This Article 78 proceeding was commenced by petitioner 62nd & 1st LLC d/b/a Cigar Lounge @ Merchants NY (the Cigar Bar) to annul the July 28, 2004 determination by respondent New York City Department of Health and Mental Hygiene (DOH) declining to register the Cigar Bar as a tobacco bar exempt from anti-smoking laws.^[FN1] The specific law at issue is the New York City Smoke Free Air Act, codified in 1988 in the New York City Administrative Code, Title 17, Chapter 5, and significantly amended in 1995 and again in 2003. Also relevant is the New York State Clean Indoor Air Act, codified in Article 13-E of the New York State Public Health Law.

The Cigar Bar claims that the DOH determination is arbitrary and capricious and constitutes an excessive penalty in that it effectively compels the Cigar Bar to close its doors. DOH in opposition insists that its application of the SFAA in this case is proper in all respects.

The Relevant Law

The State's Clean Indoor Air Act (CIAA) prohibits smoking in virtually all indoor areas to which the public has access. NY Public Health Law (PHL) §1399-o. Among the handful of establishments exempt from the law are "Cigar bars that, in the calendar year ending December 31, 2002, generated ten percent or more of its total annual gross income from the on-site sale of tobacco products and the rental of on-site humidors..." PHL §1399-q, subd 5. The cigar bar must maintain a registration which is renewable annually upon [*2]a showing that the establishment still satisfies the 10% gross income requirement and "has not expanded its size or changed its location ... since December 31, 2002." The law makes clear that the City may promulgate additional laws "which comply with at least the minimum applicable standards set forth in this article." PHL §1399-r, subd. 3.

The City did precisely that when it promulgated a more extensive ban on smoking known as the New York City Smoke Free Air Act (SFAA), with particularly stringent restrictions on tobacco bars effective March 30, 2003. Although the City's anti-smoking law has provisions which are similar to those in the State's law, the parties agree that it is the City's more restrictive provisions which govern here.

The City's anti-smoking law prohibits smoking in virtually all public places, including restaurants and most bars. Among the few exceptions where smoking is permitted are establishments defined as a "tobacco bar." NYC Admin Code §17-503(20). A "tobacco bar" is defined as:

a bar that, in the calendar year ending December 31, 2001, generated ten percent or more of its total annual gross income from the on-site sale of tobacco products and the rental of on-site humidors, not including any sales from vending machines, and is registered with the department of health and mental hygiene in accordance with the rules of such agency. Such registration shall remain in effect for one year and shall be renewable only if: (I) in the preceding calendar year, the previously registered tobacco bar generated ten percent or more of its total annual gross income from the on-site sale of tobacco products and the rental of on-site humidors; and (ii) the tobacco bar has not expanded its size or changed its location from its size or location as of December 31, 2001.

NYC Admin. Code §17-502, subd. jj. Thus, with respect to cigar bars, the State and City laws are virtually identical but with one significant difference relevant here. The City law sets December 31, 2001 as the date when the bar's eligibility is judged, whereas the State law uses a date of December 31, 2002.

Background Facts

Despite diligent efforts, petitioner has been repeatedly stymied in its attempt to register its Cigar Bar as a tobacco bar exempt from the City's anti-smoking laws. Although the City has presented petitioner with a laundry list of problems with the registration application, the central dispute is one: whether DOH may combine the gross income of petitioner's Cigar Bar on the lower level of the building with the gross income of petitioner's restaurant on the upper level when calculating whether the Cigar Bar generates 10% of its gross income from tobacco-related sales as required for an exemption from the anti-smoking law. An issue also exists related to petitioner's change in the form of its ownership entity. To understand the competing claims on these points, a review of the facts is necessary.

In December 1996, petitioner's predecessor-in-interest 1125 First LLC (petitioner)^[FN2] [*3]opened a restaurant known as Merchants NY on the upper level of the premises at 1125 First Avenue, New York, NY. A few months later, petitioner opened the Cigar Bar on the lower level of the same premises. The two spaces are divided physically and operationally. The upper level is a full-scale restaurant with a complete lunch and dinner menu and its own liquor license. Smoking of both cigars and cigarettes is prohibited there. The lower level Cigar Bar has a limited menu and its own liquor license, and it provides nightly entertainment for its patrons. The Cigar Bar sells cigars and has always permitted the smoking of cigars there. Indeed, its main purpose is to provide a venue for cigar smoking for its patrons. The restaurant and the Cigar Bar have different hours of operation, different clientele, separate bathroom facilities, and separate ventilation systems. The two establishments also maintain separate books and records documenting separately recorded gross sales. Petitioner has established these facts through an affidavit from its principal, documentary evidence, photographs and an architectural sketch depicting the respective layouts of the restaurant and the Cigar Bar. Respondent DOH has not disputed any of these facts.

In accordance with the above-quoted exception to the City's anti-smoking laws, petitioner applied to respondent DOH on July 22, 2003 to register the Cigar Bar as an exempt tobacco bar. In support of the application, petitioner submitted its tax returns for 2001 and 2002. Although the owner had filed a single set of tax returns, the returns separately listed the sales of (a) tobacco products, (b) food, and beverages in the lower level Cigar Bar, distinct from any sales in the upper level restaurant. To satisfy the requirement in the City's law, the returns were accompanied by a statement from petitioner's accountant certifying that the Cigar Bar's sale of tobacco products was in excess of 10% of its gross income.

By letter dated December 19, 2003, the City denied the Cigar Bar's registration application. After first explaining that the more restrictive provisions of the City law took precedence over the State law, DOH stated that:

Hence, even if you were to demonstrate that compliance with the [State] CIAA has caused your business an undue financial hardship or that there are other circumstances that make compliance with the CIAA unreasonable, smoking would still be prohibited in your establishment under the [City's] SFAA because your establishment would have had to have been in business on December 31, 2001, without having moved or expanded since that date to qualify for registration as a tobacco bar pursuant to SFAA. Since your business changed ownership [on or about December 30, 2001] and the new entity applied for a DOHMH permit on August 28, 2002, it could not have been in business qua the new entity on December 31, 2001. Therefore, your waiver application must be denied as a matter of law. I am not delineating the numerous other defects and omissions in your registration application that would have resulted in denial in any event because we cannot approve [*4]your registration for the aforementioned reasons.^[FN3]

DOH then went on in its letter to advise petitioner of its right to file an appeal with the Commissioner of the New York State Department of Health, which petitioner did.

Shortly thereafter, while petitioner's appeal was pending, DOH rescinded its determination by letter dated February 2, 2004, explaining that it had mistakenly advised petitioner to appeal to the State when only the City had jurisdiction over the matter. The City then decided to reveal another ground for its previously issued denial and to give petitioner an opportunity to have its application reviewed anew. In so doing, DOH appeared to backtrack from its prior position that a denial of petitioner's application was mandated by the change in petitioner's ownership entity and it focused instead on the relationship between the upper level restaurant and the lower level Cigar Bar. Specifically, DOH stated in relevant part that:

I must inform you that your client is nevertheless ineligible, at least at the present time, because it did not provide us with an adequate breakdown of gross annual sales by type. Although your client considers only part of its premises to be its tobacco bar, in fact, we are required to make a determination of its eligibility based on total annual gross sales of the entire establishment. Therefore, if your client wishes to submit revenue figures for both the lower and upper levels of the establishment, we will make a determination de novo of its application.

Petitioner objected to the request for information about the upper level restaurant, emphasizing that the restaurant was an establishment wholly separate from the Cigar Bar, as if the two were located miles apart. Nevertheless, petitioner submitted the requested information on March 26, 2004.

In the ensuing days and months, as petitioner awaited word on its application, DOH inspectors issued petitioner a series of violations for allowing smoking in the Cigar Bar without a tobacco bar registration in place. An administrative law judge dismissed the violations at a hearing, finding that the application was still pending and petitioner could not fairly be penalized for the DOH delay in determining the application. Inspectors arriving as late as October 20, 2004 declined to issue additional violations on the same ground.

Unbeknownst to everyone, however, DOH had denied petitioner's application by letter dated July 28, 2004. The letter first came to light two years later, on July 13, 2006, when DOH attached it as an exhibit to papers it submitted at a hearing regarding anti-smoking violations issued to the Cigar Bar in 2006. The denial letter stated 14 grounds. Some were highly technical and easily curable, such as a defect in the notarization section of the application. Others appeared to be based on confusion as to why some of the documents were in the name of 62nd & 1st LLC and others listed the predecessor entity 1125 First LLC. However, the significant substantive grounds related to the two points at issue herein: (1) the change in the ownership entity; and (2) the relationship between the [*5]upper level restaurant and the lower level Cigar Bar. Specifically, DOH found that:

1.The establishment was not legally operating as a food service establishment on or before 12/31/2001. DOHMH records indicate that 62nd & 1st LLC changed ownership from 1125 First LLC on 12/30/2001 and did not apply for a DOHMH permit until 8/28/2002 in violation of section 10- 07(a) of the Rules of the City of New York, Title 24, Chapter 10. ...

4.The percentage of tobacco sales reported on Section B of the original application is inaccurate as all revenue figures are only for the Lower Level and do not include the Upper Level. ...

5.Sales figures for the entire establishment provided by your attorney on March 26, 2004 yield tobacco sales percentages of 2.55% and 2.99% for 2001 and 2002, respectively.^[FN4]

This Article 78 proceeding ensued.

The Issue of Ownership Entity

Petitioner argues that respondent should be estopped from denying the Cigar Bar's registration application based on the change in the ownership entity on or about December 30, 2001. Specifically, petitioner asserts that DOH effectively waived its objection based on the 2001 change in the ownership entity when it revoked its denial on that ground in its February 2, 2004 letter and asked petitioner to address a wholly different issue for the de novo review of the application. Respondent does not directly address the estoppel issue,

arguing instead that the denial based on the change in ownership entity was rational and that the denial is further supported by other grounds.

In this jurisdiction, estoppel may not be easily invoked against a municipal agency to prevent it from discharging its statutory duties. See, Velella v NYC Local Conditional Release Commission, 13 AD2d 201, 203 (1st Dep't 2004), citing Parkview Associates v City of New York, 71 NY2d 274, 282 (1988), cert denied, appeal dismissed 488 US 801. However, no need exists to address petitioner's estoppel argument because this Court finds that the DOH denial on the ownership ground is arbitrary and capricious when viewed on the merits.

As indicated above, the City significantly amended the anti-smoking law effective March 20, 2003. In addition to the 10% gross income requirement referenced above, the amendment as relevant here included in its eligibility requirements for a "tobacco bar" proof that the establishment (1) was in existence on December 31, 2001 and had not "expanded its size or changed its location" since then, and (2) was registered with DOH and has operated since December 31, 2001 pursuant to a food service establishment permit issued "to the current and any prior owner." 24 RCNY §10-07(a).

With respect to the first criterion, the parties agree that the Cigar Bar has not expanded its size or changed its location since December 31, 2001. And whereas originally [*6]in its December 19, 2003 denial letter the DOH contended that the establishment could not have been "in existence on December 31, 2001" due to the change in the ownership entity earlier that month, its recent denial is based on a somewhat different, though related, ground. DOH now contends that the Cigar Bar was not operating with a valid food service establishment permit on December 31, 2001 because the change in the ownership entity shortly before that date "automatically revokes" the permit. Resp. Memo at p. 6 (emphasis in original), citing 24 RCNY Health Code Reg. §5.11.

This denial is arbitrary and capricious in form and substance. First, the shift in the City's position certainly suggests that respondent is intent on finding any possible ground to block the Cigar Bar's registration. In addition, the overly literal application of the regulation in this case is inconsistent with its purpose and imposes an excessive penalty on petitioner. A food service establishment permit (FSE) is required to insure that the establishment meets health and safety standards. The regulation mandates the automatic revocation of the FSE upon a change in ownership, presumably based on the assumption that the new owner would adopt its own practices, rather than follow the practices of the prior, unrelated owner. But where, as here, the "new" owner and the "prior" owner are really one and the same, the rationale behind the regulation does not apply and its hypertechnical implementation to revoke petitioner's permit simply results in a penalty wholly disproportionate to the offense. See, Shore Haven Lounge, Inc. v New York State Liquor Authority, 37 NY2d 187, 190 (1975), citing Matter of Pell v Board of Education, 34 NY2d 222, 230-35 (respondent's cancellation of petitioner's liquor license based on technical violations constituted an excessive penalty which could not withstand Article 78 review).^[FN5]

In addition, and quite significantly, petitioner has attested that its attempts to obtain a separate FSE permit for the Cigar Bar were stymied by the City. When the need for an FSE became apparent, petitioner promptly applied, but respondent denied the application on the wholly uninformative ground that "This was not allowed by the Department." The request for a separate FSE permit was denied, even though petitioner had been granted separate liquor licenses for the two establishments. Despite diligent efforts by petitioner, no explanation for the denial was given and no opportunity to obtain a separate FSE permit for the Cigar Bar was ever made available. (See Merchant Aff at ¶¶ 40-54 and Exhibits K & L). Respondent's only response to this assertion is that petitioner's complaints about the FSE denial are barred by the statute of limitations. (Resp. Memo, n. 6). Respondent in no way disputes any of the facts alleged.

For these reasons, the Court rejects as arbitrary and capricious respondent's denial of the Cigar Bar registration application based on the nominal change in ownership entity [*7]in December 2001. That denial is arbitrary and capricious whether it is based on the original finding that the establishment was not "in existence" on December 31, 2001, or whether it is based on the subsequent finding that petitioner lacked a valid food service establishment permit on December 31, 2001 because the existing permit was "automatically" revoked when petitioner changed its name.

The Restaurant and Cigar Bar are Separate Entities

As quoted above, an establishment can qualify as a tobacco bar exempt from the City's anti-smoking laws if it proves that in the preceding calendar year, the tobacco bar generated ten percent or more of its total annual gross income from the on-site sale of tobacco products and the rental of on-site humidors. NYC Admin. Code §17-502, subd. jj. In paragraphs 4 and 5 of the denial at issue herein, the DOH denied petitioner's application based on a purported failure to satisfy that criterion (see p. 7, above). The expressed basis for the denial was the DOH decision to combine the gross income of the upper level restaurant with the lower level Cigar Bar, resulting in a finding that the tobacco sales were less than 3% of the combined income. Respondent does not dispute petitioner's assertion that the Cigar Bar satisfies the 10% requirement when its income is viewed separately from that of the restaurant.

Petitioner insists that the restaurant and Cigar Bar are separate and distinct entities based on the numerous separate and distinct physical and operational characteristics listed above (at p. 4), supported by the common understanding of the word "bar," as distinct from "restaurant." The fact that a single owner owns both establishments and reports the income of both on a single tax return does not make the two establishments one, petitioner claims, equating the situation to one where a single owner owns two establishments miles apart. Nor can DOH rely on the single food service establishment permit, petitioner claims, because DOH declined to issue petitioner a second FSE permit, stating simply that it was "not allowed." Petitioner further cites instances where a single FSE permit has been issued to one entity operating multiple establishments, such as a Taco Bell and Pizza Hut, even though the establishments were separate and distinct from one another. Thus, the single FSE permit directed by respondent, without explanation, cannot fairly be viewed as being dispositive of the issue.

DOH in response puts great weight on the single tax return and single food service establishment permit. It also argues that no FSE permit was in effect from December 30, 2001, when the ownership entity changed and the permit was "automatically revoked," until a new application was filed on August 28, 2002. Also, while not addressing in any way petitioner's evidence as to the separate physical and operational characteristics of the upper level restaurant and the lower level Cigar Bar, DOH insists that its determination to combine the income of the two establishments was proper in all respects.

Conclusion

This Court agrees with petitioner that the DOH determination must be annulled as arbitrary and capricious and as an excessive penalty wholly disproportionate to the offense. The only common characteristics cited by respondent are the common ownership and the consolidated tax return, which are in no way dispositive, and the single FSE permit, which was dictated by respondent. The numerous separate physical and operational characteristics far outweigh these few common elements. Regarding the FSE permit, the hypertechnical application of the revocation provision based on the change in the [*8]ownership entity was arbitrary. As discussed above, the mere change in name does not result in a change in the ownership sufficient to justify the revocation of the permit. Also, DOH cannot properly refuse to grant two separate permits, without explanation, and then rely so heavily on the single permit.

Accordingly, it is hereby ADJUDGED that the petition is granted, respondent's determination denying petitioner's application for registration as a tobacco bar is denied, and the matter is remanded to respondent for a new determination consistent with this decision.

Dated: April 23, 2007

__________________________

J.S.C.

Nadia Rivera, Esq.

Corporation Counsel

100 Church Street, Room 5-195

New York, NY 10007

(212) 788-0772

Attorney for the Respondents

Richard L. Cohn, Esq.

55 Liberty Street

New York, NY 10005

(212) 871-4000

Attorney for the Petititoner