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April 25, 2013

New York State Court of Appeals Hears Arguments Regarding Constitutionality of Empire Zones Decertifications

On Tuesday, April 23, 2013, the Court of Appeals (the highest court in New York) heard oral arguments regarding the constitutionality of the State's retroactive decertification of five entities from the Empire Zones Program.

The Empire Zones Program was a program the State put in place in 2000 to incentivize development and employment primarily in certain economically challenged areas or "zones." To participate in the Program and receive benefits, largely through various credits received against New York State taxes, businesses had to apply for "certification" into the Program and meet certain defined performance criteria on a going-forward basis. Perhaps for the first time realizing the full extent of its obligations under the Program, the State began enacting Program changes in 2005 that served to curtail future Program participation by additional businesses.

In early 2009, however, with the budget crisis in full bloom, the Legislature and then-Governor Paterson enacted certain changes to the Program calling for the decertification of certain existing participants from the Program resulting in the elimination of the State's obligation to those participants for the payment of benefits under the Program. The 2009 legislation created two new criteria for decertification: (1) the business's investments in the form of capital improvements or wages were less than the benefits the business received from the Program during at least three years of certification; or (2) the business caused the transfer of property or employees from another taxable entity in New York. In June 2009, the State Department of Economic Development began decertifying businesses retroactively to January 1, 2008. The State's Empire Zone Designation Board heard administrative appeals from the decertified businesses, with most appeals denied for one reason or another. Many of the entities with denied appeals commenced Article 78 proceedings to challenge the administrative process, and of those entities, many included claims for declaratory judgment on the constitutionality of the decertifications, generally, and the retroactive nature of the decertifications in particular.

Third and Fourth Departments of the Appellate Division rendered decisions on the constitutional questions in several cases, including those cases heard by the Court of Appeals on April 23rd. The Fourth Department held that the retroactive nature of the decertifications was unconstitutional and that the State could not retroactively decertify businesses. The Third Department also held that the retroactive nature of the decertifications was unconstitutional; however, in many of the cases before it, the Third Department upheld the prospective decertifications of the businesses removed from the Program. Also, a number of cases remain pending in Supreme Court, Albany County and before the Third Department.

In the Court of Appeals, the State leaned heavily on the Court of Appeals' 1987 decision in Replan Dev. v. Dep't of Housing Preservation & Dev. of City of New York to justify the retroactive application of the 2009 decertifications. A further analysis of that case demonstrates that the facts were quite different than the dispute over decertifications. In Replan, the Court of Appeals upheld the retroactive repeal of a tax credit for the conversion of single room occupancy houses into larger scale multiple dwellings that was made retroactive so that property owners would not precipitously evict tenants in order to obtain the tax credit in the final days of program eligibility. The Program cases differ from Replan, the decertified entities argued and the Third and Fourth Departments below held, because they had a protected property right in their certificates of eligibility for the Program, and there was no compelling reason for retroactively decertifying them. The April 23rd oral argument before the Court of Appeals focused largely on whether the decertified businesses have a protected property right in the receipt of the already earned benefits, or whether the benefits are merely a tax exemption, like that in Replan, that the State can revoke at will as a matter of "legislative grace."

Given the question before the Court – was the retroactive decertification a violation of each business's constitutional right to due process – the Court of Appeals' decision in the cases argued April 23rd will have an important impact on all decertified businesses. Essentially, the decertifications made in mid-2009, but retroactive to January 1, 2008, retroactively stripped decertified businesses of approximately 18 months of benefits notwithstanding that the businesses complied with all Program requirements during those 18 months. Many businesses made long-term business decisions and commitments during 2008 and the first half of 2009 in reliance on their continued receipt of the benefits, including credits based on wages and real property taxes the businesses paid, only to be told that earned benefits would be taken away for non-compliance with rules that did not exist until mid-2009. One of the cases also raises additional issues that will potentially impact other businesses and shape economic development incentive programs, including whether the decertifications as a whole were unconstitutional and whether the State can impose new requirements on existing programs.

We will provide a further update as soon as the Court issues a decision, which is likely to come before the Court recesses for the summer.

Click here for a copy of an article regarding the argument that appeared in the legal publication, Law360.


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