State of New York

Supreme Court, Appellate Division

Third Judicial Department

Decided and Entered: June 2, 2016 521831 

________________________________

In the Matter of PG ERIE

PROPERTIES, LLC,

Appellant,

v

MEMORANDUM AND ORDER

DEPARTMENT OF ECONOMIC

DEVELOPMENT, Also Known as

EMPIRE STATE DEVELOPMENT,

et al.,

Respondents.

________________________________

Calendar Date: April 19, 2016

Before: Peters, P.J., Garry, Rose, Clark and Aarons, JJ.

__________

Centolella Lynn D'Elia & Temes LLC, Syracuse (Michael T.

Stanczyk of counsel), for appellant.

Eric T. Schneiderman, Attorney General, Albany (Owen W.

Demuth of counsel), for respondents.

__________

Garry, J.

Appeal from a judgment of the Supreme Court (Collins, J.),

entered October 6, 2014, which, among other things, partially

dismissed petitioner's application, in a combined proceeding

pursuant to CPLR article 78 and action for declaratory judgment,

to review a determination of respondent Empire Zone Designation

Board revoking petitioner's certification as an empire zone

business enterprise.

In 1997, petitioner was certified as a participant in the

Economic Development Zones Program, which later became the Empire
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Zones Program (see General Municipal Law art 18-B). Statutory

amendments in 2009, as relevant here, directed respondent

Commissioner of Economic Development to conduct a review of

participating businesses and revoke the certifications of any

entities that failed a 1:1 benefit-cost test or that were found

to be "shirt-changers" – that is, businesses that had transferred

employees or real property between related entities to produce

the appearance that new jobs or investments had been created (see

General Municipal Law § 959 [a] [v] [5]; [w]; Matter of Lyell Mt.

Read Bus. Ctr. LLC v Empire Zone Designation Bd., 129 AD3d 137,

141 [2015]). In June 2009, respondent Department of Economic

Development notified petitioner that the Commissioner was

revoking its certification for failing both the 1:1 benefit-cost

test and the shirt-changer test. Petitioner appealed to

respondent Empire Zone Designation Board (hereinafter the Board),

and the Board upheld the decertification. Petitioner commenced

this combined declaratory judgment action and CPLR article 78

proceeding, which was marked off the calendar pending a de novo

review by the Board. Thereafter, the Board reversed the

Commissioner's determination as to the 1:1 benefit-cost test, but

upheld petitioner's decertification based upon the shirt-changer

test, finding that petitioner had not established the existence

of extraordinary circumstances warranting continued certification

(see General Municipal Law § 959 [w]; 5 NYCRR 14.2 [b]). Supreme

Court found that petitioner was entitled to a declaration that

the revocation of petitioner's certification could not be made

retroactive to 2008, and otherwise dismissed the combined

petition/complaint. Petitioner appeals.

In deciding whether a business should be decertified for

failing the shirt-changer test, the Commissioner was directed to

determine whether the entity had "caused individuals to transfer

from existing employment with another business enterprise with

similar ownership . . . to similar employment with the certified

business enterprise or if the enterprise acquired, purchased,

leased, or had transferred to it real property previously owned

by an entity with similar ownership, regardless of form of

incorporation or organization" (General Municipal Law § 959 [a]

[v] [5]; see General Municipal Law § 959 [w]). Petitioner

contends that it never engaged in such transfers of real property

or employment, that the administrative record lacks any evidence
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to the contrary, and, thus, that there is no factual basis for

the determination that this provision was violated. We agree,

and therefore find that the Board's denial of petitioner's appeal

from the revocation of its certificate was "arbitrary and

capricious and without a rational basis" (Matter of WL, LLC v

Department of Economic Dev., 97 AD3d 24, 29 [2012], affd sub nom.

James Sq. Assoc. LP v Mullen, 21 NY3d 233 [2013]).

In its appeal to the Board, petitioner argued that the

Commissioner improperly based its determination that petitioner

had violated the shirt-changer provision on its response to a

particular question on a business annual report (hereinafter BAR)

that petitioner had submitted in 2006.1 The question required

petitioner to state whether it was subject to a Tax Law provision

that precluded certain businesses from receiving tax benefits if

they could not establish that they were formed for a valid

business purpose and were not "formed solely to gain empire zone

benefits" (Tax Law § 14 [j] [4] [B]). Petitioner gave an

affirmative response to this question and was thus required to

explain the circumstances of its formation. Petitioner's

explanatory statement reads in full as follows: "This entity was

formed for valid business purposes related to acquisition and

leasing of real property from an unrelated party. The form of

the new business entity was chosen on consideration of financing

requirements and legal issues." Petitioner contends – and we

agree – that this response failed to provide a rational factual

1 Contrary to petitioner's argument, the Commissioner's

decertification letter was not required to set out the specific

factual basis for its determination. The letter provided

adequate notice by stating the statutory basis for the revocation

and explaining petitioner's right to appeal to the Board (see

General Municipal Law § 959 [w]; Matter of Hague Corp. v Empire

Zone Designation Bd., 96 AD3d 1144, 1147 [2012], affd sub nom.

James Sq. Assoc. LP v Mullen, 21 NY3d 233 [2013]). Petitioner

asserted in its appeal to the Board that it was "well-publicized"

that the Commissioner had identified petitioner and numerous

other businesses for decertification under the shirt-changer test

based upon their affirmative responses to the question on the

2006 BAR. 
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basis for the Commissioner's subsequent revocation of its

certification as a shirt-changer.

Tax Law § 14 (j) (4) (B) was a 2005 legislative effort to

address shirt-changing as it was then defined, applying to

businesses that were certified before August 1, 2002, "ha[d] a

base period of zero years or zero employment for its base period"

and were similar in ownership and operation to another tax paying

business entity.2 This legislation focused on the purpose of an

entity's formation and sought to identify businesses that had

been formed solely to obtain benefits rather than for valid

business reasons. The 2009 shirt-changer legislation was not

concerned with the purpose of an entity's formation but, instead,

examined its actions – specifically, whether a business had

qualified for benefits by using transfers of assets or employees

between related entities to create the impression that new jobs

or investments had been generated (see General Municipal Law §

959 [a] [v] [5]; [w]). These were new statutory criteria that

did not exist in 2006. As such, although an affirmative response

to the question on the 2006 BAR about the applicability of the

2005 Tax Law provision indicated that the business in question

was similar in ownership and operation to another entity so that

transfers of assets or employees might have occurred, it was not

sufficient, without more, to provide a rational basis for an

inference that such transfers had actually taken place (see 

Matter of Dermody, Burke & Brown, CPAs, LLC v Department of

Economic Dev., ___ AD3d ___ [decided herewith]).

Nothing in the statement that petitioner attached to its

2006 BAR indicates that any transfers of employment or property

between similar entities occurred. The statement makes no

reference of any kind to transfers of employment, and its sole

reference to asset transfers concerns the "acquisition and

leasing of real property from an unrelated party" (emphasis

2 Separate legislation excluded businesses that were

substantially similar in operation and ownership to existing or

previously existing entities from obtaining certification after

August 1, 2002 (see L 2002, ch 85, pt CC § 10, adding Tax Law

§ 14 [j]).
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added). As such, nothing in petitioner's 2006 BAR provides a

factual basis for the Commissioner's determination that

petitioner was a shirt-changer within the meaning of the 2009

legislation (compare id.; Matter of Lyell Mt. Read Bus. Ctr. LLC

v Empire Zone Designation Bd., 129 AD3d at 145-146). Upon this

appeal, respondents concede that the Commissioner's determination

in petitioner's case was premised upon the 2006 BAR, and they

make no argument that anything else in the administrative record

supports the revocation of its certificate. 

In its appeal to the Board, petitioner relied in part upon

an affidavit from Peter Muserlian, one of its members, setting

forth facts about petitioner's business operations, investments

and assets. With regard to real property transfers, Muserlian

asserted that petitioner was formed in 1996 to acquire a building

in the City of Syracuse, Onondaga County that had formerly been a

furniture warehouse, had been vacant for a long period of time

and was in "decrepit condition." Muserlian stated that

petitioner acquired the building in a tax foreclosure proceeding

and further averred that petitioner did not acquire, purchase,

lease or transfer to itself real property previously owned by a

company with similar ownership, and did not cause individuals to

transfer from existing employment with another business with

similar ownership to employment with petitioner.

In its decision rejecting petitioner's appeal, the Board

acknowledged these factual assertions as well as petitioner's

contention that its response on the 2006 BAR did not reveal a

violation of the 2009 shirt-changer provision. The Board further

acknowledged that it had found extraordinary circumstances

justifying the continued certification of certain other

enterprises based upon proof that they had not transferred assets

or employees from a related entity. The Board nevertheless

denied petitioner's appeal, finding that petitioner had failed to

produce "specific factual information and supporting

documentation" demonstrating the existence of the required

extraordinary circumstances and had not presented "underlying

facts that would allow the Board to conclude that [petitioner's]

employees and properties were not transferred from related

entities." In the absence of any record evidence revealing that

petitioner had ever engaged in prohibited transfers of assets or
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employment, this determination was irrational. 

As respondents contend, the sole basis upon which the Board

could reverse a determination by the Commissioner that a

participant should be decertified under the shirt-changer

provision was a unanimous finding that "extraordinary

circumstances [had] occurred which would justify the continued

certification of the business enterprise" (General Municipal Law

§ 959 [w]), and it was petitioner's burden to establish the

existence of such extraordinary circumstances by submitting

"specific factual information (along with documentation

establishing that information) and all legal arguments" (5 NYCRR

14.2 [b]). We reject respondents' contention that Muserlian's

affidavit was inadequate to satisfy this burden and that

petitioner should also have submitted a deed or other

documentation substantiating the affidavit's description of the

acquisition of its real property. Muserlian's sworn testimony

that the building was acquired in a tax foreclosure proceeding –

and, thus, presumably from a municipality – revealed that the

property was not transferred from a similar private business

entity; it is unclear what further relevant information the tax

deed may possibly have conveyed. The Board did not state that it

had rejected the credibility of Muserlian's uncontradicted

testimony, nor did it provide any reason for doing so, and this

Court may not "affirm the underlying determination upon a ground

not invoked by the Board in the first instance" (Matter of Office

Bldg. Assoc., LLC v Empire Zone Designation Bd., 95 AD3d 1402,

1404-1405 [2012]). In view of the complete absence of any

evidence controverting Muserlian's account or otherwise

indicating that a prohibited real property transfer had occurred,

it was irrational for the Board to require further proof on this

issue. 

Likewise, while Muserlian's terse statement that no

prohibited employment transfers had occurred might not have

sufficed under 5 NYCRR 14.2 (b) if there had been some other

contradictory proof in the record, it was adequate where, as

here, there was no evidence whatsoever that petitioner had ever

engaged in a prohibited employment transfer (compare Matter of

Dermody, Burke & Brown, CPAs, LLC v Department of Economic Dev.,

___ AD3d at ___). As such, the Board should have found
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extraordinary circumstances warranting the issuance of a

retention certificate pursuant to General Municipal Law § 959 (w)

(see Matter of Lyell Mt. Read Bus. Ctr. LLC v Empire Zone

Designation Bd., 129 AD3d at 149). Petitioner's remaining

arguments are rendered academic by this determination.

Peters, P.J., Rose, Clark and Aarons, JJ., concur.

ORDERED that the judgment is modified, on the law, without

costs, by reversing so much thereof as dismissed that part of the

petition/complaint seeking to annul the revocation of

petitioner's certification as an empire zone business enterprise;

petition granted to that extent and determination annulled; and,

as so modified, affirmed.

ENTER:

Robert D. Mayberger

Clerk of the Court