| Matter of Homestead Funding Corp. v State of N.Y. BankingDept. |
| 2012 NY Slip Op 03499 [95 AD3d 1410] |
| May 3, 2012 |
| Appellate Division, Third Department |
| 2—In the Matter of Homestead Funding Corporation,Appellant, v State of New York Banking Department et al.,Respondents. |
—[*1] Eric T. Schneiderman, Attorney General, Albany (Victor Paladino of counsel), forrespondents.
McCarthy, J. Appeal from a judgment of the Supreme Court (McDonough, J.), enteredOctober 4, 2011 in Albany County, which dismissed petitioner's application, in a combinedproceeding pursuant to CPLR article 78 and action for declaratory judgment, to review adetermination of respondent Banking Department imposing an annual general assessment uponpetitioner.
Petitioner is a mortgage bank conducting the business of originating mortgage loans in NewYork. As such, petitioner is licensed and regulated by respondent BankingDepartment.[FN1] Pursuant to the Banking Law, the Department charges mortgage banks an annual generalassessment to cover the cost of its operations associated with overseeing such entities(see [*2]Banking Law § 17 [2]).[FN2] Mortgage banks must annually file a report with the Department setting forth their income fromthe previous year, which the Department uses to calculate the annual general assessments.Beginning with the 2010-2011 fiscal year, mortgage banks were instructed to include not onlymortgage loan origination income, but also income from secondary market sales of mortgagesand mortgage loan servicing activities. This resulted in a significant increase in petitioner'sreported income and, correspondingly, a significant increase in petitioner's annual generalassessment for fiscal year 2010-2011.
Petitioner objected to the determination of its annual general assessment. When theDepartment upheld the assessment, petitioner commenced this combined proceeding pursuant toCPLR article 78 and action for declaratory judgment challenging the determination. After joinderof issue, Supreme Court dismissed the petition. Petitioner appeals.
The annual general assessment does not constitute an unconstitutional tax (see NYConst, art XVI, § 1). A tax is a charge imposed upon citizens to defray the costs ofgovernment services and operations generally, whereas a fee is a charge, imposed upon certaincitizens or entities who use particular services of or obtain benefits from a particulargovernmental program or agency, to defray the costs of those services or benefits (see Matter of Walton v New York StateDept. of Correctional Servs., 13 NY3d 475, 485 [2009]; New York Tel. Co. v Cityof Amsterdam, 200 AD2d 315, 318 [1994]). One legitimate purpose of fees is to make anagency self-sustaining so that its operations are paid for by those who use that agency rather thanby the public at large through general tax revenues (see Matter of Joslin v Regan, 63AD2d 466, 470 [1978], affd 48 NY2d 746 [1979]). The annual general assessments herewere a fee, not a tax, because the purpose of the assessments was to recover the Department'sexpenses related to regulating banks from the banks that are regulated, "not to raise revenue forthe support of government generally" (American Assn. of Bioanalysts v Axelrod, 106AD2d 53, 56 [1985], appeal dismissed 65 NY2d 847 [1985]; see Matter of Joslin vRegan, 63 AD2d at 470-471).[FN3]
The determination of petitioner's annual general assessment was not arbitrary or capricious.The statute provides that "[a]ll general expenses, including in addition to the direct costs ofpersonal service, the cost of maintenance and operation . . . and all other direct orindirect costs, incurred in connection with the supervision of any person or entity licensed [or]registered . . . pursuant to this chapter shall be charged to and paid by them in suchproportions as the superintendent [of Banking] shall deem just and reasonable" (Banking Law§ 17 [2]). Contrary to petitioner's argument, expenses by ancillary divisions, such as legalservices, consumer services and information technology, are incurred by the Departmentindirectly in [*3]connection with the supervision of licensedentities, including mortgage banks (compare Matter of Joslin v Regan, 63 AD2d at470-472). Thus, the statute permits the Department to recoup those expenses from the bankspaying assessments.
Petitioner was not treated differently from other similarly situated entities. The same formulawas applied to all mortgage banks. Depository institutions are not similarly situated, as they aresubject to federal regulations, federal deposit insurance requirements and equity capitalmaintenance levels that are not applicable to mortgage banks (see Bower Assoc. v Town of Pleasant Val., 2 NY3d 617, 632[2004]). The Department rationally determined that, considering these differences, it wasappropriate to apply a different assessment methodology to depository institutions than the oneapplied to mortgage banks. Although the Department had not previously included income frommortgage servicing and secondary market activities for purposes of calculating the annual generalassessment, it was reasonable to include that income because it is indirectly related to a mortgagebank's license, and failing to include this income could allow banks to structure transactions so asto avoid paying fees to the Department.
Nevertheless, the Department's definition of income constitutes a rule that must be formallypromulgated. A rule is defined as "the whole or part of each agency statement, regulation or codeof general applicability that implements or applies law, or prescribes a fee charged by or paid toan agency or the procedure or practice requirements of any agency" (State AdministrativeProcedure Act § 102 [2] [a] [i]). The definition excludes "forms and instructions,interpretive statements and statements of general policy which in themselves have no legal effectbut are merely explanatory" (State Administrative Procedure Act § 102 [2] [b] [iv]).Blanket requirements and fixed standards that are to be generally applied in the future, regardlessof individual circumstances, are rules subject to the State Administrative Procedure Act'srule-making procedures (see Matter of Alca Indus. v Delaney, 92 NY2d 775, 778 [1999];Matter of Schwartfigure v Hartnett, 83 NY2d 296, 301 [1994]; Matter of Home CareAssn. of N.Y. State v Dowling, 218 AD2d 126, 128 [1996]).
Petitioner only asserted that the Department created a rule when it implemented its newpolicy of including secondary market income and income from servicing activities as grossincome for purposes of calculating a mortgage bank's annual general assessment. Petitioner didnot challenge, as an unpromulgated rule, the Department's overall formula or methodology usedto calculate annual general assessments; the Department has apparently been applying thatmethodology for years to determine the annual general assessments for petitioner and otherswithout challenge.[FN4] Banking Law § 17 (2) contains broad authority for the Department to charge fees to banks,but does not contain any specific methodology or definitions. By redefining income, theDepartment did more than just explain part of its methodology or interpret the policy as it alreadyexisted; the Department crafted a new aspect of the policy and declared what is consideredincome for all mortgage banks when they calculate their annual general assessments (see Matter of SLS Residential, Inc. v NewYork State Off. of Mental Health, 67 AD3d 813, 816 [2009], lv denied 14 NY3d713 [2010]; Matter of HMI Mech. Sys. v McGowan, 277 AD2d 657, 658 [2000], lvdenied 96 NY2d 705 [2001]; compare Lewis v New York State Dept. of Civ. Serv., 60 AD3d216, 224 [2009], affd 13 NY3d 358 [2009]; Matter of Pharmacists Socy. of State[*4]of N.Y., Inc. v Pataki, 58 AD3d 924, 926-927 [2009],lv denied 12 NY3d 710 [2009]). The Department created an expansive definition ofincome, required all mortgage banks to annually report their income based upon that definition,and rigidly applied the definition across-the-board to calculate annual general assessments for allmortgage banks. It is undisputed that the Department did not follow the procedures for makingand filing a rule when it established this definition (see State Administrative ProcedureAct §§ 202, 203; see also NY Const, art IV, § 8). As no rule wasproperly promulgated, the assessment based on this definition cannot be enforced, it must beannulled and the Department must determine petitioner's 2010-2011 annual general assessmentbased on a properly promulgated rule or upon petitioner's individual facts and circumstances(see Matter of Schwartfigure v Hartnett, 83 NY2d at 302).
Mercure, J.P., Lahtinen, Spain and Garry, JJ., concur. Ordered that the judgment is reversed,on the law, without costs, petition granted to the extent that respondent Banking Department's2010-2011 annual general assessment of petitioner is annulled, it is declared that the BankingDepartment's methodology for determining the annual general assessment for mortgage banks isnot arbitrary or capricious and does not result in an unconstitutional tax, and matter remitted torespondents for further proceedings not inconsistent with this Court's decision.
Footnote 1: The Banking Department andthe Insurance Department merged to form the Department of Financial Services, effectiveOctober 3, 2011 (see Financial Services Law § 102; L 2011, ch 62, § 1, partA, § 1).
Footnote 2: Due to the merger of theBanking Department and Insurance Department and the enactment of the Financial Services Law,the Banking Law was repealed, effective April 1, 2012 (see L 2011, ch 62, § 1, partA, § 1).
Footnote 3: Because petitioner sought adeclaratory judgment, Supreme Court was required to declare the rights of the parties one way orthe other (see CPLR 3001; Stonegate Family Holdings, Inc. v Revolutionary Trails, Inc., Boy Scouts ofAm., 73 AD3d 1257, 1262 [2010], lv denied 15 NY3d 715 [2010]). We willtherefore issue a declaration in respondents' favor.
Footnote 4: Based on the limited nature ofpetitioner's challenge, we do not express an opinion on whether the overall methodologyconstitutes a rule under the State Administrative Procedure Act.