Travelers Ins. Co. v. 633 Third Associates

• Decision Date: 17 August 1992
• Docket Number: No. 1130,D,1130
• Citation: 973 F.2d 82
• Parties: The TRAVELERS INSURANCE COMPANY, Plaintiff-Appellant, v. 633 THIRD ASSOCIATES, Tower 41 Associates and Citibank, N.A., as Trustee of Citibank, N.A. Commingled Employee Benefit Trust, Defendants-Appellees. ocket 91-9038.
• Court: U.S. Court of Appeals — Second Circuit

Page 82

973 F.2d 82

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

No. 1130, Docket 91-9038.

United States Court of Appeals Second Circuit.

Argued March 13, 1992.

Decided Aug. 17, 1992.

David Fleischer, Betsy L. Anderson, Battle Fowler, New York City for plaintiff-appellant.

Edward Brodsky, James R. DeVita, Jeffrey S. Weintraub, Spengler Carlson Gubar Brodsky & Frischling, New York City, for defendants-appellees, 633 Third Associates and Tower 41 Associates.

Thomas W. Pippert, Robert W. Lehrburger, Patterson, Belknap, Webb & Tyler, New York City, for defendant-appellee, Citibank, N.A., as Trustee of Citibank, N.A. Commingled Employee Benefit Trust.

Before: OAKES, Chief Judge, WALKER, Circuit Judge, and PARKER, District Judge. ^*

PARKER, Chief Judge:

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 which owns a 41-story office building in New York City. The loan was secured by a mortgage on the New York property. The Partnership subsequently encountered difficulties filling the building with tenants, and defaulted on the loan. Unable to recover the full value of its loan by foreclosing on the property, plaintiff sued to set aside as a fraudulent conveyance an amount of $4 million in cash allegedly distributed by the Partnership to its two partners in January 1991, and to enjoin further such conveyances. ¹ The United States District Court for the Southern District of New York, Charles S. Haight, Jr., Judge, dismissed the complaint under Rule 12(b)(6), Fed.R.Civ.P., and plaintiff appealed.

The sole issue presented is whether plaintiff has standing under sections 274 and 275 of New York's fraudulent conveyance statute ² to set aside fraudulent conveyances of the Partnership's cash assets in light of a provision in the governing loan and mortgage documents limiting the creditor's remedies in the event of the debtor's default. Those documents contain the following exculpation clause:

Notwithstanding anything to the contrary contained in this Note or the Mortgage, the liability and obligation of the Exculpated Parties [defendants and Tower 41's partners] to perform and observe and make good the obligations contained in this Note and the Mortgage shall not be enforced by any action or proceeding wherein damages or any money judgment shall be sought against any of the Exculpated Parties, except a foreclosure action against the Mortgaged Property, but any judgment in any foreclosure action shall be enforceable against the Exculpated Parties only to the extent of Maker's interest in the Mortgaged Property and Payee, by accepting this Note and the Mortgage, waives any and all right to sue for, seek or demand any deficiency judgment against any of the Exculpated Parties in any such foreclosure action, under or by reason of or under or in connection with this Note or the Mortgage.

Amended and Restated Note p 15.

In orders dated October 31 and November 1, 1991, Judge Haight denied preliminary injunctive relief and dismissed the complaint on the ground that plaintiff lacked standing to assert fraudulent conveyance claims as to funds to which plaintiff, as a nonrecourse creditor under the exculpation provision, had waived any claim. Judge Haight relied on the principle that "for a creditor to maintain a suit to set aside a fraudulent conveyance, it is essential that he shall have been injured by the conveyance.... It cannot be said that a creditor has been ... defrauded until some property out of which he has a specific right to be satisfied is withdrawn from his reach." 37 Am.Jur.2d Fraudulent Conveyances § 172 (1968). Because plaintiff, in the governing documents, foreswore any recourse in the cash allegedly transferred in violation of the New York statute, Judge Haight held that any distribution of the cash to the partners therefore could not cause plaintiff legal injury. ³

Plaintiff takes no issue with the general requirement that a creditor must have been injured by a conveyance before it may seek to set it aside as fraudulent. It further concedes that the exculpation provision bars it from looking to the cash assets of the Partnership in the event of default. Plaintiff argues, however, that it nonetheless has standing to bring this action on the ground that the challenged conveyance caused the value of the real property to decline; in particular, that the property has been allowed to waste through mismanagement and has become subject to a tax lien, superior to the mortgage, as a result of the Partnership's failure to pay local property taxes. Plaintiff contends, in short, that it has suffered the requisite injury because the transfer of the cash assets to the partners caused a diminution in the value of the security, to which plaintiff can look under the exculpation provision. ⁴

Defendants respond essentially as follows: The Partnership might have defaulted on its loan and tax obligations even had it refrained from distributing the cash assets to the partners, and there would be nothing plaintiff could do about it other than to avail itself of the foreclosure remedy that it bargained for. According to defendants, the cash distribution to the partners in no sense caused any subsequent diminution of the property's value. The Partnership, for its part, struck a bargain which allowed it to hold its cash assets free from liability to plaintiff in the event of default. By this lawsuit, plaintiff, finding the foreclosure remedy inadequate, seeks to undo its bargain, a result the court should not permit.

In its Reply Brief to this court, plaintiff counters that, if the conveyance were set aside and the Partnership still refused to pay the taxes and prudently manage the property, plaintiff could then bring a tort action for waste. See Jaffe-Spindler Co. v. Genesco, Inc., 747 F.2d 253, 256 (4th Cir.1984) (mortgagor liable to mortgagee for waste from leaking roof). If that is so, plaintiff has been injured by the alleged fraudulent transfer (and therefore has standing to sue) because the transfer frustrates its right of action to recover in tort. "The non-recourse nature of Travelers' loan does not prevent Travelers from subjecting the Partnership's assets to a personal judgment for damages arising from waste." Reply Brief for Plaintiff-Appellant, at 2.

With this proposition we disagree. The damages action suggested by plaintiff is foreclosed by the exculpation clause in the parties' agreement. As quoted above, the defendants' liability "to perform and observe and make good the obligations contained in this Note and the Mortgage shall not be enforced by any action or proceeding wherein damages or any money judgment shall be sought against any of the Exculpated Parties, except a foreclosure action...." Payment of property taxes and prevention of waste are among "the obligations" expressly undertaken by the Partnership in the loan and mortgage documents, see Agreement of Spreader, Consolidation and Modification of Mortgage, Exhibit C, pp 4, 8, and as such cannot be enforced "by any action or proceeding" for damages against the defendants. Denominating the action as one sounding in tort, as urged by plaintiff, does not save it. Plaintiff is simply precluded by the clear terms of its agreement from enforcing these obligations by a damages action. See Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 736 (2d Cir.1984) ("most venerable of contract norms" that contract terms are given effect rather than destroyed). Accordingly, plaintiff may not predicate its standing to set aside fraudulent conveyances on an asserted injury that its right of action to recover damages in tort has been defeated by the conveyances.

Although the exculpation provision bars plaintiff from bringing a tort action seeking money damages for waste of the secured property, however, it does not bar an equitable action to prevent waste. The provision forecloses to the creditor "any action or proceeding wherein damages or any money judgment shall be sought"; other remedies for breach of contract or for wrongful waste available under state law remain intact. See North American Consol., Inc. v. Kopka, 644 F.Supp. 191, 192-94 (D.Mass.1986) (claims for specific performance and actual damages actionable in contract dispute despite liquidated damages provision in contract; intent to relinquish right to specific performance must be clearly expressed); Rubinstein v. Rubinstein, 23 N.Y.2d 293, 297-98, 296 N.Y.S.2d 354, 358, 244 N.E.2d 49, 51 (1968) (equitable relief for breach of contract available where remedy at law inadequate and contract did not specifically bar equitable relief); cf. Franklin v. Gwinnett County Public Schools, --- U.S. ----, ----, 112 S.Ct. 1028, 1032, 117 L.Ed.2d 208 (1992) (once determined that federal statute is enforceable through implied private right of action, court will "presume the availability of all appropriate remedies unless Congress has expressly indicated otherwise"). By waiving its right to pursue remedies at law upon the Partnership's default, plaintiff did not thereby waive whatever rights it may have under New York law to sue, in equity, to force the Partnership to pay all property taxes due or otherwise to preserve the value of the property. ⁵

We believe an equitable action as described may be available to plaintiff in this case, although it has not yet been adequately pled. A mortgagee may bring a waste action against a mortgagor-in-possession to preserve the value of real property. "A person who has a specific lien against real estate has a right to restrain waste by the owner of the real estate." Jaffe-Spindler, 747 F.2d at 257. "Under New York law, there is a substantive cause of action for...