In the Matter of Brookford, LLC, Appellant,v.New York State Division of Housing and Community Renewal, et al., Respondents.BriefN.Y.May 2, 2018To be Argued by: VICTOR A. KOVNER (Time Requested: 30 Minutes) APL-2016-00211 New York County Clerk’s Index No. 100065/15 Court of Appeals of the State of New York In the Matter of the Application of BROOKFORD, LLC, Appellant, For a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules, – against – NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL and MARGARET SCHUETTE FRIEDMAN, Respondents. REPLY BRIEF FOR APPELLANT Of Counsel: VICTOR A. KOVNER THOMAS R. NEWMAN JEFFREY TURKEL CAROL M. LUTTATI VICTOR A. KOVNER, ESQ. DAVIS WRIGHT TREMAINE LLP 1251 Avenue of the Americas, 21st Floor New York, New York 10020-1104 Tel.: (212) 489-8230 Fax: (212) 489-8340 THOMAS R. NEWMAN, ESQ. DUANE MORRIS LLP 1540 Broadway New York, New York 10036-4086 Tel.: (212) 692-1028 Fax: (212) 692-1020 (For Further Appearances See Reverse Side of Cover) Printed on Recycled Paper JEFFREY TURKEL, ESQ. ROSENBERG & ESTIS, P.C. 733 Third Avenue New York, New York 10017 Tel.: (212) 867-6000 Fax: (212) 551-8484 CAROL M. LUTTATI, ESQ. LAW OFFICES OF CAROL M. LUTTATI 150 East 58th Street New York, New York 10155 Tel.: (212) 829-0011 Fax: (212) 829-0055 Attorneys for Appellant TABLE OF CONTENTS Page PRELIMINARY STATEMENT. 1 POINT I BECAUSE THE PERCEIVED CONFLICTS WITHIN CRL § 26-403.1 DO NOT EXIST, THERE IS NO NEED TO APPORTION JOINT INCOME .3 POINT II DHCR’S INTERPRETATION CREATES, RATHER THAN RESOLVES, STATUTORY CONFLICTS .6 A. Apportionment Nullifies the As-Reported Provision B. Apportionment Nullifies the Anti-Audit Provisions C. Apportionment Nullifies the DTF Exclusivity Provision ... D. The Primary Residence Provision Cannot be Exalted over All Other Provisions in the Statute .7 .9 10 13 E. CRL § 26-403.1 Reflects the Legislature’s Finding that High-Income Tenants in High-Rent Apartments are not Entitled to Regulatory Protection F. The Comment Period in CRL § 26-403.1(c)(2) does not Authorize Apportionment POINT III THE APPORTIONMENT PROCEDURE THAT DHCR USED IS ULTRA VIRES THE STATUTE AND CANNOT BE RESCUED BY AN MOU 16 17 19 A. Owner Raised its Objection to the MOU before DHCR B. An Administrative Agency can Never Promulgate a Rule or Regulation that is Ultra Vires the Governing Statute C. DHCR Abandoned the Apportionment Procedure in the MOU, and Substituted a Procedure that Led to Additional Statutory Violations 19 20 23 RE\49426\0001 \2245718v4 POINT IV RESPONDENTS MISSTATE THE STANDARD OF REVIEW 26 27CONCLUSION -ii- RE\49426\0001\2245718v4 TABLE OF AUTHORITIES Page(s) State Cases 103 E. 86th St. Realty Corp. v New York State Div. ofHous. & Community Renewal, 12 AD3d 289 (1st Dept 2004) 315 E. 72nd St. Owners, Inc. v New York State Div. ofHous. & Community Renewal, 101 AD3d 647 (1st Dept 2012) Angelo v Angelo, 74 AD2d 327 (2d Dept 1980) Ansonia Assoc. L.P. v Unwin, 130 AD3d 453 (1st Dept 2015) Avella v City of New York, 29 NY3d 425 (2017) Blanco v Am. Tel. & Tel. Co., 90 NY2d 757(1997) Burger King, Inc. v State Tax Commn., 51 NY2d 614 (1980) Chatsworth Realty Corp. v New York State Div. of Hous. & Community Renewal, 56 AD3d 371 (1st Dept 2008) Colton v Berman, 21 NY2d 322(1967) Doyle v Calogero, 52 AD3d 252 (1st Dept 2008) Enright by Enright v Eli Lilly & Co., 77 NY2d 377(1991) 1 13, 14 15 4 7,8 17 6 14 26 15 17 - iii - RE\49426\0001\2245718v4 Finger Lakes Racing Assn, v New York State Racing & Wagering Bd., 45 NY2d 471 (1978) Foley v Bratton, 92 NY3d 781 (1999) Germantown Cent. Sch. Dist. v Clark, Clark, Millis & Gilson, AIA, 100 NY2d 202 (2003) Goldman v Davis, 49 Misc3d 16 (App Term, 1st Dept 2015) Long v Adirondack Park Agency, 76 NY2d 416 (1990) Matter of 737 ParkAve. Acquisition, LLC, DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued January 20, 2013 Matter of Beer Garden v New York State Liq. Auth., 79 NY2d 266(1992) 20 6,9 17 4 6 11 21 Matter of Classic Realty LLC v New York State Div. of Hous. & Community Renewal, 2 NY3d 142 (2004) 24 Matter of Ferrara, 10 NY2d 1 (1961) Matter of Georgia Properties, DHCR Adm. Rev. Dckt. No. ET-4200054-RO, issued May 5, 2017. Matter of Giffuni Bros, v New York State Div. of Hous. & Community Renewal, 293 AD2d 402 (1st Dept 2002), Iv denied 99 NY2d 505 (2003) Matter of Goodman (Barnard Coll.), 95 NY 2d 15(2000) Matter of Jones v Berman, 37 NY2d 42(1975) 8 15 9 10 20 -iv- RE\49426\0001\2245718v4 Matter of KSLM-Columbus Apts., Inc. v New York State Div. of Hous. & Community Renewal, 5 NY3d 303 (2005) Matter of Moran Towing & Transp. Co. v New York State Tax Commn., 72 NY2d 166(1988) . Matter of Pell v Board of Educ., 34 NY2d 222(1974) Matter of Williamsburg Assets LLC, DHCR Adm. Rev. Dckt. No. XH-410008-RO, issued February 16, 2010 12 Roberts v Tishman Speyer Props., L.P., 13 NY3d 270 (2009)... Schumer v Holtzman, 60 NY2d 46(1983) Weiss v City of New York, 95 NY2d 1 (2000) 26 3 23 22, 26 22 20 Federal Cases Helvering v Janney, 311 US 189(1940) Statutes 4 26 USC § 6013(d)(3) CRL § 26-403(e)(2)(i)(10) CRL§ 26-403.1 CRL § 26-403.1(a) CRL § 26-403.1(b) CRL § 26-403.1(c)(2) CRL § 26-408(b)(l) 4 14 3,4, 6, 14, 16, 22,25,26 3, 13, 15 9,11 10,17,18 14 - v - RE\49426\0001\2245718v4 CRL § 26-408(b)(4) . CRL § 26-408(j) L 1993, ch 253, § 5... L 1993, ch 253, §28. 14 14 16 20 State Administrative Procedure Act. 21 Tax Law § 171-b(3)(a) Tax Law § 171-b(3)(b) Tax Law § 607(a) Tax Law § 651(b)(2)... 21,22 9, 13 3 5 Regulations 26 CFR § 1.6013-4(b) 4 9 NYCRR Part 2211 21 Other Authorities Governor’s Bill Jacket, L 1993, ch 253 NY Senate Debate on Assembly Bill A8859, July 7, 1993 10 9 Senate Introducer’s Mem in Support, 1993 NY Legis Ann 4, 17 - vi - RE\49426\0001X2245718v4 PRELIMINARY STATEMENT Appellant Brookford, LLC (Owner) submits this brief in reply to the September 6, 2017 briefs of respondents New York State Division of Housing and Community Renewal (DHCR) and Margaret Schuette Friedman (Tenant). Owner must make one critical point before addressing the proper construction of the statute herein. DHCR incorrectly asserts that in 103 E. 86th St. Realty Corp. v New York State Div. of Hous. & Community Renewal (12 AD3d 289 [1st Dept 2004]), DHCR used, and the First Department endorsed, the apportionment “methodology in the Memorandum of Understanding because the husband [therein] ... had vacated the housing accommodation prior to the service of the ICF [income certification form]” (DHCR Br., p. 21). In fact, 103 E. 86th St. Realty Corp. concerned a tenant (Daniel Weitzman) who vacated an apartment, leaving in occupancy his wife (Stacy Malin) and their children. Weitzman and Malin filed a joint return for 1999, but filed separately in 2000. There is nothing in the DHCR, Supreme Court, or First Department orders to indicate that DHCR or DTF apportioned the 1999 joint income. 1 To the contrary, DHCR found in its October 30, 2002 order that “a complete match for the tenant’s wife and two children in 2000” established that the statutory income threshold for 2000 had not been met {see Compendium, p. 3). Because deregulation requires the See Compendium, pp. 1-12. - 1 - RE\49426\0001V2245718v4 relevant income to have exceeded the threshold for both 1999 and 2000, there was no need for DHCR to apportion the 1999 joint income, thus explaining why DHCR’s order mentions neither apportionment nor the MOU. At oral argument before Supreme Court herein, DHCR’s counsel admitted that “there is no other case like this one,” and that “this is the first time we have ever had this situation” (R. 489, 491). DHCR was correct; no other case has ever addressed DHCR’s apportionment methodology. -2- RE\49426\0001\2245718v4 POINT I BECAUSE THE PERCEIVED CONFLICTS WITHIN CRL § 26-403.1 DO NOT EXIST, THERE IS NO NEED TO APPORTION JOINT INCOME Owner established in Point I of its Main Brief that there are no conflicts within the statute because, as a matter of federal and New York State tax law, jointly reported income is indivisible and can be ascribed to each joint filer. Respondents concede this point as a matter of taxation, but argue that basic principles of tax law are irrelevant to the proper construction of a rent regulatory statute (DHCR Br., pp. 19-20; Tenant Br., pp. 5, 21). The statute says otherwise. Although the CRL is not a tax statute, the Legislature defined “annual income” by deliberately using a term imported from federal tax law - “federal adjusted gross income as reported” - in CRL § 26- 403.1(a). Because the Legislature has not indicated to the contrary, “federal AGI as reported” should be given its precise and well-settled meaning in the jurisprudence of the state (see Matter of Moran Towing & Transp. Co. v New York State Tax Commn., 72 NY2d 166, 173 [1988]). Notably, a term used in the Tax Law has “the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes” (Tax Law § 607[a]). The Legislature used federal AGI as reported to create “a simple and straight forward income verification process,” in that a tenant’s federal AGI would already -3- RE\49426\0001\2245718v4 be “on file with taxation and finance” (Senate Introducer’s Mem in Support, 1993 NY Legis Ann at 176). That figure was reported as true, correct, and complete under penalties of perjury, and did not need to be computed, adjusted, or manipulated. Contrary to Tenant’s claim, “federal AGI as reported” is not a mere “label that points to a number” (Tenant Br., p. 5), divorced from its well-established meaning and use. Tenant claims that Owner asks this Court “to import the entire body of federal tax law into our state regulated housing law” (Tenant Br., p. 21). That is not so. Owner simply asserts that when interpreting CRL § 26-403.1, the phrase “federal AGI as reported” should be given its accepted meaning. Prior authority establishes that a tenant’s rights under a rent regulation statute can indeed depend on how that tenant elects to report his or her income and deductions (see e.g. Ansonia Assoc. L.P. v Unwin, 130 AD3d 453, 454 [1st Dept 2015]; Goldman v Davis,49 Misc3d 16, 18- 19 [App Term, 1st Dept 2015]). Tenant next argues that federal tax law does not provide that “income reported on a joint return magically becomes ‘joint and several income’” (Tenant Br., p. 5). There is nothing magical about this. The income of joint filers is deemed, as a matter of law, to be the indivisible income of a single filer (see 26 CFR § 1.6013-4[b]; Helvering v Janney, 311 US 189, 192 [1940]). The phrase “joint and several,” on the other hand, relates to the tax liability of joint filers (see 26 USC § 6013[d][3]). -4- RE\49426\0001\2245718v4 DHCR mistakenly asserts that apportionment- i.e., the separation of income as between spouses who have filed a joint return- is permissible, citing Tax Law § 651(b)(2) (DHCR Br., pp. 31-32). This provision has nothing to do with the apportionment of income. Instead, it deals with certain circumstances, not present here, under which taxpayers who file a joint return are relieved of joint and several liability for the tax due on that return. It does not alter the fact that under federal and New York State tax law, income reported on a joint return is indivisible as between the joint filers. -5- RE\49426\0001\2245718v4 POINT II DHCR’S INTERPRETATION CREATES, RATHER THAN RESOLVES, STATUTORY CONFLICTS A court must try to harmonize apparently conflicting provisions in a statute (see Burger King, Inc. v State Tax Commn., 51 NY2d 614, 620-21 [1980]). Put another way, a court should “give the statute a sensible and practical over-all construction, which is consistent with and furthers its scheme and purpose and which harmonizes all its interlocking provisions” (Long v Adirondack Park Agency, 76 NY2d 416, 420 [1990]). DHCR misapprehends this rule by claiming that apportionment is “in harmony with ... the statutory definition of total annual income” (DHCR Br., p. 14). DHCR’s burden is to offer an interpretation by which apportionment is harmonized with all of CRL § 26-403.1, not just a single provision relating to primary residence. DHCR’s interpretation violates the rule because it does not harmonize apportionment with the as-reported, anti-audit, and DTF exclusivity provisions. DHCR’s facile interpretation further violates this rule by declaring the primary residence provision to be “the victor” over all others (Foley v Bratton, 92 NY3d 781, 787 [1999]). -6- RE\49426\0001\2245718v4 A. Apportionment Nullifies the As-Reported Provision The Legislature defined “annual income” as “federal adjusted gross income as reported.” Tenant elected to jointly report her income. She never reported to any taxing authority her individual income and deductions. Apportionment thus impermissibly writes the words “as reported” out of the statute {see Avella v City of New York, 29 NY3d 425, 434 [2017] [“A statutory construction which renders one part meaningless should be avoided”]). In place of statutory analysis, DHCR argues that a tenant with a disabled spouse should not be forced to file a separate return, or forgo the considerable monetary benefits of filing jointly, merely “because the statute requires DTF to examine federal adjusted gross income as reported” (DHCR Br., pp. 21, 23). DHCR, however, has rebutted its own argument. Because the Legislature has indeed required DTF to examine federal AGI “as reported,” the manner in which a tenant chooses to report her income is critical. Tenant made a choice herein, and obtained financial benefits as a result of that choice. Respondents cannot now ask this Court to pretend that Tenant reported her income as a married person filing separately, and ignore the as-reported provision in the statute. DHCR complains that deregulation should not be “dictated by administrative convenience and protecting ... confidentiality” (DHCR Br., p. 25). The legislative history, however, establishes that ease of administration and tenant privacy were of -7- RE\49426\0001\2245718v4 paramount concern to the Legislature when it enacted the statute’s income verification provisions. A court’s primary consideration when construing a statute is to give effect to the Legislature’s intention (see Avella v City of New York, 29 NY3d at 434). Where the Legislature creates a statutory scheme premised, inter alia, on administrative convenience, the court should effectuate, not thwart, that intent (see e.g. Matter of Ferrara, 10 NY2d 1, 8-9 [1961]). DHCR asserts that Owner’s interpretation would require a new regulation mandating that the income of an absent spouse be included when determining annual income (DHCR Br., p. 22). No such regulation is needed; all of the joint income is lawfully ascribed to Tenant, who primarily resides in the apartment. Conversely, DHCR’s interpretation would require a new regulation allowing DHCR to (i) manipulate reported income; (ii) demand confidential tax information; and (iii) usurp DTF’s statutory role. DHCR next argues that under Owner’s interpretation, the as-reported provision “governs everything to the exclusion of all other legislative concerns” (DHCR Br., p. 26). Because joint income is lawfully ascribed to each joint filer, Owner’s interpretation gives meaning to all portions of the statute. Under DHCR’s interpretation, the primary residence provision nullifies the as-reported, anti-audit, and DTF exclusivity provisions. -8- RE\49426\0001\2245718v4 B. Apportionment Nullifies the Anti-Audit Provisions The Legislature intended income verification to be “a very simple procedure, one that mandates that all privacy conditions remain intact” (NY Senate Debate on Assembly Bill A8859, July 7, 1993 at 8211-12). Accordingly, CRL § 26-403.1(b) states that DHCR “shall not require disclosure of any income information other than whether the aforementioned threshold has been exceeded.” Tax Law § 171-b(3)(b) is to the same effect. Enforcing these provisions, courts have held that it would be inconsistent with the statute to permit DHCR to request an actual tax return from a tenant {see e.g. Matter of Gijfuni Bros. vNew York State Div. of Horn. & Community Renewal, 293 AD2d 402, 403 [1st Dept 2002], Iv denied 99 NY2d 505 [2003]). DHCR’s own Operational Bulletin 95-3 states that during the income verification process, “[s]pecific income figures will not be disclosed or exchangecF (Compendium to Main Br., pp.10-21). DHCR nevertheless argues that it is free to “violate” all of this (DHCR Br., p. 40) where spouses file a joint return, but one spouse is absent from the apartment on the ICF service date. More specifically, DHCR asserts that it violated the anti-audit provisions because the procedure in the MOU- if actually followed -would have required DHCR to blindly accept “Tenant’s allocation without question” (DHCR Br., pp. 37, 40). In Foley v Bratton (92 NY3d at 787), this Court wrote: -9- RE\49426\0001\2245718v4 “It is not the function of the court, however, to declare one statute the victor over another if the statutes may be read together, without misdirecting the one, or breaking the spirit of the other. We conclude that the provisions may be reconciled agreeably, and that it does not require a high- wire statutory balancing act to discern a plausible legislative format.” (See also Matter of Goodman [Barnard Coll.], 95 NY 2d 15, 21 [2000]). DHCR’s high-wire balancing act breaks the spirit of the anti-audit provisions, as well as the as-reported and DTF exclusivity provisions. Tenant argues that DHCR’s authority to demand confidential tax information is not at issue because Tenant voluntarily submitted her confidential tax documents to DHCR (Tenant Br., p. 6). It is the Legislature, however, that determines what DHCR can demand or review. Here, the Legislature created an income verification procedure that directs “DHCR only to check [income] upon [a landlord’s] appeal and not to check anything else but whether or not the records of the state reflect an income that’s greater than the eligibility limit” (Governor’s Bill Jacket, L 1993, ch 253). Neither DHCR nor an individual tenant should be allowed to override the Legislature’s clearly expressed intent. C. Apportionment Nullifies the DTF Exclusivity Provision CRL § 26-403.1(c)(2) states that an apartment will be deregulated where “the department of taxation and finance determines that the total annual income is in excess of the deregulation income threshold.” Thus, DTF-not DHCR-is to verify - 10- RE\49426\0001\2245718v4 income, and has the final word as to whether a tenant’s income exceeds the threshold for deregulation. DHCR argues that it “used the Tenant’s IRS transcript ... to confirm DTF’s finding that the Tenant’s income was below the statutory threshold” (DHCR Br., p. 39). The statute does not authorize DHCR to “confirm” DTF’s findings. As DHCR wrote in Matter of 737 Park Ave. Acquisition, LLC (DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued January 20, 2013): “DHCR is not authorized to make its own independent determination of what a tenant’s income is. The DHCR is required by statute to rely on the findings reported by DTF in determining whether the subject apartment qualifies for high income rent deregulation” (R. 321-22). DHCR also asserts that “after DTF verified” Tenant’s income, DHCR, in turn, verified the “percentages submitted by the Tenant” (DHCR Br., p. 37). Those percentages, however, were meaningless unless DHCR also knew the joint income reported for 2004 and 2005, here, $200,831 and $228,823 (R. 136-37). CRL § 26- 403.1(b), however, states that DHCR is not entitled to “disclosure of any income information other than whether the aforementioned threshold has been exceeded.” Thus, DHCR could never lawfully have sufficient information to “confirm” DTF’s determination, or compute a tenant’s income. DHCR does not explain where it acquired the expertise to analyze IRS transcripts, tax returns, W-2 forms, 1098 forms, 1099 forms, and 5498 forms. Tenant - 11 - RE\49426\0001\2245718v4 argues that “it does not require any ‘expertise’ to read the name of the recipient/owner of income on tax backup documents or a federal tax transcript” (Tenant Br., 25). Certainly, it requires jurisdiction to do so, which the Legislature did not see fit to confer on DHCR. As to its lack of expertise, DHCR conceded that in Matter of Williamsburg Assets LLC (DHCR Adm. Rev. Dckt. No. XH-410008- RO, issued February 16, 2010), where it stated: “The owner, in effect, is requesting DHCR to independently investigate and determine the amount of the household income before issuing an order. Such a requirement would create an unreasonable administrative hardship, would force the DHCR to conduct inquiries and make income and tax determinations which it is not qualified to make, and is not authorized by law. DHCR does not have the requisite technical expertise to independently investigate or determine a tenant’s income or to be able to interpret the myriad technical provisions of the federal and state tax codes. This expertise lies with the federal and state tax authorities” (R. 330). Even if DHCR somehow acquired the expertise that it previously disavowed, nothing in the record before this Court establishes that DHCR correctly analyzed Tenant’s confidential tax information, which information DHCR has not disclosed to this Court or to Owner (DHCR Br., p. 11, n 7). Neither the statute nor common sense requires this Court to give DHCR the benefit of the doubt as to legal and factual findings outside of DHCR’s area of expertise. Stated another way, DHCR is not entitled to blind acceptance of its secret, expert calculations. - 12- RE\49426\0001\2245718v4 D. The Primary Residence Provision Cannot be Exalted over All Other Provisions in the Statute Respondents repeatedly observe that CRL § 26-403.1(a) and Tax Law § 171- b(3)(b) state that DTF shall compute “the annual incomes of all persons who occupy the housing accommodation as their primary residence.” They claim that apportionment is the only way to effectuate the primary residence provision where a joint return has been filed, but fail to harmonize apportionment with the as- reported, anti-audit, and DTF exclusivity provisions. Citing 315 E. 72nd St. Owners, Inc. v New York State Div. of Hous. & Community Renewal (101 AD3d 647 [1st Dept 2012]) and similar cases, Respondents argue that the First Department has held without exception that DTF cannot count the annual income of persons who do not primarily reside in an apartment on the ICF service date (DHCR Br., pp. 14-15, 33; Tenant Br. p. 14). As Owner has established (Main Brief, pp. 26-27), these cases do not apply herein because in none of them did the absent family member file a joint return with the tenant in occupancy. Absent a joint return, there is not even a question as to apportionment. The cited cases unremarkably hold that where a person did not primarily reside in the apartment on the ICF service date, and reported his or her income separately, that person’s annual income shall not be counted for purposes of luxury deregulation. No one disputes that, but those are not the facts herein. Here, - 13- RE\49426\0001\2245718v4 all of the federal AGI reported on Tenant’s joint returns is ascribable to her as a matter of law, and the occupancy of her husband on the ICF service date is irrelevant. As part of its campaign to declare the primary residence provision the victor over all others, DHCR cites CRL § 26-403(e)(2)(i)(10) for the proposition that primary residence is the sine qua non’ of the rent control law” (DHCR Br., p. 24). That provision has nothing to do with luxury deregulation, and merely states that tenants who do not primarily reside in a rent controlled apartment can be evicted. The CRL, however, also allows for the eviction of tenants who do primarily reside in their apartments, based on, for example, owner occupancy, demolition, and hardship (CRL §§ 26-408[b][l], [4], and 26-408[j]). Primary residence does not guarantee any rent controlled tenant the right to continued regulated status. Primary residence is a factor in luxury deregulation proceedings where the absent person has filed a separate return (see e.g. 315 E. 72nd Owners, Inc.,101 AD3d 647). CRL § 26-403.1, however, counts only the income of persons who primarily resided in the apartment on the ICF service date (see DHCR Operational Bulletin 95-3, Compendium to Main Br., pp.10-21). The income of a person filing a separate return who has been a primary resident for many years, but who moved out before the ICF service date, is not counted (see Chatsworth Realty Corp. v New York State Div. of Hous. & Community Renewal, 56 AD3d 371, 372 [1st Dept 2008]). Conversely, the income of a person who filed an individual return shall be - 14- RE\49426\0001\2245718v4 counted even if he or she only became a primary resident just before the ICF service date (see Doyle v Calogero, 52 AD3d 252, 252-53 [1st Dept 2008]). DHCR chides Owner for “attempting to add the income of a deceased person” (DHCR Br., p. 26), but that is exactly what DHCR did in Matter of Georgia Properties (DHCR Adm. Rev. Dckt. No. ET-4200054-RO, issued May 5, 2017; see Compendium, pp. 17-23). There, DHCR held that because the tenant’s husband was in occupancy on the ICF service date, his income should be counted even though he died thereafter. Although DHCR argues that primary residence is the be-all and end-all for purposes of luxury deregulation, CRL § 26-403.1(a) does not count the income of employees and legal subtenants who primarily reside in an apartment on the ICF service date ( see Main Brief, p. 42). The statute so provides because the Legislature recognized that the income of such persons does not inure to the benefit of the rent controlled tenant in occupancy; stated differently, employees and subtenants are not part of the tenant’s social and economic unit ( Angelo v Angelo, 74 AD2d 327, 331 [2d Dept 1980]). The same cannot be said of tenants in occupancy who file a joint return with an absent spouse and then demand that DTF, DHCR, and the courts treat the joint income as divisible, contrary to tax law. DHCR’s extensive reliance on Mitchell-Lama succession provisions (DHCR Br., pp. 27-29) is misplaced. This is not a succession case involving a Mitchell- - 15- RE\49426\0001\2245718v4 Lama apartment; it is a luxury deregulation proceeding involving a high-income tenant seeking to continue the rent controlled status of her Central Park West apartment. In a succession case, the occupant asserts that he or she is entitled to regulatory protection despite the permanent vacatur of the tenant of record. Ironically, Tenant herein claims that she is entitled to regulatory protection because the tenant of record permanently vacated. E. CRL § 26-403.1 Reflects the Legislature’s Finding that High-Income Tenants in High-Rent Apartments are not Entitled to Regulatory Protection Unable to establish that apportionment is consistent with the as-reported, anti¬ audit, and DTF exclusivity provisions, DHCR argues that apportionment, and rent regulation in general, is designed to protect tenants in occupancy due to “an acute shortage of dwelling units” (DHCR Br., p. 20). DHCR’s argument is without merit. At issue is the interpretation of CRL § 26-403.1, which the Legislature added pursuant to L 1993, ch 253, § 5. The Legislature enacted high-rent, high-income deregulation because (i) high-income tenants did not need rent regulatory protection and could afford market rents; and (ii) there was no shortage of vacant apartments renting for $2,000 per month or more: “A sound housing policy should be equitable to both tenants and owners. The current system is neither. This bill is a first attempt to restore some rationality to the system. The current rent regulation system provides the bulk of its benefits to high-income tenants. There is no reason why - 16- RE\49426\0001\2245718v4 public and private resources should be expended to subsidize rents for these households. The vacancy rate for apartments renting at $2,000 or more... exceeds 12.5% (2.5 times the statutory standard). Thus, there is clearly no ‘housing emergency’ for apartments renting for more than $2,000.” (Senate Introducer’s Mem in Support, 1993 NY Legis Ann at 175-76). The Legislature does not share DHCR’s solicitude for such tenants; indeed, the Legislature has enacted a comprehensive statutory scheme to divest them of regulatory protection and subsidized rents. As this Court wrote in Enright by Enright v Eli Lilly & Co. (77 NY2d 377, 385, n 1 [1991]): “[E]ven a remedial statute must be given a meaning consistent with the words chosen by the Legislature — those words define the scope of the remedy that the Legislature deemed appropriate. In our view, the role of the courts is to give effect not only to the remedy, but also to the words that delimit the remedy.” (see also Germantown Cent. Sch. Dist. v Clark, Clark, Millis & Gilson, AIA, 100 NY2d 202, 206 [2003]; Blanco vAm. Tel. & Tel. Co.,90 NY2d 757, 766-67 [1997]). F. The Comment Period in CRL § 26-403.1(c)(2) does not Authorize Apportionment Reviving an argument that both the First Department and Supreme Court rejected, DHCR asserts that the comment period set forth in CRL § 26-403.1(c)(2) implicitly authorizes apportionment, in that it recognizes that “there may be issues - 17- RE\49426\0001\2245718v4 such as occupancy which may not be answered through the income verification process” (DHCR Br., p. 32). Again, DHCR is wrong. CRL § 26-403.1(c)(2) states in relevant part: “If the department of taxation and finance determines that the total annual income is in excess of the deregulation threshold in each of the two preceding calendar years, the division shall, on or before November fifteenth of such year, notify the owner and tenants of the results of such verification. Both the owner and the tenants shall have thirty days within which to comment on such verification results.” Plainly, the Legislature designed the comment period to ensure due process by giving owners and tenants an opportunity to comment upon DTF’s income determination. The comment period does not authorize DHCR to ignore income as actually reported, conduct intrusive investigations, or usurp DTF’s statutory role. Moreover, the “comments” upon which DHCR relied herein — Tenant’s confidential submission and the IRS Transcripts — were not submitted as part of and during the comment period authorized by CRL § 26-403.1(c)(2). Tenant made the confidential submission to DHCR months before the agency, on October 23, 2007, forwarded to the parties its “Notice of Verification of Income Information and Opportunity to Comment” (R. 106). Tenant’s submission of the IRS Transcript was made pursuant to DHCR’s April 11, 2014 notice (R. 240), and was in the nature of a mandatory submission. It was not a “comment” upon a DTF verification that had been made almost seven years before. - 18- RE\49426\0001\2245718v4 POINT III THE APPORTIONMENT PROCEDURE THAT DHCR USED IS ULTRA VIRES THE STATUTE AND CANNOT BE RESCUED BY AN MOU Unable to establish that apportionment can be harmonized with the as- reported, anti-audit, and DTF exclusivity provisions, DHCR argues that because apportionment is authorized in the MOU, it must be legal. DHCR’s argument is without merit, and misapprehends the most basic tenets of administrative law. A. Owner Raised its Objection to the MOU before DHCR DHCR incorrectly alleges that Owner did not object to the MOU in the proceedings before DHCR (DHCR Br., p. 36). DHCR forwarded the MOU to the parties for comment on August 5, 2014. On August 15, 2014, Owner’s counsel responded to DHCR, stating: “Also unavailing is the November 1, 1994 MOU. The relevant portion of the MOU merely states that for cases where a tenant files a joint income tax return and one of the parties on the joint return is no longer in the apartment, DTF shall prepare for DHCR a form ‘to segregate the items of federal adjusted gross income of the nonresident spouse so those amounts will not be included in the income determination.’ As DHCR is aware, however, Owner’s position is that the relevant statutes do not authorize, or even mention, allocation, and instead require DTF to inform DHCR as to whether the federal AGI ‘as reported’ is over or under the income threshold. The statute does not permit the federal AGI as reported to be allocated or segregated in any way” (Compendium, pp. 13-16). - 19- RE\49426\0001\2245718v4 DHCR’s more general claim that it is too late for Owner to challenge the MOU is also without merit (DHCR Br., p. 36). Ignoring the fact that DHCR kept the 1994 MOU secret until 2014, Owner has timely challenged DHCR’s November 19, 2014 order herein. To the extent that DHCR’s order relies on an unlawful procedure set forth in the MOU, Owner’s challenge to that procedure is properly before this Court. B. An Administrative Agency can Never Promulgate a Rule or Regulation that is Ultra Vires the Governing Statute “It is a fundamental principle of administrative law that an agency cannot promulgate rules or regulations that contravene the will of the Legislature” (Weiss v City of New York, 95 NY2d 1, 4-5 [2000]). “Administrative agencies can only promulgate rules to further the implementation of the law as it exists; they have no authority to create a rule out of harmony with the statute” (Matter of Jones v Berman, 37NY2d42, 53 [1975]; see also Finger Lakes Racing Assn. vNew York State Racing & Wagering Bd., 45 NY2d 471, 480 [1978]). To the extent that a regulation conflicts with the statute, it is invalid (Weiss v City of New York, 95 NY2d at 5). Because the apportionment procedure in the MOU contravenes the as- reported, anti-audit, and DTF exclusivity provisions in the statute, it must fail. Respondents make various unavailing arguments to legitimize the MOU and its unlawful procedure. DHCR points to L 1993, ch 253, § 28, whereby the Legislature authorized DHCR to promulgate rules and regulations necessary to -20- RE\49426\0001\2245718v4 implement the 1993 amendments (DHCR Br., pp. 4-5). Even where broad rule- making authority has been granted, however, an agency cannot promulgate rules that contravene the will of the Legislature (see Matter of Beer Garden v New York State Liq. Auth., 79 NY2d 266, 276 [1992]). Respondent’s reliance on the Tax Law § 171-b(3)(a), which authorized DTF to promulgate rules and regulations, fails for the same reason. Although DHCR promulgated luxury deregulation rules (9 NYCRR Part 2211), as well as Operational Bulletin 95-3 (Compendium to Main Br., pp.10-21), neither says anything about apportionment. Rather than publish regulations subject to review and comment under the State Administrative Procedure Act, DHCR buried apportionment in a document that DHCR kept secret for 20 years and exhumed (in virtually illegible form [R. 402]) solely to defend its order herein. DTF, in contrast, has never promulgated rules relating to income verification. Respondents also rely on the fact that the Legislature authorized DTF “to enter into an agreement with the commissioner of the division of housing and community renewal” relating to income verification (see Tax Law § 171-b[3][a]). The Legislature intended that the MOU would govern inter-agency conduct and communications regarding income verification, not secretly create an unlawful procedure affecting the substantive rights of owners and tenants. An MOU that is -21 - RE\49426\0001\2245718v4 ultra vires the governing statute is invalid (see Schumer v Holtzman, 60 NY2d 46, 53 [1983]). Respondents assert that apportionment is lawful because, pursuant to Tax Law § 171-b(3)(a), DTF designed the apportionment worksheet, as well as that portion of the ICF that directs a tenant to supply uncorroborated apportionment percentages (DHCR Br., pp. 5-6, 16, 29-30, 35; Tenant Br., p. 21). The Legislature’s ministerial authorization cannot be construed as license to create a procedure that conflicts with the statute. DHCR also defends the MOU by observing that the “legislature has not acted since the MOU’s execution to change DHCR and DTF’s long standing procedures” (DHCR Br., p. 27). DHCR kept the MOU secret for 20 years, and admits that that there have been no prior apportionment cases (R. 489, 491). Legislative inactivity is inherently ambiguous and affords the most dubious foundation for drawing positive inferences (see Roberts v Tishman Speyer Props., L.P., 13 NY3d 270, 287 [2009]). Nor is there any proof that apportionment has been brought to the Legislature’s attention (id.). -22- RE\49426\0001\2245718v4 C. DHCR Abandoned the Apportionment Procedure in the MOU, and Substituted a Procedure that Led to Additional Statutory Violations DHCR’s reliance on the MOU is undermined by the fact that even DHCR realized that the MOU procedure was unlawful, causing DHCR to abandon it and engage in new violations of CRL § 26-403.1. The MOU states that where a tenant has filed a joint tax return and the other joint filer is out of occupancy, the tenant shall set forth in the ICF his or her percentage of the joint income (R. 402). The MOU does not require documentation or corroborating evidence. DHCR then directs DTF to multiply the tenant’s unverified percentages by the joint federal AGI as reported. DTF then informs DHCR whether the “apportioned” joint income is above or below the statutory threshold (R. 402). At that point, DHCR will grant or deny the owner’s application for deregulation. This is what DHCR initially did in the instant case, although DHCR, in both its December 5, 2007 and April 30, 2008 orders herein, claimed that it had not apportioned income (R. 107, 109). These orders misleadingly stated that the joint income reported by both Tenant and her husband was below $175,000 for the two years in question (id.). On remand, DHCR recognized that the “blind acceptance” procedure in the MOU would not survive judicial review. Administrative action is arbitrary and -23- RE\49426\0001\2245718v4 capricious, as a matter of law, unless the agency’s determination is supported “by proof sufficient to satisfy a reasonable [person]” (Matter of Pell v Board of Educ., 34 NY2d 222, 231 [1974]). A reasonable person would not be satisfied by a determination based on self-serving and uncorroborated “proof.” More specifically, this Court has held that DHCR cannot allow a tenant to evade luxury deregulation by virtue of DHCR’s “blind acceptance” of Tenant’s income claims, or any other practice that “invites abuse of luxury deregulation procedures” (Matter of Classic Realty LLC v New York State Div. of Hous. & Community Renewal, 2 NY3d 142, 146-47 [2004]). To avoid “blind acceptance,” DHCR created a new procedure whereby it asked Tenant for confidential tax documents, analyzed those documents, and purported to determine Tenant’s income. Even DHCR’s attorney, at oral argument before Supreme Court, conceded that DHCR’s conduct was not authorized by either the statute or the MOU: “DHCR subsequently, because it felt a little squeamish, because it never did this before, actually asked the tenant to get the federal transcript that was the 1099s to verify. The landlord wouldn’t know, but what DHCR did was actually conduct the very verification that you’re referring to. That’s when DHCR, and it isn’t provided by statute, it isn’t even provided by the memo of understanding, DHCR just felt compelled to verify the allocation, and that’s why -24- RE\49426\0001\2245718v4 they asked the tenant’s attorney to get this income” (R. 491,493). The MOU procedure violated the “as-reported” provision, and required DHCR and DTF to accept at face value a Tenant’s self-created percentages. To avoid these infirmities, DHCR (i) demanded confidential information from Tenant, thereby violating the anti-audit provisions; and (ii) affirmatively calculated Tenant’s income, violating the DTF exclusivity provision. None of this cured the original violation of the as-reported provision, in that DHCR based its determination on an income that was never reported to any tax authority. Worse still, DHCR has no expertise with respect to taxation, such that it has replaced blind acceptance with inexpert analysis. If DHCR and DTF believed that CRL § 26-403.1 did not adequately address circumstances like those herein, they should have sought relief from the Legislature. Creating a procedure that violates the statute and legislative intent was not an option. -25- RE\49426\0001\2245718v4 POINT IV RESPONDENTS MISSTATE THE STANDARD OF REVIEW DHCR incorrectly asserts that its determination had a rational basis, and that DHCR’s statutory interpretation is entitled to deference (DHCR Br., Point IV). The sole issue here is the proper interpretation of CRL § 26-403.1. Where the question is one of pure statutory reading and analysis, depending only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretative regulations (see Roberts v Tishman Speyer Props., L.P., 13 NY2d at 285; Matter of KSLM-Columbus Apts., Inc. v New York State Div. ofHous. & Community Renewal, 5 NY3d 303, 312 [2005]). DHCR’s regulatory “interpretation” boils down to DHCR’s assertion that under the circumstances herein, it was “neither irrational, nor contrary to law, for DHCR to violate its own rule” (DHCR Br., p. 40). Tenant erroneously asserts that DHCR’s order is supported by substantial evidence (Tenant’s Br., p. 16). That standard only applies where there has been an administrative hearing (see Colton v Berman, 21 NY2d 322, 329 [1967]), which is not the case herein. -26- RE\49426\0001\2245718v4 CONCLUSION The order of the First Department should be reversed, DHCR’s November 19, 2014 order should be annulled, and the matter should be remanded to Supreme Court with instructions to remand to DHCR for an order of deregulation. Respectfully submitted,Dated: New York, New York September 20, 2017 DAVIS WRIGHTJREMAINE LLP Attorneys for Petitioner-AppeUant By: VicWr A. Kovner 1251 Avenue of the Americas, 21st Floor New York, New York 10020-1104 (212)489-8230 victorkovner@dwt.com DUANE MORRIS LLP Attorneys for Petitioner-Appellant 1540 Broadway New York, New York 10036-4086 (212) 692-1028 tmewman@duanemorris.com ROSENBERG & ESTIS, P.C. Attorneys for Petitioner-Appellant 733 Third Avenue New York, New York 10017 (212) 867-6000 jturkel@rosenbergestis.com -27- RE\49426\0001\22457 18v4 LAW OFFICES OF CAROL M. LUTTATI Attorneys for Petitioner-Appellant 150 East 58th Street New York, New York 10155 (212) 829-0011 cluttati@aol.com VICTOR A. KOVNER THOMAS R. NEWMAN JEFFREY TURKEL CAROL M. LUTTATI Of Counsel -28- RE\49426\0001\2245718v4 CERTIFICATE OF COMPLIANCE I, Victor A. Kovner, an attorney for the appellant, hereby certifies that this brief is in compliance with Rule 500.13(c)(1). The brief was prepared using Microsoft Word 2010. The typeface is Times New Roman. The main body of the brief is in 14 pt. Footnotes and Point Headings are in compliance with Rule 500.1. The brief contains 5,738 words as counted by the word processing program. Dated: New York, New York September 20, 2017 Victor /V Kovner RE\49426\0001\2245718v4