Federal judge rules co-ops revert to rent stabilization.

In a ruling that a Federal judge distinguished from a recent circuit court decision involving the Resolution Trust Corp. (RTC), the former cooperative shareholders in a Brooklyn property that came into the hands of the Federal Home Loan Mortgage Corp. (FHLMC), also known as Freddie Mac, should revert to rent stabilized treatment.

The ruling was hailed by tenants groups and the New York State Attorney General, but Rent Stabilization Association president Joseph Strasburg said, "This is outrageous and another nail in owners. People will think it's wonderful, but if there was no rent control, sponsors would have had enough money for their underlying mortgages."

Richard Barr, a spokesperson for NYS Attorney General G. Oliver Koppell, said, "We are very pleased with this decision. There are numerous other co-ops in the city for which Freddie Mac holds the mortgage that could face the same problems."

The building at 101 Lincoln Road in Crown Heights, Brooklyn was converted in 1989 by Aaron Ziegelman. While only three tenants chose to purchase their units, another 17 were sold to outsiders. Nevertheless, 66 rent stabilized apartments remained in the sponsor's hands.

According to the court documents filed by the Division of Housing and Community Renewal (DHCR), the sponsor stopped paying the maintenance, the co-op defaulted on its mortgage payments to FHLMC and in 1991 the Federal agency foreclosed on the property.

Although Freddie Mac is a government entity, it is a lender and was not formed as a disposer, as was the RTC. Congress, therefore, gave the RTC the right to repudiate leases, which it has chosen to try to do to New York City rent regulated apartments located in cooperatives. Judge I. Leo Glaser said there was no Federal interest in the Freddie Mac case that would require the court to ignore the "plain language" and intent of the rent stabilization laws.

The courts have been split in RTC v Diamond, and while the last round was won by the regulators, the State has requested certiorari from the U.S. Supreme Court.

A spokesperson for DHCR, on behalf of Commissioner Donald Halperin, said this was a lawsuit that should have never been brought. "I am pleased that Judge Glaser has rejected it. It is unfortunate that Freddie Mac sought to ignore the plain language of the New York State law in a misguided effort to deny basic rent protection to a group of vulnerable middle income tenants who had already suffered the loss of the investments in their apartments. I hope that a similar disregard for local rents laws on the part of the RTC will be rejected by the Supreme Court in the pending case of RTC v Diamond."

Attorney Edward T. Braverman, who heads Braverman & Associates and represents co-ops, said he was not happy with Judge Glaser's decision but agreed with it. "I'm not a believer in statutory rent control," he said. "The free market economy should prevail and the housing stock in New York City would be in a lot better shape."

Braverman explained that if the judge had granted the power to Freddie Mac, every lender would claim the same privilege. While co-operative apartments would suddenly become more valuable, there would be an outcry from politicians and tenants.

The case came to court when FHLMC requested a declaratory judgement against DHCR. The judge denied the request for a declaration that after a building is converted, it would permanently be out of the rent stabilization administration.

The judges said he agreed with the state court ruling in DeSantis v White Rose in 1991, wherein a co-op reverted back to rent stabilization when the former owner foreclosed.

Judge Glaser noted that rent stabilization does not apply to dwellings that are not cooperatives and condominiums and therefore, since the units were no longer co-ops, should go back under the stabilization umbrella.

To set rents, Justice Glaser noted in his decision that the Rent Stabilization Law provides the ability to either ask DHCR to set the rents or to look at the last lease in effect, which in this case, was the proprietary lease of the cooperative to the shareholders. "That would be a break even rent," noted Braverman, "because a co-op is designed not to be profit making."

The judge also denied the argument that the revival of the rent stabilization would be an unconstitutional taking.

It is still unclear if Freddie Mac will appeal the ruling and calls to its attorneys, Fischbein*Badillo*Wagner*Itzler, were not returned.