Federal Home Loan Mortgage Corp. v. New York State Division of Housing and Community Renewal, 87 N.Y.2d 325 (1995)
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When a building exempt from rent stabilization due to cooperative ownership is foreclosed upon and returns to operation as rental housing, the units revert to rent-regulated status under the Rent Stabilization Law.
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Summary
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The Federal Home Loan Mortgage Corporation (FHLMC) foreclosed on a building that had been converted to cooperative ownership. FHLMC sought a declaratory judgment that units formerly owned as cooperatives were not subject to rent regulation after the foreclosure. The New York Court of Appeals held that upon foreclosure and return to rental status, the units revert to rent regulation. The court reasoned that the Rent Stabilization Law (RSL) exempts buildings “owned as a cooperative,” and once that status is lost, the exemption no longer applies. The court also rejected FHLMC’s claims of unconstitutional taking and due process violations, emphasizing FHLMC’s voluntary purchase and acquiescence in the building’s use as rental housing.
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Facts
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FHLMC became the assignee of a mortgage on an 83-unit building in Brooklyn, which was initially a rent-stabilized property. The building was converted to cooperative ownership, and FHLMC approved the conversion, though it had the right to demand mortgage satisfaction. A cooperative offering plan was submitted and approved, giving existing tenants the option to purchase their units. Three tenants and seventeen outside purchasers bought units; the remaining units stayed rent-regulated under existing tenants who did not purchase. The cooperative corporation defaulted on the mortgage, and FHLMC foreclosed, purchasing the property at a public sale. The proprietary leases were cancelled, but former purchasers remained liable on their loans. FHLMC then failed to collect rent or offer renewal leases, claiming lack of expertise and inability to determine proper rents.
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Procedural History
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FHLMC filed a declaratory judgment action in Federal District Court. The District Court ruled in favor of the New York State Division of Housing and Community Renewal (DHCR), holding that the building reverted to rent-regulated status upon the cooperative’s demise. The Second Circuit Court of Appeals then certified the question of reversion to the New York Court of Appeals.
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Issue(s)
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Whether, in light of FHLMC’s challenge to 9 N.Y.C.R.R. 2520.11(l), units in a rent-stabilized building that was converted to cooperative ownership revert to units subject to the Rent Stabilization Law, upon the foreclosure of the cooperative’s underlying mortgage and the return of the building to operation as rental housing?
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Holding
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Yes, because the Rent Stabilization Law exempts buildings