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NY's rent laws prevail over RTC.

New York State's much debated rent regulations were galvanized late last month when a judge ruled that not even the Federal government, with the taxpayers in mind, can supersede them.

A Federal judge ruled the Resolution Trust Corporation does not have the authority to evict rent-controlled and stabilized tenants in New York State condominiums and cooperatives.

A statement released by Attorney General Robert Abrams said, "The Federal government now knows that trampling on the rights of innocent tenants and on state and local housing laws is not the way to deal with the impact of the nation's banking crisis."

His spokesman, Richard Barr, said they were very grateful for the judge's decision. "He agreed with the arguments we made that these tenants enjoyed statutory protection under a variety of state laws."

The legal case, RTC vs. Diamond, developed when sponsor Gerald Guterman defaulted on a loan that pledged nine condominium units at 444 East 57th Street to Nassau Federal Savings and Loan Association which was later taken over by the RTC.

The RTC was created through the Financial Institutions Reform. Recovery, and-Enforcement Act (FIRREA) to manage and sell properties taken over by the United States government as a result of bank defaults. The RTC said last fail it would evict those tenants at 444 East 57th Street who did not elect to purchase their units at market prices. According to the agency, it had a duty to the taxpayers to get the greatest return on the properties.

Frederick K. Mehlman, a partner with Wolf Haldenstein Adler Freentan & Herz and the former chief of the Real Estate Finance Bureau of the New York State Attorney General's office who helped try the case, said he was extremely gratified by the decision, which supports the Attorney General's position.

"The decision says the RTC does not have the unbridled authority to override the state's rights under either the state rent regulatory laws or the Martin Act and-Judge Carter made that clear," Mehlman added.

Southern District Judge Robert L. Carter determined the tenants' rights were insured by New York State statutes and that the Resolution Trust Corporation (RTC) was not given the power to repudiate statutory tenancies.

Robert A. Machleder, a partner in Wien Malkin & Bettex who represented seven of the nine tenants subject to the eviction proceedings that initiated the lawsuit, said the ruling protects people in this state and in other states where there are rules for tenant protections. Machleder noted the decision does not limit itself to this building and these tenants.

"I'm delighted of course,' Machleder said. "The decision is correct and reached the underlying point which is whether the RTC has the right to override state statutes. We always believed that they did not."

The Rent Stabilization Association, which has not been involved in the suit but has been watching it closely, held a different view.

"We haven't reviewed the ruling but we are disappointed and we hope that it will be appealed," said Jack Freund, director of Research for RSA.

While the RTC has approximately 1,000 units under its control in the metropolitan area, Bart said he did not think there were blocks of apartments in other parts of the country where there were non-eviction co-op plans that might be affected by the ruling.

Other units Guterman owned are located at Glen Oaks Village in Bellerose, Queens, where 134 units were pledged to Ensign Bank, FSB, and are now subject to the RTC's actions. The former Coronet Properties' Le Havre and buildings at 157 East 72nd Street, 240 West 75th Street, 235 East 22nd Street, 5577 Park Terrace, as well as one building in Forest Hills, and one on 64th Avenue in Rego Park are among others under RTC control.

Various sponsors have defaulted on co-op and condo units pledged to Nassau, Ensign, Crest, Empire FSB of America, Metropolitan Federal S & L and Yorkville Federal Savings. The attorney general has calculated an appraised value of $12.5 million for 583 of these occupied units versus $45.7 million should the units become vacant on the open market. There is also more than $1.6 million in cash flow deficiencies on these units on a yearly basis.

Where elsewhere the RTC would dispose of assets at a fraction of the value, Barr noted, here they wanted to make money.

The RTC is reviewing its options and considering whether to appeal, said a spokesperson. The agency has 30 days within which to give notice of an appeal to the Court of Appeals for the Second Circuit.

Mehlman believes there is a substantial likelihood the RTC will appeal the decision because of the number of units it controls. 'I hope they don't," he said, and instead take into consideration both the dollar costs of trying a lawsuit and the emotional costs to the tenants.

Machleder suspects it will be some time before a decision is made whether to appeal, principly because many of the RTC attorneys are on vacation.

Mehlman said there are other steps the RTC could take to mitigate its losses, some of which were discussed in the supporting court papers. The RTC can negotiate with tenants to purchase their apartments or can find investor groups, he suggested. In case of 57th Street, Mehlman said, the loan balance was $3 million and the RTC acknowledged they could get $1.5 million for the occupied units.

`...which means under the worst case scenario they could get 50 cents on the dollar and they were trying to get $7 million,' he said.

The $7 million was projected based on the sale of the empty units.

At a West Side Manhattan co-op in a similar sponsor and bank default situation, the RTC has been following the Attorney General's advice. The RTC stepped in some two years ago to continue talks being held at that time with the bank. The other co-op owners' investments would be 'worth zip' unless this situation is worked out, noted tenants' association attorney Patricia L. Kantor, of Edwards & Angell. Now that the Attorney General has won the Diamond lawsuit, Kantor hopes to conclude the deal in the near future.
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Title Annotation:Federal judge rules in support of New York State's rent regulations; Resolution Trust Corp. cannot evict tenants from New York State's rent-controlled buildings
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Sep 2, 1992
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