Introduction

This judgment, rendered by the Supreme Court of New York, Second Department on February 13, 2025, addresses an appeal in a complex rent overcharge and deregulation dispute. The action arises from allegations that the defendant, Vermyck, LLC, engaged in a fraudulent scheme to deregulate rent-stabilized apartment units while continuing to receive New York City's J-51 tax benefits. The case involves multiple parties, including the respondents Jacobus Gomes and Kathryn Gomes (representing a class of tenants), and centers on whether the new legislative standard—amended by the 2024 chapter amendments—should retroactively apply to actions pending before its effective date. The dispute additionally involves key procedural elements such as summary judgment on the fraudulent scheme claim, calculation of legal regulated rents using the default formula, and the appropriate measure for assessing rent overcharges and attorneys’ fees.

Summary of the Judgment

The Court addressed several central issues:

• It held that the standard for determining whether there was a fraudulent scheme to deregulate an apartment unit—set forth in the recent chapter amendments—applies retroactively to pending cases, even though the underlying conduct occurred prior to the amendments.
• The defendant’s constitutional challenge to this retroactive application was rejected. The Court found that the retroactive application is supported by a rational legislative purpose to correct prior judicial interpretations that diverged from the Legislature’s intent.
• Upon applying the new standard, the Court concluded that the plaintiffs failed to establish, on a prima facie basis, that the defendant knowingly engaged in a fraudulent scheme. Consequently, the use of the default formula for calculating the legal regulated rent and any rent overcharges was not warranted at the summary judgment stage.
• Finally, the Court modified the previous order by denying the branch of summary judgment that directed the application of the default formula, and by eliminating the referral to a special referee for calculations of illegal rent increases and attorneys' fees, while affirming liability for improper deregulation.

Analysis

Precedents Cited

The judgment thoroughly reviews a range of precedents which have significantly influenced its decision-making process:

• ROBERTS v. TISHMAN SPEYER Properties, L.P. – This seminal decision clarified that deregulation of rent-stabilized apartments under J-51 benefits was impermissible. The Court’s analysis acknowledged that this precedent, although initially ambiguous regarding retroactivity, was later reaffirmed in subsequent appellate decisions.
• Matter of Regina Metro. Co., LLC v. DHCR – The case is critical as it informs the discussion on the lookback period and the conditions under which a fraudulent scheme might be determined. The Court noted that while the elements of common-law fraud were traditionally required, later decisions and legislative amendments relaxed these requirements to focus on the “totality of the circumstances.”
• Thornton v. Baron, Matter of Grimm, and Conason v. Megan Holding, LLC – These cases provided a framework for examining fraudulent schemes by outlining factors such as misstatements, scienter, and reliance. In particular, Thornton set the default formula parameters, which form the basis for calculating rent overcharges when fraud is alleged.
• Gridley v. Turnbury Vil., LLC – This decision reinforced the need for a clear evidentiary showing of fraudulent intent in rent deregulation actions.

The Court also relied on legislative enactments, including the Housing Stability and Tenant Protection Act of 2019 (HSTPA) and subsequent amendments in the 2023 act and chapter amendments of 2024, to pioneer a standard that does not compel tenants to establish every element of common-law fraud but instead to consider the overall circumstances.

Legal Reasoning

The Court’s legal reasoning proceeds through several analytical steps:

• Retroactivity of the Legislative Standard: The Court determined that the new standard, which requires an examination of the “totality of the circumstances” to establish fraudulent deregulation, should apply retroactively to pending cases. This decision was grounded in both the express language of the legislative amendments and the confirmed legislative intent to address persistent inconsistencies in applying the fraud exception.
• Constitutionality: The defendant’s argument that the retroactive application violated constitutional protections was dismissed. The Court held that retroactive legislation in this context is justified by a legitimate public policy objective—namely, the correction of previous judicial interpretations that misaligned with legislative intent. The Court cited landmark cases such as Matter of Regina Metro and GENERAL MOTORS CORP. v. ROMEIN to underscore that retroactive application is constitutionally acceptable when backed by a rational legislative purpose.
• Prima Facie Burden on Fraud: A central issue was whether the plaintiffs had established a prima facie case that the defendant “knowingly” participated in a fraudulent scheme. Relying on both statutory amendments and prior case law, the Court emphasized that the standard does not require proof of every element of common-law fraud. Instead, if the totality of circumstances indicates fraud, the default formula should be applied. However, the record in this case did not unequivocally support a finding of knowing misconduct, therefore undermining the application of the default formula for calculating overcharges.

Impact on Future Cases and on the Relevant Area of Law

This judgment is significant because it sets a clear precedent regarding:

• Retroactive Application: Courts and litigants must now consider that legislative changes, when clearly articulated, may be applied to pending cases. This enhances predictability in cases concerning rent deregulation and fraudulent conduct claims.
• Fraud Exception Standard: The decision confirms that tenants need not prove every element of common-law fraud. Instead, a “totality of the circumstances” approach will be adopted, which could broaden or narrow the scope of liability depending on the facts of each case.
• Calculation of Damages: The case underscores the importance of the default formula as a remedial tool designed not as a penalty but to ensure compensatory damages accurately reflect the difference between what was charged and what should have been legally charged. Future disputes over rent overcharge calculations will look to this framework.

Complex Concepts Simplified

The judgment deals with several complex legal concepts which can be simplified as follows:

• Fraudulent Scheme to Deregulate: Traditionally, proving fraud required extensive evidence of dishonesty, including false statements and the intent to deceive. Under the new standard, however, a streamlined “totality of the circumstances” approach is used. This means that if various factors (such as delayed re-registration or improper rent calculations) collectively suggest fraudulent intent, it may be sufficient—even if not every technical element is proven.
• Retroactivity: Retroactive application means that even if the legislative change occurred after the detrimental acts happened, the new rules can still apply to actions still pending in court. The Court’s decision confirms that, for rent deregulation fraud cases, pending claims will be judged by the most current standard.
• Default Formula: This is a method established by regulatory guidelines to calculate what the legal rent should be when there is evidence of deregulation fraud. It considers factors such as the lowest registered rent, previous tenant rents, or adjustments based on regulatory data. It functions as a corrective measure rather than an automatic penalty.

Conclusion

The judgment represents an important development in New York rent regulatory law. By affirming the retroactive application of the chapter amendments, the Court has reinforced the Legislature’s intent to provide clarity when addressing fraudulent schemes in rent deregulation. While the defendant’s improper deregulation is undisputed, the plaintiffs failed at the summary judgment stage to establish that the actions were “knowingly” fraudulent under the standard set forth in the amendments. This ruling not only reaffirms landlords’ liabilities when engaging in deregulation during periods of J-51 benefits but also sets a refined standard on the evidentiary burden required to invoke the default formula for calculating damages. Consequently, future cases will likely further refine these elements, and litigants must be mindful that even retroactive rules will apply if supported by a rational legislative purpose.