New York Law Review

Tag: Federal Home Loan Mortgage Corp. v. New York State Division of Housing

  • Federal Home Loan Mortgage Corp. v. New York State Division of Housing, 87 N.Y.2d 325 (1995): Reversion to Rent Stabilization After Cooperative Foreclosure

    87 N.Y.2d 325 (1995)

    Units in a rent-stabilized building that converts to cooperative ownership revert to rent-stabilized status upon foreclosure of the cooperative’s underlying mortgage and the building’s return to rental housing.

    Summary

    Federal Home Loan Mortgage Corporation (FHLMC) foreclosed on a cooperative building in New York City. The building had previously been a rent-stabilized apartment building before being converted to a cooperative. FHLMC sought a declaratory judgment to determine whether the units formerly owned as cooperative apartments reverted to rent-stabilized status after the foreclosure. The New York Court of Appeals held that the units did revert to rent-stabilized status, relying on the plain language of the Rent Stabilization Law (RSL) and the Rent Stabilization Code. The court rejected FHLMC’s claims that this reversion constituted an unconstitutional taking or a due process deprivation. The court reasoned that the RSL’s exemption for cooperatives applies only “so long as” the building maintains cooperative status.

    Facts

    FHLMC was the assignee of a mortgage on an 83-unit building in Brooklyn, NY, which was initially a rent-stabilized building. The building was converted to cooperative ownership. FHLMC approved the conversion but did not require its mortgage to be satisfied. A cooperative offering plan was submitted to the NY Department of Law and provided to the tenants. Of the 83 units, 3 were purchased by existing tenants, 17 by outsiders. The remaining 63 units remained rent-stabilized. The cooperative corporation defaulted on the mortgage, and FHLMC foreclosed and purchased the property at a public sale, canceling the proprietary leases.

    Procedural History

    FHLMC filed a declaratory judgment action in federal district court seeking a ruling on whether the units of former purchasers and tenants who moved in after the conversion were subject to rent regulation. The District Court ruled in favor of the New York State Division of Housing and Community Renewal (DHCR), declaring that the building reverted to rent regulatory status upon the demise of the cooperative. The Second Circuit Court of Appeals certified the question to the New York Court of Appeals.

    Issue(s)

    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?

    Holding

    Yes, because the Rent Stabilization Law exempts buildings “owned as a cooperative,” and upon foreclosure, the building is no longer owned as a cooperative; therefore, the exemption no longer applies.

    Court’s Reasoning

    The court relied on the plain language of the Rent Stabilization Law (RSL), which applies to Class A multiple dwellings “not owned as a cooperative.” The court noted that the DHCR’s Rent Stabilization Code (9 NYCRR 2520.11(l)) specifies that the RSL’s protections apply except to housing accommodations in buildings “owned as cooperatives” “for so long as they maintain [cooperative] status.” The court reasoned that once a cooperative reverts to rental status, it is again subject to the RSL’s provisions. The court rejected the argument that the absence of an express provision in the RSL directing that the units of a cooperative revert to regulated status upon foreclosure entitles the units to continue to enjoy the benefits of the cooperative exemption. The court reasoned that upon foreclosure, the condition that warranted the exemption—cooperative ownership—was removed, and the statute again applied to the building as a rental property. The court found no unconstitutional physical taking because FHLMC voluntarily purchased the building and acquiesced in its use as rental housing. The court found no regulatory taking because the regulation substantially advanced a legitimate state interest in preventing eviction and protecting tenants in a housing shortage. The court stated, “Indeed, we perceive no reason why these tenants should be penalized because of their prior status as shareholders in a failed cooperative.” The court also rejected the argument that the law was unconstitutionally vague, noting the existence of methods for calculating rents after reversion to rent-regulated status.