Case Information
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-------------------------------------------x
COMMUNITY HOUSING IMPROVEMENT PROGRAM,
RENT STABILIZATION ASSOCIATION OF N.Y.C.,
INC., CONSTANCE NUGENT-MILLER, et al.,
Plаintiffs, -against- 19-cv-4087(EK)(RLM) CITY OF NEW YORK, RENT GUIDELINES BOARD,
DAVID REISS, CECILIA JOZA, ALEX SCHWARZ,
GERMAN TEJEDA, MAY YU, et al.,
Defendants. -------------------------------------------x MEMORANDUM AND ORDER 74 PINEHURST LLC, 141 WADSWORTH LLC, 177
WADSWORTH LLC, DINO PANAGOULIAS, DIMOS
PANAGOULIAS, et al.,
Plaintiffs, -against- 19-cv-6447(EK)(RLM) STATE OF NEW YORK, NEW YORK DIVISION OF
HOUSING AND COMMUNITY RENEWAL, RUTHANNE
VISNAUSKAS, et al.,
Defendants.
-------------------------------------------x
ERIC KOMITEE, United States District Judge:
Rent regulations have now been the subject of almost a hundred years of case law, going back to Justice Holmes. That case law supports a broad conception of government power to regulate rents, including in ways that may diminish — even significantly — the value of landlords’ property.
In 2019, the New York State legislature amended the state’s rent-stabilization laws (RSL). As amended, the RSL now goes beyond previous incarnations of the New York statute in its limitations on rent increases, deregulation of units, and eviction of tenants in breach of lease agreements, among other subjects. Plaintiffs claim that in light of the 2019 amendments, the RSL (in its cumulative effect) is now unconstitutional.
This opinion concerns two cases. Plaintiffs in
Community Housing Improvement Program v. City of New York (19- cv-4087) are various landlords and two landlord-advocacy groups, the Community Housing Improvement Program and the Rent Stabilization Association (the “CHIP Plaintiffs”). Plaintiffs in 74 Pinehurst LLC v. State of New York (19-cv-6447) are landlords 74 Pinehurst LLC, Eighty Mulberry Realty Corporation, 141 Wadsworth LLC and 177 Wadsworth LLC, and members of the Panagoulias family (the “Pinehurst Plaintiffs”). Because of the significantly overlapping claims and issues of law in the two cases, the Court addresses them here in a single opinion. [1] Pursuant to 42 U.S.C. § 1983, Plaintiffs assert (a) a facial claim that the RSL violates the Takings Clause (as both a physical and a regulatory taking); (b) in the case of certain Pinehurst Plaintiffs, a claim that the RSL, as applied to them, violates the Takings Clause (as both a physical and a regulatory taking); (c) a facial claim that the RSL violates their due- process rights; and (d) a claim that the RSL violates the Contracts Clause, as applied to each Pinehurst Plaintiff. [2] They seek an order enjoining the continued enforcement of the RSL, as amended; a declaration that the amended law is unconstitutional (both on its face and as-applied); and monetary relief for the as-applied Plaintiffs’ Takings and Contracts Clause claims.
Supreme Court and Second Circuit cases foreclose most
of these challenges. No precedent binding on this Court has
ever found any provision of a rent-stabilization statute to
violate the Constitution, and even if the 2019 amendments go
beyond prior regulations, “it is not for a lower court to
reverse this tide,”
Fed. Home Loan Mortg. Corp. v. N.Y. State
Div. of Hous. & Cmty. Renewal
,
I. Background
New York City has been subject to rent regulation, in some form, since World War I. But the RSL is of more recent vintage. It traces its roots to 1969, when New York City passed the law that created the Rent Guidelines Board (RGB) — the body that, to this dаy, continues to set rents in New York City. Five years later, New York State passed its own statute, which amended the 1969 law. Together, these laws formed the blueprint for today’s RSL. The State and City have amended the RSL repeatedly since its initial enactment, culminating with the amendments at issue here.
The 2019 amendments, enacted on June 14, 2019, made significant changes. Most notably, they:
• Cap the number of units landlords can recover for personal use at one unit per building (and only upon a showing of immediate and compelling necessity). N.Y. Reg. Sess. § 6458, Part I (2019).
• Repeal the “luxury decontrol” provisions, which allowed landlords, in certain circumstances, to decontrol a unit when the rent reached a specified value. Id. at Part D, § 5. • Repeal the “vacancy” and “longevity” increase provisions, which allowed landlords to charge higher rents when certain units became vacant. Id. at Part B, §§ 1, 2.
• Repeal the “preferential rate” provisions, which allowed landlords who had been charging rates below the legal maximum to increase those rates when a lease ended. Id. at Part E. • Reduce the value of capital improvements — called “individual apartment improvements” (IAI) and “major capital improvements” (MCI) — that landlords may pass on to tenants through rent increases. Id. at Part K, §§ 1, 2, 4, 11.
• Increase the fraction of tenant consent needed to convert a building to cooperative or condominium use. Id. at Part N.
• Extend, from six to twelve months, the period in which state housing courts may stay the eviction of breaching tenants. Id. at Part M, § 21.
II. Discussion
A. State Defendants’ Eleventh Amendment Immunity
Before turning to Plaintiffs’ constitutional claims,
the Court must address certain defendants’ assertion of immunity
from suit. The “State Defendants” — the State of New York, the
New York Division of Housing and Community Renewal (DHCR),
[3]
and
DHCR Commissioner RuthAnne Visnauskas — argue that the Eleventh
Amendment bars certain claims against them.
[4]
State Defendants’
Motion to Dismiss for Lack of Jurisdiction in Part, ECF No. 67.
The State Defendants did not raise the Eleventh Amendment
defense until oral argumеnt on their motion to dismiss for
failure to state a claim — after the 12(b)(6) motions had been
fully briefed. This omission is difficult to understand, to say
the least; nevertheless, the Court must resolve these arguments,
as they implicate its subject-matter jurisdiction.
See Dube v.
State Univ. of N.Y.
,
The parties agree that sovereign immunity bars
Plaintiffs’ Due Process and Contracts Clause claims (with certain exceptions). Plaintiffs’ Response to State Defendants’ Motion to Dismiss for Lack of Jurisdiction in Part at 1, ECF No. 71. Therefore these claims cannot proceed against the State Defendants, except to the extent they seek declaratory relief against DHCR Commissioner Visnauskas (as explained below). The parties dispute, though, whether the Eleventh Amendment immunizes states against takings claims. Id .
There is an obvious tension between the Takings Clause
and the Eleventh Amendment. The Eleventh Amendment provides the
states with immunity against suit in federal court. Plaintiffs
contend, however, that the Takings Clause’s “self-executing”
nature (meaning, its built-in provision of the “just
compensation” remedy) overrides the states’ immunity. In
support, they cite several cases that have reached that
conclusion (or related conclusions).
See, e.g.
,
Manning v. N.M
Energy, Minerals & Nat. Res. Dep’t
,
Despite the fact that the Eleventh Amendment and
Takings Clause date back so long, neither the Supreme Court nor
the Second Circuit has decisively resolved the conflict. The
Second Circuit recently affirmed a decision that held the
Eleventh Amendment to bar a takings claim, but in a non-
precedential summary order that did not analyze the question in
detail.
Morabito v. New York
,
The overwhelming weight of authority among the
circuits contradicts the cases cited by Plaintiffs, supra .
These cases hold that sovereign immunity trumps the Takings
Clause — at least where, as here, the state provides a remedy of
its own for an alleged violation.
[5]
The reasoning of one such
case,
Seven Up Pete Venture v. Schweitzer
,
The Ninth Circuit in Seven Up reasoned that the
Takings Clause, like the Due Process Clause, “can comfortably
co-exist with the Eleventh Amendment immunity of the States,”
provided state courts make a “constitutionally enforced remedy”
available.
Seven Up
,
These cases give effect to the Supreme Court’s
admonition that:
[T]he sovereign immunity of the States neither derives from, nor is limited by, the terms of the Eleventh Amendment. Rather, as the Constitution’s structure, its history, and the authoritative interpretations by this Court make clear, the States’ immunity from suit is a fundamental aspect of the sovereignty which the States enjoyеd before the ratification of the Constitution, and which they retain today . . . .
Alden v. Maine
,
There are fleeting suggestions to the contrary in
Supreme Court authority, but none of them compel the opposite
conclusion. Most recently, in
Knick v. Twp. of Scott
, 139 S.
Ct. at 2162 (2019), the Supreme Court cast doubt on the notion
that the availability of state-law relief should determine
whether federal courts may hear takings claims.
Id.
at 2169-71
(stating that the existence of a state-law remedy “cannot
infringe or restrict the property owner’s federal constitutional
claim,” and that to hold otherwise would “hand[] authority over
federal takings claims to state courts”) (internal quotations
omitted). Similarly, in
First English Evangelical Lutheran
Church of Glendale v. Cnty. of Los Angeles
,
But these cases do not control here. They establish,
at most, that the Takings Clause can overcome
court-imposed
—
rather than constitutional — restrictions on takings claims.
See Knick
,
Accordingly, New York State, the DHCR, [7] and Commissioner Visnauskas (to the extent Plaintiffs seek monetary relief in her official capacity) will be dismissed from this litigation.
This holding may not have the profound impact that one
might initially surmise. Plaintiffs may continue to seek
prospective remedies — like an injunction — against state
officials under
Ex Parte Young
,
Sovereign immunity also does not bar the remaining
damages claims (for just compensation) against Commissioner
Visnauskas in her individual capacity.
[8]
But to establish
individual liability, Plaintiffs must allege that Commissioner
Visnauskas was “personal[ly] involve[d]” in the alleged
regulatory takings.
Grullon v. City of New Haven
,
* * * * * The Court turns next to Plaintiffs’ substantive claims. Plaintiffs bring two types of challenge under the Takings Clause — they allege physical and regulatory takings. The CHIP Plaintiffs allege only facial challenges under both theories ( i.e. , they claim that the face of the statute effectuates a physical and regulatory taking in all applications). Certain Pinehurst Plaintiffs also bring as- applied takings challenges with respect to specific properties under both theories.
B. Physical Taking: Facial and As-Applied Challenges When a government authorizes “a permanent physical occupation” of property, a taking occurs. Loretto v.
Teleprompter Manhattan CATV Corp.
,
Examples include the installation of physical items on
buildings,
Loretto
,
In this case, all Plaintiffs retain the first and
third strands in Horne ’s bundle of rights, supra : they continue to possess the property (in that they retain title), and they can dispose of it (by selling). See Andrus v. Allard , 444 U.S. 51, 65-66 (1979) (“[W]here an owner possesses a full ‘bundle’ of property rights, the destruction of one ‘strand’ of the bundle is not a taking, because the aggregate must be viewed in its entirety.”). The restrictions on their right to use the property as they see fit may be significant, but that is insufficient under the standards set forth by the Supreme Court and Second Circuit to make out a physical taking.
Recognizing as much in prior cases, the Second Circuit
has held that “the RSL regulates land use rather than effecting
a physical occupation.”
W. 95 Hous. Corp. v. N.Y.C. Dep’t of
Hous. Pres. & Dev.
,
Plaintiffs attempt to overcome these Second Circuit
cases by arguing that they rest in part on reasoning that the
Supreme Court has since disparaged in
Horne
. In
Harmon
and
FHLMC
, the Second Circuit had invoked what Plaintiffs here call
the “acquiescence theory” — the notion that the landlords chose,
voluntarily, to enter the rental real estate business, and that
they can exit it if they choose. In
Horne
, decided
subsequently, this strain of reasoning came under criticism.
See Horne
,
The Pinehurst Plaintiffs’ as-applied physical challenges fail for the same reasons (to the extent they make them, which 177 Wadsworth LLC does not). No Plaintiff alleges that they have been deprived of title to their property, or that they have been deprived of the ability to sell the property if they choose. At most, these Plaintiffs allege that the manner in which they can remove apartments from stabilization — the so- called “off ramps” from the RSL regime — have been significantly limited.
Accordingly, the Court finds that Plaintiffs fail to state physical-taking allegations upon which relief can be granted, and dismisses these claims — both facial and as-applied — pursuant to Rule 12(b)(6).
C. Regulatory Taking – Facial Challenge
Like the physical-takings challenges, every
regulatory-takings challenge to the RSL has been rejected by the
Second Circuit.
See W. 95 Hous. Corp.
,
In a facial challenge, Plaintiffs must demonstrate
that “no set of circumstances exists under which [the RSL] would
be valid.”
United States v. Salerno
,
The Supreme Court has identified two distinct strains
of regulatory-takings analysis. The first applies in the case
of a regulation that “denies all ecоnomically beneficial or
productive use of land.”
Palazzolo v. Rhode Island
, 533 U.S.
606, 617 (2001);
see also Lucas
,
Even without rendering property worthless, a
regulatory scheme may still effectuate a taking if it “goes too
far,” in Justice Holmes’s words.
Mahon
,
Simply to apply these “ad hoc” factors to the instant
facial
challenge is to recognize why the RSL is not generally
susceptible to such review. The first factor — economic impact
— obviously needs to be calculated on an owner-by-owner basis,
and those calculations will vary significantly depending on when
a property was purchased, what fraction of its units are rent-
stabilized, what improvements the landlord has made, and many
other metrics. At best, Plaintiffs can make vague allegations
about the average diminution in value across regulated
properties.
See, e.g.
, Transcript dated June 23, 2020 at 59:19-
24,
Community Housing Improvement Program v. City of New York
,
19-cv-4087, ECF No. 86 (“[CHIP Plaintiffs’ counsel]: . . . .
At the complaint stage, we don’t have to have developed all of
our evidence, even our own evidence, with respect to the
economic impact.”).
[12]
This lack of clarity surely arises because
the diminution in value will vary significantly from property to
property — making it virtually impossible to show there is “no
set of circumstances,”
Salerno
,
The second
Penn Central
factor is the extent to which
the regulation interferes with reasonable investment-backed
expectations. “The purpose of the investment-backed expectation
requirement is to limit recovery to owners who could demonstrate
that they bought their property in reliance on a state of
affairs that did not include the challenged regulatory regime.”
Allen v. Cuomo
,
Plaintiffs cannot make broadly applicable allegations
about the investment-backed expectations of landlords state- or
city-wide. Different landlords bought at different times, and
their “reliance,” such as it was, would have been on different
incarnations of the RSL.
See Ark. Game & Fish Comm’n v. United
States
,
Finally,
Penn Central
’s third factor considers the
“character of the taking.”
See Penn Central
,
D. Post-Breach Relief Provisions
The RSL provisions that provide the most substantial basis for a facial challenge, in this Court’s estimation, are contained in New York’s Real Property Actions and Proceedings Law (RPAPL) Sections 749 and 753. As amended in 2019, these provisions dictate that even after the RSL has operated to eliminate “unjust, unreasonable and oppressive rents,” N.Y.C. Admin. Code § 26-501, the state housing courts may still stay (for up to twelve months) the eviction of a tenant who fails to pay the reduced rent, if eviction would cause the tenant “extreme hardship.” RPAPL § 753. In making the hardship determination, “the [housing] court shall consider serious ill health, significant exacerbation of an ongoing condition, a child’s enrollment in a local school, and any other extenuating life circumstances affecting the ability of the applicant or the applicant’s family to relocate and maintain quality of life.” Id.
These “post-breach relief” provisions are aimed at
requiring particular property owners to alleviate the hardships
of particular tenants — including hardships that may arise from
circumstances separate and distinct from the dynamics of supply
and demand in New York’s rental housing market. That aim, while
indisputably noble, nevertheless carries a “heightened risk that
private property is being pressed into some form of public
service,”
Lucas
,
Neither the Supreme Court nor the Second Circuit has
squarely considered a regulation like the post-breach rеlief
provisions here, but the Supreme Court came closest in
Pennell,
which also involved a statute that called on landlords to
provide additional benefits on the basis of tenant “hardship.”
[T]he Ordinance establishes the seven factors that a hearing officer is to take into account in determining the reasonable rent increase. The first six of these factors are all objective, and are related either to the landlord's costs of providing an adequate rental unit, or to the condition of the rental market. Application of these six standards results in a rent that is “reasonable” by reference to what appellants contend is the only legitimate purpose of rent control: the elimination of “excessive” rents caused by San Jose's housing shortage. When the hearing officer then takes into account “hardship to a tenant” pursuant to [the seventh factor] and reduces the rent below the objectively “reasonable” amount established by the first six factors, this additional reduction in the rent increase constitutes a “taking.” This taking is impermissible because it does not serve the purpose of eliminating excessive rents — that objective has already been accomplished by considering the first six factors — instead, it serves only the purpose of providing assistance to “hardship tenants.”
Id.
In response to this argument, Justice Scalia would have held that a facial taking occurred. He concluded that in any application of the “hardship” provision, the city would not be “‘regulating’ rents in the relevant sense of preventing rents that are excessive; rather, it [would be] using the occasion of rent rеgulation (accomplished by the rest of the Ordinance) to establish a welfare program privately funded by those landlords who happen to have ‘hardship’ tenants.” Id. at 22 (Scalia, J., concurring in part and dissenting in part).
A broad majority of the Court, however, declined to reach the facial-takings question, on the basis that it would have been “premature” to do so without record evidence that the hardship provision had ever actually been relied on to reduce a proposed rent increase. Id. at 9-10. The majority noted that there was nothing in the law requiring the hearing officer to reduce rents on the basis of tenant hardship, and that the Court therefore lacked a “sufficiently concrete factual setting for the adjudication of the takings claim” presented. Id.
Applying
Pennell
’s reasoning, the facial challenge to
the post-breach relief provisions here, too, must be deemed
premature. Though Plaintiffs allege that application of the
pоst-breach relief provisions is “far from uncommon,” CHIP
Plaintiffs’ Supplemental Memorandum of Law in Opposition to
Defendants’ and Intervenors’ Motions to Dismiss at 11, ECF No.
87 (quoting
Elmsford Apartment Assocs. v. Cuomo
, 20-cv-4062,
And the parties do not agree on how the provisions are
likely to work in practice. Plaintiffs contend that the
statutory provision conditioning stays on the tenant depositing
rent payments is illusory because the statute provides no
“enforcement mechanism” to force tenants to pay,
see
Pinehurst
Plaintiffs’ Supplemental Brief in Opposition to Defendants’
Motions to Dismiss at 3, ECF No. 65 (“Although the statute
purports to require a deposit of one year’s rent as a condition
of the tenant’s post-breach occupancy, the statute contains
no
enforcement mechanism through which a property owner can require
the tenant to make that deposit.”). Defendants argue, howevеr,
that state courts do, in fact, enforce this requirement in
practice,
see, e.g.
, Pinehurst City Defendants’ Supplemental
Brief in Further Support of Their Motion to Dismiss the
Complaint at 3, 5-7, ECF No. 68. Given these factual disputes,
the Court must heed the
Pennell
majority’s admonition to avoid
decision until the provision is challenged in a “factual setting
that makes such a decision necessary.”
E. Regulatory Taking – As-Applied Challenge
Even in bringing their as-applied challenges, the
Pinehurst Plaintiffs (except 177 Wadsworth LLC) must “satisfy
the heavy burden placed upon one alleging a regulatory taking.”
Keystone Bituminous Coal Ass’n,
Applying the first Penn Central factor, each as-
applied Plaintiff alleges that the 2019 amendments significantly diminished the value of their properties. While the extent of this diminution remains to be determined with precision, Plaintiffs 74 Pinehurst LLC and 141 Wadsworth LLC allege that the 2019 amendments reduced the value of their regulated properties by twenty to forty percent beyond the diminution alreаdy occasioned by the pre-2019 RSL. Pinehurst Compl. at ¶ 97. And Eighty Mulberry Realty Corporation and the Panagouliases allege that the 2019 amendments “significantly reduced the value” of their rent-stabilized apartments, id. at ¶ 96, which now rent for roughly half the rate of unregulated apartments in the same building (or less), id. at ¶ 106. These alleged economic impacts, though insufficient on their own , [13] are not so minimal to compel dismissal of the complaint at this stage.
But only two Plaintiffs (Eighty Mulberry Realty
Corporation and the Panagouliases) adequately allege that the RSL violates their reasonable investment-backed expectations in its current cumulative effect. These Plaintiffs bought their properties at the dawn of the rent-stabilized era — either before the RSL was first enacted (Eighty Mulberry Realty Corporation, before 1950, id. at ¶ 17) or not long thereafter (the Panagouliases, in 1974, id. at ¶ 13). And they allege that the 2019 amendments not only frustrate their expectation to a reasonable rate of return, but also their expectation that some units would not be (or remain) regulated at all. Id . at ¶¶ 108-09. [14] The Panagouliases contend that the DHCR rejected their attempt to reclaim units for personal use, which effectively prevents them from using the property for other purposes. Id. at ¶¶ 63-64. [15] Although questions remain as to the nature and reasonableness of these expectations, it cannot be said, at this stage, that these allegations are inadequate. Discovery is needed to assess these claims.
The same is not true for the other as-applied Plaintiffs, 74 Pinehurst LLC and 141 Wadsworth LLC. Unlike Eighty Mulberry Realty Corporation and the Panagouliases, these Plaintiffs bought their properties under a different, and more mature, version of the RSL (as in effect in 2003 and 2008, respectively, see id. at ¶¶ 14-15). [16] By that point, the RSL had decontrol provisions eliminated the only mechanisms to transition a rent- stabilized apartment into a market-rate rental unit. . . . The luxury and high-income decontrol provisions had been the law for over 25 years, and formed the backbоne of property owners’ reasonable investment-backed expectations that they could eventually charge market rents for their units.” Pinehurst Compl. at ¶¶ 108-09.
[15]
Cf. Yee
,
[16] Whether the time of acquisition matters to the Penn Central inquiry appears to be subject to some debate among the Justices. See Palazzolo , 533 U.S. at 630 ( Penn Central claims are “not barred by the mere fact that title was acquired after the effective date of the state-imposed restriction”); id. at 637 (Scalia, J., concurring) (“In my view, the fact that a restriction existed at the time the purchaser took title . . . should have no bearing upon the determination of whether the restriction is so substantial as to constitute a taking.”). But for the moment, at least, the timing of purchase — even if not dispositive, in and of itsеlf — remains at least significant, and the as-applied Plaintiffs here have very different purchase profiles in that regard. See id. at 633, 635 (O’Connor, J., concurring) (the Palazzolo majority’s holding “does not mean that the timing of the regulation’s taken its basic shape and become a fixture of New York law. [17] Cf. CHIP Compl. at ¶ 303 (the RSL was “nominally established as a temporary measure”).
74 Pinehurst LLC and 141 Wadsworth LLC argue that they did not reasonably expect operating costs to outpace rate increases. Pinehurst Compl. at ¶¶ 98, 101, 237. Nor, these Plaintiffs claim, did they expect the repeal of luxury decontrol or vacancy, longevity, and preferential-rate increases, id. at ¶¶ 102, 104, 114, 120, 124, or the reduction of recoverable IAIs and MCIs, id. at ¶¶ 138-42.
But by the time these Plaintiffs invested, the RSL had
been amended multiple times, and a reasonable investor would
have understood it could change again. Under the Second
Circuit’s case law, it would not have been reasonable, at that
point, to expect that the regulated rate would track a given
figure, or that the criteria for decontrol and rate increases
would remain static.
See, e.g.
,
id.
at ¶¶ 22, 99-100 (RGB sets
enactment relative to the acquisition of title is immaterial to the
Penn
Central
analysis,” and “does not remove the regulatory backdrop against which
an owner takes title to property from the purview of the
Penn Central
inquiry”);
1236 Hertel Ave. v. Calloway
,
[17] There were some background rent-regulation laws when Eighty Mulberry
Realty Corporation and the Panagouliases bought their properties as well. As
stated above, some form of rent regulation has existed in New York City since
World War I. But these were very different regimes, and it is unclear
whether and to what extent they applied to the properties at issue here.
permissible rates annually based on the rent set under the RSL
in 1974);
id.
at ¶ 38 (luxury-decontrol introduced in 1993);
CHIP Compl. at ¶ 59 (vacancy and longevity increases introduced
in 1997); Memorandum of Law in Support of Pinehurst State
Defendants’ Motion to Dismiss at 8, ECF No. 53 (luxury-decontrol
amended in 1997). Because these Plaintiffs made their
investments “against a backdrop of New York law” that suggested
the RSL could change,
see 1236 Hertel Ave
.,
Finally, analysis of the RSL’s “character” should be determined after discovery, when the precise effects of the RSL on these Plaintiffs becomes clearer.
The claims brought by 74 Pinehurst LLC and 141
Wadsworth LLC are therefore dismissed, while the claims brought by Eighty Mulberry Realty Corporation and the Panagouliases may proceed.
F. Due Process
Nor do the 2019 amendments violate the Due Process Clause of the Fourteenth Amendment. Plaintiffs argue that the RSL is not “rationally related” to increasing the supply of affordable housing, helping low-income New Yorkers, or promoting socio-economic diversity. Instead, they claim the law is counterproductive: it perpetuates New York’s housing crisis, and fails to target the people it claims to serve. See CHIP Compl. at ¶¶ 70-155; Pinehurst Compl. at ¶¶ 159-88. The CHIP Plaintiffs also argue that New York City’s triennial declaration of a “housing emergency” (which triggers the RSL) itself violates due process, because that decision is arbitrary and irrational. CHIP Compl. at ¶¶ 167-92.
In support, Plaintiffs allege that economists broadly agree that laws like the RSL do not work for their intended purpose, and indeed may do substantially more harm than good. As one Nobel Prize-winning economist, cited in the Pinehurst Plaintiffs’ complaint, put it in discussing San Francisco’s rent-stabilization scheme:
The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that “a ceiling on rents reduces the quality and quantity of housing.” Almost every freshman- level textbook contains a case study on rent cоntrol, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go — and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. . . . [S]urely it is worth knowing that the pathologies of San Francisco's housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts.
Paul Krugman, Reckonings; A Rent Affair , N.Y. T IMES (June 7, 2000); see also Pinehurst Compl. at ¶ 160 (citing Krugman article).
But the Court is engaged in rational-basis review
here, not strict scrutiny.
See Pennell
,
Moreover, alleviating New York City’s housing shortage
is not the only justification of the RSL that the legislature
offered. The RSL was also intended to allow people of low and
moderate income to remain in residence in New York City — and
specific neighborhoods within — when they otherwise might not be
able to.
See
N.Y.C. Admin. Code § 26-501 (extending the RSL to
prevent “uprooting long-time city residents from their
communities”). The Supreme Court has recognized neighborhood
stability and continuity as a valid basis for government
regulation.
See Nordlinger v. Hahn
,
Sullivan
,
Accordingly, the due-process challenge is dismissed.
G. Contracts Clause
The Pinehurst Plaintiffs also claim that the 2019
amendments, as applied to each of them, violate the Contracts Clause of Article I by repealing the RSL’s so-called “preferential rates” provision. [18] This provision allowed landlords to raise rents on an expiring lease to the maximum rate that would otherwise apply to the unit. While the preferential-rates provision existed, many landlords, including each of the Plaintiffs here, Pinehurst Compl. at ¶ 120, allegedly offered “preferential” leases to tenants ( i.e. , leasing rates discounted below even what the RGB would permit). These landlords expected, prior to repeal, that they could raise rates significantly when a preferential lease term ended. The 2019 amendments, however, prevent Plaintiffs from doing so by limiting future rates to the amount charged at the time the 2019 amendments were enacted (plus annual increases). See N.Y. Reg. Sess. § 6458, Part E, § 2 (2019).
Plaintiffs claim this violates the Contracts Clause in two ways. First, they claim that it extends the duration of all Plaintiffs’ expiring, preferential leases (since now they must not only renew the lease, but also at the same preferential rates). Second, 74 Pinehurst LLC claims that, as to it, the 2019 amendments also required the retroactive reduction of rent — the most important term in the lease — in two particular lease agreements that it had executed before the amendment passed.
Plaintiffs’ first claim — that the 2019 amendments
revise the duration of their expiring leases — is unavailing.
As applied to future renewals, “[a] contract . . . cannot be
impaired by a law in effect at the time the contract was made.”
Harmon
,
74 Pinehurst LLC, however, also alleges that the 2019
amendments revised the terms of two of its
already
executed
leases. In resolving this claim, the Court must ask three
questions: “(1) is the contractual impairment substantial and,
if so, (2) does the law serve a legitimate public purpose such
as remedy a general social or economic problem and, if such
purpose is demonstrated, (3) are the means chosen to accomplish
this purpose reasonable and necessary[?]”
Buffalo Teachers
Fed’n v. Tobe
,
74 Pinehurst LLC adequately alleges that the 2019
amendments “substantially impair” its executed leases by
affecting a critical term of their executed lease agreements —
the monthly rent.
Cf. id.
at 368 (wage freeze substantially
impaired unions’ labor contracts because compensation is “the
most important element[] of a labor contract”). But 74
Pinehurst LLC cannot surmount the second and third steps of the
Contracts Clause analysis. The legislative purposes behind the
RSL are valid (as explained above).
See Sal Tinnerello & Sons,
Inc. v. Town of Stonington
,
III. Conclusion
For the reasons explained above, the Court grants
Defendants’ motions to dismiss all claims in Community Housing Improvement Program v. City of New York (19-cv-4087). The Court also grants Defendants’ motions to dismiss all claims in 74 Pinehurst LLC v. State of New York (19-cv-6447) except the as- applied regulatory-takings claims brought by Eighty Mulberry Realty Corporation and the Panagouliases. The Pinehurst Plaintiffs’ claims against the State of New York and the DHCR are dismissed for lack of subject-matter jurisdiction, as are their claims for damages against DHCR Commissioner Visnauskas in her official capacity. The Clerk оf Court is respectfully directed to enter judgment and close the action in CHIP (19-cv- 4087), given that that action is now dismissed in its entirety.
SO ORDERED.
_____/s Eric Komitee_________ ERIC KOMITEE United States District Judge Dated: Brooklyn, New York September 30, 2020
Notes
[1] The Court does not, however, consolidate the cases. Accordingly, the Court issues a separate judgment in CHIP, as directed below.
[2] Each Pinehurst Plaintiff brings as-applied challenges under the Takings Clause and Contracts Clause except for 177 Wadsworth LLC, which only brings an as-applied claim under the Contracts Clause.
[3] The DHCR is the New York State agency charged with overseeing and administering the RSL.
[4] The Eleventh Amendment provides: “The Judicial power of the United
States shall not be construed to extend to any suit in law or equity,
commenced or prosecuted against one of the United States by Citizens of
another State, or by Citizens or Subjects of any Foreign State.” U.S. Const.
amend. XI. Though the text does not speak to suits against states by their
own
residents, the Supreme Court held in
Hans v. Louisiana
,
[5] See N.Y. Const. art. I, § 7(a) (“Private property shall not be taken for public use without compensation.”). No court has reached the ultimate question of whether the Takings Clause usurps the Eleventh Amendment when no remedy is available in the state courts. Given New York’s express remedy, this Court need not reach that issue.
[6] Some have argued that this footnote proves the Takings Clause trumps sovereign immunity, insofar as it suggests sovereign immunity does not strip the Takings Clause of its remedial nature. See, e.g. , Eric Berger, The Collision of the Takings and State Sovereign Immunity Doctrines, 63 W ASH . & L EE L. R EV . 493 (2006). But that reading is far from obvious, and it would, in any event, be dictum (because the defendant in First English was a county, which cannot invoke sovereign immunity).
[7] Sovereign immunity extends to state agencies like the DHCR as well,
because they are an arm of the state.
See, e.g.
,
Schiavone v. N.Y. State
Office of Rent Admin.
, No. 18-cv-130,
[8] Moreover, the Eleventh Amendment does not bar Plaintiffs’ Contracts Clause claims against Commissioner Visnauskas for declaratory relief (in her official capacity) or for damages (in her personal capacity). As explained below, those claims are dismissed on the merits, as are Plaintiffs’ due- process claims against Commissioner Visnauskas for facial declaratory and injunctive relief.
[9] Plaintiffs allege that Commissioner Visnauskas was personally “charged with implementing and enforcing” certain provisions of the RSL, including the personal-use restrictions and the MCI and IAI provisions. Pinehurst Complaint at ¶¶ 68, 127, ECF No. 1 (Pinehurst Compl.) (citing N.Y.C. Admin. Code § 26-511(b) (“[N]o such amendments shall be promulgated except by action of the commissioner of the division of housing and community renewal”).
[10] The Supreme Court has spoken about the need for takings jurisprudence
to redress this kind of incremental deprivation of property rights.
See,
e.g., Lucas v. S.C. Coastal Council,
[11] Pinehurst Compl. at ¶ 216 (“The RSL thus results in a decrease of 50 percent or more of a unit’s value. The 2019 Amendments exacerbate this decrease in value and have caused rent-stabilized apartments to lose 20 to 40 percent (or more) of their value prior to enactment of the 2019 Amendments.”); id. at ¶ 97 (the 2019 amendments “have reduced the value of the rent-stabilized buildings owned by Plaintiffs 74 Pinehurst LLC, 141 Wadsworth LLC, [and] 177 Wadsworth LLC . . . by 20 to 40 percent”); id. at ¶ 232 (the RSL has “decreas[ed] the resale value of Plaintiffs’ properties”); CHIP Complaint at ¶ 274, ECF No. 1 (CHIP Compl.) (“The RSL’s regulatory burdens have dramatically reduced the market value of regulated properties, in some cases by over 50%”); id. at ¶ 298 (“[B]uildings where rent stabilized units account for almost 100% of the units can expect a price per square foot . . . of two-thirds less” than buildings where “0-20% of the units” are regulated).
[12] See also Pinehurst Compl. at ¶ 94 (comparing the average “value per square foot” of regulated and unregulated buildings); id. at ¶ 101 (comparing landlords’ average “operating costs” and “permitted [rate] increases”); CHIP Compl. at ¶ 273 (regulated units charge “on average 40% lower than market- rate rents, and in some units 80% lower”); id. at ¶ 274 (“unregulated properties are typically worth 20% to 40% more” than regulated ones), id. at ¶ 284 (“the income from non-regulated units can be as much as 60-90% higher than regulated units”).
[13]
See Penn Central
,
[14] “The 2019 Amendments further undermine the investment-backed expectations of property owners, including Plaintiffs [the Panagouliases] and Plaintiff Eighty Mulberry [Realty] Corporation, by repealing the luxury- and high-income decontrol provisions described above . . . . Many property owners, including Plaintiffs [the Panagoluiases] and Plaintiff Eighty Mulberry Realty Corporation, undertook significant capital improvements, improving the quality of their units, with the expectation that the apartments could be converted to market-rate rentals under the luxury- and high-income decontrol provisions. Repeal of the luxury- and high-income
[18] The Contracts Clause prohibits states from “pass[ing] any . . . Law impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1.