Scott E. Mollen

Developer Plausibly Alleged Opposition to Low-Income Housing Project was Based on Racial Animus—Fair Housing Act, Breach of Contract and Tortious Interference Claims Sufficiently Stated—Breach of Implied Covenant of Good Faith and Fair Dealing and Fraudulent and Negligent Misrepresentation Claims Dismissed—New City Administration Allegedly Sabotaged Project Approved by Prior Administration

A plaintiff developer (developer) sued the City of Newburgh (City) and its city manager under the federal Fair Housing Act (FHA) and several New York state laws. The suit arose from the developer's "failed attempt to build a mixed-use commercial and residential building for low-income residents…." The defendants moved to dismiss pursuant to the Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). The court granted and denied parts of the motion.

In 2011, the City solicited proposals from developers to redevelop an abandoned city property. The property consisted of 17 city owned parcels and 1 privately owned parcel. After submitting a proposal which included affordable housing, developer was designated by the City as its "preferred developer" for the project. The developer and the City thereafter entered into a development agreement (agreement).

The project contemplated 103 residential rental apartments and retail space. The agreement provided that the developer would obtain all necessary entitlements at its own expense and seek public funding for the project. Upon obtaining all approvals and funding, the developer would be entitled to close on the City owned parcels of land. The agreement included the City's agreement to "cooperate… in good faith" with the developer and "issue the appropriate letters or resolutions of support and assist in obtaining licenses, approvals, and permits." The agreement had a term of 24 months.

The City initially complied with its obligations. It granted the developer a special permit to permit construction on the property and had adopted a resolution endorsing the developer's application for public funding. It also extended the developer's deadline to obtain approvals and public funding.

However, in December 2013, local landlords who opposed the project (opponents) commenced an Article 78 proceeding against the City and the developer to challenge the special use permit. A court found that the project was not permitted in the subject zoning district and had remitted the matter to the City. The City thereafter adopted zoning which would permit the project to proceed without the need for variances.

In 2015, several new city council (council) members were elected" and "A" was appointed to be the new city manager.

The developer alleged that the opponents continued to oppose the project and that their opposition was "racially motivated." The opponents had allegedly stated that the said City was already a "dumping ground" and "every time the City starts getting better, we put in another low-income project." They also allegedly said that the contemplated apartments "are not for people who are working," and they would allow the county to "drop off their problems" in the City and would "attract more of them."

The developer alleged that the new city manager sympathized with the opponents and sought to undermine the project. The developer cited extensive delays caused by the City manager and asserted that the City manager had "appointed two well-known opponents of the project to city boards that would evaluate (developer's) proposal."

The agreement required that the developer send a notice of default to the City if the City violated its obligations. The developer sent a notice of default, citing the City manager's efforts to delay the project. Two weeks thereafter, the council issued a requested resolution of support for the project and the planning board had granted the developer conditional site plan approval.

Thereafter, an opponent presented the council with a copy of a deed which contained a restriction that provided that if a certain parcel of property was ever used for anything other than "municipal purposes," ownership of the property would revert back to the grantor, a local Housing Authority (HA). The developer alleged that the reverter clause prevented the City from conveying an essential parcel of property, without which the project could not proceed. The council had approved a further extension of the agreement.

The developer alleged that the HA would not cancel the reverter clause without approval of its Board of Commissioners. However, the City manager had appointed one of the leading opponents to the HA board. The developer alleged that such opponent had "berated" the developer throughout its presentation and the HA board ultimately took no action on the developer's request. The HA allegedly advised the developer that the HA would not act until the City reconfirmed its support for the developer's project. The developer requested such reaffirmation. However, the council voted not to issue a resolution in support for the HA. The developer then served the City with a second notice of default. The City thereafter took no action. Without the essential parcel, the developer alleged that it could not obtain financing and its agreement expired. The developer further alleged that it had spent more than $1.5 million pursuing the project.

The court noted that a Rule 12(b)(1) motion challenges the court's jurisdiction to hear the plaintiff's claims based on an alleged lack standing. In order to defeat a Rule 12(b)(6) motion, a complaint's allegations "must meet a standard of 'plausibility.'" A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." The "plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully."

The court found that the developer, at the early stage of the case, had "alleged facts to suggest its injuries are fairly traceable to the City's actions, affording it standing under the FHA to maintain this action."

The defendants had argued, inter alia, that even if the City had issued a letter of support, there was no guarantee that the HA would have eliminated the reverter clause and therefore the developer could not prove that the City was the cause of the project's failure. However, the developer alleged that the HA would not even consider its request unless and until the City expressed its support for the project and that absent the City's support, "the project had no hope of success." The court held that at this stage of the case, the developer had standing to proceed.

The defendants also contended that the developer failed to state a claim under the FHA for either disparate treatment or disparate impact. They claimed that the complaint failed to allege that the defendants "had animus toward the project or that defendants' actions had a disproportionate impact on those set to benefit from the project." The court disagreed.

The court found that the developer "plausibly alleges facts suggesting racial animus played a significant factor in the opposition to the project and the people it served." The court cited the alleged statements which referred to the city as a "dumping ground," asserted that "every time the city starts getting better, we put in another low-income project" and the statements that the contemplated project is not "for people who are working" and would allow the county "to drop off their problems" in the city and "attract more of them…."

The developer alleged that following the election of new council members, the City "ultimately capitulated to the project's opposition." The developer noted that after supporting the project, "the new administration abruptly reversed course." The developer emphasized that the new city manager had appointed the project's "chief opponent" to the HA board shortly before the board was to vote on the elimination of the reverter clause and the council had decided not to issue a letter supporting the project when such letter was needed to remove the reverter clause. Moreover, the mayor, when deciding not to send the letter supporting the project, had allegedly stated that the project "is not in the best interest of the property." The court opined that if proven, those allegations "would support the inference that racial animus was a significant factor in the City's refusal to support the project."

Additionally, the court held that the complaint "sufficiently alleged that the City maintained a facially-neutral policy or practice in connection with the … project." The developer had alleged that the City's policy "had a significantly adverse or disproportionate impact on the minority groups that would benefit from the project." The developer asserted that a "predominately low-income minority population" lived in the subject area and that "rates of minority and low-income populations far exceed the national and county averages." The developer further alleged that the city suffered from a "shortage of habitable, affordable housing to support its low-income and racial/ethnic minority population—a fact recognized in the City's 2015 Consolidated Plan." The developer also alleged that a "majority of existing developments are at or near capacity, and the project would have provided much needed housing, jobs and other resources to this population."

Thus, the court held that the developer had "plausibly alleged facts to support a disparate impact-based FHA claim" and denied the defendant's motion to dismiss the FHA claim. The developer was permitted to proceed under "both disparate treatment and disparate impact theories of discrimination…."

The court also denied the motion to dismiss the developer's tortious interference claim. The defendants argued that such claim against the city manager was "barred by New York's governmental function immunity." It explained that "[g]overnmental function immunity shields public entities or persons 'from liability for discretionary actions taken during the performance of governmental functions.'" It held that "[w]ithout the benefit of evidence, this defense is premature. Defendants may reassert the governmental function immunity defense with evidentiary support at a later stage in this case."

However, the court dismissed fraudulent and negligent misrepresentational claims and a claim for breach of the duty of good faith and fair dealing because they were duplicative of the breach of contract claim. It also rejected the defendants' argument that the developer had not timely filed its notice of claim. The developer had filed a notice of claim once it became evident that City would "not attempt to resolve the alleged default" after the developer had served the City with a notice of default. The court held that the 90-day time period for the developer to file a notice of claim began to run when the City's cure period under the agreement expired.

Since the notice of claim had not included a New York State Human Rights Law claim, such claim was dismissed.

Accordingly, the court dismissed New York State Human Rights Law, breach of the duty of good faith and fair dealing and fraudulent and negligent misrepresentation claims, but denied the motion to dismiss the developer's FHA, breach of contract and tortious interference claims.

Comment: As this decision illustrates, efforts to develop a significant real estate project may extend through one or more local elections and different government administrations. While most new administrations will comply with legally binding agreements and government approvals that became effective during a prior government administration, there are occasions when a new administration will try to sabotage a previously approved project. Sometimes, a municipality's changed view of a project may be attributable to changes in the local economy. When suffering from a recession, a city may want new jobs and increased tax revenue. When the economy improves, that same city may be more concerned about e.g., community objections based on increased traffic and lack of adequate parking. Sometimes, a change in position may occur merely because of local petty politics. A new administration may view the need for additional later stage approvals as an opportunity to "kill" or renegotiate the terms of the transaction.

Generally, developers of such projects should retain not just experienced general real estate lawyers, but also lawyers who are familiar with the local government regulatory process. Developers should strive to minimize the need for future discretionary approvals and address the possibility that public officials may later attempt to undermine a previously approved project by citing "changed circumstances" and/or engaging in unreasonable delay.

While a private party may be concerned about liability for breach of contract or breach of the implied covenant of good faith and fair dealing, an irresponsible public official may be most concerned about being re-elected. Moreover, an irresponsible official may not worry about legal fees since he or she may think that the government will pay for and provide a defense to litigation, and indemnify the public official. They may also think that they are covered by some governmental immunity. In such situations, developers have hard choices to make. They have to consider their ability to incur delay and litigation costs and market timing issues.

These issues also illustrate why some developers decline to participate in government related projects. They prefer to operate solely in the private sector. However, during a recession, when there is a dearth of private sector opportunities, many of those developers will seek government related work in order to generate revenues and return their key employees.

Mill Street Partners LLC v. City of Newburgh, U.S. District Court, S.D.N.Y., Case No. 18 CV 5465, decided September 9, 2019, Briccetti, J.

Commercial Landlord-Tenant—Yellowstone Injunction Denied—Default With Respect To a Lease Insurance Requirement Was Incurable "No Waiver" Provisions

A commercial tenant moved for a "Yellowstone" injunction. The court denied the motion. A Yellowstone injunction "maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period (so) that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture…." A Yellowstone injunction will be granted where the tenant demonstrates that it "holds a commercial lease," it received a notice of default, a notice to cure, or a threat of termination of the lease, it sought injunctive relief prior to the termination of the lease and the tenant is "prepared to and maintains the ability to cure the alleged default by any means short of vacating the premises."

The tenant had received a notice to cure which asserted that the tenant violated a lease requirement that the tenant maintain "public liability coverage against claims for bodily injury or death in the amount of $2 million in a single limit or under an original policy with an umbrella …" and that such insurance name the landlord. The landlord asserted that the tenant had provided the landlord with an insurance certificate showing "coverage only in the amount of $1 million in a single limit." The tenant was to have provided such insurance for the years 2006 through 2019.

The tenant argued that "to the extent that it was ever in breach of the 'insurance' provision in the lease, the landlord's claims with respect to this breach are waived because the tenant has delivered to the landlord copies of its insurance for more than five years without there being any objection from the landlord as to the insurance coverage, and the landlord accepted rent payments from the tenant throughout."

The court rejected the tenant's waiver argument on the grounds that the lease embodied a "no waiver" provision. That provision specified, inter alia, that receipt by "owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by owner unless its waiver is signed by owner…."

Additionally, the Appellate Division, First Department, had held that the "failure to procure insurance cannot be cured where the proposed cure does not involve 'any retroactive change in coverage, which means that the alleged defaults raised by the landlord are not susceptible to cure'" and therefore, a failure to have obtained the required insurance constitutes a default that cannot be cured and cannot be the basis of a Yellowstone injunction. The court noted that the First Department's rationale was that "a deficiency in past insurance coverage 'does not protect the landlord against the unknown universe of any claims arising during the period of no insurance coverage.'" In the subject case, there is "no means for the tenant to obtain retroactive insurance coverage" and therefore, the Yellowstone injunction was denied.

The tenant had also argued that the landlord's concerns were addressed by the tenant's "posting of a $1 million indemnity bond and that such bond 'cures' any alleged insurance coverage shortfall…." The court rejected such argument and noted that the lease did not provide "for alternatives to providing the requested insurance coverage set forth in the Lease." Additionally, even if the lease had provided for such alternative, the landlord had argued "that $2 million of coverage in a 'single limit' means $2 million 'per occurrence.'" The court stated that a $1 million bond, in addition to the tenant's $1 million coverage for each occurrence "would not provide the coverage that landlord claims is required. i.e., 'in the amount of $2 million in a single limit….'" Since the tenant also argued that it had never breached the lease since it always had a $2 million policy "in the aggregate," the court held that such argument is not a basis for a Yellowstone injunction, which requires "a default capable of a cure." Accordingly, the court denied the tenant's motion for a Yellowstone injunction.

Comment: A benefit of seeking a Yellowstone injunction, as opposed to a traditional injunction, is that a movant for a Yellowstone injunction need not demonstrate a likelihood of success. Rather, it need only show that it has a commercial lease, the landlord has threatened termination of the lease, the termination has yet to occur and the tenant has the willingness and ability to cure if the court determines that the landlord's legal argument is correct.

Booston LLC v. 36 W. Realty Co. LLC, Supreme Court, New York Co., Case No. 654308/2019, decided Sept. 12, 2019, Borrok, J.

 Scott E. Mollen is a partner at Herrick, Feinstein.