Opinion
27578/10
10-06-2011
East 49th Street Development II, LLC, and 250 East Borrower, LLC, Plaintiffs, v. Prestige Air & Design, LLC, Isaac Schwartz and First Sealord Surety, Inc., Defendants.
Attorney for Plaintiffs: Alan Sclar, Esq. Silverman Sclar Shin & Byrne PLLC. Attorney for Defendants: Christopher Sheehy, Esq. Westermann Sheehy Keenan Samaan & Aydelott, LLP.
Attorney for Plaintiffs: Alan Sclar, Esq. Silverman Sclar Shin & Byrne PLLC.
Attorney for Defendants: Christopher Sheehy, Esq. Westermann Sheehy Keenan Samaan & Aydelott, LLP.
Carolyn E. Demarest, J.
The following papers numbered 1 to 14 read on this motion:
Papers Numbered
Notice of Motion/Order to Show Cause/ Petition/Cross Motion and Affidavits (Affirmations) Annexed1-5
Opposing Affidavits (Affirmations)6-8
Reply Affidavits (Affirmations)9-11
Affidavit (Affirmation) Other PapersMemoranda of Law12-14
In this action by plaintiffs East 49th Street Development II, LLC (East 49th Street) and 250 East Borrower, LLC (250 East Borrower) (collectively, plaintiffs) against defendants Prestige Air & Design, LLC (Prestige), Isaac Schwartz, and First Sealord Surety, Inc. (First Sealord) (collectively, defendants) arising out of Prestige's performance of heating, ventilation, and air conditioning (HVAC) work in connection with the construction of a condominium building and alleging claims of breach of contract, negligence, breach of payment and performance bonds, fraud, and negligent misrepresentations, First Sealord moves for an order, pursuant to CPLR 3212, granting it summary judgment dismissing plaintiffs' complaint as against it.
Prestige and Schwartz have not moved for summary judgment, but have submitted papers in support of First Sealord's motion.
BACKGROUND
On August 17, 2007, East 49th Street entered into an agreement with Prestige, under which Prestige was to perform certain HVAC work in connection with the construction of a mixed-use condominium building located at 250 East 49th Street, in Manhattan (the project) for an agreed upon price of $2,085,000 (the Construction Contract). Under the Construction Contract, Prestige was required to obtain a labor and material payment bond and a performance bond. At Prestige's request, First Sealord, as surety, issued a performance bond and a payment bond, each assigned Bond No. 07-7788-PP and having a penal sum of $2,085,000, on behalf of Prestige for the project. The performance bond and the payment bond name Prestige as the Contractor and principal, First Sealord as the Surety, and East 49th Street as the Owner. According to a deed dated December 29, 2006, 250 East Borrower, actually owns the premises, but was not named as an Owner or an obligee in either the performance bond or the payment bond. 250 East Borrower is a wholly-owned subsidiary of 250 East Mezzanine, LLC, which is a wholly-owned subsidiary of 250 East Holdco, LLC, which is a wholly-owned subsidiary of East 49th Street.
The performance bond is an American Institute of Architects Document A312 (AIA 312) form bond. Pursuant to the terms of the performance bond, in the event that Prestige defaulted under the Construction Contract, East 49th Street, as the obligee under the bond, could, if it complied with certain conditions, make a demand upon First Sealord, as the Surety, to complete or arrange for the completion of the Construction Contract. Paragraph 3 of the performance bond provided that if there was no default by the Owner, the Surety's obligation under such performance bond would arise after:
"3.1 The Owner has notified the Contractor and the Surety at its address . . . that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to be held not later than fifteen days after receipt of such notice to discuss methods of performing the Construction Contract. If the Owner, the Contractor and the Surety agree, the Contractor shall be allowed a reasonable time to perform the Construction Contract, but such an agreement shall not waive the Owner's right, if any, subsequently to declare a Contractor Default; and
"3.2 The Owner has declared a Contractor Default and formally terminated the Contractor's right to complete the contract. Such Contractor Default shall not be declared earlier than twenty days after the Contractor and the Surety have received notice as provided in Subparagraph 3.1; and
"3.3 The Owner has agreed to pay the Balance of the Contract Price to the Surety in accordance with the terms of the Construction Contract or to a contractor selected to perform the Construction Contract in accordance with the terms of the contract with the Owner."
Paragraph 4 of the performance bond provided that when East 49th Street "ha[d] satisfied the conditions of Paragraph 3," First Sealord shall promptly and at its expense take one of three actions listed in subparagraphs 4.1, 4.2, and 4.3. Specifically, First Sealord could: (1) arrange for Prestige, with East 49th Street's consent, to perform and complete the Construction Contract, (2) undertake to perform the Construction Contract itself, through its agents or through independent contractors, or (3) obtain bids from contractors acceptable to East 49th Street and arrange for a contract to be executed by East 49th Street and the selected contractor. Alternatively, subparagraph 4.4 of the performance bond provided that First Sealord could "[w]aive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances", do one of the following:
"-1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment therefore to the Owner; or
"-2 Deny liability in whole or in part and notify the Owner citing reasons therefore."
Prestige commenced work at the project in 2007, and work continued through early 2010. According to Schwartz, who is Prestige's president, Prestige's work was substantially completed. East 49th Street issued payments to Prestige totaling approximately $2,043,727.66, which constituted over 98% of the entire price of the Construction Contract. Schwartz asserts that these payments reflected all but retainage for the majority of the Construction Contract's items.
By letter dated January 25, 2010 (the January 25, 2010 letter), 250 East Borrower formally served Prestige with a "7-Day Notice of Termination," referencing 250 East 49th Street. In the letter, 250 East Borrower stated that despite several requests, Prestige had failed to perform the necessary obligations of the Construction Contract, and that, if by the close of business on February 1, 2010, Prestige's work was not to its satisfaction, arrangements would be made to complete the work by other means.
The January 25, 2010 letter was addressed only to Prestige at 16 West 42nd Street in Manhattan, and was not sent to First Sealord at that time. Schwartz claims that the January 25, 2010 letter was sent to an incorrect address and was not received by Prestige. Plaintiffs acknowledge that this address was incorrect, but asserts that Prestige cannot claim that it did not receive a copy of the letter since, in addition to mailing the January 25, 2010 letter, it was e-mailed to "Julius" at Prestige. Notwithstanding the letter, plaintiffs do not deny that Prestige appeared to be present at the project site after this purported termination. According to Schwartz, East 49th Street also made a payment to Prestige in February 2010, after the date of this purported termination.
By letter dated January 29, 2010 (the January 29, 2010 letter), 250 East Borrower, which is not named as the Owner or an obligee under the performance bond, wrote to First Sealord "requesting Funds from the Bond held for Prestige." In the January 29, 2010 letter, 250 East Borrower stated that "[c]urrently, Prestige's contract . . . total[ed] with change orders . . . $2,094,763 with a balance including retainage of $104,738.00." 250 East Borrower, in the January 29, 2010 letter, further stated that "Prestige's subcontractor and suppliers have been alerting us of unpaid balances currently estimated at $150,000.00 not including damages to the premises valued at approximately $10,000.00 to 15,000.00 due to leaks from there [sic] improper workmanship, and damages as a result of improper duct installation" and requested that First Sealord "[p]lease contact us to set up an on-site meeting [for] any and all matters."
The heading of the January 29, 2010 letter contained a reference to the project's location of 250 East 49th Street, but it did not reference a project or bond number, did not mention plaintiff East 49th Street, and did not contain an address or any contact information for 250 East Borrower in spite of its request to set up a meeting. First Sealord claims that these omissions prevented it from ascertaining the project or bond to which this purported reimbursement claim referred. Although plaintiffs claim that the January 29, 2010 letter enclosed the relevant portions of the performance bond, there is no notation on the face of the January 29, 2010 letter of any enclosures or attachments. Moreover, while the January 29, 2010 letter referred to deficiencies in Prestige's work, it did not expressly advise First Sealord, pursuant to the requirements of subparagraphs 3.1 and 3.2 of the performance bond, that it was considering declaring a default by Prestige nor did it state that it had served Prestige with notice of termination or indicate that it was formally terminating Prestige's right to complete the Construction Contract.
By letter dated March 8, 2010 (the March 8, 2010 letter), which referenced the performance bond number and the property address and enclosed the January 29, 2010 letter, East 49th Street's attorney, Adam Sclar, Esq., advised First Sealord that his law firm was representing East 49th Street with regard to the performance bond issued by First Sealord on behalf of Prestige for work to be performed at the property, stating that his client had sent the January 29, 2010 letter to First Sealord as a claim for costs associated with damages to the property due to improper workmanship by Prestige, including duct installation at the property that had caused leaks throughout the building. Mr. Sclar also noted that there were several threatened claims by Prestige's subcontractors for monies due and owing, which were then estimated to be in excess of $150,000. As his client's claim under the performance bond had remained unanswered, Mr. Sclar advised First Sealord to contact him to resolve this matter, and warned that if he did not hear from First Sealord within five business days from receipt of that letter, legal proceedings would be commenced without further notice.
In response to the March 8, 2010 letter, by letter dated March 25, 2010, (the March 25, 2010 letter), First Sealord advised Mr. Sclar that it had retained a consultant, HMS Victory, LLC, to investigate East 49th Street's alleged claim, and that, in order to assist in the investigation of East 49th Street's claim, he should complete, execute, and return an enclosed form entitled "Proof of Claim Bond Obligee Affidavit" and provide all documentation and other evidence that supported East 49th Street's claim. First Sealord further advised that the failure to supply documentation or cooperate in the investigation might result in East 49th Street's claim being denied. The March 25, 2010 letter further stated that such letter and all prior and subsequent communications were "made with the express reservation of all rights and defenses that may be available to [it] at law or in equity, and under the terms and provisions of the bond and contract documents."
By undated letter received by First Sealord on May 10, 2010, Ilona Babinsky, an attorney associated with Mr. Sclar, attached an executed "Proof of Claim Bond Obligee Affidavit," and enclosed a number of documents including the Construction Contract dated August 17, 2007; a spreadsheet detailing the payments made to Prestige which totaled $2,043,727.66, listing an amount of $15,997.49 paid by East 49th Street directly to L & U Mechanical, one of Prestige's subcontractors, in order to mitigate damages associated with the filing of a mechanic's lien by L & U Mechanical; the last application for payment prepared by Prestige and submitted to East 49th Street dated February 28, 2010, which was rejected because the payment due reflected monies owed to L & U Mechanical and not Prestige directly; an application for payment prepared by Prestige and submitted to East 49th Street dated October 5, 2009, which was paid to Prestige; copies of change orders accepted by East 49th Street, which totaled $9,762.57; a lien waiver executed by Prestige; a notice sent to Prestige on January 8, 2010 referencing Prestige's lack of performance; the January 25, 2010 letter, which purported to be a "7-Day Notice of Termination"; a completion list dated March 10, 2010 detailing remaining work Prestige allegedly had to complete; invoices from L & U Mechanical; invoices from HTS Engineering, another subcontractor of Prestige, showing monies still owed to it by Prestige; invoices from Boris Metal Master Inc., another subcontractor of Prestige, showing monies still owed to it by Prestige; and five deductive change orders that East 49th Street claimed had to be performed by others because of Prestige's failure to perform.
The May 10, 2010 letter sought reimbursement under the performance bond in the amount of $1,000,000, which included the alleged costs for the completion of Prestige's work, costs to repair Prestige's work, costs to pay purported claims of subcontractors and suppliers to Prestige, and legal fees. The May 10, 2010 letter did not indicate that it was meant to comply with the requirements of subparagraph 3.1 or 3.2 of the performance bond. Rather, the letter only requested that a meeting be scheduled to discuss the matter of reimbursement to East 49th Street under the bond.
By letter dated June 10, 2010 (the June 10, 2010 letter) from First Sealord's attorney, Michael Carson, First Sealord denied East 49th Street's claim under the performance bond. First Sealord based such denial on, among other things, East 49th Street's failure to comply with the conditions precedent contained in paragraph 3 of the performance bond and to include any contact information, project name or bond number in the January 29, 2010 letter. First Sealord also noted that East 49th Street had failed to provide any documentation in support of its claim for completion and remedial work. Moreover, First Sealord questioned the extent of the corrective and completion work to be performed when almost the entire contract price had already been paid to Prestige. Mr. Carson also noted, regarding the payment bond claimants, "to date Sealord has not received any payment bond claims."
By letter dated August 19, 2010 (the August 19, 2010 letter), more than two months after First Sealord's denial of East 49th Street's claim, East 49th Street's attorney attached additional documentation and requested that First Sealord review its denial of East 49th Street's claim. In the August 19, 2010 letter, East 49th Street's claim more than doubled to $2,089,645.83, and East 49th Street's attorney requested a meeting to discuss the matter of reimbursement to East 49th Street under the "Bond."
On September 7, 2010, First Sealord's attorney spoke to East 49th Street's attorney regarding East 49th Street's claim under the performance bond, and requested a meeting to discuss payment to East 49th Street, which was followed by a September 21, 2010 e-mail requesting a meeting to discuss East 49th Street's claim. In response, First Sealord's attorney, in a September 21, 2010 e-mail to East 49th Street's attorney, responded that a meeting would not be appropriate at that time since he had not received a response from Prestige.Byletter dated October 6, 2010, addressed to Ms. Babinsky, (the October 6, 2010 letter), Prestige's attorney, Christopher Sheehy, Esq., advised East 49th Street's attorney that Prestige had found East 49th Street's claim to be vastly overstated and without merit. Mr. Sheehy provided Prestige's explanations as to why each of the listed claims by East 49th Street was incorrect and improper, and further stated that East 49th Street had waived its claims by ignoring conditions of the Construction Contract for asserting claims and seeking recovery, including a notice requirement. Mr. Sheehy also advised that plaintiffs' failure to comply with the conditions precedent contained in the Bond precluded the establishment of a valid bond claim, concluding that plaintiffs were actually indebted to Prestige for damages for breach of the contract.
PROCEDURAL HISTORY
On November 5, 2010, plaintiffs filed this action against defendants, alleging five causes of action. Plaintiffs allege that Prestige breached the Construction Contract by failing to complete performance of the HVAC work in its entirety, that Prestige negligently installed drains, joints, and pipes as called for in the Construction Contract, and that Prestige, in its lien waivers, fraudulently and negligently misrepresented that all of its subcontractors and suppliers had been paid.
On January 21, 2011, Prestige and Schwartz served their answer, and on February 2, 2011, First Sealord served its answer. Defendants' answers assert various defenses, including defenses based upon plaintiffs' failure to comply with conditions precedent under the performance bond, 250 East Borrower's lack of standing to assert claims under the bonds, the fact that East 49th Street and 250 East Borrower are not proper claimants under the payment bond, and East 49th Street's alleged breach of the underlying Construction Contract with Prestige.
DISCUSSION
First Sealord has moved for summary judgment dismissing the complaint as asserted against it based upon plaintiffs' failure to comply with conditions precedent contained in the bonds. Although all five causes of action are asserted against First Sealord, the first, second, fourth and fifth causes of action seek relief primarily based upon the actions of Prestige and Schwartz. Thus, the court will address only the claim specific to First Sealord, the third cause of action, which alleges that First Sealord failed to perform its obligations in contravention of the payment bond and the performance bond. As all the claims against First Sealord are essentially based upon an alleged breach of contract, summary judgment dismissing those claims will be appropriate only if First Sealord can demonstrate that each contract is clear and unambiguous on its face and unequivocally precludes any recovery by plaintiffs against the movant (National Loan Investors, L.P. v First Equities Corp., 261 AD2d 518 [2d Dept 1999]). The "drastic remedy of summary judgment should be granted only if there are no material issues of fact" (Dykeman v Heht, 52 AD3d 767, 769 [2d Dept 2008]; see also Andre v Pomeroy, 35 NY2d 361, 364 [1974]).
Plaintiffs have alleged a single cause of action against First Sealord for breach of contract with respect to the "Payment and Performance Bond." There are, however, two separately-captioned bonds, one covering a failure to perform the construction contract and the other providing for payment to subcontractors. Although both bonds contain the same parties as "Owner" and "Contractor," and appear to jointly form the "AIA Form 312 bond", as evidenced by a single pagination sequence shared by the two bonds, each bond is separately identified and each contains separate conditions and imposes separate obligations upon First Sealord.
"In New York, a bond is a contract[,] and [a court] therefore look[s] to standard principles of contract interpretation to determine the rights and obligations of a surety under a bond. Surety bonds, like all contracts, are to be fairly construed so as to effectuate the intent of the parties as it has been expressed in the terms of the contract. Where the terms are unambiguous, interpretation of the surety bond is a question of law" (Travelers Cas. and Sur. Co. v Dormitory Auth. State of New York, 735 F Supp 2d 42, 83 [SDNY 2010] (internal citations and quotations omitted)). "[B]efore a surety's obligations under a bond can mature, the obligee must comply with any conditions precedent" (U.S. Fidelity & Guar. Co. v Braspetro Oil Services Co., 369 F3d 34, 51 [2d Cir 2004]; see also Elm Haven Const. Ltd. Partnership v Neri Const. LLC, 376 F3d 96, 100 [2d Cir 2004]; Travelers Cas. & Sur. Co. v Dormitory Authority-State of New York, 735 F Supp 2d at 84. "A condition precedent is "an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises" (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 690 [1995]; see also U.S. Fidelity & Guar. Co.,369 F3d at 51; 120 Greenwich Development Associates, LLC v Reliance Ins. Co., 2004 WL 1277998, *11 [SD NY 2004]). "Express conditions must be literally performed" (Oppenheimer & Co.,86 NY2d at 690). Substantial compliance with a condition precedent is insufficient (see Id. at 692-693; see also MHR Capital Partners LP v Presstek, Inc., 12 NY3d 640, 654 [2009] ("We have recognized that the use of terms such as if,' unless' and until' constitutes "unmistakable language of condition'" quoting Oppenheimer & Co. at 691)).
The Performance Bond
It has been specifically held that the conditions contained in paragraph 3 of the AIA 312 performance bond at issue in this action constitute conditions precedent that require strict compliance, and that the failure to strictly comply with these conditions precedent are fatal to an obligee's claim under a performance bond (see Travelers Cas. & Sur. Co., 735 F Supp 2d at 84; 120 Greenwich Development Assoc., LLC,2004 WL 1277998, *12-13; Walter Concrete Constr. Corp. v Lederle Labs., 99 NY2d 603, 605 [2003]; 150 Nassau Assoc., LLC v Liberty Mut. Ins. Co., 36 AD3d 489, 489 [2007]; Tishman Westwide Constr. LLC v ASF Glass, Inc., 33 AD3d 539, 539 [2006]; 153 Hudson Dev., LLC v DiNunno, 8 AD3d 77, 78 [2004]). Thus, where an owner has failed to comply with such conditions precedent, it may not maintain a claim against a surety under a performance bond (see Travelers Cas. & Sur. Co., 735 F Supp 2d at 84; 120 Greenwich Development Assoc., LLC, 2004 WL 1277998, *13; Walter Concrete Constr. Corp., 99 NY2d at 605; 150 Nassau Assoc., LLC, 36 AD3d at 489; Tishman Westwide Constr. LLC, 33 AD3d at 539; 153 Hudson Dev., LLC, 8 AD3d at 78).
Plaintiffs argue that they substantially complied with the conditions precedent of subparagraph 3.1 of the performance bond by the January 29, 2010 letter. However, the conditions precedent of the performance bond are "express conditions," which "must be literally performed" (Oppenheimer & Co., 86 NY2d at 690). Here, the January 29, 2010 letter failed to comply with subparagraph 3.1 of the performance bond, which required that notice be sent by the Owner, defined in the performance bond as East 49th Street, rather than by 250 East Borrower. Moreover, the January 29, 2010 letter failed to advise First Sealord that the Owner was considering declaring a Contractor Default and failed to request a conference with Prestige and First Sealord to discuss methods of performing the Construction Contract in accordance with the requirements of subparagraph 3.1 of the performance bond. Instead, the January 29, 2010 letter simply demanded payment by First Sealord under the performance bond. In fact, the January 25, 2010 letter, addressed only to Prestige, purported to be a "7-Day Notice of Termination" thus declaring a default, without affording First Sealord prior notice or the opportunity to intervene and explore with the Owner and Prestige alternate methods of completing the Construction Contract to avoid default or termination.
As set forth above, subparagraph 3.1 of the performance bond required East 49th Street to advise First Sealord when it was considering declaring Prestige in default and to request and attempt to arrange a conference. This condition was intended to provide First Sealord with both prompt notice of a possible default and the opportunity to intervene before a default was declared, in the hope of preventing a claim under the performance bond (see 153 Hudson Dev., LLC, 8 AD3d at 78). While this important protection was relied upon by First Sealord in issuing the performance bond, East 49th Street ignored this right and did not provide it with notice of a possible default or request a conference to review the completion of the Construction Contract. Instead, East 49th Street preemptively terminated Prestige and independently arranged for the completion and repair of Prestige's allegedly incomplete and defective work, without providing First Sealord with notice until after it had incurred its alleged costs.
While 250 East Borrower did ask First Sealord to set up an on-site meeting in the January 29, 2010 letter, 250 East Borrower's purpose for the meeting was not to comply with the requirements of the performance bond by reviewing with both First Sealord and Prestige methods of performing the Construction Contract within 15 days of the receipt of that letter. Rather, the meeting sought to address 250 East Borrower's demand for payment under the performance bond, after Prestige had already been terminated. Moreover, contrary to the requirements of subparagraph 3.1 of the performance bond, the January 29, 2010 letter was not even addressed or copied to Prestige.
Although plaintiffs contend that First Sealord refused to meet, relying upon First Sealord's attorney's September 21, 2010 e-mail to East 49th Street's attorney, which stated that a meeting would not be appropriate at that time since he had not received a response from Prestige, such e-mail was sent long after the completion of the allegedly incomplete and defective work and the purported termination of Prestige, and after Sealord had denied plaintiffs' claim.
Although, as plaintiffs argue, subparagraph 3.2 of the performance bond, which required East 49th Street to declare a Contractor Default and formally terminate Prestige's right to complete the Construction Contract, was satisfied by the January 25, 2010 letter, subparagraph 3.2 of the bond required that such formal termination not occur earlier than 20 days after the notice required in subparagraph 3.1 had been received by both Prestige and First Sealord. It is undisputed that the January 25, 2010 letter was sent before the January 29, 2010 letter. Thus, even if the January 29, 2010 letter were deemed sufficient to provide the requisite notice of imminent default, in compliance with subparagraph 3.1 of the performance bond, East 49th Street was not entitled to actually declare a default and formally terminate Prestige until twenty days after both Prestige and First Sealord had received such notice. The January 25, 2010 letter, sent four days before 250 East Borrower's January 29, 2010 letter, purported to constitute notice of imminent default, but clearly did not comply with the time requirement set forth in subparagraph 3.2 of the performance bond.
Subparagraph 3.2 of the performance bond was designed to provide First Sealord with notice of its obligations, along with the opportunity to investigate the validity of a claim and to mitigate any loss. The requirement for formal notice of default and termination of the contractor set forth in subparagraph 3.2 was "to avoid the common-law rule that a [surety] is not entitled to notice when the time for its performance is due"(L & A Contracting Co. v Southern Concrete Services, Inc.,17 F3d 106, 111 [5th Cir 1994]; see also Mid-State Sur. Corp. v Thrasher Engineering, Inc., 575 F Supp 2d 731, 742 [SD W Va 2008]). East 49th Street ignored this express condition and declared a default and terminated the Construction Contract, commencing the alleged necessary completion and remediation of the Construction Contract without prior notice to the surety. Thus, plaintiffs deprived First Sealord of its notice right under the Bond by failing to provide it with a copy of the January 25, 2010 letter until the letter was attached to the May 10, 2010 letter.
Plaintiffs argue, however, that they were justified in not complying with subparagraph 3.2 of the performance bond because Prestige's catastrophic delays had made it dangerous and impractical to wait 20 days after providing the purported notice under subparagraph 3.1 to First Sealord. Plaintiffs assert that, pursuant to the Construction Contract, Prestige had committed to complete the HVAC work by December 15, 2009, and that such completion was absolutely necessary to ensure that the building be supplied with heat and ventilation through the winter, which was required for the timely completion of the project. However, while plaintiffs assert that Prestige had failed to meet a critical deadline on December 15, 2009, East 49th Street did not send the purported 7-Day Notice of Termination until January 25, 2010, nearly six weeks later, when the HVAC work was allegedly 40 days behind the scheduled completion date. Plaintiffs fail to explain why, if circumstances had been as dire as they now claim, they could not have complied with subparagraph 3.1 of the performance bond by providing the required notice to First Sealord in December 2009, when they knew that Prestige was allegedly at risk of defaulting, and then, if the matter was not resolved, terminate Prestige in compliance with subparagraph 3.2 of the performance bond 20 days thereafter in January 2010. Moreover, plaintiffs' present depiction of a dire and emergent situation is inconsistent with the January 25, 2010 and January 29, 2010 letters, which lack any reference to an emergency.
Plaintiffs also admit that they did not comply with subparagraph 3.3 of the performance bond, which required East 49th Street to offer to pay the balance of the Construction Contract price to First Sealord or to a contractor that First Sealord selected to perform the work. The performance bond required that this offer be made at the time of the default and termination, before any remedial work was performed, in order to enable First Sealord to use the remaining Construction Contract balance to offset the cost of completing the Construction Contract work. While acknowledging that $104,738 remained due to Prestige under the Construction Contract, East 49th Street failed to tender or agree to tender this remaining Construction Contract balance to First Sealord.
Although plaintiffs admit that they failed to comply with subparagraph 3.3 of the performance bond, they argue that such compliance was excused. Specifically, plaintiffs claim that in January 2010, they were aware of claims from subcontractors in the amount of $150,000 and damages from leaks in the amount of $10,000 to $15,000. Plaintiffs contend that since the total of these claims and damages was more than the balance of $104,738 remaining due to Prestige on the Construction Contract, there was no balance to be paid over to First Sealord. Subparagraph 12.1 of the performance bond, however, defined "Balance of the Contract Price" as follows:
"12.1 The total amount payable by the Owner to the Contractor under the Construction Contract after all proper adjustments have been made . . . reduced by all valid and proper payments made to or on behalf of the Contractor under the Construction Contract."
Thus, since plaintiffs acknowledged that at the time that they were required to tender the Contract Balance under subparagraph 3.3, they had allegedly incurred costs of no more than $15,000, the Contract Balance which East 49th Street was required to agree to pay to First Sealord was approximately $90,000. The purported $150,000 in claims from subcontractors, which was not paid by plaintiffs, could not be properly deducted from the Contract Balance under the express terms of subparagraphs 12.1 and 3.3 of the performance bond. Plaintiffs' reliance upon U.S. Fidelity & Guar. Co. (369 F3d at 51), in arguing that they were excused from complying with subparagraph 3.3 of the performance bond is misplaced. In U.S. Fidelity & Guar. Co. (369 F3d at 59-60), while actual payment to the surety was unnecessary because there was no contract balance, the obligee had complied with subparagraph 3.3 by agreeing to pay the contract balance to the surety. Here, in contrast, it is undisputed that plaintiffs did not agree to make any payment to First Sealord of the contract balance owed to Prestige. Moreover, the $150,000 in alleged claims of subcontractors would not be covered by the performance bond, but could only be compensated under the payment bond.
Thus, inasmuch as East 49th Street has failed to comply with the conditions precedent of paragraph 3, it may not maintain a claim against First Sealord under the performance bond (see Travelers Cas. & Sur. Co., 735 F Supp 2d at 84; 120 Greenwich Development Assoc., LLC, 2004 WL 1277998, *13; Walter Concrete Constr. Corp., 99 NY2d at 605; 150 Nassau Assoc., LLC, 36 AD3d at 489; Tishman Westwide Constr. LLC, 33 AD3d at 539; 153 Hudson Dev., LLC, 8 AD3d at 78).
Plaintiffs, however, attempt to argue that First Sealord should be equitably estopped from enforcing the conditions contained in paragraph 3 of the performance bond because it lulled them into believing that the March 8, 2010 letter complied with the terms of the performance bond. This argument must be rejected. Plaintiffs have failed to show any detrimental reliance upon any representation by First Sealord or any prejudice to them resulting from any alleged representation by First Sealord (see Home Indem. Co. v Wachter, 115 AD2d 590, 591 [1985]; Liberty Ins. Underwriters, Inc. v Perkins Eastman Architects, P.C., 31 Misc 3d 1223[A], 2011 NY Slip Op 50806[U], *11 [Sup Ct, NY County 2011]).
Plaintiffs' further argument that First Sealord waived its defenses by not immediately denying their claim is similarly without merit. First Sealord first received effective notice of plaintiffs' claim on March 8, 2010, when the letter of counsel first advised the surety of sufficient information to enable it to respond. At no time was there intentional relinquishment by First Sealord of a known right (see Greater Johnstown School Dist. v Frontier Ins. Co., 252 AD2d 615, 618 [1998]; Warhoftig v Allstate Ins. Co.,199 AD2d 258, 258 [1993]). While First Sealord, in the March 25, 2010 letter, requested documentation from East 49th Street supporting its claim under the performance bond, it never represented that East 49th Street had complied with the performance bond's terms. First Sealord was under no obligation to identify for East 49th Street its contractual obligations under the performance bond. Moreover, from First Sealord's first communication, it advised East 49th Street that it would be conducting its own review and investigation of the claim, and, as noted above, it expressly stated, in the March 25, 2010 letter, that it was "express[ly] reserv[ing] . . . all rights and defenses that may be available to [it]."
With respect to First Sealord's argument that 250 East Borrower lacks standing to assert a claim under the performance bond, plaintiffs merely contend that First Sealord should have known that 250 East Borrower was an owner of the project based upon its inclusion as an additional insured on a certificate of insurance that was an exhibit to the Construction Contract. Such contention is devoid of merit. The performance bond was issued solely on behalf of East 49th Street, the defined Owner, and First Sealord cannot be imputed with knowledge of the complex subsidiary/parent structure of ownership between 250 East Borrower and East 49th Street.
Plaintiffs also argue that First Sealord's motion is premature because discovery has not yet taken place. This argument is unavailing. Plaintiffs' lack of compliance with the conditions precedent of the performance bond has been established, as a matter of law, by the express terms of the performance bond and the letters submitted by the parties. Plaintiffs have failed to show that any facts essential to oppose First Sealord's motion may exist but cannot now be stated or that discovery could lead to any relevant evidence (see CPLR 3212 [f]; Kimyagarov v Nixon Taxi Corp., 45 AD3d 736, 737 [2007]).
The Payment Bond
With respect to any claims made under the payment bond issued by First Sealord, First Sealord maintains that plaintiffs lack standing to assert such claims because the payment bond was issued by First Sealord for the benefit of Prestige's subcontractors and suppliers, and that East 49th Street, as the owner, is not a proper claimant under the payment bond. Under the express terms of subparagraph 15.1 of First Sealord's payment bond, a "claimant" is defined as "[a]n individual or entity having a direct contract with [Prestige] to furnish labor, materials or equipment for use in the performance of the Contract."
Plaintiffs argue that because East 49th Street contracted with Prestige, East 49th Street is a "claimant" under the payment bond. Such argument, however, ignores the requirement set forth subparagraph 15.1 of the payment bond that the claimant must have contracted "to furnish labor, materials or equipment for use in the performance of the Contract." Thus, East 49th Street does not fall within this definition of a "claimant."
Plaintiffs further argue, however, that they have standing as intended third-party beneficiaries of the payment bond. Such argument is meritless. A third party has no direct cause of action as a third-party beneficiary against a surety on a bond " unless it is established that there was an intent to confer such right of action'" (Novak & Co. v Travelers Indem. Co., 56 AD2d 418, 426 [1977], quoting J & J Tile Co. v Feinstein, 43 AD2d 529, 530 [1973]; see also Fosmire v National Sur. Co., 229 NY 44, 47 [1920]). Here, the terms of the payment bond do not evince such an intent.
"A payment bond is an undertaking whereby a surety guarantees to an obligee that all bills for labor and materials contracted for, and actually used by the contractor, will be paid by the surety if the contractor defaults" (Travelers Cas. & Sur. Co., 735 F Supp 2d at 85; see also Area Masonry v Dormitory Auth. of State of NY, 64 AD2d 810, 810-811 [1978]; 11 NY Jur 2d, Bonds § 61). It is well established that "the owner-obligee may generally not recover damages from the surety under the payment bond, as the bond is intended to provide payment to persons supplying labor and material to the contractor, not to provide a financial recovery to the owner-obligee" (Travelers Cas. & Sur. Co., 735 F Supp 2d at 87). Indeed, "[n]umerous courts have denied recovery to an owner-obligee under a payment bond, or at least observed that the caselaw generally disfavors' such a suit" (Id., quoting Fed. Ins. Co. v Me. Yankee Atomic Power Co.,183 F Supp 2d 76, 81 [D Me 2001] [collecting cases]).
Plaintiffs further claim that they should be entitled to recovery under the payment bond because Prestige failed to make payment to certain subcontractors that it hired. Specifically, Gennady Kiselman, a member of East 49th Street, points out that on July 8, 2010, Boris Metal Master Inc., one of Prestige's subcontractors, filed a notice of mechanic's lien against the 250 East 49th Street property in the amount of $33,759.30, which was reduced to $18,000 by an amended notice of lien filed by it on August 3, 2010. Plaintiffs assert that on July 22, 2010, they sent a request to First Sealord to obtain a release of the lien or arrange for the lien to be bonded, to which First Sealord did not respond. On August 23, 2010, 250 East Borrower obtained a bond in order to discharge this lien. Plaintiffs also claim that on October 25, 2010, Saddle Brook Thermal Contracting LLC, another one of Prestige's subcontractors, filed a notice of mechanic's lien in the amount of $29,650 against the 250 East 49th Street property, and, on October 28, 2010, plaintiffs sent a notice to First Sealord and Prestige, demanding that they immediately bond this lien. Plaintiffs do not allege that they have bonded this lien.
It has been held that an obligee may have a right on a payment bond with respect to the claims of laborers and materialmen if, through payment, it has become subrogated to their claims (see Travelers Cas. & Sur. Co., 735 F Supp 2d at 87-88). The Appellate Division, Second Department has held that:
"The equitable doctrine of subrogation is applicable to cases where a party is compelled to pay the debt of a third person to protect his own rights, or to save his own property. However, while the scope of subrogation is broad, it cannot be invoked where the payments sought to be recovered are voluntary. A party seeking subrogation can establish that its payments were not voluntary either by pointing to a contractual obligation or to the need to protect its own legal or economic interests " (Broadway Houston Mack Dev., LLC v Kohl, 71 AD3d 937, 937 [2d Dept 2010] (internal quotations omitted)).
Although plaintiffs have not alleged that Prestige's subcontractors provided notice of their claims to First Sealord, as required by paragraph 4 of the payment bond, plaintiffs have submitted evidence that East 49th Street, the Owner under the payment bond, notified First Sealord of the subcontractor claims, as permitted by section 5 which states that "[i]f a notice required by Paragraph 4 is given by the Owner to the Contractor or to the Surety, that is sufficient compliance."
Moreover, plaintiffs have asserted that several of Prestige's subcontractors have filed mechanic's liens, which plaintiffs claim that they have been compelled to bond in order to maintain a clear title to the property and avoid defaulting on their loan obligations. Thus, plaintiffs have raised a triable issue of fact as to whether East 49th Street may recover under an equitable subrogation theory (see Travelers Cas. & Sur. Co., 735 F Supp 2d at 87-88). Consequently, although East 49th Street is not a "claimant" under the payment bond, plaintiffs have raised a triable issue of fact as to whether East 49th Street has standing and may recover under the payment bond issued by First Sealord under the theory of equitable subrogration.
CONCLUSION
Accordingly, First Sealord's motion for summary judgment dismissing plaintiffs' complaint as against it is granted only to the extent that those claims relating to performance of the Construction Contract are dismissed, and is denied as to the payment bond claim.
This constitutes the decision and order of the court.
ENTER,
J. S. C.