Realty Law Digest

, New York Law Journal


Scott E. Mollen
Scott E. Mollen

Second Circuit Affirmed District Court's Approval of Class Action Settlement—Overcharge and RICO Claims—General Business Law §349 Claim—Settlement Involved Maintenance of "Best Practices," Audit of Leases, Claims Process for Damages, Supervision by a Court Appointee, $25 Million Payment to Non-Profits for Tenant Assistance Services, $1.25 Million in Attorney Fees and $200,000 in Expenses

This appeal involved the issue of "when a class-action settlement requires subclassing of the plaintiff class to ensure adequacy of representation pursuant to Federal Rules of Civil Procedure [FRCP] 23(e) and (a)(4)." The district court had certified the plaintiff classes, which included "more than 20,000 current and former occupants" of New York City rent-regulated apartments. The settlement that had been approved by the district court "provides no damages relief for claims that tenants were overcharged rent by prior landlords, rather than by defendants, or for claims for rent overcharges that predate July 11, 2004" (excluded claims). The appellant objectors to the settlement, asserted that "the lack of separate representation for tenants with Excluded…Claims during settlement negotiations violated Rule 23 and constitutional due process…." The U.S. Court of Appeals for the Second Circuit (court) held that the settlement was "fair, reasonable, and adequate, as required by Rule 23(e)(2)," and affirmed.

The plaintiffs had alleged that the defendants had conspired to "fraudulently increase rents" in over 400 city buildings, in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) "and the New York Consumer Protection Act…, which prohibits '[d]eceptive acts or practices in the conduct of any business,' N.Y. Gen. Bus. Law §349(a)." The plaintiffs cited city rent regulations, violations of tenant succession laws, alleged misrepresentations of rent payment histories, and the filing of meritless eviction suits and/or other harassment of tenants. The defendants had allegedly sought to raise rents above legal levels and "drive tenants out of rent-regulated units," so that such units could be sold or rented at "higher, market-rate monthly rent."

The plaintiffs' proposed class included "[a]ll persons who, at any time from July 11, 2004 to the date of certification, leased an apartment in the City…owned…by the [defendants]." The district court certified "two classes: an injunctive-relief class comprising all current residents of rent-regulated apartments owned by [defendants], and a damages class comprising 'all persons who, at any time between July 11, 2004 and…[April 27, 2010], were tenants in rent-regulated apartments…directly or indirectly owned in whole or in part by' [defendants]."

The district court found that the proposed injunctive relief class met Rule 23(a)'s requirements as to "numerosity, commonality, representativeness, and adequacy of representation,—as well as Rule 23(b)(2)'s requirement that injunctive relief be appropriate to the class as a whole." Although the proposed damages class met Rule 23(a)'s requirements, it did not satisfy Rule 23(b)(3)'s requirement that "questions of law or fact common to the members of the class predominate, given the members' individualized issues relating to injury and causation." However, the district court had certified a class "that was limited to certain common liability issues that did satisfy Rule 23(b)(3)'s predominance and superiority requirements." Actions "may be brought or maintained as a class action with respect to particular issues."

Prior to the commencement of discovery on the merits, the parties had "extensive settlement negotiations under the supervision of a magistrate judge…." The parties were represented by prominent law firms and class counsel had been assisted by "an expert in New York landlord-tenant law…."

Pursuant to a settlement which had been approved by the magistrate judge, the defendants "agreed to maintain 'best practices,' enforced by a court-appointed claims administrator, with respect to: setting initial rents for new tenants and rent increases for existing tenants; eviction proceedings against tenants; repairs and tenant services; and staff training." The defendants were required "to undergo an audit of a random sample of its leases issued from 2008 to 2010 and, depending on the outcome of that audit," defendants could be required to "submit to a more extensive audit of all its leases from that period." The defendants also agreed to establish a claims administration process (CAP) "to pay damages for past rent overcharges as well as for 'harassment' claims." The CAP would be administered "by a court appointee."

Tenants with rent overcharge claims may recover their "actual damages or, if they can prove willfulness on the part of [the defendants], double damages." Tenants who assert harassment claims, "may recover the greater of a pre-set penalty ranging from $500 to $1500 or their actual damages." The "informal" claims process permits tenants to prove their claims "through a simple form and [tenants] are not required to adhere to traditional rules of evidence." The defendants also agreed to pay $2.5 million to community legal services and non-profit organizations for provision of tenant assistance with respect to the CAP, class counsel fees of $1.25 million and $200,000 in expenses.

The settlement excluded certain claims, i.e., it "provided for damages…only for rents set by [the defendants] after July 11, 2004" and "under the [CAP], it would be 'a defense to any allegation of overcharge' that [the defendants had] 'relied on a rent registered by a prior owner with the [NYS Div. of Housing and Community Renewal]…or contained in documentation from a prior owner of the[…]building."

After an "extended notice period with substantial outreach to class members, only about 1 percent of the class members opted out or objected to the settlement." Following a fairness hearing, the district court approved the settlement. It held that "notice of the proposed settlement was adequate, …the settlement was fair, adequate, and reasonable…, and…there were no intra-class conflicts." The appellants challenged the "fairness, adequacy and reasonableness of the settlement and the adequacy of the class members' representation."

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