Council of New York Cooperatives & Condominiums
Current Articles
Legal Issues
Impact of J-51 Case, Electronic Records

Published: Autumn 2009

Impact of Stuyvesant Town Decision
on Cooperatives and Condominiums

CNYC thanks its Chairman, Stuart M. Saft for the following article. Mr. Saft is a partner in the law firm of Dewey & LeBoeuf.

On October 22, 2009, the Court of Appeals, rendered a decision in Roberts v. Tishman Speyer Properties, L.P. relating to Stuyvesant Town (“ST”) and Peter Cooper Village (“PCV”). Although ST/PCV are rental buildings, the decision could have potential negative effect on cooperatives and condominiums.

ST/PCV became rent stabilized in 1974 and in 1992 the owners of ST/PCV obtained J-51 Tax abatements from New York City for work that was done to the property. In 1993 the Rent Regulation Reform Act (RRRA) was enacted, which provided for the decontrol of apartments if certain stringent requirements were met. It included the provision that, if the apartments were rent stabilized by virtue of receiving J-51 benefits, they could not be “luxury” decontrolled while the J-51 benefits were being received.

In 1996, the former owners of ST/PCV obtained an opinion from DHCR, the state agency monitoring the housing law, indicating that because of ST/PCV’s receipt of J-51 benefits was not the sole reason that ST/PCV was rent stabilized, then ST/PCV could benefit from luxury decontrol and raise the rents to market. DHCR’s position was that because ST/PCV was not rent stabilized solely as a result of getting J-51 benefits, then the fact that it received the J-51 benefit did not preclude it from benefiting from luxury decontrol.

In early 2007, tenants at ST/PCV, whose rents had been increased to market due to luxury decontrol, sued the owners of ST/PCV for rent overcharges, claiming that no landlord benefiting from J-51 could obtain the benefit of luxury decontrol until such time as the landlord ceased to benefit from J-51. The decision in their favor, rendered on October 22, 2009 in the State’s highest court determined that a landlord receiving tax abatements under the J-51 law cannot utilize luxury decontrol to raise rents.

What has not been decided and will be the subject of further litigation are the answers to the following questions: 1) do the apartments that were destabilized at ST/PCV revert back to rent stabilization? 2) do the tenants have their rents reduced to where they would have been if the landlord never took them out of rent stabilization? 3) what is the effect of the landlord having relied on an opinion from DHCR? 4) what rights and damages do the tenants have who moved out of ST/PCV because their rents went above $2,000? 5) what can and what will the Legislature do to deal with this situation? and, 6) if the current owners of ST/PCV file for bankruptcy, what is the effect of the decision?

In addition, the issue that must also be considered is the likely effect of the Court of Appeal’s decision on cooperatives and condominiums. We do know that any cooperative or condominium that does not receive J-51 benefits or have rent controlled or rent stabilized tenants living in the building will not be affected by the decision. Accordingly, buildings that were built as co-ops or condos and those with no unsold shares or unsold units are not affected.
Even though Section 2520.11(l) of the Rent Stabilization Code (“RSC”) provides that co-ops and condominiums are not subject to the rent laws, there is a possibility that a co-op/condo that owns unsold apartments and obtained the benefit of the J-51 law could l be subject to a similar rent overcharge claims by the tenants whose rents went to market.

Another potential problem involves boards of buildings with unsold shares held by a sponsor or an investor. The question is whether, if the board obtained J-51 benefits and the tenants in the unsold apartments received a rent roll-back or the owner of those apartments had to pay rent over charges, would the sponsor or investor have a claim against the board for the higher rent the apartment owner lost or for the cost of the overcharge? The answer will depend on the precise terms of the Offering Plan and the Condo By-Laws or Co-op Proprietary Lease. If either documents makes the co-op or condo responsible where the board takes an action that has an adverse impact on an owner with tenants, then the co-op or condo may have to reimburse the owner for such cost. Theoretically, a holder of unsold shares or units could also make the claim for reimbursement even if the By-Laws or Proprietary Lease are silent, but such a claim would be more difficult to establish.

The most frightening scenario would be a situation where a sponsor obtained J-51 benefits and then used luxury decontrol to vacate apartments, which were then sold. The problem would occur if the courts rule that any tenant who lost his or her apartment because the landlord improperly raised the tenant’s rent would have a right to return to the apartment or the building. Such an event is unlikely, but is possible.

The ST/PCV decision leaves many questions unanswered. We will be following this situation closely as matters proceed in order to make certain that cooperatives and condominiums are not adversely affected by the decision or the litigation and, possibly, legislation, that will follow. u

rules regarding
electronic data

CNYC thanks attorney Randall A. Pentiuk, Esq. for the following guest article alerting us to the importance of proper treatment of electronic communications. This article was originally written for the summer newsletter of the Midwest Association of Housing Cooperatives and was subsequently published in the September Cooperative Housing Bulletin of the National Association of Housing Cooperatives. Mr Pentiuk practices law in the several Midwestern states and serves on the NAHC Board of Directors.

Perhaps you recall the radio commercial that asks, “Do you know where your children are tonight?” Well now something else has come along that takes that question to the next level for cooperative housing and management agents. The question now being asked is, “Do you know where your email and electronic data are today?” If you don’t, you could be in for a rough legal time when litigation comes knocking on your door.

What brought about this concern for e-data anyway and why should you be concerned?

Recent changes to many state and the federal court rules make clear that discovery of electronically stored information stands on equal footing with discovery of paper documents. The principal focus of these new rules is to preserve electronically discoverable records, documents and email. Courts have characterized these records as electronically stored information (ESI). Thus, databases, Web content, voice messaging, e-mails and even spreadsheets are open to discovery in their electronic form. The upshot of the new Federal Rules of Civil Procedure is that ESI is discoverable; litigants must preserve and produce ESI; lawyers must understand how to request, protect, review and produce ESI; and the courts can address abuses to electronic discovery.

Now you may be saying, “That’s all well and good, but we aren’t in litigation and if we were, our lawyers would handle that issue.” Well, maybe. You see, the new rules put the burden on each party to preserve ESI, even before a lawsuit is filed. A major part of the new rules requires that when a cooperative, its board or management agent, for instance, “knows or should have known” that litigation is either likely or imminent, then it has a duty to place its employees, agents and related third parties on notice to preserve possible evidence relating to the nature or scope of the likely litigation.

This notice also extends to persons who have custody and control of potentially relevant evidence. For example, if a member or employee has a dispute and says, “I am going to get a lawyer” or “I am going to sue you,” then the cooperative is probably going to be considered on notice that litigation is likely. That knowledge triggers an ongoing duty to recognize and implement a search process for documents or evidence relevant to the issues to be litigated. A log of the search for those documents must also be made. Where did you look? What did you look for? What did you find? This log is especially useful if litigation actually commences.

The search must also be authentic, meaning it must actually be carried out by someone who can later testify that it was conducted. You must also preserve those documents, even if they otherwise would have been destroyed in the normal course of your business operation.

Thus, once you are on notice that litigation is likely, the new rules require three things.

First, they require a litigation hold on the elimination or discarding of relevant documents.

Second, they require an authentic search of the records for such documents.

Third, they require production of documents in their original format.

Destruction of email is perhaps the biggest problem in complying. Make sure you have documentation directing persons with relevant email to preserve same. The duty to preserve usually falls on the sender.

For example, in typical employment-related litigation, the employer would have a duty to preserve the employees’ files, and personnel and/or medical files, and request its IT department or custodians or other employees to preserve emails, the employees’ computer and/or other electronically stored information that may be relevant to the scope of the employment dispute.

We encourage you to contact your attorney to get more information concerning the new rules and how they may specifically affect the way you preserve and eliminate documents.



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