New York State Law Digest: July 2024

News Center
New York State Law Digest: July 2024

CASE LAW DEVELOPMENTS

Agreement Waiving Benefit of Rent Stabilization Laws Is Void as Against Public Policy Regardless of Tenant’s Status

Stipulation Here Was Void Because It Purported to Waive the Tenant’s Right to File Fair Market Rent Appeal

In Liggett v. Lew Realty LLC, 2024 N.Y. Slip Op. 03378 (June 20, 2024), the Court of Appeals ruled that an agreement waiving a benefit of the Rent Stabilization Laws (RSL) is void as against public policy regardless of the tenant’s status. Thus, the Court held that the stipulation here purporting to waive the tenant’s right to file a Fair Market Rent Appeal (FMRA) was void and did not provide a basis to deregulate the relevant apartment.

The defendant owns and operates a Manhattan apartment building where plaintiff resided since October 2020 under a market lease. When the defendant attempted to raise the rent in 2021, the plaintiff brought this action, seeking a declaration that the apartment was rent-stabilized and was entitled to a rent-stabilized lease, overcharges, and attorneys’ fees.

The plaintiff’s claim actually related to events dating back many years ago, culminating in the alleged illegal deregulation of the apartment. In 2000, the defendant and an Edward McKinney entered into a so-ordered Stipulation following a holdover proceeding against McKinney, after Edward Brown, the former rent-controlled tenant of the premises, died. McKinney claimed to be Brown’s successor. The plaintiff alleges that the Stipulation circumvented the initial rent registration procedures for decontrolling the apartment. The Stipulation provided that the apartment was rent-stabilized, rather than rent-controlled; the “initial legal regulated rent” for the apartment would be $1,650 per month, but McKinney would pay a lower preferential rent of $650 per month, plus allowable renewal increases, as long as he was the tenant; and, significantly, that he would not challenge the rent (thereby waiving his right to file a FMRA). The defendant filed the signed lease with DHCR, registered $1,650 as the “legal regulated rent” and $650 as the “actual rent paid,” and mailed McKinney notice of his right to file a FMRA as the statute requires, even though, as noted above, McKinney had already apparently waived that right.

The defendant renovated the apartment after McKinney vacated it; applied increases to the $1,650 figure agreed to in the Stipulation and RSL-authorized increases connected to the vacancy and renovation; calculated that the legal rent would exceed $2,000 and determined that the apartment was subject to luxury decontrol; and reported to DHCR that the apartment was deregulated. The next tenant rented the apartment at an open market rate of $1,650 per month, and the apartment remained on the open market since.

The plaintiff here claims that the Stipulation was void as against public policy, the deregulation was invalid and thus the apartment remained rent stabilized. The trial court denied defendant’s motion to dismiss, but the Appellate Division reversed and dismissed the complaint. It opined that, among other things, the prohibition against waiver of the RSL did not apply here, because McKinney was not an established tenant when he signed the Stipulation.

The Court of Appeals reversed. The Court noted that, under New York’s Administrative Code, where an apartment is converted from rent control to rent stabilization, the initial regulated rent “shall be the rent agreed to by the owner and the tenant and reserved in a lease or provided for in a rental agreement subject to the provisions of this Code, and subject to a tenant’s right to a Fair Market Rent Appeal to adjust such rent pursuant to section 2522.3 of this Title”; the first tenant of a rent-stabilized apartment has the right to file a FMRA, as long as the tenant received mailed notice of this right; and an agreement to waive a statutory protection is void.

The Court stressed that the right to file the FMRA protects not just the tenant but, as with all of the RSL’s protections, is also designed

“to ensure the viability of the rent regulation system which protects tenancies in general, provides predictability to landlords, and significantly enhances the social, economic and demographic stability of New York City.” The availability of an FMRA provides a crucial check on the initial rent for a rent stabilized apartment. Because that amount serves as the baseline against which subsequent rent increases are calculated, it can affect the apartment’s subsequent status and in turn, the overall stock of rent stabilized apartments in New York City (citation omitted).

Id. at *6–7.

The Court held that the provision in the Stipulation that McKinney agreed “not to challenge the rent” constituted a waiver of his right to file a FMRA and, hence, the Stipulation was void in its entirety as a matter of law. As a result, the defendant’s “registration statement based on the Stipulation is as well, and therefore ‘neither party is entitled to rely on it’ and it cannot serve as the basis for deregulation.” Id. at *7.

The Court insisted that “McKinney’s status vis-à-vis the apartment has no bearing on whether the Stipulation was void. Rather, the Stipulation is void because it purports to waive a
benefit of the rent laws.” Id. at *8. The Court dispensed with any argument that there was a statute of limitations bar here because a bar “‘does not make an agreement that was void at its inception valid by the mere passage of time’ (citations omitted).” Id. at *9. Notwithstanding that the Court held that the Appellate Division erred in dismissing the complaint, it noted that on remand the defendant

may rely on other reasons, apart from the Stipulation, to establish that the apartment was not rent stabilized when Liggett took tenancy, such as by establishing the fair rent of the apartment when it first entered rent stabilization in 2000 and applying subsequent allowable increases pursuant to the rent history (citations omitted).

Id. at *9–10.

Narrow Majority of Court Finds Language in Amendment to Main Agreement To Be Unambiguous, Resulting in the Dismissal of the Action

Dissent Believes Language Was Subject to More Than One Interpretation and Thus Ambiguous

MAK Tech. Holdings Inc. v. Anyvision Interactive Tech. Ltd., 2024 N.Y. Slip. Op. 03376 (June 20, 2024), addresses ambiguity in contracts. The basic rules are that a court in the first instance is to determine whether a contract is ambiguous; a finding of ambiguity is appropriate where the language is “written so imperfectly that it is susceptible to more than one reasonable interpretation”; if a contract provision or term is unambiguous, reference to extrinsic evidence is not permitted; and if ambiguous, extrinsic evidence may be considered.

Here, a slim majority of the Court found the relevant language to be unambiguous despite “minor syntactic and spelling errors in the preamble of an amendment to the contract.” What
divided this court was particularly sloppy drafting. The result was that the plaintiff was unable to recover a $1.25 million fee.

The defendant is an Israeli company selling facial-recognition software to businesses and governments. In 2017, it entered into a referral agreement in which the plaintiff would introduce potential customers to the defendant in exchange for referral fees. The written Referral Agreement contained a defined “Effective Date” of November 23, 2017, and provided that “[t]his Agreement
shall commence on the Effective Date and shall remain in force for a period of three (3) years unless earlier terminated . . . (‘Term’). The Term may be extended by the written agreement of both parties.”

The problems in this case arose out of subsequent amendments to the agreement impacting compensation issues. Each of the amendments contained “a preambulatory clause that no one would dispute is written in less-than-perfect English: ‘Each of the undersigned hereby agrees that the with affect as of the date hereof [sic] and notwithstanding anything to the contrary in the [Referral] Agreement, the Agreement shall be amended as follows.’” Id. at *3. The disputed language more particularly is: “the with affect as of the date hereof [sic].”

After the three-year term of the original agreement, plaintiff alleges that an investment was made for which the plaintiff was entitled to a $1.25 million fee under the second amendment.
The plaintiff brought this action seeking recovery of the fee. The defendant moved to dismiss on the ground that the transaction occurred eight months after the Term of the Referral Agreement expired in November 2020. The trial court denied the motion and a narrowly divided Appellate Division affirmed. A narrow majority of the Court of Appeals reversed. The second amendment provided that the plaintiff would be entitled to a fee, only if that transaction was consummated “during the Term.” Since the word “Term” was not defined in that amendment, “it must—in accordance with the parties’ express directive— be given the meaning specifically ascribed to it in the Referral Agreement, which is a three-year period commencing on the Effective Date of November 23, 2017, and expiring in November 2020.” Id. at *5. The majority felt that “[t]he muddled phrase ‘the with affect as of the date hereof’” in the amendment did not create a factual issue as to the length of the Term, because

that language is susceptible to only one reasonable interpretation. As defendant contends, and both the majority and dissent at the Appellate Division agreed, “the with affect as of the date hereof” can easily be understood to mean “with effect as of the date hereof.” To reach that interpretation, one need only set aside a plainly extraneous article, the word “the,” and correct a common, one-letter spelling error (“effect” versus “affect”). Employing this common-sense reading, section 2 has no impact on the length of the Term. The basic and essential function of the provision is to clarify when Exhibit B became effective, not alter the agreed-upon Term.

Id. at *5–6.

The majority rejected the dissent’s argument that an ambiguity existed because “the errors could be corrected to state ‘with the Effective Date hereof,’” thereby, in essence, restarting the three year period from the date of the amendment:

We disagree that the problematic language is reasonably susceptible to such an interpretation. As written, section 2 neither references the Effective Date nor purports to amend the Term. There are no extraneous capital letters in the clause or anything else that reasonably suggests an intent to amend the Effective Date of the original agreement rather than simply to use the word “effect” or “affect.” Nor does the defined phrase fit grammatically into the section unless additional words are added and subtracted on both sides. Courts must give meaning to every word whenever possible (citations omitted).

Id. at *6–7.

The Court stated that it was inconceivable that an essential issue like extending the term of the agreement would be left to an “oblique phrase” in preambulatory language, rather than clearly set forth in the portion of the amendment where other substantive changes were made. Moreover,

[i]t is even less conceivable, given the increased importance of section 2 under this reading, that the typographical errors and glaring omission of the critical phrase “Effective Date” would have gone unnoticed not once, but twice, in separate amendments executed seven months apart. The parties’ longstanding failure to identify the error-infected language strongly suggests that neither party understood section 2 to have any impact on the duration of defendant’s financial obligations.

Id. at *9.

The dissent did not contest that the majority’s interpretation was reasonable. However, it maintained that “there are other possible, and reasonable, ways to resolve the errors.” Id. at *13. Thus, because there were at least two reasonable interpretations of the subject language, rendering it ambiguous, the defendant’s motion should be denied, to permit discovery to proceed to determine the parties’ intent.

In support of its conclusion, the dissent remarked, among other things, that “several reasonable jurists have disagreed about whether there is only one way to correct the errors.” While disagreement over the meaning of the terms of a contract does not necessarily render the contract ambiguous, it is ironic that the last word in this case – the majority’s conclusion that there was no ambiguity – was shared by only six of the 13 judges who had the occasion to analyze the language and to address the issue.

Court Rejects Argument That Education Law Requires Schools District to Provide Transportation to Nonpublic School Students on Days That Public Schools Are Closed

Court’s Historical Analysis Concludes Relevant Statute Did Not Mean to Impose Such an Obligation on the School District

In Matter of United Jewish Community of Blooming Grove, Inc. v. Washingtonville Cent. Sch. Dist., 2024 N.Y. Slip. Op. 03377 (June 20, 2024), parents with children in nonpublic schools sought to compel the local school district, the Washingtonville Central School District located outside New York City (the District), to provide students with school bus transportation to their private schools on days when the public schools were closed.

The Court of Appeals unanimously held that Education Law § 3635(1)(a) did not require the District to provide such transportation. The District provides transportation to resident students enrolled in nonpublic schools, but only on days when the public schools are in session. This is consistent with the guidance published by the State Education Department. The petitioners here
were seeking transportation on some 20 days when the public schools were closed.

The relevant statute is Education Law § 3635(1)(a), which provides that:

Sufficient transportation facilities (including the operation and maintenance of motor vehicles) shall be provided by the school district for all the children residing within the school district to and from the school they legally attend, who are in need of such transportation because of the remoteness of the school to the child or for the promotion of the best interest of such children.

The issue surrounded the meaning of “sufficient” and whether “sufficient transportation” required the District to transport nonpublic students on days when their schools were open but
the public schools were closed. The Court’s interpretation rested on an historical analysis to ascertain the legislative intent of the phrase “sufficient transportation,” which the Court felt was ambiguous.

While New York had a long history of prohibiting public funding of private or parochial schools, a 1938 constitutional amendment provided the Legislature with the ability to provide transportation to nonpublic school students. The following year the Legislature passed the law referenced above requiring school districts to provide sufficient transportation to all students within the district. Many years later, in 1985, a proposed amendment provided that New York City was required to offer five alternative days of transportation to nonpublic school students (when public schools were closed) and non-NYC districts to offer two days. Ultimately, however, the two-day provision concerning the non- NYC districts was removed. Thus, “[t]he exclusion of the two-day transportation requirement from the enacted law demonstrates the Legislature’s intent not to require central school districts to transport nonpublic school students on days the public schools are closed.” Id. at *14.

The Court also focused on the school districts’ financial and administrative burdens if petitioners’ request was granted:

Here, petitioners request transportation on 20 days when public schools are closed. That request far exceeds the 1985 proposal that non-New York City districts provide a maximum of two alternative days—a far more modest proposal that was still criticized as overly burdensome. Nor can we introduce limitations unmoored from the text of the statute. Rather, those policy choices, with the accompanying financial consequences, must be left to the Legislature. As the law now stands, school districts outside New York City are not required to provide transportation on days that public schools are closed.

Id. at *16–17.

Second Department Provides Primer on Reasons for Not Permitting Sua Sponte Dismissals Absent Extraordinary Circumstances

Court Holds Trial Court Erred in Issuing Such a Dispositive Order With Respect to Motions Primarily Dealing With Discovery-Related Issues

In Wells Fargo Bank, N.A. v. Louis, 2024 N.Y. Slip Op. 02948 (2d Dep’t May 29, 2024), the Second Department gave a primer on issues relating to sua sponte dismissals by a court. It recognized that it was not dealing with a novel legal question. Nevertheless, it felt that the facts in the case presented the court with “an opportunity to emphasize to trial courts the due process importance of not directing the dismissal of a complaint absent notice and an opportunity to be heard, which has been occurring with unwarrantable frequency.” Id. at *1–2.

In this mortgage foreclosure, the plaintiff moved for summary judgment, to strike the answer, and for an order of reference. The defendant cross-moved to dismiss the complaint as time-barred and for summary judgment. In September 2019, the trial court denied the motion and cross-motion, concluding that triable issues of fact existed as to whether the action was timely commenced. These issues of fact included whether a certain letter supposedly sent to the defendant in 2016 had actually been sent and whether the letter de-accelerated the mortgage debt within the limitation period.

Subsequently, the defendant moved under CPLR 3126 for sanctions or under CPLR 3124 to compel plaintiff to produce certain discovery, for an extension of time to make dispositive motions once discovery was complete, and “for other and further relief.” The plaintiff cross-moved for discovery sanctions against the defendant, for an award of costs and attorneys’ fees for frivolous conduct under 22 N.Y.C.R.R. § 130-1.1, and “for other and further relief.” Another trial court judge denied both the motion and cross-motion, but sua sponte awarded the defendant summary judgment on the ground that the action was time-barred, “based upon the invalid and improper deceleration letter dated February 2, 2016, . . . which invalid and improper letter failed to decelerate the subject loan.” Id. at *4.

The Second Department stated outright that the order needed to be reversed but took the time to emphasize that, with limited exceptions, courts are not permitted to dismiss complaints sua sponte.

As the Appellate Division here noted, many times the Appellate Division, and particularly the Second Department, has enunciated the principle that trial court judges should not “take lightly” that “[a] court’s power to dismiss a complaint sua sponte is to be used sparingly, and only when extraordinary circumstances exist to warrant such a dismissal.” Moreover, those Appellate courts have “consistently and predictably reversed in almost every instance” where a trial court has issued a sua sponte dismissal or refused to vacate one. Nevertheless, sua sponte dismissals continue to be issued by trial courts with some regularity.

Underpinning the practice against sua sponte dismissals in the absence of extraordinary circumstances relates to the basic due process right that parties be provided with notice and an opportunity to be heard:

It is not the role of the court, within the moat of that bastion, to seize upon an issue not raised by any party in a motion and to unilaterally dismiss an action on the basis of that discrete issue, without providing the party whose claim is dismissed so much as notice of the issue and an opportunity for all parties to be heard on it. The Court of Appeals has cautioned the judiciary that “[w]e are not in the business of blindsiding litigants, who expect us to decide [matters] on rationales advanced by the parties, not arguments their adversaries never made” (citation omitted).

Id. at *9.

The Second Department referenced that favorite add-on of practitioners in motions to provide a court with the ability to fashion relief not expressly requested: “for such other and further relief the court deems just and proper.” However, while that language can be relied upon by courts to render non-dispositive orders “on issues not specifically argued by parties but which fall within the family of relief contained in the notice of motion, or relief that is not unlike that which is actually sought and argued,” it does not justify a sua sponte dismissal, a dispositive order.

In this case, the motions concerned CPLR 3124 (motion to compel), CPLR 3126 (discovery sanctions), and 22 N.Y.C.R.R. § 130-1.1 (costs and attorneys’ fees for frivolous conduct). Since the issues raised by these motions were discovery-related, “[t]he court’s attention should not have extended to any dispositive issue, not raised or argued by either party, regarding the viability of the plaintiff’s 2016 letter purportedly de-accelerating the balance due on the note and the effect of that determination on the applicable statute of limitations (citations omitted).”

Id. at *12–13.

In addition, the Second Department found that

this action does not present an extraordinary circumstance as would warrant a sua sponte dismissal of the complaint. Far from it. The sufficiency of the plaintiff’s 2016 de-acceleration letter had been adjudicated in a prior motion made by the plaintiff seeking at that time, inter alia, summary judgment on the complaint and for an order of reference, and the defendant’s related cross-motion to dismiss the complaint insofar as asserted against him based upon the purported defects of the same de-acceleration letter.

Id. at *13–14.

The court rejected the argument that, under CPLR 5019(a), the trial court could “correct” the prior justice’s order that found issues of fact with respect to the validity of the 2016 de-acceleration letter. In fact, CPLR 5019(a) provides that a court can cure a mistake, defect, or irregularity but only where they do not affect “a substantial right of a party.” Thus, “CPLR 5019(a) applies to insubstantial errors in any of the papers or procedures in the action; it does not include changes affecting matters of substance.” New York Civil Practice: CPLR Weinstein, Korn & Miller ¶ 5019.03 (David L. Ferstendig, ed.).

Wishing each of you a peaceful and relaxing summer.
David