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In the Matter of J-P Group, LLC v. New York State Department of Economic Development

January 31, 2012

IN THE MATTER OF J-P GROUP, LLC,
PETITIONER-RESPONDENT,
v.
NEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT, EMPIRE STATE
DEVELOPMENT CORPORATION, COMMISSIONER OF ECONOMIC DEVELOPMENT, DENNIS MULLEN
(ACTING), EMPIRE ZONE DESIGNATION BOARD,
RESPONDENTS-APPELLANTS,
ET AL.,
RESPONDENT.



Appeal from a judgment (denominated order) of the Supreme Court, Erie County (Joseph R. Glownia, J.), entered August 25, 2010 in a proceeding pursuant to CPLR article 78.

Matter of Matter of J-P Group, LLC v New York State Dept. of Economic Dev.

Appellate Division, Fourth Department

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on January 31, 2012

PRESENT: SMITH, J.P., FAHEY, CARNI, SCONIERS, AND GORSKI, JJ.

The judgment, inter alia, granted the petition to annul the determination of respondent New York State Department of Economic Development revoking petitioner's certification as a qualified Empire zone enterprise.

It is hereby ORDERED that the judgment so appealed from is unanimously modified on the law by vacating the first and third through seventh decretal paragraphs and as modified the judgment is affirmed without costs.

Memorandum: Petitioner owns and manages commercial rental properties within an Empire zone and was certified as a qualified Empire zone enterprise effective March 19, 2002 (see General Municipal Law § 955 et seq.). In April 2009, the Legislature amended General Municipal Law § 959 (a) to revise the eligibility for businesses receiving Empire zone benefits (see L 2009, ch 57, part S-1, § 3) and, by the same legislation, amended numerous sections of the Tax Law that provided tax credits to businesses receiving those benefits (see L 2009, ch 57, part S-1, §§ 11-22). Sections 11 through 17 of that legislation stated that "[a]ny carry over of a credit from prior taxable years will not be allowed if an [E]mpire zone retention certificate is not issued pursuant to [General Municipal Law § 959 (w)] to the [E]mpire zone enterprise [that] is the basis of the credit," and sections 18 through 22 contained similar provisions. The subject amendments were to "take effect immediately," with the exception of, inter alia, the Tax Law amendments in sections 11 through 22 of the legislation, which were to "apply to taxable years beginning on and after January 1, 2008" (L 2009, ch 57, part S-1, § 44 [a]).

On June 29, 2009, respondent New York State Department of Economic Development (DED) revoked petitioner's certification as a qualified Empire zone enterprise retroactive to January 1, 2008 on the ground that petitioner "failed to provide economic returns to the [S]tate in the form of total remuneration to its employees (i.e. wages and benefits) and investments in its facility greater in value to the tax benefits [petitioner] used and had refunded to it" (General Municipal Law § 959 [a] [v] [6]). Petitioner appealed to respondent Empire Zones Designation Board (EZDB), but the EZDB upheld the revocation of petitioner's certification. Petitioner then commenced this CPLR article 78 proceeding seeking, inter alia, to annul the determination revoking its certification as a qualified Empire zone enterprise and reinstating its certification as such an enterprise. Supreme Court granted the petition in its entirety, and it declared that, inter alia, the amendments to General Municipal Law § 959 (a) are not retroactive, that the emergency regulations promulgated by the DED Commissioner pursuant to General Municipal Law § 959 were null and void inasmuch as they were improperly filed and otherwise defective, and that the revocation of petitioner's Empire zone certification was arbitrary and capricious and thus null and void.

We note at the outset that the court erred in granting declaratory relief inasmuch as petitioner did not seek such relief in this CPLR article 78 proceeding. We agree with the court, however, to the extent that it determined that the amendments to General Municipal Law § 959 are prospective only (see James Sq. Assoc. LP v Mullen [appeal No. 2], ___ AD3d ___ [Nov. 18, 2011]). Although the Legislature intended that the subject amendments were to apply retroactively, we have recently held that such "retroactive application . . . violates [a party's] due process rights" (id. at ___).

We agree with respondents, however, that the court erred in determining that there was no rational basis for the determination to revoke petitioner's Empire zone certification. "It is well established that [j]udicial review of an administrative determination is limited to whether the administrative action is arbitrary and capricious or lacks a rational basis . . . Such a determination is entitled to great deference . . ., and [a] reviewing court may not substitute its own judgment for that of the agency" (Matter of Walker v State Univ. of N.Y. [Upstate Med. Univ.], 19 AD3d 1058, 1059, lv denied 5 NY3d 713 [internal quotation marks omitted]).

General Municipal Law § 959 (a) (v) (6) authorized the DED Commissioner to promulgate emergency regulations governing "the decertification by the [C]commissioner . . . of business enterprises for benefits referred to in [section 966] with respect to an [E]mpire zone . . . upon a finding [that] . . . the business enterprise has failed to provide economic returns to the [S]tate in the form of total remuneration to its employees (i.e. wages and benefits) and investments in its facility greater in value to the tax benefits the business enterprise used and had refunded to it . . . ." Thus, businesses producing less than $1 in actual wages and benefits and investments for every $1 in State tax incentives (hereafter, 1:1 cost-benefit test) were to be decertified from the program. The emergency regulation promulgated pursuant to General Municipal Law § 959 (a) (v) (6) is set forth in part in 5 NYCRR 11.9 (c) (2), which provides that the DED Commissioner "shall revoke the certification of a business enterprise upon a finding that . . . a business enterprise that has submitted at least three years of business annual reports has failed to provide economic returns to the [S]tate in the form of total remuneration to its employees (i.e., wages and benefits) and investments in its facility that add to a greater value than the tax benefits the business enterprise used and had refunded to it . . . ." That regulation further provides that "a business enterprise that has submitted at least three years of business annual reports shall have failed [the 1:1 cost-benefit test] if the sum of . . . all wages and benefits paid to all employees of the business enterprise in the zone . . . and . . . the value of capital investments in the zone, as indicated in the business enterprise's business annual reports submitted and reporting for any of the years from and including [2001] through and including . . . [2007], does not exceed the total amount of [S]tate tax benefits the business enterprise used and had refunded to it or its members, partners or shareholders under the [E]mpire zones program as indicated in the business annual reports submitted and reporting for any of the years from and including [2001] through and including [2007] . . . ."

Here, the revocation of petitioner's Empire zone certification had a rational basis based on the business annual reports that petitioner submitted to respondents. Those reports establish that petitioner has a cost-benefit ratio of .9 for the years 2002 through 2007 and thus produced less than $1 in actual wages and benefits and investments for every $1 in State tax incentives it received. The data contained in the schedule that petitioner submitted to the EZDB on administrative appeal indicates that petitioner had an even lower cost-benefit ratio of .795. Respondents, albeit tersely, relied on petitioner's data in revoking its Empire zone certification inasmuch as the EZDB upheld the determination by the DED revoking petitioner's certification on the ground that it "failed to provide economic returns to the [S]tate in the form of total remuneration to its employees (i.e. wages and benefits) and investments in its facility greater in value to the tax benefits [that petitioner] used and had refunded to it." The language used by the DED and upheld by the EZDB is consistent with the language of General Municipal Law § 959 (a) (v) (6), and those respondents thereby concluded that petitioner failed the 1:1 cost-benefit test. Contrary to petitioner's contention, respondents were not required to rely only on the business annual reports for the three years during the 2002-2007 period in which petitioner passed the 1:1 cost-benefit test. General Municipal Law § 959 (w) requires that decertification "be based upon an analysis of data contained in at least three business annual reports filed by the business enterprise" (emphasis added), and the emergency regulations promulgated by the DED Commissioner pursuant to section 959 condition decertification upon an analysis of a data set to be derived from "the business annual reports submitted and reporting for any of the years from and including [2001] through and including [2007]" (5 NYCRR 11.9 [c] [2] [emphasis added]). Contrary to petitioner's further contention, we conclude that it was not entitled to a hearing concerning the revocation of its Empire zone certification (see ...


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