Tenant Sues For Failure to Return Security Deposit

This was originally posted on the SGR Blog.

Was Landlord’s Conduct Actionable/Sanctionable?

On August 11, 2021, Arlene Marie Karole filed a small claims action against 340 West End Ave, LLC, seeking $3,851.89 in damages for, among other things, the failure to return a security deposit for an apartment which Karole had leased from West End.

The Court conducted a nonjury trial from 10:25 a.m. and concluding at 12:25 pm. Karole appeared virtually via MS Teams. And West End appeared in person by Steven Kirschner, the president of Kay Equities, the management company of the apartment building. The trial was held on the record via FTR recording in Room 419 at 111 Centre Street, New York, New York.

Karole testified at the trial and submitted 13 exhibits that were accepted into evidence. Kirschner appeared and testified on behalf of West End. He submitted two exhibits that were accepted into evidence.

Karole was the tenant of rent-stabilized Apartment A in a building pursuant to a written lease which would expire on October 31, 2021. The building contains 6 or more dwelling units. Based on Kirschner’s testimony and the lease, Kay Equities was the management company. Kirschner confirmed that true name of the owner was 340 West End Avenue LLC.

It was undisputed that Karole had tendered a security deposit to in the amount of $1,327.93. West End held the security deposit in an interest bearing account with Chase Bank.  As indicated on the bank statements, West End 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’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 the 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.

Karole’s March 3, 2021 letter stated, 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 [than] 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 Judge’s 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 did not return any portion of the security deposit to Karole. West End submitted no evidence that it had 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 the landlord return $1,743, which was not the amount of the security deposit which was 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 Karole moved out.

Even in the relatively relaxed and informal atmosphere of a small claims action, Karole had the prima facie burden of proof at trial to establish, by preponderance of the evidence, a basis for West End’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. And 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.

General Obligations Law § 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 the trial, the parties stipulated that the date of vacatur was December 31, 2020. Thus, West End was required to provide Karole with an itemized statement and any remaining portion of the deposit by Friday, January 14, 2021.

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

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

The evidence at trial established that West End had 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 kept a portion of the accrued interest, and the remaining portion was paid annually to Karole.

Karole was 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 when she was entitled to the full amount of the deposit and could therefore sue West End for not returning the deposit.

Punitive damages are permitted when the defendant’s wrongdoing is not simply intentional but evinces a high degree of moral turpitude and demonstrates such wanton dishonesty as to imply a criminal indifference to civil obligations. And 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 has 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, a plaintiff must show, by clear, unequivocal and convincing evidence, egregious and willful conduct that was morally culpable, or was actuated by evil and reprehensible motives. The evidentiary 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, it is generally understood to refer to conduct that is not merely negligent but requires more than inadvertence—and requires actions performed knowingly, intentionally or deliberately. Thus, in other contexts, courts have construed “willfully” to mean whether someone “knew or should have known” that they were violating the law.

In cases involving whether a landlord willfully violated rent statutes that prohibited the landlord from demanding rent in excess of lawful emergency rent, one court ruled the word ‘willfully’ should be applied to a specific intention on the part of the landlord to violate the law, to defy the statute, an intent deliberately to exact a rent known to the landlord to be unlawful, or at least one which it may be fairly inferred that the landlord as a reasonable man knew was unlawful. And the word ‘willfully’ in the GOL, which imposes a penalty or forfeiture, means much more than intentionally. It means malevolently, with an evil purpose, and without grounds for believing the act to be lawful. It implies some element of turpitude. Whether the applicable burden of proof was a preponderance of the evidence, or clear and convincing evidence, Karole met her burden of demonstrating that West End willfully violated General Obligations Law § 7-108.

Intent may be proved by circumstantial evidence.  Intent 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 General Obligations Law § 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’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 that West End intentionally disregarded GOL§ 7-108. The fact that Karole was mistaken about the amount actually held on deposit would not have prevented West End 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 to retain the security deposit until the dispute was resolved in court.

Thus, Karole was awarded punitive damages against West End for twice the amount of the security deposit, i.e., $2,655.86 ($1,327.93 × 2).

Upon the Court’s own motion, the ad damnum clause in the statement of claim was amended to increase the damages sought, so as to conform to the proof at trial that West End willfully violated General Obligations Law § 7-108.

However, Karole was not entitled to recover copying expenses, lost time from work, or travel expenses incurred in coming to court. Costs are awarded for the very purpose of indemnifying the successful party for the expense of maintaining their rights. The costs of suit recoverable by a successful party are thus expressly limited by statute, and there is no authority for a recovery of any amount, except such as is provided by statute, in the absence of an express contractual obligation by the parties.

Here, the New York Civil Court Act did not provide for the recovery of costs in small claims actions. As to disbursements, the prevailing party in a small claims action may recover the fees paid to the clerk, which in this case was $20.00 for the commencement of the action.

The Court found in favor of Karole. And awarded compensatory damages in the amount of $1,327.93, with prejudgment interest at the rate of 9% per annum, from January 15, 2021, and punitive damages in the amount of $2,655.86, with disbursements in the amount of $20.00.

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