Federal Home Loan Mortg. Corp. v. New York State Div. of Housing and Community Renewal

Decision Date28 December 1995
Citation87 N.Y.2d 325,639 N.Y.S.2d 293,662 N.E.2d 773
Parties, 662 N.E.2d 773 FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Defendant.
CourtNew York Court of Appeals Court of Appeals
OPINION OF THE COURT

TITONE, Judge.

On a question certified to this Court from the Second Circuit Court of Appeals, we are asked to determine whether a multiple dwelling exempt from the Rent Stabilization Law by virtue of its cooperative ownership reverts to its former rent-regulated status upon foreclosure. Relying on the plain language of the Rent Stabilization Law, we answer that question in the affirmative, and reject plaintiff's claims that reversion to regulated rent constitutes an unconstitutional physical or regulatory taking or a due process deprivation.

I

Plaintiff, the Federal Home Loan Mortgage Corporation (FHLMC), is a Federal corporation chartered as part of the Emergency Home Finance Act of 1970 (12 USC §§ 1451-1459). Its statutory mission is to foster home ownership by increasing the amount of financing available to the residential mortgage market. To achieve this goal, FHLMC generally purchases investment-quality mortgages from primary lenders, and sells them to investors as securities packages. Defendant, the New York State Division of Housing and Community Renewal (DHCR), is the State agency charged with administering and enforcing the rent-regulatory laws of New York City and State.

In July 1986, plaintiff became the assignee of a $1.45 million mortgage on an 83-unit multiple dwelling located in Brooklyn, New York. There is no dispute that at that time the building was a rental housing accommodation subject to regulation under the New York City Rent Stabilization Law (RSL) (see, Administrative Code of City of NY § 26-501 et seq.).

The building was subsequently converted to cooperative ownership, and title to the building passed from the sponsor to a cooperative apartment corporation. Although FHLMC had the right to demand that its mortgage be satisfied upon the conversion, it elected not to do so, and approved the conversion. In compliance with the Martin Act (see, General Business Law § 352-eeee), a cooperative offering plan setting forth the terms of the offering was submitted to and approved by the New York State Department of Law, was accepted for filing by the Attorney General, and was also provided to all tenants who occupied the building. Existing tenants were given the option to purchase the shares allocated to their respective units, and tenants who chose to purchase were issued long-term proprietary leases that superseded their existing leases. The offering plan was expressly made subject to the underlying mortgage held by plaintiff and a wrap-around mortgage of $2 million held by the sponsor.

Of the building's 83 units, 3 were purchased by existing tenants, and 17 were purchased by outsiders. Because the offering plan was a "non-eviction plan" as defined in the Martin Act (see, General Business Law § 352-eeee[1][b], the rents of the 63 apartments occupied by existing tenants who declined the purchase option remained regulated by the RSL. These units are not the subject of this appeal.

The cooperative apartment corporation defaulted on the mortgage and FHLMC foreclosed and purchased the property at a public foreclosure sale. Upon foreclosure, the proprietary leases were cancelled. The purchasers ceased ownership of their allocable shares, but remained liable on the personal loans acquired to purchase those shares.

Since the foreclosure sale, FHLMC has failed to collect rent and has declined to provide renewal leases to the former purchasers and to tenants who took occupancy after the conversion. FHLMC cites its lack of expertise in operating a multiple dwelling and inability to ascertain the proper rent to charge for the units as justification for those omissions.

Plaintiff commenced this declaratory judgment action in Federal District Court, 1 seeking a ruling as to whether, upon dissolution of the cooperative corporation, the units of former purchasers and tenants who moved in after the conversion are subject to rent regulation. Ruling in defendant's favor on the parties' cross motions for summary judgment, the court declared that "upon the demise of the cooperative, the building reverted to rent regulatory status." (854 F.Supp. 151, 165.) In so holding, the District Court concluded that section 2520.11(l ) of the Rent Stabilization Code, which provides that cooperatives are exempt from regulation under the RSL "so long as they maintain [cooperative] status" (9 NYCRR 2520.11[l ], is consistent with the RSL's exemption of cooperatively-owned multiple dwellings, which is lost when the property returns to rental status. Relying on this Court's holding in Rent Stabilization Assn. v. Higgins, 83 N.Y.2d 156, 608 N.Y.S.2d 930, 630 N.E.2d 626, the court concluded that plaintiff's acquiescence in the use of the building as a multiple dwelling defeated the claim that return of the units to regulated status constituted an unconstitutional physical taking. Finding a " 'sufficiently close nexus' between New York's interest in protecting the former proprietary lessees from potentially unconscionable rent increases and the regulation at issue" (854 F.Supp. at 163), the court found that the statute advanced a legitimate State interest, and thus did not effect an unconstitutional regulatory taking. The court also rejected plaintiff's claim that the statute and regulation were unconstitutionally vague, reiterating that the statute and regulation alike clearly notify a person of ordinary intelligence that "the exemption from rent regulation applies only to buildings 'not owned as a cooperative' 'for so long as' the buildings maintain that status." (854 F.Supp. at 164.)

On appeal, the Second Circuit certified the following question to this Court: "[W]hether, in light of [Federal Home Loan Mortgage Corporation's] challenge to 9 N.Y.C.R.R. 2520.11( [l ], units in a rent stabilized building that was converted to cooperative ownership revert to units subject to the Rent Stabilization Law, upon the foreclosure of the cooperative's underlying mortgage and the return of the building to operation as rental housing"? We accepted the question, which is case determinative and not controlled by precedent (see, Rules of Court of Appeals 22 NYCRR 500.17), and now answer in the affirmative.

II

Our point of departure is the RSL (Administrative Code §§ 26-501--26-520), which governs the regulation of rents for eligible housing units in New York City. The RSL was originally enacted in response to "a severe housing shortage following World War II" and has been "periodically extended" by the Legislature as it perceives a continuing need (Rent Stabilization Assn. v. Higgins, 83 N.Y.2d 156, 164-165, 608 N.Y.S.2d 930, 630 N.E.2d 626, cert. denied 512 U.S. 1213, 114 S.Ct. 2693, 129 L.Ed.2d 823, supra ). "The central, underlying purpose of the [Rent Stabilization Law] is to ameliorate the dislocations and risk of widespread lack of suitable dwellings" that accompany a housing crisis (Manocherian v. Lenox Hill Hosp., 84 N.Y.2d 385, 395-396, 618 N.Y.S.2d 857, 643 N.E.2d 479). Noting their remedial nature, this Court has repeatedly interpreted laws regulating rents broadly to effectuate their intended purpose (see, e.g., Braschi v. Stahl Assocs. Co., 74 N.Y.2d 201, 208, 544 N.Y.S.2d 784, 543 N.E.2d 49; Matter of McMurray v. New York State Div. of Hous. & Community Renewal, 72 N.Y.2d 1022, 1024, 534 N.Y.S.2d 924, 531 N.E.2d 645).

By its terms, the Rent Stabilization Law applies to "Class A multiple dwellings not owned as a cooperative * * * containing six or more dwelling units which * * * were completed after February [1, 1947]" (Administrative Code § 26-504 [emphasis added]. 2 Defendant DHCR, the agency that has been delegated the "broad mandate to promulgate regulations in furtherance of the rent control and rent stabilization laws" (Higgins, 83 N.Y.2d, at 168, 608 N.Y.S.2d 930, 630 N.E.2d 626, supra ), has provided in the Rent Stabilization Code (the Code) that its protections apply to all housing accommodations regulated under the RSL except "housing accommodations contained in buildings owned as cooperatives" "for so long as they maintain [cooperative] status" (9 NYCRR 2520.11[l ] [emphasis added]. The clear import of this regulation is that once a cooperative reverts to rental status, it is again subject to the RSL's provisions.

Accordingly, the initial question raised here is whether 9 NYCRR 2520.11(l), promulgated by defendant DHCR under its rule-making authority, is consistent with the RSL's exemption for cooperatives. More specifically, plaintiff contends that the absence of any express provision in the RSL directing that the units of a cooperative revert to regulated status upon foreclosure...

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