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October 2, 1981

FRIARTON ESTATES CORP., BWIT Fifty Fifth Street, Inc., and Mid-Central Properties, Ltd., Plaintiffs,
The CITY OF NEW YORK, Philip R. Michael, as Commissioner of Finance of the City of New York, and Tax Commission of the City of New York, Defendants

The opinion of the court was delivered by: BRIEANT


By their complaint filed May 19, 1981 and by order to show cause filed May 20, 1981, plaintiffs seek preliminary and permanent injunctive relief preventing defendants from transferring to the City of New York title to and possession of, several of their properties, pursuant to Amended Supplemental Judgments of Foreclosure in rem entered on May 20, 1980 in the Supreme Court, New York County. Plaintiffs also seek damages from the City of New York to redress alleged violations of rights secured to plaintiffs by the Constitution of the United States and 42 U.S.C. § 1983. Subject matter jurisdiction is predicated upon 28 U.S.C. § 1343(3) to redress the deprivation, under color of state law, of rights secured to plaintiffs by the Constitution of the United States and by 28 U.S.C. § 1331, because the case arises under the Constitution and laws of the United States.

 Plaintiffs' underlying claim is that their properties have been assessed unequally and overassessed improperly for purposes of real property taxation. They also claim to suffer from a "multi-dimensional squeeze" wherein the income from the properties is restricted by rent control and rent stabilization, while expenses are increased by required "essential" services, and the real property tax assessment does not reflect this limited profit margin. They allege that they have made consistent and repeated efforts to obtain a trial on the merits of these claims in tax certiorari proceedings and in the foreclosure action, but they have been deprived of a day in state court for seven years, by means of various procedural obstructions imposed by the City. The City now threatens to convey title from plaintiffs to itself pursuant to proceedings in the nature of in rem tax foreclosure discussed below. Plaintiffs seek to have this Court prevent such conveyance, pending a trial on the merits of plaintiffs' tax certiorari cases.

 This Court has reviewed the state court record in the related actions and held hearings in this action on May 20, 1981, May 27, 1981 and June 10, 1981. No testimony was taken at these hearings because the essential facts are undisputed. For reasons stated below, we find that the complaint states a claim; plaintiffs are entitled to a preliminary injunction to protect their ownership; and an order of abstention should be made in this action.


 Plaintiff Friarton Estates Corp. is the present owner in fee of premises known as Block 735, Lot 30 *fn1" and Block 1042, Lots 2, 3, 4, 5, 6, 7 and 64 *fn2" on the tax map of New York County (hereinafter the "properties"). Plaintiffs BWIT Fifty-Fifth Street, Inc. and Mid-Central Properties, Ltd. are the former owners and present mortgagees of the properties and are the predecessors-in-interest to plaintiff Friarton. As such they have a possible financial interest in the state court certiorari cases. Friarton, BWIT and Mid-Central (hereinafter "plaintiffs", sometimes referred to collectively for convenience as "Friarton") collectively represent ownership of the properties since 1973. Apparently, some of the properties are empty lots and some are improved with old apartment buildings, which are subject to New York City's rent control and/or rent stabilization laws. New York City Admin. Code §§ Y51-1.0 et seq. and YY51-1.0 et seq. Defendants are the City of New York, Philip R. Michael in his capacity as Commissioner of Finance of the City of New York, *fn3" and the Tax Commission of the City of New York *fn4" (collectively the "City").

 Beginning in 1973, plaintiffs brought tax certiorari proceedings in the New York State Supreme Court, New York County, pursuant to N.Y.C.Admin.Code § 166-1.0. Such proceedings were filed for each fiscal year from 1972-73 through 1980-81, inclusive, seeking review and correction of the assessed valuations of the properties. Specifically, plaintiffs sought reduction of the assessed valuations of the properties on the separate statutory grounds of over-valuation, and unequal assessment in proportion to similar properties. *fn5" Plaintiffs claimed that the assessed valuations were fixed in disregard of large operating losses allegedly incurred with respect to each parcel, which made it impossible to pay the property taxes imposed by the City out of net revenues of the properties. Plaintiffs claim that their revenues are severely and arbitrarily limited by the City as a result of rent control and rent stabilization, *fn6" and that they are also required under those laws to provide numerous "essential" services under threat of substantial civil and criminal penalties. Plaintiffs also claimed that the assessments are many times greater than fair market value, which value is properly evidenced by the arms-length transactions in which Friarton recently purchased the properties from its predecessors. *fn7"

 A tax certiorari proceeding pursuant to N.Y.C.Admin.Code § 166-1.0 is the only judicial remedy available under New York law to property owners in New York City to obtain relief from excessive or confiscatory real property tax assessments. Plaintiffs claim that they have, since 1973, made diligent efforts to obtain a trial on the merits of the assessment dispute by bringing the necessary tax certiorari proceedings. They claim, however, that the City has frustrated their efforts through a variety of intentionally evasive and delaying tactics which seek only to avoid a fair and prompt resolution of this dispute.

 The State Supreme Court within this City maintains separate trial calendars for each of the three types of tax certiorari proceedings. Apparently, and the record is unclear on this point, cases such as this, where both over-valuation and inequality claims are made are either all placed on the inequality calendar, or required to be tried on the inequality issue prior to trial on the over-assessment issue. Plaintiffs claim, and the City does not dispute this, that not a single case from the so-called inequality calendar has been reached for trial in more than five years. (Complaint, P 17(a) and (b); Transcript of Hearing of May 27, 1981, at 7). Plaintiffs have on numerous occasions requested a trial of these claims, but the City, with the acquiescence of the State Court, has either refused, or conditioned its agreement to trial of the over-valuation claim upon plaintiffs' waiving or abandoning their inequality claim. (Complaint, P 17(d); Affidavit of George Peters, May 19, 1981, at 6, quoting Affidavit of Asst. N.Y.C. Corporation Counsel). *fn8"

 On July 6, 1977, the City instituted In Rem Foreclosure Action No. 29 in the New York State Supreme Court, New York County to foreclose tax liens on all parcels delinquent in payment of property taxes, water charges and sewer rents for one or more years, including plaintiffs' properties described in the complaint in this action. *fn9"

 Pursuant to N.Y.C.Admin.Code § D17-11.0 *fn10" which permits the pleading and establishment of the affirmative defense of invalidity of the tax in an in rem foreclosure action, Friarton sought to raise defenses in In Rem Foreclosure Action No. 29 based upon: (1) over-valuation; (2) inequality of assessment; (3) denial of due process because of the unavailability of a trial on the merits of their tax certiorari claims; (4) deliberate delays by the City; and (5) failure in determining assessed valuations to consider the impact of the City's rent control and rent stabilization restrictions combined with required "essential" services. Friarton also presented two overlapping counterclaims in the in rem foreclosure case. The first counterclaim repeated the claim that the City has failed to consider the impact of rent control and rent stabilization restrictions when combined with required "essential" services, in determining assessed valuations, and added that this amounted to a taking of property without compensation in violation of the Fifth and Fourteenth Amendments to the United States Constitution and the Constitution of the State of New York. Plaintiffs sought One Million Dollars damages under this counterclaim. The second counterclaim alleged that the assessments of the properties are over-valued and that they will be substantially reduced in the tax certiorari proceedings (if those proceedings are ever tried on the merits), and that foreclosure was, therefore, improper and premature.

 By a decision of August 29, 1979, rendered without an evidentiary hearing, the New York State Supreme Court Justice presiding found no merit in three of plaintiffs' defenses as a matter of state law. As to the remaining defense he held that:

"It would, of course be inequitable to allow In Rem foreclosure ... if in fact the taxes were improperly over-assessed and if defendant did not have a reasonable opportunity to obtain a proper assessment. Such a transfer of title would be an unconstitutional taking of property without compensation."

 However, on the face of the pleadings and affidavits, the state court, notwithstanding its holding quoted above that foreclosure was inequitable prior to trial of the tax certiorari case, granted summary judgment for the City. The state court held that plaintiffs' counterclaims, which "may have merit," were not permitted in an in rem foreclosure action under N.Y.C.Admin.Code § D17-9.0(d). *fn11" Accordingly, he ordered the counterclaim severed. *fn12" On December 27, 1979 the state court denied reargument, holding that: "Insofar as they (Friarton) raise procedural due process questions," these issues were "mooted" because of the failure to accept a "Settlement Offer" apparently tendered by the City. *fn13"

 Friarton appealed, and the Appellate Division, First Department, affirmed without opinion on August 31, 1979 with leave to appeal denied. On May 20, 1980 the state court issued Amended Supplemental Judgments of Foreclosure for each block. Plaintiffs then appealed to the New York State Court of Appeals as of right and that court dismissed on March 26, 1981 for want of a substantial constitutional question.

 On April 30, 1981, the City moved for an order restoring and reinstating nunc pro tunc a June, 1980 deed by which the City had purported to convey the properties to itself in violation of a state court-ordered stay, which deed had been previously vacated pending a final determination of plaintiffs' appeal from the judgments of foreclosure. Plaintiffs cross-moved for an order relieving them from the judgments of foreclosure, staying enforcement of the judgments pending the determination of the pending tax certiorari proceedings, and directing immediate trials for dates certain in the tax certiorari proceedings. The principal basis for plaintiffs' cross-motion was a claim of newly discovered evidence. *fn14" By a memorandum decision of the Supreme Court, New York County, dated May 6, 1981, the City's nunc pro tunc application and plaintiffs' cross-motions were denied. The City is now permitted to file and record a deed to itself for the properties, unless enjoined by this Court.

 We now consider the state of the tax certiorari cases. Just before the Appellate Division, First Department affirmed Special Term's decision, the City applied for and obtained a "blanket stay" of the entire inequality calendar. That application was made in an action by another taxpayer to which plaintiffs, as well as all the other parties on the inequality calendar, were not parties. No notice of the application for the stay was given to Friarton or to the other litigants having similar cases ready for trial. See Freewalt Realty Corp. v. Finance Administrator, N.Y.L.J., December 6, 1980, at 6, col. 6 (Sup.Ct.N.Y.Co., Dec. 2, 1980, not otherwise reported). *fn15" See Colt Industries Inc. v. Tax Commission, N.Y.L.J., Nov. 17, 1981 (App.Div. 1st Dept., Nov. 13, 1980) (per curiam).

 As can be seen, plaintiffs' counterclaims, which were severed by the trial court on August 29, 1980, have remained non-justiciable in the state court to this day primarily because of the stay of the entire inequality calendar obtained by the City in Freewalt. In addition, plaintiffs allege other improper activity intended to produce delay, on the part of the City, which need not now be considered. *fn16"

 Frustrated in their attempts to litigate these issues in the state courts, plaintiffs commenced this civil rights action on May 19, 1981. At the same time they moved by order to show cause for a preliminary injunction and temporary restraining order. Plaintiffs' complaint, patterned largely on their pending counterclaims severed in the foreclosure action, alleges that the procedural denial by the New York state courts of an opportunity to adjudicate their claims, the effect of rent control, and the City's conduct when taken as a whole, amounted to an unconstitutional taking of their property without compensation, in violation of the Fourteenth Amendment. The complaint further alleges that state judicial consideration of plaintiffs' over-assessment and inequality claims on the merits was denied on state procedural grounds in the In Rem proceeding, and that due to deliberate City-induced delays in the tax certiorari proceedings and the Freewalt stay (obtained by the City without notice to plaintiff nor any opportunity to be heard), of all trials on the entire inequality calendar, such consideration was also prevented in the tax certiorari proceedings.

 The complaint alleges more particularly that in fact the properties were discriminatorily assessed at values far in excess of fair market value, without regard to the huge operating losses resulting solely from City rent restrictions and "essential services" requirements. Plaintiffs also claim that in order to obtain financing to pay the outstanding property taxes and thereby avoid foreclosure, it is essential for them to be able to inform any prospective lender or mortgagee of the exact amount of outstanding taxes and what the future taxes are likely to be.

 By continuing to deny plaintiffs an immediate trial on the merits of all their tax assessment claims, a fact not disputed, the City deprives them, plaintiffs claim, of an opportunity to obtain funds to pay the outstanding amounts.

 By notice of motion dated May 21, 1981, the City moved to dismiss under Rule 12, F.R.Civ.P. and for failure to state a claim, and for summary judgment under Rule 56, F.R.Civ.P., dismissing plaintiffs' complaint and denying all relief requested by plaintiffs on the grounds that the action is barred by (1) res judicata; (2) the Tax (Anti-) Injunction Act, 28 U.S.C. § 1341; and (3) by plaintiffs' failure to petition for certiorari to the United States Supreme Court from the adverse decision of the New York State Court of Appeals (supra, p. 1256).

 In opposition to the motion for a preliminary injunction, in the event that its motion to dismiss is not granted, the City urges that injunctive relief be denied, notwithstanding plaintiffs' claims unless plaintiffs now pay the "undisputed" tax arrears, computed according to their allegations in the certiorari cases, pending a trial on the merits at some undetermined future date "after the stay of the Inequality Calendar of the Supreme Court in New York County is vacated." See Ex. B to Plaintiffs' Memorandum in Reply to Affirmation in Opposition to Interim Stay, at 2 (docketed August 27, 1981).

 On July 23, 1981 this Court referred all proceedings in this matter to Hon. Leonard Bernikow, United States Magistrate, "for the purpose of conducting continued settlement discussions and to ... hear and determine any and all requests for preliminary injunctive relief or temporary restraining orders or other provisional remedies ... in order that the status quo of the subject matter of this lawsuit be maintained pending settlement or pending the resolution by this Court ... of the motions heretofore submitted." On July 31, 1981, Magistrate Bernikow, doubtful of his power to do so, recommended that this Court issue an interim preliminary injunction to preserve the status quo pending decision of the motions submitted. This Court did not issue a temporary restraining order or an interim preliminary injunction because the City agreed on the record in ...

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