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PLAINTIFFS COULD NOT DEMONSTRATE RELIANCE UPON THE INFLATED RENTS DESCRIBED IN THE FILED REGISTRATION STATEMENTS; THEREFORE THE COMPLAINT ALLEGING A FRAUDULENT SCHEME TO DEREGULATE APARTMENTS SHOULD HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Friedman, determined defendant landlord’s motion to dismiss the complaint alleging a fraudulent scheme to deregulate apartments should have been granted. The court found that the plaintiffs did not demonstrate the “reliance” element of fraud:

The primary question on this appeal is whether plaintiffs, who allege that the predecessor in interest of defendant 75-25 153rd Street, LLC initially registered an unlawfully inflated “legal regulated rent” for each of their apartments in 2007, have sufficiently alleged, in this action commenced in 2020, the perpetration of “a fraudulent scheme to deregulate” so as to avoid the bar of the four-year lookback rule and to allow recalculation of the legal rent on the base date (in 2016), utilizing the default formula referenced in Regina [35 NY3d 332], as a basis for overcharge damages. We hold that plaintiffs have failed to allege such a fraudulent scheme because neither plaintiffs nor their predecessors in interest could have reasonably relied upon the inflated legal regulated rents on the registration statements. As the Court of Appeals recognized in Regina [35 NY3d 332], reasonable reliance is as much an element of fraud in this context as in others (see id. at 356 n 7 [“Fraud consists of evidence of a representation of material fact, falsity, scienter, reliance and injury”] [emphasis added, internal quotation marks and brackets omitted]). As more fully explained below, the inflation of the legal regulated rents set forth on the publicly filed registration statements was evident from the registration statements themselves, negating the element of reliance as a matter of law. Burrows v 75-25 153rd St., LLC, 2023 NY Slip Op 01940, First Dept 4-13-23

Practice Point: In this action alleging the fraudulent deregulation of apartments, plaintiffs were unable to demonstrate reliance upon the inflated rents described in the registration statements. Therefore the complaint alleging a fraudulent scheme to deregulate apartments should have been dismissed.

 

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