James Square Assocs. LP v. Mullen
| Decision Date | 04 June 2013 |
| Parties | JAMES SQUARE ASSOCIATES LP et al., Respondents, v. Dennis MULLEN, Commissioner, New York State Department of Economic Development, et al., Appellants. In the Matter of J–P Group, LLC, Respondent, v. New York State Department of Economic Development et al., Appellants, et al., Respondent. In the Matter of Morris Builders, LP, et al., Respondents, v. Empire Zone Designation Board et al., Appellants. In the Matter of Hague Corporation, Respondent, v. Empire Zone Designation Board et al., Appellants. In the Matter of WL, LLC, Respondent–Appellant, v. Department of Economic Development, Also Known as Empire State Development, et al., Appellants–Respondents. |
| Court | New York Court of Appeals Court of Appeals |
OPINION TEXT STARTS HERE
Unconstitutional as Applied
McKinney's General Municipal Law § 959(a)Eric T. Schneiderman, Attorney General, Albany (Andrew D. Bing, Owen Demuth and Barbara D. Underwood of counsel), for appellants in the first and second above-entitled action and proceeding.
Eric T. Schneiderman, Attorney General, Albany (Andrew D. Bing, Owen Demuth and Barbara D. Underwood of counsel), for appellants in the third and fourth above-entitled proceedings and actions and appellants-respondents in the fifth above-entitled proceeding and action.
Bond, Schoeneck & King, PLLC, Syracuse (Jonathan B. Fellows of counsel), for respondents in the first above-entitled action.
Mosey Persico, LLP, Buffalo (Jennifer C. Persico of counsel), for respondent in the second above-entitled proceeding.
Collier, Halpern, Newberg, Nolletti & Bock, LLP, White Plains (Philip M. Halpern of counsel), for respondents in the third above-entitled proceeding and action.
Hodgson Russ LLP, Albany (Michelle L. Merola and Christopher L. Doyle of counsel), for respondent in the fourth above-entitled proceeding and action.
Bousquet Holstein PLLC, Syracuse (Robert K. Weiler, Philip S. Bousquet and Cecelia R.S. Cannon of counsel), for respondent-appellant in the fifth above-entitled proceeding and action.
The common question presented by these appeals is whether the retroactive application of the 2009 Amendments to the Empire Zones Program complies with the Due Process Clause of the Fifth Amendment. Evaluating these cases under the balancing test of Matter of Replan Dev. v. Department of Hous. Preserv. & Dev. of City of N.Y., 70 N.Y.2d 451, 456, 522 N.Y.S.2d 485, 517 N.E.2d 200 (1987), we conclude that the retroactive application of the 2009 Amendments violated plaintiffs' due process rights and affirm on slightly different grounds from those invoked by the Appellate Division.
In 1986, the legislature enacted New York State's Economic Development Zones Act (the EDZ Program). The goal of the EDZ Program was to stimulate private investment, private business development, and job creation in certain geographic areas characterized by persistent poverty, high unemployment, shrinking tax bases, and dependence on public assistance ( seeGeneral Municipal Law § 956). The EDZ Program offered a variety of state tax incentives designed to attract new businesses to the state and to enable existing businesses to expand and create more jobs ( see id.). Over time, the EDZ Program gradually shifted its focus on poverty reduction to business development by relaxing eligibility requirements, and the name of the program was changed to the Empire Zones Program Act (the Program) in May of 2000 (L. 2000, ch. 63, part GG).1
Businesses located in qualifying Empire Zone areas and that otherwise meet the statute's criteria could apply to the Department of Economic Development (DED) for a certificate of eligibility, which they could then submit to the Department of Taxation and Finance in support of their claim for tax credits ( seeGeneral Municipal Law § 959[a] ). Among the tax credits available to qualifying businesses were the Empire Zone Wage Tax Credit, permitting certified Program participants to claim a credit of $1,500 to $3,000 per new job created against their New York State tax liability ( seeTax Law §§ 210[19]; 606[k] ). Since 2000, the Program has provided that a company's continued eligibility for Program benefits requires it to meet the Program's wage, employment, and investment goals, and new tax credits and exemptions were added for qualified Empire Zone enterprises ( see Technical Analysis, Dept. of Taxation and Finance, Bill Jacket, L. 2000, ch. 63 at 37–40). The State Comptroller issued two reports (one in 2004 and one in 2007) noting problems with verifying that Program participants were meeting the job creation and investment goals of the Program.
On April 7, 2009, Governor Paterson signed legislation enacting certain amendments (the 2009 Amendments) to General Municipal Law § 959 (L. 2009, ch. 57, part S–1, § 3). The 2009 Amendments introduced two new criteria that businesses must meet to retain their certificates of eligibility for the Program. The legislature also required the Commissioner of Economic Development to review all certified businesses during 2009 to determine if they should be decertified under the new criteria and closed the Program to new participants (General Municipal Law § 959[w] ). The impetus for the 2009 Amendments was the Governor's Enacted Budget Financial Plan, which stated that reforms were necessary to rein in abuses in the Empire Zones Program. The Governor projected that the 2009 Amendments would provide savings of $90 million in 2009–2010 to the State.
The new criteria included determining whether Program participants engaged in a practice known as “shirt-changing.” Businesses were prevented from reincorporating or transferring employees or assets among related entities in order to appear to have created new jobs or made new investments to maximize Program benefits ( seeGeneral Municipal Law § 959 [a] ). An additional criterion was that a participant must have “provide[d] economic returns to the state in the form of total remuneration to its employees (i.e. wages and benefits) and investments in its facility greater in value to the tax benefits the business enterprise used and had refunded to it” (General Municipal Law § 959[a][v][6] ). This requirement was also referred to as the “1:1 benefit-cost standard.” A business that failed to meet either standard was subject to decertification.
The 2009 Amendments were to take effect immediately, and section 44 of the legislation said that the amendments to the Tax Law relating to the carryover of tax credits “shall apply to taxable years beginning on and after January 1, 2008” (L. 2009, ch. 57, part S–1, § 44[a] ). However, the legislature did not adopt the provisions of the Governor's 2009 Budget Bill that provided that decertifications made pursuant to the new criteria and required review by the Commissioner would be retroactive to January 1, 2008.2 Nevertheless, both the Commissioner of Economic Development and the Department of Taxation and Finance (DTF) announced that the 2009 Amendments applied to the tax years beginning on and after January 1, 2008.
The legislature amended the statute in August 2010 to state that the decertifications pursuant to the 2009 Amendments were effective as of January 1, 2008. The 2010 update stated, (L. 2010, ch. 57, part R, § 1).
Plaintiffs are businesses which were certified under the Program and were issued certificates of eligibility by the State prior to 2008. On June 29, 2009, the DED issued letters to each of the plaintiffs to notify them of their decertification from the Empire Zones Program. Each letter stated that the revocation was effective January 1, 2008, pursuant to the 2009 Amendments. Plaintiffs were decertified for either “shirt-changing,” failing to meet the 1:1 benefit-cost standard, or for both violations.
In the James Sq. Assoc. LP v. Mullen action, plaintiffs filed their complaint while their administrative appeals were pending, seeking a declaration that the decertification constituted an improper retroactive application of the 2009 Amendments. Supreme Court granted the James Sq. plaintiffs' summary judgment motion and concluded that the State defendants 3 acted without legal authority when they applied the new criteria for the Empire Zones Program retroactively.
After the legislature clarified its intention and stated that the 2009 Amendments to the Empire Zones Program were to be applied retroactively to January 1, 2008, Supreme Court granted the State's motion to renew its previous motion for summary judgment but adhered to its prior determination. The court determined that the legislature's “clarification” in fact altered the legislation and created a period of retroactivity of two years and eight months. The court declared that the legislature's clarification as applied was an unconstitutional taking of the James Sq. plaintiffs' property.
The Appellate Division affirmed in James Sq., 91 A.D.3d 164, 166, 933 N.Y.S.2d 485 (4th Dept.2011). Though the Court agreed that the legislature made clear its intent to make the Empire Zone Amendments retroactive, the Court concluded that the retroactivity of the 2009 Amendments violated the James Sq. plaintiffs' due process rights. The Court determined that the time period at issue, the lack of warning to plaintiffs, and the lack of legitimate public purpose of the retroactive application of the 2009 Amendments rendered it unconstitutional, null, and void.
Petitioner J–P Group, LLC owns and manages commercial rental properties in Buffalo and was certified as a qualified...
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