Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.J. Super. App. Div.: Landlords violated New Jersey Consumer Fraud Act by overcharging tenants for rent, (Jun 26, 2013)

By Tobias J. Gillett, J.D., LL.M.

Landlords who overcharged their tenants for rent in violation of a rent control ordinance were liable for treble damages under New Jersey’s Consumer Fraud Act (CFA), a New Jersey appellate court has ruled (Heyert v. Taddese, June 25, 2013, Parrillo, A.). The court upheld the determinations of the Law Division that the landlords were “professional sellers” for purposes of the CFA, that the landlords violated the CFA despite their alleged reliance on the advice of their counsel, that the tenants suffered an ascertainable loss, and that the tenants’ loss was caused by the landlords’ overcharges rather than merely their failure to make a prompt refund.

In 1985, the Caparra housing development was built in Hoboken. Prospective homeowners were permitted to purchase two-family homes in the development with a subsidized $15,000 down payment, in exchange for a 20-year commitment to rent out the second unit in the building to a Section 8 family. When the agreements began to expire in 2005, the apartments became subject to Hoboken’s rent control ordinance.

In May 2005, the landlords purchased a property in the development, and when the commitment expired they attempted to raise the rent 28 percent, but were informed that the rent control statute only permitted them to raise the rent 3.4 percent. In 2006, they purchased a second property in the development which they rented to the tenants for $4,000 a month. In 2007, the landlords converted the apartments to condominiums, without informing the tenants. The tenants later requested a legal rent calculation from the Division of Rent Leveling and Stabilization, which notified the landlords that the legal base rent for the apartment was $2,086, and that the excess would have to be refunded to the tenants. The Rent Leveling and Stabilization Board denied their appeal.

Although the landlords and the tenants reached a settlement, the landlords later backed out, and claimed the settlement was not binding. The tenants then filed an action in the Law Division, including a claim under the CFA. The Law Division later granted summary judgment to the tenants on their CFA claim, and entered an order granting the tenants treble damages, attorneys’ fees, and costs. The landlords appealed.

The appellate court explained that a CFA plaintiff must prove three elements, including (1) unlawful conduct, (2) an ascertainable loss, and (3) a causal relationship between the unlawful conduct and the ascertainable loss. The plaintiff also had to prove that the transaction was “consumer-oriented” and involved the sale of “merchandise,” and that the seller was acting in a “professional, commercial capacity.” A violation of the CFA could be an affirmative act, a knowing omission, or a violation of a regulation, and an affirmative act did not require a showing of an “intent to deceive.”

Professional sellers. The court rejected the landlords’ claim that they were not “professional sellers,” and hence that the transaction did not fall within the scope of the CFA. The court noted that it was “well-established” that landlord-tenant transactions were covered by the CFA. The landlords owned at least three rental properties, and their prior experience as landlords in Hoboken had made them aware of the rent control ordinance. Moreover, one of the landlords had a business degree from Penn State University, and was director of finance for a large pharmaceutical company. Under these circumstances, the landlords were “sophisticated landlords in the business of renting residential apartments,” in the court’s view.

CFA violation. The court also concluded that the landlords had violated the CFA, despite their claim that they had relied on the advice of their attorney, who allegedly informed them that condominiums were not subject to the rent control ordinance. “[T]he affirmative act of overcharging rent subjected the landlords to liability under the CFA,” according to the court. Although good faith reliance on the advice of counsel might be a defense where the purported CFA violation constituted a knowing omission, here the tenants did not have to prove that the landlords knew of the illegality of their actions “because intent to deceive or to commit an unconscionable commercial practice is not a prerequisite to the imposition of liability” for an affirmative act.

Even if good faith reliance would relieve the landlords of liability, the landlords here would have “failed to raise a genuine issue of material fact concerning their knowledge that the rent was illegal,” the court observed. The landlords had not provided any documentation of the lawyer’s alleged advice, and therefore their only proof was their own “self-serving assertion.” Moreover, the landlords raised the rent prior to converting the unit to a condominium, and never informed the tenants of the conversion. Therefore, their reliance on the attorney’s advice regarding the application of the rent control ordinance to condominiums would not have permitted them to escape liability even if they did have proof of the advice.

Ascertainable loss. The court rejected the landlords’ contentions that the tenants did not suffer an ascertainable loss, and that even if they did the court improperly calculated the amount of the loss. The landlords relied on the court’s prior decision in Feinberg v. Red Bank Volvo, Inc., 331 N.J. Super. 506 (App. Div. 2000), in which the court found that the plaintiff in that case had to prove he demanded cancellation of charges made to his credit card, or reimbursement of the charges, before filing suit.

The court declined to adopt a broad interpretation of Feinberg, limiting it to the facts presented there, which involved a former lawyer who failed to disclose several judgments against him on a credit application and who could have easily disputed the charges with his credit card company. Here, the tenants did not commit any fraudulent conduct, and thus did not have to make a pre-suit demand for reimbursement.

Even if they did have to make such a demand, the tenants met that requirement, according to the court. The landlords had been informed of their obligation to refund the overcharges by September 2009, but had not refunded any money by as late as February 2010. The landlords repudiated the settlement reached between the parties, dishonored checks written under it, and threatened to sue the tenants if they did not abandon their claims. “[T]he landlords knew that they were legally obligated to refund the rent overcharges, that the tenants were seeking reimbursement, and that litigation was imminent,” which would have been enough to comply with Feinberg.

In addition, the Law Division appropriately calculated the tenants’ loss using an “out of pocket approach.” The landlords provided no authority for their assertion that the Law Division should have calculated the loss as the time loss of money from when the tenants filed suit, the court noted. Finally, the landlords did not raise a genuine issue of fact regarding their claim that $400 of the rent was allocated to a parking space. Their only documentation of this claim was an amended rent control registration form filed after the Division of Rent Leveling and Stabilization had determined that the landlords had overcharged the tenants, the court observed. Moreover, the tenants provided copies of e-mail messages indicating that they would not be charged for their parking space.

Causation. The court also dispensed with the landlords’ argument that the tenants’ loss was caused by "the failure to refund or credit forthwith,” rather than an act of consumer fraud or a violation of the rent control ordinance. The court explained that “[c]ourts have generally found causation to be established for CFA purposes when a plaintiff has demonstrated a direct correlation between the unlawful practice and the loss; they have rejected proofs of causation that were speculative or attenuated.” In the present case, the tenants’ loss was “neither speculative nor attenuated,” since the landlords’ overcharge caused the tenants a “direct and personal loss” each time “they paid the illegal rent.”

In any case, the landlords did not have a legitimate “basis for refusing to proffer a full refund.” Their “claim that the City gave them erroneous advice concerning the refund” was “unsupported by the record.” The Rent Leveling and Stabilization Division had ordered the landlords to refund the overcharges forthwith, the Rent Leveling and Stabilization Board had denied the landlords’ appeal, and they had not been permitted to apply a hardship rent increase retroactively.

The case is Docket No. A-4801-10T2.

Attorneys: Richard W. Mackiewicz, Jr. (Mackiewicz & Associates, L.L.C.) for Menassie Taddese. Cathy C. Cardillo for Brian Heyert.

Cases: StateUnfairTradePractices NewJerseyNews