Marine Midland Grace Trust Co. v. New York, 32 N.Y.2d 1 (1973)

When a tax statute is alleged to be unconstitutional or wholly inapplicable, a party may challenge it through a plenary action for moneys had and received, which is governed by a six-year statute of limitations that begins to run when judicial proceedings are instituted, not when an administrative claim is filed.

Summary

Marine Midland bank sought a refund of municipal taxes, arguing their levy was unconstitutional. The City denied the claim as untimely under the tax statute’s short limitations period. The bank then initiated an Article 78 proceeding. The court addressed whether the bank was bound by the statute’s time limits due to using the prescribed Article 78 remedy, or if it could pursue a common-law action for moneys had and received, subject to a longer statute of limitations. The court held that resorting to the statutory proceeding invoked its limitations, but the proceeding could be converted to a plenary action. The six-year statute of limitations, however, began when the judicial proceeding was initiated, not when the claim was filed, limiting the recoverable taxes.

Facts

Between 1963 and 1966, Marine Midland Bank paid commercial rent taxes to New York City, totaling $679,008.68. Each payment was made under protest, arguing that the tax, as applied to a national bank, violated the U.S. Constitution and federal law. Subsequent court decisions in cases involving other national banks supported the bank’s position, validating their claim of unconstitutional taxation. The bank applied for a refund on June 20, 1968, which the City Finance Administration largely denied on February 11, 1971, citing untimeliness under the statute’s 18-month or 6-month limitation periods. Only the last quarterly payment of $51,076 was refunded.

Procedural History

The bank initiated an Article 78 proceeding on March 11, 1971, to challenge the denial of its refund application. Separately, on June 18, 1971, the bank started a plenary action for moneys had and received. Special Term granted judgment to the bank, dismissing the city’s untimeliness argument. The Appellate Division modified the judgment only to adjust the interest rate, affirming the rest.

Issue(s)

1. Whether the bank, by pursuing an Article 78 proceeding prescribed by the tax statute, is bound by the statute’s short time limitations.
2. Whether the Article 78 proceeding can be converted into a plenary action for moneys had and received.
3. When the statute of limitations begins to run for a plenary action for moneys had and received in this context: upon filing the administrative claim or upon initiating judicial proceedings?

Holding

1. Yes, because resorting to the special proceeding prescribed by the statute subjects the bank to its limitations, including the time to file a claim and institute the proceeding.
2. Yes, because under CPLR 103(c), courts may convert an improperly brought proceeding into a proper form, such as a plenary action, to avoid dismissal.
3. Upon initiating judicial proceedings, because the filing of an administrative claim does not toll the Statute of Limitations governing a plenary action.

Court’s Reasoning

The court reasoned that while the tax statute provided an exclusive remedy with specific time limitations, this exclusivity does not apply when the statute is challenged as unconstitutional or wholly inapplicable. In such cases, a common-law action for moneys had and received is available, governed by the six-year statute of limitations. The court invoked CPLR 103(c) to convert the Article 78 proceeding into a plenary action, emphasizing that courts should prioritize proper form over dismissal, especially when the statute’s constitutionality is questioned. However, the court clarified that the six-year limitation period begins when judicial proceedings are initiated, not when the refund application is filed. The court noted that the bank could have avoided the time bar by pursuing a plenary action earlier. “When a tax statute…is attacked as wholly inapplicable, it may be challenged in judicial proceedings other than those prescribed by the statute as ‘exclusive’…One method of collateral attack is a plenary action for moneys had and received.” Because the action was commenced in March 1971, only tax payments made within the six years prior to that date could be recovered. The case was remitted to Special Term to allow the city to assert a statute of limitations defense.