New York Court of Appeals Update (August 2019)

We recently published this on the SGR Blog.

The end of June often sees “blockbuster” decisions by the Court of Appeals before the Summer recess. But the 2018/2019 Term ended “not with a bang but a whimper.” Decisions dealt with important but mundane matters: whether or not a coke oven was a product or a service for strict liability purposes; whether buildings in Lower Manhattan that received certain tax benefits were subject to luxury rent deregulation; and whether an earlier and undocketed judgment of divorce was superior to a later and docketed judgement based on an arbitration award.

Matter of Eighth Judicial District Asbestos Litigation
2019 NY Slip Op 04640
Decided on June 11, 2019

Question: Donald J. Terwilliger, as administrator of the estate of Donald R. Terwilliger, brought a negligence and products liability action against Honeywell, seeking damages for injuries Terwilliger sustained while employed by Bethlehem Steel at its plant in Lackawanna, New York. Did Honeywell meet its burden on summary judgment that the large, industrial coke ovens located in Terwilliger’s workplace were not “products” for purposes of strict products liability, such that Honeywell did not owe a duty to warn of their alleged harmful nature. Answer: Honeywell failed to carry that burden.

Terwilliger worked for Bethlehem as a coke oven “lid man” at the Lackawanna plant between 1966 and 1993. A “coke oven,” roughly 13 feet high and 1.5 feet wide, burned coal at high temperatures to create coke, a fuel then used in the production of steel. A “coke oven battery” was a collection of individual ovens stacked in a long row to create the wall of the battery structure in which the ovens were housed. The batteries were located on the grounds of the coke oven plant, which “consisted of a number of other structures, including coal towers, coal conveyors, coke wharfs, screening stations, storage tanks, electrical substations, gas recovery systems, byproduct facilities, and quenching stations.”

Terwilliger’s job as a lid man was to work on top of the battery, near where the ovens released the emissions that were a byproduct of the coke production process. The complaint alleged that prolonged exposure to these emissions posed long-term health risks, most notably various types of cancer. The complaint further alleged that from 1966, the time he began working around the ovens, until the late 1970s, when OSHA issued regulations requiring warning placards to be placed on the ovens and all oven workers to wear protective respirators, Terwilliger was continuously and “injuriously exposed to coke oven emissions from coke ovens designed, constructed, maintained and repaired” by Wilputte.

After Terwilliger died from lung cancer his estate filed suit alleging that his cancer was proximately caused by his exposure to the coke oven emissions at the Lackawanna plant. Honeywell did not dispute that, for the purposes of the appeal, which pertained only to a products liability theory, that Honeywell, as successor-in-interest to Wilputte, “engaged in the design, construction, maintenance, and repair of coke ovens and coke oven batteries, as well as in the sale of goods and contracting services for the construction of coke ovens” at the Lackawanna plant and “failed to disclose to Terwilliger and those similarly situated or warn them of the known dangers associated with the inhalation of coke emissions.”

Honeywell moved for summary judgment, arguing that the coke ovens were not products and it was not subject to strict liability as a products manufacturer; and that Wilputte’s contract with Bethlehem, under which it designed and built the ovens, was one for services, and that, as a service provider, it was not subject to strict products liability.

The estate submitted several documents relevant to the nature of Wilputte’s business, including sales records showing that Wilputte had, by 1962, sold hundreds of coke ovens in the United States, Canada, and Mexico; Wilputte’s proprietary schematics for the coke oven batteries and their various component parts; and a 1954 advertising brochure, widely distributed by Wilputte entitled “The Wilputte Coke Oven,” that contained several figures detailing the various components that made up ovens. The estate further alleged that “[t]he individual coke ovens, assembled into battery units, were products with a particular design, the purpose of which was to transform coal into coke for the steel industry.”

Supreme Court denied defendant’s motion, framing its conclusion as follows:

The Appellate Division reversed and granted the motion for summary judgment dismissing the complaint against Honeywell. Noting that the battery’s construction “would have taken approximately 1,460,000 hours of labor to complete over six phases,” the Appellate Division opined “that service predominated the transaction herein and that it was a contract for the rendition of services, i.e., a work, labor and materials contract, rather than a contract for the sale of a product.” Therefore, emphasizing its size and immovable nature, the Court concluded that “a coke oven, installed as part of the construction of the great complex of masonry structures’ at Bethlehem, permanently affixed to the real property within a coke battery, does not constitute a product for purposes of plaintiff’s products liability causes of action.”

In New York, a product is considered “defective,” and the manufacturer is liable, if the product: (1) “contains a manufacturing flaw,” (2) “is defectively designed,” or (3) “is not accompanied by adequate warnings for the use of the product.” Honeywell argued on summary judgment that the coke ovens were not “products” to which a duty to warn would attach.

Initially, the Court of Appeals noted that, when considering whether strict products liability attached, the question of whether something was a product was often assumed; none of the strict products liability case law provided a clear definition of a “product.” However, “[a]part from statutes that define product’ for purposes of determining products liability, in every instance it was for the Court to determine as a matter of law whether something was, or was not, a product.”

In the failure-to-warn context, the Court has imposed a duty upon a manufacturer whose wares serve a standardized purpose, such that the product’s latent dangers, if any, were known, or should be known, from the time it leaves the manufacturer’s hands. In many cases, industrial machines were assumed to be products for strict liability purposes. Because many products may create “circumstances where the danger from use was likely to be so very disastrous,” case law did not focus on creating an exhaustive list of the product’s physical characteristics but instead focused on those potential dangers.

Intertwined with an analysis of whether something was a product was the more central question of whether the manufacturer owed a duty warn. A manufacturer’s duty typically “extends to the original or ultimate purchasers of the product, to employees of those purchasers, and to third persons exposed to a foreseeable and unreasonable risk of harm by the failure to warn.” Thus, a manufacturer can be held liable for failing to warn of “latent dangers resulting from foreseeable uses of its product of which it knew or should have known,” as well as “the danger[s] of unintended uses of a product provided these uses are reasonably foreseeable.”

Failure-to-warn claims, like all strict products liability claims, sound in tort rather than contract; the manufacturer’s liability will “ar[i]se out of the nature of [its] business and the danger to others incident to its mismanagement,” even where no privity exists between the maker of the hazardous article and its end-user. Although failure-to-warn claims “can be framed in terms of strict liability or negligence, [such] claims grounded in strict liability and negligence are functionally equivalent, as both forms of a failure-to-warn claim depend on the principles of reasonableness and public policy at the heart of any traditional negligence action.”

Thus, on the motion for summary judgment, the Court of Appeals evaluated whether the coke ovens were products within the broader context of common-law principles of assigning a legal duty to warn.

Although the criteria for determining whether a duty should attach to a seller may be tied to the nature of the given transaction, case law emphasized governing factors such as a defendant’s control over the design of the product, its standardization, and its superior ability to know—and warn about—the dangers inherent in the product’s reasonably foreseeable uses or misuses.

The Court of Appeals was required to determine whether the record supported Honeywell’s arguments on summary judgment that the ovens were not products to which strict liability attached under a failure-to-warn theory.

Based on the record, Honeywell had not met its burden in showing that the coke ovens were not products as a matter of law. The ovens themselves served one function: the production of coke. This process was standard across all variations of coke ovens that Wilputte sold, ultimately placing the hazardous thing at issue squarely within the category of products to which liability attached in the failure-to-warn context.

Where a good is sold in the course of a transaction, the mere presence of a service component in that transaction does not mean that the furnished item was not a product to which a duty to warn may apply. Here, it was of no moment that the coke ovens took many hours to build, or that the work required to complete the transaction between Bethlehem and Wilputte resembled tasks typically fulfilled by a general contractor. The Appellate Division’s emphasis on the apportionment of time between sale and service was not the test upon which a duty relied. Such a test ignored the fact that Wilputte crafted, marketed, and sold the coke ovens that allegedly caused the harm underlying the estate’s strict product liability claim.

Judge Stein wrote a dissenting opinion in which Chief Judge DiFiore joined:

The majority held that a coke oven—a large brick chamber that was capable of holding more than 25 tons of coal at one time and was entirely indivisible, both structurally and functionally, from the 10-story tall “battery” that houses it—was a product. The Court’s products liability jurisprudence did not support that result.

Honeywell argued that Wilputte’s coke ovens were not products and, thus, could not expose Honeywell to products liability. In support of their position, Honeywell proffered the affidavit of John Balik. Balik—an engineer with more than 30 years of experience “in all phases of coke oven battery construction including estimating, purchasing, engineering, accounting, cost control, project management, project engineering and supervision of direct hire craftsmen and subcontractors on projects”—described a coke oven battery as “a building constructed for the specialized purpose of manufacturing coke and other by products,” which are then used to manufacture steel. Balik explained the construction process for coke ovens and coke oven batteries. According to Balik, the newest Wilputte battery at Bethlehem Steel’s Lackawanna plant—where Terwilliger was employed—housed 76 coke ovens, was approximately 10 stories tall, and extended the length of three football fields. The construction of the battery consisted of six phases over approximately 18 months, during which workers drove approximately 1,100 to 1,200 piles into the ground to support the battery’s foundation, laid 10,000 pallets of bricks and 2,800 linear feet of running rail, and installed 250,000 feet of electric wiring and 20 electrical panels.

Balik explained that the 76 individual coke ovens—which could each hold between 28 and 34 tons of coal at one time—were “designed to work as an integrated battery, together with [various] supporting facilities, each of which also had to be designed, constructed, and integrated with the coke ovens to collectively comprise an operable coke oven battery.” To that end, Balik opined that coke ovens “are not pieces of equipment, but are chambers that have common walls with the battery and with the other ovens. The ovens’ brickwork is an integral structural component of the battery. . . . [E]ach oven has a common wall with the next oven except those at the end. These walls support the battery roof.”

Thus, according to Balik, a coke oven battery was not “a series of multiple, independent, free-standing ovens merely situated together in close proximity.” Rather, it “[was] a complex, integrated manufacturing plant, consisting of a massive building with numerous rooms; chambers; an elevator; tracks for the movement of coke, heating, plumbing and electrical utilities; and piping and other facilities for the movement of gas and other products.”

Honeywell also proffered the affidavit of William Thomas Birmingham—an engineer formerly employed by Bethlehem as the superintendent of the Coke Oven Department at Lackawanna, whose “duties included planning and supervising engineering projects for the Coke Oven Department.” Birmingham stated that “Wilputte provided only architectural and general contracting services for the construction of [several of Lackawanna’s] coke plants.” For each of these projects, “Wilputte would have received from Bethlehem a scope of work which outlined the number of ovens to be built and the expected output of the battery.” Wilputte would then submit design plans to Bethlehem’s engineers, “who either approved or rejected the plans in whole.” Birmingham also stated that Bethlehem’s engineers “provided input on the design plans, mainly to ensure that [they] were consistent with the production objectives of the [plant].” Furthermore, once Bethlehem approved Wilputte’s plans, “Wilputte would construct the project as general contractor,” and would hire subcontractors to complete the required work. Because of their size and weight, coke oven batteries were constructed on site and were not movable. A publication provided by Birmingham cataloged the dimensions of the individual coke ovens at various steel mills around the country and indicated that the coke ovens built by Wilputte at Lackawanna measured approximately 18 inches wide by 40 feet long, by 12 feet high.

In the view of Judge Stein, a complete analysis of the policy considerations that have traditionally guided New York’s products liability jurisprudence demonstrated that a coke oven was not a product for purposes of products liability.

Judge Stein disagreed with the majority that, on the record, public policy required that a coke oven be deemed a product as a matter of law, such that Honeywell may be subject to causes of action sounding in products liability. Initially, the physical characteristics of coke ovens strongly militated in favor of the conclusion that they were not products. Coke ovens were unlike any item the Court had previously considered. Coke ovens were not mass produced, mass marketed, or mass distributed. Although Wilputte promoted its coke ovens, its only customers were large steel companies. Even as one of the largest coke oven builders servicing that “market,” Wilputte constructed only 22 coke oven batteries in the United States between 1932 and 1962. While it was true that there may be dozens of coke ovens in a single battery, the uncontested proof submitted in support of Honeywell’s motion for summary judgment made plain that coke ovens could not reasonably be viewed as separate and distinct from the larger coke oven battery. The coke ovens at the Lackawanna plant were both inseparable from the coke oven battery and inoperable outside of that battery. The coke ovens were effectively empty chambers without the coke oven battery to heat them. Under the majority’s analysis, it was wholly unclear why, if a coke oven was a product, the battery was not also a product, since it too, according to Terwilliger’s allegations, was responsible for the emission of toxic gases. The dissent also noted that the extensive involvement of Bethlehem’s engineers in the design process of the coke oven was another indication why product liability law did not apply.

The record demonstrated both that the construction of the coke ovens, according to the dissent, did not implicate the concerns raised by mass production, mass distribution, or mass marketing, and that Bethlehem was better positioned than Wilputte to protect Terwilliger from the dangers associated with its factory.

Pangea Capital Mgt., LLC v Lakian
2019 NY Slip Op 05059
Decided on June 25, 2019

Question: If an entered divorce judgment grants a spouse an interest in real property pursuant to Domestic Relations Law § 236, and the spouse does not docket the divorce judgment in the county where the property is located, is the spouse’s interest subject to attachment by a subsequent judgment creditor that has docketed its judgment and seeks to execute against the property? Answer: No.

John and Andrea Lakian married in 1977 and, in 2002, purchased a home on Shelter Island, Suffolk County.  Title to the property was recorded in John’s name and immediately transferred to a trust, for which John was the sole trustee. Each spouse was a 50% beneficiary as tenant in common. Under the trust agreement, the trustee maintained the power to “revoke and terminate” the trust. The divorce was finalized in 2015, with a judgment entered in New York County on June 11, 2015 that incorporated by reference an agreement that settled all issues, including providing for the sale of the Shelter Island property. Under the settlement, Andrea would receive 62.5% of the proceeds plus another $75,000 and John would receive the balance.

John’s former employer, Pangea Capital Management, LLC, won an arbitration award against him on the basis that he and a co-worker (with whom he was romantically involved) had defrauded the company by diverting millions of dollars to themselves. Pangea brought an action in federal court to enforce the $14 million arbitral award against John.

Pangea sought and obtained an order of attachment on the Shelter Island property in Federal District Court. Several months later, John asked the court to modify the order of attachment to permit the sale of the home. The court allowed Andrea to intervene and the parties agreed to the sale and further agreed that the proceeds, totaling over $5 million, would be deposited with the Clerk of the Court while the dispute over Pangea’s claim to the proceeds was litigated. The parties also agreed that their rights to the proceeds would constitute the “cash equivalent” of their rights in the Shelter Island property. During this time, the District Court confirmed the $14 million award against John and entered a judgment in Pangea’s favor in November 2016, which Pangea promptly docketed.

Andrea contended that, pursuant to the terms of the divorce settlement, she was entitled to 62.5% of the sale proceeds, plus $75,000. Pangea argued that, because it docketed its judgment before Andrea docketed her judgment of divorce in Suffolk County, CPLR 5203 gave Pangea priority over Andrea with respect to the Shelter Island property.

Under section 5203, when multiple judgment creditors are attempting to satisfy their judgments against real property owned by the debtor, priority goes to the first judgment creditor to docket a judgment in the county where the realty is located, regardless of whose judgment was first obtained. Pangea contended that Andrea’s divorce judgment rendered her a judgment creditor; therefore, because Pangea docketed its judgment in Suffolk County and she did not, her claim to the property was subordinate to Pangea’s.

Pangea further contended that its judgment could be satisfied against the entire trust corpus, not just John’s 50 percent share prior to the divorce or John’s approximately 36% share post-divorce, because, as trustee with the power of revocation, John was the “absolute owner” of the trust, and the trust was void as against creditors under New York trust law.

Andrea countered that her equitably distributed share of the trust corpus — 62.5% plus $75,000 — was fixed and vested upon entry of the divorce judgment, regardless of her and John’s interests in the trust corpus prior to the divorce. Accordingly, she contended she was not a judgment creditor of John.

The Court agreed with Andrea, holding that the judgment of divorce did not transform Andrea into a judgment creditor of her husband, but rather worked an equitable distribution of their marital assets in which, until the entry of the divorce judgment, both spouses had inchoate and indivisible ownership interests. Pangea appealed to the United States Court of Appeals for the Second Circuit, which certified the question of New York law to the Court of Appeals.

CPLR 5203(a) concerns “Priority and lien on docketing judgment,” and provides, in relevant part:

Under Domestic Relations Law § 236(B)(1)(c), marital property is “all property acquired by either or both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held.” Andrea had an interest in that marital property.

Domestic Relations Law § 236(B)(5)(c) also provides that marital property “shall be distributed equitably between the parties” in the event of divorce. More specifically, “the court . . . shall determine the respective rights of the parties in their separate or marital property, and shall provide for the disposition thereof in the final judgment.” Thus, legal rights to specific marital property vest upon the judgment of divorce, with inchoate rights becoming actual ownership interests by virtue of an equitable distribution judgment.

Pangea’s characterization of Andrea as judgment creditor was incompatible with the legislature’s dramatic revision of the Domestic Relations Law in 1980. By incorporating the concept of “marital property” into Domestic Relations Law § 236, “the New York Legislature deliberately went beyond traditional property concepts when it formulated the Equitable Distribution Law.” Under that statute, both “spouses have an equitable claim to things of value arising out of the marital relationship.” Marital property “hardly fall[s] within the traditional property concepts because there is no common-law property interest remotely resembling marital property.” The equitable distribution resulting from the dissolution of a marriage is “based on the premise that a marriage is, among other things, an economic partnership to which both parties contribute as spouse, parent, wage earner or homemaker.”

The legislative reform “recognized that the marriage relationship is also an economic partnership.” Marital assets are not owned by one spouse or another, and the dissolution of a marriage involving the division of marital assets does not render one ex-spouse the creditor of another. Courts are empowered not only to make an equitable disposition of marital property between the spouses, but also to make a distributive award in lieu of or to supplement, facilitate or effectuate the division or distribution of property where authorized in a matrimonial action, and payable in a lump sum or over a period of time.

A unanimous Court of Appeal held that Andrea was not a judgment creditor of John. Thus, CPLR 5203(a), had no application and Pangea could not claim priority.

Kuzmich v 50 Murray St. Acquisition LLC
2019 NY Slip Op 05057
Decided on June 25, 2019

Question: Whether plaintiffs’ apartment, located in buildings in Lower Manhattan receiving tax benefits pursuant to Real Property Tax Law § 421-g, were subject to the luxury deregulation provisions of the Rent Stabilization Law. Answer: They were not.

In each of the several cases, plaintiffs were individual tenants of rented apartments located in lower Manhattan, in buildings that received certain tax benefits pursuant to section 421-g of the RPTL in connection with the conversion of their buildings from office space to residential use.

In these actions, tenants sought a declaration that their apartments were subject to rent stabilization. Tenants alleged that the owners failed to treat the apartments as rent stabilized even though the receipt of benefits under RPTL 421-g was expressly conditioned upon the regulation of rents in the buildings. The owners maintained that the apartments were exempt from rent regulation under the luxury deregulation provisions added to the RSL as part of the Rent Regulation Reform Act of 1993.

Supreme Court, in separate orders by two different Justices, denied owners’ motions for summary judgment and granted the tenants’ cross-motions declaring that the apartments were subject to rent stabilization. Both Justices reasoned that RPTL 421-g (6) unambiguously stated that, with only one express and inapplicable exception, any provisions of the RSL that limited the applicability of rent stabilization—including the luxury deregulation provisions—did not apply to buildings receiving section 421-g tax benefits.

The Appellate Division separately reversed both orders and granted owners’ motions for summary judgment to the extent of declaring that tenants’ apartments were properly deregulated and were not subject to rent stabilization. The Appellate Division held that the luxury deregulation provisions of the RSL applied to apartments in buildings receiving tax benefits under RPTL 421-g because, in the Court’s view, section 421-g did “not create another exemption” to luxury deregulation. The Court noted that, under its holding that “421-g buildings are subject to luxury . . . decontrol, . . . most, if not all, apartments in buildings receiving 421-g benefits would, in fact, never be rent-stabilized, because the initial monthly rents of virtually all such apartments were set . . . at or above the deregulation threshold.” Although the Court acknowledged that “courts should construe statutes to avoid objectionable, unreasonable or absurd consequences,” it nevertheless concluded that the legislature intended for RPTL 421-g(6) to essentially nullify itself.

Tenants argued that the plain language of RPTL 421-g(6) made clear that any provisions of the RSL that would otherwise operate to exempt apartments from rent regulation, apart from those provisions exempting cooperatives and condominiums, did not apply to buildings receiving section 421-g tax benefits. Under tenants’ reading of the statute, luxury deregulation did not apply to apartments in such buildings during the time period in which section 421-g tax benefits were extended. For their part, owners maintained that section 421-g rendered the relevant dwelling units subject to the entire scheme of the RSL, including the luxury deregulation provisions which did not include a carve-out for buildings receiving section 421-g benefits.

RPTL 421-g (6) states, in pertinent part that,

That subdivision further directs that, after section 421-g benefits terminate,

“When presented, as here, with a question of statutory interpretation, the Court’s primary consideration is to ascertain and give effect to the intention of the legislature.”

The legislature’s intention, as reflected in the language of the statute was clear. The notwithstanding clause of the statute showed the legislature’s intent that any “local law for the stabilization of rents” that would exempt the unit from “control under such local law” does not apply to buildings receiving RPTL 421-g benefits, with the sole exception being for cooperatives and condominiums.

Owner’ contention, adopted by the dissent, that the notwithstanding clause was intended to import into RPTL 421-g (6) the entire RSL, including those provisions that would remove the units from control, could not be squared with the statutory language. And, if accepted, owners’ proffered construction would simultaneously render superfluous both the entire notwithstanding clause and the exception for cooperatives and condominiums. If the legislature intended to import the deregulation provisions of the RSL, it easily could have so stated.

The lone dissenter, Chief Judge DiFiore, filed a separate opinion:

Rent stabilization is a critical government initiative designed to foster socioeconomic diversity and make New York City affordable for non-wealthy families. There was no dispute in this case that “rent stabilization” applies to buildings receiving Real Property Tax Law (RPTL) § 421-g benefits. Although the Rent Stabilization Law as recently amended, during the time period relevant to the appeal, an owner’s ability to collect a market-based rent on luxury apartments leased to tenants with the means to afford them was an integral component of the rent stabilization scheme pursuant to the 1993 Rent Regulation Reform Act.

The question presented here was whether, when it adopted the Lower Manhattan Revitalization Plan in 1995, the legislature intended to subject section 421-g buildings to an enhanced form of rent stabilization that precluded application of luxury decontrol to individual apartments. The legislature determined that luxury decontrol was unavailable only with respect to three classes of buildings expressly identified by statute but not section 421-g buildings. Nevertheless — based on a purported plain text analysis of language that made no mention of luxury decontrol — the majority retroactively conferred this heightened form of rent stabilization on buildings receiving RPTL 421-g tax benefits.

According to the dissent, the majority glossed over the context in which the New York City government spearheaded the comprehensive legislation containing RPTL 421-g.  In the early 1990s Lower Manhattan was a depressed area. Businesses were fleeing at “an alarming rate” due in part to high taxes, economic development packages offered by neighboring regions, and the “antiquated” nature of Wall Street office space. Aging skyscrapers increasingly stood empty — vacancy was at a post-World War II high, tax assessment values were “in a downward spiral,” and decreasing tax revenues were causing multi-million-dollar losses for the City. The City government determined that Lower Manhattan “demand[ed] . . . special attention,” as worsening of this “deterioration” would “have damaging impacts on the economic well-being of the entire City.”

In response to this crisis, the NYC Mayor supervised the crafting of the Lower Manhattan Revitalization Plan, a multi-faceted benefits package designed to entice businesses and the real estate industry to re-invest in Downtown and thus “reverse the decline in [its] economy.” More specifically, it “addresse[d] the twin problems” manifested by the downturn — “an aging commercial building stock . . . and a high vacancy rate in those buildings.” The drafters “carefully formulated” a set of tax benefits to implement two overarching strategies: “to stem the flow of businesses out of Manhattan . . . and to encourage alternative uses for obsolete commercial office buildings.”

To achieve the first of these strategies, the plan sought to “stimulate office and retail leasing activity” in Lower Manhattan by “provid[ing] significantly lower occupancy costs for commercial tenants” in the form of commercial rent tax reductions, electricity cost rebates for commercial tenants, and a real property tax abatement for buildings that executed new commercial leases.

To achieve the other major goal of the legislation — finding alternative uses for obsolete office towers — the plan encouraged the conversion of vacant commercial buildings to residential use. To incentivize the developers in the private sector to make “major investments” in Lower Manhattan’s building stock, the plan included two tax benefit programs. First, RPTL 421-g granted a 12-year property tax exemption and 14-year property tax abatement for commercial buildings converted to at least 75% residential use. Second, a 12-year property tax exemption was granted to buildings whose configuration made them suitable only for mixed commercial and residential use. Importantly, the City indicated that buildings receiving benefits under both programs “would be subject to rent stabilization during the benefit period.” The regulatory scheme for rent stabilization as it stood then — contained largely in the Rent Stabilization Law of 1969 — prescribed detailed rules limiting the types of buildings covered and provided a system of government oversight regarding both the rents that could be charged during rent stabilization and circumstances in which apartments could be transitioned to market rents under luxury decontrol. The fact that “rent stabilization” encompassed the entire regime in existence at that time, including its luxury decontrol provisions adopted only two years before, was made clear when the LMRP legislation was before the Legislature.

In reliance on this statute, the property owners in this case — owners in these actions or their predecessors in interest — purchased buildings and applied for RPTL 421-g benefits.

Construing RPTL 421-g(6) and the Rent Stabilization Law of 1969, the dissent disagreed with the majority’s conclusion that the luxury decontrol provisions of the RSL were inapplicable to section 421-g buildings.

In New York City, the primary “local law” governing rent stabilization is the Rent Stabilization Law. The prefatory phrase “notwithstanding other provisions of law” is generally used by the legislature to preempt other conflicting statutes. The only provisions of the RSL that would conflict with the imposition of that body of law to these newly renovated and converted buildings are the limitations narrowing its reach to buildings completed or substantially rehabilitated between February 1, 1947 and January 1, 1974. On its face, therefore, subsection (6) extends “full[] . . . control” under the RSL to the apartments in 421-g buildings for the duration that the owner receives the tax benefits by using the “notwithstanding” prefatory phrase to supersede the RSL’s temporal provisions. Had the legislature omitted the “notwithstanding” clause, the bare incorporation of the Rent Stabilization Law would have had no practical effect because, by its terms, that law would not have reached LMRP buildings.

The word “control” is defined as “the power or authority to guide or manage” or “the regulation of economic activity especially by government directive.” This plain text provides that apartments in section 421-g buildings fall within the governing or regulating power of the RSL, i.e., that they are subject to the rent stabilization scheme. There is no language in section 421-g(6) indicating that the legislature intended to impose only a portion of the rent stabilization scheme — much less that it intended to exclude the critical luxury decontrol provisions in place at that time.

In light of the legislature’s clear exemption of three other categories of building from luxury decontrol, the decision not to include section 421-g buildings in that list reflected an intent that they be fully subject to the entirety of the rent stabilization regulatory scheme, including its decontrol provisions. Had the legislature intended to take the substantial policy step of exempting luxury decontrol, thereby imposing a specialized form of rent stabilization on section 421-g buildings, it would have said so.

The legislative history of the Lower Manhattan Revitalization Plan offered a simple explanation for why the legislature treated section 421-g buildings differently than some other buildings subjected to rent stabilization by receipt of tax benefits. The aim of this legislation was not the creation of affordable housing. Rather, section 421-g was enacted to address an economic crisis in the City: the real estate depression in Lower Manhattan. The legislative history materials emphasized — for both the broader revitalization plan and for section 421-g — the economic recovery of the neighborhood. A significant portion of the revitalization plan was intended to incentivize commercial, not residential, leasing. Further, the conversion of old office space to apartments was specifically designed to decrease building vacancy by finding a new use for obsolete buildings, re-build the City’s tax base, and promote growth in retail and entertainment spaces to generate revenue.

Property developers were induced by a legislative benefits package to purchase and convert obsolete, empty office buildings into apartments, in a depressed and empty neighborhood that had no residential community to speak of.

According to the dissent, the majority’s holding will lead to results antithetical to the legislature’s aims in enacting both New York City’s rent stabilization scheme and the 1995 Lower Manhattan Revitalization Plan. Soon, tenants of Lower Manhattan buildings who agreed to lease luxury apartments at market rates  will converge on DHCR in an attempt to collect refunds, based on the majority’s conclusion that their apartments should have been rent-stabilized for years. Those “overcharge” refunds will be assessed against property owners (or their successors in interest) promised by government that they could lease the tenants’ luxury apartments at market rents after purchasing and developing previously-empty buildings in exchange for section 421-g tax benefits.

The Chief Judge predicted that the next time government looks to the private sector and asks developers to take risk and finance a revitalization program, potential investors will think twice about relying on a common sense reading of legislation, clear legislative history and the representations of implementing agencies — none of which protected them here from the majority’s retroactive reading of statutory text that dramatically changed the terms of the bargain long after the legislature’s goals have been achieved.

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