Landlord-Tenant—Harassment—Owner Challenged Constitutionality of Restriction On Owner's Property Based On Alleged Harassment—HPD Sent Notices and Decision to Incorrect Address for the Owner

An owner commenced an action against NYC Department of Housing Preservation and Development (HPD), “challenging the constitutionality of the imposition of” a use restriction on the owner's property (property). The owner alleged that “HPD failed to provide adequate notice of the filings or proceedings which led to the restriction, leading to a deprivation of [owner's] due process and equal protection rights” under the federal and state constitutions. HPD moved to dismiss the claims. The court granted the motion in part and denied the motion in part.

The subject lot is a corner parcel. The corner parcel consists of Lots 1 and 3. In 2004, the record owner (owner) entered into a long-term net ground lease with “A” for the corner parcel. In 2007, “A” assigned its lease to “B.” Without it notifying the owner, “B” then applied for a building permit for Lot 1.

The corner parcel is located within “a designated 'anti-harassment area,'” i.e., “a district in which, in order to protect tenants from harassment in furtherance of development by owners and operators of multiple dwellings, specific prerequisites have been mandated before any material alterations can be made to multiple dwellings.” Before a building permit could be obtained, a party must comply with “the certification of no harassment (CONH) requirements set forth in the SRO anti-harassment provisions as codified in the [NYC] Administrative Code (Admin. Code) §27-2093 and Zoning Resolution (ZR) §§98-70 and 93-90.”

Without notifying the owner, “B” applied to HPD for a CONH. The Admin. Code required that “upon receipt of an application for a CONH, HPD must mail notice to the owner of record.” However, the owner never received notice of the proceedings. It appeared that “the notice was mailed to an incorrect address.”

Pursuant to the terms of the net ground lease, the owner was entitled to require “B” to abandon its application for a CONH. Upon receiving “B's” application, “HPD conducted a CONH investigation to determine whether harassment had occurred on Lot 1 over the three-year period preceding the application.… Unbeknownst to [the owner], HPD determined there was reasonable cause to believe that ['B'] and its invitees had harassed several SRO tenants who resided on Lot 1, and HPD scheduled a hearing with an administrative law judge [ALJ]….” On March 19, 2009, the ALJ issued “a Report and Recommendation (OATH report), finding that ['B'] and its invitees had harassed several SRO tenants who resided on Lot 1 and recommending that the CONH be denied.” HPD mailed the OATH report to the owner, again to an incorrect address.

In 2009, an HPD deputy commissioner “denied the CONH application in a final determination…. That final determination was also sent to the incorrect mailing address.” “B” thereafter vacated the corner parcel, assigning the net ground lease back to “A.”

As a result of HPD's final determination, HPD “imposed a restrictive declaration on the corner parcel in perpetuity, precluding the issuance of an 'as of right' building permit unless and until the owner complies with the cure requirements of Section 93-90 of the [ZR] (the cure).” “The cure requires an amount of floor area to be set aside for low-income housing in perpetuity; that amount cannot be less than the greater of: (i) 28 percent of the total 'residential' and 'hotel floor area' of any 'multiple dwelling' to be altered or demolished in which 'harassment' has occurred; or (ii) 20 percent of the total 'floor area' of any new or altered 'building' on the 'cure requirement lot.'”

“The gravamen of [the owner's] complaint is that HPD failed to notify it of any of the filings or proceedings that led to HPD's imposition of the restrictive declaration on the corner parcel, and that the regulatory scheme is unconstitutional to the extent it fails to require adequate notice to the owner of record. HPD moved to dismiss all of the subject claims as “time-barred; for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure (FRCP) 12(b)(1); and for failure to state a claim…pursuant to [FRCP] 12(b)(6).”

HPD argued that the owner's “first through sixth causes of action” were time-barred. These claims, based on 42 U.S.C. §1983 are subject to a three-year statute of limitations. The court explained that “[t]he date on which an action accrues is governed by federal law, which provides that an action generally accrues 'when the plaintiff knows or has reason to know of the injury which is the basis of his action.'”

The owner alleged that it did not learn of the proceedings and HPD's final determination until May 1, 2013, “which would make its due process claims timely by fourteen days.” HPD argued that even if such assertion were true, that the owner “had 'constructive notice' by Aug. 4, 2011, when HPD recorded its CONH denial against the property.” Since the complaint was filed on April 14, 2016, HPD argued that such claims were time-barred.

HPD had not cited any legal authority “for the proposition that the recording of a CONH denial constitutes constructive notice as a matter of law.” The court declined to rule as a matter of law, that the owner had “constructive notice.” The court explained that the defendants bore “a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law.”

HPD had also cited an “amended and restated ground lease” which was signed on May 24, 2013. That lease referred to “HPD's 2009 finding of harassment and the denial of ['C's'] CONH application, as well as provisions that discuss the cure.” HPD contended that it was “implausible that [the owner] did not have notice of the CONH application or final determination before May 1, 2013.” HPD reasoned that “[i]t strains credulity' to believe” that the owner lacked knowledge of the proceedings until May 1, 2013, but was “able to incorporate them into the '107-page single-spaced lease' by May 24, 2013.”

The court noted that although “discovery may produce evidence to support HPD's argument, at the motion to dismiss stage,” the court assumes that all factual allegations in the complaint are true and draws “all inferences in the light most favorable to the non-moving party[].'” Thus, the court denied HPD's motion to dismiss the first six claims as time-barred.

Although the owner contended that it had retained the right to require “B” to abandon its application for its CONH, the owner had not identified any provision in that document that supported such allegation. The court stated that “[e]ven so, by providing sufficient notice to the owner of record, the regulatory scheme does not interfere with [the owner's] ability to exercise its alleged contractual right to withhold consent.”

The court then explained that:

“In order for a civil action under 42 U.S.C. §1983 to survive a 12(b)(6) motion to dismiss, the plaintiff must preliminarily set forth facts in the complaint demonstrating a deprivation of a liberty or property interest protected by the Constitution or federal statutes without due process of law”…. “An essential principle of due process is that a deprivation of life, liberty, or property 'be preceded by notice and opportunity for hearing appropriate to the nature of the case'”…. The Supreme Court has “described 'the root requirement' of the Due Process Clause as being 'that an individual be given an opportunity for a hearing before he is deprived of any significant property interest'”….

The owner also asserted multiple causes of action, claiming that “its due process rights were violated as a result of the proceedings that led to the application of the cure to the corner parcel.” The owner cited HPD's failure to notify it, as the owner of the corner parcel, of the proceedings and also asserted “facial challenges to the constitutionality of certain provisions of the regulatory scheme itself” and to “the imposition of the cure to Lot 3 of the corner parcel.” With respect to “the facial challenges,” the owner asserted “a due process challenge” to a regulatory provision that permitted “the imposition of a restrictive declaration on a property, in perpetuity, without notification to the owner.”

Since the Rules of the City of New York (RCNY) permit “a lessee, as opposed to an owner, to be a CONH applicant,” the owner contended that 28 RCNY ¶¶10-01 to 10-03 “are facially unconstitutional.” The owner emphasized that there is no requirement that the owner of record consent to the filing of a CONH application. The owner also argued that 28 RCNY §10-01 embodies certain procedures for conducting an OATH hearing, i.e., provides that “HPD shall serve a notice of hearing by regular mail upon the applicant and any other individual or entity as determined by HPD…. Thus, providing notice of the hearing to the owner of record is discretionary.” The owner asserted that such provision “is 'a clear violation of due process'” since it affords “the applicant (or anyone) more rights than the owner of record with regard to a hearing,'” and sought “an order declaring 28 RCNY §10-06” “facially unconstitutional.” RCNY also provides that “HPD shall provide the applicant with written notice of the final determination.” 28 RCNY §10-07(d). The owner argued that “this provision is facially unconstitutional because it allows for the deprivation of a property interest without notice to the owner.” Each of the owner's “facial challenges is premised on the failure of the challenged regulation to require that notice be provided to the owner of record before taking a step in the process that leads to the eventual deprivation of the owner's property interest.”

HPD countered that the owner's “lack of participation does not give rise to a cognizable defense against a finding of harassment.” The court and the owner characterized this as a “red herring.” The court explained that “[a]t this stage, the issue is whether [the owner]…was entitled to notification at each of the various steps challenged …, not whether it would have prevailed had such notice been provided.”

The court explained that “another provision in the regulatory scheme expressly requires such notice be provided to the owner,” i.e., specifically, Admin. Code §27-2093, requires that “'[u]pon receipt of an application for a certification of no harassment, the commissioner shall publish notice in such publication as the commissioner deems appropriate for a period of seven consecutive days' and 'shall mail notice to the owner of record.'” The court further stated that “[l]ogically, the 'receipt of an application for a certification of no harassment' precedes both the OATH hearing, which is the subject of [the owner's] challenge to 28 RCNY §10-06…, as well as the final determination, the subject of [the owner's] challenge to 28 RCNY §10-07(d) ….” Additionally, Admin. Code §27-2093(d)(1), “requires that notice of an application for a CONH be mailed to the 'owner of record' even though an applicant may be an individual other than the owner.”

The court noted that “[e]ach facial challenge to the constitutionality of the regulatory scheme is premised on the failure of the scheme to require HPD to provide notice reasonably calculated to apprise the owner of record of the pendency of the action and to afford the owner an opportunity to present objections or withhold consent.” Since “Admin. Code §27-2093(d)(1) requires that notice be provided to the owner of record, and because [the owner] provides no explanation for why such notice does not provide it sufficient opportunity to object, HPD's motion to dismiss” certain counts were granted.

With respect to the “as-applied challenges,” the owner contended that “it was not provided notice and an opportunity to be heard at various stages of the proceedings.” The owner argued that “notice of the application for CONH was not mailed to the owner of record…in a way reasonably calculated so it would receive the same because it was mailed to an incorrect address.” HPD's mailings had been “returned to the city of New York, marked 'RETURN TO SENDER,' 'NOT DELIVERABLE AS ADDRESSED,' and 'UNABLE TO FORWARD.'” The owner contended that the notice of the final determination of harassment was also “undeliverable.” The court explained:

“[d]ue process does not require that a property owner receive actual notice before the government may take his property”…. Nevertheless, the government must provide “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”

The U.S. Supreme Court has held that “when mailed notice of a tax sale is returned unclaimed, the state must take additional reasonable steps to attempt to provide notice to the property owner before selling his property, if it is practicable to do so.” Here, HPD “imposed a restrictive declaration on the corner parcel in perpetuity, precluding the issuance of an 'as of right' building permit unless and until the owner complies with the cure.” Moreover, although the application for a CONH was filed by the net lessee, to whom the owner had “ceded broad control of the subject property,” the court did find “at the motion to dismiss stage,” the owner's “decision to lease the property constituted constructive notice to the owner of the possibility that the lessee would apply for a CONH.” Accordingly, the court denied HPD's motion to dismiss the subject “as applied” challenges.

The owner also challenged the imposition of the cure on Lot 3, since Lot 3 “never had any SRO tenants,” and “no harassment ever occurred on Lot 3.” HPD conceded that “the finding of harassment was recorded against Lot 1” and explained that “[t]he cure applies to Lot 3 simply because the owner has chosen to merge the lots for development purposes.” The city argued that it did not obligate the plaintiff to merge the two zoning lots, and the owner “is free 'to develop a smaller “as of right” building on Lot 3 without the use of Lot 1's unused floor area.'” The court granted HPD's motion to dismiss based on the cure being imposed on Lot 3.

The owner had also asserted Equal Protection claims, arguing that the regulatory scheme wrongfully forced the owner, “a non-harasser, and those similarly situated to bear a public burden that fairly should be borne by the taxpayers as a whole.” However, the owner had not alleged that it was “a member of a suspect class, or that owners of property in the [anti-harassment district]…constitute a suspect class.” When a plaintiff does not allege membership in a protected class, the plaintiff “may still prevail on a 'class-of-one' theory of equal protection.” “A class-of-one claim arises when a plaintiff claims that he was 'intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treatment.'” In order to succeed on such a claim, the plaintiff must establish that:

(i) no rational person could regard the circumstances of the plaintiff to differ from those of a comparator to a degree that would justify the differential treatment on the basis of a legitimate government policy; and (ii) the similarity in circumstances and difference in treatment are sufficient to exclude the possibility that the defendants acted on the basis of a mistake.

The owner compared itself “to other 'non-harasser[s]' and 'taxpayers as a whole.'” However, the court stated that the owner “is the owner of a building in which harassment was found to have taken place – it is not similarly situated with all other taxpayers” and the owner had “not demonstrated that its circumstances are 'prima facie identical' to taxpayers as a whole.” The court further opined that even if the owner could “demonstrate sufficient similarity to all other taxpayers, it similarly fails to allege that it 'was intentionally singled out for reasons that so lack any reasonable nexus with a legitimate governmental policy that an improper purpose—whether personal or otherwise—is all but certain.'”

Although the owner alleged that the regulatory scheme was “flawed,” and there were “no findings or empirical data to support the claims that the regulatory scheme would help resolve [a housing] crisis; or that it does not punish those whose have not engaged in harassment,” the owner failed to allege that “the regulatory scheme is not a 'legitimate governmental policy' or that its treatment pursuant to that scheme lacks 'any reasonable nexus' with that policy.” The court accepted HPD's argument that “the scheme 'provides thoughtful and rational means to pursue a legitimate government purpose.'” Accordingly, the court granted HPD's motion to dismiss the Equal Protection claims.

Nick & Duke v. Dept. of Housing Preservation, 16-CV-2790, NYLJ 1202795988162, at *1 (SDNY, Decided Aug. 9, 2017), Oetken, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John's University School of Law.