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ECON. OPPORTUNITY COM'N v. CTY. OF NASSAU

May 3, 1999

ECONOMIC OPPORTUNITY COMMISSION OF NASSAU COUNTY, INC., CEDC, INCORPORATED, AND JOHN L. KEARSE, PLAINTIFF,
v.
THE COUNTY OF NASSAU, INCORPORATED, VILLAGE OF HEMPSTEAD, INCORPORATED, VILLAGE OF HEMPSTEAD COMMUNITY DEVELOPMENT AGENCY, CLINTON C. BOONE, TINA HODGE-BOWLES, JOHN COURTNEY, JAMES A. GARNER, ALVINA GRAY, GLEN SPIRITIS, CHARLES THEOFAN, THOMAS S. GULOTTA, OWEN B. WALSH, KENNETH CYNAR, JOSEPH W. RYAN, JR., HARRISON J. EDWARDS AND DONALD J. CAMPBELL, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

    MEMORANDUM OF DECISION AND ORDER

This lawsuit arises from the claims of the plaintiffs, including the Economic Opportunity Commission of Nassau County, Inc. ("EOC"), a self-described "official antipoverty community action agency for Nassau County," that the defendants, consisting of local municipalities, agencies and officials, conspired, among other things, to unlawfully deprive it of a multi-million dollar loan guarantee by the United States Department of Housing and Urban Development ("HUD"), so as to obtain control of the plaintiffs' coveted properties. The Complaint raises claims of due process and equal protection under 42 U.S.C. § 1983; conspiracy and substantive violations under the Racketeer and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and (d); and several common law causes of action. At issue are three, separately-filed motions to dismiss the Amended Complaint (the "Complaint"), pursuant to Federal Rule of Civil Procedure 12(b)(6), by the Village of Hempstead defendants (the "Village"), the Nassau County defendants (the "County"), and the defendant Incorporated Village of Hempstead Community Development Agency (the "CDA"). The County also moves to dismiss pursuant to Rule 9(b).

I. BACKGROUND

The following facts are derived from the Complaint.

A. The Parties

1. The Plaintiffs

The plaintiff Economic Opportunity Commission of Nassau County, Inc. ("EOC") is a private, nonprofit corporation which serves as the "official anti-poverty community action agency for Nassau County," New York. The plaintiff CEDC, Incorporated ("CEDC"), also a private, nonprofit corporation, serves as the "economic development arm" of the EOC and administers certain community development programs in the County. The plaintiff John L. Kearse ("Kearse") serves as the Chief Executive Officer of both the EOC and the CEDC.

Kearse is a long-time community activist who states that he "was a motivating force behind the recent successful federal court constitutional challenge to the composition of [the] County's governing body." His political activities have contributed to the "creation of [the] current County Legislature, which has served to enhance the political influence of the minority community," albeit, allegedly at the expense of the "controlling political establishing" in the County, which opposed Kearse's efforts "with vigor."

The EOC owns and occupies two properties. The first property is a building, which the plaintiffs renovated, located at 134 Jackson Street, in Hempstead, Nassau County (the "Jackson Street building"). The Jackson Street building "serves as a primary example of the recent revitalization effort" the plaintiffs have conducted in a "previously dilapidated area" of the Village.

In 1977, CEDC purchased the second property, the Hempstead Bus Terminal Building, located at 100 Main Street in Hempstead, Nassau County (the "Bus Terminal" and, collectively with the Jackson Avenue building as "the Properties") for the purpose of providing "a consistent income base" for the plaintiff agencies and "as a symbol of the ability of the minority, low-income committee to become economically self-sufficient."

Several years later, in or about May 1993, CEDC undertook major renovations at the Bus Terminal. The work was financed through a program adopted as part of the Housing and Urban Development Act of 1974, codified at 42 U.S.C. § 5308, and commonly referred to as a "Section 108 loan guarantee." The Section 108 loan guarantee was issued to Nassau County, as recipient, and the Village of Hempstead, as sub-recipient, for the purpose of eventually channeling the funds to the EOC and the CEDC. Under this arrangement, the Village, through its Community Development Agency (the "CDA"), loaned 6.25 million to the CEDC of which approximately $2 million was used to satisfy an existing mortgage on the property. The balance of the funds were allocated for renovations. The loan was secured by a $6 million first mortgage, with the CDA as the mortgagee.

2. The Defendants

a. The CDA Defendants

The CDA is empowered to design and implement urban renewal projects in the Village. Many of the defendants in this case are CDA officials who are sued in their individual and official capacities: Clinton C. Boone ("Boone") is the Vice-Chairman of the CDA and a member of the Board of Directors; Tina Hodge-Bowles ("Hodge-Bowles") is the Secretary of the CDA and a member of the Board of Directors; John Courtney ("Courtney") is the Treasurer of the CDA and a member of the Board of Directors; James Dunne ("Dunne") is a member of the CDA's Board of Directors; Alvina Gray ("Gray") is the Deputy Commissioner of the CDA and a member of the Board of Directors; Glen Spiritis ("Spiritis") is the Commissioner of the CDA; Charles Theofan ("Theofan") is the Assistant Commissioner for Legal Affairs of the CDA; Anne Martin ("Martin") is a member of the CDA's Board of Directors; and James A. Garner ("Garner"), is the Village Mayor and the Chairman of CDA's Board of Directors (collectively, the "CDA defendants").

b. The Nassau County Defendants

The Nassau County defendants, who also are sued in their individual and official capacities, include the following: Thomas S. Gulotta ("Gulotta") is the Nassau County Executive; Owen B. Walsh ("Walsh") is the Nassau County Attorney; Kenneth Cynar ("Cynar") is the Special Assistant to the County Executive; Joseph W. Ryan, Jr. ("Ryan") serves as Special Counsel to the County Attorney; Harrison J. Edwards ("Edwards") is the Special Counsel to the Nassau County Department of Housing and Intergovernmental Affairs; and Donald J. Campbell ("Campbell") is the Commissioner of the Nassau County Office of Housing and Intergovernmental Affairs (collectively, the "County defendants").

  B. The Defendants' Alleged Efforts to Control the Bus
     Terminal

As noted previously, in 1993, CEDC undertook major renovations needed at the Bus Terminal. However, by the plaintiffs' account, the CDA threw up roadblocks at every turn. For example, the CDA insisted that the contract for a general contractor to perform the work be put out for a public bid, rather than permit the CEDC to perform the work itself. Then, when the CEDC submitted the lowest bid to serve as the general contractor, the CDA nevertheless demanded that the contract be awarded to the next lowest bidder, Viron Company, Inc. ("Viron").

At the encouragement of Mayor Garner and CDA Commissioner Spiritis, Viron subcontracted with another company, QDR Consultants and Development Co. ("QDR"), for a $1.3 million part of the work. "The result was a disaster," the plaintiffs maintain. QDR did not complete the work it designated for itself, and did not pay its own subcontractors. When Kearse tried to terminate QDR, the CDA and Village officials "threatened" him, saying that "any action taken to terminate the [QDR] contract would result in CDA not releasing any further funds to the project."

As a result of Viron's failure to complete the project in a timely or competent manner, CEDC was unable to generate sufficient rental income from the Bus Terminal to satisfy its real estate tax and mortgage obligations for the property. As of 1995, CEDC was unable to lease more than 30% of the projected available office space in the Property due to the "massive construction problems" that resulted in "burdensome construction delays and thwarted completion." According to the plaintiffs, officials from the Village and the CDA conspired to cause these delays and cost overruns in an effort to "divest CEDC of its real property, to discredit and defame Plaintiffs for controversial political activities, and to improperly subvert and discontinue funding for EOC."

The Complaint further alleges that the CEDC's efforts to increase the rent roll at the Property were "inhibited by Defendants' actions to discourage public agencies from leasing available space in the building," despite the pressing need for office space in the Village, and the Bus Terminal's convenient location at the "heart of the District Court area." In this regard, the plaintiffs state that the County canceled a bidding process to house the Bureau of Traffic Violations "after it became apparent that CEDC was ready to submit the lowest bid and win the contract to house the agency." Also, the CDA and the Village "selectively and discriminatorily chose to preclude CEDC from leasing property" to a methadone clinic, despite the fact that existing zoning regulations would have permitted the lease. The actions of the County, the CDA and the Village resulted in the plaintiffs allegedly losing "at least $100,000" each year in rental income.

C. The Failed Effort to Gain Section 108 Refinancing

In 1994, CEDC communicated with officials at HUD and learned that Section 108 funds might be made available to restruture the mortgage and make additional funds available for the rehabilitation of the Bus Terminal.

In February 1994, the defendant Cynar, the Special Assistant ot the County Executive, entered into a "verbal agreement with Plaintiffs," promising that the County would complete HUD refinancing of the Bus Terminal "expeditiously and without undue delay." Contrary to this agreement, the County delayed refinancing "for a substantial period of time," thereby pushing the plaintiffs further into debt.

More than a year later, in September 1995. Nassau County submitted an application to HUD requesting a $10 million Section 108 loan guarantee on the CEDC's behalf. In May 1996, HUD approved an $8 million loan guarantee, and gave the County a 6 month window to execute the agreement for the restructuring. In a subsequent letter dated January 22, 1997, from HUD to Campbell, the Commissioner of the Nassau County Office of Housing and Intergovernmental Affairs, HUD reiterated its desire to proceed with the contemplated refinancing and requested that the County refrain from asserting its tax lien on the Bus Terminal. In addition, the HUD letter served notice that an additional $2 million dollars was available to increase the refinance package.

During the 6-month window, the plaintiffs and the County negotiated, unsuccessfully, regarding the refinancing agreement. During that time, the County continuously promised it would expeditiously finalize the restructure agreement and that the CEDC would soon receive the federally guaranteed loans. The County also agreed that it would forbear delivery of a tax deed and foreclosure of the mortgage, which would divest CEDC of ownership of the properties, in light of the oral agreement to refinance. However, the County never executed the agreement for the restructuring.

According to the plaintiffs, the County needlessly prolonged the fruitless negotiations, under the guise of seeking stricter financial controls over the CEDC's operations, in order to drive the CEDC further into debt and ultimately seize control of the valuable Bus Terminal by issuing a tax deed. The County required the CEDC to accept numerous rigorous conditions, that had not been part of the HUD proposal, such as demanding that the CDA be a party to the transaction, application or approval, and that the CEDC consent to the Village holding increased financial control over the property.

Also towards this end, the County initiated an investigation by the defendant Ryan, Special Counsel to the County Attorney, to study the CEDC's operations and the proposed refinancing. On May 20, 1997. Ryan issued a report recommending that the refinancing be completed under certain conditions, including the appointment of an independent comptroller. On or about July 22, 1997, the CDA served the CEDC in a foreclosure lawsuit with regard to the Bus Terminal Property. Approximately a week later, on July 31, 1997. Ryan issued an amended report recommending that the County terminate its refinancing negotiations with the CEDC due to irreconcilable differences between the parties. The County followed Ryan's recommendation, and filed a tax deed against the property, which is currently in the County's ownership and possession.

The plaintiffs contend that the defendants have attempted "to cripple the operational ability" of the EOC and the CEDC, in that the defendants are "well aware that foreclosure proceedings against the [Bus Terminal] will likely result in a deficiency judgment, rendering the 134 Jackson Street property vulnerable to creditors."

D. The Social Services Agreement

The CEDC's activities have been funded, in part, through successive agreements with the Nassau County Department of Social Services (the "DSS Agreement"). Most recently, the County and the EOC entered into a written DSS Agreement dated January 17, 1997, and amended July 3, 1997, in which the County agreed to provide $1,766,720 to the EOC to cover administrative expenses, including legal fees. This DSS Agreement is a successor agreement to a similar 1996 agreement between the County and the EOC. The 1997 DSS Agreement requires that the County reimburse the EOC for expenses related to administrative functions, and further provides that the EOC may transfer or exchange funds between specific administrative budget items as long as the overall cost does not exceed the maximum contract amount. Under the DSS Agreement, the EOC must submit vouchers to the County for reimbursement of expenses incurred as a result of the administrative functions covered.

The Complaint alleges that as of September 6, 1997, the County violated the DSS Agreement by failing to reimburse the EOC for $131,235.67 that it expended on legal fees which were reimbursable under the Agreement.

E. Procedural History of this Case

The plaintiffs commenced this action on or about October 23, 1997, by serving a summons and complaint alleging due process and equal protection claims under Section 1983, RICO claims, and various state common law claims.

On April 13, 1998, United States Magistrate Judge Michael L. Orenstein directed the plaintiffs to file a RICO case statement, and a motion to amend their complaint, apparently after some discussion as to the viability of RICO claims against the municipal defendants.

After a series of conferences before Magistrate Judge Orenstein, and several interim proceedings, the plaintiffs filed the Amended Complaint at issue, which redacted allegations that the County and the Village were part of a RICO association-infact enterprise, and removed the municipalities as RICO defendants.

F. The Claims Raised in the Complaint

The claims raised in the Complaint are listed below, with numbers corresponding to those designated in the Complaint.

  1. § 1983: Due Process/Takings Clause Claim and Equal
     Protection Claim Against All the Defendants

a. As Against All of the Individual Defendants

The Complaint alleges that all of the individual defendants conspired to violate the plaintiffs' constitutional rights to due process and equal protection by: (1) wrongfully taking, without just compensation, the properties at issue; (2) interfering with the plaintiffs' right to receive approved Section 108 loan guarantees; (3) maliciously interfering with the plaintiffs' right to manage and control their property; and (4) violating the express terms of the social services agreement between the EOC and the County by refusing to reimburse EOC for legal fees that it incurred and continues to incur as a result of the defendants' allegedly wrongful conduct.

b. As Against the Village, the County and the CDA

The Complaint alleges that these defendants, acting through municipal officers at the insistence of final policymakers, and as the result of an unannounced municipal policy to acquire valuable property in urban renewal areas, knowingly and purposefully conspired to violate the plaintiffs' due process and equal protection rights by: (1) wrongfully and illegally taking, without just compensation, the properties at issue; (2) interfering with the plaintiffs' right to receive approved Section 108 loan guarantees; (3) maliciously interfering with the plaintiffs' right to manage and control their property; and (4) violating the express terms of the social services agreement between the EOC and the County by refusing to reimburse EOC for legal fees that it incurred and continues to incur as a result of the defendants' allegedly wrongful conduct.

    c. As Against the CDA Commissioner Spiritis, the Village
                           and the CDA

The Complaint states that these defendants, acting through final policy makers and pursuant to the CDA's unannounced policy of improperly asserting control over private properties in the Village, violated the plaintiffs' due process and equal protection rights by "circumventing the legally agreed upon bidding procedures so as to ensure that contractors subject to their influence and ...


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