Matter of IG Second Generation Partners L.P. v New York State Div. of Hous. & Community Renewal

[*1] Matter of IG Second Generation Partners L.P. v New York State Div. of Hous. & Community Renewal 2009 NY Slip Op 50467(U) [22 Misc 3d 1136(A)] Decided on February 11, 2009 Supreme Court, New York County Kornreich, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on February 11, 2009
Supreme Court, New York County

In the Matter of the Application of IG Second Generation Partners L.P., and I Bldg Co., Inc. and Wembly Management Co., Inc., Petitioners,

against

New York State Division of Housing and Community Renewal, Office of Rent Administration, Respondents.



107832/2006



Attorneys: Shaw & Binder, New York, New York, for plaintiff

DHCR for respondent DHCR

Shirley Werner Kornreich, J.

By order to show cause,Petitioners IG Second Generation Partners L.P., I Bldg Co., Inc. and Wembly Management Co., Inc. (collectively "the Owner"), bring this Article 78 proceeding for a judgment reversing and annulling the April 7, 2006 Order (DHCR Order) issued by respondent New York State Division of Housing and Community Renewal (DHCR) under Docket No. UB410006-RK. By that Order, DHCR, on remand pursuant to a February 2005 Order of this Court (Lehner, J.), set a 48 month pay-out period for rent arrears by tenant Dru Arstark. Petitioners do not challenge the amount of arrears set by DHCR, $20,423.06, but claim that DHCR was arbitrary and capricious in setting the lengthy pay-out period and that if the payout is affirmed, the tenant should be required to pay interest. DHCR has filed a brief opposing the Petition. Tenant Arstark, by November 20, 2008 letter application, seeks to intervene in this proceeding. Petitioners oppose intervention. DHCR, in its response to the tenant's letter application, mistakenly states that this Court had granted intervention at the argument on the Petition, and therefore DHCR did not take a position.

Procedural and Factual History

This matter began in 1990 as a fair market rent appeal brought by tenant Arstark, and has

since then has been the subject of protracted litigation. The procedural history and underlying [*2]facts were succinctly stated by the New York Court of Appeals in its opinion cited at 10 NY3d 474 (2008):

In 1990, the tenant leased an apartment in a Manhattan building, owned by IG Second Generation Partners, L.P. (the owner). She was the first rent-stabilized tenant after the preceding rent-controlled tenant vacated the apartment. The initial lease set the monthly rent at $ 830, commencing May 1, 1990. The tenant then filed a fair market rent appeal with the agency, seeking an adjustment of the $ 830 rent on the ground that it exceeded the apartment's fair market rent. Five years later, in 1995, the agency's Rent Administrator issued an order establishing the fair market rent for the subject apartment at $ 556.82 per month, based upon its applicable rent guidelines The order directed the owner to adjust the tenant's monthly rent to that amount prospectively and to refund the overcharged rent, totaling $ 12,877.37. In establishing the fair market rent, DHCR must consider the applicable rent guidelines and "the rents generally prevailing in the same area for" comparable properties (Rent Stabilization Law of 1969 [Administrative Code of City of NY] § 26-513 [b] [1]; see Rent Stabilization Code [9 NYCRR] § 2522.3 [e]). In response, the owner filed a petition for administrative review. That portion of the administrator's order directing a refund of overcharged rent was automatically stayed pending resolution of the petition (see Rent Stabilization Code [9 NYCRR] § 2529.12). The agency denied the owner's request for a stay of the remainder of the administrator's order, i.e., the prospective rent adjustment. While the landlord's petition for review was pending, the owner notified the tenant that it would accept the rent set by the Rent Administrator's order without prejudice to collecting the full lease rent in the event that the order is overturned. The tenant also signed several renewal leases during the pendency of the review. All of the leases stated that the "collectible rent" i.e., the lower rent set by the Rent Administrator "may be modified pursuant to the DHCR's decision" on administrative review. Another five years passed when, in January 2000, the agency partially granted the owner's petition and established the fair market rent at $ 798.07 per month, not $ 556.82 as determined by the Rent Administrator. The tenant then brought an article 78 proceeding to annul the agency's January 2000 determination. In July 2000, Supreme Court granted the agency's request to remit the matter for further consideration. At issue on this appeal is DHCR's determination on remand. [*3]Two years later, in 2004, DHCR, once again, partially granted the owner's petition and this time established the fair market rent at $ 1078.30 per month. In making this determination, the agency utilized a broader comparability standard enacted by a 2000 amendment to Rent Stabilization Code § 2522.3. However, relying on several of its regulations, the agency determined that the tenant's payment of the rent set by the previous order of the Rent Administrator would "be deemed full payment of the legal rent" until the first payment due 60 days after the agency's new order. Only then would the owner be permitted to collect the initial lease rent plus applicable increases. The agency reasoned that, on the one hand, its amended regulations resulted in a more accurate assessment of the fair market rent; but on the other hand, "undue hardship" to the tenant would result if the agency allowed the owner to collect the $ 830 rent retroactive to May 1, 1990 because the tenant would have to repay the substantial rent arrears that accumulated during the decade between the rent administrator's order and the agency's ultimate resolution of the petition for administrative review. As a result, DHCR effectively cancelled approximately $ 19,000 of rent arrears owed by the tenant. The owner then commenced this article 78 proceeding, challenging the agency's determination to the extent that it cancelled the tenant's rent arrears. The tenant intervened in the proceeding, arguing that the court should either sustain the determination or remand the matter to DHCR to allow her to submit evidence of hardship. Supreme Court granted the owner's petition, holding that the agency's determination cancelling the rent arrears was arbitrary and capricious. The court remanded the matter to DHCR to calculate the exact amount owed and to establish a repayment schedule.[On appeal] [t]he Appellate Division, with one Justice dissenting, affirmed, concluding that, "[o]nce DHCR found that the lease rent did not exceed the fair market rent, it had no authority to waive rent arrears" (34 AD3d 379, 379, 825 NYS2d 452). That court granted DHCR and the tenant leave to appeal and certified the following question: "Was the order of this Court, which affirmed the order of the Supreme Court, properly made?" We answer the certified question in the affirmative.

Matter of IG Second Generation Partners L.P. v. New York State Div. of Hous. & Community Renewal, Off. of Rent Admin.,10 NY3d at 478-481. While the appeal was pending, DHCR processed the remand, which resulted in the Order now being challenged in this Article 78 proceeding. The portion of that Order now being challenged as arbitrary and capricious provides, in pertinent part, "Given the length of time that this proceeding has been pending and the amount of arrears due, the Commissioner deems it appropriate to afford the tenant a period of 48 months to repay the arrears...." Exh. A, Petition. There was no finding regarding hardship to the tenant [*4]

Discussion and Rulings

A court reviewing an Article 78 proceeding must judge the propriety of an administrative action solely on the reasons cited by the administrative body. See Scherbyn v. Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 NY2d 753, 758 (1991). Such an action must be upheld unless it "shocks the judicial conscience and, therefore, constitutes an abuse of discretion as a matter of law." See Featherstone v. Franco, 95 NY2d 550, 554 (2000). CPLR section 7803 states that the following questions may be raised with respect to an Article 78 proceeding: "Whether a determination was made in violation of lawful procedure, was effected by error of law or was arbitrary and capricious or an abuse of discretion, including abuse of discretion as to the measure or mode of penalty or discipline imposed."

In deciding whether an agency's determination was arbitrary, capricious, or an abuse of discretion, courts are limited to an assessment of whether a rational basis exists for the administrative determination, "without disturbing underlying factual determinations."Heinz v. Brown, 80 NY2d 998, 1001 (1992); see Matter of Pell v. Board of Educ., 34 NY2d 222, 231 (1974) ("Arbitrary action is without sound basis in reason and is generally taken without regard to the facts."). A rational or reasonable basis for the agency's determination exists if there is evidence in the record to support its conclusion. See Sewell v. New York, 182 AD2d 469, 473 (1st Dept. 1992).

In deciding whether an agency's determination was arbitrary, capricious, or an abuse of discretion, courts are limited to an assessment of whether a rational basis exists for the administrative determination, "without disturbing underlying factual determinations."Heinz v. Brown, 80 NY2d 998, 1001 (1992); see Matter of Pell v. Board of Educ., 34 NY2d 222, 231 (1974) ("Arbitrary action is without sound basis in reason and is generally taken without regard to the facts."). A rational or reasonable basis for the agency's determination exists if there is evidence in the record to support its conclusion. See Sewell v. New York, 182 AD2d 469, 473 (1st Dept. 1992).

The 48-Month Payout

The Owner claims that DHCR's decision to allow the tenant a 48-month payout period

was arbitrary and capricious. The Court disagrees. As the Supreme Court (Lehner, J.) found in its 2005 Decision remanding the matter to DHCR, "The agency also possesses the discretion to direct the payment of arrears found owing over a period of time." Matter of IG Second Generation Partners L.P. v. New York State Div. of Hous. & Community Renewal, Off. of Rent Admin., 7 Misc 3d 229, 232 (Sup. Ct. New York County 2005), citing Matter of Meyer v. New York State Div. of Hous. & Community Renewal, 192 AD2d 375, 377 (1st Dept 1993). In Meyer, the Court held that a direction by DHCR for a repayment over a 12-month period was "grossly inequitable as to render this aspect of the decision arbitrary and capricious," and directed that the repayment period for $8,140.97 be increased to 48 months. Id. In this case, DHCR based its decision on "the length of time that this proceeding has been pending and the amount of arrears due," which is rational and reasonable based on the record. See Matter of Atkinson v. Division of Hous. & Community Renewal, 280 AD2d 326 (1st Dept. 2001).

The agency and court proceedings in this matter have spanned more than fourteen years, have not been frivolous and cannot be attributed solely to either the tenant or the Owner, both of whom experienced gains and losses. The fact that the tenant understood she could eventually be [*5]required to pay an adjudicated "fair market rent" far in excess of the rent she had been paying must be weighed with the Owner's agreement to accept the lower amount in the interim. DHCR implemented the Supreme Court's remand order and exercised its discretion in a rational and reasonable way under the circumstances.

Interest

The Owner is wrong in claiming that DHCR acted arbitrarily and capriciously in denying interest on the rent arrears. In denying interest, the Commissioner stated, "There is no provision in the Rent Stabilization Law and Code for imposing interest on rent arrears." Exh. A, Petition. The Court of Appeals decision cited by the Owner in support of its position is entirely inapposite. Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Avenue Associates, 93 NY2d 508 (1999) involved a lease with a specific provision calling for interest on rent arrears. There is no evidence of a similar lease provision in this case. The case also differs procedurally in that the parties were litigating a landlord-tenant dispute in Supreme Court, not administratively, so the standard of review was far less deferential. Accordingly, it is

ORDERED that the application by petitioner seeking to vacate and annul the determination by respondent DHCR is denied and the proceeding is dismissed; and it is further

ORDERED that the application by the tenant Dru Arstark, to intervene in this proceeding, is denied as moot.

ENTER:

Date: February 11, 2009_______________________________

New York, NYJ.S.C.