Dorce v. City of N.Y.

• Decision Date: 24 June 2022
• Docket Number: 19-cv-2216 (JGK)
• Parties: McConnell DORCE et al., Plaintiffs, v. CITY OF NEW YORK et al., Defendants.
• Court: U.S. District Court — Southern District of New York

608 F.Supp.3d 118

McConnell DORCE et al., Plaintiffs,

v.CITY OF NEW YORK et al., Defendants.

19-cv-2216 (JGK)

United States District Court, S.D. New York.

Signed June 24, 2022

Keith Howard Wofford, White & Case LLP, New York, NY, Alexander Simkin, Gregg L. Weiner, Phillip G. Kraft, Ropes & Gray LLP, New York, NY, Daniel Yanofsky, Ropes & Gray LLP, Boston, MA, Robert John Valli, Jr., Sara Wyn Kane, Matthew L. Berman, Valli Kane & Vagnini, LLP, Garden City, NY, for Plaintiffs McConnell Dorce, Sherlivia Thomas-Murchinson.

Robert John Valli, Jr., Sara Wyn Kane, Matthew L. Berman, Valli Kane & Vagnini, LLP, Garden City, NY, for Plaintiff Cecilia Jones.

Andrea Bonnie Feller, Kent Michael Langloss, Rachel Brothman Kane, Michael S. Adler, New York City Law Depart. Office of the Corporation Counsel, New York, NY, for Defendant City of New York.

Brian J. Markowitz, Goldstein Hall PLLC, New York, NY, for Defendants BSDC Kings Covenant Housing Development Fund Company, Inc., Neighborhood Restore Housing Development Fund Corp.

Andrea Bonnie Feller, Rachel Brothman Kane, New York City Law Depart. Office of the Corporation Counsel, New York, NY, for Defendant Sherif Soliman.

Rachel Brothman Kane, The New York City Law Department, New York, NY, for Defendant Louise Carroll.

Samuel Spital, NAACP Legal Defense & Educational Fund, Inc., New York, NY, for Amicus NAACP Legal Defense & Educational Fund, Inc.

OPINION AND ORDER

John G. Koeltl, United States District Judge

McConnell Dorce, Cecelia Jones, and Sherlivia Thomas-Murchison brought this putative class action against the City of New York (the "City"); Louise Carroll, Commissioner of the New York City Department of Housing Preservation and Development ("HPD"); Sherif Soliman, Commissioner of the New York City Department of Finance ("DOF") (together with the City and Carroll, the "City Defendants"); the Neighborhood Restore Housing Development Fund Co. Inc. ("Neighborhood Restore"); and Bridge Street Kings Covenant Housing Development Fund Company, Inc. ("Bridge Street") (together with Neighborhood Restore, the "TPT Defendants"). Jones and Thomas-Murchison also name 585 Nostrand Avenue Housing Development Fund Corporation and 248 Madison Street Housing Development Fund Corporation, respectively, as nominal parties in the event that their claims cannot be maintained as direct actions.

In brief, the plaintiffs allege that the defendants used and conspired to use in rem proceedings to seize the plaintiffs’ properties based on asserted tax debts, and that the defendants have failed to compensate the plaintiffs for the excess value of their properties, in violation of the plaintiffs’ rights under the United States Constitution, the New York State Constitution, and New York State law. Pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, the defendants now move to dismiss the plaintiffs’ claims for lack of subject matter jurisdiction and for failure to state a claim. For the reasons that follow, the motion to dismiss is granted in part and denied in part .¹

I.

The following facts are taken from the Amended Complaint and are accepted as true for the purposes of this motion.

A. Factual Background

1. The TPT Program

In New York State, after a certain period, unpaid property taxes become "tax liens," upon which "tax districts" may collect.² Am. Compl. ¶ 36, ECF No. 91.³ In 1939, the New York State Legislature passed a law (" Tax Law § 165"), granting tax districts the power to collect tax liens using in rem proceedings. Id. ¶ 35.⁴ In 1948, the City enacted its own in rem foreclosure procedures to collect on tax liens within New York City. Id. ¶ 37.

In 1996, the New York City Council enacted Local Law No. 37, which created the Third Party Transfer Program (the "TPT Program"). Id. ¶¶ 43–44. Pursuant to the TPT Program, when the City obtains a judgment of foreclosure and sale, the DOF may transfer title to the foreclosed-upon property to the City or to a third party designated by the HPD to participate in the TPT Program (a "TPT Partner"). See id. ¶¶ 2, 43, 54. Under § 11-412.1(c) of the New York City Administrative Code (the "Administrative Code"), a TPT Partner may receive title to the property in fee simple absolute after the expiration of a statutory four-month redemption period following the award of judgment. Id. ¶ 52. The TPT Partner does not pay the City anything in exchange for this transfer of ownership, and makes no payment towards the underlying tax lien for which the City initiated the in rem proceeding. Id. ¶ 53. The original owner of the property receives nothing for the value of the transferred property in excess of the value of the tax lien (the "surplus equity"). Id. ¶ 54.

The City's authority to use such in rem proceedings to collect tax liens and to administer the TPT Program is codified in Title 11, Chapter 4 of the Administrative Code. Id. ¶ 37; N.Y.C. Admin. Code § 11-401 et seq.

Today, the City includes in the TPT Program both (1) properties that meet the statutory definition of "distressed," and (2) properties that are located near distressed properties and that are tax delinquent but that do not themselves meet the statutory definition of "distressed." Am. Compl. ¶¶ 3, 47, 50, 65. "Distressed properties" are defined in Local Law No. 37 as

[a]ny parcel of class one or class two real property that is subject to a tax lien or liens with a lien or liens to value ratio, as determined by the commissioner of [the DOF], equal to or greater than fifteen percent and that meets one of the following two criteria:

i. such parcel has an average of five or more hazardous or immediately hazardous violations of record of the housing maintenance code per dwelling unit; or

ii. such parcel is subject to a lien or liens for any expenses incurred by the [HPD] for the repair or the elimination of any dangerous or unlawful conditions therein, pursuant to section 27-2144 of this code, in an amount equal to or greater than one thousand dollars.

Id. ¶ 44; N.Y.C. Admin. Code § 11-401.

The plaintiffs allege that, in recent years, the City Defendants, working in concert with the TPT Defendants, have used the City's in rem powers and the TPT Program to deprive owners — and, in particular, elderly owners of color⁵ — of their property rights in order to advance the housing agenda of the City and the Mayor and to "reward political allies" among the TPT Partners. See Am. Coml. ¶¶ 1, 26, 61, 169. According to the plaintiffs, the City and TPT Defendants have systematically targeted properties with little tax debt relative to their property value within communities of color for seizure through the TPT Program. See id. ¶¶ 170–71, 306. The plaintiffs allege that homeowners of color are targeted because, among other reasons, the defendants believe that such homeowners are "less likely to have the resources to mount legal challenges" and to have the abilities to fight the defendants’ tactics. Id. ¶ 217. As evidence of this scheme, the plaintiffs allege that in the latest round of the TPT Program, the total market value of the 210 non–statutorily distressed properties selected for the TPT Program was nearly $152 million, whereas the total amount of arears owed on such properties was just over $4.5 million. Id. ¶ 175. Moreover, of the properties selected in this latest round of the TPT Program, the plaintiffs allege that approximately 50% were located in just 11 neighborhoods, all of which the plaintiffs characterize as communities of color. Id. ¶ 222. The plaintiffs further allege that, as part of the City and TPT Defendants’ scheme, the DOF intentionally and systematically manipulated property values so as to be able to designate a targeted property as "distressed," or else to designate a targeted property as "near" a distressed property, in order eventually to foreclose upon and transfer such property under the TPT Program. Id. ¶ 177; see, e.g., id. ¶¶ 179–87.

The plaintiffs claim that there is no real mechanism for a former owner to seek or regain their surplus equity after the property has been transferred under the TPT Program. Id. ¶ 193. The two apparent means by which the foreclosed-upon owners may redeem their properties — through instalment agreement or full payment, see N.Y.C. Admin. Code § 11-412.1(d) — are, according to the plaintiffs, illusory.⁶ As Dorce experienced, the instalment agreement avenue is not always respected, Am. Compl. ¶¶ 199–206, and the defendants do not always accept former homeowners’ attempts to redeem their property through full payment, id. ¶ 209.

According to the plaintiffs, this alleged misuse of the TPT Program has stripped away "intergenerational black and brown wealth" and has contributed to steep racial disparities in homeownership. Id. ¶¶ 178, 227–28.

2. The Named Plaintiffs

The named plaintiffs are people of color whose properties were transferred to one of the TPT Defendants pursuant to the TPT Program. All three plaintiffs allege that the TPT Defendants consulted with the City Defendants concerning the selection and targeting of their properties for inclusion in the TPT Program. See id. ¶¶ 26–28, 51, 93, 124, 155, 212.

McConnell Dorce is an elderly Caribbean-American immigrant. Id. ¶ 74. Between 1977 and 2018, Dorce was the owner of property located at 373 Rockaway Parkway (the "Rockaway Property"), in Brooklyn, New York, a community of color. Id.; see id. ¶ 84. Since 2012, Dorce owned the Rockaway Property free and clear of any mortgage. Id. ¶ 75. Sometime after 2012, Dorce incurred water and sewage charges for the Rockaway Property and entered into a written instalment agreement with the City to pay the outstanding charges. Id. ¶ 77. Dorce made all of the instalment payments to the City on time. Id. Notwithstanding this, and unbeknownst to Dorce, on July 14, 2015, the City commenced in rem proceedings against more than 180 properties, including the Rockaway Property, pursuant to the TPT Program. Id. ¶¶ 78–79, 85. On November 27, 2017, Justice Partnow...