Opinion
Decided February 23, 1999
Appeal from the Civil Court of the City of New York, New York County (Peter M. Wendt, J.).
Kellner, Chehebar Deveney, New York City ( Douglas A. Kellner, John Patrick Deveney and Denise A. Cors of counsel), for appellants.
Rosenberg Estis, P. C., New York City ( Jeffrey Turkel, Gary M. Rosenberg and Lawrence M. Furtzaig of counsel), for Leon Scharf and another, respondents.
Michael D. Hess, Corporation Counsel of New York City ( Ellen B. Fishman of counsel), for Department of Housing Preservation and Development of the City of New York, respondent.
Gainsburg Hirsch, L. L. P., New York City ( Allen G. Kadish of counsel), for Hal M. Hirsch, as bankruptcy trustee of the estate of 610 West 142 Owners Corp.
Bernard v. Scharf, 246 A.D.2d 171, reversed.
Petitioners lived at the building owned by respondents until the building was rendered uninhabitable by a devastating fire. The roof and sixth floor were destroyed and the five lower floors were badly damaged by the water used to extinguish the fire. Of the 61 apartments in the building, 13 were destroyed, while the others sustained various types of damage. At that time, 18 apartments had been purchased by resident shareholders, 26 were rented at rent-stabilized rates and the remaining 17 were rented at market rates. The Scharf family, holders of the unsold shares, owned the majority of the cooperative shares. Appellants Leon and Morris Scharf were the president and secretary of the cooperative corporation and also managed the building. Although the offering plan required that the structure be insured for $3 million, Leon Scharf unilaterally reduced that coverage in 1991 by replacing the original $3 million policy with a $2 million, 80% coinsurance policy. After the fire, appellants neither demolished the building nor took steps to repair it. It is not alleged that they were responsible for the fire; however, they did not comply with a peremptory vacate order issued by the New York City Department of Buildings, nor did they correct the building code violations caused by the fire. Appellants' complete inaction prompted petitioners to bring this proceeding against the Scharf family, the cooperative corporation, the mortgagee bank and the Department of Housing Preservation and Development of the City of New York, seeking to compel appellants to restore the building to habitable condition. Appellants opposed this course of action as economically infeasible, alleging that the cost of repair would be greater than the market value of the restored building. Since this proceeding was commenced, the cooperative corporation has become bankrupt, and the bankruptcy trustee has sold the subject property to a purchaser who took the property subject to appellants' obligation, if any, to restore the building. While the parties' experts disagreed somewhat on the extent to which the cost of repair would exceed the value of the building, the record indicates that the cost of repair would be about $4.5 million, while the value of the restored building would be between $1 million and $2 million.
The Civil Court directed respondents to restore the subject building to safe and habitable condition, and concluded that the statutes and regulations of the City and State do not allow an owner to simply give up on a residential building, without seeking prior permission to do so from the appropriate governmental agency, simply because the owner feels that continued repair and maintenance would be against its economic interest; that to apply the relevant statutes and regulations to respondents does not work an unconstitutional taking under the Fifth and Fourteenth Amendments to the United States Constitution; that respondents have failed to prove the economic infeasibility of restoring the building versus the cost of not doing so; and that respondents cannot assert the equitable defense of economic infeasibility because they brought the economic hardship upon themselves by the heedlessness of their actions in underinsuring the subject building, in violation of the offering plan.
The Appellate Term concluded that respondents failed to prove that restoring the premises was economically infeasible; that respondents should be estopped from asserting an economic infeasibility defense by virtue of their deliberate underinsurance of the premises; and that the trial court's order to repair does not constitute an unconstitutional physical or regulatory taking.
The Appellate Division concluded that the deficient insurance coverage should not preclude the economic infeasibility defense, because the relevant issue is the economic condition of the building, not that of the owners; that given the extreme disparity between the cost of restoration and the building's apparent value, the option to restore the building should be left to the affected property owner, not commanded by the court; that the doctrine of unclean hands is not relevant because respondents were not at fault, i.e., they were not responsible for the fire that damaged the premises; that the proper method of valuation is to compare the cost of repairing the building to the anticipated market value of the restored structure, rather than comparing it to the cost of not repairing the building; and that an order to spend over $4 million to create $1 million of value denies respondents any reasonable return on their investment.
Subsequent to the filing of appellants' notice of appeal, the New York City Department of Buildings issued a letter rescinding its prior vacate order, stating "based upon an inspection * * * the premises was totally renovated * * * and is now ready for occupancy."
Respondents Arlene Rivera and others precluded.
On review of submissions pursuant to section 500.4 of the Rules of the Court of Appeals ( 22 NYCRR 500.4), order reversed, without costs, and case remitted to Civil Court of the City of New York, New York County, with directions to dismiss the proceeding upon the ground of mootness ( see, Matter of Hearst Corp. v. Clyne, 50 N.Y.2d 707, 718; Matter of Adirondack League Club v. Board of Black Riv. Regulating Dist., 301 N.Y. 219, 223).
Concur: Chief Judge KAYE and Judges BELLACOSA, SMITH, LEVINE, CIPARICK, WESLEY and ROSENBLATT.