Travelers Ins. Co. v. 633 Third Associates

• Decision Date: 04 January 1994
• Docket Number: No. 253,D,253
• Citation: 14 F.3d 114
• Parties: The TRAVELERS INSURANCE COMPANY, Plaintiff-Appellant, v. 633 THIRD ASSOCIATES, Tower 41 Associates, Joseph T. Comras, Stanley Stahl, Robert Carmel and Citibank, N.A. as Trustee of Citibank, N.A. Commingled Employee Benefit Trust, Defendants-Appellees. ocket 93-7270.
• Court: U.S. Court of Appeals — Second Circuit

Page 114

14 F.3d 114

The TRAVELERS INSURANCE COMPANY, Plaintiff-Appellant, v. 633 THIRD ASSOCIATES, Tower 41 Associates, Joseph T. Comras Stanley Stahl, Robert Carmel and Citibank, N.A. as Trustee of Citibank, N.A. Commingled Employee Benefit Trust Defendants-Appellees.

No. 253, Docket 93-7270.

United States Court of Appeals Second Circuit.

Argued Sept. 14, 1993.

Decided Jan. 4, 1994.

David Fleischer, New York City (Battle Fowler, Stewart Klein, of counsel), for plaintiff-appellant.

John Linsenmeyer, New York City (Richard A. Mescon, Thomas R. Stritter, Morgan, Lewis & Bockius, of counsel), for defendants-appellees 633 Third Associates, Tower 41 Associates, Joseph T. Comras, Stanley Stahl, and Robert Carmel.

Marc S. Kirschner, New York City (Robert W. Gaffey, Jones, Day, Reavis & Pogue, of counsel), for defendant-appellee Citibank, N.A., as Trustee of Citibank, N.A. Commingled Employee Benefit Trust.

Before: OAKES and MAHONEY, Circuit Judges, and MISHLER, Senior District Judge. ^*

OAKES, Senior Circuit Judge:

I. BACKGROUND

This dispute is before this court for a second time. See Travelers Ins. Co. v. 633 Third Assocs., 973 F.2d 82 (2d Cir.1992) ("Travelers I "). It is useful, however, to reiterate the basic facts.

In 1986, plaintiff, The Travelers Insurance Company ("Travelers"), a Connecticut corporation, loaned $145 million to defendant 633 Third Associates ("Partnership"), a New York limited partnership that owns a single property--a 41-story office building in New York City ("the Property"). The loan was secured by a non-recourse mortgage on the Property. In 1990, the Partnership learned that it would lose some important tenants. Facing a depressed New York real estate market and mounting vacancies, the Partnership distributed $4 million in accumulated cash assets to its partners and prepared to distribute another $17 million.

On August 22, 1991, Travelers brought suit ¹ to set aside the $4 million distribution and to enjoin the $17 million distribution as fraudulent conveyances under the law of New York. ² The United States District Court for the Southern District of New York, Charles S. Haight, Jr., District Judge, denied preliminary injunctive relief and dismissed the complaint under Fed.R.Civ.P. 12(b)(6). Travelers appealed, bringing the dispute before a panel of this court for the first time. ³

Judge Haight denied preliminary injunctive relief and dismissed the complaint on the ground that Travelers lacked standing to bring a suit to set aside a fraudulent conveyance. Travelers Ins. Co. v. 633 Third Assocs., et al., No. 91 Civ. 5735 (CSH), 1991 WL 236842 (S.D.N.Y. Oct. 31, 1991) (order denying temporary restraining order); Travelers Ins. Co. v. 633 Assocs., et al., No. 91 Civ. 5735 (CSH) (S.D.N.Y. Nov. 1, 1991) (order denying preliminary injunction and dismissing complaint). Judge Haight determined that, under New York law, only those who have been injured by a conveyance have standing to set it aside as fraudulent. Judge Haight reasoned that Travelers had no property interest in the accumulated cash assets of the Partnership because Travelers had secured its loan by a non-recourse mortgage on the Property. ⁴ Accordingly, in Judge Haight's view, Travelers could not claim that it was injured by the actual or threatened distribution.

On January 1, 1992, the Partnership failed to pay property taxes and failed to meet a payment on its loan, thereby defaulting. On January 13, 1992, the Partnership distributed $17 million to its partners. On January 14, 1992, Travelers filed for foreclosure of the mortgaged property. A receiver was appointed by a New York Supreme Court on January 27, 1992. Order Appointing Receiver dated January 27, 1992 in Travelers Ins. Co. v. 633 Third Assocs., Index No. 01138/92 (N.Y.Sup.Ct.New York County).

In an opinion dated August 17, 1992, a unanimous panel of this court vacated Judge Haight's order. ⁵ Travelers I, 973 F.2d 82. This court held that the non-recourse provision did not preclude an action for equitable relief. Because Travelers could have brought an equitable action to enjoin distribution of the Partnership's cash assets, insofar as such distribution operated as waste in allowing the value of the property to decrease, this court reasoned that the Partnership may have been injured by the distribution and, accordingly, might have had standing under New York's fraudulent conveyance law. This court therefore remanded the case with instructions to provide Travelers with an opportunity to amend its complaint to allege facts supporting an equitable action for waste.

On November 9, 1992, Travelers filed an amended complaint alleging that the distributions rendered the Partnership incapable of performing its obligations under the loan, including the payment of property taxes. ⁶ Travelers claimed that failure to pay the property taxes would constitute waste remediable in equity under New York law, as would failure to maintain the property in good condition and repair. Travelers did not limit itself to stating facts sufficient to establish standing under New York fraudulent conveyance law, however. Rather, Travelers amended its complaint to include a claim for equitable relief from waste and for specific performance of the Partnership's obligations along with its original claims for equitable relief from the distributions under the law of fraudulent conveyances.

The District Court dismissed Travelers' amended complaint on the ground that an equitable action for waste would lie only against a mortgagor in possession. Travelers Ins. Co. v. 633 Third Assocs., 816 F.Supp. 197 (S.D.N.Y.1993). Citing the appointment of a receiver on January 27, 1993, Judge Haight found that the Partnership was no longer in possession. Consequently, Judge Haight dismissed Travelers' claim of waste. Judge Haight also dismissed Travelers' fraudulent conveyance claims. Finally, Judge Haight dismissed Travelers' claims for specific performance.

II. DISCUSSION

This appeal presents two main questions of New York law. The first is whether New York law recognizes failure to pay property taxes as waste, a question which we left for the district court to answer on the prior appeal. Travelers I, 973 F.2d at 85-86. The second is whether the appointment of a receiver on January 27, 1992 ousts the Partnership of possession thereby depriving Travelers of any pre-existing (1) cause of action for waste, (2) claims for specific performance, and (3) standing to set aside the distributions as fraudulent conveyances.

A. Failure to Pay Property Taxes as Waste

The central issue in this appeal is whether failure to pay property taxes constitutes waste under New York law. This issue is important both to Travelers' claims of waste and to Travelers' claims of fraudulent conveyance.

Federal courts sitting in diversity cases will, of course, apply the substantive law of the forum State on outcome determinative issues. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); 28 U.S.C. Sec. 1652 ("The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply."); see generally In re Eastern and Southern Districts Asbestos Litig., 772 F.Supp. 1380, 1388-91 (E. & S.D.N.Y.1991), rev'd on other grounds, In re Brooklyn Navy Yard Asbestos Litig., 971 F.2d 831 (2d Cir.1992). In ascertaining the substantive law of the forum, federal courts will look to the decisional law of the forum state, as well as to the state's constitution and statutes. Erie, 304 U.S. at 78, 58 S.Ct. at 822. Where the substantive law of the forum state is uncertain or ambiguous, the job of the federal courts is carefully to predict how the highest court of the forum state would resolve the uncertainty or ambiguity. See Minotti v. Lensink, 798 F.2d 607, 610-11 (2d Cir.1986) (predicting Connecticut law), cert. denied, 482 U.S. 906, 107 S.Ct. 2484, 96 L.Ed.2d 376 (1987).

Because the law of New York is unclear as to whether failure to pay property taxes constitutes waste, this court must "carefully review available resources to predict how the New York Court of Appeals would resolve the questions at bar." In re Eastern and Southern Districts Asbestos Litig., 772 F.Supp. at 1389. These resources include "the statutory language, pertinent legislative history, the statutory scheme set in historical context, how the statute can be woven into the state law with the least distortion of the total fabric, state decisional law, federal cases which construe the state statute, scholarly works and any other reliable data tending to indicate how the New York Court of Appeals would resolve the [issue]." Id. at 1391. In considering state decisional law, we must afford the fullest weight to the pronouncements of the New York Court of Appeals. See Sanchez v. United States, 696 F.2d 213, 216 (2d Cir.1982). Where there is "no decision by th[e state's highest] court then federal authorities must apply what they find to be the state law after giving 'proper regard' to relevant rulings of other courts of the State." Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967). We will also consider relevant cases from jurisdictions other than New York in an effort to predict "[w]hat would be the decision of reasonable intelligent lawyers, sitting as judges of the highest New York court, and fully conversant with New York 'jurisprudence.' " Cooper v. American Airlines, 149 F.2d 355, 359 (2d Cir.1945); see Leon's Bakery Inc. v. Grinnell Corp., 990 F.2d 44, 48 (2d Cir.1993) (federal court may consider all sources used by the highest court of the state, including decisions of other jurisdictions).

The common law doctrine of waste emerged in response to problems of divided ownership that occurred...