Berry Estates, Inc., In re

• Decision Date: 19 February 1987
• Docket Number: D,Nos. 186,185,s. 186
• Citation: 812 F.2d 67
• Parties: Bankr. L. Rep. P 71,659 In re BERRY ESTATES, INC., d/b/a Blueberry Hill Management Corp., Debtor. BERRY ESTATES, INC., Plaintiff-Appellant, v. STATE OF NEW YORK, Defendant-Appellee. Hon. Edward REGAN, Comptroller of the State of New York, State Capitol, Plaintiff-Appellant, v. BERRY ESTATES, INC., Defendant-Appellee. ockets 86-5029, 86-5037.
• Court: U.S. Court of Appeals — Second Circuit

Page 67

812 F.2d 67

Bankr. L. Rep. P 71,659

In re BERRY ESTATES, INC., d/b/a Blueberry Hill Management

Corp., Debtor.

BERRY ESTATES, INC., Plaintiff-Appellant, v. STATE OF NEW YORK, Defendant-Appellee.

Hon. Edward REGAN, Comptroller of the State of New York, State Capitol, Plaintiff-Appellant, v. BERRY ESTATES, INC., Defendant-Appellee.

Nos. 186, 185, Dockets 86-5029, 86-5037.

United States Court of Appeals, Second Circuit.

Argued Sept. 22, 1986.

Decided Feb. 19, 1987.

David S. Cook, Senior Atty., New York City (Robert Abrams, Atty. Gen. of the State of N.Y., and Richard G. Liskov, Asst. Atty. Gen., of counsel), for defendant-appellee.

Joseph J. Haspel, Spring Valley, N.Y. (Barr and Faerber, Spring Valley, N.Y., of counsel), for plaintiff-appellant.

Before VAN GRAAFEILAND, MESKILL and NEWMAN, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

These are appeals from an order of the United States District Court for the Southern District of New York (Brieant, J.) affirming an order of the bankruptcy court. The issue presented is whether certain orders of New York State courts under that State's Emergency Tenant Protection Act of Nineteen Seventy-Four (ETPA), N.Y. Unconsol. Laws Secs. 8621-8634, should control the disposition of unlawful excess rents collected by a landlord who thereafter filed for a Chapter 11 arrangement, 11 U.S.C. Secs. 1101-1174. A brief look at the public policy underlying rent control laws, such as the ETPA, is an appropriate starting point for our discussion.

Rent control legislation has been a vital part of the American scene since World War I. See Block v. Hirsh, 256 U.S. 135, 153, 41 S.Ct. 458, 459, 65 L.Ed. 865 (1921); People ex rel. Durham Realty Corp. v. La Fetra, 230 N.Y. 429, 130 N.E. 601, appeal dismissed, 257 U.S. 665, 42 S.Ct. 47, 66 L.Ed. 424 (1921). Constitutional challenges to such legislation consistently have been rejected. Israel v. City Rent and Rehabilitation Administration, 285 F.Supp. 908, 910 (S.D.N.Y.1968). Federal and State courts have held that limitation on rents is not a taking of property. Bowles v. Willingham, 321 U.S. 503, 517, 64 S.Ct. 641, 648, 88 L.Ed. 892 (1944); Teeval Co. v. Stern, 301 N.Y. 346, 362, 93 N.E.2d 884, cert. denied, 340 U.S. 876, 71 S.Ct. 122, 95 L.Ed. 637 (1950). The New York Court of Appeals has characterized rental as an instrument of oppression, which may be regulated in the public good. People ex rel. Durham, supra, 230 N.Y. at 451-52, 130 N.E. 601.

Because rent control statutes are police power statutes enacted for the benefit of the general public, landlords are not permitted to evade them, whether by subterfuge, mistake, or otherwise. "Knowledge on the part of a landlord that he cannot escape liability for excess payments of rent under any circumstances, tends to insure compliance with the statute. The obtaining of excessive rents strikes at the very purpose of the act." Estro Chemical Co. v. Falk, 303 N.Y. 83, 86-87, 100 N.E.2d 146 (1951) (emphasis in original). The public policy underlying rent control legislation militates against the collection or retention of such excess payments. United States v. Moore, 340 U.S. 616, 619, 71 S.Ct. 524, 525-26, 95 L.Ed. 582 (1951); Hansen v. United States, 340 F.2d 142, 144-45 (8th Cir.1965); Sylvester v. Bernstein, 283 A.D. 333, 338, 127 N.Y.S.2d 746, aff'd, 307 N.Y. 778, 121 N.E.2d 616 (1954). "[A] person should not be permitted to retain that which is illegally acquired even through a mistake of legality." Woods v. Kaye, 175 F.2d 886, 889 (9th Cir.1949); see Woods v. Richman, 174 F.2d 614, 616 (9th Cir.1949). Neither should a landlord be able to avoid the statutory restrictions by agreement with or waiver of his tenant. Thomas v. United States, 200 F.2d 686, 689 (1st Cir.1952); Estro Chemical Co. v. Falk, supra, 303 N.Y. at 87, 100 N.E.2d 146; Norms Realty Corp. v. Rodriguez, 108 Misc.2d 124, 126-27, 437 N.Y.S.2d 223 (1981).

The courts of New York squarely hold that city and State housing laws are to be obeyed and "none shall benefit from a violation thereof even though the victim may not choose to complain." Meyer & Steffens, Inc. v. Popolizzio, 124 Misc.2d 159, 160, 475 N.Y.S.2d 991 (1984). Thus, in Matter of Plaza Realty Investors and Queens Blvd. Properties Co. v. New York City Conciliation and Appeals Board, 111 A.D.2d 395, 489 N.Y.S.2d 603 (1985) (mem.), a proceeding under the Code of the Rent Stabilization Association of New York City, Inc., where the New York City Conciliation and Appeals Board ordered that excess rentals be placed in an escrow account and refunds uncollected by tenants be forfeited to the Board, the court held:

Converting the refund to the prior tenants into a fine should the prior tenants not claim the refund guaranteed that petitioner [the landlord] would not benefit from its misconduct.

Id. at 397, 489 N.Y.S.2d 603. See also N.Y.Penal Law Sec. 180.55 which makes rent gouging a misdemeanor.

When the ETPA was enacted in 1974, the New York Legislature found:

that a substantial number of persons residing in housing not presently subject to the provisions of the emergency housing rent control law or the local emergency housing rent control act are being charged excessive and unwarranted rents and rent increases; that preventive action by the legislature continues to be imperative in order to prevent exaction of unjust, unreasonable and oppressive rents and rental agreements and to forestall profiteering, speculation and other disruptive practices tending to produce threats to the public health, safety and general welfare; that in order to prevent uncertainty, hardship and dislocation, the provisions of this act are necessary and designed to protect the public health, safety and general welfare....

N.Y.Unconsol.Laws Sec. 8622.

To carry out the policy thus expressed, the ETPA empowers a municipality to declare an emergency as to any class of housing if the vacancy rate for those accommodations does not exceed five percent. Id. Sec. 8623. Once an emergency is declared, a landlord is prohibited from collecting more than the legal regulated rent. Id. Sec. 8626. Both the statute and the regulations enacted pursuant thereto provide that any agreement by a tenant to waive the benefits of the Act shall be void as contrary to public policy. Id. Sec. 8631; Emergency Tenant Protection Regulations Sec. 2500.12. Section 2505.1 of the Regulations makes it "unlawful ... for any person to demand or receive any rent for any housing accommodations in excess of the legal regulated rent...."

Berry Estates, Inc. is the owner of an apartment complex in Spring Valley, New York, whose rents have been set by the New York Division of Housing and Community Renewal (the Division) in accordance with the foregoing provisions and section 8629 of the ETPA. In 1979, Berry commenced an article 78 proceeding, N.Y.Civ.Prac.Law Secs. 7801-7806, against the Division in which it challenged the ETPA's constitutionality. The Division simultaneously sought to enjoin Berry from collecting rents in excess of the regulated rate. The trial court dismissed Berry's petition and granted the Division's request for a temporary injunction. Berry Estates v. Marrero, 101 Misc.2d 297, 420 N.Y.S.2d 970 (1979). The Appellate Division reversed the dismissal and modified the injunction to allow Berry to continue collecting market rate rents, to be escrowed, however, as follows:

[E]ach of the defendants is directed to deposit with the Clerk of the Supreme Court, Rockland County, any rents collected in excess of the applicable legal regulated rents herein, to be held in escrow by said clerk during the pendency of the injunction action; in the event that the defendants prevail in the injunction action, said clerk shall pay the funds held in escrow to the defendants; in the event that the plaintiff prevails, the funds held in escrow shall be returned to the tenants from whom they were collected, in such manner as shall be prescribed by Special Term in the final judgment. In the event that the defendants shall fail to deposit any such excess rents into court as directed herein, and upon the plaintiff's application to Special Term, a full preliminary injunction against the collection of rents in excess of the legal regulated limit shall issue.

74 A.D.2d 871, 871-72, 426 N.Y.S.2d 47 (1980).

After a joint trial of Berry's claim and the Division's request for a permanent injunction, the trial court upheld the Division's enforcement of the ETPA and permanently enjoined Berry from collecting rents in excess of the regulated rate. Berry also was directed to return to the tenants any excess rents collected that were not escrowed with the Rockland County Clerk. The judgment was affirmed by both the Appellate Division, 87 A.D.2d 161, 450 N.Y.S.2d 845, and the Court of Appeals, 58 N.Y.2d 701, 458 N.Y.S.2d 905, 444 N.E.2d 1324 (1982). Following the Court of Appeals' affirmance, the Division moved in the Appellate Division for an accounting by Berry of all excess rents that it had collected. The court granted the motion and ordered that Berry pay the Rockland County Clerk all sums collected in excess of the legal regulated rent that had not previously been placed in escrow.

On August 3, 1982, while the appeal from the original Appellate Division decision was pending in the Court of Appeals, Berry began a collateral attack on Spring Valley's declaration of emergency, on the ground that the emergency resolution had not been validly enacted. Berry Estates v. Village of Spring Valley, No. 4953/82 (Sup.Ct.Rockland Cty.1982). Berry secured a temporary restraining order from Judge Marbach allowing it to collect excess rents and place them in escrow with the Rockland County Clerk.

Meanwhile, other Spring Valley landlords had launched a separate attack on the validity of the emergency resolution, and, on September 13, 1982, Judge Dickinson upheld their claim. Spring Valley Garden Assocs. v. Marrero, Nos. 7542/80, 2801/81, 2394/81 ...