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RTC remanded by Supreme Court.

U.S. Supreme Court justices have sent the Resolution Trust Corp. back to the lower court for reconsideration of the Federal agency's attempt to evict rent-stabilized and controlled tenants from cooperative apartments it acquired after taking over failed banks.

The Second Circuit had ruled in favor of the RTC last March, reversing State Court decisions and putting politicians in a frenzy to keep the tenants protected.

Attorney Edward T. Braverman believes the Circuit Court will now have to find the RTC was not given specific powers to repudiate rent-controlled and rent-stabilized leases.

"They will find the rent-stabilized tenancies will prevail," he said. These tenants are also granted their occupancy through prevailing State statutes.

While politicians were gleeful, including the current Attorney General Oliver Koppell, whose office stepped in on behalf of the tenants, owner representatives and housing advocates have voiced concern.

Joseph Strasburg, president of the Rent Stabilization Association, which represents 25,000 owners, noted the case is very important symbolically. "I'm somewhat disappointed," he said. "I hope this doesn't send a signal from the Supreme Court to the real estate community that they aren't willing to entertain a review of the rent regulations. It would be nice to know they have an open mind and take it on its own merits."

Under the short decision, the Supreme Court directed the Second Circuit to review a Ninth Circuit decision that they ruled on this past June.

The decision reads in full:

"The petition for writ of certiorari is granted, the judgement is vacated and the case is remanded to the U.S. Court of Appeals of the 2nd Circuit for further consideration in light of O'Melveny Meyers v. FDIC, 512 U.S."

O'Melveny is a California case and has nothing to do with rent laws, explained Braverman. The law firm O'Melveny & Meyers represented American Diversified Savings Bank in Stockton, California, in a real estate syndication. Soon after, the bank failed and the FDIC sued the law firm for restitution.

The law firm made a motion for summary judgement. "The law firm said you have to apply California law and you can't sue us," Braverman noted. "While the FDIC stood in the shoes of the bank, the law firm said the bank couldn't sue us because the president and CEO participated in the fraud. When you are a participant in a fraud, you can't sue under tort law in California."

The U.S. Supreme Court held the lawyers were right. Braverman said the important part of the decision is the question of what law applies. "The Supreme Court says the law of the State is going to apply unless under Federal statute it specially legislates in a given area," he said.

The Supreme Court, he continued, is telling the Second Circuit to apply New York State law and look at the statute that gave rise to the RTC and see if it had specific authority to vacate rent-controlled leases. "Unless there is a specific authority to repudiate you are going to have to reverse," Braverman said. "The rent-stabilized tenancies will prevail based on this decision. The RTC has the power to repudiate, but it seems the Court is saying if there is a contrary state law, generally on point it must be applied.

The O'Melveny & Meyers v. FDIC decision reads in part, "In answering the central question of displacement of California law [whether Fed law will prevail] we of course would not contradict a specific Federal statutory provision. Nor would we adopt a court-made rule to supplement Federal statutory regulation that is comprehensive and detailed; matters left unaddressed in such a scheme are presumably left subject to the disposition provided by state law."

Braverman said the Supreme Court is telling the Second Circuit to look to state law when it decides the RTC case, so if the state law protects these statutory leases and the statute which gave rise to the RTC's ability to disaffirm contracts did not speak specifically to this type of lease, then state law would be controlling. "Of course, state law protects these tenants," he said. "Now we have to wait to see what the Second Circuit says."

The ruling is not a welcome one for housing advocates who see it continuing the rent stabilization scheme in which private owners subsidize individual tenants, who may or may not need subsidies.

"It was very clear the RTC has to dispose of properties that were definitely inviable in terms of the income stream," noted Strasburg of the RSA. "They looked at the rent regulations as limiting the rental stream and as long as you have the rent restrictions, the price one can get from disposing that property is reduced."

"I'm unhappy," sighed Braverman. "I really thought that it was time that the statutory rent arrangements in New York State start to be eased and go into more of a free market economy. It's wrong to have one segment of the population subsidize the other. If the state wants to subsidize the tenant let them do so, but not foist it on the landlords of the state."

Braverman represents residential apartment building owners, co-ops and condominiums and sees the effects that the rent laws have made on building communities.

A spokesperson for the FDIC said usually State law prevails unless the Federal Recovery Act (FIRREA) of 1989 gives the FDIC or RTC a better position. "FIRREA specifically states the FDIC and RTC have the power to repudiate contracts," he said. "I don't think FIRREA specifically addressed the main topics in the O'Melveny case. They said state law prevails in this aspect unless FIRREA specifically has positions that would have put us in a better position. Sometimes we're covered by state law and sometimes Federal law."

Ruben Klein, president of the Bronx Realty Advisory Board of the and a partner in the law firm of Klein & Keenan that represents owners, said "If government itself can't enforce it's regulations we've reached a sad state. There is a desire to help the poor people and the RTC stands in the situation of being an owner."

Right now, Klein noted, private owners are supporting those tenants who pay less for rent than it costs to operate the buildings, and in some cases, with the tacit approval of the Housing Courts, no rent at all. "The real question is who should support housing?," he asked, "Private individuals or government programs?"

Some of the same issues have arisen in co-ops that still have rent-regulated apartments tenanted by individuals who are paying less in rent than the maintenance allows.

Braverman said this ruling may have some bearing on a Freddie Mac case which is going up on appeal to the Second Circuit. In this case, a bank failed, Freddie Mac took over the Brooklyn co-op at the foreclosure sale and was trying to knock out the rent-stabilized leases. Judge L Leo Glasser of the Eastern District Court ruled against Freddie Mac.

The RTC case itself was prompted by the agency's attempt in 1991 to repudiate the leases of nine rent-regulated tenants residing in condominium apartments at 444 East 57th Street so it could sell the units. The tenants, one of whom is dead, were paying about $9,000 per month in rent while condominium charges were more than $30,000 per month.

The RTC was created under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to manage and sell properties that are taken over by the United States government as a result of bank defaults. The RTC claims it has a duty to the taxpayers to get the greatest return on the properties and to repudiate burdensome leases. It claimed the units were worth under $2 million if occupied but nearly $12 million if vacant. It also said the tenants had incomes above the median for the area and were not paying market rents.

After the last decision in its favor, the RTC had pledged to local politicians it would work out a deal with the specific tenants so those with low incomes could continue to pay limited rents and not be evicted.

The RTC acquired these particular units after banks failed that had already taken the units back from sponsors who defaulted on their loan obligations. Ironically, many sponsors defaulted because rents on these units did not cover the actual maintenance and loans.
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Title Annotation:Resolution Trust Corp., rent stabilization, O'Melveny and Myers, American Diversified Savings Bank
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Oct 12, 1994
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