Argo v. Hills

Decision Date13 January 1977
Docket NumberNo. 76 C 1969.,76 C 1969.
Citation425 F. Supp. 151
PartiesLynn ARGO et al., Plaintiffs, v. Carla HILLS, Individually and as Secretary of Housing and Urban Development of the United States, et al., Defendants.
CourtU.S. District Court — Eastern District of New York

Rosenstein & Kahn, New York City, for plaintiffs.

David G. Trager, U. S. Atty., E.D.N.Y. by Prosper K. Parkerton, Asst. U. S. Atty., Brooklyn, N.Y., Squadron, Ellenoff & Plesent, W. Bernard Richland, Corp. Counsel, Ellis S. Franke, Gen. Counsel, Conciliation and Appeals Bd., New York City, for defendants.

OPINION and ORDER

PLATT, District Judge.

This case involves the complex interplay of the New York City rent control laws, the National Housing Act, and the Due Process Clause. It comes before this Court on cross-motions for injunctions to prohibit or order the payment of certain rent increases.

FACTS

Birchwood Towers #1 and Birchwood Towers #2 ("Birchwood Towers") are multifamily housing projects located in Forest Hills, New York. The plaintiffs in this action are various individual tenants of Birchwood Towers and the Birchwood Towers Tenants Association, Inc. ("Tenants"). The defendants are the owners and operators of Birchwood Towers ("Landlord"), Carla Hills as Secretary of the Department of Housing and Urban Development ("HUD"), the Conciliation and Appeals Board of the City of New York ("CAB") which is authorized to administer the Rent Stabilization Code, and the Housing and Development Administration of the City of New York ("HDA"), which is the agency charged with the administration of the Rent Stabilization Law and with supervising the CAB.

Birchwood Towers is a middle income development built in 1963 which was financed by two mortgages totaling nearly sixteen million dollars. These mortgages were endorsed and guaranteed by HUD pursuant to § 207 of the National Housing Act, 12 U.S.C. § 1713. As a condition of guaranteeing the mortgages, HUD required the Landlord to sign a regulatory agreement which allows HUD to control the Landlord's activities as to "rents or sales, charges, capital structure, rate of return, and methods of operation to such extent and in such manner as to provide reasonable rentals to tenants and a reasonable return on the investment." 12 U.S.C. § 1713(b)(2).

In 1969 the New York City Rent Stabilization Law and Rent Stabilization Code ("rent control laws") became effective and Birchwood Towers joined the Rent Stabilization Association and became subject to those laws. At that time, apparently in order to comply with HUD's regulatory agreement, the Landlord put into all leases for apartments at Birchwood Towers a rider which provided that should HUD approve or require a rental charge greater than that approved or required by the CAB under the local rent control laws, the tenant would pay the federally approved rental immediately.

On November 4, 1974, the Landlord applied to CAB for hardship rent increases allowable under § 43 of the Rent Stabilization Law of the City of New York. Under Chapter XIII of that law if the tenants wish to contest the landlord's application, they have an opportunity to submit forms showing "any incorrect matter or items contained in the owner's application." R.S.L. Chap. XIII 2. At this point if "there are many tenants involved who are making the complaint or claim, or if the factual situation is very involved, the CAB may determine a hearing is necessary." R.S.L. Chap. XIII 1. See also Rules of the Conciliation and Appeals Board promulgated October 10, 1969.

In this case, since the Landlord's application, the CAB has requested various information from the Landlord, but there is some dispute whether the Landlord has fully complied with those requests and thus whether their application for the hardship increase was ever complete. In any case, as of the date of this opinion the CAB has not granted the Landlord any increase in rent.

On February 6, 1975, the Landlord filed an application for rent increases with HUD. On July 23, 1975, HUD approved rent increases so that the annual rental for Birchwood Towers would be $3,795,104. The maximum permitted under CAB regulations was $3,256,288. On September 9, 1975, the Landlord requested CAB to issue the necessary orders to permit the Landlord to collect the HUD approved rents.

On October 22, 1975, HUD adopted a regulation concerning the authority of local rent control laws over HUD projects. 24 C.F.R. § 403 (1975). That regulation provides in relevant part that "HUD will preempt the regulation of rents for such projects when the Department determines that the delay or decision of a board, or other authority regulating rents pursuant to state or local law, jeopardizes the Department's economic interest in the project." 24 C.F.R. § 403.5 (1975).

In order for Landlord to have HUD preempt the local rent control laws under the above regulation, the Landlord must file an application for increases in rent with HUD and notify the local board, in this case the CAB, of that application. If the local board does not act within 30 days and HUD determines that the delay will jeopardize the Department's interest in the guaranteed mortgager, HUD issues "a formal certification that it has pre-empted local rent controls as to such rents in order to protect the Department's economic interest in the project. Copies of the certification shall be transmitted to the mortgagor, the local HUD office, the Regional Office, and the board." 24 C.F.R. § 403.6(e). Nowhere in this pre-emption process are the tenants of the HUD projects allowed any opportunity to be heard.

On May 7, 1976, the Landlord requested HUD to issue a certificate of pre-emption pursuant to 24 C.F.R. § 403. On May 26, 1976, HUD advised CAB that it was imperative that CAB render a decision on the Landlord's hardship application or HUD would consider issuing certificates of preemption for Birchwood Towers.

On June 29, 1976, CAB advised HUD that the Landlord had not completed his application for hardship increases and further (letter from CAB to HUD, June 29, 1976):

"in the event the owner qualifies for a comparative hardship increase under the provisions of the Rent Stabilization Law, the rent increase granted the owner in any hardship order would be collectible in an amount not exceeding 6% in any one year (above guidelines) with any balance due the owner collectible in succeeding years at a rate similarly not exceeding 6%. Moreover, the Rent Stabilization Law limits the owner to no more than one hardship order in any 36 month period."

On September 1, 1976, HUD issued the certificates of pre-emption and beginning on November 1, 1976, the Landlord sought to collect the HUD approved increases both from tenants signing new leases and, by way of the pass through rider discussed above, from tenants who had unexpired leases as of November 1, 1976.

On October 19, 1976, the Tenants filed the complaint in this action seeking a declaratory judgment pursuant to 28 U.S.C. § 2201 that HUD's pre-emption order was void, and seeking to enjoin the Landlord from collecting the increased rents approved by HUD pursuant to 5 U.S.C. § 701, et seq.

Next, both sides filed orders to show cause returnable November 5, 1976, requesting preliminary injunctions. On November 5 and again on November 12 this Court heard extensive oral argument and then reserved decision. In order to maintain the status quo, on November 12, 1976, this Court signed an order consented to by both sides requiring that the plaintiffs pay to their lawyers as escrow agents the difference between the current lease rental or the CAB guidelines rental and HUD approved rents pending the Court's decision in this matter. This order also provides that should the HUD approved rents eventually be upheld, notwithstanding any lease then in effect, the tenants shall have the right to vacate the premises.

I

The first issue before the Court is the plaintiffs' argument that HUD's preemption of local rent control was invalid because the pre-emption regulation, 24 C.F.R. § 403 (1975) goes beyond HUD's Congressionally delegated powers. Due to the recent promulgation of that regulation, the only case that has decided that issue is City of Boston v. Hills, 420 F.Supp. 1291 (D.Mass.1976), which held that this regulation was consistent with statutory authority and was a necessary and reasonable means of carrying out that authority. Except as modified by our due process analysis below, we adopt the reasoning and conclusion of that case on this point.

II

The plaintiffs further argue that even if the regulation was valid, it was improperly invoked in this case because there was no real conflict between local rent control laws and HUD's rent increases because the Landlord could have achieved the needed increases under the rent control laws. This position is not supported by the facts. First, the Landlord applied to CAB for hardship rent increases in 1974 and has received no action over two years later. Plaintiffs argue that this is because the Landlord has not completed his application to CAB, but the Landlord disputes this. Assuming, however, that the Landlord has not completed his application, there is still a conflict, as CAB admits in its letter of June 29, quoted above, that the maximum allowable increase the Landlord could receive under the Rent Stabilization Law in any one year was 6%. HUD had already authorized a much greater increase than that, and so if HUD, after the due process procedures described below, decides again in favor of pre-emption, then the regulation will have been validly invoked.

III

The plaintiffs argue that even if local rent control is properly pre-empted, the new rents can only apply to tenants whose leases have expired. The Landlord argues that the pass through rider he inserted in leases in 1969 allows him to pass on to all tenants any HUD approved rent increases. The tenants argue that this type of pass through provision is invalid under local rent...

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