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

• Decision Date: 02 May 1996
• Docket Number: No. 992,D,992
• Parties: FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff-Appellant, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, Defendant-Appellee. ocket 94-7677.
• Court: U.S. Court of Appeals — Second Circuit

Page 45

83 F.3d 45

FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff-Appellant, v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL Defendant-Appellee.

No. 992, Docket 94-7677.

United States Court of Appeals Second Circuit.

Argued March 1, 1995.

Decided May 2, 1996.

Appeal from a judgment of the United States District Court for the Eastern District of New York (I. Leo Glasser, Judge ) granting summary judgment for defendants. Plaintiff sought a declaratory judgment that foreclosure of a co-op's mortgage does not result in the termination of the building's exemption from rent stabilization laws, or, alternatively, that the application of the rent stabilization laws to previously exempt housing constitutes an unconstitutional taking. After certifying the state law question to the New York Court of Appeals, we hold that the application of rent stabilization laws to a previously exempt building does not violate the Takings Clause.

Richard S. Fischbein, Fischbein Badillo Wagner Itzler, New York City (Kenneth G. Schwarz, Pamela A. Phillips, of counsel; Mitchell A. Rothken, Assistant General Counsel, Federal Home Loan Mortgage Corporation, of counsel), for Plaintiff-Appellant.

Gary R. Connor, Assistant Attorney General, State of New York, New York City (G. Oliver Koppell, Attorney General; Karen S. Smith, Assistant Attorney General, of counsel), for Defendant-Appellee.

Jean E. Burke, Thacher Proffit & Wood, New York City (Joseph Philip Forte, Michael B. Wolk, of counsel; William E. Cumberland, General Counsel, Mortgage Bankers Association of America, Washington, DC, of counsel), for Amicus Curiae Mortgage Bankers Association of America.

Stuart M. Saft, Wolf Haldenstein Adler Freeman & Herz, New York City, for Amicus Curiae Council of New York Cooperatives.

Pamela Seider Dolgow, Assistant Corporation Counsel, City of New York, New York City (Paul A. Crotty, Corporation Counsel; John Hogrogian, Assistant Corporation Counsel, of counsel), for Amicus Curiae The City of New York.

Sandra Russo, Legal Services for New York City, New York City (David Robinson, of counsel; William A. Schoneman, White & Case, New York City, of counsel), for Amici Curiae Legal Services for New York City et al.

Before: LUMBARD and WINTER, Circuit Judges, and BATTS, District Judge. ^*

WINTER, Circuit Judge:

The Federal Home Loan Mortgage Corporation ("FHLMC") brought this declaratory judgment action seeking a determination that an exemption from New York City's Rent Stabilization Law for housing that is cooperatively owned, see N.Y. City Admin. Code § 26-504, continues to apply even upon foreclosure, or alternatively, that application of the Rent Stabilization Law to previously exempt housing violates the Takings Clause of the United States Constitution, U.S. Const. amend. V.

The dispute arose from the following facts. In July 1986, FHLMC became the assignee of a $1.45 million mortgage on a multi-family apartment dwelling located in Brooklyn, New York. At the time the FHLMC acquired its mortgage lien, the building consisted exclusively of rental units, all of which were subject to the provisions of the New York City Rent Stabilization Law, see N.Y. City Admin. Code § 26-501, et seq. After the FHLMC's acquisition of the mortgage lien, the building was converted to cooperative ownership, and title to the building passed to the 101 Lincoln Tenants Corporation (the "co-op corporation"). The FHLMC approved the conversion on November 16, 1989. Three of eighty-three units in the building were purchased by existing tenants; seventeen units were purchased by outsiders with no prior rental relationship with the building. The remaining units, rented by existing tenants who declined the purchase option, remained rent stabilized; these units are not the subject of the instant appeal.

Within two years after the conversion, the co-op corporation defaulted on its mortgage, and FHLMC instituted foreclosure proceedings. A judgment of foreclosure was entered on October 8, 1991, and in June, 1993 FHLMC purchased the property at public auction. Upon completion of the foreclosure, the proprietary leases were cancelled. FHLMC then commenced this declaratory judgment action in federal district court, seeking a ruling as to whether, upon dissolution of the co-op corporation, the units revert to rent-stabilized status.

On cross-motions for summary judgment, Judge Glasser granted judgment for the defendant. Federal Home Loan Mortgage Corp. v. New York State Div. of Housing and Community Renewal, 854 F.Supp. 151 (E.D.N.Y.1994). Pursuant to Article VI, § 3(b)(9) of the New York Constitution and New York Rule of Court § 500.17(b), 22 N.Y.C.R.R. § 500.17, we certified to the New York Court of Appeals a question of law: whether the units in a rent-stabilized building that was converted to cooperative ownership revert to rent-stabilized status upon foreclosure of a cooperative's underlying mortgage and the return of the building to operation as rental housing. Federal Home Loan Mortgage Corp. v. New York State Div. of Housing and Community Renewal, No. 94-7677 (2d Cir. Apr. 28, 1995) (order certifying unsettled question of New York state law). We did not certify any questions of law concerning rent stabilization and the federal Constitution.

The Court of Appeals answered the state law question in the affirmative, holding that rent stabilization applies to formerly cooperative housing that, because of foreclosure, has reverted to rental status, Federal Home Loan Mortgage Corp. v. New York State Div. of Housing and Community Renewal, 87 N.Y.2d 325, 639 N.Y.S.2d 293, 662 N.E.2d 773 (1995). However, the Court of Appeals also addressed the federal constitutional claims raised by FHLMC, which had not been certified and over which we had explicitly retained jurisdiction. There is, therefore, a serious jurisdictional issue with regard to the binding effect of the Court of Appeals decision. We need not reach that issue, however, because our independent consideration of the federal questions leads to the same result reached by the Court of Appeals.

Rent control is a controversial subject, and some have argued that it offends the Takings Clause of the Constitution as a physical or regulatory taking of the landlord's property. See Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 186-88 (1985); Epstein, Rent Control and the Theory of Efficient Regulation, 54 Brook.L.Rev. 741, 742-50 (1988); Neal Stout, Making Room at the Inn: Rent Control as a Regulatory Taking, 38 Wash. U.J. Urb. & Contemp. L. 305 (1990). Caselaw has run in the other direction, however, and it is not for a lower court to reverse this tide. Under governing Supreme Court precedent, a taking occurs where governmental action compels an owner to endure a "permanent...