based on an alleged default of $50 per month from October 2022 through January 2023, against a tenant who, per Zara, had resided at the premises since 1999 (see LT-303770-23/QU at NYSCEF 1).⁷ In fact, all of these “arrears” were covered by the RRO, and the proceeding was frivolous. Making matters worse, Petitioner did not plead the existence of the RRO or why it believed it was exempt from the consequences of DHCR’s order, a material omission of the ultimate facts in violation of RPAPL 741 (see Jamaica Seven v. Villa, 67 Misc.3d 138[A] [App Term, 2d Dept, 2d, 11th &13th Jud Dists 2020] [involving another Zara-owned building where the petition failed to disclose critical information to the court that warranted dismissal]). After the tenant in Castillo did not answer following affix and mail service, Petitioner sought a default judgment on March 31, 2023 (see LT-303770-23/QU at NYSCEF 4). In the affidavit of merit, signed by an employee named Amaranth Kuppannan and notarized by Daniel De Castro, there is again no mention of the RRO — it appears Zara was prepared to evict a long-term rent-stabilized tenant for $200 she did not owe on default based on materially false representations. On July 18, 2023, before a default judgment was entered, Ms. Castillo filed a pro se order to show cause seeking to vacate her default, stating that was she did not believe she needed to come to court because she owed no rent, alleging the arrears were fully covered by the RRO, and attaching the relevant DHCR order (id. at NYSCEF 7). The court heard argument in Castillo on September 14, 2023, at which time the Legal Aid Society (“LAS”) appeared for the respondent. During argument, the court inquired of Petitioner’s counsel Maria Tibas of the firm Schnitzer and Tibas, acting as of counsel for Green & Cohen PC (“Green & Cohen”) the incoming counsel for the deceased attorney of record Curtis Harger, why Zara would file what appeared to be a meritless case. After conferring with someone at Zara by phone, in all likelihood Zara’s employee Daniel De Castro,⁸ Ms. Tibas advised the court that Petitioner felt it was entitled to proceed, notwithstanding the unequivocal DHCR order for the $50 per month, because Ms. Castillo’s rent is frozen through the Senior Citizen Rental Increase Exemption (“SCRIE”) program. SCRIE freezes the legal rent for eligible low-income tenants who are at least 62 years old by covering any future lawful increases through a tax abatement administered by the Department of Finance (“DOF”) (see RSL §26-509). According to Ms. Tibas, Zara is of the opinion that any reduction in the legal rent for a tenant with SCRIE benefits following the issuance of a permanent rent reduction should reduce the DOF tax abatement portion rather than the affected tenant’s rent share. It is unclear how Zara came to its position with respect to the interplay of SCRIE benefits and permanent rent reduction orders, as it is directly contradicted by the plan language of the RSL, which provides that: When a rent reduction order is issued by the state division of housing and community renewal, the amount of the reduction shall be subtracted from the rent payable by the tenant specified in a currently valid [SCRIE] rent exemption order issued pursuant to this subdivision. The landlord may not collect from the tenant a sum of rent exceeding the adjusted amount while the rent reduction order is in effect. RSL §26-509(b)(3)(iii) (emphasis added).⁹ The court advised Ms. Tibas that Zara’s unpled “theory” as to SCRIE was specious and suggested that Zara withdraw the proceeding immediately in lieu of the court’s issuing an adverse order.¹⁰ Ms. Tibas then called her client at Zara and informed the court that she had received permission to discontinue the matter. Before so ordering the stipulation of discontinuance, the court reiterated to Ms. Tibas on the record that she should inform Zara to cease the maintenance or commencement of similar proceedings for arrears covered by the RRO, including for tenants covered by SCRIE.¹¹ Relevant Background in the Current Proceeding Petitioner did not heed the court’s advice in Castillo. Instead, eleven days later, on September 25, 2023, it took a default judgment against Luz Elena Morales, the Respondent and tenant of record in the subject proceeding, who like Ms. Castillo owed no rent and was simply deducting $50 per month as authorized by the RRO. 57 Elmhurst LLC v. Morales, LT-310271-23/QU, was filed by the attorney Autrey Johnson in June 2023. The Petition sought $248.80 for alleged arrears accruing over five months from December 2022 to April 2023, essentially $50 per month, all of which it is now conceded by Zara’s counsel was covered by the DHCR order. Ms. Morales, who according to the Petition has resided in the premises since 2008, interposed a pro se answer on July 20, 2023, claiming that all rent had been paid (see NYSCEF 4). The proceeding was calendared for September 25, 2023, on a holiday during which the undersigned judge was absent. Respondent, under the impression that her newly retained counsel LAS would be appearing for her, did not appear, nor did LAS due to an apparent scheduling error. As a result, Petitioner obtained a default judgment for the $248.80 sought in the Petition, so ordered by the Honorable Judge Kitson on September 25, 2023 (see NYSCEF 5), who, covering for the part for the undersigned judge, was never made aware of the RRO, or that Respondent owed nothing. Three days after the default judgment was entered, Respondent, now formally represented by LAS, moved by order to show cause to vacate the default, dismiss the proceeding, and for legal fees for frivolous conduct pursuant to Rule 130 based on Petitioner’s improper commencement of this proceeding (see NYSCEF 6). In the motion, counsel for Respondent claimed law office failure as a reasonable excuse for the default, and for a meritorious defense attached a copy of the DHCR $50 rent reduction order, which counsel alleged, albeit without a client affidavit in support, entirely encompassed the arrears sought in the Petition (see NYSCEF 9). In signing LAS’s order to show cause on September 29, 2023, the court added its own interim order to the cover page, providing as follows: Petitioner is ordered to IMMEDIATELY review all current and future nonpayment proceedings to ensure they are complying with the pending DHCR rent reduction orders at this building. If the court discovers any further instances of Petitioner disregarding DHCR rent reduction orders, Petitioner will be subject to sanctions for frivolous conduct. See NYSCEF 11.¹² The court heard argument on Respondent’s motion on October 16, 2023, at which time the parties stipulated to vacatur of the default judgment and adjourned the matter to November 30, 2023, for argument on the remaining branches of the motion. What followed were a series of adjournments, during which the court repeatedly encouraged Petitioner and its counsel to take seriously its order to comply with the RRO at the premises and to stop wasting the court’s time with frivolous filings. At one point on October 17, 2023, the court advised Petitioner’s counsel that if it submitted an affidavit from a Zara principal committing to complying with the terms of the RRO, the court would be inclined to deny the motion for sanctions and let the matter rest. Such affidavit was not initially forthcoming, however by order to show cause dated December 6, 2023, Petitioner through its principal Rajesh Subraj moved to discharge its counsel Autrey Johnson, stating that it had provided the “letter” requested by the court to him, but that Mr. Johnson had failed to file it. The motion attached a copy of the letter, dated November 30, 2023, signed by Mr. Subraj, which stated as follows: I had given authority to my attorneys to discontinue this case without prejudice the last time the case was on. In addition, pending an order of determination of the Owner/Petitioner’s PAR under docket #KV11008RO, underlying docket #: JP110005OD, the management office will not pursue an action for the $50.00 rent owing by the tenants. NYSCEF 21-23. Before this motion was heard, Petitioner submitted a substitution of counsel dated December 14, 2024, whereby the law firm Green & Cohen took over as counsel for Mr. Johnson, and now appears to be Zara’s primary counsel on all L&T matters in Queens housing court.¹³ Separately on December 6, 2023, the court was presented a pro se stipulation for allocution in 57 Elmhurst LLC v. Filpo, LT-312012-23/QU, another nonpayment proceeding at the premises in which the tenant was agreeing to pay $5,116 in arrears. In conducting a thorough allocution of the stipulation as required by RPAPL 746, which directs the court to, inter alia, ensure that “that the unrepresented litigant’s claims or defenses are adequately addressed in the stipulation,” (see RPAPL 746[2][c][v]), the court asked the respondent if Zara had credited her with the RRO. After Ms. Filpo replied that she was uncertain, the court inquired of Petitioner’s counsel, Michael Schnitzer of Schnitzer & Tibas, of counsel that day to Green & Cohen. Mr. Schnitzer called someone at Zara and then stated that the stipulation would need to be revised to afford the respondent a credit of $750 to account for the RRO. The court, at this point deeply perturbed by Zara’s continued defiance of its orders and directives, reiterated to Mr. Schnitzer on the record that he should advise Zara to immediately stop disregarding the RRO, and that there would be serious consequences for continued noncompliance. Meanwhile, at a court appearance on December 20, 2023, following the substitution of counsel from Autrey Johnson to Green & Cohen, the court urged the parties to resolve the matter with a stipulation that included a more detailed commitment by Zara to take seriously the RRO. The court suggested that an affidavit from Mr. Subraj, rather than a mere letter, would provide the court with more confidence that Zara was prepared to finally take this matter seriously in considering whether to impose sanctions. The matter was adjourned to February 6, 2024, for further briefing and argument. Prior to the hearing date, on its own motion the court issued an order dated December 21, 2023, directing Petitioner to show cause on February 6, 2024: [W]hy it should not be sanctioned for frivolous conduct in disregarding the court’s order dated September 29, 2023 (NYSCEF 11), directing Petitioner to immediately ensure that it complied with the building-wide $50 per month permanent rent reduction order issued by the DHCR under Docker Number JP 110005 OD in all pending and future proceedings before the court by subsequently presenting a stipulation for allocution in LT312012/23-QU on December 6, 2023, that improperly sought arrears subject to the DHCR order, and which was only modified upon the court’s inquiry. See NYSCEF 26. LAS submitted supplemental papers with respect to Respondent’s motion to dismiss and for sanctions on February 6, 2024, noting that notwithstanding the letter from Mr. Subraj, Zara had failed to withdraw or even acknowledge to the court the lack of merit in several pending cases including LT-303801-23/QU, LT-303792-23/QU, LT-310268-23/QU (see NYSCEF 30). At a court appearance on February 6, 2024, the parties adjourned the matter for argument on February 29, 2024, in order to attempt settlement. In adjourning the matter, the court reminded Petitioner that it had before it not only LAS’s motion, but the court’s own motion and again recommended it file an affidavit from Mr. Subraj that more unequivocally committed to complying with the DHCR order than his November 30, 2023, letter to the court. An affidavit from Mr. Subraj was ultimately submitted on February 21, 2024. The affidavit, like the prior letter, avers that Mr. Subraj has authorized discontinuance of the subject proceeding without prejudice pending the result of the PAR. Mr. Subraj further affirms that Zara will not “pursue any new action for the $50.00 rent owing by the tenants,” albeit without clearly addressing Zara’s position with respect to other pending cases that fail to credit the RRO (NYSCEF 32). An attorney affirmation from Zara’s attorney Michael Cohen dated February 20, 2024, meanwhile concedes that the subject proceeding was wrongly filed but suggests that sanctions are not warranted because the rent sought was a good faith albeit mistaken approximation of what was due (see NYSCEF 31 at