James Square Associates LP, et al., Respondents,v.Dennis Mullen, Commissioner New York State Department of Economic Development, et al., Appellants.BriefN.Y.April 23, 2013To Be Argued By: Jonathan B. Fellows, Esq. Time Requested: 20 minutes Appellate Division, Fourth Department Docket Numbers: CA 11-00673 CA 11-00675 COURT OF APPEALS STATE OF NEW YORK JAMES SQUARE ASSOCIATES LP, MOHAWK GLEN ASSOCIATES, LLC, PIONEER FULTON SHOPPING CENTER, LLC, PIONEER MANAGEMENT GROUP, LLC, and WATERFRONT ASSOCIATES, LLC Plaintiffs-Respondents, -against- Dennis Mullen, as Commissioner ofNEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT, Jamie Woodward, as Commissioner ofNEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE Defendants-Appellants, BRIEF OF PLAINTIFFS-RESPONDENTS BOND, SCHOENECK & KING, PLLC Jonathan B. Fellows, Esq. Attorneys for Plaintifft-Respondents One Lincoln Center Syracuse, New York 13202 Telephone: 315-218-8000 Facsimile: 315-218-8100 1985861.1 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................................................ iii DISCLOSURE STATEMENT PURSUANT TO SECTION 500.l ..................... vi PRELIMINARY STATEMENT ........................................................................... ! QUESTIONS PRESENTED ................................................................................. 4 STATEMENT OF THE CASE ............................................................................. 5 A. The Empire Zone Program .................................................................. 5 B. The 2009 Amendments ....................................................................... 6 C. The Executive Branch's Implementation of the 2009 Empire Zone Amendments ......................................................... 8 D. The Senate Clarification ............................................................... : ..... lO E. F. G. H. I. J. The Declaratory Judgment Action ..................................................... 11 The Supreme Court's First Decision .................................................. 12 The 2010 Amendments ...................................................................... 14 The Attorney General's Motion to Renew ......................................... 16 The Supreme Court's Second Decision ............................................. 16 The Fourth Department's Decision Affirming the Unconstitutionality of the Retroactive Application of the 2009 Amendments ........................................................................ 18 ARGUMENT ....................................................................................................... 21 I. THE LEGISLATURE DID NOT PROVIDE THAT DECERTIFICATIONS UNDER THE 2009 EMPIRE ZONE AMENDMENTS WOULD BE RETROACTIVE WHEN IT ADOPTED THEM IN APRIL 2009 ........................................ 21 A. Supreme Court correctly held that the Legislature did not provide for retroactive application of the 2009 Empire Zone Atnendments ....................................................................................... 22 B. The Retroactive Provision in the 2010 amendments was not a "Clarification", but was new legislation ................................... 28 1985861.1 II. THE RETROACTIVE DECERTIFICATION OF THE PLAINTIFFS AS EMPIRE ZONE ENTERPRISES IS UNCONSTITUTIONAL .......... 31 A. The plaintiffs-respondents had no forewarning of amendments to General Municipal Law Section 959 .................................................. 40 B. The period of retroactivity is unreasonable ........................................ 46 C. There is no legitimate public purpose for retroactive application of the 2009 Amendments ................................................ 4 7 CONCLUSION .................................................................................................... 52 11 1985861.1 TABLE OF AUTHORITIES Page CASES Beck v. Graves, 280 N.Y. 405 (1939) ..................................................................................................... 38, 39 Clarendon Trust v. State Tax Commission, 43 N.Y.2d 933 (1978) ............................................................................................ 38, 43, 51 Eastern Enterprises v. Apfel, 524 u.s. 498 (1998) ........................................................................................................... 32 General Motors Corp. v. Romein, 503 u.s. 181 (1992) ........................................................................................................... 32 In re Yarrington Corp. v. City ofNew York Dep't of Fin., 85 N.Y.2d 28 (1995) ......................................................................................... 33, 36, 37, 51 James Square Associates, L.P. v. Mullen, 91 A.D.3d 164 (4th Dept. 2011) .............................................................................. passim Landgrad v. USI Film Prod., 511 u.s. 244 (1999) ........................................................................................................... 32 Majewski v. Broadalbin-Perth Central School District, 91 N.Y.2d 577 (1998) ........................................................................................... .25, 26, 29 Matter of Bright Homes v. Weaver, 7 A.D.2d 352 (1959), aff'd 6 N.Y.2d 973 (1959) ....................................................... 30 Matter of Capital Finance Corp. v. Commissioner of Taxation and Finance, 218 A.D.2d 230 (3d Dept. 1996), appeal dismissed, 88 N.Y.2d 874 ............ .42, 45 Matter of Chrysler Properties v. Morris, 23 N.Y.2d 515 (1969) .................................................................................................. 38,43 Matter ofLacidem Realty Corp., 288 N.Y. 354 (1942) ........................................................................................................... 38 111 1985861.1 Matter ofNeuner v. Weyant, 63 A.D.2d 290 (2d Dept. 1978), appeal dismissed, 48 N.Y.2d 975 (1979) ........ .44 Matter of Replan Development, Inc. v. Department of Housing Preservation and Development, 70 N.Y. 2d 451 (1987) ................................................................................................. 37, 51 Matter of Roosevelt Raceway v. Monaghan, 9 N.Y.2d 293 (1961), appeal dismissed, 368 U.S.12 (1961) ............................ .42, 43 Matter of WL, LLC v. Department of Economic Development, _A.D.3d_(3dDept., May 3, 2012) ............................................................. passim Morales v. Gross, 230 A.D.2d 7 (2d Dept. 1997) ......................................................................................... 22 Oregon v. Hass, 420 u.s. 714 (1975) ........................................................................................................... 33 Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 u.s. 717 (1984) ............................................................................................... 33, 36,49 People of the State ofNew York v. Isaacson, 44 N.Y.2d 511 (1978) ........................................................................................................ 33 People v. Brooklyn Garden Apartments, 283 N.Y. 373 (1940) ........................................................................................................... 43 People v. Singer, 44 N.Y.2d 241 (1978) ........................................................................................................ 33 United States v. Carlton, 512 U.S. 26 (1994) ...................................................................................................... passim Welch v. Henry, 305 u.s. 134 (1938) ..................................................................................................... 38, 49 iv 1985861.1 STATUTES Chapter 57 ofthe Laws ofNew York, Part S-1, § 44 ...................................... 6, 14, 23,24 General Municipal Law § 956 ................................................................................................. 5 General Municipal Law§ 959 ................................................................. 6, 7, 9, 15, 24, 27, 40 General Municipal Law § 960 ................................................................................................. 9 General Municipal Law § 966 ................................................................................................. 5 Article 18-B ofthe New York General Municipal Law ................................................... 5 OTHER AUTHORITIES 5 N.Y.C.R.R. Part 13 ............................................................................................................ 9, 48 5 N.Y.C.R.R. § 11.9 ................................................................................................................. 48 v 1985861.1 DISCLOSURE STATEMENT PURSUANT TO SECTION 500.1 James Square Associates, LP is a limited partnership, and therefore has no parents, subsidiaries, or affiliates. Mohawk Glen Associates, LLC, Pioneer Fulton Shopping Center, LLC, Pioneer Management Group, LLC and Waterfront Associates, LLC, are all limited liability companies, and therefore also have no parents, subsidiaries, or affiliates. Dated: May 7, 2012 BOND, SCHOENECK & KING, PLLC na afl . Fellows, Esq. A rneys for Plaintifft-Respondents One Lincoln Center Syracuse, New York 13202 Telephone: 315-218-8000 Facsimile: 315-218-8100 Vl 1985861.1 PRELIMINARY STATEMENT Despite the Attorney General's statements, this case is not simply about retroactive application of new tax legislation. As Supreme Court recognized, the State of New York entered into agreements with the plaintiffs-respondents, which have now been retroactively revoked. Accordingly, this case presents the issue of whether the State ofNew York may retroactively revoke agreements it made with each of the plaintiffs-respondents. Each of the plaintiffs-respondents was a certified business under the State's Empire Zone Program. In April2009, the Legislature adopted amendments to the criteria for participation in the Empire Zone Program. When the Governor proposed the Empire Zone Amendments, he included language specifically providing that decertifications under the new criteria would be retroactive to January 1, 2008. The Legislature, however, removed the Governor's retroactivity language with respect to decertifications under the new criteria. Notwithstanding the removal of the retroactivity language, the Department of Taxation and Finance and the Department of Economic Development construed the April 2009 Empire Zone Amendments to be retroactive to January 1, 2008. In June 2009, the Commissioner of Economic Development decertified each of the plaintiffs-respondents retroactive to January 1, 2008. The plaintiffs-respondents therefore brought this declaratory 1985861.1 judgment action seeking only a declaration that the April 2009 Amendments were not retroactive, and that any retroactive application of them would be unconstitutional. Supreme Court issued a declaration in June of201.0 that the Legislature had not provided for the 2009 Empire Zone Amendments to be retroactively applied. Thereafter, in August 2010, the Legislature adopted new legislation, specifically providing that the 2009 Empire Zone Amendments should be retroactively applied to January 1, 2008. In a second decision, Supreme Court found that the purported "clarification" of the 2009 Empire Zone Amendments was in fact new legislation that affected an unconstitutional taking. The Court therefore reaffirmed its prior declaration. The Fourth Department held that in light of the August 2010 "clarification," the Legislature did intend for the 2009 Empire Zone Amendments to be applied retroactively. However, the Fourth Department found that "defendants have failed to explain what legitimate public purpose is served by retroactive application of the 2009 amendments." In the "absence of a persuasive reason for retroactivity," the Fourth Department held that retroactive application was unconstitutional. The record shows that the only purpose of retroactive application of the 2009 Empire Zone Amendments was to raise additional 2 1985861.1 revenues. This is not a sufficient reason for retroactively decertifying businesses that agreed to operate in Empire Zones, and the decision below should be affirmed. The holding of the Fourth Department in this case has now been followed by the Third Department in Matter of WL, LLC v. Department of Economic Development,_ A.D.3d _(3d Dept., May 3, 2012), which likewise held that the 2009 Empire Zone Amendments "may only be prospectively applied." 3 1985861.1 QUESTIONS PRESENTED 1. Whether the Legislature provided that the 2009 Amendments to the Empire Zone Program should be applied retroactively to January 1, 2008, when it enacted them in April 2009. Supreme Court held that the Legislature did not intend the 2009 Empire Zone amendments to be applied retroactively when it enacted them in April 2009. The Fourth Department, relying on the August 2010 "clarification", held that the legislature did intend the 2009 Empire Zone amendments to be retroactively applied. 2. Whether the retroactive decertification of plaintiffs-respondents under the 2009 Empire Zone Amendments constituted an unconstitutional taking of property. Both Supreme Court and the Appellate Division held that the retroactive decertification of plaintiffs-respondents was unconstitutional. 4 1985861.1 STATEMENT OF THE CASE A. The Empire Zone Program In 1986, the State Legislature enacted the New York State Economic Development Zones Act (the "Empire Zone Program"), which was codified at Article 18-B of the New York General Municipal Law. The Empire Zone Program was New York's primary program to stimulate economic growth in economically distressed areas. The Empire Zone Program offered a variety of state tax incentives designed to attract new businesses to New York State and to enable existing businesses to expand and create more jobs. General Municipal Law § 956. Under the Empire Zone Program, the State designated certain economically depressed areas as "Empire Zones." Thereafter, a business located in an Empire Zone could apply to the State for certification under the Empire Zone Program. A certified business may be entitled to claim certain tax credits. R. 30- 31; General Municipal Law § 966. The plaintiffs-respondents in this action are five different businesses that applied for participation in the Empire Zone Program. Each business was certified under the Empire Zone Program and was issued a Certificate of Eligibility by the State ofNew York. R. 112-17. The plaintiffs-respondents are located in the Syracuse, Rome, Buffalo and Fulton Empire Zones. The Certificates of Eligibility each stated that the enterprise's eligibility shall 5 1985861.1 continue in effect until terminated by operation of law or by action taken pursuant to such laws, rules and regulations as may be applicable. Each of the plaintiffs operated in their respective Empire Zones throughout 2008, and closed their books and records on that year after December 31, 2008. R. 159- 70. B. The 2009 Amendments On April 7, 2009, the Governor signed legislation including certain amendments to the Empire Zone Program in Chapter 57 ofthe Laws of2009 (hereinafter the "2009 Empire Zone Amendments"). The 2009 Empire Zone Amendments contained two provisions most pertinent herein. First, the Legislature adopted new criteria under which the Commissioner of Economic Development could decertify businesses under the Empire Zone Program. These new provisions are now codified at Sections 959(a)(v)(5) and 959(a)(v)(6) of the General Municipal Law. Second, the Legislature required the Commissioner of Economic Development to review all certified businesses during 2009 to determine if they should be decertified under the new criteria. The requirement for a review of all businesses during 2009 is now codified at Section 959(w) of the General Municipal Law. In that review, the Commissioner would either decertify the business or issue the business a "retention certificate." 6 1985861.1 As initially introduced by the Governor in his Budget Bill in January 2009, the Bill contained a provision specifically providing that decertifications of Empire Zone enterprises under the 2009 Empire Zone Amendments would be retroactive to January 1, 2008. In particular, the Governor's proposed 2009 Budget Bill proposed to add language to Section 959(a) of the General Municipal Law providing that: With respect to any business enterprise decertified pursuant to subparagraph 6 of paragraph (ii) of this subdivision, that decertification (1) will be effective for taxable year beginning on or after January 1, 2008 and before January 1, 2009 and for subsequent taxable years for a business enterprise for which review is required to be conducted pursuant to subdivision (w) of this section in calendar year 2009 ... R. 141. The Legislature elected not to adopt the provisions in the Governor's 2009 Budget Bill set forth above providing that decertifications made pursuant to the required review by the Commissioner during 2009 would be retroactive to January 1, 2008. Accordingly, the Governor's proposed retroactivity language did not appear in the legislation as ultimately passed by the Legislature and signed by the Governor, or in the recodified Section 959(a) of the General Municipal Law. R. 64-65. 7 1985861.1 C. The Executive Branch's Implementation of the 2009 Empire Zone Amendments On April 15, 2009, the date many 2008 tax returns were due to be filed, the New York State Department of Taxation and Finance issued a memorandum setting forth guidance to taxpayers with respect to the Empire Zone Program. The Department of Taxation and Finance announced that it was interpreting the new criteria for decertifying businesses enacted in the 2009 Empire Zone Amendments to be retroactive to January 1, 2008. R. 39-42. The memorandum further stated that taxpayers could claim Empire Zone tax credits on their 2008 tax returns only if they attached an "Empire Zone Retention Certificate" to their tax return. However, no such "retention certificates" had been issued as of April 15, 2009, the date tax returns were due to be filed. R. 33-34. On or about June 17, 2009, the New York State Department of Economic Development issued new regulations regarding the Empire Zone Program, which likewise provided that the effective date of the decertification of certified businesses under the 2009 Empire Zone Amendments would be January 1, 2008. R. 34; 102-11. On June 29, 2009, the New York State Department of Economic Development issued a letter to each of the plaintiffs decertifying them from the Empire Zone Program. Each letter stated that the revocation was effective January 1, 2008, and that the revocation was being issued pursuant to the 2009 Empire 8 1985861.1 Zone Amendments and in particular Section 959(a)(v)(5) or Section 959(a)(v)(6) of the General Municipal Law. The letters were form letters, and contained no individualized analysis whatsoever of respondents' qualifications as Certified Empire Zone Businesses. R. 119-28. The 2009 Empire Zone Amendments provided that a business decertified pursuant to the 2009 Amendments could pursue a limited administrative appeal to the Empire Zone Designation Board. General Municipal Law§ 959(w). The Empire Zone Designation Board is composed of a combination of executive and legislative officials: the Commissioner of Taxation and Finance, the Director of the Budget, the Commissioner of Labor, two members to be appointed by the Governor, one member to be appointed by the president Pro Tern of the Senate and one member appointed by the Speaker of the Assembly. General Municipal Law§ 960(a). The appeal procedure set forth for the revocations under the 2009 Amendments is in stark contrast to the existing procedures for appealing revocation of certifications under the Empire Zone Program. See 5 N.Y.C.R.R. Part 13. Those provisions set forth procedures for pleadings, disclosure, an evidentiary hearing and a report and recommendation of a hearing officer to the Commission of Economic Development. No such procedural rights were afforded to plaintiffs-respondents in their appeals to the EZDB. 9 1985861.1 Four of the plaintiffs submitted such appeals of their decertification (Mohawk Glen, Pioneer Fulton, Pioneer Management Group and Waterfront Associates). Plaintiff-respondent James Square did not submit an appeal of its decertification. On February 2, 2010, the Empire Zone Designation Board upheld the decertifications of Pioneer Fulton and Waterfront Associates. It also upheld the decertification of James Square even though James Square had not submitted an appeal. R. 130-32. The Empire Zone Designation Board gave no reasons or analysis for its decision; it simply adopted a resolution denying the appeals of dozens of enterprises listed in an appendix. The appeals of Mohawk Glen and Pioneer Management were denied in October 2010. Although the Attorney General's brief contains extensive criticism of the Empire Zone Program as it existed prior to the 2009 Amendments, there has never been any suggestion that the plaintiffs-respondents were not properly certified as Empire Zone businesses under the Program as it existed prior to the 2009 Empire Zone Amendments. D. The Senate Clarification After the Executive Branch undertook its actions to interpret the 2009 Amendments as retroactive to January 1, 2008, the State Senate responded by passing a Bill on July 16, 2009, by a unanimous vote, to "clarify" that the 2009 Amendments were not intended to be applied retroactively. R. 460. The Senate 10 1985861.1 Bill provided that the "effective date of decertification shall not be earlier than the first day ofthe business entity's taxable year, beginning on or after January 1, 2009." R. 464. E. The Declaratory Judgment Action On October 7, 2009, plaintiffs-respondents filed this action seeking a declaration that decertifications under the 2009 Empire Zone Amendments may not be retroactively applied. The plaintiffs-respondents did not challenge their decertifications in this action. To the contrary, plaintiffs-respondents only sought a declaration that those decertifications could not be applied retroactively. R. 36-37. The defendants-appellants moved pursuant to CPLR 3 211 to dismiss on the ground that plaintiffs-respondents were required to exhaust their administrative remedies prior to seeking judicial relief. The Court denied that motion by order dated January 11,2010, and defendants-appellants thereafter served an answer. R. 44- 46. Both sides then moved for summary judgment. 11 1985861.1 F. The Supreme Court's First Decision On June 11, 2010, Supreme Court issued a decision granting summary judgment in favor of the plaintiffs. In its decision, Supreme Court stated as follows: It is well settled in New York that "statutes are presumptively prospective only, absent an express legislative intent to the contrary." Morales v. Gross, 230 A.D.2d 7, 9 (2d Dept. 1997). It is not difficult to understand the rationale for such a presumption. As the Morales Court points out, basic notions of fairness dictate that individuals should have notice of what the law is so that they may conform their conduct accordingly. Id. at 10. Moreover, the requirement that the Legislature clearly express its intent when the law is to be applied retroactively ensures that the Legislature will consider the adverse consequences of applying such legislation retroactively and will weigh it against the benefits of doing so. Id. Here, there is no clear indication from the Legislature that suggests §§ 959(a)(v)(5) and 959(a)(v)(6) were meant to be applied retroactively. In fact, plaintiffs have presented evidence that the Legislature intended the contrary; that these provisions specifically not be applied retroactively, but prospectively. Defendants urge that this Court view the statute in its entirety, as opposed to the specific provisions addressed by the plaintiffs, in order to discern where the former found its authority to apply§§ 959(a)(v)(5) and 959(a)(v)(6) retroactively. Indeed the statute should be viewed in its entirety, but this does little to avail the defendants in the present matter. As plaintiffs maintain, and this Court acknowledges, the issue presently before us is not whether the defendants had authority to decertify the plaintiffs, rather the issue is whether or not they had the authority to apply said decertification retroactively to 12 1985861.1 January 1, 2008. For the reasons that follow, this Court holds that they did not have such authority. Chapter 57 ofthe Laws ofNew York, Part S-1, § 44lays out the specific dates for when certain provisions of the 2009 amendments will take effect. Section 44 provides, "[T]his act shall take effect immediately ... "except for the specific dates laid out in the subsections. Chapter 57 ofthe Laws ofNew York, Part S-1, § 44 (emphasis added). For example, subsection (a) provides "sections eleven through twenty-two of this act shall apply to taxable years beginning on and after January 1, 2008." Chapter 57 ofthe Laws ofNew York, Part S-1, § 44(a) (emphasis added). This is the only provision which addresses sections that are meant to be applied retroactively to January 1, 2008. Nowhere in § 44 is a specific 'effective date' expressly laid out for the provisions in § 3, which contains the provisions at issue here,§§ 959(a)(v)(5) and 959(a)(v)(6). The Legislature could not have intended that the provisions of § 3 of the amendments would apply retroactively absent an explicit effective date. This conclusion is only bolstered by the fact that § 44 explicitly lists start dates for other sections of the amendments. Therefore, the only logical date when§§ 959(a)(v)(5) and 959(a)(v)(6) should have taken effect, was immediately upon the signing of the amendments into law by Governor Patterson, or April 7, 2009. The language and structure of the statute would likely be enough to find in favor of the plaintiffs, but the intent of the Legislature becomes even clearer when the legislative history of the 2009 amendments is given a closer look. The 2009 amendments, as originally introduced to the Legislature in the Governor's 2009-10 Budget Bill, actually included specific language providing that the new criteria laid out in§§ 959(a)(v)(5) and 959 (a)(v)(6) was to be applied retroactively back to January 1, 2008. However, the Legislature removed this language from these provisions as his Budget Bill for 2010-11 contains 13 1985861.1 R. 12-15. the same retroactive language originally in the proposed 2009-10 Budget Bill in an attempt to rectify the fact that the Legislature did not previously provide for retroactive decertification from the Empire Zone Program. Not only is there no express language in the 2009 amendments permitting retroactive application of §§ 959(a)(v)(5) and 959(a)(v)(6), but it is clear from the Legislative history of the amendments that the Legislature specifically omitted such language because it did not intend such criteria to be applied retroactively to businesses that were certified under the Empire Zone Program. The June 29, 2009 decertification of plaintiffs, which was applied by the defendants retroactively to January 1, 2008, was therefore without legal authority. G. The 2010 Amendments On August 11, 2010, two months after Supreme Court's first decision, the Legislature effectively reversed the Supreme Court's declaratory judgment when it enacted the 2010 Budget Bill as Chapter 57 ofthe Law ofNew York of 2010. R. 238. In Part R of the 2010 Budget Bill, the Legislature stated that it intended: to clarify and confirm that the amendments made to the General Municipal Law in Chapter 57 of the Laws of 2009 that require the revocation of certification of certain business entities previously certified under the Empire Zone's Program are intended to be effective for the taxable year in which the revocation of certification occurs ... and that such revocations of certification that occur in 2009 are deemed to be in effect for the taxable year commencing on or after January 1, 2008 and before January 1, 2009. 14 1985861.1 R. 258. The Legislature implemented this "clarification" by amending Section 959 of the General Municipal Law to reinsert the very language the Governor had originally proposed for the 2009 Empire Zone Amendments, which the Legislature had removed in adopting the 2009 Empire Zone Amendments. R. 206. This August 2010 "clarification" was adopted: • Two months after the decision of the Supreme Court declaring that the 2009 Empire Zone Amendments had not been retroactive. • Ten months after the plaintiffs-respondents commenced this declaratory judgment action. • Thirteen months after the New York State Senate unanimously "clarified" that the 2009 Empire Zone Amendments were not to be applied retroactively. • Fourteen months after the defendants-appellants had revoked plaintiffs-respondents' certifications as Empire Zone businesses. • Sixteen months after the initial enactment of the 2009 Empire Zone Amendments. • Thirty-two months after the commencement of the tax year for which the 2010 Amendments were purportedly "clarifying" the rules of participation in the Empire Zone Program. 15 1985861.1 H. The Attorney General's Motion to Renew Based on the August 2010 "clarification" contained in the 2010 Budget Bill, the Attorney General filed a motion to renew defendants-appellants' prior summary judgment motion. R. 230-36. Plaintiffs-respondents opposed the motion to renew on the ground that the 2010 Amendments were not a "clarification", but constituted new legislation adopted in an attempt to reach back more than two and a half years to take away Empire Zone benefits and that such a retroactive decertification would be unconstitutional. R. 3 97-40 1. I. The Supreme Court's Second Decision In a decision issued on January 14, 2011, the Supreme Court granted defendants-appellants' motion to renew based on the new legislation, but upon renewal again denied their motion for summary judgment. Supreme Court rejected the assertion that the 2010 Amendments were a mere "clarification" and declared that the August 2010 legislation's attempt to reach back nearly three years to strip plaintiffs-respondents of their Empire Zone status was unconstitutional. R. 221-29. The Court stated in its decision: It does not escape this Court's attention that the August 11, 2010 "clarification" is the second such clarification of the 2009 amendments, the first being adopted unanimously by the Senate on July 16, 2009, which set forth that the amendments were to only be applied prospectively, not retroactively .... 16 1985861.1 * * * * ... It must be noted that this August clarification was passed in and about the same time that the Legislature and Governor struggled to pass what was one of the latest New York State Budgets in State history. * * * * The Respondents argue that the retroactivity of the amendments was only sixteen months (the date of passage of the original amendment, April 7, 2009 to January 1, 2008), and that case law exists that states that periods of retroactivity of one year to even eighteen months were upheld as constitutional because the periods of retroactivity were not unreasonably long. See Replan Development, Inc. v. Department of Housing Preservation and Development, 70 N.Y. 2d 451; Wittenberg v. City ofNew York, 135 A.D.2d 132. However, the period of retroactivity here is actually much longer than sixteen months. After this Court determined that the retroactive application of the amendments passed on April 7, 2009 was improper and that the amendments, as passed, did not provide for the retroactive application. It was not until August 11, 2010 that the Legislature passed a second so-called clarification of the April 7, 2009 Amendments that the limiting changes were to be applied retroactively. This was two years, eight months and eleven days past the date to which retroactivity was to extend. When the legislature enacted their August 11, 2010 in response to this Court's June 11, 2010 decision, it specifically made the amendments retroactive to January 1, 2008. On August 11, 2010, the legislature reached back two years, eight months and eleven days, and stripped those businesses that were affected by the amendments, including the Petitioners herein, of their Empire Zone tax credits; tax credits that had been worked into their books and figured into their bottom lines and 17 1985861.1 counted on for two years. During this period of time that the Petitioners would have developed business plans, made capital improvements, hired additional personnel, all in reliance on (and having the expectation of) having received the benefit of the "Empire Zone" benefits. This Court agrees with the Petitioners that this case does not present a mere matter of amendments to a tax statute. The Petitioners did not just read the existing tax law and rely on it when filling out their returns. The State of New York adopted the Empire Zone Program as an inducement to the Petitioners and others to operate in economically depressed zones in exchange for certain tax benefits. The Petitioners applied for these benefits and were accepted into the Program by the State with the promise that their eligibility would remain in effect until terminated by operation of law or by action taken pursuant to such laws, rules and regulations as may be applicable. The petitioners performed their obligations in accordance with the requirements of the Empire Zone Program as they existed prior to April 7, 2009. There has been no allegation that any of the petitioners were ineligible to participate under the criteria in existence prior to the enactment of the 2009 Amendments; in fact, the State certified each of the petitioners to participate. R. 225-228 (emphasis in original). J. The Fourth Department's Decision Affirming the Unconstitutionality of the Retroactive Application of the 2009 Amendments. The defendants-appellants appealed both decisions of Supreme Court, and the two appeals were consolidated. On November 18, 2011, the Appellate Division Fourth Department issued a decision affirming Supreme Court's declaration that the retroactive application of the 2009 Empire Zone Amendments 18 1985861.1 was unconstitutional. James Square Associates, L.P. v. Mullen, 91 A.D.3d 164 (4th Dept. 2011). The Fourth Department disagreed with the Supreme Court's initial declaration that the Legislature did not intend the 2009 Empire Zone Amendments to be applied retroactively. In doing so, the Fourth Department relied almost exclusively on the August 2010 "clarification" enacted by the Legislature. The Fourth Department's decision acknowledged that the Legislature has no authority "to declare, retroactively, that an existing statute shall receive a given construction when such construction is contrary to that which the statute would ordinarily have received." 91 A.D.3d at 171-72. However, the Fourth Department noted that "seemingly prompted" by the Supreme Court's initial declaration, "the Legislature acted swiftly to clarify the effective date in response to the court's initial decision." 91 A.D.3d at 172. Although the Fourth Department accepted the August 2010 legislation as a mere "clarification" of what the Legislature had intended in April 2009, the Fourth Department nonetheless found that retroactive application of the 2009 Empire Zone Amendments would be unconstitutional. In reaching this holding the Fourth Department noted: • "The time period at issue, measured from the enactment of the 2009 amendments, is approximately 16 months". 91 A.D.3d at 173; • "There is no indication in the record that plaintiffs had any warning that the criteria for certification of empire zones' 19 1985861.1 businesses were going to change, prospectively or retroactively, prior to April2009." 91 A.D.3d at 174. • "Further, and most significantly, it is undisputed that plaintiffs maintained their eligibility for Empire Zones' tax credits throughout the tax year beginning January 1, 2008 pursuant to the criteria then in effect. As the court observed, here plaintiffs did not merely rely on the continuing benefit of a tax statute ... but they were induced to conduct their businesses in a particular way in specified disadvantaged areas in reliance upon the availability of Empire zones' tax credits." 91 A.D.3d at 174. • "Finally, we conclude that defendants have failed to explain what legitimate public purpose is served by retroactive application ofthe 2009 Amendments." 91 A.D.3d at 174. Based on all of these findings, the Fourth Department concluded that retroactive application of the 2009 Empire Zone Amendments would be unconstitutional. 20 1985861.1 ARGUMENT POINT I THE LEGISLATURE DID NOT PROVIDE THAT DECERTIFICATIONS UNDER THE 2009 EMPIRE ZONE AMENDMENTS WOULD BE RETROACTIVE WHEN IT ADOPTED THEM IN APRIL 2009 The Fourth Department held that a sixteen month period of retroactive application, coupled with the absence of any "legitimate public purpose" for retroactive application, rendered the retroactive application of the 2009 Empire Zone Amendments unconstitutional. Although plaintiffs-respondents obviously agree with this holding, plaintiffs-respondents respectfully submit that the actual period of retroactive application is not the sixteen months measured from April 2009, but the thirty-two months from the adoption of the "clarification" in August 2010 back to January 2008. As Supreme Court concluded, the August 2010 legislation was not a "clarification" but a substantive act of legislation, in which for the first time the Legislature provided for retroactive application of the 2009 Empire Zone Amendments. Contrary to the conclusion of the Fourth Department, prior to August 2010 the Legislature had not clearly provided for retroactive application of decertification under the 2009 Empire Zone Amendments. 1 1 In Matter ofWL, LLC v. Department of Economic Development,_ A.D.3d _(3d Dept., May 3, 2012), the Third Department followed the Fourth Department's holding that retroactive application of the 2009 Empire Zone Amendments was unconstitutional, but unlike the Fourth Department, concluded "that these amendments, when enacted in April 2010, were not made retroactive until August 2010." 21 1985861.1 A. Supreme Court correctly held that the Legislature did not provide for retroactive application of the 2009 Empire Zone Amendments. The general rule in New York is that statutes are presumptively prospective only, absent an express legislative intent to the contrary. See,~, Morales v. Gross, 230 A.D.2d 7 (2d Dept. 1997). In Morales, the court stated: Analysis begins with the well-settled principle that statutes are presumptively prospective only, absent an express legislative intent to the contrary .... Indeed, the presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic. Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and conform their conduct accordingly; settled expectations should not be lightly disrupted ... Significantly, the principle requiring a clear legislative expression that retroactive application was intended is an important one, since such a statement constitutes evidence that the Legislature has affirmatively assessed the potential for unfairness created by retroactivity and concluded that it is an acceptable price to pay for the anticipated benefits. 230 A.D.2d at 9-10. Here, the Legislature clearly did not intend decertifications under the 2009 Amendments to be retroactive when it adopted them in April 2009. Rather than expressly calling for retroactive application of decertifications under the 2009 Empire Zone Amendments, the Legislature removed such language from the Governor's proposed bill, while retaining express retroactivity language for other provisions in the 2009 Empire Zone Amendments. R. 23, 141. 22 1985861.1 The 2009 Empire Zone Amendments were contained in Part S-1 of Chapter 57 ofthe Laws of2009. Section 1 of Chapter 57 of the Laws of2009 provides that: "The effective date for each particular provision contained within such Part is set forth in the last section of such Part." R. 57. Section 44 of the 2009 Amendments (Section 44 is the last section ofPart S-1 of Chapter 57 of the Laws of New York 2009) provides specific effective dates for some sections, as follows: R. 78. This act shall take effect immediately, provided, however, that: (a) sections eleven through twenty-two of this act shall apply to taxable years beginning on and after January 1, 2008; (b) sections thirty and thirty-one and sections thirty-four through forty-one of this act shall take effect on the first day of the sales tax quarter next commencing at least 60 days after this act becomes a law; and provided further that any refund or credit allowed pursuant to the amendments made by section thirty-one of this act may not be paid for that quarter for at least two hundred seventy days after this act becomes a law; (c) section thirty-three of this act shall take effect April 1' 2009; (d) section forty-two ofthis act shall take effect on January 1, 2012; and (e) the amendments to subdivision (u) of section 957 of the general municipal law made by section one of this act shall not affect the repeal of such subdivision and shall be deemed repealed therewith. 23 1985861.1 The provisions at issue here are all within Section 3 of the 2009 Empire Zone Amendments. Chapter 57 of the Laws ofNew York 2009, Part S-1, § 3 (R. 63-68). In particular, Section 3 of the 2009 Empire Zone Amendments added Section 959(a)(v)(5) of the General Municipal Law, which directs the decertification of certified businesses which had been certified prior to August 1, 2002, and had "caused individuals to transfer from existing employment with another business enterprise with similar ownership and located in New York State to similar employment with the certified business enterprise." Further, Section 3 of the 2009 Empire Zone Amendments added Section 959(a)(v)(6) ofthe General Municipal Law, which directs the decertification of certified businesses that failed a cost benefit analysis. Section 3 of the 2009 Amendments also added Section 959(w) of the General Municipal Law, which required the Commissioner of Economic Development to conduct a review during 2009 to determine if businesses should be decertified under the new criteria. Accordingly, as the Legislature specifically directed that certain sections of the 2009 Empire Zone Amendments would be retroactive to January 1, 2008, but did not include Section 3 of the 2009 Empire Zone Amendments, it is clear that the initial legislation did not call for retroactive decertifications. In the Fourth Department, the Attorney General argued that because the Legislature provided in Section 44 of the 2009 Empire Zone Amendments that 24 1985861.1 the legislation should take effect "immediately", the Court should find that the Legislature acted out of a sense of urgency and infer that retroactive application was intended. In Majewski v. Broadalbin-Perth Central School District, 91 N.Y.2d 577 (1998), this Court considered whether the amendments to the Workers' Compensation Law, which were adopted to overrule the prior decision of the Court of Appeals in Dole v. Dow Chemical, should be retroactively applied to pending actions. Just as is the case here, the Workers' Compensation Reforms stated that they should "take effect immediately." 91 N.Y.2d at 583. The Court of Appeals noted that this language "contributes little to our understanding of whether retroactive application was intended." 91 N.Y.2d at 584. This Court further noted that: It is a fundamental canon of statutory construction that retroactive operation is not favored by courts and statutes will not be given such construction unless the language expressly or by necessary implication requires it. 91 N.Y.2d at 584. This Court ruled that the Workers' Compensation Reforms should not be retroactively applied to pending lawsuits. Just as here, the legislation as originally proposed specifically provided that it should be applied retroactively to pending lawsuits, but that language did not appear in the statute as enacted: Importantly, we note that the initial draft of the Act expressly provided that it would apply to "lawsuits [that have] neither been settled nor reduced to judgment" by the date of its enactment (231 A.D.2d at 1 07). That language does not appear in the enacted version. A court 25 1985861.1 may examine changes made in proposed legislation to determine intent (see, United States v. St. Paul Minneapolis & Manitoba Ry. Co., 247 U.S. 310, 318; Woollcott v. Shubert, supra, 217 N.Y. at 221; People v. Korkala, 99 A.D.2d 161, 166 ["rejection of a specific statutory provision is a] significant consideration when divining legislative intent." Here, such evidence is consistent with the strong presumption of prospective application in the absence of a clear statement concerning retroactivity. 91 N.Y.2d at 587 (emphasis in original). Majewski is directly on point here and indicates that the Legislature did not call for the 2009 Empire Zone Amendments to be retroactively applied in April 2009. Indeed, the case is even stronger here, as Section 44 of the 2009 Empire Zone Amendments specifically called for retroactive application of certain provisions, but did not call for retroactive application of Section 3. The Attorney General asserted in the court below that the amendments to the Tax Law in sections 11 through 22 of the 2009 Empire Zone Amendments that were expressly made retroactive to January 1, 2008, would be meaningless if decertifications under the 2009 Empire Zone Amendments could not be applied retroactively. The Attorney General ignores the actual provisions of Sections 11 through 22 of the 2009 Empire Zone Amendments. These sections apply only to "carry over" credits. For example, section 11 of the 2009 Empire Zone Amendments amends the Tax Law to provide that: "Any carry over of a credit from prior taxable years will not be allowed if an empire zone retention certificate 26 1985861.1 is not issued pursuant to subdivision (w) of section nine hundred fifty-nine of the general municipal law to the empire zone enterprise which is the basis of the credit." R. 70. Likewise, the remaining sections (sections 11 through 22) in question all relate to "carry over" credits and state that tax credits may only be carried over if the business receives a "retention certificate." However, the plaintiffs-respondents did not seek a declaration that they could continue to carry over tax credits from prior tax years into tax year 2008 and beyond. Rather, plaintiffs-respondents only wish to use the tax credits they earned in 2008 on their 2008 tax returns, and tax credits they earned up to the time of their decertifications in 2009 on their 2009 returns. The complaint only sought a declaration that "Section 3 of the 2009 Amendments to the Empire Zone Program, which is set forth in Section 959(a)(v)(5) and Section 959(a)(v)(6) ofthe General Municipal Law, is prospective only and not retroactive to July 1, 2008." R. 36. Likewise, Supreme Court only declared that the "Section 3 of the 2009 Amendments ... is prospective only and not retroactive to January 1, 2008." R. 6-7. The amendments to the Tax Law regarding carry over credits are a separate matter from the issues in this case. The Attorney General also argued below that the Legislature intended retroactive application of decertifications under the new criteria in the 2009 Empire Zone Amendments because retroactive application of decertifications was 27 1985861.1 necessary to meet revenue projections in the 2009-1020 fiscal year budget. The Fourth Department relied in part on this argument, noting that "the legislative history of the amendments at issue suggests that they were intended, at least in part, to generate revenue during 2009 to 2010, revenue that would not be generated, if those amendments to be applied prospectively." 91 A.D.3d at 172. However, the only legislative history the Attorney General cited to was the Governor's Financial Plan. R. 181. The Legislature did not "adopt" this document as law; it is simply a summary of the financial projections of the Governor and his Director of the Budget. The Court should determine whether the Legislature intended retroactivity in April 2009 by reviewing the actual legislation proposed and then passed, not by drawing remote inferences from the Governor's revenue forecasts. B. The Retroactive Provision in the 2010 Amendments was not a "Clarification", but was new legislation. The August 2010 Act of the Legislature was nothing short of a legislative reversal of a Court's interpretation of a statute. The Supreme Court's determination that the initial legislation in April 2009 was not intended to be retroactive was supported by the following: (1) Legislation is presumptively prospective only, and the legislature must clearly show an intent for retroactive application. 28 1985861.1 (2) The legislation as initially proposed by the Governor specifically provided for retroactive application of decertifications under the Empire Zone amendments, but the Legislature removed this language when it enacted the 2009 Empire Zone Amendments. (3) The legislation as adopted in April 2009 specifically called for retroactive application of certain sections, but not for the section adopting new criteria for decertification of Empire Zone businesses. ( 4) The Legislature provided that the other provisions were to be effective "immediately." The Supreme Court properly relied on this Court's decision in Majewski v. Broadalbin-Perth Central School District, 91 N.Y.2d 577, 583 (1998), in which the Legislature had provided that a statute was to take effect "immediately," but the Legislature likewise removed express retroactivity language. (5) After the Commissioner of Economic Development and Commissioner of Taxation and Finance announced they would be applying the 2009 Empire Zone amendments retroactively to January 1, 2008, the Senate adopted a bill unanimously clarifying that the Legislature did not intend retroactive application of the 2009 Empire Zone amendments. R. 460. The Fourth Department correctly noted that: "The Legislature has no power to declare, retroactively, that an existing statute shall receive a given construction 29 1985861.1 when such construction is contrary to that which the statute would ordinarily have received." 91 A.D.3d at 171, quoting Matter of Roosevelt Raceway v. Monaghan, 9 N.Y.2d 293, 304 (1961), appeal dismissed, 368 U.S.12 (1961). See also Matter of Bright Homes v. Weaver, 7 A.D.2d 352, 358 (4th Dept. 1959), affd 6 N.Y.2d 973 (1959) ("The power to construe the laws is vested in the courts and not in a legislative body. Hence, such a body 'has no controlling power to retroactively declare that an existing statute shall receive a given construction when such a construction is contrary to that which the statute would ordinarily have received.'"). The Fourth Department found that these cases prohibiting retroactive "clarifications" of statutes by the Legislature were not applicable because "here the Legislature's retroactive construction is entirely consistent with the 2009 amendments." 91 A.D.3d at 172. Plaintiffs-Respondents respectfully submit that the Fourth Department's conclusion in this regard is incorrect. What the Fourth Department's analysis misses is the long tradition in common law jurisprudence that statutes are presumptively prospective only and that the intent of the legislature for a retroactive application must be clearly stated. As is set forth above, rather than stating an intent for retroactive application in April 2009, the Legislature removed such proposed language from the 2009 Empire Zone amendments. Indeed, it is curious that in July 2009 the State Senate unanimously adopted a bill "clarifying" 30 1985861 '1 that retroactive application was not intended for the April2009 Empire Zone amendments, but then reversed course in August 201 0 and adopted a bill "clarifying" that the 2009 amendments were intended to be retroactive. What the history shows is that the Legislature acted in August 2010 not to "clarify" what it had done fifteen months earlier, but agreed to a compromise in one of the latest budget bills in history in order to raise more revenue. Although plaintiffs- respondents are not unsympathetic to the fiscal challenges the Legislature was facing in August 2010, those challenges are not an excuse to rewrite history. Nor are they an excuse for the Legislature to overrule judicial interpretations such as that duly reached by the Supreme Court herein. In sum, the period of retroactivity before the Court is not simply the 16 months (which the Fourth Department found to be too long), but the 32 months from August 201 0 to January 2008. As is set forth in Point II, infra, the retroactive application for such a period is unconstitutional. POINT II THE RETROACTIVE DECERTIFICATION OF THE PLAINTIFFS AS EMPIRE ZONE ENTERPRISES IS UNCONSTITUTIONAL Both the Third and Fourth Departments have now held that the Legislature's August 2010 authorization of retroactive decertifications of Empire Zone businesses to January 1, 2008, was unconstitutional. As set forth in Point I, 31 1985861.1 above, Supreme Court correctly found that the Legislature was reaching back nearly three years when it adopted the August 2010 retroactivity provision. Even if the Legislature in August 2010 was merely "clarifying" what it intended in April 2009, and was only reaching back sixteen months to retroactively decertify plaintiffs-respondents, that retroactive decertification would still be unconstitutional. Although the Attorney General now seeks to rely primarily on federal law, the Attorney General's brief ignores that the United States Supreme Court has long disfavored retroactive statutes because "retroactive laws are, indeed generally unjust and, as has been forcibly said, neither accord with sound legislation nor with the fundamental principles of the social compact." Eastern Enterprises v. Apfel, 524 U.S. 498, 533 (1998) (citations omitted). Retroactive statutes "present problems of unfairness that are more serious than those posed by prospective legislation, because [they] can deprive citizens of legitimate expectations and upset settled transactions." General Motors Corp. v. Romein, 503 U.S. 181, 191 (1992). The due process clause of the United States Constitution "protects the interests in fair notice and repose that may be compromised by retroactive legislation." Landgrad v. USI Film Prod., 511 U.S. 244, 266 (1999). The Supreme Court has held that retroactive economic legislation must meet a burden not faced by legislation that has only prospective effects. 32 1985861.1 Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 730 (1984). The federal Constitution requires "that the retroactive application of the legislation is itself justified by a rational legislative purpose." I d. Retroactivity is rational if it is "modest" and "confined to short and limited periods required by the practicalities of national legislation." United States v. Carlton, 512 U.S. 26, 32 (1994) (quoting United States v. Darusmont, 449 U.S. 292,296 (1981)). Under New York's own due process clause, this Court may impose a higher standard than the federal constitutional provision. See Oregon v. Hass, 420 U.S. 714, 719 (1975); People ofthe State ofNew York v. Isaacson, 44 N.Y.2d 511, 519 (1978). Indeed, this Court has construed New York's right to due process as broader than the right to due process guaranteed by the federal constitution. People v. Singer, 44 N.Y.2d 241,253 (1978). Consequently, in addition to the test set forth by the Supreme Court in Carlton, this Court has noted that the constitutionality of a retroactive economic statute "turns on a 'balancing of the equities' by looking to see if there are any potentially harsh effects of applying the law retroactively to the taxpayer." In re Yarrington Corp. v. City ofNew York Dep't of Fin., 85 N.Y.2d 28, 33 (1995). Notably, this balancing test has been employed by this Court following the Supreme Court's decision in Carlton. See id. 33 1985861.1 The arguments in the Attorney General's brief are based on the flawed premise that this case is simply about the retroactive application of a change in the tax laws. As Supreme Court found, this premise is incorrect: This Court agrees with the Petitioners that this case does not present a mere matter of amendments to a tax statute. The Petitioners did not just read the existing tax law and rely on it when filling out their returns. The State of New York adopted the Empire Zone Program as an inducement to the Petitioners and others to operate in economically depressed zones in exchange for certain tax benefits. The Petitioners applied for these benefits and were accepted into the program by the State with the promise that their eligibility would remain in effect until terminated by operation of law or by action taken pursuant to such laws, rules and regulations as may be applicable. The Petitioners performed their obligations in accordance with the requirements of the Empire Zone Program as they existed prior to April 7, 2009. There has been no allegation that any of the Petitioners were ineligible to participate under the criteria in existence prior to the enactment of the 2009 amendments; in fact, the State certified each of the Petitioners to participate. R. 227-28. The Fourth Department agreed with Supreme Court: "The 2009 Amendments are not, strictly speaking, retroactive tax laws, i.e., they do not retroactively impose a new tax or increase an existing tax." 91 A.D.3d at 172-73. Likewise, in Matter of WL, LLC, the Third Department again rejected respondents' assertion that the case was simply about retroactive tax legislation: We do agree with petitioner that making its decertification retroactive to 2008 and, as a result, 34 1985861.1 depriving it of tax benefits and credits earned during the 2008 tax year, constitutes an unlawful taking of its property without due process of law. Contrary to respondents' contention, it is petitioner's certification as a participant in this program - and not the attendant tax benefits and credits - that are at issue in this proceeding and represent a property interest that is entitled to due process protection. Matter of WL, LLC, slip op. at 8 (emphasis added). Further the tax cases, whether under the federal or the New York constitution, do not support retroactive application of the 2009 Empire Zone Amendments. United States v. Carlton, 512 U.S. 26 (1994), heavily relied upon by the Attorney General, is distinguishable. In Carlton, Congress passed amendments to the federal estate tax law in October 1986. It was promptly noticed that there had been a drafting error in the 1986 amendments, and in December 1987 Congress passed a corrective amendment. The corrective amendment provided that it should be applied "as if it had been contained in the statute as originally enacted in October 1986." 512 U.S. at 29. The United States Supreme Court upheld the retroactive application of the corrective amendment because it was clearly shown in the record that Congress had made a simple drafting error in October 1986, and Congress acted promptly in December 1987 to correct the error. Thus, the case involved "only a modest period of retroactivity" and was necessary to correct a drafting error in the legislation. 512 U.S. at 33. The Supreme Court noted that retroactive tax legislation must be "confined to short and limited periods 35 1985861.1 required by the practicalities of producing national legislation." 512 U.S. at 33. In Pension Benefit Guaranty Corp. v. R. A. Gray & Co., 467 U.S. 717, 733 (1984), the Supreme Court upheld a period of retroactive application when Congress had amended pension provisions regarding withdrawals from multi-employer pension plans, and noted that certain employers had withdrawn from such plans while the legislation was under consideration, and therefore a modest period of retroactivity was appropriate to address these evasive measures. The Court of Appeals has upheld the retroactive application of new tax laws, but only where the balance of equities favors retroactive application, and there are no potentially harsh effects to the taxpayer from retroactive application. See, M·, Yarrington v. New York City Department of Finance, 85 N.Y.2d 28, 33- 34 (1995). In Yarrington, the Court of Appeals stated that retroactivity may be imposed only "for a short period," and that its constitutionality "turns on a 'balance of equities' by looking to see if there are any potentially harsh effects of applying the law retroactively to a taxpayer." 85 N.Y.2d at 33. In Yarrington, this Court upheld retroactive application of a new administrative tax rule. 85 N.Y.2d at 31- 32. This Court found there was no evidence the taxpayer had reasonably relied on any "long-established policy" contrary to the new rule. This Court stated: "Indeed, all of the evidence points in the opposite direction." 85 N.Y.2d at 35. Yarrington was decided by the Court of Appeals after Carlton, and the Court of 36 1985861.1 Appeals cited Carlton in it. 85 N.Y.2d at 33. Any suggestion by the Attorney General that the test set forth in Yarrington is no longer good law is thus misplaced. In Replan Development, Inc. v. Department of Housing, Preservation & Development ofthe City ofNew York, 70 N.Y.2d 451 (1987), the Court of Appeals held that the primary issue in considering whether the retroactive application of a tax amendment unconstitutionally deprives a taxpayer of due process is the reasonableness of the reliance of the taxpayer on the old law. 70 N.Y.2d at 455-56. In Replan, this Court upheld the retroactive application of an amendment repealing a locally-enacted tax credit for renovating certain housing units. The Court of Appeals noted that the taxpayer had forewarning of the repeal in advance, because the state authorization for the local program had expired. 70 N.Y.2d at 457. Because the period of retroactivity was only one year, and the taxpayer "could not have justifiably relied on the tax inducement as it existed in 1982," the Court of Appeals found that retroactive application was lawful. 70 N.Y.2d at 457. Replan is distinguishable because here the plaintiffs-respondents had no forewarning that they might be retroactively decertified, and they reasonably relied on their Certificates of Eligibility as Empire Zone Businesses. 37 1985861.1 In Clarendon Trust v. State Tax Commission, 43 N.Y.2d 933 (1978), the Court of Appeals found retroactive application of a new higher tax rate to be unconstitutional: Retroactive provisions in tax statutes, if for a short period, are generally valid, but the constitutional analysis must involve a balancing of equities. Arbitrariness in a tax statute, it has been held, deprives taxpayers of property without due process of law. Although a close question is presented, the apparent absence of a persuasive reason for retroactivity, with its potential harsh effects, offends constitutional limits, especially when the tax imposed is one which might exert significant influence on personal or business transactions. Also somewhat influential, but hardly determinative, is the lapse of an entire legislative session before the apparent "error" was corrected. 43 N.Y.2d at 934-35. In Matter of Chrysler Properties v. Morris, 23 N.Y.2d 515, 519-21 ( 1969), this Court held that retroactive application of an amendment allowing the City of New York to seek further review of a tax refund ordered by the State Tax Commission would be unconstitutional. In Matter ofLacidem Realty Corp., 288 N.Y. 354 (1942), the Court of Appeals invalidated the retroactive application of a new utility tax, while affirming the prospective application of the new tax. In Beck v. Graves, 280 N.Y. 405 (1939), the Court of Appeals found retroactive application of a new income tax to be invalid. The Court of Appeals distinguished Welch v. Henry, 305 U.S. 134 38 1985861.1 (1938), noting that in that case the state legislature had acted at the very next session to fix the statute in question. 280 N.Y. at 409-10. Accordingly, the Fourth Department below correctly set forth the factors this Court has considered in prior cases regarding retroactivity of tax legislation: "First, and perhaps predominant, is the taxpayer's forewarning of a change in the legislation and the reasonableness of his [or her] reliance on the old law ... This inquiry focuses on whether the taxpayer's reliance has been justified under all the circumstances of the case and whether his [or her] expectations as to taxation [have been] unreasonably disappointed ... The strength of the taxpayer's claim to the benefit may be significant if he [or she] has obtained a sufficiently certain right to the money prior to the enactment of the new legislation ... Second, "the length of the retroactive period often has been a crucial factor, and excessive periods have been held to unconstitutionally deprive taxpayers of a reasonable expectation that they will secure repose from the taxation of transactions which have, in all probability, been long forgotten." "Finally, the public purpose for retroactive application is important because of the taxing authority's legitimate concern that evasive measures taken after introduction of a bill but before enactment might frustrate the purpose of the legislation." 91 A.D.3d at 173, quoting Replan, 70 N.Y.2d at 456. Applying this standard, the Fourth Department correctly found that retroactive application of the 2009 Empire Zone Amnesty is unconstitutional. 39 1985861.1 A. The plaintiffs-respondents had no forewarning of amendments to General Municipal Law Section 959. The Fourth Department made the following factual conclusion based on the record: There is no indication in the record that Plaintiffs had any warning that the criteria for certification of Empire Zone's businesses were going to change, prospectively or retroactively, prior to April 2009. 91 A.D.3d at 174. Likewise, the Third Department held in Matter ofWL, LLC, "before these amendments were even introduced, there is no indication in the record that any of the EZP participants were on notice that the rules governing certification would be changed." Slip op, at 9. The Attorney General has not explained how this factual determination made on the basis of the record is a question of law to be reviewed by the Court of Appeals. The Attorney General moved for summary judgment in Supreme Court, and failed to submit any record evidence in support of the assertion that the plaintiffs-respondents had been forewarned that they could be retroactively decertified. The moving affidavit of Randal Coburn ofthe Department ofEconomic Development (R. 355-61) contains 40 1985861.1 no such evidence. 2 Each of the plaintiffs-respondents had applied to participate in the Empire Zone program, and had been issued a certificate of eligibility years earlier (Mohawk Glen received its certificate in 1999, James Square, Pioneer Management and Waterfront Associates received certificates in 2002 and Pioneer Fulton in 2003). R. 113-17. Rather than warning the plaintiffs-respondents that they might be retroactively removed from the Empire Zone Program and assessed back taxes, the certificates said their eligibility shall "continue in effect until terminated by operation of law." The Attorney General argues that "plaintiffs knew that the Legislature could repeal the Empire Zone program tax credits at any time, and that plaintiffs could have no claim against the State for continued tax benefits." Brief for Defendants-Appellants, at 26. The Attorney General misses the point: the plaintiffs-respondents are not challenging the prospective loss of tax credits due to a repeal of the program; to the contrary, they are challenging their retroactive 2 The statement of facts in the Attorney General's brief cites to two publications of the Comptroller's Office from 2004 and 2007, neither of which were included in the record, for the proposition that problems were identified in the Empire Zone program prior to 2009. Any argument by the Attorney General that these reports put certified Empire Zone businesses on notice that they might be retroactively decertified years later is without merit. Neither of these reports proposes any legislation remotely similar to the 2009 Empire Zone Amendments; more particularly, neither recommends the amendments to the criteria for Empire Zone eligibility enacted years later, and neither recommends the mass retroactive decertification of certified Empire Zone businesses implemented by defendants in June 2009. 41 1985861.1 decertification from the Empire Zone program, and the resulting loss of tax credits for a year that had already been closed. In any event, the Attorney General's argument proves too much: under his argument a taxpayer could never have a reasonable expectation, as the Legislature always has the authority to amend the tax laws; nevertheless the Court of Appeals has struck down retroactive tax legislation that violates a taxpayer's reasonable expectation. The Attorney General's arguments that the New York Constitution prohibits "taxpayers from claiming any vested right in the continuation of tax credits, exemptions or beneficial rates" (Brief for Defendants-Appellants, at 24), likewise misses the point. Again, plaintiffs-respondents are not seeking "a continuation of tax credits"; nor are plaintiffs-respondents challenging the prospective termination of their Empire Zone certification. Likewise, the Attorney General's reliance on Matter of Roosevelt Raceway, Inc. v. Monaghan, 9 N.Y.2d 294, 307 (1961), is misplaced. In that case, the Legislature only took away prospective tax credits and did not reach back into prior tax years. In fact, the Court of Appeals in Roosevelt Raceway noted that: A retroactive change affecting Roosevelt's tax liability for years prior to·1959 might well be invalid. However, when considered in its context, the 1959 enactment will be seen to be entirely prospective in its operation . . . . the statute will not have such an effect. It will not require Roosevelt to pay in taxes for the years 1957 and 42 1985861.1 1958 pending more that it has already paid under Section 45-A before its amendment. 9 N.Y.2d at 310. The record here shows the exact opposite. In its August 2010 "clarification," the Legislature provided that the decertifications under the 2009 Empire Zone Amendments are to be retroactively applied. It is undisputed that the Department of Taxation and Finance has disallowed tax credits and assessed taxes for 2008 based on those decertifications, thus applying the 2009 Empire Zone Amendments retroactively. R. 36, 161-62. The Attorney General's assertion that a taxpayer may never reasonably rely on a legislatively-enacted tax exemption is thus contrary to New York law. To the contrary, as in Clarendon Trust and Matter of Chrysler, New York courts have repeatedly struck down retroactive legislation that takes away tax exemptions. See also People v. Brooklyn Garden Apartments, 283 N.Y. 373, 380 (1940) ("exemptions from taxation which have induced action and reliance thereon, as the defendant may well contend that the exemption here has done, may not be invalidated by subsequent legislation"). The Attorney General has not cited a case even remotely similar to this case, in which the taxpayer did not simply rely on the tax law, but was specifically certified by the State to receive the exemption. The New York cases relied on by the Attorney General are not dispositive of this case and do not support the Attorney General's broad assertion that a taxpayer may never 43 1985861.1 reasonably rely on an exemption. For example, in Matter of Neuner v. Weyant, 63 A.D.2d 290 (2d Dept. 1978), appeal dismissed, 48 N.Y.2d 975 (1979), the Legislature enacted in 197 4 a limited property tax exemption for forest lands that were being held for timber production. The taxpayer applied for the exemption for 197 5, but five days after the time actual assessments were made for 197 5, the Legislature adopted legislation delaying implementation of the limited exemption. Thereafter, in 1976, the Legislature rewrote the requirements for the limited exemption for forest lands, and petitioner's property no longer qualified. The Appellate Division upheld the retroactive application of the legislation removing the limited exemption because the retroactive period was only five days. Further, the taxpayer did not show any reliance on the initially enacted exemption. 63 A.D.2d at 302-04. The court noted that the focus remains whether "the taxpayer's expectation as to taxation has been unreasonably disappointed." 63 A.D.2d at 300. Nothing in Neuner calls into question the multiple decisions of the Court of Appeals stating that retroactive revocation of a tax exemption is unconstitutional where the taxpayer has reasonably relied on the statutory scheme. The Attorney General's reliance on Matter of Capital Finance Corp. v. Commissioner of Taxation and Finance, 218 A.D.2d 230 (3d Dept.), appeal dismissed, 88 N.Y.2d 874 (1996), is likewise misplaced. Matter of Capital Finance involved a 1986 amendment to the Tax Law which provided that mortgage recording tax credits 44 1985861.1 could not be carried over to taxable years beginning on or after January 1, 1986. 218 A.D.2d at 232. Nothing in the opinion indicates that the taxpayer asserted it had relied on the existence of carry over tax credits, and the period of retroactive application was of course limited to the year in which the amendment was adopted. This case is a prototypical example of plaintiffs-respondents reasonably relying on a statutory scheme for tax exemptions. The plaintiffs- respondents did not simply read the existing tax law of the State ofNew York and rely on it in filing their returns. To the contrary, the State ofNew York adopted the Empire Zone program as an inducement to plaintiffs-respondents and other businesses to operate in depressed zones of the State in exchange for certain benefits. Each plaintiff-respondent applied for such benefits to the State. Each plaintiff-respondent was then issued a certificate by the State which provided: R. 426-30. Such eligibility shall remain in effect ... and continue in effect until terminated by operation of law or by action taken pursuant to such laws, rules and regulations as may be applicable. In short, the State promised each plaintiff-respondent that its eligibility would remain in effect "until terminated by operation of law or by action taken pursuant to such laws." The earliest the State could argue that such eligibility was terminated "by operation oflaw" would be June 29, 2009, the date the Department of Economic Development revoked their certifications. 45 1985861.1 Each of the plaintiffs-respondents relied on its Empire Zone certifications and operated in their respective Empire Zones during 2008. The plaintiffs-respondents' applications for Empire Zone certification, and the State's issuance of certificates thereupon, constitutes a contract, as well as a property right, which cannot be retroactively stripped. The plaintiffs-respondents performed their obligations by conducting their businesses in Empire Zones in accordance with the requirements of the Empire Zone Program as they existed prior to April 7, 2009. Retroactively taking away those benefits when plaintiffs-respondents fully performed in reliance on their certifications as Empire Zone businesses is an unconstitutional impairment of contract and violation of due process. B. The period of retroactivity is unreasonable. The period of retroactivity here, whether measured from April 2009 or August 2010, is unreasonable. It is undisputed that the plaintiffs-respondents had operated in their distressed Empire Zone locations through 2008 in reliance on their certifications, and reaching back into a closed year is unreasonable. The fact that it took until August 2010 for the Legislature to "clarify" that decertifications should be retroactive to January 1, 2008, confirms the unreasonableness of the defendants-appellants' conduct. Moreover, as the Fourth Department stated, "whether that period is excessive, in our view cannot be resolved in the abstract, but only in light of the other factors, i.e., notice and reliance." 91 A.D.3d at 173. 46 1985861.1 As is set forth above, plaintiffs-respondents had no notice of the prospect that there would be retroactive decertifications, and as they applied for and received certificates of eligibility, there can hardly be a stronger case for reasonable reliance. In this context, the 32 months from January 2008 until the Legislature finally "clarified" its intent is unreasonable. C. There is no legitimate public purpose for retroactive application of the 2009 Amendments. The Fourth Department stated: "Finally, we conclude that defendants have failed to explain what legitimate public purpose is served by retroactive application of the 2009 amendments." 91 A.D.3d at 174. Nor has the Attorney General identified in his brief any compelling reason why the 2009 Empire Zone Amendments had to be retroactively applied. Although the Attorney General has asserted that the 2009 Amendments were enacted because of perceived problems with the Empire Zone program, there has been no allegation that any of the plaintiffs were ineligible to participate under the criteria in existence prior to the enactment of the 2009 Empire Zone Amendments. The Attorney General's suggestion that public policy requires retroactive decertifications because the plaintiffs-respondents did not fulfill their obligations under the Empire Zone Program is not supported anywhere in the record. To the contrary, the State certified each of the plaintiffs-respondents to participate. If any of the plaintiffs- respondents were not fulfilling their obligations under the Empire Zone Program as 47 1985861.1 it existed before April 7, 2009, the Commissioner had the authority under the statute and regulations as they existed prior to April 7, 2009, to revoke their certificates. R. 109; 5 N.Y.C.R.R. § l1.9(a) (allowing the Commissioner to decertify business enterprises that failed to make investments it promised in its application or "failed to create new employment or prevent a loss of employment in the empire zone"). Such revocation, however, had to be accompanied by notice and a right to an evidentiary hearing. 5 N.Y.C.R.R. § 11.9(d); 5 N.Y.C.R.R. Part 13. These due process procedures are in stark contrast to the mass form letter decertifications on June 29, 2009, and the mass denials of appeals by the EZDB. The 2009 Empire Zone Amendments were not the type of "curative" amendments at issue in Carlton, in which Congress made a drafting error in 1986, and promptly corrected it in 1987. The plaintiffs-respondents had been participating in the program for years, and it is undisputed they met the criteria for participation under the existing statute. In April 2009, the Legislature was not promptly correcting some drafting error, but was adopting fundamental changes to the Empire Zone Program. That change in policy could be fully implemented by prospective application of the 2009 Empire Zone Amendments. As the Fourth Department stated: Plaintiffs were powerless to alter the conduct of their businesses for the tax year that ended before the 2009 amendments were introduced, and defendants offer no justification for retroactive application of the 2009 48 1985861.1 amendments apart from the additional revenue that the State would realize by retroactively eliminating tax credits for certain participants in the Empire Zones Program. That justification by defendants, balanced against the inequity to plaintiffs, is insufficient. 91 A.D.3d at 174. Likewise, the Third Department concluded in Matter ofWL, LLC: Moreover, it is difficult to understand how making this statute retroactive could act to address problems in the EZP that may exist or, more importantly, how that objective could possibly be served by severely penalizing an entity that has faithfully complied with the requirements of the program and legitimately earned its tax credits. As a result, we conclude that retroactive application of the April 2009 amendments constituted an unlawful taking of petitioner's property and, as such, violated its right to due process. Slip op. at 10. Nor is it akin to the situation in Welch v. Henry, 305 U.S. 134 (1938), where the Wisconsin State legislature took action at the next legislative session to amend the tax law in question. Here, the Legislature acted to change a policy that had been in place for years and which the plaintiffs-respondents had a reasonable expectation would not be retroactively eliminated. Nor is this case analogous to cases such as Pension Benefit Guaranty Corp., in which retroactive application of amendments was necessary because certain parties had taken evasive steps during the time the legislation was pending. As the Fourth Department noted: "This is not a situation in which 'evasive 49 1985861.1 measures taken after introduction of a bill but before enactment might frustrate the purpose ofthe legislation." 91 A.D.3d at 174. The record here, in which the Legislature first stripped the retroactivity language from the 2009 Empire Zone Amendments, one house then unanimously "clarified" that retroactive application was not intended, and a year later the Legislature "clarified" that retroactive application was intended, shows that there was no public policy reason for retroactive application. Rather, the August 201 0 "clarification" was adopted solely as part of a record overdue budget process and was only intended to raise revenue. As both the Third and Fourth Departments have concluded, balancing the budget is not a public policy rationale for retroactivity. 91 A.D.3d at 174; Matter ofWL, LLC, slip op. at 10. Further, the assertion of the Attorney General that the plaintiffs- respondents did not fulfill their obligations under the Empire Zone Program is belied by the fact that the retroactive decertification of the plaintiffs-respondents was done without even a semblance of due process. The June 29, 2009, decertification letters were simply form letters, with no reasons provided whatsoever other than a reference to the 2009 Empire Zone Amendments. The appeals to the EZDB did not provide plaintiffs-respondents any opportunity to be heard, or present evidence. Nor did the EZDB provide any findings of facts or reasons when it upheld the Department of Economic Development's form letter 50 1985861.1 decertifications. In sum, the State has taken away a vested property right, that it agreed to with each of the plaintiffs, without any due process, and has done so retroactively. Its actions are unconstitutional, and the declaratory judgments of the Court below should be affirmed. What the decisions of the Court of Appeals in Yarrington, Replan, and Clarendon Trust make clear is that the constitutionality of retroactive application of tax laws turns first and foremost on whether there has been reasonable reliance by the taxpayer. 85 N.Y.2d at 32-33; 70 N.Y.2d at 456, 43 N.Y.2d at 934-35. The record clearly shows such reasonable reliance. As the Third Department found in Matter ofWL, LLC: Also, there can be no doubt that petitioner, by fully complying with the laws then in place to obtain its certification, had every reason to assume that it would continue to enjoy the benefits of certification so long as it continued to comply with the provisions in the existing statutory enactments. When these amendments were enacted, the program had been in existence in one form or another for over 25 years, and petitioner had been a certified participant in it since 2000. Also, before these amendments were introduced, there is no indication in the record that any of the EZP participants were on notice that the rules governing certification would be changed. In fact, when these additional criteria for certification was first introduced, it was originally intended that they apply only to new entities seeking admission to the program, and not to entities already certified to participate in it (see L 2005, ch 63, part A [W] § 3). We also note that these amendments, when enacted in April 2009, were not made retroactive until August 2010- or well after the 2009 tax year had ended and petitioner, 51 1985861.1 while certified to participate in the program, had made decisions in its business that entitled it to certain tax benefits and credits (see Holly S. Clarendon Trust v State Tax Commn., 43 NY2d 933, 935 [1978], cert denied 439 US 831 [1978]). Given this history, petitioner had every reason to expect that as long as it retained its certification and complied with the requirements then in place for the program, it could make investments in its business, be they in the form of capital contributions or the employment of additional personnel, and rely upon the program's promise that it would receive commensurate tax relief. Slip op., at 9-10. Absent a compelling reason for retroactive application, the retroactive application of the 2009 Empire Zone amendments is unconstitutional. CONCLUSION The Appellate Division correctly upheld Supreme Court's declaration that the decertifications of plaintiffs-respondents may not be retroactively applied, and the judgments of the Court below should be affirmed. Dated: May 7, 2012 Respectfully, BOND, SCHOENECK & KING, PLLC onathan B. Fellows, Esq. Attorneys for Plaintiffs-Respondents One Lincoln Center Syracuse, New York 13202 Telephone: 315-218-8000 Facsimile: 315-218-8100 52 1985861.1 AFFIDAVIT OF SERVICE BY UPS OVERNIGHT STATEOFNEWYORK ) COUNTY OF ONONDAGA ) ss.: Jannette C. Heisler, being duly sworn, deposes and says: I am not a party to the action, am over 18 years of age and reside in Baldwinsville, New York. On the 7th day of May, 2012, I served three copies of the annexed Brief of Plaintiffs-Respondents, one copy of a disk containing the digital version of the annexed Brief of Plaintiffs-Respondents and a Statement Pursuant to Technical Specifications and Instructions for Submission ofBriefs and Record Material in Digital Format, by mailing them in a securely sealed envelope, with postage prepaid thereon, in a mail box regularly maintained by UPS at One Lincoln Center, Syracuse, New York, addressed to the following at his last known address set forth below: Sworn to before me this Eric T. Schneiderman, Attorney General ofthe State ofNew York Owen Demuth, Assistant Solicitor General Office of the Attorney General The Capitol Albany, NY 12224 :;;;;~u:~ SUSAN M. BRAZELL Notary Public, State of New York Qual. in onondaga co. No. OlBR608rt Commission Expires October 15, 20 1990780.1