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When The Pinnacle Group purchased the building where Kim Powell and her family were living in 1997, she and her family hoped their 19 years of housing woes might finally come to an end. Their dispute with the building’s former owner had ended with a victory: a judge ordered their rent reduced $53 per month until necessary repairs were made. All they needed now was for Pinnacle to comply with that order, which is exactly what Powell says the company didn’t do.
Not only would Pinnacle resist the order for the next 12 years – raising her rent to $705 and suing her for failing to pay it – they would also delay repairs and frequently fail to supply heat and hot water, according to a lawsuit that Powell and eight fellow tenants filed against the company in 2007. The company even installed three feet from Powell’s door a device, Powell believed, to spy on her. The device consisted of an electrical junction box with a hole drilled in the face place.
“It leaves a bitter taste on my family’s mouth since we had to deal with this so long,” Powell says. “We spent a lot of mental energy in them coming to us and saying can we start anew and us extending our hand to them, only to be slapped one more time.”
Powell’s experience was not a series of isolated incidents, advocates say, but a classic case of predatory equity, a common landlord scheme that they hope will soon be restricted by the Pinnacle tenants’ landmark lawsuit. In the scheme, real estate investors buy rent-controlled or stabilized buildings, then pressure the tenants – primarily through harassment and failing to make repairs – to vacate them. After a tenant leaves, the landlord rents or sells the vacant unit at a higher price.
“These hedge-fund backed landlords that acquired huge numbers of subprime apartments gambled on their ability to raise rents and evict low-income tenants,” says Edward Josephson, director of litigation at South Brooklyn Legal Services. “Either the gamble pays off and they displace tenants or they don’t succeed and their business model collapses.” (Pinnacle is not backed by hedge funds. Other landlords whom advocates believe are trying to force out rent-stabilized tenants are.)
The crash of the housing market in 2007 has already reduced the prevalence of predatory equity in New York City, but a tenant victory in the Pinnacle lawsuit would help ensure that when the market rebounds, the practice doesn’t. And this month, the prospect of such a victory grew brighter when a judge granted the plaintiffs class action status. Pinnacle owns over 420 apartment buildings in New York City, containing more than 21,000 apartments and 60,000 tenants. Gaining class action status will enable potentially thousands of current and former Pinnacle tenants to join the plaintiffs’ case.
The Rent Stabilization Association, which represents property owners, said it’s too early to comment on the significance of the case. “It’s way too soon to know what impact it has” says spokesperson Frank Ricci. “We have to see the merits of the case. Right now it’s a very esoteric case, a very specific fact pattern with a very specific owner.”
Indeed, the case could drag on for several more years while the tenant’s attorneys labor to prove their case. The lawsuit alleges that Pinnacle and its chief executive Joel Weiner not only violated the New York Consumer Protection Act and rent stabilization laws and codes, but acted as a “criminal enterprise” under the Federal Racketeer Influenced and Corrupt Organizations Act (RICO), a law enacted to fight organized crime. That law applies to landlords who engage in predatory equity because, similar to an organized crime syndicate, they scheme to violate the law to make a profit, says Sateesh Nori, an attorney with the Legal Aid Society who spoke about the legal theory behind the case but did not assert that Pinnacle has violated RICO.
Proving that Pinnacle violated RICO will be the most difficult part of the case, because it will require plaintiffs to show that the company and Weiner engaged in a deliberate pattern of racketeering by violating over a 10 year period at least two of 35 crimes under the statute.
The other problem plaintiffs might face is convincing more tenants to participate, Powell says. From 2004 to 2006, Pinnacle reportedly filed eviction proceedings against about 5,000 tenants. Since the plaintiffs filed suit, Powell contends, Pinnacle’s harassment and intimidation of tenants has worsened. “The massive fear that is being kicked out of your home,” says Powell. “What is perturbing to me even today, I have reason to believe, despite the signing of the settlement agreement they continued to conduct illegal practices.”
But if the plaintiffs succeed in obtaining an adverse judgment against Pinnacle, the company could lose millions of dollars. The judge could order the company to reimburse up to three times the rent it overcharged. Additionally, the state’s Division of Housing and Community Renewal can penalize landlords $250 for deliberate violations of rent regulations and $2,500 when it finds them guilty of harassing tenants to vacate apartments.
“I think if the plaintiffs prevail in Pinnacle, the precedent will create a strong additional disincentive for landlords to engage in broad predatory practices,” says Josephson. “In fact, just the fact that the Pinnacle case has progressed as far as it has, has probably given landlords some food for thought.”
The case is not the first to allege that landlords violated RICO laws, nor is it the first filed since the City Council passed the tenant anti-harassment law in 2008. But Josephson believes it could be the first time in New York City history that tenants have won class action status in a case filed under RICO.
Attorneys for the plaintiffs have set up a hotline for tenants with complaints against Pinnacle, and the Manhattan Borough President’s Office is recruiting tenant advocates in the 194 Pinnacle buildings in Manhattan to get more tenants involved in the lawsuit.
Powell recalls that when tenants in her building, 706 Riverside Drive in West Harlem, first began to realize that their problems with Pinnacle were systemic, their only option was to file a complaint with DHCR.
Now the court will have the opportunity to consider the impact on every alleged Pinnacle victim, Powell says. “While I sat back there in 1997, while I saw what I saw, I wasn’t able to articulate it ’til 2005, other than to say I saw something that was potentially terribly wrong,” she says. “I just needed to get someone to listen. I think we have that now.”
Portions of this article were corrected after initial publication.