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GRAMERCY SPIRE TENANTS' ASSN. v. HARRIS

September 16, 1977;

GRAMERCY SPIRE TENANTS' ASSOCIATION, Plaintiff, against PATRICIA ROBERTS HARRIS, as Secretary of the Department of Housing and Urban Development; THE DEPARTMENT OF HOUSING & URBAN DEVELOPMENT; and MORRIS SOSNOW, JERROLD A. LIEBERMAN, LEONARD SCHWARTZ, individually and as co-partners in 16th STREET ASSOCIATES, Defendants, and PATRICIA GRANT, JAMES N. PALIK, ROSALYN RUSALEM, THE CONCILIATION AND APPEALS BOARD and THE HOUSING AND DEVELOPMENT ADMINISTRATION OF THE CITY OF NEW YORK, Additional Defendants on Counterclaim.


The opinion of the court was delivered by: CONNER

MEMORANDUM AND ORDER

CONNER, D.J.:

 Plaintiff Gramercy Spire Tenants' Association has brought suit to challenge the federal government's preemption of New York City's rent control laws as they apply to the Gramercy Spire Apartments located at 160 Third Avenue in New York City. The complaint names as defendants the Department of Housing and Urban Development and its Secretary, Patricia Roberts Harris *fn1" ("HUD") and the individual co-partners of "16th Street Associates" ("Associates"), the owner of Gramercy Spire Apartments. In its answer, Associates has counter-claimed for a declaration of the validity of the preemption and for injunctive relief. *fn2" Before us now is its motion for summary judgment on the counterclaim.

 Associates' position, in brief, is that the HUD regulation, 24 C.F.R. §§ 403.1-403.6, *fn3" which authorized the preemption was validly promulgated, and that HUD's determination, pursuant thereto, that its economic interest was jeopardized in respect to the Gramercy Spire project -- necessitating preemption -- is unreviewable agency action. Plaintiff contends, to the contrary, that the regulation is invalid; that the basis for HUD's determination of economic jeopardy is reviewable in this Court; that there are genuine issues of fact pertaining to the latter issue; and that, in any event, in being denied an opportunity to be heard prior to HUD's preemption decision, the tenants of Gramercy Spire were deprived of their right to procedural due process guaranteed by the Fifth Amendment. On the latter claim plaintiff, together with the Housing and Development Administration, joined as a defendant on Associates' counterclaim, have cross-moved for summary judgment.

 I.

 The facts which will be relevant to the Court's disposition of the motion are undisputed. Gramercy Spire is a privately owned and financed apartment building (with 146 rentable dwelling units), whose mortgage note in the amount of $2,588,100 is insured by the Secretary of HUD under § 207 of the National Housing Act ("NHA"), as amended, 12 U.S.C. § 1713. The insurance of mortgages under § 207 is designed as an incentive to private lenders to make funds available for the construction of family housing accommodations at reasonable rentals. The § 207 program represents the federal government's "basic" commitment to unsubsidized housing. Affidavit of Fred W. Pfaender, Director of HUD Office of Loan Management ("Pfaender Affidavit") at 1; 12 U.S.C. § 1713(b)(2); 515 Associates v. City of Newark, 424 F. Supp. 984, 988 (D.N.J. 1977). During the term that the Secretary is the insurer or the holder of the mortgage, HUD exercises considerable supervision over the mortgagor, the precise nature of which is set forth in the regulations promulgated by the Secretary at 24 C.F.R. § 207.1 et seq. HUD, inter alia, maintains close scrutiny over the financial records and business operations of the mortgagor, as well as over the general maintenance of the property and the level of rent which is charged. 24 C.F.R. § 207.19(e), (f). In respect to the latter, the regulations provide that

 "No charge shall be made by the mortgagor for the accommodations, facilities or services offered by the project in excess of those approved by the Commissioner in writing prior to the opening of the project for rental. In approving such charges and in passing upon applications for changes, consideration will be given to the following and similar factors:

 (1) Rental income necessary to maintain the economic soundness of the project.

 (2) Rental income necessary to provide reasonable return on the investment consistent with providing reasonable rentals to tenants." 24 C.F.R. § 207.19(e).

 The obligations which the mortgagor assumes in accepting the benefits of § 207 mortgage insurance, and the restrictions to which he becomes subject, are embodied in a "regulatory agreement," as provided for in 24 C.F.R. § 207.18(c) (Exhibit A annexed to Associates' motion).

 In the present case, Associates availed itself of the § 207 program and became a party to a regulatory agreement with the Federal Housing Commissioner *fn4" in August of 1962. At that time, since it was of post-1947 construction, Gramercy Spire Apartments was subject to neither New York State nor New York City rent control laws. See N.Y.C. Admin. Code § Y51-3(e)(2)(h); *fn5" 8200 Realty Corporation v. Lindsay, 27 N.Y.2d 124, 313 N.Y.S.2d 733, 261 N.E.2d 647 (Ct. App. 1970). The building came under the umbrella of local rent regulation only upon the passage by New York City of the Rent Stabilization Law ("RSL") of 1969, N.Y.C. Admin. Code §§ YY51-1.0 to YY51-7.0, *fn6" which undertook to provide rent regulation for housing accommodations completed between February 1, 1947 and March 10, 1969.N.Y.C. Admin. Code § YY51-3(a); 8200 Realty Corporation v. Lindsay, supra, at 736. The administration of the 1969 law was confided largely in a Real Estate Industry Stabilization Association ("Stabilization Association"), N.Y.C. Admin. Code § YY51-6.0, of which Associates became a member.Also at this time, Associates added to all Gramercy Spire leases a "pass-through" rider providing, in effect, that if HUD approved rentals greater than those permissible under the RSL, tenants would pay the federally approved rentals immediately (Exhibit B annexed to Associates' motion).

 The category of dwelling units afforded protection under the RSL, however, was significantly restricted by the passage of State legislation in 1971. Under the Vacancy Decontrol Law, 1971 Laws of N.Y., Ch. 371, all rent-controlled or rent-stabilized apartments which became vacant on or after July 1, 1971, were to be rented on a free-market basis. See Perth Realty Company v. Dovoll, 79 Misc. 2d 514, 358 N.Y.S.2d 619, 622 (Civil Ct. N.Y. Cty. 1974). In 1974, however, pursuant to the Emergency Tenant Protection Act ("ETPA") and related legislation, 1974 Laws of New York, Ch. 576, New York State ended vacancy decontrol and considerably broadened the scope of potential local rent regulation. The ETPA was a form of local option legislation, which authorized the City of New York (and other specified localities) to declare the existence of a public emergency requiring the regulation of residential rents. The Act provided that upon the declaration of an emergency, all apartments which had theretofore been destabilized or exempt from rent stabilization -- including apartments which had become vacant on or after July 1, 1971 -- were to be subject to the RSL. 1974 Laws of New York, Ch. 576 §§ 2, 4. Effective July 1, 1974, the New York City Council implemented the legislation, determining the existence of a public emergency for all classes of housing accommodations in New York City subject to control by the ETPA.N.Y.C. Council Resolution 276.See Axelrod v. Starr, 52 A.D.2d 232, 383 N.Y.S.2d 31, 33 (App. Div. 1st Dept. 1976); Perth Realty Company v. Dovoll, supra.The consequence, for purposes of the present case, is that Gramercy Spire Apartments became fully subject to the provisions of the RSL. As Associates acknowledges, until the local rent control laws were preempted by HUD in respect to Gramercy Spire apartments on April 6, 1976, Associates assumed that it was legally bound to comply with -- and did comply with -- both the RSL and the ETPA (Associates' Answer at 3, [*] 10; Exhibit G annexed to Associates' motion).

 Under the RSL, a "level of fair rent increase" is established annually by the Rent Guidelines Board "as a guideline for rent increases upon renewal of leases or any new tenancy * * *" N.Y.C. Admin. Code § YY51-5.0.Provision is made, as well, for landlords to apply for "hardship" increases in the level of stabilization rents. N.Y.C. Admin. Code § YY51-6(b)(3); § 43 of the Rent Stabilization Code ("RSC"). *fn7" / Application is made by the landlord to the Conciliation and Appeals Board ("CAB") of the Stabilization Association. Associates filed such an application with respect to the Gramercy Spire Apartments on November 4, 1974 (Exhibit C annexed to Associates' motion). Under the hardship formula as set forth in § 43, Associates requested a 12.27 percent increase in gross monthly rental income (from $47,932.09 to $53,815.09). Upon request, it supplied the CAB with additional financial data on April 11, 1975. Associates was later informed, on November 3, 1975, of CAB's intention to process its hardship application in accordance with State legislation effective July 2, 1975, providing for the use of a new formula (the "3 plus 3" formula) in the determination of comparative hardship. According to Associates, "the effect of the new formula would have been a substantially smaller increase than that for which [it had] applied" (Associates' motion at 6).On December 2, 1975, Associates agreed to have its application processed in accordance with the new formula. As of the date of this opinion, however, Associates has not, to the Court's knowledge, received a decision on its application. *fn8"

 During the time that its hardship request was pending with CAB, Associates submitted a proposed schedule of rents to HUD, which received HUD approval on March 18, 1975. The schedule provided for a gross monthly rental income of $58,692.00. In a letter dated September 9, 1975, Associates demanded CAB's approval of the schedule, citing the "interim" local rent control regulation, 40 Fed. Reg. 8189 (predecessor to 24 ...


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