J-P Group, LLC v. New York State Department of Economic Development , 937 N.Y.2d 766 ( 2012 )

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
1410
CA 11-01242
PRESENT: SMITH, J.P., FAHEY, CARNI, SCONIERS, AND GORSKI, JJ.
IN THE MATTER OF J-P GROUP, LLC,
PETITIONER-RESPONDENT,
V MEMORANDUM AND ORDER
NEW YORK STATE DEPARTMENT OF ECONOMIC
DEVELOPMENT, EMPIRE STATE DEVELOPMENT
CORPORATION, COMMISSIONER OF ECONOMIC
DEVELOPMENT, DENNIS MULLEN (ACTING),
EMPIRE ZONE DESIGNATION BOARD,
RESPONDENTS-APPELLANTS,
ET AL., RESPONDENT.
ERIC T. SCHNEIDERMAN, ATTORNEY GENERAL, ALBANY (OWEN DEMUTH OF
COUNSEL), FOR RESPONDENTS-APPELLANTS.
MOSEY PERSICO, LLP, BUFFALO (SHANNON M. HENEGHAN OF COUNSEL), FOR
PETITIONER-RESPONDENT.
Appeal from a judgment (denominated order) of the Supreme Court,
Erie County (Joseph R. Glownia, J.), entered August 25, 2010 in a
proceeding pursuant to CPLR article 78. The judgment, inter alia,
granted the petition to annul the determination of respondent New York
State Department of Economic Development revoking petitioner’s
certification as a qualified Empire zone enterprise.
It is hereby ORDERED that the judgment so appealed from is
unanimously modified on the law by vacating the first and third
through seventh decretal paragraphs and as modified the judgment is
affirmed without costs.
Memorandum: Petitioner owns and manages commercial rental
properties within an Empire zone and was certified as a qualified
Empire zone enterprise effective March 19, 2002 (see General Municipal
Law § 955 et seq.). In April 2009, the Legislature amended General
Municipal Law § 959 (a) to revise the eligibility for businesses
receiving Empire zone benefits (see L 2009, ch 57, part S-1, § 3) and,
by the same legislation, amended numerous sections of the Tax Law that
provided tax credits to businesses receiving those benefits (see L
2009, ch 57, part S-1, §§ 11-22). Sections 11 through 17 of that
legislation stated that “[a]ny carry over of a credit from prior
taxable years will not be allowed if an [E]mpire zone retention
certificate is not issued pursuant to [General Municipal Law § 959
(w)] to the [E]mpire zone enterprise [that] is the basis of the
-2- 1410
CA 11-01242
credit,” and sections 18 through 22 contained similar provisions. The
subject amendments were to “take effect immediately,” with the
exception of, inter alia, the Tax Law amendments in sections 11
through 22 of the legislation, which were to “apply to taxable years
beginning on and after January 1, 2008” (L 2009, ch 57, part S-1, § 44
[a]).
On June 29, 2009, respondent New York State Department of
Economic Development (DED) revoked petitioner’s certification as a
qualified Empire zone enterprise retroactive to January 1, 2008 on the
ground that petitioner “failed to provide economic returns to the
[S]tate in the form of total remuneration to its employees (i.e. wages
and benefits) and investments in its facility greater in value to the
tax benefits [petitioner] used and had refunded to it” (General
Municipal Law § 959 [a] [v] [6]). Petitioner appealed to respondent
Empire Zones Designation Board (EZDB), but the EZDB upheld the
revocation of petitioner’s certification. Petitioner then commenced
this CPLR article 78 proceeding seeking, inter alia, to annul the
determination revoking its certification as a qualified Empire zone
enterprise and reinstating its certification as such an enterprise.
Supreme Court granted the petition in its entirety, and it declared
that, inter alia, the amendments to General Municipal Law § 959 (a)
are not retroactive, that the emergency regulations promulgated by the
DED Commissioner pursuant to General Municipal Law § 959 were null and
void inasmuch as they were improperly filed and otherwise defective,
and that the revocation of petitioner’s Empire zone certification was
arbitrary and capricious and thus null and void.
We note at the outset that the court erred in granting
declaratory relief inasmuch as petitioner did not seek such relief in
this CPLR article 78 proceeding. We agree with the court, however, to
the extent that it determined that the amendments to General Municipal
Law § 959 are prospective only (see James Sq. Assoc. LP v Mullen
[appeal No. 2], ___ AD3d ___ [Nov. 18, 2011]). Although the
Legislature intended that the subject amendments were to apply
retroactively, we have recently held that such “retroactive
application . . . violates [a party’s] due process rights” (id. at
___).
We agree with respondents, however, that the court erred in
determining that there was no rational basis for the determination to
revoke petitioner’s Empire zone certification. “It is well
established that [j]udicial review of an administrative determination
is limited to whether the administrative action is arbitrary and
capricious or lacks a rational basis . . . Such a determination is
entitled to great deference . . ., and [a] reviewing court may not
substitute its own judgment for that of the agency” (Matter of Walker
v State Univ. of N.Y. [Upstate Med. Univ.], 19 AD3d 1058, 1059, lv
denied 5 NY3d 713 [internal quotation marks omitted]).
General Municipal Law § 959 (a) (v) (6) authorized the DED
Commissioner to promulgate emergency regulations governing “the
decertification by the [C]ommissioner . . . of business enterprises
for benefits referred to in [section 966] with respect to an [E]mpire
-3- 1410
CA 11-01242
zone . . . upon a finding [that] . . . the business enterprise has
failed to provide economic returns to the [S]tate in the form of total
remuneration to its employees (i.e. wages and benefits) and
investments in its facility greater in value to the tax benefits the
business enterprise used and had refunded to it . . . .” Thus,
businesses producing less than $1 in actual wages and benefits and
investments for every $1 in State tax incentives (hereafter, 1:1 cost-
benefit test) were to be decertified from the program. The emergency
regulation promulgated pursuant to General Municipal Law § 959 (a) (v)
(6) is set forth in part in 5 NYCRR 11.9 (c) (2), which provides that
the DED Commissioner “shall revoke the certification of a business
enterprise upon a finding that . . . a business enterprise that has
submitted at least three years of business annual reports has failed
to provide economic returns to the [S]tate in the form of total
remuneration to its employees (i.e., wages and benefits) and
investments in its facility that add to a greater value than the tax
benefits the business enterprise used and had refunded to it . . . .”
That regulation further provides that “a business enterprise that has
submitted at least three years of business annual reports shall have
failed [the 1:1 cost-benefit test] if the sum of . . . all wages and
benefits paid to all employees of the business enterprise in the zone
. . . and . . . the value of capital investments in the zone, as
indicated in the business enterprise’s business annual reports
submitted and reporting for any of the years from and including [2001]
through and including . . . [2007], does not exceed the total amount
of [S]tate tax benefits the business enterprise used and had refunded
to it or its members, partners or shareholders under the [E]mpire
zones program as indicated in the business annual reports submitted
and reporting for any of the years from and including [2001] through
and including [2007] . . . .”
Here, the revocation of petitioner’s Empire zone certification
had a rational basis based on the business annual reports that
petitioner submitted to respondents. Those reports establish that
petitioner has a cost-benefit ratio of .9 for the years 2002 through
2007 and thus produced less than $1 in actual wages and benefits and
investments for every $1 in State tax incentives it received. The
data contained in the schedule that petitioner submitted to the EZDB
on administrative appeal indicates that petitioner had an even lower
cost-benefit ratio of .795. Respondents, albeit tersely, relied on
petitioner’s data in revoking its Empire zone certification inasmuch
as the EZDB upheld the determination by the DED revoking petitioner’s
certification on the ground that it “failed to provide economic
returns to the [S]tate in the form of total remuneration to its
employees (i.e. wages and benefits) and investments in its facility
greater in value to the tax benefits [that petitioner] used and had
refunded to it.” The language used by the DED and upheld by the EZDB
is consistent with the language of General Municipal Law § 959 (a) (v)
(6), and those respondents thereby concluded that petitioner failed
the 1:1 cost-benefit test. Contrary to petitioner’s contention,
respondents were not required to rely only on the business annual
reports for the three years during the 2002-2007 period in which
petitioner passed the 1:1 cost-benefit test. General Municipal Law §
959 (w) requires that decertification “be based upon an analysis of
-4- 1410
CA 11-01242
data contained in at least three business annual reports filed by the
business enterprise” (emphasis added), and the emergency regulations
promulgated by the DED Commissioner pursuant to section 959 condition
decertification upon an analysis of a data set to be derived from “the
business annual reports submitted and reporting for any of the years
from and including [2001] through and including [2007]” (5 NYCRR 11.9
[c] [2] [emphasis added]). Contrary to petitioner’s further
contention, we conclude that it was not entitled to a hearing
concerning the revocation of its Empire zone certification (see 5
NYCRR 11.9 [c], [d]). We therefore modify the judgment by vacating
the first decretal paragraph, which granted the petition in its
entirety, the fifth and sixth decretal paragraphs, which determined
that the revocation of petitioner’s Empire zone certification was
arbitrary and capricious and thus null and void, and the seventh
decretal paragraph, which required respondents to take any actions
necessary to ensure petitioner is deemed certified as a qualified
Empire zone enterprise continuously from its original date of
certification.
Respondents further contend that, because the petition did not
allege that the emergency regulations and the subsequent 2009
amendments promulgated by the DED Commissioner pursuant to General
Municipal Law § 959 and set forth in 5 NYCRR 11.9 were defective and
improperly filed seriatim, the court should not have reached that
issue (see generally Matter of Town of Rye v New York State Bd. of
Real Prop. Servs., 10 NY3d 793, 795; Matter of Violet Realty, Inc. v
City of Buffalo Planning Bd., 20 AD3d 901, 903, lv denied 5 NY3d 713).
Even assuming, arguendo, that the court did not err in reaching that
issue because the papers submitted by both parties specifically
addressed it (see Matter of Mathis v New York State Dept. of
Correctional Servs. [appeal No. 2], 81 AD3d 1435, 1436; Matter of Roth
v Syracuse Hous. Auth., 270 AD2d 909, lv denied 95 NY2d 756), we
conclude that the court erred in determining that the emergency
regulations and amendments promulgated by the DED Commissioner
pursuant to General Municipal Law § 959 were null and void as
improperly filed and otherwise defective (see 5 NYCRR 11.9). Here,
the substantive requirements for filing of an emergency regulation
were sufficiently met (see State Administrative Procedure Act § 202
[6] [d]; [8]; see also Matter of Industrial Liaison Comm. of Niagara
Falls Area Chamber of Commerce v Williams, 72 NY2d 137, 144-145;
Matter of Gioia v Lynch, 306 AD2d 280, lv denied 100 NY2d 514). In
any event, the improper filing of the 2009 amendments to the subject
regulations would be of no consequence to petitioner inasmuch as
petitioner was decertified as an Empire zone business on June 29,
2009, before the amendments were filed (cf. Matter of NRG Energy, Inc.
v Crotty, 18 AD3d 916, 919). We therefore further modify the judgment
by vacating the third and fourth decretal paragraphs, which determined
that the emergency regulations promulgated by respondents pursuant to
General Municipal Law § 959 were improperly filed and otherwise
defective and thus that they were null and void.
Entered: January 31, 2012 Frances E. Cafarell
Clerk of the Court