Opinion ID: 660667
Heading Depth: 2
Heading Rank: 1

Heading: Failure to Pay Property Taxes as Waste

Text: 10 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. 11 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). 12 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). 13 The common law doctrine of waste emerged in response to problems of divided ownership that occurred when, say, an owner in fee simple granted a tenant an estate in years. The tenant had an incentive to maximize the stream of benefits that could be realized from the property during the period of his tenancy. The owner, on the other hand, preferred that the property be managed so as to maximize the stream of benefits that could be realized over the life of the property. An action for waste gave the owner a remedy against a tenant who undermined the long-term profit maximizing potential of the property in order to realize short-term gains. At first the doctrine of waste prohibited any change in the property. Over time, however, it came to prohibit only those changes that reduced the long-term value of the property. In this way, it has been suggested by one commentator, the doctrine of waste developed to force tenants to manage the property as if they were the owner of the property. See Richard A. Posner, Economic Analysis of Law, 64-65 (1986). 14 New York has codified a common law cause of action for waste: 15 An action for waste lies against a tenant by the curtesy, in dower, for life, or for years, or the assignee of such a tenant, who, during his estate or term, commits waste upon the real property held by him, without a special and lawful written license so to do; or against such a tenant who lets or grants his estate and still retaining possession thereof commits waste without a like license. 16 N.Y.Real Prop.Acts.Law, Sec. 801 (McKinney 1979). 7 This cause of action provides for both legal and equitable relief. See Dime Sav. Bank of Brooklyn v. Beecher, 23 A.D.2d 297, 301, 260 N.Y.S.2d 500, 504 (App.Div.2d Dep't 1965) (suggesting the availability of equitable relief), appeal dismissed, 17 N.Y.2d 725, 216 N.E.2d 838, 269 N.Y.S.2d 976 (1966). 17 New York Courts have recognized two general categories of waste. First, as this court observed in the previous appeal, New York courts recognize  'a substantive cause of action for waste against one in control of real property who does no more than allow the property to deteriorate and decrease in value....'  Travelers I, 973 F.2d at 85 (quoting United States v. Miller, 400 F.Supp. 1080, 1084 (S.D.N.Y.1975) (citing 300 West Realty Co. v. City of New York, 43 A.D.2d 680, 350 N.Y.S.2d 147 (App.Div. 1st Dep't 1973))). Second, New York courts recognize a cause of action for waste by a mortgagee against a mortgagor who impairs the mortgage. See Union Mortgage Co. v. Nelson, 82 N.Y.S.2d 268, 269 (Sup.Ct.Bronx County 1948) (damages suit by mortgagee for damage to property caused by mortgagor), aff'd, 275 A.D. 1028, 91 N.Y.S.2d 839 (App.Div. 1st Dep't 1949); Syracuse Sav. Bank v. Onondaga Silk Co., Inc., 14 N.Y.S.2d 356, 357-59, 171 Misc. 993 (Sup.Ct.Onondaga County 1939) (This action is not strictly an action for waste such as comes within the provisions of [the predecessor of N.Y.Real Prop.Acts. Sec. 801]. The interest of the mortgagee in the property is a contingent interest.... The cause of action alleged in the complaint is for the impairment of the security of the mortgages and was formerly called an action on the case in the nature of waste.... The essence of an action of this kind is the impairment of the security of the mortgage. The mortgagee is entitled to have his mortgage security unimpaired by acts of the mortgagor or his grantee.); Van Pelt v. McGraw, 4 N.Y. 110 (N.Y.1850). 18 The existence of two categories of a cause of action is only rarely recognized explicitly. See Syracuse Sav. Bank, 14 N.Y.S.2d at 359, 171 Misc. 993 (providing a rare explicit recognition of the distinction). Consequently, our task is made more difficult by the tendency of both the New York courts and the parties to this action to borrow language from physical injury cases for application to mortgage impairment cases. It is clear that injury to real property is an essential aspect of many actions for waste. See Bobal v. Rensselaer Polytechnic Institute, 916 F.2d 759 (2d Cir.1990) (dismissing student's claim that university's failure to award degree constituted waste), cert. denied, 499 U.S. 943, 111 S.Ct. 1404, 113 L.Ed.2d 459 (1991). It is evident, however, that physical damage should not be required in an action for waste claiming impairment of the security of a mortgage. Given the recognition by New York courts of two distinct categories of waste, we will not blindly import language from one category into another. Furthermore, we have been unable to find a single case holding that financial injury to real property may never constitute waste. 19 The difference between the two categories of an action for waste can best be illustrated by an example. Under New York law, an action for waste will lie against a tenant who fails to undertake certain repairs on the property. See Watner v. P & C Food Mkts., Inc., 138 A.D.2d 959, 526 N.Y.S.2d 292, 293 (App.Div. 4th Dep't 1988) (tenant has an implied obligation to refrain from affirmative acts of waste and to make 'tenantable' repairs to avoid permissive waste of the leasehold); see also Suydam v. Jackson, 54 N.Y. 450 (1873); Marcy v. City of Syracuse, 199 A.D. 246, 255-256, 192 N.Y.S. 674 (App.Div. 4th Dep't 1921); but see Staropoli v. Staropoli, 180 A.D.2d 727, 580 N.Y.S.2d 369 (App.Div.2d Dep't 1992) (failure to paint exterior of marital residence did not constitute waste). If a mortgagor were to undertake these repairs through, say, a contractor, the mortgagor could satisfy its duty and escape liability for waste for physical injury. If the mortgagor failed to pay the contractor, however, a mechanic's lien would attach against the property. N.Y.Lien Sec. 3 (McKinney 1993). The mortgagor would then be liable for waste for the impairment of a mortgage even though no injury were done to the property. If an action for waste for the impairment of the mortgage would not lie, it would be possible for mortgagors to escape liability for permissive waste by contracting for necessary repairs, defaulting on repair bills, and allowing a mechanic's lien to attach to the property. 20 It is uncertain whether New York law recognizes the willful failure to pay taxes as actionable waste. In the previous appeal, this court wrote that it believe[d] an equitable action ... may be available to plaintiff in this case, although it has not yet been adequately pled. Travelers I, 973 F.2d at 85. This court, therefore, vacated and remanded the District Court's decision with instructions to grant Travelers leave to amend its complaint. Id. at 88. This court emphasized, however, the narrowness of its decision: 21 [W]e 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. 22 Id. This court did not decide, as a matter of law, that New York law would recognize the willful failure to pay property taxes as waste remediable by an action in equity. Rather, this court merely noted, 23 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 Straus 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. 24 Id. at 85-86. The reluctance of this court to more firmly set forth its view of the law of New York on this issue can, perhaps, be attributed to the fact that an action for waste had not yet been adequately pled, id. at 85, much less briefed. 25 On remand, the District Court dismissed the amended complaint's claims for waste and fraudulent conveyance on the ground that the Partnership was no longer in possession of the property and, therefore, could not be the subject of an action for waste. In dismissing the complaint, the District Court noted in dicta that it did not find persuasive the Second Circuit's presumption that New York law would recognize the willful failure to pay property taxes as actionable waste. Before examining whether the appointment of a receiver ousts the Partnership of possession and deprives Travelers of the opportunity to bring an action for waste, therefore, it is necessary to determine whether New York state law would recognize willful failure to pay property taxes as waste remediable by an action in equity. 26 While the New York cases on waste tend to deal with mortgage impairment resulting from physical injury to real property, at least one case clearly contemplates that, in certain circumstances, an action in waste will lie for financial injury to real property. In Union Mortgage Co. v. Nelson, 82 N.Y.S.2d at 270, Justice Corcoran citing a Maine case wrote, 27 It is true that the failure of a life tenant to pay taxes has been held waste in so far as the remainderman is concerned. 28 While the court went on to hold that the case at bar did not present a situation in which an action in waste would lie, the court was more concerned with the fact that the action was brought by a junior mortgagee than with the fact that the action claimed that failure to pay taxes was waste. See Union Mortgage, 82 N.Y.S.2d at 270. In discussing this case, the District Court noted that on appeal the Appellate Division four-sentence memorandum decision wrote, The allegations sought to be added by the amended and supplemental complaint are factually nothing more than non-payment of first mortgage interest and taxes. This is not waste in a legal sense. Union Mortgage Co. v. Nelson, 275 A.D. 1028, 91 N.Y.S.2d 839 (App.Div., 1st Dep't 1949). The District Court failed to note, however, that the Appellate Division went on to write, In the absence of showing fraud or some obligation on the part of defendant owing to plaintiff to make such payments, neither the proposed amended nor supplemental complaint make out a cause of action. Id. This seems to suggest that the Appellate Division would countenance an action for waste for failure to pay taxes where that failure occurred in violation of the mortgagor's obligations or where the failure was willful, intentional, fraudulent, or the like. 29 The District Court cites another Supreme Court case, Ganbaum v. Rockwood Realty Corp., 62 Misc.2d 391, 308 N.Y.S.2d 436 (Sup.Ct.Bronx Co.1970), for the proposition that waste does not include the breach of financial conditions. Ganbaum, however, cites a single case for this proposition--Union Mortgage. Id. 62 Misc.2d at 396, 308 N.Y.S.2d 436. And, as we have seen, in considering Union Mortgage on appeal, the Appellate Division's First Department contemplated the possibility of an action in waste for failure to pay taxes upon a showing of fraud or an obligation to pay. 30 A line of New York cases has interpreted the scope of an action for waste broadly. In Van Pelt v. McGraw, 4 N.Y. 110, 111-12 (1850), the New York Court of Appeals said: 31 It forms no objection to this action that the circumstances of the case are novel, and that no case precisely similar in all respects has previously arisen. The action is based upon very general principles, and is designed to afford relief in all cases where one man is injured by the wrongful act of another, where no other remedy is provided. This injury may result from some breach of positive law, or some violation of a right or duty growing out of the relations existing between the parties.... The defendant ... in this case, came into possession of the land subject to the mortgage. The rights of the holder of the mortgage were therefore paramount to his rights, and any attempt on his part to impair the mortgage as a security, was a violation of the plaintiff's rights. 32 Justice Kimball of the New York Supreme Court has written, 33 Such an action [for waste], whether against a mortgagor, a stranger, or other person seems to have been of ancient origin and came into use by reason of the exigencies of the particular set of circumstances, the law not being without a remedy for a wrong. 34 Syracuse Sav. Bank, 14 N.Y.S.2d at 358, 171 Misc. 993. The Appellate Division's Third Department has observed, [I]t has been well remarked that courts of equity will exercise a liberal jurisdiction in respect to waste, and in its restraint. Vandemark v. Schoonmaker, 9 Hun (N.Y.) 16, 19 (App.Div. 3d Dep't 1876); see also Wade v. Malloy, 16 Hun (N.Y.) 226, 230 (App.Div. 2d Dep't 1878) (waste remediable though no precise precedent for such an action as this ..., for it is one of the chief beauties of our system of jurisprudence that it is flexible, and opens to take in all meritorious cases and give a remedy.). 35 Together with this line of New York cases interpreting the cause of action for waste broadly, the contemplation by the Appellate Division's First Department of an action for waste for failure to pay taxes suggests that an equitable action for waste would lie under New York law for the intentional failure to pay property taxes where there is an obligation to do so or the failure is intentional or fraudulent. 36 As we have previously noted, other courts have recognized the failure to pay property taxes as waste. See Pike v. Wassell, 94 U.S. 711, 715, 24 L.Ed. 307 (1876) (The defendants admit that they have determined not to pay the taxes upon the property. The danger of incumbrance by reason of this failure to perform their duties as tenants for life is, therefore, imminent, and the case a proper one for a court of equity to interfere and grant appropriate relief.); Hausmann v. Hausmann, 231 Ill.App.3d 361, 172 Ill.Dec. 937, 596 N.E.2d 216 (App.Ct. 5th Dist.1992); Chapman v. Chapman, 526 So.2d 131, 135 (Fla.Ct.App.1988); First Nat'l Bank v. Clark & Lund Boat Co., 68 Wis.2d 738, 229 N.W.2d 221, 223 (Sup.Ct.1975); Farmers' Mut. Fire & Lightning Ins. Co. v. Crowley, 354 Mo. 649, 653, 190 S.W.2d 250, 253 (1945); Thayer v. Shorey, 287 Mass. 76, 191 N.E. 435 (Sup.Jud.Ct.1934); Straus v. Wilsonian Inv. Co., 171 Wash. 359, 17 P.2d 883 (Sup.Ct.1933); Mutual Benefit Life Ins. Co. v. Canby Inv. Co., 190 Minn. 144, 147, 251 N.W. 129, 131 (Sup.Ct.1933). Most recently, a United States District Court in Illinois held that failure to pay taxes constitutes waste as that term has been defined by the Illinois courts. Capitol Bankers Life Ins. Co. v. Amalgamated Trust and Sav. Bank, No. 92 C 4480, 1993 WL 594103, at  5 (N.D.Ill. May 6, 1993). 37 We hold that the intentional failure to pay property taxes where there is an obligation to do so or where the failure is fraudulent constitutes waste under the law of New York. We note, however, the narrow limits of this holding. Not every failure to comply with loan obligations will constitute waste actionable by the mortgagee. First, the failure must be intentional or fraudulent. Second, the failure must result in the impairment of the security of the mortgage. The mere failure to pay principal and interest, for example, will not constitute waste. Such failure does not impair the mortgage. Instead, such failure triggers default provisions and gives the mortgagee the right to foreclose on the mortgaged property. 8 By contrast the intentional failure to pay property taxes does impair the mortgage. Under New York Real Property Tax law, a lien attaches against real property immediately upon the failure to pay assessed property taxes. N.Y.Real Prop.Tax Sec. 902 (McKinney 1989). Further, under the New York City Administrative Code, interest accrues on the unpaid real estate taxes at the rate of 18 percent per annum compounded daily. See N.Y.C.Admin.Code Secs. 11-123, -224; New York City Department of Finance, Finance Quarterly Bulletin, Fall 1991. A mortgagee who attempts to foreclose on real property must pay the accrued taxes and interest in order to assume title to the property free of these liens. 9 38 It should be noted that, in addition to claiming waste for willful failure to pay property taxes, Travelers claimed waste for failure to maintain the property in good condition. This, too, states an adequate basis for waste. New York law is clear that a tenant has an implied obligation to refrain from affirmative acts of waste and to make 'tenantable' repairs to avoid permissive waste of the leasehold. Watner v. P & C Food Mkts., Inc., 138 A.D.2d 959, 526 N.Y.S.2d 292, 293 (App.Div. 4th Dep't 1988) (lower court erred in denying plaintiff's motion for leave to amend her complaint to assert a cause of action for waste); see also Suydam v. Jackson, 54 N.Y. 450; but see Staropoli v. Staropoli, 180 A.D.2d 727, 580 N.Y.S.2d 369 (App.Div. 2d Dep't 1992) (failure to paint exterior of marital residence did not constitute waste). 39