Kessler v. Grand Central District Management Association, Inc.

R. Hewitt Pate, Richmond, Virginia (Sarah C. Johnson, Hunton & Williams, Richmond, Virginia, Myron D. Cohen, Hunton & Williams, New York, New York, on the brief), for Defendant-Appellee.

Constantine A. Speres, Assistant Attorney General, New York, New York (Dennis C. Vacco, Attorney General of the State of New York, Thomas D. Hughes, Assistant Solicitor General, Charles F. Sanders, Assistant Attorney General, New York, New York, on the brief), for Intervenor-Defendant-Appellee Dennis C. Vacco.

Cheryl Payer, Assistant Corporation Counsel, New York, New York (Paul A. Crotty, Corporation Counsel of the City of New York, Ellen B. Fishman, Robin Binder, Assistant Corporation Counsel, New York, New York, on the brief), for Intervenor-Defendant-Appellee City of New York.

Before: KEARSE and WALKER, Circuit Judges, and WEINSTEIN, District Judge.*

Plaintiffs Robert Kessler and Vicki Cheikes, residents of the Grand Central Business Improvement District ("Grand Central BID" or "GCBID") in midtown Manhattan, appeal from a judgment of the United States District Court for the Southern District of New York, Shira A. Scheindlin, Judge, dismissing their complaint alleging that defendant Grand Central District Management Association, Inc. ("GCDMA"), the manager of the Grand Central BID, denies them equal voting power in the election of GCDMA's board of directors ("Board"), in violation of the Equal Protection Clause of the Fourteenth Amendment. The district court granted the summary judgment motion of GCDMA and intervenors-defendants City of New York (the "City") and Dennis C. Vacco, Attorney General of the State of New York (collectively "defendants"), on the ground that the Grand Central BID is a special, limited-purpose entity that disproportionately affects one class of GCBID constituents, and that GCDMA's system for electing Board members is thus not subject to the requirement of "one person, one vote." On appeal, plaintiffs contend principally that GCDMA's management of the Grand Central BID entails the exercise of general governmental power sufficient to require that Board elections comply with the one-person-one-vote requirement. We affirm.

To promote commercial development in urban areas, the New York State ("State") legislature has authorized municipalities in the State to establish business improvement districts ("BIDs"). In a BID, owners of nonexempt real property pay a periodic assessment to the municipality, over and above their ordinary municipal taxes. That assessment money is used to fund the construction of capital improvements to land in the district and the provision of certain services intended to promote business activity in the district.

The State's Business Improvement District Act, N.Y. Gen. Mun. Law § 980 et seq. (McKinney Supp.1998) (the "Act"), which was made applicable to the City by N.Y.C. Admin. Code § 25-401 et seq. (1998), generally sets forth both the procedures for establishing a BID and the mechanics of BID operation, including the representational structure of the governing Board. The following facts with respect to the Grand Central BID and GCDMA have been stipulated by the parties.

The establishment of a BID begins with the preparation of a "district plan." N.Y. Gen. Mun. Law § 980-d(a). The district plan must set forth the geographical boundaries of the proposed BID, see id. §§ 980-a(a), (b)(1), along with "a list of the properties to be benefited," id. § 980-a(b)(8). All of the "real property benefited [must be] included within the limits of the proposed [BID]," id. § 980-f(a)(3), and all of the taxable property included in the proposed BID must benefit from the BID's establishment, see id. § 980-f(a)(2). The district plan must also, inter alia, describe any proposed capital improvements, see id. § 980-a(b)(3), and state "the proposed time for implementation and completion of the district plan," id. § 980-a(b)(6). With respect to financing, the district plan must, inter alia, specify the total cost of the proposed improvements, see § 980-a(b)(3); state the "total annual amount proposed to be expended for improvements, maintenance and operation," id. § 980-a(b)(4); explain the proposed sources of funding, see id. § 980-a(b)(5); and provide "a statement of the method or methods by which the expenses of [the] district will be imposed upon benefited real property, in proportion to the benefit received by such property," id. § 980-a(b)(8).

In a municipality with a population of one million or more, the local planning commission and various officials are given an opportunity to review the district plan and submit comments to the municipality's legislative body ("municipal council"). See id. § 980-d(c). If the municipal council wishes to proceed with the establishment of the BID, it must hold a public hearing on the subject. See id. § 980-e. Property owners are given 30 days after the hearing in which to file written objections to the formation of the BID. See id. § 980-e(b). Absent sufficient objections, the municipal council may adopt a local law providing for the BID's establishment. See id. § 980-f(c). After review by the State's comptroller for compliance with certain financial restrictions, that law will take effect. See id. § 980-g.

After a BID is established, "the legislative body [of the municipality] shall have authority," id. § 980-c, to make physical improvements to "municipally or [BID] owned or leased property which will restore or promote business activity in the district," such as the renovation of streets and sidewalks, the creation of parks and parking lots, and the installation of better lighting and signage, id. § 980-c(a). The municipality may also provide "enhanced sanitation services," "services to enhance the security of persons and property," and

other additional services required for the enjoyment and protection of the public and the promotion and enhancement of the district whether or not in conjunction with improvements authorized by this section.

Id. § 980-c(c). These services "must be in addition to or an enhancement of those provided by the municipality prior to the establishment of the [BID]." Id. § 980-j(a).

For each BID, there must be established a not-for-profit corporation called a "district management association," which is charged with "carrying out such activities as may be prescribed in the [district] plan." Id. § 980-m(a). The district management association "may make recommendations to the [municipal council] with respect to any matter involving or relating to" its BID, id. § 980-m(c), and "upon [such a] recommendation," the municipal council may amend the district plan, id. § 980-i(a). "[W]here there is no indebtedness, outstanding and unpaid, incurred to accomplish any of the purposes of the [BID]," the municipal council has the power to dissolve a BID, after giving the management association an opportunity to make a recommendation concerning dissolution. Id. § 980-n(a). A BID will also be dissolved upon the petition of a sufficient number of property owners. See id.

The Grand Central BID was established in 1988, and its territory was extended in June 1995, pursuant to the procedures set forth in the Act and the corresponding City ordinances. As extended, the Grand Central BID encompasses 337 properties on sections of 75 blocks in midtown Manhattan, including the Grand Central Terminal railroad station. There are 242 owners of property within the GCBID. That property includes approximately 71 million square feet of commercial space, constituting approximately 19% of the total commercial space in Manhattan. The office space in the GCBID "exceeds the entire space inventory of the Central Business District in such cities as Houston, San Francisco, Dallas, Denver, and Boston." (District Plan, as Amended, for the Grand Central BID dated June 30, 1994 ("District Plan"), § II.B.). The GCBID also contains approximately 897,000 square feet of residential space, occupied by approximately 930 residents.

The District Plan authorizes the construction of capital improvements (the "Improvements") and the provision of additional services (the "Services") in the GCBID. The Improvements include the renovation of sidewalks and crosswalks; the planting of trees; the installation of new lighting, street signs, bus shelters, news kiosks, and trash receptacles; contributions to the renovation of Grand Central Terminal; and "the creation of a restaurant facility" on 42nd Street. (Id. § IV.A.) The Services "may include any services required for the enjoyment and protection of the public and the promotion and enhancement of the District," including

7. retail improvements.

(Id. § III.A.)

Pursuant to a contract between the City Department of Business Services and GCDMA dated July 30, 1993 (the "Contract"), GCDMA became the Grand Central BID's management association. The original Contract was to expire on June 30, 1998, subject to renewal for a five-year term at the "sole discretion" of the City. (Id. § 1.03.) That expiration date was extended to July 31, 1998, and the Contract has not been renewed, although the City has not contracted with another entity to serve as manager. As discussed in Part II.A. below, GCDMA currently continues to manage the Grand Central BID.

To carry out the District Plan, GCDMA, through its operating entity, Grand Central Partnership, Inc., employs approximately 63 security guards, most of whom are unarmed. These guards "patrol the streets and sidewalks of the District" and "attempt[ ] to obtain compliance with City regulations controlling vending, sidewalk obstructions, noise generation, and air pollution." (Id. § III.A.1.) They are "tied into [the New York City Police Department's] communications network" and act "[i]n cooperation with [the New York City Police Department] and the building staffs of private property-owners." (Id.) GCDMA employs "sanitation" workers, who perform functions such as sweeping sidewalks and streets, as well as removing graffiti, washing sidewalks, caring for trees and plants, "poster removal, cleaning street signs, and repainting street furniture." (Id. § III.A.2.) These workers bag trash, which is in due course collected by the City's Department of Sanitation in the normal course of its refuse removal duties. GCDMA also provides other services to improve the attractiveness of the district, such as giving free assistance to retailers in removing old signs and designing new signs and facades; and it provides assistance in complying with applicable City ordinances.

In addition, GCDMA contributes to the funding and operation of a 24-hour "outreach, assessment and referral" facility for homeless persons that provides services such as job training. (Id. § III.A.4.) Other GCDMA Services include operating tourist information booths in the district and sponsoring events, such as an alcohol-free New Year's Eve celebration, in the district's public spaces. GCDMA "retains the flexibility to eliminate or add to" the Services listed in the District Plan. (Id. § III.A.)

The primary source of funding for the Grand Central BID is an assessment that the City levies against and collects from all industrial, commercial, and residential property within the district. (See District Plan § V.B.) The GCBID is divided into two geographic sections, and the rate of the assessment in each section is calculated by dividing the annual budget for that section by the total taxable square footage in that section. (See id.) All industrial, commercial, and residential properties within a section are assessed at the same rate per square foot. In addition to the funds received through assessment, GCDMA may receive money from donations, limited borrowing, licensing City-owned land in the district for private use, and "any other source." (See id. §§ V.C.--V.F.)

The Act provides that the assessment is to be "determined, levied and collected in the same manner, at the same time and by the same officers, as general municipal taxes are levied and collected." N.Y. Gen. Mun. Law § 980-j(b). Any assessment money that the City collects must be "separately accounted for in the books and records" of the City and may not be "used for any purposes other than those set forth in the district plan." Id. § 980-l (a).

As contemplated by the District Plan, GCDMA received the GCBID assessment money from the City in accordance with the Contract. The Contract required GCDMA to provide the Improvements and the Services, substantially as they are described in the District Plan. In return for GCDMA's providing the Improvements and the Services, the City was generally required to give GCDMA the full amount of the assessments against property within the GCBID, plus interest, that the City has actually collected.

Both the Contract and the District Plan, however, placed certain restrictions on GCDMA's use of the assessment money and other GCBID funds. Each year GCDMA was required to develop a proposed budget setting forth, separately for the Improvements and the Services, the total amounts to be expended in that year and "reasonably itemiz[ing]" the proposed expenditures. (District Plan § VI.B.2.) The proposed budget was not to exceed the total annual amount approved by the City's legislative body, i.e., the City Council, and set forth in the District Plan. See, e.g., N.Y. Gen. Mun. Law § 980-a(b)(4); District Plan § VI.C.1. That amount could not be increased except by the City Council after a public hearing. See id. § 980-i(b). GCDMA may, however, revise the itemization in a given budget. (District Plan § VI.C.4.)

GCDMA's proposed annual budgets, along with a detailed account of the previous year's expenditures, were required to be submitted to the Commissioner of the City's Department of Business Services (the "Commissioner"). Before GCDMA may construct an Improvement, it must submit "designs, plans and specifications" to the City for approval. (Contract § 2B.04.) Further, the Commissioner is given authority

to determine the amount, quality, acceptability and fitness of the work being performed by [GCDMA] under th[e] Contract, and ... to withhold any [assessment money] if he or she determines that the provisions of th[e] Contract have not been materially complied with.

(Contract § 1.05.) The performance of the Services is "subject to the review and reasonable direction and control of the Commissioner." (Id. § 2A.04(a).) If the Commissioner "reasonably finds, after considering all the facts and circumstances," that specific Services "for which [GCDMA] has allocated [assessment money] in its annual budget" have not been "satisfactorily performed," the Commissioner may order the performance of those Services. (Id. § 2A.04(b).) If GCDMA fails to follow that order,

the City shall have the right, upon notice to [GCDMA], to perform such work for [GCDMA], and to charge [GCDMA] therefor and shall have the right, without limitation as to other remedies, to deduct its costs of doing such work from the next installment or installments of [assessment money] to be paid to [GCDMA].

(Id.)

4. Representation in the Management of GCDMA

The Act provides that the board of directors of the management association of a BID is to consist of

representatives of owners and tenants within the [BID], provided, however, that not less than a majority of its members shall represent owners and provided further that tenants of commercial space and dwelling units within the [BID] shall also be represented on the board,

along with, in a municipality "having a population of one million or more,"

one member appointed by each of the following: the chief executive officer of the municipality, the chief financial officer of the municipality[,] .... the borough president of the borough in which the [BID] is located[,] and ... the council member representing the council district in which the [BID] is located, or if the [BID] is located in more than one council district, the fourth additional member will be appointed by the speaker of the city council,

id. § 980-m(b) (emphasis added). Thus, while the management association's board is to include representatives of both property owners and tenants, the owners have the right to elect a majority of the directors.

GCDMA's bylaws provide for a Board comprising groups of directors selected by four voting classes:

a) Class A. Owners of record of real property in the [D]istrict ... or such other persons as are registered with the City of New York to receive real property tax bills for property located in the District [are eligible to] be Class A members of [GCDMA].

b) Class B. Tenants not eligible for Class A membership, who are occupants pursuant to leases of commercial space within the District ... [are eligible to] be Class B members of [GCDMA].

c) Class C. Tenants not eligible for Class A or Class B membership, who are occupants pursuant to leases of dwelling units within the District ... [are eligible to] be Class C members of [GCDMA].

d) Class D. The persons serving from time to time as directors of [GCDMA] by virtue of their appointment by [City officials] shall be Class D members of [GCDMA].

(Bylaws of GCDMA dated December 20, 1988 ("Bylaws"), Art. I, § 1.)

GCDMA holds annual elections, in which each class of voters separately elects a specified number of directors. In accordance with N.Y. Gen. Mun. Law § 980-m(b) and the corresponding N.Y.C. Admin. Code § 25-414(b), GCDMA's bylaws provide that "the number of Class A Directors shall at no time constitute less than a majority of the Board." (Bylaws Art. II, § 1.) Currently, in addition to the four Class D directors appointed by the City, GCDMA's Board is composed of 31 directors elected by the members of Class A, 16 directors elected by the members of Class B, and one director elected by the members of Class C.

Plaintiffs are residents of the Grand Central BID. They live in an apartment building at 372 Fifth Avenue, which was added to the GCBID in June 1995. Plaintiffs' building is owned by a cooperative association, in which they hold shares. That cooperative association, as an owner of property within the GCBID, is entitled to Class A membership in GCDMA. As non-property-owning noncommercial residents, plaintiffs individually are entitled only to Class C membership.

Plaintiffs commenced the present action in November 1995 pursuant to 42 U.S.C. § 1983 (1994). As amended, their complaint asserted that the "system of voting" for GCDMA Board members "privileges one class of district members over another without regard to actual number or place of residence" (Third Amended Complaint p 24), and that

[b]ecause residents are consigned to a permanent minority status on the Board even though they are numerically superior to the class of owners of property within the district, they are deprived of any meaningful opportunity to advance their interests concerning GCDMA activities

(id. p 25). Plaintiffs contended that GCDMA provides general services to the whole district, funded by a general mandatory tax, and that its functions are neither narrow in scope nor limited in purpose and thus give it the character of local government. They sought, inter alia, a declaration that

the system of representation on the Board ... violates the Equal Protection Clause by denying to the plaintiffs, who are residential tenants in the district, representation on the basis of the principle of one person, one vote

(id. at 9, p A), and they requested a permanent injunction ensuring plaintiffs equal voting rights.

In defense, GCDMA contended that the one-person-one-vote requirement is inapplicable on the ground that GCDMA falls within the exception to that requirement established by Salyer Land Co. v. Tulare Lake Basin Water Storage District, 410 U.S. 719, 93 S.Ct. 1224, 35 L.Ed.2d 659 (1973), and Ball v. James, 451 U.S. 355, 101 S.Ct. 1811, 68 L.Ed.2d 150 (1981). GCDMA argued that (a) it does not exercise general governmental powers, (b) it does not supplant or replace local government because it merely provides certain services in addition to and not in lieu of the services provided by the City, (c) its activities are subject to the supervision and control of the City, and (d) its activities affect property owners disproportionately. The State intervened in the action to defend the constitutionality of the Act's provision governing the composition of BID management associations' boards of directors, N.Y. Gen. Mun. Law § 980-m(b); and the City intervened to defend the corresponding City ordinance, N.Y.C. Admin. Code § 25-414(b). The City and the State presented arguments on the merits similar to those presented by GCDMA.

Both sides moved for summary judgment, and the case was submitted to the district court on the stipulated facts. In an opinion reported at 960 F.Supp. 760 (1997), the district court upheld the system for electing GCDMA's Board as constitutional, relying on the principle that

[t]he strictures of one-person, one-vote do not apply to a governmental body that has a special limited purpose and performs activities that have a disproportionate effect on a definable group of constituents.

Id. at 771 (citing Salyer Land Co. v. Tulare Lake Basin Water Storage District, 410 U.S. at 728, 93 S.Ct. 1224, and Ball v. James, 451 U.S. at 370, 101 S.Ct. 1811).

The district court acknowledged that GCDMA performs a wider range of functions than were performed by the governmental bodies at issue in Salyer and certain other Supreme Court cases, but the court concluded that GCDMA's functions "bear a close relationship to the [Grand Central] BID's purpose, which is restoring and promoting business activity in the District." 960 F.Supp. at 774. The court also noted that GCDMA "lacks regulatory power" and "does not have the power to levy and collect taxes, or to set tax rates." Id. at 773. "Most importantly," the district court found that "residents within the district still have recourse to their own elected officials." Id. at 774.

GCDMA's provision of ... services merely supplements and does not replace the City's services.... [T]his is significant because residents within the BID are not without recourse should they be displeased with the [services] in their area.... Residents can still appeal to their elected representatives if the City's provision of [services] is inadequate.

Id. at 774. Citing the City's role in the formation of the Grand Central BID and the presence of City officials' appointees on the Board, the court found that residents were further protected because GCDMA was subject to "a high level of municipal control." Id. at 773. With respect to the GCBID's effects, the court stated that the property owners "foot the bill" for GCDMA's activities by paying the assessment and that they receive a "significant benefit" in the form of increased property values. Id. at 775. Thus, the owners as a group are the persons who are "primarily burdened and benefited" by the Grand Central BID. Id. (internal quotation marks omitted).

The district court concluded that Board elections are not subject to the one-person-one-vote requirement, but "need only be reasonably related to the purpose of the [Grand Central] BID to satisfy the Equal Protection Clause." Id. The court upheld the voting scheme on the ground that "[t]he New York State Legislature could ... reasonably conclude that property owners would not have agreed to subject their property to ... an assessment unless they had a dominant role in determining how that revenue would be allocated." Id.

The complaint was dismissed, and this appeal followed.

On appeal, plaintiffs pursue their contention that GCDMA performs such broad governmental functions that its Board is subject to the one-person-one-vote requirement. Though the matter is not free from doubt, we agree with the district court that the limited functions and powers of GCDMA, and the disproportionate effects of its activities, place it within the Salyer-Ball exception to that requirement.

Preliminarily, we consider whether, in light of the July 31, 1998 expiration of the Contract between GCDMA and the City, plaintiffs' challenge to the makeup of the GCDMA Board continues to present a live case or controversy. Following newspaper reports that the City had declined to renew the Contract, we asked the parties to submit supplemental briefs as to whether the case had thereby become moot. Notwithstanding the State's somewhat peculiar response that consideration of the question of mootness is premature, we conclude for several reasons that the case is not moot.

First, the GCBID itself has not been dissolved, and the City informs us that GCDMA continues to perform management duties that have survived the expiration of the Contract:

GCDMA continues in existence, it continues to disburse funds previously received or which it is currently receiving under formerly established procedures, and its Board continues to govern the association, under the challenged bylaws and statutory provisions.

(City's Supplemental Brief at 3.) Thus, the board of directors whose makeup plaintiffs challenge remains in operation.

Further, both the City and GCDMA inform us that negotiations are ongoing between them for a new contract. Although the City states that "[i]t remains unclear whether agreement can be reached on any new contract between the parties" (id.), GCDMA states that its negotiations with the City for a new agreement allowing GCDMA to continue as GCBID's manager are "active" (GCDMA's Supplemental Brief at 1). Thus, it may well be that GCDMA, with its currently constituted board of directors, will continue to manage the GCBID in the future.

Finally, even if the City does not enter into a new agreement with GCDMA, the statutory scheme requires that the activities prescribed in a BID's district plan be carried out by a "district management association," N.Y. Gen. Mun. Law § 980-m(a). Thus, unless the GCBID is dissolved, the City will be required to enter into agreement with some other not-for-profit corporation to manage the GCBID. The City states that it intends to continue the existence of the GCBID and that[w]hether or not agreement can be reached in the future with the present Board of GCDMA, which remains subject to negotiation, [the City's Department of Business Services] and the City anticipate that a new contract will be in place within a short period of time with this or another entity.

(City's Supplemental Brief at 3, 4.) Whether the manager is GCDMA or a different entity, however, the makeup of the board of a BID's managing entity is controlled by statute, see, N.Y. Gen. Mun. Law § 980-m(b), and hence any board of directors of the future manager of the GCBID, whether it be GCDMA or another entity, will be required by law to be constituted in the manner under attack here.

Accordingly, we conclude that the expiration of the Contract between the City and GCDMA has not rendered the present action moot.

B. "One Person, One Vote"

In the landmark case of Reynolds v. Sims, 377 U.S. 533, 84 S.Ct. 1362, 12 L.Ed.2d 506 (1964), the Supreme Court announced that "as a basic constitutional standard, the Equal Protection Clause requires" that the seats in a state legislature "be apportioned on a population basis." Id. at 568, 84 S.Ct. 1362. This principle, generally referred to as the principle of "one person, one vote," Gray v. Sanders, 372 U.S. 368, 381, 83 S.Ct. 801, 9 L.Ed.2d 821 (1963), is based on the propositions that "people govern themselves through their elected representatives and that 'each and every citizen has an inalienable right to full and effective participation in the political processes.' " Board of Estimate v. Morris, 489 U.S. 688, 693, 109 S.Ct. 1433, 103 L.Ed.2d 717 (1989) (quoting Reynolds v. Sims, 377 U.S. at 565, 84 S.Ct. 1362). The Court in Reynolds v. Sims concluded that population-based apportionment was necessary in state legislative elections to ensure that each voter had an equal vote, and hence an "equally effective voice." 377 U.S. at 565, 84 S.Ct. 1362. Thus, in such cases, "[p]opulation is, of necessity, the starting point for consideration and the controlling criterion for judgment." Id. at 567, 84 S.Ct. 1362.

This principle applies as well to elections for units of local government. See, e.g., Board of Estimate v. Morris, 489 U.S. at 692-93, 109 S.Ct. 1433; Hadley v. Junior College District, 397 U.S. 50, 54, 90 S.Ct. 791, 25 L.Ed.2d 45 (1970); Avery v. Midland County, 390 U.S. 474, 480-81, 88 S.Ct. 1114, 20 L.Ed.2d 45 (1968).

While state legislatures exercise extensive power over their constituents and over the various units of local government, the States universally leave much policy and decisionmaking to their governmental subdivisions.... [I]nstitutions of local government have always been a major aspect of our system, and their responsible and responsive operation is today of increasing importance to the quality of life of more and more of our citizens.

Id. at 481, 88 S.Ct. 1114; see id. at 483, 88 S.Ct. 1114 ("virtually every American lives within what he and his neighbors regard as a unit of local government with general responsibility and power for local affairs"). If "general governmental powers" have been delegated, the fact of the delegation does not "insulate" the recipient of the power "from the standard of substantial voter equality." Board of Estimate v. Morris, 489 U.S. at 693, 109 S.Ct. 1433.

When the one-person-one-vote rule applies, deviations from that rule are subject to "close scrutiny." Kramer v. Union Free School District No. 15, 395 U.S. 621, 626, 89 S.Ct. 1886, 23 L.Ed.2d 583 (1969). See, e.g., Hill v. Stone,