Court Rules City Not Bound to Continue Rent Subsidies

[This story, in slightly different form, has appeared in the New York Law Journal.]

ALBANY-New York City has no obligation to continue rent subsidies under the Advantage program designed to help homeless families and individuals secure permanent housing now that state and federal assistance is no longer available, a deeply divided Court of Appeals held yesterday in a key contractual law case.

The four-judge majority read the city's "guarantee[d]" commitment to the Advantage housing program as nothing more than an assurance that landlords would receive their rents even if the tenant was stripped of public assistance benefits, which was not the case under a predecessor housing program.

But three dissenters accused the court of allowing the city to "renege" on an inducement and expressed concern that the ruling would muddle contract law with uncertainty.

Zheng v. The City of New York, 147, involved roughly 15,000 participants in a program which paid up to $1,000 per month in rent subsidies for up to two years.

The Advantage program combined state, federal and local funds to promote permanent housing for the homeless and replaced another, relatively unstable program that was available only to those currently receiving public assistance.

Last year, the state stopped funding the initiative, and when state monies were withdrawn Advantage was no longer eligible for federal assistance. The city closed down the program in April 2011 rather than pick up the state and federal share of expenses.

That resulted in a class action suit by the Legal Aid Society on behalf of formerly homeless families and individuals who claimed that the unexpired agreements signed by landlords, tenants and the city constituted legally enforceable contracts obligating the city to subsidize rents for a full two years. The Legal Aid Society pointed to words such as "guarantee" and phrases such as "shall pay" and "will pay" in the agreements the city executed with landlords and tenants.

Manhattan Supreme Court Justice Judith Gische dismissed the suit, finding that the city "did not manifest an intent to be contractually bound" to the Advantage program, and the Appellate Division, First Department, affirmed 4-1. Yesterday, the Court of Appeals affirmed 4-3.

Judge Susan Phillips Read and the majority said the lower courts had properly used the "template" for deciding this type of case—Brown Bros. Electrical Contractors v. Beam Construction, 41 NY2d 397 (1977)—and made a factual determination that the city had not exhibited an intent to contract.

"The courts are not empowered to second-guess the City by conjuring up a 'contract' from bits and pieces of documents meant to explain and condition participation in what was a voluntary government program," Read said in a majority opinion joined by judges Victoria Graffeo, Robert Smith and Eugene Pigott Jr. "Indeed, doing so can only discourage governmental bodies from enacting voluntary programs to help the needy; they will fear being compelled by judges to continue such programs even if sources of funding are reduced or withdrawn."

Judge Carmen Beauchamp Ciparick, along with Chief Judge Jonathan Lippman and Judge Theodore Jones, argued that the question before the court was one of law rather than fact and would have applied contract law principles to a social services program.

"Much has been made of the fact that 'the Advantage rent subsidy program for the homeless was simply a social services program,' as though the term 'social services program' were anathema to the law of contracts; it is not," Ciparick wrote. "Nor is it a shield that, when invoked, permits the City to renege on the very promises it used to induce private parties—here, the landlords, who received no program benefits—to enter into separate agreements, causing them to forego profitable alternatives for the use of their property."

Ciparick found yesterday's holding "cause for concern."

"After today, even the clearest of contract terms on which public and private entities routinely rely to efficiently coordinate their transactions apparently will grant no assurance that the law will recognize an agreement and provide a remedy for its breach," Ciparick wrote.

The dissenters also bemoaned the "human consequences" of the decision, noting that 252 families within the class are domestic violence victims and that there are roughly 42,000 individuals in the city's shelter system, 17,000 of them children. 

Steven Banks, the attorney-in-chief at Legal Aid who argued the appeal, predicted that as a result of the decision the city's shelter system will be "swamped" with homeless individuals and families who have been receiving rent subsidies under the Advantage program. Approximately 8,000 households remained in the program as of February.

"I think by winning the city is actually losing because now 8,000 formerly homeless families and individuals will lose their homes prematurely and flood the shelter system at a greater cost to the taxpayers than the cost of continuing to pay the subsidies until the Advantage agreements expire in March 2013," Banks said.

"Taxpayers are being left to hold the bag for the city's position that 'guarantee' doesn't mean what the dictionary says it means."

Assistant Corporation Counsel Eric Rundbaken argued for the city.

Corporation Counsel Michael Cardozo said in a statement that the majority properly drew a distinction between "a legally binding contract" and a "social program" and "reached the right decision under the law."

In a statement, the city's commissioner of the Department of Homeless Services, Seth Diamond, said that without state and federal support the city could not sustain the Advantage program.

"Homeless Services is actively offering prevention services to households and landlords experiencing difficulties, and the overwhelming number of households who received the Advantage subsidy remain housed in the community," Diamond said.

@|John Caher can be reached at jcaher@alm.com.