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435 Central Park West Tenant Association v. Park Front Apartments, LLC

Supreme Court, New York County

July 24, 2017

435 Central Park West Tenant Association, YASUTO TAGA, LYDIA BAEZ, CESAR PENA, JORGE MARTINEZ, MARTHA ARIF, JOY HARRIS, ALTON SWIFT, JENNIE MORTON-GARCIA, MARTHA ADAMS, ALLADIN WALTERS, VICTORIA FRASIER, JOSE REGALDO, JUAN HUNTT, CHRISTINE BARROW, GEORGE PARKER, BJORG JEAN-PIERRE, MARIA CRUZ, and HIRAM CHAPMAN, Plaintiffs,
v.
Park Front Apartments, LLC., Defendant.

          CAROL R. EDMEAD, J.

         Plaintiffs are 435 Central Park West Tenant Association, an unincorporated association comprising low and moderate income tenants of the subject building located at 435 Central Park West, New York, NY 10025 (the "Building"), and individual tenants of the Building (the "Tenants"). Plaintiffs commenced this action against Defendant Park Front Apartments, LLC ("Owner"), the current owner of the Building, seeking declaratory judgment that Plaintiffs' tenancies are subject to the local Rent Stabilization Law (the "RSL"), damages stemming from overcharging, and various forms of injunctive relief.

         Before the Court is Owner's motion for summary judgment pursuant to CPLR 3212 seeking: (1) dismissal of Plaintiffs' Complaint in its entirety; and (2) a judgment declaring that the subject building is and has always been subject to federal preemption from local rent regulation.

         Plaintiffs oppose dismissal, and cross-move for summary judgment on their first cause of action for a declaration that the Building is subject to local rent regulation or, if the court finds that federal preemption is applicable, that the Building is governed by HUD Handbook guidelines.

         BACKGROUND FACTS

         The Initial (1969) Subsidy and Regulatory Agreement

         Owner's predecessor Jacob Haberman (the "Former Owner") took title to the Building on or about July 29, 1969 (Owner Aff ¶ 5, Owner Exh C; [1] Pl Affirm ¶ 8 [2]). At the time, the subject property consisted of nine separate tenement buildings known as 431 through 439 Central Park West, which were rehabilitated and combined into a single apartment building to be used as rental housing for low and moderate income families (Owner Aff ¶ 6). The building contains 120 units (Owner Aff ¶ 4).

         On July 29, 1969, in connection with the proposed rehabilitation of the Building, the Former Owner and the Federal Housing Administration ("FHA") entered into a "Regulatory Agreement for Limited Distribution Mortgagor Projects under Section 221(d)(3) of the National Housing Act, as Amended" (Owner Aff ¶ 8; Def Exh E, the "1969 Regulatory Agreement"). The Former Owner obtained a below-market, 3%, 40-year mortgage loan for the Building, classifying the Building as a "Subsidized Project, " or a § 221(d)(3) Below Market Interest Rate project (Owner Aff ¶ 9, the "Loan"). The Loan was secured by a Secured Note insured and subsidized by the FHA Commissioner (id.).

         Tenants first moved into the newly-unified Building in January of 1971 (id.).

         The 1980 Grant

         In or about 1980, the Former Owner applied for, and HUD granted, a Flexible Subsidy Grant pursuant to 12 USC § 1715z-1a, also known as Section 201 of the Housing and Community Development Amendments of 1978 (the "1980 Subsidy"). The Former Owner and HUD entered into a Financial Assistance Contract on or about February 29, 1980 in connection with the 1980 Grant (the "1980 Subsidy Contract"). The 1980 Subsidy Contract required the Former Owner to maintain the low- and moderate-income character of the project until the Loan's maturity date, subsequently amended to extend until April 11, 2011 (Owner Aff ¶ 18-19, Pl Affirm ¶ 10). [3]

         From the Loan's origination to the Owner's prepayment of the Loan on December 29, 2000, the parties agree that federal law preempted local and state regulations.

         The Loan Prepayment and Use Agreement

         In 1999, the Former Owner was considering prepayment of the Loan (Owner Aff ¶ 20). Concerned that prepayment might end federal preemption of local and state regulations, the Former owner sought the opinion of the New York State Division of Housing and Community Renewal ("DHCR") regarding federal preemption of local rent regulation pursuant to a "superseding Use Agreement" -- essentially a contract between HUD and Owner setting forth rules, regulations, and obligations relating to the building after prepayment (id., Exh J [the "Use Agreement"]).

         The Use Agreement set forth, among other things, the regulatory scheme for the Building after prepayment (Owner Aff ¶ 24, Exh J). Part of the Use Agreement indicated that the Owner "agreed to continue the low and moderate income affordability restrictions, and has agreed to continue certain other restrictions until April 1, 2016" (Owner Aff ¶¶ 24-26, Exh J at 1-2).

         As relevant here, the Use Agreement's preemption provision provides that

Effective immediately upon the prepayment of the Mortgage Note, the Prior Use Agreement, the Regulatory Agreement and any and all other documents applying to the Project granted in favor of the Commissioner or the Department of Housing an[sic] Urban Development, or to which the Commissioner or the Department of Housing and Urban Development is a party shall be terminated and of no further force or effect, except that this Use Agreement shall continue HUD's preemption of state and/or local rent regulation (Owner Aff ¶ 27, Exh J ¶ 7 [emphasis added]).

         On December 17, 1999, in response to Owner's request, DHCR issued an opinion letter which found that

"HUD's position [that the project should retain its preemption after prepayment of its mortgage] is clearly reasonable [and that] it is DHCR's opinion that after prepayment of its mortgage, [the building] should remain free of any existing New York City rent regulation until such time as HUD relinquishes its level of control of the project. Presumably this would occur at the expiration of the above described use agreement" (Owner Aff ¶ 21-22, Exh I [emphasis added]). [4]

         In or about November of 2000, Owner and HUD executed the Use Agreement. Shortly thereafter, on or about December 29, 2000, Owner prepaid the loan (Owner Aff ¶ 23, Exh J; Pl Affirm ¶ 13-14). There is nothing in the record evidencing Plaintiffs' receipt of, or response to, the Use Agreement itself. [5]

         After Owner recorded the Use Agreement on or about March 1, 2001, Owner entered into new leases with various Plaintiffs (Owner Aff ¶ 29). A rider accompanying these leases bore, in boldface and underlined capital letters, language explicitly informing the tenant that, "pursuant to a HUD Use Agreement, " federal law preempted any otherwise-applicable state or local law, including the RSL (Owner Aff ¶ 29, Exh L). [6] Beginning in 2002, Owner began to charge, and Plaintiffs began to pay, the annual 7.5% rent increases authorized by the Use Agreement (Owner Aff ¶ 30).

         Plaintiffs Commence This Action

         On November 23, 2016, Plaintiffs filed the Complaint, which asserts four causes of action seeking:

(1) a judgment declaring that local rent regulations were not preempted by the Use Agreement, and therefore that Tenants' apartments were subject to the RSL since November of 2000;
(2) if the RSL is found applicable, individual money judgments for all Plaintiffs representing the difference between the amount charged under the Use Agreement and the lower amount which should have been charged under the RSL, together with treble damages, costs, attorneys' fees, and injunctive relief directing Owner to register the Building with the DHCR Office of Rent Regulation and calculate future rents in compliance with the RSL;
(3) pursuant to General Business Law 349(h), an order and judgment enjoining unlawful acts by Owner and awarding treble monetary damages and attorneys' fees; and
(4) if the Use Agreement is found to preempt the RSL, an order declaring that Plaintiffs' rent increases did not comply with the HUD Handbook and that future rent increases shall comply, and a judgment for each Plaintiff refunding all noncompliant rent payments.

         Owner's Motion and Plaintiffs' Cross-Motion

         Owner moves for summary judgment on all causes of action.

         Plaintiffs oppose Owner's motion, and cross-move for summary judgment only on the first cause of action. Plaintiffs also ask that if the Court finds federal preemption applicable, that the Court also find the HUD Handbook applicable, and reserve for trial any determination of alleged violations of the Handbook.

         DISCUSSION

         I. Summary ...


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