Key Points

  • Under Rent Stabilization Code § 2520.6(i), a managing agent falls within the definition of an owner and is not shielded from liability if it participates in a fraudulent deregulation scheme.
  • The fraud and rent-overcharge claims against managing agent Two Trees survived because the defendants did not establish, prima facie, that Two Trees did not participate in the alleged scheme.
  • The General Business Law § 349 claim survived against 125 Court Street and Two Trees based on alleged false rent registrations, misleading leases, and an HPD letter indicating 256 units were improperly registered as exempt in 2011.
  • All claims against David C. Walentas and Jed Walentas were dismissed because the complaint did not allege how they abused the corporate form to wrong the plaintiff.
  • The punitive damages claim was dismissed against all four appellants because punitive damages cannot be a separate cause of action and the alleged conduct did not reach the required level of moral culpability.

A New York appeals court on Nov. 12 allowed a former rent-stabilized tenant to keep pressing fraud and rent-overcharge claims against Two Trees Management Co., the managing agent of her Brooklyn building, but threw out every claim against David C. Walentas and Jed Walentas, whom she had sued personally.

The Appellate Division, Second Department, held in an unsigned decision and order that the state's Rent Stabilization Code counts a managing agent as an owner, so an agent that took part in a scheme to deregulate apartments can be held liable. All four justices on the panel concurred: Justice Cheryl E. Chambers, who presided, and Justices Linda Christopher, Helen Voutsinas and Phillip Hom. The court also kept alive the tenant's consumer-deception claim against Two Trees and the building's owner, 125 Court Street LLC. It dismissed her separate claim for punitive damages.

The ruling means a property manager, not only the company that holds title, can be kept in a lawsuit over claims that apartments were improperly taken out of rent stabilization. The Walentases are out of the case because the tenant did not allege facts that would justify piercing the corporate veil.

Yolande I. Nicholson leased a rent-stabilized apartment in the building in 2005, according to the decision. She was evicted in July 2014 and sued that October. Her suit named, among others, 125 Court Street, Two Trees and the Walentases, whom the decision describes as the alleged owners or managing members of both companies.

The complaint asserted nine causes of action. The first seven sought damages for rent overcharges and fraud. The eighth invoked General Business Law § 349, and the ninth sought punitive damages.

In 2024 the defendants moved for summary judgment on the first seven claims against Two Trees and the Walentases and on the last two claims against all four appellants. Wavny Toussaint of Supreme Court, Kings County, denied those parts of the motion in an order dated Aug. 15, 2024, and the defendants appealed.

The panel first found that the trial court had erred in setting aside an affidavit from Richard Shill that the defendants submitted. Shill's second affidavit "properly responded to arguments raised in the plaintiff's opposition papers and laid a foundation for the admission of the documents submitted with his first affidavit," the court wrote, and so it "should not have been disregarded in its entirety."

Even so, the fraud and overcharge claims against Two Trees survived. Citing Section 2520.6(i) of the Rent Stabilization Code, the panel wrote that "an agent is included in the definition of an owner, and a managing agent who participates in a fraudulent scheme is not shielded from liability."

The complaint, the court held, "sufficiently alleged that Two Trees participated in a fraudulent scheme to deregulate apartments within the subject building and to overcharge tenants." The defendants' papers "failed to establish, prima facie, that Two Trees did not participate in the alleged fraudulent scheme," the panel added.

The Section 349 claim also survived against 125 Court Street and Two Trees. Nicholson alleged that the defendants filed false rental registrations for the building's rent-stabilized units and presented misleading leases to the tenants of those units. Her complaint attached a letter from the Department of Housing Preservation and Development indicating that in 2011, 256 units in the building were improperly registered with the Division of Housing and Community Renewal as "exempt" from rent stabilization.

In opposing the motion, Nicholson submitted additional documents from the housing division that the court said substantiated her allegations. Taken together, the panel held, "the complaint, as supplemented by the plaintiff's additional submissions, sufficiently pleaded deceptive conduct that was consumer-oriented, resulting in damages."

The Walentases fared differently. To pierce the corporate veil, the court wrote, a plaintiff must allege that the person targeted exercised complete domination over the company in the transaction at issue and used that domination to abuse the corporate form to wrong the plaintiff.

Assuming without deciding that Nicholson had alleged domination, the court found that the complaint "is devoid of any allegations as to how the Walentas defendants abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the plaintiff." It granted summary judgment dismissing the first eight causes of action against the two men.

The punitive damages claim fell against all four defendants. "A demand for punitive damages may not constitute a separate cause of action for pleading purposes," the panel wrote. Even if the claim were treated as tied to the fraud counts, the court held, Nicholson had not alleged conduct that "rose to the high level of moral culpability or that constituted willful or wanton negligence or recklessness" needed to support such an award.

Lawyers for the defendants included Adam Lindenbaum of Kane Kessler, P.C. Nicholson was represented by Matthew L. Berman of Valli Kane & Vagnini LLP.

The appellate court modified the trial court's August 2024 order and otherwise affirmed it, so the case continues in Supreme Court, Kings County. Pending there are Nicholson's fraud and overcharge claims against Two Trees and her Section 349 claim against Two Trees and 125 Court Street; her first seven claims against 125 Court Street were not part of the appeal.