Opinion
Index No. 650533/2017
04-23-2020
GPK 31-19 LLC, individually and on behalf of all the lienors, claimants or creditors for wages or materials, pursuant to Lien Law Article 3-A, in connection with the improvement of real property known as 31-19 37th Avenue, Long Island City, in the City of New York, County of Queens and State of New York, Plaintiff, v. L & L CONSTRUCTION DEVELOPMENT INC., XIANGBO LI, "JOHN DOE 1" through "JOHN DOE 10", defendants being unknown to plaintiff and having or claiming an interest in or lien upon the private improvements foreclosed herein and "JANE DOE 1" through "JANE DOE 10", being fictitious names, the real names being unknown to the plaintiff at this time, and being intended to designate the individuals, corporations or other legal entities who are or were recipients of funds diverted from the Trust described in the complaint, Defendants. L & L CONSTRUCTION DEVELOPMENT INC., Third-Party Plaintiff, v. GP KEYSTAND LLC and WESTCHESTER FIRE INSURANCE COMPANY, Third-Party Defendants.
NYSCEF DOC. NO. 200 Motion Sequence No. 003 DECISION & ORDER ANDREA MASLEY, J.S.C.:
In motion sequence number 003, plaintiff GPK 31-19 LLC (Owner) and third-party defendant Westchester Fire Insurance Company (Westchester) move for partial summary judgment against defendant and third-party plaintiff L & L Construction Development Inc. (Contractor) and its president, defendant Xiangbo Li, pursuant to CPLR 3212. They seek dismissal of Contractor's counterclaims and the causes of action asserted in its third-party complaint. Owner and Westchester also seek an order discharging defendants' mechanic's lien, releasing the mechanic's lien discharge bond, and granting Owner summary judgment against defendants on its first cause of action, for trust fund diversion, and against Contractor on its second cause of action, for breach of contract. Owner and Westchester also seek attorneys' fees and costs against defendants.
Defendants oppose and cross-move, pursuant to CPLR 3212, for an order dismissing Owner's complaint, in its entirety, granting partial summary judgment in defendants' favor on the issue of Owner's liability to Contractor for breach of contract, and scheduling a trial on the issue of the damages.
Background
Owner is engaged in the development of real property located at 31-19 37th Avenue, in Long Island City, Queens County, New York (Site), constructing residences and a mixed-use five-story building at the Site (Project) (Verified Amended Complaint, dated March 27, 2017 (Complaint), ¶ 11 (NYSCEF Doc No. [NYSCEF] 14).
Owner contends that, on December 22, 2015, it hired Contractor as its general contractor by entering a written agreement (Contract) in which Contractor promised to provide all work, labor and materials for the Project (Work) in exchange for the sum of $2,200,000 (Contract Amount) (NYSCEF107, Sen Zhang 11/9/18 aff., [Sen aff], ¶ 5).
Sen Zhang is a member of GPK.
Under paragraph 3 of the Contract's Terms and Conditions, Owner is to pay Contractor each month in accordance with Contractor's pre-approved scope-of-work plan and its submitted payment requisitions (see NYSCEF 108, Contract ¶ 3).
Owner asserts that, after executing the Contract, it provided an advance payment to Contractor in the amount of $220,000 and other unidentified payments (NYSCEF 107, Sen aff ¶ 19). Owner alleges that, despite these payments and the 16-month term of the Project, Contractor performed little or no work at the Site during the 2016 calendar year and, by December 2016, had not yet completed the foundation (id. ¶ 20).
Owner contends that it repeatedly complained to Contractor about its failure to perform its obligations under the Contract, including its failure to monitor activities at the Site, to provide a construction schedule, to obtain necessary inspections and permits, and to coordinate the Work of its subcontractors (id. ¶ 21). Contractor also purportedly ignored safety hazards identified in several safety reports, including three reports that Owner provided to Contractor in which it raised safety issues that required immediate attention (id. ¶¶ 21-22).
Owner claims that, because of these failures, it sent Contractor a notice of material default (Default Notice) on December 23, 2016, listing deficiencies that had arisen at the Site and demanding that Contractor correct them immediately (id. ¶ 25).
Owner further charges that Contractor did not respond to the Default Notice, or act to correct or otherwise address these deficiencies; therefore, on January 10, 2017, it sent a written notice to Contractor terminating the Contract and demanding a refund of all down payments and advances paid to Contractor or its subcontractors. Contractor has not complied (id. ¶ 26). On January 12, 2017, Owner hired nonparty JB Max Enterprises Corp. to replace Contractor as its new general contractor for the Project for the sum of $2,268,000 (id. ¶ 27).
Owner asserts three causes of action against defendants: (1) trust fund diversion against both defendants (Complaint ¶¶24-41); (2) breach of contract against Contractor (Complaint ¶¶42-56); and (3) willful exaggeration of lien against Contractor (Complaint ¶¶57-65).
Defendants answered, generally denying the allegations of the complaint and asserted two counterclaims, for breach of contract and quantum meruit (NYSCEF 92, 4/4/17 Verified Answer to Amended Complaint and Counterclaims).
Contractor claims that, even though it performed all its duties, Owner terminated the Contract, without justification, on January 10, 2017 (id. ¶ 96). Contractor further contends that Owner caused repeated delays and increased costs by changing the scope of the Work unnecessarily, including by adding a floor and changing the configuration of the foundation in the building plans, and by usurping Contractor's role and directly overseeing the Work of the various subcontractors in an incompetent fashion (id. ¶¶ 90-94). Contractor's claims against Owner include: (1) breach of contract for the unpaid balance on the contract in the amount of $315,039.14 (id. ¶¶86-100); and (2) quantum meruit for labor and materials in the amount of $315,039.14 (id. ¶¶101-103).
Contractor also asserts a cause of action as third-party plaintiff against third-party defendants GP Keystand LLC and Westchester, for recovery under a mechanic's lien discharge bond and quantum meruit (NYSCEF 128, 3/23/17 Amended Third-Party Complaint). Relevant Contract Provisions
Under the Contract, Contractor agrees "to act as a general contractor" and, among other things, to "supply all labor, services, supervision, equipment and materials necessary to construct and complete the Project," which items are defined as "the 'Work'" (Contract at 1 [NYSCEF 108]). In consideration for Contractor's "proper and timely completion of the Work, and the Contractor's performance of all of its other obligations under this Contract ... the Owner shall pay to Contractor two million two hundred thousand ($2,200,000.00) dollars [sic]," defined as the "Contract Amount" (id.).
The Contract Amount is to be paid in installments, based on payment requisitions submitted by Contractor, in amounts based on the portion of the Work that has been completed in a timely manner, in full compliance with the Contract, by Contractor and its subcontractors, subject to retainage, offsets and withholdings (id. ¶ 3).
The Contract also requires Contractor to perform its obligations in a diligent manner. Paragraph 4 of the Contract, titled "SCHEDULE," explicitly states that "[t]ime is of the essence" and that Contractor agrees to perform its various obligations promptly and to "meet any milestone dates established by the Owner, in its discretion," under the Program Schedule (id. ¶ 4). Paragraph 4 goes on to provide:
"The Contractor shall submit to the Owner [] a copy of the Proposed Project Schedule and shall update the Proposed Schedule as needed, but not less than on a monthly basis. The Project Schedule is subject to reasonable revision and written approval by the Owner as may be necessary to meet an overall Project schedule or other needs of the Project, or to coordinate the Work with the adjacent or contiguous work of others. The Contractor acknowledges that any unexcused delay in completion of the Work, or any other improper performance on its part under the Contract, may cause damages to the Owner, including the liability of the Owner to others and agrees to compensate the Owner for all such direct and consequential damages suffered as a result of such causes, including reasonable attorney's fees and costs"(id.).
Paragraph 5 of the Contract gives Owner a free hand to modify the Work:
"The Owner may modify the Work, delete (not including the assignment of Work to someone else or cancellation of the Work) or add portions to the Work. In the event of such modifications (regardless of the nature, extent or aggregate scope of all other modifications), this Contract shall remain in full force and effect, except that the Contract Amount shall be adjusted, as provided in this Article ... Any modifications or Change Order requests made by the Contractor shall be presented in writing to the Owner for approval. The Contractor shall attempt to negotiate, in good faith, an equitable adjustment to the Contract Amount for each specific modification of the Work. In the event that the Owner and the Contractor cannot agree upon the amount of such equitable
adjustment, in the case of added work, the Owner shall have the option to direct the Contractor to perform the added work and to submit contemporaneous daily and Owner-verified cost records of its actual and necessary costs of labor and materials incurred in performing the added work. The Owner and the Owner's Lenders shall then determine the appropriate equitable adjustment by review of such cost records to determine their accuracy and the fact and reasonableness of such costs, or to make appropriate adjustments, and then add 10% to such costs to cover all other elements of direct and indirect costs, profit and all other aspects of the Work, regardless of the scope, nature, or aggregate number of all other modification s or changes to the Work... The Contractor shall be free to dispute the Owner's determination of any equitable adjustment in accordance with the notice and claims provisions of the Contract. The Contractor may not, however, refuse a written directive from the Owner to perform modified or added work"(id. ¶ 5).
Paragraph 22, however, captioned "MODIFICATION," states:
"This Contract may not be modified orally. All modifications must be in writing and signed by the Owner and the Contractor. Further, Contractor shall not make any claim, in any context, that the Contract, or any of its provisions, has been modified by the Owner's conduct unless Contractor shall have first notified the Owner in writing, within three working days of the subject conduct, of such contention"(id. ¶ 22) (emphasis added). None of the parties raise Paragraph 22 in their submissions.
Paragraph 28 of the Contract, captioned "DELAYS," provides, in pertinent part:
"Should the Contractor be delayed or disrupted in the prosecution of the Work by any extra work and/or any act, omission, neglect or default of the Owner, or of any party for whom the Owner is or may be responsible, or by any damage caused by fire or other casualty, or by the Owner's need to delay, disrupt or re-sequence the Work in order to conform or proceed in sequence with adjacent or contiguous work of others, and the delay or disruption was not caused or contributed to by the Contractor, the Project Schedule will be extended for a period equal, in the Owner's estimation, to the time lost solely because of these causes of delay or disruption. No extension of time shall be allowed unless the Contractor provides the Owner with detailed written notice of the delay or disruption within five (5) working days of its inception. . . Any claim by the Contractor that the Owner, or any party for whom it is responsible, (a) intentionally or willfully interfered with the Work causing delay or disruption, (b) breached a fundamental obligation under this Contract causing delay or disruption, (c) abandoned the Project, or (d) that the Contractor suffered delay or disruption for reasons or causes wholly beyond the contemplation of this Contract (considering, among other things, the type of work being undertaken, others working at the Project, the acknowledgements contained within this
Contract and the conditions of the Project, including the age of the building) shall be made by detailed written notice to Owner and within five (5) working days of the inception of delay or disruption. If this notice is not given, the Contractor will be deemed to have fully and forever waived and released the Owner from any claim for costs, expenses, damages and extensions of the Project Schedule"(id. ¶ 28) (emphasis added).
At oral argument, defendants conceded that they did not give Owner any notice of delay under Paragraph 28. (NYSCEF 197, Oral argument 5/28/19 Transcript [Tr.], 3:23-5:13). Although they did not raise this point in written submissions, defendants maintain that Owner did not need notice, as Owner was the cause of the delay and so any notice would have been futile (id., 3:23 to 6:1).
Motion Sequence No. 003
Owner and Westchester move for partial summary judgment pursuant to CPLR 3212, seeking, among other things, dismissal of Contractor's counterclaims and other causes of action in its third-party complaint, discharge of Contractor's mechanics lien and release of the mechanic's lien discharge bond, and the grant of summary judgment to Owner on its first cause of action for trust fund diversion against defendants and its second cause of action for breach of contract against Contractor.
Defendants oppose and cross-move, seeking dismissal of Owner's three causes of action and a grant of partial summary judgment in their favor, holding Owner liable for its material breach of contract, and directing that a trial on the issue of L & L's damages be scheduled.
Discussion
The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact (Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]; Zuckerman v City of New York, 49 NY2d 557, 562 [1980]). Once this showing has been made, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action (Zuckerman v City of New York, supra). Mere conclusions, expressions of hope, or unsubstantiated allegations or assertions are insufficient to defeat summary judgment (id.). The court views the evidence in the light most favorable to the non-movant (Branham v Loews Orpheum Cinemas, 8 NY3d 931, 932 [2007]). Proof must be examined closely "because summary judgment is a drastic remedy and should not be granted where there is any doubt as to the existence of a triable issue" (Rotuba Extruders v Ceppos, 46 NY2d 223, 231 [1978] [citation and internal quotation marks omitted]).
Breach of Contract and Quantum Meruit
"The elements of a breach of contract claim are formation of a contract between the parties, performance by the plaintiff, the defendant's failure to perform, and resulting damage" (Flomenbaum v New York Univ., 71 AD3d 80, 91 [1st Dept 2009], affd 14 NY2d 901 [2010]).
Owner and Westchester identify several emails and other writings Owner sent to Contractor between March and July 2016, which purportedly inform Contractor of Owner's redesign of the Project, including intended modifications to the foundation (NYSCEF 143, 3/15/16 email from Sen; NYSCEF 146, 5/19/16 email to Sen regarding revised drawings; NYSCEF Doc No. 138, Sen 1/9/19 Aff) ; and NYSCEF Doc No. 171, Sen 2/28/19 reply aff. [Sen reply aff]; NYSCEF 172, Change Order list 7/13/16 email from Sen to L&L).
At argument on May 28, 2019, the court invited the parties to identify documents filed with the motion or cross motion which establish whether Owner directed Contractor to perform added Work on a time and materials basis, pursuant to Article 5 of the Contract (NYSCEF197, tr. 48:1-49:7). Counsel made submissions in accordance with this directive by letters dated May 31, 2019, submitted on behalf of Owner and Westchester (NYSCEF Doc No. 194), and June 5, 2019, submitted on behalf of defendants (NYSCEF Doc No. 196).
Owner asserts that, despite Contractor's knowledge of these intended changes and Owner's efforts to induce Contractor's performance in conformity with these modifications, Contractor remained uninvolved and unresponsive and so Owner found it necessary to oversee the foundation subcontractor NY Drilling directly (NYSCEF 171, Sen reply aff ¶¶ 42-45; NYSCEF 111, 112, 114, 115 and 116; and NYSCEF Doc No. 178, Bayardo Peralta 2/28/19 reply aff., ¶¶ 8-10]).
Peralta is GPK's project manager. The affidavit is undated, but it was filed on 2/28/19.
Defendants acknowledge that Owner sought to modify the scope of Work, by adding a floor to the building and revising the structural plans for its foundation, and that this intent was reflected in emails Owner sent to Contractor between May 31 and August 24, 2016 (NYSCEF 143, 3/15/16 email; NYSCEF 146, revised plans). Defendants, however, assert that Contractor prepared a proposed change order, dated July 13, 2016, summarizing the proposed modifications (NYSCEF Doc No. 172, email with list of change orders), but that document is not signed by either party or used to record required adjustments to the Contract Price (id.). Defendants argue that they met their contractual obligations by attempting to negotiate terms of the change order in good faith but that Owner refused to act reasonably, inasmuch as Owner added Work to the Project but refused to pay for it, purportedly insisting that Contractor was responsible to perform the additional Work and to bear the additional costs (id.).
"Summary judgment is appropriate only where the intent of the parties can be ascertained from the face of the agreement" (Bank of New York Mellon Trust Co., N.A. v Merrill Lynch Capital Servs. Inc., 99 AD3d 626, 628 [1st Dept 2012] [citation and internal quotation marks omitted]). Here, neither party is entitled to summary judgment on their respective breach of contract claims because of ambiguities in the Contract.
Unsigned documents such as the emails at issue cannot serve to amend a written agreement containing a merger clause such as Section 20 to the Contract, which requires a writing signed by both Owner and Contractor (see Global Events LLC v Manhattan Ctr. Studios, Inc., 123 AD3d 449, 449-50 [1st Dept 2014] [merger clause requiring modifications to be in "a writing signed by both parties" precluded claim that agreement had been modified by emails exchanged between parties]).
By contrast, an email sent by a party to be charged, "under which the sending party's name is typed, can constitute a writing for the purposes of the statute of frauds" (Newmark & Co. Real Estate Inc. v 2615 E. 17th St. Realty LLC, 80 AD3d 476, 477 [1st Dept 2011], citing General Obligations Law § 5-701 [b][4]).
The parties anticipated that revisions and modifications to the Contract's scope of work and project schedule would be necessary and adopted detailed provisions to govern these issues (see Contract §§ 4, 5, 22 and 28). After they entered the Contract, however, Owner and Contractor came to an immediate impasse with respect to initial Contract modifications. Owner, relying on Section 5 of the Contract, asserts that Contractor may not refuse Owner's written order to perform all modified or additional work. Contractor acknowledges receipt of Owner's modifications but balked at agreeing to perform in accordance with these changes without Owner's signed agreement to pay additional amounts for the additional Work.
Section 22 provides that no proposed modification to the Contract is binding unless it is reduced to writing and signed by both parties. This arguably gives Contractor veto power over any proposed modification. As there is support for both parties' positions within the four corners of the Contract, neither party is entitled to summary judgment on their claim for breach against the other (Bank of New York Mellon Trust Co., N.A., 99 AD3d at 628).
Quantum Meruit
"The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter" (Clark-Fitzpatrick, Inc. v Long Island R. Co., 70 NY2d 382 [1987]). "A party cannot obtain recovery for unjust enrichment unless the written agreement between the parties 'has been rescinded, is unenforceable or abrogated'" (Ross Network, Inc. v RSM McGladrey, Inc., 11 Misc 3d 1089[A], 2006 NY Slip Op 50778[U], *6 [Sup Ct Nassau County 2006], quoting Waldman v Englishtown Sportswear, Ltd., 92 AD2d 833, 836 [1st Dept 1983]). In light of Contractor's reliance on the Contract and failure to address the motion to dismiss Contractor's quantum meruit claim, the court is compelled to dismiss it.
Trust Fund Diversion
Lien Law Article 3-A's "primary purpose . . . is to ensure that those who have directly expended labor and materials to improve real property at the direction of an owner or general contractor receive payment for work performed" (BCD NY Inc. v Britt Realty, LLC, 47 Misc 3d 923, 926 [Sup Ct Kings County 2015] [citations omitted]). To that end, the funds received by "a contractor under or in connection with a contract for an improvement to real property . . . shall constitute assets of a trust. . ." (Lien Law § 70 [1]). "The funds received by the contractor or subcontractor and the rights of action with respect thereto, under or in connection with each contract or subcontract, shall be a separate trust and the contractor or subcontractor shall be the trustee thereof (Lien Law § 70 [2]).
Thus, the $220,000 Owner advanced to Contractor were the initial assets of a discrete trust which Contractor, as trustee, was required to expend on labor and materials for the Project, including the excavation and construction of the foundation performed by subcontractor NY Drilling, a trust beneficiary under Lien Law Section 71 [4] (see Sen aff ¶ 19).
Owner alleges that Contractor's refusal to pay the $76,666.47 it owed to NY Drilling for its Work on the foundation was a violation of its duties as trustee (NYSCEF 107, Sen aff ¶¶ 28-32), and actionable as a wrongful diversion of trust funds under the Lien Law (see Anthony DeMarco & Sons Nursery, LLC v Maxim Constr. Serv. Corp., 130 AD3d 1409, 1411 [3d Dept 2015] ["Any use of the trust funds other than payment of claims under the contract. . . is an improper diversion of trust assets"] [alteration and internal quotation marks and citation omitted]).
"The penalty for a diversion [is] recovery of the diverted trust assets from knowing transferees, or damages against consenting trustees or knowing participants in the diversion" (Teman Bros. v New York Plumbers Specialties Co., 109 Misc 2d 197, 200 [Sup Ct NY County 1981] [citing Lien Law §§ 72 [1] and 77 [3][a][1]).
Owner also alleges that Contractor's diversion of trust funds has been established by its refusal, despite repeated demands, to provide access to its trust account books and records, in accordance with Lien Law § 75 [4] ["trustee's failure to keep the statutorily required books and records 'shall be presumptive evidence that the trustee has applied or consented to the application of trust funds . . . for purposes other than a purpose of the trust'"]), and to produce those documents upon demand to Owner, as subrogee of trust beneficiary NY Drilling, as required by Lien Law Section 76.
As a preliminary matter, the court must address defendants' claim that Owner lacks standing to assert a cause of action for trust fund diversion and premise their arguments on principles of equitable subrogation. Owner's rights as subrogee are founded on principles of contractual subrogation, under its contract of release and assignment of claim with subcontractor NY Drilling (NYSCEF 117, Release 1/20/17). Defendants' arguments, based on equitable subrogation, are inapposite (see, e.g., Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 582 n [1995]). Further, Owner's subrogation rights are protected under the Lien Law (Lien Law § 77[1]["A trust arising under this article may be enforced by the holder of any trust claim, including any person subrogated to the right of a beneficiary of the trust holding a trust claim, in a representative action brought for the benefit of all beneficiaries of the trust"]).
Relying on Xiangbo's affidavit, sworn to July 13, 2018 (NYSCEF 102]), Owner asserts that Contractor not only failed to produce trust documents but responded to discovery requests that no such documents exist. For their part, defendants contend that they have produced all responsive documents in their possession and their production complies with the requirements of the Lien Law. Defendants' showing, however, is deficient and so fails to rebut the presumption that it has diverted trust funds for non-trust purposes.
"Section 75 of the Lien Law describes the records that a trustee of a trust under article 3-A of the Lien Law . . . is required to keep regarding the assets of the trust. A beneficiary of such a trust . . . is entitled to inspect the pertinent records or to receive, at its option, a verified statement from the trustee setting forth and explaining the entries with respect to trust assets" (Matter of East Coast Wholesalers, Inc. v Moran Co.,42 AD2d 605, 605 [2d Dept 1973], citing Lien Law, § 76 [1]).
Lien Law Section 75 (1) states that a "trustee shall not be required to keep in separate bank accounts or deposits the funds of separate trusts of which he may trustee under this article," but if he chooses to combine funds from separate trusts "his books of account shall clearly show the allocation of each trust of the funds deposited in his general or special bank account or accounts."
Subsection (2) provides that:
"Every trustee shall keep books or records with respect to each trust of which he is trustee and, if funds of separate trusts are deposited in the same bank account, shall keep a record of such account showing the allocation to each trust of the deposits therein and withdrawals therefrom."(ECD NY, Inc., 47 Misc 3d 923, 928-29 [Sup Ct, Kings County 2015]).
Subsection (3) "requires the article 3-A trustee to maintain books and records detailing the trust assets receivable, including the name and address of each person from whom trust funds are or will be receivable and the basis for such obligation, with the amount due and the date it is payable (Lien Law § 75 [3] [A]); the trust accounts payable, also including the details as specified in section 75 (3) (A) (Lien Law § 75 [3] [B]); the trust funds received (Lien Law § 75 [3] [C]); and the payments made with trust assets (Lien Law § 75 [3] [D]). The record of payments made with trust assets must specify the name and address of each payee (Lien Law § 75 [3] [D] [1]), the date and place where each payment was made (Lien Law § 75 [3] [D] [2]), the amount of each payment (Lien Law § 75 [3] [D] [3]) and the nature of the trust claim being paid, i.e., whether payments were made for labor (Lien Law § 75 [3] [D] [4]). Failure to keep these records is presumptive evidence that trust funds were diverted (Lien Law § 75 [4]; see also Lien Law § 79-a [3])"
Contractor admits receipt of $220,000 from Owner on or about January 29, 2016 and claims to be owed this amount and more, having purportedly spent $290,263.26 providing services, supervision and material for the Project (Xiangbo aff ¶ 4 [NYSCEF Doc No. 138]). The amounts Contractor claims to have expended, however, were not paid to NY Drilling or other subcontractors working on the foundation. Rather, they appear to be principally comprised of accounting fees, insurance, and other charges attributable to its Contractor's own general overhead (id. ¶¶ 19-27). Indeed, defendants state that Contractor ascribed 75% of its "general office overhead costs" to the Project (id. ¶ 23) in making its Lien Law § 76 disclosures.
For example, these expenditures included charges for supervision costs, even though defendants admit Contractor's supervisor rarely visited the Site because Contractor could not start its portion of the Work before the foundation was completed. (id.).
Contractor-trustees are not allowed to expend trust assets for their own purposes, to the detriment of trust beneficiaries.
"The contractor-trustee holds the trust assets in a fiduciary capacity akin to that of the trustee of an express trust and thus, does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give him a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid"(Canron Corp. v City of New York, 89 NY2d 147, 157-58 [1996] [citation and internal quotation marks omitted, emphasis in original]).
Thus, Contractor's fiduciary duties barred it from claiming precedence over the valid trust fund claim of its subcontractor NY Drilling. By doing so, Contractor "[u]ndermine[d] the statute's primary goal of protect[ing] those whose skill, labor and materials made possible the performance of a construction contract and who in fact, creating the improvement, actually gave rise to the owner's obligation to pay" (id. at 158 [citation and internal quotation marks omitted]).
Owner and Westchester make out a prima facie claim for trust fund diversion. Defendants fail to rebut this claim. Owner and Westchester are therefore granted partial summary judgment as to Contractor's liability for trust fund diversion.
Willful Exaggeration of Lien
Owner and Westchester do not move for summary judgment with respect to Owner's cause of action against Contractor for willful exaggeration of lien. Defendants, however, cross move to dismiss this cause of action.
Lien Law 39 states that a lien willfully exaggerated in amount is void. The elements of a cause of action for willful exaggeration of a lien are: (i) a lien was filed; (ii) the amount of the lien was exaggerated relative to the underlying claim; and (iii) this exaggeration is willful and not due to honest mistake (Goodman v Del-Sa-Co Foods, Inc., 15 NY2d 191, 200 [1965]).
Defendants also noted that:
"A claim under Lien Law 39-a is subject to summary disposition where the evidence concerning whether or not lienor willfully exaggerated the lien is conclusive. Such a burden necessarily involves proof as to the credibility of the lienor. Accordingly, the issue of willful or fraudulent exaggeration is one that is ordinarily determined at the trial of the foreclosure action, and not on summary disposition"(On the Level Enters., Inc. v 49 E. Houston LLC, 104 AD3d 500, 500 [1st Dept 2013] [internal citation omitted]).
In most cases, claims for willful exaggeration must be resolved at trial (see Executive Towers at Lido, LLC v Metro Constr. Servs., 303 AD2d 545, 545-46 [2d Dep't 2003] ["a necessary determination for purposes of both Lien Law §§ 39 and 39-a should be resolved at the trial of the defendant's lien foreclosure"]; Matter of Upstate Bldrs. Supply Corp. (Maple Knoll Apts.) 37 AD2d 901, 902 [4th Dept 1971], citing Durand Realty Co. v Stolman, 197 Misc 208 [Sup Ct, NY County 1949], affd 280 AD 758 [1st Dept 1952], appeal dismissed, 30 NY2d 515 [1972]). However, where the lienor has "included in its lien amount items that are not for labor or materials, as its own itemization makes plain" and does not offer a good faith explanation for their inclusion, a grant of summary judgment on a cause of action of willful exaggeration is appropriate (LMF-RS Contr., Inc. v Kaljic, 126 AD3d 436, 437 [1st Dept 2015]).
Defendants not only fail to present evidence that Contractor's lien is not willfully exaggerated but instead admit facts which require denial of their motion to dismiss the willful exaggeration claim. In paragraph 7 of his affidavit (NYSCEF 138), Xiangbo declares that the largest portion of Contractor's $315,039.14 mechanic's lien (NYSCEF Doc No. 141], L&L's 2/16/17 Notice of Mechanic's Lien) represents what Contractor projected to be "its lost profit from the Project, 10% of the [C]ontract price, approximately $220,000." Lost profits cannot be recovered through a mechanic's lien (Goldberger-Rabin, Inc. v 74 Second Ave. Corp., 252 NY 336, 340 [1929]; see also Aaron v Great Bay Contr., Inc., 290 AD2d 326, 326 [1st Dept 2002] ["validity of lien plainly turns on a dispute as to whether respondent has completed the work required by the contract"] and Matter of Atlantic Cement Co. v St. Lawrence Cement Co., 22 AD2d 228, 230-31 [3d Dept 1964] ["anticipated profits under uncompleted contracts or damages for prevention of performance are not lienable, the lien being available only for past performance"]). For the same reason, the request of Owner and Westchester to void the lien and release the lien discharge bond must be granted.
This is not a case of "mere inaccuracy" or "honest mistake in setting the amount of the lien" (Strongback Corp. v N.E.D. Cambridge Ave. Dev. Corp., 25 AD3d 392, 393-94 [1st Dept 2006], citing Goodman, 15 NY2d at 196). Rather, defendants admit that Contractor received $220,000 from Owner, for the excavation and construction of the foundation, yet defendants fail to show that Contractor expended any of these funds in payments to subcontractors or materialmen toward completion of this Work. The court is compelled to grant the motion of Owner and Westchester for an order voiding the lien, pursuant to Lien Law § 39, and directing that the lien discharge bond be released.
Accordingly, it is
ORDERED that plaintiff Owner's motion for partial summary judgment to hold defendants Contractor and Xiangbo liable on Owner's cause of action for trust fund diversion is granted, and that defendants' cross motion for partial summary judgment to dismiss Owner's cause of action for trust fund diversion is denied; and it is further
ORDERED that defendants, L&L and Li, are directed to account for funds received for the Project and disclose all transactions related thereto; and it is further
ORDERED and ADJUDGED that defendants, L&L and Li, are Article 3-A trustees under the Lien Law; and it is further
ORDERED and ADJUDGED that GPK has a valid trust claim against the L&L Trust Funds; and it is further
ORDERED, that GPK shall have judgment against Li and L&L, jointly and severally, in an amount to be determined at trial, plus statutory interest, along with the costs, disbursements of this action, and attorneys' fees, all related to the trust fund claim; and it is further
ORDERED that Owner's motion for partial summary judgment to hold Contractor liable on Owner's cause of action for breach of contract is denied; and it is further
ORDERED that defendants' cross motion for partial summary judgment to hold Owner liable on Contractor's counterclaim for breach of contract is denied; and it is further
ORDERED that Owner's motion for partial summary judgment to dismiss Contractor's counterclaims for breach of contract and against Owner is denied; and it is further
ORDERED that Owner's and Westchester's motion for partial summary judgment to dismiss Contractor's counterclaims for quantum meruit and that claim is dimissed; and it is further
ORDERED that Owner and Westchester's motion for partial summary judgment with respect to Owner's cause of action for willful exaggeration of lien, requesting that the lien be declared void and that its mechanic's lien discharge bond be released is granted and defendants' cross motion for partial summary judgment to dismiss Owner cause of action for willful exaggeration of lien is denied; and it is further
ORDERED that Owner and Westchester's motion for an award of attorneys' fees and costs related to the breach of contract claim is hereby denied without prejudice; and it is further
ORDERED that with the dismissal or denial of all other claims and counterclaims, Owner's claim for breach of contract and defendants' counterclaim for breach of contract are severed and shall proceed to trial; and it is further
ORDERED that counsel to the parties shall appear for a pre-trial conference in Part 48 on May 21, 2020, at 11 a.m. Attorneys shall set up a conference call if 60 Centre Street is not yet open and share calling instructions with the court via SFC-Part48@nycourts.gov. Dated: 4/23/2020
ENTER:
/s/_________
ANDREA MASLEY, J.S.C.