421-A Tenants Ass'n, Inc. v. 125 Court Street, LLC ( 2019 )

17-3865 (L)
421-A Tenants Ass’n, Inc., et al., v. 125 Court Street, LLC, et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ASUMMARY ORDER@). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 23rd day of January, two thousand nineteen.
PRESENT: RALPH K. WINTER,
JOHN M. WALKER, JR.,
CHRISTOPHER F. DRONEY,
Circuit Judges.
_____________________________________
421-A TENANTS ASSOCIATION, INC., VINETTA
SCRIVO, RICHARD LEBED, ON BEHALF OF
THEMSELVES AND ALL OTHERS SIMILARLY
SITUATED,
Plaintiffs-Appellants,
v. 17-3865-cv, 17-3964-cv
125 COURT STREET LLC, TWO TREES
MANAGEMENT CO. LLC, 30 MAIN LLC, DW
ASSOCIATES LP, DAVID C. WALENTAS, JED D.
WALENTAS, 194 ATLANTIC LLC,
Defendants-Appellees.
_____________________________________
FOR PLAINTIFFS-APPELLANTS: MATTHEW L. BERMAN (Robert J. Valli, Jr. on
the brief), Valli Kane & Vagnini LLP, Garden
City, NY.
FOR DEFENDANTS-APPELLEES: PAUL L. SHECHTMAN (Rita K. Maxwell, on the
brief), Bracewell LLP, New York, NY.
Appeal from a November 3, 2017 judgment dismissing the complaint and a
December 7, 2017 denial of a motion for leave to amend the complaint of the United States
District Court for the Eastern District of New York (Donnelly, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of the district court is AFFIRMED.
Plaintiffs-Appellants 421-A Tenants Association, Inc., Vinetta Scrivo, and Richard
Lebed (“the tenants”) appeal from the district court’s decision dismissing their class action
complaint for failure to state a claim and for untimeliness, and from a denial of a motion
for leave to amend. On appeal, they contend that their claims were timely and that the
district court abused its discretion by denying leave to amend their complaint. We assume
the parties’ familiarity with the facts and record of prior proceedings, which we briefly
summarize as necessary to explain our decision. We then turn to the merits of this appeal,
first addressing the timeliness of the suit, and second, the denial of leave to amend the
complaint.
I. The Tenants’ Allegations and Procedural History
In the complaint, the tenants allege a broad scheme to defraud the State of New
York, New York City, and a proposed tenant class by overcharging tenants on their rent at
two different housing developments subject to New York City’s rent stabilization scheme.1
According to the tenants, defendants David Walentas and Jed Walentas, who are New York
real estate developers, and some of the business organizations that they control, perpetrated
this scheme in order to “unlawfully deregulate apartments” subject to rent stabilization
while still “collect[ing] tax breaks under Section 421-a of the Real Property Tax Law of
the State of New York.” App. 87. Under section 421-a, New York allows real estate
developers to receive certain tax benefits on properties when the developers agree to make
the property subject to the New York City Rent Stabilization Law. See N.Y. Real Prop.
Tax Law § 421-a. A landlord’s property that is subject to the Rent Stabilization Law must
comply with several restrictions on rent increases and respect certain tenant protections.
1
The plaintiffs initiated this lawsuit on January 31, 2017, and filed a first amended complaint on April 20,
2017. All references in this summary order are to the first amended complaint, which was the operative
complaint at the time the district court entered judgment.
2
According to the tenants, a landlord whose property is subject to the Rent
Stabilization Law must inform the City and the tenant at that property of a unit’s “initial
legal regulated rent.” App. 94. The “initial legal rent” is the lower of “(i) the initial ‘legal
rent’ established by the New York City Department of Housing Preservation and
Development . . . or (ii) the actual rent paid by the initial tenant.” App. 96. The Rent
Stabilization law protects tenants paying those controlled rates in part by guaranteeing that
they receive a renewal lease each time their lease expires. At the time of such renewal, a
landlord may only increase the rent in “modest” amounts as “permitted . . . by the [City’s]
Rent Guidelines Board.” App. 98. The law also permits strictly regulated rent increases for
certain improvements to a tenant’s apartment or building. Finally, certain reporting
requirements apply to the rent amounts. For example, each year the landlord must inform
the state’s Division of Housing and Community Renewal (“DHCR”) of the “legal rent for
each regulated apartment” and “must provide tenants with a copy of their respective
apartment’s registration form.” App. 94–95, 96.
The tenants contend that the Walentas developers and some of the companies that
they control (the “Walentas Enterprise”) attempted to evade the restrictions of the Rent
Stabilization Law while still receiving tax exemptions through a variety of fraudulent acts.
The allegations concern two apartment complexes located in Brooklyn: 125 Court Street
and Cobble Hills Mews.2 The tenants allege that in the initial application for section 421-
a tax exemptions for the 125 Court Street property, the Walentas Enterprise made many
fraudulent statements to New York City’s Department of Housing Preservation and
Development (“HPD”). The HPD “determines both eligibility for Section 421-a real
property tax exemptions and the initial rents in the subject property.” App. 108. Following
HPD’s approval of the initial rent amounts, the Enterprise allegedly registered the
apartments at 125 Court Street with the DHCR “at rents that were far in excess of the lower
of: (i) the legal regulated rent (as approved by HPD), or (ii) the actual rent paid by the
initial tenants,” and falsely listed many of the units at the property as “‘exempt’ from rent
stabilization.” App. 114. The Walentas Enterprise sent the same misleading registrations
to tenants occupying units in the building.
The tenants further allege that the Walentas Enterprise then compounded that fraud
by using the illegally-inflated initial rent amount to calculate rent increases each time a
tenant renewed their lease. The initial rent amount is relevant because the Rental
Guidelines Board allows landlords to increase rents by a percentage of the prior year’s
permitted rent amount. The tenants contend that the Walentas Enterprise used the inflated
rent amounts to extract higher-than-permissible rents over nearly a decade of operating 125
2
Most of the allegations discussed here center on the 125 Court Street property, and not the Cobble Hill
Mews property.
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Court Street. As part of this alleged ongoing fraud, the Enterprise submitted false rent
registration reports to DHCR and to the tenants at 125 Court Street. The complaint also
alleges that the rent increases “coerced [tenants] into moving out of their apartments,”
which allowed the Walentas Enterprise to apply further increases to the rent amount
because of the tenant vacancy. App. 126. Similarly, the Walentas Enterprise allegedly used
unlawful evictions to remove individuals from their apartments in order to create vacancies
that would permit rent increases. Finally, the tenants allege that a similar scheme occurred
at the Enterprises’ Cobble Hill Mews property, although they provide significantly less
detailed factual allegations for that property.3
The tenants initiated this lawsuit in early 2017, alleging civil Racketeering
Influenced and Corrupt Organizations (RICO) claims, as well as a pendent state law
contract reformation claim. After filing an amended complaint, the Walentas realtors and
the defendant business organizations moved to dismiss, primarily on the grounds that the
complaint (1) lacked specificity as to the Cobble Hill Mews property, and (2) was untimely.
As to the timeliness ground, defendants pointed to a New York state court lawsuit alleging
similar violations at the 125 Court Street building against the same defendants, as well as
some news articles covering that lawsuit, to argue that the defendants were put on inquiry
notice of the alleged scheme in 2012. The district court agreed and dismissed the complaint
for failing to state a claim regarding the Cobble Hill Mews property, and on timeliness
grounds as to the claims regarding the 125 Court Street property. The tenants appealed. On
appeal, they argue that the district court erred in its analysis of whether their lawsuit was
timely, and that the district court erred by denying leave to amend the complaint. We
address each of those issues in turn.
II. Timeliness
Civil RICO claims have a four-year statute of limitations. Agency Holding Corp v.
Malley-Duff & Assocs. Inc., 483 U.S. 143, 156 (1987). The district court reasoned that the
2012 state lawsuit alleging similar claims as those in this case put the tenants on inquiry
notice in 2012, and that as a result, their 2017 lawsuit over four years later was untimely.
The district court also rejected the tenants’ arguments that each new lease was a “new and
independent injury” that makes some injuries timely and that equitable tolling should
apply. We review those decisions regarding the statute of limitations de novo. See Deutsche
Bank Nat. Trust Co. v. Quicken Loans Inc., 810 F.3d 861, 865 (2d Cir. 2015).
3
The tenants have not challenged the district court’s ruling dismissing the Cobble Hill Mews property
claims.
4
We agree with the district court that the 2012 state court lawsuit put the tenants on
inquiry notice of their civil RICO claims. “The limitations [for civil RICO claims] begins
to run when the plaintiff discovers or should have discovered the RICO injury.” In re
Merrill Lynch Ltd. P’ships Litig., 154 F.3d 56, 58 (2d Cir. 1998). A plaintiff “should have
discovered” a potential claim and is therefore on “inquiry notice” where “a reasonable
[person] of ordinary intelligence would have discovered the existence of the fraud.” Dodds
v. Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993). Here, the reasonable tenant would
have been on inquiry notice about the suspected fraud at 125 Court Street beginning in
May 2012. The prior month, ten tenants from that apartment building filed a lawsuit
alleging remarkably similar fraud to the fraud alleged in this case. For example, the lawsuit
alleged that 125 Court Street LLC had “wrongfully provided leases and renewal leases . . .
establishing an illegal rent” and that tenants had “been denied the right to rent increases
limited to the amounts provided under the [Rent Stabilization Law].” App. 191. Moreover,
the lawsuit alleged that 125 Court Street LLC unlawfully inflated rents through “deceptive
and fraudulent itemization of charges and filings with [DHCR].” App. 194. Thus, the 2012
state lawsuit—which was brought against one of the same defendants as in this case—was
in sum and substance similar to the claims brought in this lawsuit.
Other attention to the alleged fraud at 125 Court Street further put the tenants on
inquiry notice by May 2012. After the state court plaintiffs initiated their lawsuit, news
articles regarding the lawsuit appeared in local media during May 2012, including the
Brooklyn Daily Eagle (a local daily newspaper), Curbed (a trade publication for realtors),
and Brownstowner (a Brooklyn real estate news and listings website).4 The combination
of that local news coverage and the strikingly similar lawsuit leave little doubt that the
tenants here were on notice of the alleged fraud at 125 Court Street beginning in May 2012.
In support of their timeliness argument, the tenants point to our decision in Staehr
v. Hartford Financial Services Group, 547 F.3d 406 (2d Cir. 2008). In that case, we
concluded that the plaintiffs were not on inquiry notice regarding the defendant’s alleged
securities violations. 547 F.3d at 42436. The Staehr court reached that conclusion despite
news articles and other lawsuits alleging violations of securities laws similar to those
alleged in the complaint in that case. See id. The defendants argued that those news articles
and other lawsuits had put the plaintiffs on inquiry notice about the alleged fraud at the
defendant insurance company. However, we rejected that argument, noting (1) that the
other lawsuits did not involve the defendant insurance company, (2) that one lawsuit that
4
The district court took judicial notice of the news articles in its decision on the tenants’ motion for
reconsideration. Although the tenants challenge the weight we can place on these articles, we have
previously made clear that it is appropriate to take news articles into account even on a Rule 12(b)(6)
motion. See Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 42733 (2d Cir. 2008).
5
involved a subsidiary of the defendant received no press coverage, and (3) that much of the
press coverage occurred in trade publications that were unlikely to put a reasonable investor
on notice. Id. at 42736. Finally, we observed that a sophisticated insurance lawyer was
the plaintiff in the prior lawsuit against a subsidiary of the defendant insurance company
and was therefore not representative of “an investor of ordinary intelligence.” Id. at 436.
This case is distinguishable for obvious reasons: here, residential tenants sued the exact
same defendant over the same building regarding similar allegations of fraud. See LC
Capital Partners, LP v. Frontier Ins. Grp., Inc., 318 F.3d 148, 155 (2d Cir. 2003) (relying
in part on lawsuit against the same defendant for alleged fraud to conclude that plaintiffs
were on inquiry notice). As a result, the tenants were on inquiry notice by May of 2012.
For similar reasons, we conclude that the district court correctly refused to equitably
toll the statute of limitations. The tenants’ failure to prosecute their lawsuit once on inquiry
notice forecloses their argument that they acted with “reasonable diligence,” a prerequisite
for equitable tolling. See Koch v. Christie’s Intern. PLC, 699 F.3d 141, 157 (2d Cir. 2012).
Finally, we agree with the district court that the tenants cannot avoid the statute of
limitations by characterizing each new lease as a new and independent injury. As we
explained in Bingham v. Zolt, a plaintiff may bring a civil RICO claim for any “separate
and independent injuries . . . discoverable within the four-year ‘window’ before suit was
filed,” even if the underlying RICO violations fall outside of the statute of limitations. 66
F.3d 553, 560 (2d Cir. 1995); see also Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1103
(2d Cir. 1988) (stating that a plaintiff has a “right to sue” when a “new and independent
injury is incurred from the same [RICO] violation”). In this case, the tenants allege that
they were injured by the renewal leases because the renewal leases used the illegally-
inflated initial rent amount to calculate rent increases. Although each renewal lease
therefore leads to a new injury, that injury is not independent of the alleged underlying
RICO violation because it is caused in material part by the alleged fraud committed in
connection with the first lease.
Our ruling applies to both the individual tenants and 421-A Tenants Association.
The Association seeks only to represent tenants via associational standing, and as a result,
cannot assert claims that the tenants themselves may not assert. See Hunt v. Wash. St. Apple
Advert. Comm’n, 432 U.S. 333, 343 (1977). In addition, to the extent that the Association
seeks to advance a claim based on new leases (as opposed to renewal leases) signed within
the last four years, it does not have associational standing to do so because both the claim
asserted and the relief requested “require[] the participation of individual members [of the
association] in the lawsuit.” Id. In this case, because the Association includes members
who signed leases at different times and with different rent amounts, “‘the damage claims
6
[of the members] are not common to the entire membership, nor shared by all in equal
degree,’ so that ‘both the fact and extent of injury would require individualized proof.’”
Sun City Taxpayers’ Ass’n v. Citizens Utilities Co., 45 F.3d 58, 61 (2d Cir. 1995) (quoting
Warth v. Seldin, 422 U.S. 490, 515-16 (1975)).”
III. Denial of Leave to Amend the Complaint
The tenants also appeal the district court’s decision to deny their motion to
reconsider and the request therein to amend the complaint to address the district court’s
timeliness ruling. “We review a district court’s denial of leave to amend for abuse of
discretion, unless the denial was based on an interpretation of law, such as futility, in which
case we review the legal conclusion de novo.” Panther Partners Inc. v. Ikanos Commc’ns,
Inc., 681 F.3d 114, 119 (2d Cir. 2012).
The tenants contend that the district court abused its discretion by not providing
leave to amend after issuing its decision on the motion to dismiss. The tenants are correct
that, in general, a plaintiff “will not see the necessity of amendment” where the plaintiff
lacks “the benefit of a ruling” from the court. Loreley Fin. (Jersey) No. 3 Ltd. v. Wells
Fargo Sec., LLC, 797 F.3d 160, 190 (2d Cir. 2015). Under such circumstances, it is often
improper to deny leave to amend. See Loreley, 797 F.3d at 19091; Cresci v. Mohawk
Valley Cmty. Coll., 693 F. App’x 21, 25 (2d Cir. 2017) (summary order) (“The proper time
for a plaintiff to move to amend the complaint is when the plaintiff learns from the District
Court in what respect the complaint is deficient. Before learning from the court what are
its deficiencies, the plaintiff cannot know whether he is capable of amending the complaint
efficaciously.”).
Here, however, the district court denied leave to amend on the ground that doing so
would be futile. Futility remains a “ground[] on which denial of leave to amend has long
been held proper.” Loreley, 797 F.3d at 190. Although the district court did not explain that
decision, we find no error. The tenants propose amending their complaint to demonstrate
that the documents underlying the state court lawsuit and this case were not in the public
record and that the defendant in the state court action misrepresented certain facts to that
court. The tenants miss the point: as we explained above, the lawsuit itself and the
accompanying press coverage put the tenants on inquiry notice of their claims. As a result,
any amendment to the complaint cannot fix the statute of limitations problem that the
tenants face. Accordingly, we affirm the denial of leave to amend the complaint as to the
statute of limitations issues.
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For the reasons stated above, we AFFIRM the district court’s judgment.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
8