Attorney General James Sues New York City Property Manager For Illegally Deregulating Hundreds Of Rent-Stabilized Apartments
Attorney General James Sues New York City Property Manager for Illegally Deregulating Hundreds of Rent-Stabilized Apartments
David Drumheller Allegedly Participated in Scheme to Increase Rent-Stabilized Rents, Took $1.2 Million in Kickbacks from Contractors
NEW YORK – Attorney General Letitia James today announced a lawsuit against David Drumheller and his closely-held company, JBD Realty Services, LLC, for fraud, unjust enrichment, and for repeatedly violating Rent Stabilization laws through manipulation of Individual Apartment Improvements (IAIs). Drumheller worked for many years at Newcastle Realty Services, a property management company that manages approximately 2,500 apartments throughout New York City.
The complaint alleges that, while at Newcastle, Drumheller and other agents jointly schemed to illegally deregulate rent-stabilized apartments by manufacturing and inflating costs used to claim IAIs, a mechanism by which landlords can raise rent-stabilized rents in excess of regular annual rent increases. Additionally, the complaint alleges that Drumheller and an associate at Newcastle accepted $1,200,000 in kickbacks from contractors who performed renovations on Newcastle-managed apartments.
“Engaging in fraud with respect to renovations is a decades-old, devious practice designed to take advantage of tenants throughout New York," said Attorney General Letitia James. “Knocking hundreds of rent-stabilized apartments off the market by illegal schemes is immoral and unacceptable. My office will work to reregulate the units lost to this fraud, and to ensure that individuals like Drumheller are no longer in a position to abuse the rent regulation system.”
The lawsuit details a years-long scheme to abuse the IAI system set forth in the Rent Stabilization laws in order to rapidly deregulate rent-stabilized buildings, sell them, and turn a profit. When landlords and managing agents are able to claim enough costs to push the rent over the “high rent” deregulation threshold, apartments become market-rate, which exponentially increases the value of buildings. Under the Rent Stabilization laws, the State Division of Housing and Community Renewal (HCR) does not approve IAIs and therefore does not receive receipts from a landlord unless a tenant brings an overcharge case.
The complaint alleges that Newcastle implemented a strategy to gut-renovate vacant rent-stabilized apartments, count the cost of the renovations as IAIs, and then claim that the apartments were exempt from rent stabilization when a new tenant moved in. It is alleged that, in order to carry out this plan, Drumheller, without speaking to any contractor, first determined how much money it would take to deregulate a unit, and then dictated the labor cost to the captured contractor regardless of the true and fair cost of the renovation. Further, he used false change orders when his calculation fell short. This practice resulted in discrepancies in the claimed cost of labor. For example, $14,500 would be claimed in construction costs to renovate a one-bedroom apartment; whereas, $95,000 would be claimed in construction costs to renovate a studio in the very same building at the same time. Drumheller and others at Newcastle assigned these labor costs to apartments based exclusively on the amount of IAI necessary to deregulate each unit and not the actual value of the work. However, because Drumheller created checklists and other paperwork to make these costs appear legitimate, it was virtually impossible for HCR or incoming tenants to uncover the fraud.
Additionally, the complaint alleges that Drumheller secretly syphoned money from payments to Newcastle contractors, and he included those kickbacks in claimed IAIs. Contractors paid Drumheller in cash and checks, and Drumheller and his associate together took more than $1.2 million from the contractors hired to do Newcastle renovations. Some contractors paid Drumheller and his associate directly, and others paid for their expenses, such as country club dues, Porsche payments, and home improvement projects.
In the filing, the Attorney General seeks an injunction against Drumheller and JBD Realty Services, LLC, disgorgement of all kickbacks, restitution for tenants affected by their conduct, and that the Court bar Drumheller and JBD Realty Services, LLC from engaging in any business related to management or ownership of rent-stabilized property in the State of New York.
“We commend the Attorney General for her continued efforts and national leadership on behalf of New Yorkers. The Governor’s Tenant Protection Unit within HCR continues to work closely with the Attorney General’s office to uncover illicit schemes that defraud hard-working, law-abiding New Yorkers, and joint AG and TPU investigations have successfully resulted in civil actions against Zara Realty and settlements against Marolda,” said HCR Commissioner RuthAnne Visnauskas. “Working together in real-time is how we create a force-multiplier to identify illegal overcharges and schemes to protect tenants. Through its audits and investigations, to date the TPU has returned more than 77,000 improperly deregulated apartments to rent regulation and recovered approximately $5 million in overcharged rent for unsuspecting tenants.”
The Attorney General, in coordination with HCR, is continuing its investigation into the loss of rent-stabilized apartments through Drumheller’s scheme. Any tenants who believe they have been overcharged can file an overcharge complaint with HCR.
The matter is being handled for the Attorney General’s Real Estate Finance Bureau by Senior Enforcement Counsel Rachel Hannaford, Assistant Attorney General Ryan Goodland, Chief of Enforcement Louis Solomon, and Bureau Chief Brent Meltzer. The Real Estate Finance Bureau is overseen by Chief Deputy Attorney General for Social Justice Meghan Faux.