Riseboro Cmty. P'ship Inc. v. Sunamerica Hous. Fund No. 682

• Decision Date: 07 August 2019
• Docket Number: 18-CV-7261 (RJD) (VMS)
• Citation: 401 F.Supp.3d 367
• Parties: RISEBORO COMMUNITY PARTNERSHIP INC., formerly known as Ridgewood Bushwick Senior Citizens Council, Inc., Plaintiff, v. SUNAMERICA HOUSING FUND NO. 682, SLP Housing I, LLC, 420 Stockholm Street Associates, L.P., Defendants.
• Court: U.S. District Court — Eastern District of New York

401 F.Supp.3d 367

RISEBORO COMMUNITY PARTNERSHIP INC., formerly known as Ridgewood Bushwick Senior Citizens Council, Inc., Plaintiff,

v.SUNAMERICA HOUSING FUND NO. 682, SLP Housing I, LLC, 420 Stockholm Street Associates, L.P., Defendants.

18-CV-7261 (RJD) (VMS)

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

Signed August 7, 2019

Brian J. Markowitz, Daniel Robert Goldenberg, Goldstein Hall PLLC, New York, NY, for Plaintiff.

Juan L. Garcia, Nixon Peabody LLP, Jericho, NY, Louis E. Dolan, Pro Hac Vice; Nixon Peabody LLP, Washington, DC, Shelby Nace, Nixon Peabody LLP, New York, NY, for Defendants.

MEMORANDUM & ORDER

DEARIE, District Judge

Plaintiff Riseboro Community Partnership Inc. brings an action against Defendants SunAmerica Housing Fund No. 682 ("SunAmerica"), SLP Housing I, LLC ("SLP") and 420 Stockholm Street Associates L.P., ("the Partnership") seeking declaratory relief and asserting breach of contract claims relating to Plaintiff's efforts to exercise a contractual right of first refusal to purchase an affordable housing project developed with the benefit of Low-Income Housing Tax Credits pursuant to Section 42 of the Internal Revenue Code, 26 U.S.C. § 42. Plaintiff first brought this action in Kings County Supreme Court, and Defendants SunAmerica and SLP timely removed the case based on federal-question and diversity jurisdiction, arguing that Plaintiff's claims present a federal question about the correct construction of federal tax law and that the non-diverse citizenship of the Partnership should be disregarded for jurisdictional purposes because it is a nominal party to this action. Plaintiff now moves to remand the case to state court, arguing that it has asserted state-law claims that merely involve a federal tax credit framework and that the Partnership must be considered for the purpose of diversity jurisdiction because it is a real defendant in this action. For the reasons stated below, Plaintiff's motion is denied.

BACKGROUND

This case concerns the interpretation of a contractual right of first refusal ("ROFR") in the amended partnership agreement of the Partnership, formed to own and operate a low-income housing project located at 420 Stockholm Street in Brooklyn ("the Apartment Complex") under the federal Low-Income Housing Tax Credit ("LIHTC") program, codified as 26 U.S.C. § 42. Defendants SunAmerica and SLP are limited investor partners of the Partnership and Plaintiff is the not-for-profit sponsor of the redevelopment of the Apartment Complex. Compl. ¶ 10.

The LIHTC program creates federally allocated tax credits awarded to real estate developers in exchange for the developer's creation and maintenance of low-income housing. Id. at ¶¶ 14-15. Developers typically fund their projects by entering into limited partnerships with private investors who have significant tax liabilities and contribute the capital for the project in exchange for having the tax credits allocated to them. Id. at ¶¶ 16-19. Investors can claim the credits annually over a period of ten years as long as the project complies with rent affordability restrictions for a period of fifteen years ("the Compliance Period"). Id. at ¶ 18. According to the Complaint, in order to ensure that these projects remain low-income housing after the tax credits are exhausted and the Compliance Period is over, 26 U.S.C. § 42 specifically contemplates and incentivizes a not-for-profit organization's purchase of the LIHTC project by expressly allowing these organizations to have a statutory right of first refusal to buy the projects at a statutorily prescribed minimum price. 26 U.S.C. § 42(i)(7)(A)¹ .

Plaintiff alleges that Defendants entered into the Partnership with a special purpose entity, 420 Stockholm Housing Development Fund Company Inc. ("HDFC"), to develop the Apartment Complex as a LIHTC project. Id. at ¶ 22. Defendant SunAmerica provided the funds for HDFC to purchase land, and once it did, the land was transferred to the Partnership so the 26 U.S.C. § 42 tax credits could be allocated to Defendants. Id. at ¶¶ 23, 26. Subsequently, 420 Stockholm Corp., a non-profit entity whose sole shareholder is Plaintiff, replaced HDFC as the General Partner of the Partnership. Id. at ¶ 26.

After HDFC purchased the land, the parties amended their partnership agreement to reflect that the Partnership was compliant with all the terms and restrictions of 26 U.S.C. § 42 ("Restated Agreement"). Id. at ¶ 24-25. The Complaint alleges that "in connection with the development of the Apartment Complex and in accordance with" 26 U.S.C. § 42, Section 12.03 of the Restated Agreement granted Plaintiff a ROFR, as follows:

"On and after the end of the 15 year Compliance Period, [RiseBoro] and its designee, if it is at that time a qualified nonprofit corporation, shall have a right of first refusal to purchase the Apartment Complex for the price equal to the sum of:

(iv) The principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5-year period ending on the date of the sale to the tenants), and (v) All Federal, State, and local taxes attributable to such sale and to any amounts paid pursuant to subsection (iii) hereof; and

(vi) Any amounts of a Tax Credit Shortfall which has not been paid"

Id. at ¶ 29.

Plaintiff alleges that, upon expiration of the Compliance Period, it attempted to exercise its ROFR to purchase the Apartment Complex, but Defendants refused, arguing that, under Section 8.02(b)(i) of the Restated Agreement² , Defendant SLP's consent is required before Plaintiff can exercise the ROFR, and the ROFR is not triggered until Defendants decide to sell and a bona-fide third party offer is made. Id. at ¶¶ 30-34. Unable to resolve their disagreement, Plaintiff filed this lawsuit, alleging that "Defendants' benefit of the bargain was to capture the LIHTC tax credits ... [which] has already been realized by SunAmerica," and "Defendants' ownership of the Apartment Complex remained a mere nominal appendage of the LIHTC structure which cannot be viewed in isolation, but must instead be construed together with, inter alia , the purpose of the Partnership: generating LIHTC tax credits and ensuring the Apartment Complex remains affordable via not-for profit ownership at the expiration of the Compliance Period." Id. at ¶ 35.

Along with claims for specific performance and damages for Defendants' alleged breach of the Restated Agreement, Plaintiff is seeking declaratory judgments pertaining to its right to exercise its ROFR under the Restated Agreement. The first cause of action alleges that Defendants' consent is not a condition precedent for Plaintiff to exercise its ROFR because (1) the ROFR under Section 12.03 contains no such requirement, (2) Section 8.02(b)(i) specifically provides that its restrictions are effective except as expressly provided in the Restated Agreement, and (3) the Restated Agreement contains no restrictions on the sale or refinancing of the Apartment Complex other than those set forth in 26 U.S.C. § 42, which contemplates no restrictions against a ROFR holder. Id. at ¶¶ 41-44. The second cause of action alleges that Plaintiff's ROFR "must be interpreted to be consistent with the statutory scheme of Section 42 as mandated by the Restated Agreement," and thus, "unlike a common law ROFR," it does not require either a willing seller or a bona fide offer before it can be exercised. Id. at ¶¶ 49-51. In support of this claim, the Complaint alleges that " Section 42 neither includes nor implies a bona fide third-party offer as a condition precedent for a ROFR holder to exercise its ROFR and such a limitation is inconsistent with the statutory scheme of Section 42 because a Section 42 ROFR permits a not-for-profit organization to purchase a project at a below-market price (the minimum purchase price) even if it is lower than the price offered by a third party, thereby discouraging any bona fide third party offeror from making any offer because the third parties would be aware that a non-for-profit would prevail against any such third-party offer no matter how competitive it is." Id. at ¶ 52.

DISCUSSION

Under 28 U.S.C. § 1441, a defendant is entitled to remove "any civil action brought in a State court of which the district courts of the United States have original jurisdiction." When federal jurisdiction is asserted by a defendant in a removal petition, the defendant has the burden of establishing that removal is proper. United Food & Commercial Workers Union, Local 919, AFL-CIO v. CenterMark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir. 1994).

Defendants contend that this Court has federal-question jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1340 because the alleged causes of action for declaratory relief and breach of contract raise necessary, disputed and substantial issues relating to interpretation of parts of the federal LIHTC program under the Internal Revenue Code, and federal jurisdiction over this action does not disturb any congressionally-approved balance of federal and state judicial responsibilities. Defendants also contend that this Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332 because the Plaintiff and Defendants SunAmerica and SLP are diverse and the non-diverse citizenship of the Partnership should be disregarded because it is a formal or nominal party without any adverse interest against any party in the action.³

I. This Court Has Federal Question Subject Matter Jurisdiction Pursuant to 28 U.S.C. §§ 1331 and 1340

Federal district courts have "original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States," 28 U.S.C. § 1331, and, specifically, "of any civil action arising under any Act of Congress providing for internal revenue, or revenue from imports or tonnage except matters within the jurisdiction of the Court of International Trade." 28 U.S.C. § 1340. "The presence or absence of federal-question...