Class-Action Suit on Behalf of Gateway Tenants Reaches Proposed Settlement

Class-Action Suit on Behalf of Gateway Tenants Reaches Proposed Settlement

Attorneys representing Gateway Plaza residents in a class-action suit that began in 2014 have reached a tentative settlement with the LeFrak Organization, the landlords at Battery Park City’s largest residential complex, which they value at $42 million.

The suit claimed that conditions such as poorly insulated windows, along with improperly functioning heating and air-conditioning units, made apartments within the six-building property effectively uninhabitable for multiple years. A related complaint alleged that residents were forced to endure financial hardship by running the defective heaters in winter and air conditioners in summer, in some cases 24 hours per day at full power, to compensate for the structural deficiencies of the buildings, thus incurring massive electric charges. (The suit further charged that LeFrak, “improperly profits from the allegedly excessive charges for electricity paid by tenants at Gateway Plaza through an electrical submetering system at Gateway Plaza,” which is a reference to an unusual provision of Gateway leases that forces residents to buy their electric service from the landlord.) While some of these conditions have since been partially remediated with the installation of new windows and climate-control units (although some residents claim that habitability issues persist, and the electrical metering scheme remains unchanged), the suit and settlement attempt to offer monetary compensation to current and former residents for the harm they suffered.

A Notice of Settlement recently distributed to Gateway tenants asserts that the LeFrak Organization, “denies all allegations of wrongdoing,” and “denies that it has breached the implied warranty of habitability… in any of the respects alleged by the Complaint,” and “denies that it is otherwise liable to members of the Class in any respect.” But the same document goes on to explain that LeFrak, “is entering this Settlement Agreement solely to eliminate the uncertainties, burden, and expense of further litigation.”

In the Notice of Settlement, attorneys for the class of residents who currently live at Gateway (or rented there anytime after April, 2008) outline three primary pools of value that the proposed agreement will recover. The first is a $10 million cash payment by the LeFrak Organization, which will cover attorneys’ fees and expenses, as well as defraying claims by current and former residents. This “settlement amount” will cover any cash disbursements to current and former residents, which will have the effect of retroactively and incrementally lowering the rent they paid during the period covered by the suit. According the documents filed with the court, the attorneys who worked on the case will receive fees not to exceed $3.5 million, along with reimbursement for various expenses, which are expected to cost several hundred thousand dollars. This will compensate the legal team (comprised of lawyers from three different firms) for five years of work.

From the same fund, current and former tenants will receive an amount up to fixed percentages of the overall rent they paid to LeFrak between 2008 and the present. For current tenants, this percentage is 1.66 percent. The percentage that former residents will be paid is 2.39 percent of their overall outlay. According to settlement documents filed with the court, this means that a current resident who paid $30,000 in rent during the period would receive a benefit of $498. A former resident who paid the same amount in rent during the same period would receive $717. While these amounts are hypothetical examples, the percentages represent fixed ceilings, because the $10 million fund (after attorneys’ fees and expenses are deducted) will be distributed on a pro rata basis, depending on the number of current and former residents who sign up to receive payments.

The method of distributing these payments will vary, depending on whether a recipient currently lives at Gateway or is a former tenant. Residents who have moved away will be issued a check. Current tenants will see the amount they are to receive appear as a credit on their rent bills later this year. In some cases, this credit may take more than one rent cycle to deplete, meaning that such a tenant would owe no rent until the credit had been fully absorbed by successive monthly bills.

The second pool of value negotiated by attorneys representing Gateway tenants is a cap on rent increases for the next two years. This benefit, which will accrue only to current residents who sign up as part of the class that will participate in the settlement, is scheduled to begin in July, immediately after the current program of rent stabilization at Gateway is slated to expire (unless it is renewed). The cap outlined in the settlement agreement stipulates a limit on rent hikes of five percent, compared with estimates of typical rent increases of six percent. For a hypothetical tenant currently paying $2,833 per month (or $34,000 per year), this one percent saving would result in a benefit of $340 per year, according to documents on file with the court.

For tenants in rent-regulated Gateway Plaza apartments, the outlook is more complicated. Under the current regime of rent stabilization, LeFrak cannot increase rents for Gateway residents in regulated apartments by more than the threshold set each year by the City’s Rent Guidelines Board, which in recent years has hovered between 1.25 percent and 2.5 percent. If the Battery Park City Authority (BPCA) succeeds in negotiating an extension of this program (which will otherwise lapse in June), the five-percent cap would not confer any benefit on Gateway tenants already protected by rent stabilization, because they are currently covered by tighter restrictions on increases. But if the Authority fails to renew the agreement that provides rent stabilization for some Gateway apartments, those residents could face sudden, massive increases, jumping substantially from their current, below-market rents. In this scenario, the subset of Gateway residents who live in rent-regulated apartments would gain a two-year reprieve, which might amount to many thousands of dollars per year. In total, the lawyers representing Gateway residents estimate that that value of the two-year, five-percent cap on rent increase is $13 million.

The third pool of value that the legal team representing Gateway has incorporated into the settlement agreement is capital repairs and upgrades, which the Settlement Notice prices at $18 to $20 million. This part of the agreement does not envision or require any new improvements to the physical plant at the Gateway complex. Rather, it retroactively incorporates into the settlement improvements made several years ago, between 2014 and 2017. The Notice of Settlement makes the argument that the LeFrak Organization, “acknowledges that this [lawsuit] was a contributing factor as to both the timing and scope of the capital improvements undertaken.”

Jeffrey M. Norton, a partner at the law firm of Newman Ferrara, which led the class-action suit against LeFrak, said, “we’re really happy with this settlement. We think it speaks for itself, and we look forward to presenting it to the court for final approval.”

Circa 1979: Gateway Plaza under construction

There will be a Fairness Hearing on Monday, March 2, during which Melissa A. Crane, the judge presiding over the case, will consider comments on this proposed settlement, either in support or denunciation of its terms. This session will be held in Courtroom 303 of the New York Supreme Court Civil Branch, at 71 Thomas Street. The purpose of the hearing will be for the judge to approve or reject the terms outlined in the Settlement Notice, based on whether they are, “fair, reasonable, adequate, and in the best interests,” of Gateway residents, according to a court document.

Apart from the immediate issues outlined above, this proposed settlement raises a range of questions. Multiple sources directly familiar with the ongoing negotiations between the BPCA and the LeFrak Organization over extension of affordability protections at Gateway Plaza allege that for several years, the landlord has used the uncertainty arising from the lawsuit as an excuse for delaying meaningful discussion. Assuming the settlement is approved by the court, this could remove a roadblock to the preservation of rent stabilization at Gateway. Conversely, however, a settlement valued at tens of millions of dollars could arguably erect a new obstacle to negotiations between the BPCA and LeFrak, with the developer demanding to be compensated for any loss arising from the class-action suit, in addition to whatever other financial incentives were demanded in exchange for extending rent stabilization.

In another scenario, if the LeFrak Organization remains intransigent, and refuses to negotiate an extension of affordability protections, it could argue that the two-year caps on rent increases are a reasonable substitute, in spite of the fact that previous affordability agreements have had terms of a decade or more, and offered more rigorous limits on rent hikes. This could also provide a fig leaf for public officials, who would otherwise face political humiliation at having failed to achieve a goal to which multiple community leaders and elected officials have committed in recent years.

For more information about the class-action lawsuit against the LeFrak Organization, and the terms of the proposed settlement (as well as details about how to sign up to be eligible for benefits, and deadlines for doing so), please browse: www.GatewayPlazaSettlement.com.