Managing Agent for Residential Landlord Failed to Return Security Deposit

This was originally published on the SGR Blog.

enant Awarded Deposit with Interest & Punitive Damages

Arlene Marie Karole commenced a small claims action against 340 West End Ave, LLC seeking $2,655.86 in damages for West End Ave’s failure to return a security deposit for an apartment which Karole had leased. On February 1, 2022, Karole amended her claim to increase the amount of damages to $3,851.89.

The Court conducted a nonjury trial. Karole appeared virtually via Microsoft Teams. West End Ave appeared in person by Steven Kirschner, the president of Kay Equities, the management company of the apartment building.

Karole was the tenant of a rent-stabilized Apartment A in a building located at 340 West End Avenue in Manhattan, which was owned by West End Avenue, LLC, pursuant to a written lease which would expire on October 31, 2021. The building contained 6 or more dwelling units. Based on Kirschner’s testimony and the lease, Kay Equities was the management company.

It was undisputed that Karole tendered a security deposit to West End Ave in the amount of $1,327.93—which was held  in an interest bearing account with Chase Bank. As indicated on the bank statements, West End Ave kept a portion of the accrued interest and the remaining portion was paid annually to Karole. Although Karole denied ever receiving any accrued interest from Chase Bank, the Court credited West End Ave’s documentary evidence over Karole’s testimony.

Karole credibly testified that, in August 2020, she informed Kirschner by telephone that she was moving out of the apartment. In an email dated October 31, 2020, Kirschner wrote, “All rent must be paid for November and December. Security will be refunded within 30 days of you vacating the premises and leaving it empty and broom swept condition”.

Karole credibly testified that she had paid rent for November and December 2020 and that she vacated the apartment in mid-December 2020. For the purposes of this lawsuit, Karole stipulated that December 31, 2020 would be deemed the official date that she vacated and surrendered possession of the apartment.

Karole credibly testified that, around the end of January and in February 2021, she telephoned and emailed Kirschner regarding the return of her security deposit, and that he did not return any calls.

On March 3, 2021, Karole sent, via certified mail with return receipt requested, a letter to Kirschner demanding a return of her security deposit.

The March 3, 2021 letter state, in relevant part: “The exact amount of the security deposit as per my lease is $1,734.76 plus all interest on it…I demand a refund in the amount of $1,734.76 plus all interest earned on it, and if I do not receive this within 10 days mailed to my name/address below, I will bring a proceeding in small claims court.”

In March 2021, Karole contacted Assembly member Linda B. Rosenthal for assistance in getting her security deposit returned. Rosenthal emailed Kirschner with a letter from Karole regarding her security deposit.

On May 28, 2021, Kirschner emailed Rosenthal, stating: “We have spoken to your office on the phone about this matter. First, we have video of Arlene Karole still going in and out of the building for months after she supposedly vacated the apartment and collecting her rent from the premises. Second, the amount of her security on deposit is substantially less then [sic] stated as she never increased the security amount with her lease renewals. Her leases always stated the amount that was on deposit. We are willing to provide and show all to the courts”.

On or about May 28, 2021, Rosenthal sent Kirschner a formal letter, stating, in relevant part:

“Management has concocted ridiculous reasons to justify its refusal to return her security deposit, such as her visiting the building and falsely accusing her of feeding birds outside. I should remind you that none of these allegations hold pertinence in management’s argument for keeping Ms. Karole’s $1,734.76 security deposit. The law regarding security deposits is clear.”

The letter then cited New York State Rent Stabilization Code 2525.4 and quoted General Obligations Law § 7-108.

On June 7, 2021, the Community Liaison/Scheduler for Rosenthal emailed Kirschner, stating, in pertinent part: “Even if everything that you are claiming is true, it is not grounds for withholding her security deposit. The tenant left the unit in good condition.”

Kirschner promptly replied by email: “I reiterate that we have way less than one month security on deposit and we are willing to tell our side of the story to the judge. I don’t believe that your office should be strong arming us as this is a matter for the small claims court to decide. We will present all of our proof to the Judge and we will abide by the Judges [sic] decision.”

Sometime between July 8 and July 13, 2021, Rosenthal’s Deputy Chief of Staff left Kirschner a message to follow up with him about Karole’s security deposit.

It was undisputed that West End Ave did not return any portion of the security deposit to Karole. No evidence was submitted that West End Ave provided Karole with an itemized statement indicating the basis for the amount of the deposit retained, if any. Kirschner stipulated that there was no damage to the apartment and that the apartment was left in at least a broom clean condition when Karole vacated the premises, which was supported by Karole’s photographs of the apartment.

At trial, Kirschner testified that he did not return any portion of the security deposit because Karole mistakenly insisted that West End Ave return $1,743, which was not the amount of the security deposit held.

The Court found that, as a management company, Kaye Equities, knew or should have known of General Obligations Law § 7-108, the law governing the return of security deposits.

Additionally, the Court found that Kirschner’s explanation for not returning any portion of the security deposit was a pretext for not returning the security deposit. Kirschner admitted that there was no damage to the apartment and that the apartment was left in at least broom clean condition. Nor were there any rent arrears at the time claimant moved out.

Karole had the prima facie burden of proof at trial to establish, by preponderance of the evidence, a basis for West End Ave’s liability.

Under General Obligations Law § 7-103 (1), money deposited or advanced by a tenant on a lease agreement ‘shall continue’ to be tenant’s money and ‘shall’ be held in trust for the benefit of tenant until the lease is terminated and it is repaid or applied. The deposit is meant to cover the costs of repairing damages to the apartment.

The security deposit must be returned at the conclusion of the tenancy, absent proof, for example, that the tenant caused damage beyond that attributable to ordinary wear and tear. Where a landlord establishes that the tenant caused such damage, it is the landlord’s further burden to establish the reasonable value of any of the repairs allegedly made to the premises.

Section 2525.4 of the Rent Stabilization Code provides that a security deposit paid by a tenant of a rent stabilized housing accommodation is subject to the provisions of article 7 of the General Obligations Law. GOL§ 7-108 states, in pertinent part:

“(b) The entire amount of the deposit or advance shall be refundable to the tenant upon the tenant’s vacating of the premises except for an amount lawfully retained for the reasonable and itemized costs due to non-payment of rent, damage caused by the tenant beyond normal wear and tear, non-payment of utility charges payable directly to the landlord under the terms of the lease or tenancy, and moving and storage of the tenant’s belongings. The landlord may not retain any amount of the deposit for costs relating to ordinary wear and tear of occupancy or damage caused by a prior tenant.

* * *

(e) Within fourteen days after the tenant has vacated the premises, the landlord shall provide the tenant with an itemized statement indicating the basis for the amount of the deposit retained, if any, and shall return any remaining portion of the deposit to the tenant. If a landlord fails to provide the tenant with the statement and deposit within fourteen days, the landlord shall forfeit any right to retain any portion of the deposit”

By the plain terms of the statute only the obligations in subdivision (e) are subject to a penalty of forfeiture if they are not complied with.

Here, Karole vacated the premises in mid-December 2020, but for the purposes of this trial, the parties stipulated that the date of vacatur was December 31, 2020. Thus, West End Ave was required to provide Karole with an itemized statement and any remaining portion of the deposit by Friday, January 14, 2021.

Because West End Ave neither timely returned Karole’s entire security deposit nor timely provided her with an itemized statement and any portion of the deposit, West End Ave forfeited any right to retain any portion of the deposit.

So, Karole was entitled to recover the full amount of her security deposit from West End Ave, i.e., $1,327.93.

The evidence at trial established that West End Ave kept the security deposit in an interest-bearing bank account. Under those circumstances, a tenant is generally entitled to recover not only the principal amount of the security deposit, but also any interest accrued on the security deposit while it was in the interest-bearing account.

However, a landlord of a rent-stabilized apartment is entitled to keep, as an administrative fee, “a sum equivalent to one percent per annum upon the security money so deposited.” At the tenant’s option, the remaining balance of the accrued interest may be paid annually to the tenant. Here, Karole did not establish that there was any unpaid accrued interest on her security deposit at the time she vacated the apartment. The evidence at trial indicated that West End Ave kept a portion of the accrued interest, and the remaining portion was paid annually to Karole.

Karole was also entitled to prejudgment interest on $1,327.93 at the rate of 9% per annum, from January 15, 2021, the earliest ascertainable date that the cause of action existed—i.e., the date she was entitled to the full amount of the deposit and could therefore sue West End Ave for not returning the deposit.

Punitive damages are permitted when the wrongdoing was not simply intentional but evinced a high degree of moral turpitude and demonstrated such wanton dishonesty as to imply a criminal indifference to civil obligations. Punitive damages may be sought when the wrongdoing was deliberate and had the character of outrage frequently associated with crime. The misconduct must be exceptional, as when the wrongdoer acted maliciously, wantonly, or with a recklessness that betokens an improper motive or vindictiveness or has engaged in outrageous or oppressive intentional misconduct or with reckless or wanton disregard of safety or rights. In order to recover punitive damages, it must be shown, by “clear, unequivocal and convincing evidence, egregious and willful conduct that was morally culpable, or was actuated by evil and reprehensible motives. Although some decisions have held that they standard for proving entitlement to punitive damages is a preponderance of the evidence, not clear and convincing evidence.

Additionally, General Obligations Law § 7-108 (g) provides, “Any person who violates the provisions of this subdivision shall be liable for actual damages, provided a person found to have willfully violated this subdivision shall be liable for punitive damages of up to twice the amount of the deposit or advance.”

The word ‘willful’ is widely used in the law, and, although it has not by any means been given a perfectly consistent interpretation, is generally understood to refer to conduct that is not merely negligent. It requires more than inadvertence, and requires actions performed knowingly, intentionally, or deliberately. In other contexts, courts have construed “willfully” to mean whether someone knew or should have known that they were violating the law.

Whether the applicable burden of proof was a preponderance of the evidence, or clear and convincing evidence, the Court found that Karole met her burden of demonstrating that defendant willfully violated GOL § 7-108.

Intent, which may be proved by circumstantial evidence, is a mental operation that ordinarily must be inferred by an examination of all the facts and circumstances. As a management company, Kaye Equities knew or should have known of GOL § 7-108, the law governing the return of security deposits. The acts of agents, and the knowledge they acquire while acting within the scope of their authority, are presumptively imputed to their principals. West End Ave’s failure to send any itemized statement to Karole within 14 days after she vacated the apartment, coupled with the pretextual explanation offered by Kirschner for not returning the security deposit, clearly demonstrated an intentional disregard of GOL § 7-108.

The fact that Karole was mistaken about the amount actually held on deposit would not have prevented West End Ave from timely tendering to her the full amount of the security deposit actually held. The fact that Karole indicated that she would sue in small claims court for return of the security deposit did not entitle West End Ave to retain the security deposit until the dispute was resolved in court.

The Court awarded Karole punitive damages against West End Avet for twice the amount of the security deposit, i.e., $2,655.86 ($1,327.93 x 2).

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