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REINER v. WEST VILLAGE ASSOCS.

January 18, 1985

JAN ALLEN REINER, PETER FAIRCHILD and JOSEPH BILERA each individually and on behalf of all others similarly situated and JAN ALLEN REINER as President of WEST VILLAGE HOUSES FAIR RENT COMMITTEE, Plaintiffs, against WEST VILLAGE ASSOCIATES, WEST VILLE ASSOCIATES, WASHINGTON VILLAGE HOUSING CORP., RAQZ, INC., STARRETT BROTHERS & EKEN, INC., GRENADIER REALTY CORP., KREISEL COMPANY, INC., SAMUEL R. PIERCE, JR., As Secretary of The Department of Housing and Urban Development, THE CITY OF NEW YORK and THE NEW YORK CITY HOUSING DEVELOPMENT CORPORATION, Defendants.


The opinion of the court was delivered by: LASKER

LASKER, D.J.

This action, which controverts allegedly impermissible rent increases, involves interplay between the National Housing Act ("NHA"), *fn1" Article 2 of the New York State Private Housing Finance Law ("Mitchell-Lama") *fn2" and New York City's Administrative Code ("Merola"). *fn3" The plaintiffs are tenants of the West Village Houses apartment project ("project") *fn4" and Jan Reiner as president of their representative organization, the West Village Houses Fair Rent Committee. The defendants include the past and present owners of the project and the project's managing agencies (past and present) (collectively "owner" or "landlord"), the City of New York ("City"), the New York City Housing Development Corporation ("HDC") and Samuel Pierce as Secretary of the Department of Housing and Urban Development ("HUD").

 The complaint presents five claims. The plaintiffs allege (1) that HUD and the landlord violated plaintiffs' right to due process of law and HUD violated its own regulations and procedures in approving the disputed rent increase; (2) that HUD denied the tenants due process by failing to order a rollback of the rents charged in excess of those permitted under the Regulatory Agreement between HUD and the project owner ("the agreement"); (3) that the landlord has been unjustly enriched by the collection of rents not authorized by the agreement; (4) that the landlord has been unjustly enriched by virtue of having made mortgage payments to the City from the allegedly unauthorized rents, and (5) that the City has been unjustly enriched by accepting mortgage payments from the landlord with knowledge that the payments were made from unauthorized rents collected by the landlord.

 Pursuant to Rule 56 of the Federal Rules of Civil Procedure all of the defendants move for summary judgment on the ground that (1) the tenants have no standing under the agreement to contest rental increases and (2) the tenants were not entitled to notice of or an opportunity to comment on the owners' application to HUD for a rental increase.The City and HDC move for summary judgment on the further ground that the complaint fails to state a cuase of action against either of them. *fn5" The plaintiffs cross move for summary judgment against each of the defendants, asserting that the law requires conclusions opposite to those urged by the defendants.

 For the reasons set forth below the defendants' joint motion for summary judgment is granted and the complaint is dismissed.

 I. Statutory and Regulatory Background

 The National Housing Act

 Pursuant to Section 223(f) of the National Housing Act the Secretary of HUD is authorized, at his discretion, to enter into contracts of insurance with mortgagees which are State or local agencies. *fn6" The mortgages to be insured must meet the eligibility requirements specified in the regulations promulgated in Title 24 of the Code of Federal Regulations, Part 207.32a(k). *fn7" That section requires that the State or local government, or agency, enter into an agreement with the Commissioner *fn8" by which the mortgagee establishes a special fund for the purpose of partially reimbursing the Commissioner in the event HUD is called upon to pay an insurance claim on a defaulted mortgage. Such an agreement must contain assurances by the State or local government, or agency that:

 The projects securing the mortgages in each portfolio shall not be subject to rent controls by the State, or a political subdivision thereof, or by any authority regulating rents pursuant to State or local law. . . . *fn9"

 Generally, the procedure for effectuating a Section 223(f) refinancing in New York City involves four steps: 1. HDC, on behalf of the City, applies to HUD pursuant to Section 223(f) for a commitment to insure a portion of a Mitchell-Lama mortgage; 2. HUD issues a commitment indicating the principal amount of a mortgage on the property involved that HUD is prepared to insure; 3. the City divides the Mitchell-Lama mortgage into a Senior Mortgage in a principal amount equal to HUD's insurance commitment and a Subordinate Mortgage in a principal amount equal to the remainder of the face amount of the initial mortgage and accrued unpaid interest; 4. HUD insures the Senior mortgage and enters into a Regulatory Agreement with the owner, which, together with the statute and HUD regulations, subject the project to HUD's supervision.

 The Mitchell-Lama Law

 Article 2 of New York State's Private Housing Finance Law ("Mitchell-Lama") provides benefits such as partial property tax exemptions and tax exempt mortgage financing to private enterprises which construct and maintain low cost housing accommodations for persons qualified under the law to be tenants. Individuals who form "Limited-profit housing companies" pursuant to the law are subject to the supervision and control of the Supervising Agency. Even if a limited-profit housing mortgage is refinanced under the federal 223(f) program it remains governed by the provisions of the Mitchell-Lama statute, rules and regulations

 except as provided otherwise by agreement with, or regulations of, the U.S. Department of Housing and Urban Development (HUD). In general, all matters involving management, maintenance, and operation shall be supervised by HUD. *fn10"

 In 1976 the New York State Legislature amended Section 31 of Mitchell-Lama to add the following:

 Where the mortgage loan of the company is insured or held by the federal government or where a project is owned by the federal government, rental rates shall be varied without regard to the provisions of any general, special or local law which would otherwise limit or control such rental rates or the determination or variation thereof for so long as such mortgage loan remains outstanding or the project financed by such a mortgage loan is owned by the federal government. *fn11"

 The Merola Law

 Section B 61.0 of the Administrative Code of the City of New York (the "Merola Law") was enacted to govern the procedure for instituting rental increases in City-aided Mitchell-Lama projects. It provides in relevant part:

 a. Before acting upon any application or motion for an increase in the maximum rental per room to be charged tenants and cooperators of dwellings where the housing and development administration *fn12" of [sic] the "supervising agency" under the provisions of the private housing finance law, a public hearing shall be held. Said hearing shall be held upon no less than twenty day's written notice to the tenants and said notice shall have annexed thereto a copy of the application or motion for increase in rentals and shall set forth the facts upon which the application or motion is based.

 II.

 The facts of this case are substantially undisputed. West Village Houses is a development containing 420 apartments which was initially constructed as a City-aided Mitchell-Lama cooperative project. The project was granted, and still enjoys, partial real property tax exemption by the City, and the development of the project was financed by a $23,961,700 City mortgage loan.

 In September, 1975, when the then owner of the project defaulted on its obligations under the mortgage the City commenced a foreclosure action in the Supreme Court, New York County. The court appointed the Administrator of HPD *fn13" as receiver and authorized him to complete construction of the project, to retain a rental and managing agent and to rent the apartments at market rentals.

 In the Spring of 1976 the rental program was commenced by an independent rental and management agent retained by HPD. *fn14" Substantially full occupancy was achieved by September of that same year. Until September 13, 1978, when the receivership was terminated, tenants were charged the going market rate at the time of the rental. Thus, as a general rule the later an apartment was rented the higher the rental rate, since market rates for Manhattan residential properties were increasing during the period.

 On August 5, 1977 HDC submitted an application to HUD for mortgage insurance for the project under Section 223(f). A rental schedule which represented the rent roll then in effect at the project was attached to the application. On March 2, 1978, HUD issued a commitment to insure a mortgage on the project in the amount of $12,034.500. The commitment contained a rental schedule virtually identical to the one supplied to HUD by HDC.

 At the closing on September 13, 1978 the City's original mortgage was divided into (1) a Senior mortgage of $12,034,500 and (2) a Subordinate mortgage in the amount of $11,927,200 plus accrued unpaid interest. The receivership of the Administrator was terminated and control of the project was reconveyed to the owner. Finally, HUD insured the Senior mortgage and entered into a Regulatory Agreement with the owner.

 The agreement provides that "Owners shall make dwelling accommodation and services of the project available to occupants at charges not exceeding those established in accordance with a rental schedule approved in writing by the Secretary." Def. Exh. D, Regulatory Agreement P4(a). The contract further provides that HUD will consider requests for increases in a previously approved rental schedule to compensate for increased costs over which the owner has no control or to provide funds to pay debt service under the Subordinate Mortgage if "market conditions warrant" and the economic stability of the project will not be jeopardized. Id. at P4(c).

 The rental schedule annexed to the Regulatory Agreement at the time it was signed in September of 1978 was a copy of the one contained in the commitment issued by HUD in March of 1977, and was therefore almost identical to the original schedule submitted with the application thirteen months earlier. However, since the rental rates had been increasing proportionate to market rates between August 1977 and September 1978 the schedule approved by HUD in September, 1978 ...


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