Kaufmans beat City Hall lawsuit.

When Robert and Melvyn Kaufman, along with partner JMB Realty, wanted to develop the property at 17 State Street and tear down the Seamen's Institute in the mid-80's, the city demanded $1 million dollars from the Institute toward housing the homeless and another $500,000 from the developers to smooth and expedite the permit process.

Last month, the Appellate Division judges reversed a lower court ruling 5 to 0 and declared the city's actions "fraudulent." The Kaufmans not only don't have to pay the city but can countersue them for $70 million in damages. The Seamen's Institute had not appealed the original court decision but settled with the city privately for an undisclosed sum.

Robert J. Ward, a partner with Shea & Gould who tried the case for the developers, called the reversal a "very strong, hot, angry decision by the Appellate Division." The were angry, he noted, because the city was selling its administrative determinations. Melvyn Kaufman of the William Kaufman Organization said, "I'm not so excited about winning as I am about the city losing."

Kaufman deemed the unanimous decision written by Justice Ernst Rosenberger, a "decision of revolution. The court was so revolted," he continued, "they slammed the city for its awful, awful misconduct and abuse of citizenry. It's so rare that you see that."

In July 1984, the developers contracted to buy the Seamen's Institute property on State Street for $29 million in order to erect a high-rise office building. Prior to closing, on the property, scheduled for March 1985, the city refused to issue a permit for the demolition of the building that was once used to house merchant seamen.

The city insisted that the Seamen's Institute, a charitable organization that was an arm of the Episcopal Diocese, was a Single Room Occupancy (SRO) dwelling that could not be demolished without a certificate saying the residents had not been harassed to leave.

The law also provided for an exemption for those residences used by employees or an institution, leading the Seamen's Institute to believe it was exempt to begin with. They pleaded with the city officials, Mayor Koch and Housing Preservation and Development, then led by Anthony Gleidman, in letters and at meetings to expedite the exemption. The institute had a deteriorating financial condition that would be aided by the timely sale of their building to the developers, known as 17 Vista Associates.

City officials agreed they could be declared exempt if payments totalling $1.5 million were made.

In a typical city scenario of one agency not knowing what the other was planning, the demolition permit was approved in February of 1985 anyway, appropriately marked "No SRO" by a clerk, while other city officials were advising the developers they needed to make the payment to expedite the exemption. The city later contended the approval was a "mistake," an argument the Appellate judges rejected.

It was around that time that Local Law 59 of 1985 was to be signed by the mayor and would provide for a moratorium on demolishing SROs. A later law, Local Law 9 of 1987, required payment of $45,000 per unit or provision of an equal number of units towards housing die homeless when demolishing an SRO and was declared unconstitutional in the Seawall case. There, the court called the payments ransom' and the plan "out and out ... extortion."

The 17 Vista developers were not told the permit had already been approved when they signed a promissory note in July of 1985, agreeing to pay 500,000 to a trust fund for low- and middle-income families.

They went to the church and said give us a million dollars and they did," recalled Kaufman, "then they went to us and said give us half a million. I said, 'I don't trust you, I'll give you a promissory note."

Kaufman eventually signed a note stating that payment would be rendered on, among other conditions, timely delivery of the construction permit. "We didn't ask for anything," insisted Kaufman. "If anybody is trying to suggest we did anything improper, they are outrageously disgusting."

Basically, Kaufman explained, the note said if the developer was going to be pushed into this position, then the city had to do things, too.

Coming into the height of development in the Downtown market, the city's bureaucracy bumbled the construction permit process anyway, taking 15 months to issue the permit, which was finally granted in October of 1986. This delayed the structure's completion until 1988 -- after the stock and real estate markets, as well as rents, tumbled.

The Kaufman's eventually sold 17 State Street to the lender, Teachers Insurance & Annuity Association, in 1990 for "a little more" than the $165 million mortgage.

When the city tried to collect the remaining $500,000, the developers refused to pay and the city sued. Justice Martin Schoenfeld found for the city in June of 1992 and the developers appealed.

Late last month, the brothers and their partner were vindicated when a New York State Appellate Division court reversed that order in its entirety and granted them permission to counterclaim for $70 million in damages.

"What's exciting about it is they didn't lose it," Kaufman noted, "they got whipped, punished and severely admonished. If it had been a person they would be going to jail. They were outraged enough, they were able to quote Chaucer."

The decision reads in part: "It is not for any governmental agency, like Chaucer's Pardoner, to sell indulgences, ... the city abused its governmental power and betrayed the public trust ... The opinion concluded the city's actions were "fraudulent."

Chaucer's Pardoner was supposed to give away indulgences for sins, but instead sold them.

The city intends to ask for leave to appeal but Ward isn't worried. "I said good luck. On a 5 to 0 reversal I don't give them much of a chance."