290 Madison Corp. v. Capone

• Decision Date: 12 March 1980
• Docket Number: Civ. A. No. 76-1600.
• Citation: 485 F. Supp. 1348
• Parties: 290 MADISON CORPORATION and James Delaney and Helen Delaney, Plaintiffs, v. Carmine E. CAPONE et al., Defendants.
• Court: U.S. District Court — District of New Jersey

485 F. Supp. 1348

290 MADISON CORPORATION and James Delaney and Helen Delaney, Plaintiffs, v. Carmine E. CAPONE et al., Defendants.

Civ. A. No. 76-1600.

United States District Court, D. New Jersey.

March 12, 1980.

Anthony M. Mahoney, Bernstein & Mahoney, Cranford, N. J., for plaintiffs.

Francis J. Dooley, Orange, N. J., for defendants Capone et al.

Alfonso C. Viscione, Orange, N. J., for defendant Members of Rent Leveling Bd. of the City of Orange.

OPINION

WHIPPLE, Senior Judge.

This is an action brought under the Civil Rights Act, 42 U.S.C. § 1983, to redress alleged violations of plaintiffs' constitutional rights by defendant officials of the City of Orange, New Jersey. Plaintiffs are landlords in the City of Orange. Their complaint alleges that defendants, members of the city's Rent Leveling Board, members of the City Council and the Mayor, acting either conspiratorily or separately, violated their constitutionally-protected property rights by arbitrarily, capriciously and unlawfully regulating the rents plaintiffs were permitted to charge tenants in one of their apartment buildings. Plaintiffs alleged that defendants' actions caused economic losses to plaintiffs, eventually resulting in the loss of their apartment building through mortgage foreclosure. Plaintiffs seek compensatory and punitive damages, attorneys' fees and costs.

The case was tried to the Court, sitting without a jury, in September 1979. The parties submitted trial briefs, post-trial memoranda and proposed findings of fact and conclusions of law. After careful review of all testimony, exhibits, memoranda and oral argument the Court hereby adopts the following findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).

FINDINGS OF FACT

Plaintiffs James and Helen Delaney are engaged in the business of purchasing apartment buildings and renting out the individual units. In connection with their business the Delaneys have created corporations to hold title to their properties. One such corporation, wholly owned by the Delaneys, is plaintiff 290 Madison Corporation (hereinafter referred to as "the corporation").

In 1968 the corporation purchased an apartment building located at 466 Highland Avenue in Orange, New Jersey. The purchase price was $385,000. The Delaneys "loaned" to the corporation approximately $75,000 for the purchase. The corporation assumed the seller's first mortgage in the amount of $255,000 and the seller's second mortgage in the amount of $55,000.

In 1972 the property was re-mortgaged to the Independence Savings Bank of Brooklyn, New York for $350,000. The corporation paid off the original first and second mortgages in full with the proceeds of the new mortgage. The balance, approximately $62,000, was remitted to the corporation. This sum was then withdrawn from the corporation by Helen Delaney, purportedly as partial repayment of the $75,000 which she and James Delaney had loaned to the corporation in 1968 for the purchase of the property. Thus the corporation was left with virtually no cash and an apartment building with a mortgage indebtedness in the amount of $350,000. The corporation may fairly be described as an owner with extremely "thin" equity in the apartment building.

On November 1, 1972 the corporation conveyed the 466 Highland Avenue property to the Delaneys without consideration. The mortgagee was apparently not advised of this transfer. The corporation remained liable on the mortgage note.

On November 10, 1972 the City Council of the City of Orange passed an ordinance (hereinafter referred to as the "Rent Leveling Ordinance") which created the Orange Rent Leveling Board (hereinafter "RLB") and established procedures regulating rents on certain properties. The ordinance was amended eleven times thereafter. As applied to multiple unit dwellings like 466 Highland Avenue, the ordinance provided that landlords could apply to the RLB for 4% rent increases which the RLB would grant unless the landlord in question were found not to be in substantial compliance with state and local housing codes.¹ It is the defendants' application of the ordinance to plaintiffs' property which is the predicate for the instant complaint.

Beginning in 1973 tenants of the Highland Avenue building began to complain about the condition of the premises and the services (or lack thereof) provided by plaintiffs. The complaints culminated in a rent strike.

In April 1974 the corporation notified the tenants that it was seeking a 4% rent increase as allowed by the Rent Leveling Ordinance. The tenants appealed to the RLB, seeking that it deny the increase and instead roll back the rents due to an alleged decrease in services and maintenance in the building. The allegations pertaining to the property were substantiated by a report of city housing inspectors enforcing the state and local housing codes. The report was released on June 3, 1974 and contained a list of 124 code violations.

The RLB heard the tenants' appeal for the first time on July 9, 1974, and this hearing was continued on August 13, 1974. Plaintiffs, the Delaneys, presented their views at both meetings, although the presence of angry tenants rendered the sessions somewhat stormy. On August 14, 1974, the RLB by resolution denied the 4% increase and rolled back the rents $20.00 per apartment per month. The resolution, although passed with only a single member voting, was made in accordance with the RLB's own parliamentary rules of procedure.

The plaintiffs appealed the RLB's decision to the Commissioners of the City of Orange. The Commission functioned as an appellate tribunal from decisions of the RLB. The Commission refused to hear the case. Plaintiffs Delaneys sued in state court to compel the Commission to act. The state court remanded the matter to the Commission, which in turn remanded it to the RLB for a further hearing. This hearing was held in November 1974. Both the tenants and plaintiffs Delaneys testified. The RLB thereafter reaffirmed its earlier decision denying the 4% increase and rolling back the rents on all apartments.

In March 1975 the Delaneys filed a second suit in state court. They sought to have the actions of the RLB and of the Commission declared an inverse condemnation constituting an unconstitutional taking of property. This second state court action named as defendants the RLB and the Commission but not the individual members of those bodies. The state trial court found against the Delaneys on the constitutional issue, even though a judgment of foreclosure had been entered against the property (April 1977) some six months prior to entry of the state court judgment (September 1977). The state appellate court affirmed the lower court ruling in April 1979.

Plaintiffs' disputes with the city officials and the tenants' disputes with plaintiffs continued throughout 1975. In July 1975 the RLB found that the housing code violations upon which the rent rollbacks were based had been abated, and the RLB restored the "rolled-back" rents and granted the 4% rent increase which plaintiffs had requested more than a year before.

The tenants immediately objected. Additional hearings were held throughout the summer of 1975. At the hearings plaintiffs asserted and tenants disputed that the rollbacks and the denial of the 4% increase were causing plaintiffs severe financial hardship.

In the spring of 1975 plaintiffs stopped making mortgage payments on the property. In September 1975 the mortgagee instituted a foreclosure action in a New Jersey state court. A judgment of foreclosure was entered on April 18, 1977, and the property was sold shortly thereafter.

Plaintiffs filed the instant complaint on August 13, 1976. The named plaintiffs were the Delaneys, trading as the 290 Madison Corporation. At an early stage of the litigation, when the case was before another judge in this district,² plaintiffs' counsel represented to that judge that the property was owned by the corporation and not by the Delaneys. Consequently, the complaint was amended to delete the Delaneys and add the corporation as the sole plaintiff. But, on the eve of the conclusion of trial (in September 1979), it emerged that the Delaneys, and not the corporation, held title to the property since 1972. Plaintiff corporation moved at that time to amend the complaint to add the Delaneys as plaintiffs. The Court granted the motion to amend under Fed.R.Civ.P. 15(a) & (c).

In addition to all of the foregoing facts, the evidence adduced at trial established that plaintiffs depreciated the 466 Highland Avenue property (as well as most if not all of their other apartment buildings) using an accelerated method of depreciation. The use of accelerated depreciation methods, though perfectly lawful under the Internal Revenue Code, see I.R.C. § 167(b), has the effect of artificially inflating expenses and thereby creating, "on paper", a smaller net profit (or larger net loss) than an individual actually³ incurs. See generally T. Fiflis & H. Kripke, Accounting for Business Lawyers, 211-14 (1971); Note, Accelerated Depreciation and State Ratemaking Policy: The Case of California, 31 Stan.L.Rev. 265, 267-70 (1979). On account of the use of an accelerated method of depreciation, plaintiffs' Highland Avenue property showed depreciation of approximately $209,000 for the period 1972-1977.

The evidence also established that plaintiff 290 Madison Corporation was nothing more than the alter ego of plaintiffs Delaneys, a true "shell" corporation. The Delaneys used the building's substantial depreciation as an expense for purposes of their personal income tax returns⁴ and withdrew funds from its capital account just as if that account were their personal property.⁵ In short, there was never a clear demarcation between the financial accounts and affairs of the individuals and those of their corporate creation, such that the creation never had an existence independent of and separate from its creators.

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