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July 29, 1948


The opinion of the court was delivered by: KENNEDY

These two condemnation proceedings to fix the rental value of premises 60-74 Columbus Avenue, New York City, were tried by the late Judge Bright in the Southern District of New York on November 5, 1947. By order dated April 16, 1948, the causes were assigned to me 'for trial or final disposition'. By stipulations made May 5, 1948, it was agreed that I may 'retain jurisdiction to adjudicate and finally determine the issue of just compensation based upon the record and pleadings heretofore made and the briefs heretofore submitted or which may be submitted * * * .'

On March 26, 1943, the government in a condemnation proceeding took the use and occupancy of this building *fn1" for a term ending June 30, 1944. The annual rental was fixed at $ 110,000 by a stipulation, approved by the court on January 22, 1944. On June 29, 1944, one of the present condemnation proceedings (Civ. 26 -- 298) was instituted only to obtain possession of the same premises from July 1, 1944, to June 30, 1945, with the right to annual extensions not beyond June 30, 1947. Again, by agreement, the rent for the period July 1, 1944, to June 30, 1946, was fixed at $ 126,500 per annum. It will be observed that the new rental represented an increase of fifteen per centum. It is the claim of the government that the stipulation was based upon the provisions of the New York State Emergency Rent Law, McKinney's Unconsolidated Laws of New York, Title 23, Ch. 2, § 8521 et seq. The owner of the building, however, asserts that the fifteen per centum increase was merely a fortuitous circumstance, and that actually there was a compromise made without special reference to the statute. This is a minor controversy, which it is unnecessary to decide.

 The government exercised its right to continue occupying the premises until June 30, 1947, but there was no agreement concerning the rent to be paid from July 1, 1946, to June 30, 1947. And this is the period for which I am called upon to fix the rental value by the first of the two condemnation proceedings.

 On January 21, 1947 the government instituted the second proceeding (Civ. 39 -- 728) to acquire the exclusive use and occupancy of the premises for the period from July 1, 1947, to December 31, 1951. No agreement concerning rental value could be reached for this period, and, therefore, I am required to determine what the correct compensation is.

 At the trial and in the briefs originally submitted, the government took the position that the District Judge, in fixing compensation, was absolutely bound by the Emergency Rent Laws of the State of New York; the owner urged that the District Judge was absolutely prohibited to follow the statute and the formulae found in it. Because the parties took this position the government offered proof of rental value based almost exclusively on one of the formulae prescribed by the State Emergency Rent Law, McKinney's Unconsolidated Laws of New York, Sec. 8524, as it existed prior to the 1948 Amendment, L. 1948, c. 676, eff. March 31, 1948. The expert called by the owner, on the other hand, ignored the Emergency Rent Law, professed himself unable to apply the emergency formulae, and based his estimate of value on rentals of 'comparable' properties (but presumably unaffected by the emergency legislation). This produced a situation under which the government arrived at a fair annual rental value of $ 137,000 for the period July 1, 1946, to June 30, 1947, and of $ 140,900 for the period July 1, 1947, to June 30, 1948. The expert for the government, in support of these figures, testified concerning the first period that the fee value of the building was $ 1,450,000 (land $ 300,000, building $ 1,150,000). Six per centum (suggested in the New York Statute) of this amount yielded $ 87,000. To this was added $ 47,002.45, being the owner's operting and management expenses. There was also added an annual amount of $ 3,000. (called 'deferred maintenance') representing a further charge to which the government thought the owner was entitled. This gave a rental of $ 137,002.45, or in round figures, $ 137,000.

 As for the second period (July 1, 1947, to June 30, 1948), the former rental value ($ 137,000.) was increased by an amount of $ 3,900 being an increased tax charge. And so, the government arrived at a figure of $ 140,900 as an annual rental for the second period.

 The owner's expert, however, asserted at the trial that a study of 'comparable' properties not subject to emergency restrictions justified a fair annual rental value of $ 186,500 for the first period, and $ 200,000 for the second.

 After the trial had been concluded, two cases were decided in the Circuit Court which have some bearing on the question presented, and which will be briefly discussed at a later point. Ernst v. Oberferst, 2 Cir., 1948, 166 F.2d 519; and United States v. Weisenbloom, 2 Cir., 1948, 168 F.2d 698, decided June 7, 1948. The government, as I have said originally seems to have argued that the federal court was bound by the Emergency Rent Legislation of New York, citing in the main United States v. Sanitary District, 7 Cir., 1945, 149 F.2d 951; and United States v. Delano Park Homes, 2 Cir., 1944, 146 F.2d 473. The owner, on the other hand, relied on United States v. Miller, 1943, 317 U.S. 369, 63 S. Ct. 276, 87 L. Ed. 336, 147 A.L.R. 55, and cases which followed it. The principle expressed in the Miller case is that while a federal court, sitting in a condemnation proceeding, adopts the forms and methods of procedure afforded by the law of the state, nevertheless, questions of substantive right -- the measure of compensation -- being grounded upon the Constitution of the United States are not ruled by local law.

 It seems clear to me that the Miller case, cited by the owner, and others like it, forbid the notion that any state can set up standards of fair and just compensation binding on the federal courts. Throughout its brief the owner stresses the injustice of a holding that the government automatically becomes the beneficiary of such state legislation, but yet is not subjected to any of the detriments, procedural or otherwise, that such statutes impose upon suitors, mentioning United States v. Weisenbloom, supra, where it was held that this very New York Emergency Rent Law did not make the government subject to restrictions placed on other 'landlords.'

 But I do not think that the argument need be pursued so far. The plain fact is that, regardless of notions of justice or equity, it would be intolerable, under our federal system, if each state could be permitted to substitute its own standards of compensation for constitutional standards, and make those standards binding in federal condemnation proceedings. Cases like Ernst v. Oberferst, supra, do not involve any such difficulty: there is no anomaly or constitutional defect in a system under which bankruptcy courts apply strictly the substantive standards found in or created by the law of the states in which they sit. And United States v. Sanitary District, together with United States v. Delano Park Homes, supra, dealt with federal, not state, regulations affecting price or value.

 But even if I am right in this conclusion, it does not necessarily follow that the owner is here entitled wholly to ignore the Emergency Rent Laws of the State of New York,and ask for compensation on the assumption, contrary to fact, that these laws do not affect the quantum of fair and just compensation under federal law.

 The Legislature of the State of New York has recognized, McKinney's Unconsolidated Laws, § 8521, that in certain cities of the state, landlords have been exacting unjust, unreasonable and oppressive leases and agreements, and in the same section it is said that a rent level of fifteen per centum above the rents charged on March 1, 1943, would curb those evils. It has branded as unjust, unreasonable and oppressive any rental which exceeds this amount, or its equivalent. And it has made provisions, McKinney's Unconsolidated Laws, § 8524, for the fixing by a court of a reasonable rental based upon a different formula, but with the caution that the ingredients of this formula must be fair and reasonable in themselves. It is for an amount arrived at by the application of the calculations last mentioned that the government here contends.

 I suppose no one would controvert the proposition that the federal notion of fair and just compensation is based upon the idea that a market value can be discovered: the price which a willing buyer would pay to a willing seller. But the Emergency Rent Law was inspired by and grounded upon a finding of fact by the legislature of the state that in certain cities the willing buyer-willing seller relationship had been displaced by one under which there were merely landlords guilty of oppressive exactions and tenants constrained to yield to them. Under these circumstances, the legislature thought it wise, at least during the continuance of the emergency, to restore the economic balance, as far as it could, by devising various formulae for a fair and reasonable rent, among which is the one invoked and attacked here.

 It seems to me that it is my task to test the conflicting claims of the parties to this litigation in an effort to determine which of the annual rentals suggested more nearly meets the standard of what is fair and reasonable, treating the New York statutory formula not as a mandate binding on the federal court either in whole or in part, but rather as one of several possible guides. And, of ...

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