IN RE DAYTON SEASIDE ASSOCIATES# 2, LP, 00-10361 (ALG)

• Decision Date: 22 December 2000
• Docket Number: 00-10364.,00-10363,No. 00-10361 (ALG),00-10361 (ALG)
• Citation: 257 BR 123
• Parties: In re DAYTON SEASIDE ASSOCIATES # 2, L.P., Dayton Seaside Associates # 3, L.P., Dayton Operating Company, L.P., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

257 B.R. 123 (2000)

In re DAYTON SEASIDE ASSOCIATES # 2, L.P., Dayton Seaside Associates # 3, L.P., Dayton Operating Company, L.P., Debtors.

Nos. 00-10361 (ALG), 00-10363, 00-10364.

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

December 22, 2000.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Olshan, Grundman, Frome, Rosenzweig & Wolosky, LLP, New York City, Thomas J. Fleming, Lisa N. Wall, of Counsel, for Debtors.

Robinson, Brog, Leinwand, Greene, Genovese & Gluck, P.C., New York City, Robert R. Leinwand, Fred B. Ringel, of Counsel, for Debtors.

Michael D. Hess, Corporation Counsel of the City of New York, New York City, Vincent D'Orazio, of Counsel, for the City of New York.

OPINION AND ORDER

ALLAN L. GROPPER, Bankruptcy Judge.

The Debtors, Dayton Operating Company L.P., Dayton Seaside Associates #2 L.P., and Dayton Seaside Associates #3 L.P. (the "Debtors"), are New York limited partnerships and owners of high-rise apartment buildings located in Rockaway Beach, New York containing, in the aggregate, approximately 768 residential units. Each of the Debtors qualifies as a redevelopment company under Article V of New York's Private Housing Finance Law and is the successor to Dayton Seaside Corp. and to entities that in turn succeeded Dayton Seaside Corp.

The City of New York has filed proofs of claim against each of the Debtors, asserting tax claims and statutory liens therefor pursuant to the New York City Administrative Code ("Administrative Code") for the periods from January 1, 1985 through the petition date of February 2, 2000. The amounts claimed by the City are as follows:

                Debtor                     Principal             Interest              Total Claim
                Dayton Operating Co.       $3,454,216.13         $14,720,116.89        $18,174,333.02
                Dayton Seaside No. 2       $3,456,389.79         $19,719,440.39        $23,175,839.18
                Dayton Seaside No. 3       $3,311,554.23         $19,400,363.70        $22,711,917.93
                

Although, as will appear below, certain aspects of the City's tax claim have concededly been miscalculated, there is no dispute that this controversy involves allegedly unpaid taxes in the tens of millions of dollars going back more than 15 years. It is also obvious that interest claimed at the rate of 18 percent per annum, accruing daily, far exceeds the base tax claim. The Court understands that this tax claim may be the City's largest and oldest, and it is certainly a cause of the Debtors' latest filing under Chapter 11. It was apparently the cause of an earlier filing under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of New York, which was dismissed. Having survived for 15 years and been a cause of two bankruptcy cases, it is time for the claim to be resolved.

The dispute comes before this Court for resolution on the Debtors' objection to the City's proofs of claim. Both parties have moved for partial summary judgment in connection with resolution of the claims objection. Neither asks the Court to calculate the precise amounts of tax that may be due but instead to set forth the principles on which the taxes can be calculated. The Debtors contend that a review of the statutory and contractual record entitles them to a rate of return and corresponding tax exemptions that would eliminate the claimed taxes in whole or in large part. Although the Debtors' principal claim is based on construction of the applicable contract, as amended, and the underlying statutes, they also assert the City is estopped or precluded from collecting taxes and interest thereon by virtue of the City's past conduct, laches and "unclean hands." The Debtors also contend that they are entitled to tax exemptions for a period of 40 years rather than 25. The City's position is that analysis of the same record entitles it to judgment on the main issues, leaving open the Debtors' Third Objection (calculation of taxes during a post-exemption phase-in period), Seventh Objection (disputing the City's calculation of the specific amounts due) and Eighth Objection (claiming the existence of certiorari proceedings for certain years, which could affect calculation of taxes for years at issue in the Objection). Both parties agree that the Court's determination of the City's proofs of claim constitutes a core issue under 28 U.S.C. § 157(b).

The burden of proof in a bankruptcy case with respect to a tax obligation rests on the party who would have the burden in accordance with the underlying substantive law. Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 23, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Under the governing law of New York, the taxpayer has the burden of disputing a tax that has been assessed, and of establishing the right to a tax exemption. Astoria Federal Savings and Loan Assoc. v. State of New York, 222 A.D.2d 36, 42, 644 N.Y.S.2d 926, 931 (2d Dep't 1996), appeal dismissed, 88 N.Y.2d 1064, 674 N.E.2d 337, 651 N.Y.S.2d 407 (1996), lv. app. denied, 89 N.Y.2d 807, 678 N.E.2d 500, 655 N.Y.S.2d 887 (1997), cert. denied, 522 U.S. 808, 118 S.Ct. 48, 139 L.Ed.2d 14 (1997). The burden of proof in this matter accordingly falls on the Debtors.

The Private Housing Finance Law

As noted above, each of the Debtors qualifies as a redevelopment company formed pursuant to Article V of the New York Private Housing Finance Law (PHFL), §§ 100 et seq. Article V was first adopted in 1942 to help provide low rent housing for persons of low income and for the clearance, reconstruction and rehabilitation of substandard areas. PHFL § 101; Murray v. LaGuardia, 291 N.Y. 320, 52 N.E.2d 884 (1943), cert. denied, 321 U.S. 771, 64 S.Ct. 530, 88 L.Ed. 1066 (1944). Article V of the PHFL provides for the formation of redevelopment companies (§ 103), makes them subject to the supervision of a "supervising agency," gives them certain rights and privileges and subjects them to various restrictions.¹ Two sections of the PHFL are material to the resolution of this dispute. Section 107, entitled "Limited Return on Investment," contains the following provision:

. . . there shall be paid annually out of the earnings of the redevelopment company, after providing for all expenses, taxes and assessments a sum for interest on and amortization of any mortgage indebtness and depreciation charges if, when and to the extent deemed necessary by the supervising agency, plus a distribution of six per centum on the capital and interest not exceeding six per centum on outstanding interest debentures . . .

. . . in the case of redevelopment companies formed prior to April twenty-ninth nineteen hundred sixty such as the Debtor Dayton Operating Company . . . there shall be paid annually out of the earnings of the redevelopment company, after providing for all expenses, taxes and assessments, a sum for interest, amortization, depreciation and dividends, equal to but not exceeding six per centum of the total actual final cost of the project as defined by subdivision two of section one hundred twelve of this article; the obligation in respect of such payments shall be cumulative, and any deficiency in interest, amortization, depreciation and distributions in any year shall be paid either from any cash surplus derived from earnings remaining in the treasury of the redevelopment company in excess of the amount necessary to provide such cumulative annual sums or from the first available earnings in subsequent years . . . emphasis added

Although this section has been amended since the Debtors' predecessor was first formed, the key language, for purposes of determining this dispute, that there "shall be paid" a six percent return, has not changed substantively.

The second material provision of Article V for purposes hereof is § 125, which provides, in pertinent part, "The local legislative body of any municipality in which a project of such company is or is to be located may by contract agree with any redevelopment company to exempt from local and municipal taxes, other than assessments for local improvements, all or part of the value of the property included in such project. . . ." Section 125 goes on to provide various conditions and limitations on available tax exemptions. See Cromwell Towers Redevelopment Co. v. City of Yonkers, 41 N.Y.2d 1, 6, 359 N.E.2d 333, 336-337, 390 N.Y.S.2d 822, 826 (1976). When the Debtors' predecessor first contracted with the City, the period of tax exemption could not exceed twenty-five years. In 1969 § 125 was amended to provide that for a project that is permanently financed by a federally-aided mortgage, the tax exemption shall last for up to 40 years, so long as the mortgage remains outstanding.² McKinney's N.Y. Session Laws L.1969, c. 1121 § 2, amending PHFL § 125. When the tax exemptions provided to redevelopment companies under PHFL § 125 expire (whether after 25 or 40 years), redevelopment companies (including the Debtors) are entitled to a nine-year transitional period in which the level of taxes payable is gradually increased. N.Y. Real Property Tax Law (RPTL) § 423; see Akari House v. Irizzary, 81 Misc.2d 543, 366 N.Y.S.2d 955 (Sup.N.Y.Co.1975). At the end of the nine-year transitional period, redevelopment companies pay full taxes. RPTL § 423.

The Debtor's Contract with the City of New York

In 1959 the City, acting through the Board of Estimate, entered into an initial contract with the predecessor of the Debtors (the "Original Agreement"). After reciting that the property was in a location in need of rehabilitation, the contract set out the terms under which the City would condemn and the Debtors' predecessor would purchase land from the City for the development of lower and middle income housing. For purposes hereof, two sections of the 1959 contract are particularly material. In § 407 the City granted the Debtors' predecessor a 25-year tax exemption equal to 40 percent of the value of the property included in the project ("Original Agreement" § 407.) In § 408, the contract limited rents to a...