The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.
Accepting the invitation extended by the Second Circuit in Travelers Insurance Company v. 633 Third Associates, 973 F.2d 82 (2d Cir. 1992), with which familiarity is assumed, plaintiff Travelers has filed an amended complaint for equitable relief to prevent waste, for specific performance, and to set aside allegedly fraudulent conveyances. Defendants move to dismiss the amended complaint under Rule 12(b)(6), Fed. R. Civ. P., for failure to state a claim upon which relief can be granted, or in the alternative for summary judgment under Rule 56.
At the outset I must consider what the court of appeals said and what it did not say.
The court of appeals' opinion concludes with these words:
We emphasize the narrowness of our decision: we merely vacate the dismissal of the action and direct the district court to permit plaintiff to file an amended complaint. Whether the amended pleading survives a new motion to dismiss is a matter for the district court to decide in further proceedings consistent with this opinion.
Vacated and remanded with instructions to grant plaintiff leave to amend complaint.
While the decision is indeed narrow, I am nonetheless directed to consider the legal sufficiency of the amended complaint "in further proceedings consistent with this opinion." Travelers professes to find in the Second Circuit's opinion unequivocal holdings that it characterizes as the law of the case, leaving this Court very little to do on remand. Defendants take a different view. They say that all the court of appeals intended to do was grant leave to file an amended complaint asserting particular equitable claims, leaving it to the district court to consider ab initio the viability of those claims.
In point of fact, what the Second Circuit actually said on this point is this:
An owner's willful failure to pay taxes due on mortgaged real property has been held to be actionable waste remediable at equity in other jurisdictions. See Strains v. Wilsonian Inv. Co., 171 Wash. 359, 17 P.2d 883, 883 (1933). The principle makes good sense--from the secured creditor's vantage point, a tax lien on the secured property may be as costly as a leaky roof and we presume the courts of New York would include the willful failure to pay property taxes among the actionable grounds for a suit claiming waste.
973 F.2d at 85-86 (emphasis added).
Similarly, Travelers' brief says at 27 that the legal viability of its claim for specific performance of the Partnership's breach of contractual covenants "as a matter of law was also determined by the court of appeals which held that the exculpation provisions in the mortgage do not bar equitable remedies for breach of contract including specific performance," citing to 973 F.2d at 86. What the Second Circuit actually said was:
The Partnership in any event specifically assumed liability for payment of property taxes for the mortgaged property; plaintiff may be entitled to sue in equity for a specific performance of the Partnership's contractual duties.
Id. at 86 (emphasis added).
At oral argument counsel for Travelers vigorously pressed the contention that these utterances by the Second Circuit constituted holdings on points of law that are binding on this Court as the law of the case. In counsel's view, the Second Circuit was saying that in the absence of definitive opinions by the New York Court of Appeals to the contrary, the quoted language constitutes holdings as to what New York's highest tribunal would say when confronted with the issues.
It is presumptuous for me to suggest what the Second Circuit meant by "presume"; and I may be criticized for construing what that court meant by "may." But these risks come with the territory. I find myself unable to accept the submissions of counsel for Travelers. I think the court of appeals would be surprised to be told that in presuming that the New York Courts would reach a certain result, it held conclusively that they would; or, in saying that Travelers may be entitled to sue in equity for specific performance, it intended to hold unequivocally that the right existed on the facts of this case. These interpretations, it seems to me, stretch the plain meaning of Chief Judge Parker's words,
a jurist who does not leave his readers in doubt when he is announcing a holding.
And while it may compound my own sin of presumption to say so, it seems to me that the Second Circuit's tentative (as I view them) reflections do not proceed from established and pertinent authority. For the proposition that a property owner's willful failure to pay taxes due on mortgaged real property constitutes "actionable waste remediable at equity," the court of appeals cited only Straus v. Wilsonian Inv. Co., 171 Wash. 359, 17 P.2d 883 (1933). Straus was an appeal from an order appointing a receiver in an action to foreclose a mortgage. The mortgagor had failed to pay real estate taxes, while diverting rental income to its own officers. In those circumstances, the Supreme Court of Washington affirmed the order appointing a receiver. The Straus court relied upon an earlier Washington case that answered in the affirmative the question: "Are delinquent taxes alone a proper ground for the appointment of a receiver in the foreclosure of a mortgage, it being admitted that the security is inadequate to discharge the debt and that no deficiency judgment can be taken?" The quotation in Straus from that earlier case, Newman v. Van Nortwick, 95 Wash. 489, 164 P. 61 (1917), includes statements that: "The payment of taxes is necessary to the preservation of the property," and: "Equity devolves it upon him who has the use; not to pay them is waste."
Holdings such as these would have been pertinent to Travelers' application to the State court for the appointment of a receiver, the Partnership having defaulted in paying the real estate taxes due on January 1, 1992. Of course, Travelers did not need to cite Washington authority to obtain that requested relief from the New York court. But it is not clear that a case like Straus supports Traveler's theory of an equitable action directly against the mortgagor for waste resulting from a failure to pay real estate taxes. At least, that was not the holding in Straus.
As for the possibility of an equitable action for specific performance, the only authority the Second Circuit cited in holding out that possibility is AMF, Inc. v. Brunswick Corp., 621 F. Supp. 456, 462 (E.D.N.Y. 1985). The facts in AMF bear no resemblance to those at bar. Judge Weinstein held that a manufacturer of bowling equipment would be required to comply with a settlement agreement with a competitor providing for a non-binding advisory opinion in a dispute over priority of advertising claims. The court derived its authority to direct that specific performance from "the Federal Arbitration Act and pursuant to this Court's equity jurisdiction." Id. at 463.
The Second Circuit's unequivocal ruling, as opposed to ruminations, appears at 973 F.2d 86:
Under the circumstances, we must reverse the district court's ruling that the exculpation clause in the loan and mortgage documents deprived plaintiff of standing simpliciter."
I take that holding to mean only that the exculpation clause's barring of claims at law does not foreclose plaintiff from attempting to assert viable claims in equity.
But the Second Circuit left the evaluation of Travelers' equitable claims to this Court, at least in the first instance; and I fail to perceive in Chief Judge Parker's opinion any law of the case which would dictate the result.
It is particularly difficult for Travelers to argue law of the case when one considers that the Second Circuit observed that Travelers failed to set forth its equitable argument "with clarity or completeness in the briefs," id at 85 n.5, adding in text: "Whether plaintiff can sustain--or adequately plead--an equitable action against the defendants as described cannot be determined on the present record." Id. at 87.
In these circumstances, I will consider under the governing New York law the legal sufficiency of the equitable claims Travelers asserts in its amended complaint.
Travelers' first claim for relief is an equitable action for waste. Travelers alleges that on January 1, 1992 the Partnership failed to pay the semi-annual installments of real estate taxes due in respect of the property to the City in the aggregate amount of $ 3,803,888.04. On or about January 24, 1992, the Partnership made a payment of $ 426,394.99 in respect of those delinquent real estate taxes, but has failed to pay the balance of $ 3,377,493.05, and has failed to pay all real estate taxes thereafter becoming due. In July 1992 the Receiver appointed by the State ...