Title: In the Matter of Daniel Peckham v. Judith A. Calogero

State: new-york

Issuer: New York Appellate Court

Document:

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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 48  
In the Matter of Daniel Peckham,
            Appellant, 
        v. 
Judith A. Calogero, as 
Commissioner of the State of New 
York's Division of Housing and 
Community Renewal, et al.,
            Respondents.
Eileen M. Cunningham, for appellant.
Magda L. Cruz, for respondent Chelsea Partners, LLC.
JONES, J.:
Respondent Chelsea Partners, LLC (“Owner”) owns a
three-story, 40-foot-deep building with a basement and eight
residential units in Manhattan.  Petitioner Daniel Peckham, the
sole remaining occupant of the building, resides in an apartment
subject to the Rent Stabilization Law and Code.
In May 2004, Owner filed an “Owner’s Application for
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No. 48
1 Rent Stabilization Code (9 NYCRR) § 2524.5 provides: 
“(a) The owner shall not be required to offer
a renewal lease to a tenant . . . and shall
file on the prescribed form an application
with the DHCR for authorization to commence
an action or proceeding to recover possession
in a court of competent jurisdiction after
the expiration of the existing lease term,
upon any one of the following grounds: . . .
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Order Granting Approval to Refuse Renewal of [Petitioner’s] Lease
and/or to Proceed for Eviction” (“application”) with the New York
State Division of Housing and Community Renewal (“DHCR”).  Owner
plans to demolish the building and construct a six-story,
70-foot-deep building with 12 dwelling units in its place. 
According to Owner’s plan, “[t]he Demolition will entail the
removal of (a) the roof, (b) entire interior of the Building, (c)
all partitions, (d) floor joints, (e) subfloors, and (f) building
systems.  In addition, much of the facade, and the entire rear
wall of the Building will be removed.”  Petitioner opposed
Owner’s application, arguing that (1) Owner advised the New York
City Department of Buildings (“DOB”) that the job involves “a
reconstruction or an alteration” and (2) the evidence of
financial ability could not be relied upon because the only thing
it established was that the funds in question were held in the
name of an entity other than Owner.  On December 13, 2005, the
Rent Administrator granted Owner’s application, stating that “the
owner has satisfied the conditions set forth under Section 2524.5
(a) (2) (i) of the New York City Rent Stabilization Code.”1 
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No. 48
(2) Demolition.  (i) The owner seeks to
demolish the building.  Until the owner has
submitted proof of [its] financial ability to
complete such undertaking to the DHCR, and
plans for the undertaking have been approved
by the appropriate city agency, an order
approving such application shall not be
issued.”
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One month later, petitioner filed a petition for
administrative review (PAR) of the Rent Administrator’s order,
arguing, in part, that Owner failed to provide adequate proof of
its financial ability to complete the undertaking.  DHCR
disagreed and, by order issued July 27, 2006, denied petitioner's
PAR.  Subsequently, petitioner commenced this article 78
proceeding against DHCR and Owner, seeking reversal of DHCR’s
order denying petitioner’s PAR.  For the first time, petitioner
challenged DHCR’s standards regarding what constitutes a
“demolition” and what an apartment building owner has to show in
order to demonstrate its “financial ability” to perform a
particular undertaking.  Despite DHCR’s arguments that the order
denying petitioner’s PAR was properly supported, Supreme Court
granted the petition to the extent of remanding the matter to
DHCR “to clarify the standard used to determine a ‘demolition’
and whether this project is a ‘demolition,’ and to clarify the
financial ability of Chelsea Partners to complete the project.”
Following Supreme Court’s order and judgment, DHCR
agreed to abide by the court order remanding the matter.  Owner
appealed to the Appellate Division pursuant to that court’s leave
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No. 48
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grant.  At the Appellate Division, DHCR sought an affirmance of
Supreme Court’s order.  DHCR argued that (1) “articulation of a
standard for demolition applications will allow for more
meaningful court review and give both owners and tenants guidance
in a controversial area of rent regulation that has created
uncertainty and confusion” and (2) more evidence of Owner’s
“financial ability” is needed.
In a 3-2 decision, the Appellate Division reversed
Supreme Court, concluding that the granting of the petition and
remand of the matter to DHCR were improper.  According to the
court, Owner was entitled to treat DHCR’s determination as final. 
Further, the court ruled that Supreme Court erred in finding that
DHCR lacked a conclusive definition of “demolition,” that DHCR’s
order denying petitioner’s PAR was not based upon an incomplete
factual record, arbitrary, capricious, irrational or contrary to
law, that DHCR properly determined that Owner had the financial
ability to complete the undertaking, and that Owner established
its intent to demolish and replace the building in question.  The
court also noted that petitioner's argument regarding DHCR’s lack
of appropriate “demolition” standards was not properly before
Supreme Court.  The dissenting Justices argued in support of
Supreme Court’s remand to DHCR by pointing out that the agency
should be allowed to exercise its legislatively granted authority
to develop rent regulations and accompanying standards. 
Specifically, they explained that given DHCR’s concessions that
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No. 48
2 DHCR has agreed to abide by the Appellate Division order
and has not appealed to this Court.
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there is no definition of demolition in the Rent Stabilization
Law or Code, that its demolition determinations have been made on
a case-by-case basis and that it did not address the weakness of
the evidence regarding Owner’s financial ability, Supreme Court’s
remand would give DHCR the opportunity to create standards courts
could employ in determining whether DHCR’s determinations are
rationally based.  Petitioner appeals as of right, pursuant to
CPLR 5601 (a), and we now affirm.2
Petitioner argues that Owner did not have standing to
appeal Supreme Court’s decision.  We disagree and hold that the
Appellate Division did not act in excess of its powers in
granting Owner leave to appeal.
 In addition, petitioner challenges DHCR’s lack of a
specific definition for the term “Demolition.”  This argument was
not raised before the Rent Administrator or at petitioner’s PAR. 
It was raised for the first time in the article 78 proceeding. 
As it is well settled that an argument “may not be raised for the
first time before the courts in an article 78 proceeding” (Matter
of Yonkers Gardens Co. v State of N.Y. Div. of Hous. & Community
Renewal, 51 NY2d 966, 967 [1980]), this argument is not properly
before us.   
Petitioner further argues that the evidence of
financial ability Owner submitted pertains to a different entity
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No. 48
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(Three Stars Associates, LLC) and that such evidence does not
necessarily inure to the benefit of Owner.  Although this
argument was raised before the Rent Administrator, it was never
repeated at the PAR or in the instant petition.  Accordingly, we
may not consider this argument.  
However, petitioner’s general arguments that DHCR’s
actions were arbitrary and capricious are before us.  We hold
that these arguments lack merit because there was a rational
basis for DHCR’s determination.  “In reviewing an administrative
agency determination, [courts] must ascertain whether there is a
rational basis for the action in question or whether it is
arbitrary and capricious” (Matter of Gilman v New York State Div.
of Hous. & Community Renewal, 99 NY2d 144, 149 [2002] [citation
omitted]).  An action is arbitrary and capricious when it is
taken without sound basis in reason or regard to the facts (see
Matter of Pell v Board of Educ. of Union Free School Dist. No. 1
of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d
222, 231 [1974]).  If the court finds that the determination is
supported by a rational basis, it must sustain the determination
even if the court concludes that it would have reached a
different result than the one reached by the agency (id.). 
Further, courts must defer to an administrative agency’s rational
interpretation of its own regulations in its area of expertise
(see Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459
[1980]).
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No. 48
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Here, DHCR’s determination denying petitioner’s PAR is
consistent with its own rules and precedents; accordingly, there
is a rational basis for the determination.  It is of no moment
that there is no precise or expansive definition of “demolition”
in the Rent Stabilization Law and Code.  Numerous terms and
concepts lack such a definition (see e.g., Rent Stabilization Law
§ 26-507 [does not contain a precise definition of “primary
residence”]).  Further, over the years, DHCR and its predecessor,
the Conciliation and Appeals Board of the City of New York
(“CAB”), have not required the proponent of a demolition
application to show that it intends to “raze the structure to the
ground” (the dictionary definition of “demolition”) in order to
be successful.  An intent to gut the interior of the building,
while leaving the walls intact, has been held as sufficient (see
e.g., Villas of Forest Hills, CAB Op 15,680, at 103-104 [1981];
Matter of Mazzia, DHCR Admin Review Docket No. PF410002OE
[September 27, 2002]; Matter of Schneider, DHCR Admin Review
Docket No. TB420052RT, at 7 [March 16, 2006]).  Courts reviewing
this interpretation of the term “demolition” have held likewise
(see e.g., Application of Gioeli, 221 NYS2d 568 [Sup Ct NY Co
1961]; Application of Mahoney v Altman, 63 Misc2d 1062, 1064 [Sup
Ct NY Co 1970]; Matter of 412 W. 44th St. Corp., NYLJ, Oct. 19,
1971, at 2, col 5).  Here, Owner’s demolition plan comports with
DHCR’s long-held interpretation of “demolition.”  
Regarding the “financial ability” that must be shown
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No. 48
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before a demolition application is granted, DHCR has stated that
“[e]vidence of financial ability to complete the project may
include a letter of intent or a commitment letter from a
financial institution, or such other evidence as DHCR may deem
appropriate under the circumstances” (DHCR Operational Bulletin
2002-1).  Here, Owner submitted (1) a printout from JP Morgan
Chase Bank verifying that a bank account had been opened and
funded in the amount of $4,800,000 and (2) a letter indicating
that these funds were to be applied toward Owner’s
demolition/construction project.  Although the letter was
addressed to Three Stars Associates, LLC, there was ample basis
for DHCR to infer that this entity and Owner were affiliates;
that is, the addressee of the letter (Mr. Larry Tauber) is the
principal and agent of both entities.  Further, according to the
letter, Mr. Tauber indicated how the funds in the bank account
would be used.  In accordance with DHCR’s procedure, therefore,
Owner has demonstrated the requisite financial ability.
As there is a rational basis for DHCR’s order denying
petitioner’s PAR, we hold that Owner is entitled to treat this
determination as final.  Because Owner has satisfied DHCR’s
requirements and obtained the necessary approvals, it should be
able to proceed with its demolition project without the threat of
having to revisit the entire administrative process again.  To be
sure, DHCR has a great deal of authority to modify the orders it
renders and the regulations--along with accompanying standards--
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No. 48
3 Under DHCR’s proposed demolition regulations, which will
amend Rent Stabilization Code § 2524.5 (a) (2), “demolition” is
defined in a manner consistent with DHCR’s application in this
case.
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it administers.  However, the question here is not whether DHCR
can change its regulation, standards or orders (it certainly
can), but when.  Here, DHCR may not get what amounts to a second
chance to rule on Owner’s application after setting and applying
a new standard regarding what constitutes a “demolition.”  DHCR
may, of course, modify its standards, but it must apply them on a
going forward basis.3
Accordingly, the order of the Appellate Division should
be affirmed, with costs.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   * 
Order affirmed, with costs.  Opinion by Judge Jones.  Chief Judge
Lippman and Judges Ciparick, Graffeo, Read, Smith and Pigott 
concur.
Decided May 5, 2009