Opinion
5657/07.
Decided July 27, 2009.
Cohen Perfetto LLP Attorneys for Plaintiff By: Andrea L. Tersigni, Esq. New York, NY.
Neil B. Connelly, Esq. Attorney for Defendant Nova Casualty Company White Plains New York.
This is an action by Plaintiff Mount Vernon City School District ("MVCSD" or "Plaintiff") to recover the monies it expended, including its reasonable attorneys' fees, in completing the performance of Defendant DJH Mechanical Associates, Ltd. ("DJH") under a contract entered into on December 22, 2003 (the "HVAC Contract") wherein DJH agreed to provide HVAC work in connection with renovations at the A.B. Davis Middle School (the "Project"). MVCSD's action against Nova Casualty Company ("Nova") is based on Nova's breach of the Performance Bond issued in connection with the Project. Plaintiff's First Cause of Action against Nova seeks damages "in an amount to be determined at trial, but not less than $300,000, including, upon information and belief, estimated attorneys fees necessitated for the prosecution of the instant action" (Verified Complaint at ¶ 12). Plaintiff's Second Cause of Action against DJH seeks damages "in an amount to be determined at trial, but not less than $154,000" ( id. at ¶ 16).
At the request of the parties, this Court bifurcated the trial. The liability phase was tried before a jury between March 9, 2009 and March 12, 2009. On March 12, 2009, the jury returned a verdict in favor of MVCSD and against Nova and answered the special verdict sheet as follows:
DJH's liability has already been established by the Order of Default this Court entered on November 9, 2007, which further provided that "an assessment of damages against DJH shall be conducted and judgment entered against DJH at the time of or following the trial or other disposition of this action against answering defendant Nova Casualty Company."
(1) "Did DJH Mechanical Associates, Ltd. breach its contract with Plaintiff . . . by failing to complete its work at the A.B. Davis Middle School?" — Answer — "Yes."
(2) "Did DJH Mechanical Associates, Ltd. waive its rights to terminate its contract with the Mount Vernon City School District?" — Answer — "Yes."
Because the jury responded "Yes" to both questions 1 and 2, they were instructed not to respond to the third question — "Did DJH Mechanical Associates Ltd. properly terminate its contract with Plaintiff Mount Vernon City School District?"
The parties stipulated to have this Court decide whether damages should be awarded, which turns on the legal issues to be determined in this decision. However, the parties stipulated as to the amount of damages and interest thereon. Specifically, the parties stipulated at trial that the cost to complete DJH's contract that exceeded the available contract balance was $105,707.90 and further stipulated after the trial (without admitting that such damages should be awarded) as to when interest should begin to run both as to the completion costs and to the attorneys' fees.
By letter dated May 15, 2009 from Plaintiff's counsel and Defendant's Counsel, counsel jointly advised this Court that the parties had agreed "that in the event of a judgment in favor of the Mount Vernon City School District, the calculation of prejudgment interest shall be as follows: Prejudgment interest on completion costs shall be calculated from September 1, 2007 on the sum of $65,293.25 (the presently paid portion of the full stipulated sum of $105,710.90) and for attorney's fees from August 1, 2008. Interest on the full stipulated sum of $105,710.90 shall accrue from the date of payment in full or the date of judgment, whichever occurs first" (Letter dated May 15, 2009 from Andrea Tersigni, Esq. of Cohen Perfetto LLP and Neil B. Connelly, Esq.).
The issues to be decided by this Court are (1) whether Nova is relieved of the liability because of MVCSD's release of $214,000 to the New York State Department of Labor ("DOL") for claims on an unrelated construction project in Mahopac; and (2) whether MVCSD is entitled to recover the attorneys' fees it expended on completing the project and pursuing this litigation against Defendants.
NOVA'S CLAIM TO AVOID LIABILITY BASED ON THE $214,000 PAID TO DOL
It is undisputed that, on June 4, 2004, MVCSD received a Notice of Cross-Withholding from DOL concerning Project No. 9908029, which was a separate DJH project at the Austin Road Elementary School in the Mahopac School District. It is also undisputed that, at the request of DJH, MVCSD paid DOL $214,000, which was used to satisfy the underpaid wages at that project. This payment occurred in January 2005 ( see, e.g. Ct. Ex. 1).
A. Nova's Contentions
Nova contends that the $214,000 payment violated paragraph 7 of Nova's Performance Bond, which states "[t]he surety shall not be liable to the Owner or others for obligations of the Contractor [DJH] that are unrelated to the Construction Contract, and the Balance of the Contract Price shall not be reduced or set off an account of any such unrelated obligations'" (Nova's Post-Trial Mem. of Law at 3, quoting Performance Bond at ¶ 7). Accordingly, Nova argues that it is discharged pro tanto in the sum of $214,000 ( id. at 4). Since the expense of completion was $105,707.90, acceptance of Nova's position would effectively exonerate it of all financial liability.
Nova also argues that the $214,000 payment violated Article 3-A of New York's Lien Law because "the money earned by DJH on the A.B. David Project was, at all times, an Article 3-A trust fund. The School District knew that paying Article 3-A trust funds for a non-trust purpose was a diversion of trust funds prohibited by Article 3-A . . . [and] the School District] itself, is equally liable with the Contractor when it participates in a diversion of trust funds. . . ." ( id. at 5, citing Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507). Nova asserts that "[i]f not for the diversion of $214,000 in Article 3-A trust funds, there would have been more than enough money in the school district's hands to pay for the cost of completion" ( id.).
The Court notes that this conclusion is highly speculative, since it is just as likely that DJH would have paid that money over to DOL itself or used the money to pay off its other debts since the money was earned by DJH.
Nova claims that it is discharged from fulfilling its surety obligations because of the wrongful payment to DOL — i.e., "had MVCSD not made the improper payment of $214,000.00 . . . MVCSD would have had contract funds available to complete the project and MVCSD would have no damages to allege against Nova" (Nova's Reply Memorandum of Law at 9-10). Nova argues that while it did not complete the project and therefore has not asserted any equitable rights of subrogation in this litigation, the fact that it is "not a completing surety does not mean it has no rights at all. It has the same rights under the terms of its bond as any other party has in the State of New York with respect to rights and obligations under its contract" ( id. at 6). Nova claims that it has a surety defense of breach of contract by the bond obligee because "[p]aying contract funds for unrelated claims is an impairment of suretyship status' under the Restatement of the Law, Suretyship and Guaranty (3d). Section 37 of the Restatement, which states that acts by the obligee that increase the surety's cost of performance discharges the surety to the extent of the increase cost" ( id.). Therefore, Nova argues that "since the amount of the diversion ($214,000) exceeds the claim against the performance bond ($105,707.90), Nova has been completely discharged of any liability to the School District on its performance bond" ( id.). Because Plaintiff breached, Nova was under no obligation to perform ( id.).
B.Plaintiff's Opposition
Plaintiff first argues that it is undisputed that Plaintiff paid DJH for monies it had earned ( i.e., work performed) and "[t]he only set of circumstances under which Nova would have any basis to object to the School's $214,000 payment would be where the $214,000 of funds paid by the School were not earned for work DJH performed on the School's project" (Plaintiff's Response to Defendant's Post Trial Memorandum at 5). "The fact that the DOL preferred that the School release the funds directly to the DOL to avoid the need to rely on DJH to send the funds is of no legal consequence" ( id.) Plaintiff posits that Defendant's argument taken to its logical extreme would mean that Nova would be freed from liability "if earned funds paid by an owner were used by a contractor to pay for the Sunday newspaper or dinner rolls" ( id. at 2). Plaintiff further contends that under Nova's view, "Nova would have had the School withhold payment for work performed on its project for as long as it knew that DJH was subject to DOL fines and penalties in connection with another project. . . ." ( id.). Plaintiff contends there is no legal authority for Nova's position and instead, under the Lien Law, "an owner is obligated to hold and apply trust assets only for payment of the cost of improvement' [and] not to police or otherwise be accountable for the contractor's use of such funds once they are earned. Lien Law § 71(1)" ( id.), which is exactly what Plaintiff did. Plaintiff further argues that Nova, in essence, is contending that "all DOL notices to release funds . . . [are improper]" yet Nova "has not asserted in this matter that the DOL notice at issue in this case is improper . . . [and] Nova chose not to pursue any alleged rights against the DOL . . . [choosing instead] to simply walk away from the School's project and deny liability" ( id. at 4).
Most notable, however, is Plaintiff's argument that Nova has conceded that it did not complete the project and, therefore, it is not asserting any rights under the equitable doctrine of subrogation, which is "the doctrine providing the only avenue for Nova to assert beneficiary rights under New York Lien Law" ( id. at 4-5).
In response to Nova's claim that Plaintiff breached the Performance Bond by releasing the funds, although Plaintiff concedes that Nova need not be a completing surety to assert a breach of contract defense, Plaintiff nevertheless argues that "it is also true that Nova must have a legitimate basis for making such an assertion, which in this case, Nova does not have" ( id. at 5, n. 4).
C. Defendant's Reply
In Reply, Defendant attacks Plaintiff's primary argument in opposition — that it merely paid for work performed — by pointing out that such a position means that MVCSD apparently thinks that "once DJH earned the contract funds, it was free to tell the School District to do anything that DJH wished to do with the earned funds" even applying the funds to debts unrelated to the Project. While Nova suggests that Plaintiff would have had no problem if it had simply paid the $214,000 over to DJH and let it do with it as it saw fit (which would have likely been to pay the sum over to DOL), it is Nova's position that Plaintiff made a fatal error by transferring the $214,000 over to DOL. According to Defendant, Plaintiff's position "flies directly in the face of the Court of Appeals statements that the remedial purpose of the Lien Law includes making certain that monies earned in the performance of a contract for a public improvement are in fact [to] be used to pay the costs of that improvement. Prohibiting diversion of trust funds to purposes unrelated to a particular project was intended to eradicate the practice of pyramiding,' in which contractors use money earned on one project to pay for its costs on another. When the School District followed DJH's instructions to pay claims on the Mahopac School District Project, the School District knowingly participated in the diversion of trust assets in violation of New York Lien Law, a Class E Felony" (Dft's Reply Mem. of Law at 2 [emphasis in original]).
Nova also argues that when Plaintiff paid the claim subject to the DOL's Notice of Cross Withholding, it did so knowing "that it was making payment for a claim that had absolutely nothing to do with the A.B. Davis School Project" since the DOL witness testified that the identity of the Mahopac School District Project "was a matter of public record readily available to the School District. While it may be true that ignorance is bliss, it is also true that ignorance of the law is no excuse" ( id. at 3). Nova concludes by arguing that "[a]s the party being asked to absorb the loss resulting from the School District's knowing diversion of trust funds, Nova clearly has standing to raise the statutory violation, the performance bond violation, and the suretyship violation resulting from that diversion of trust funds" ( id.).
MVCSD'S REQUEST FOR ATTORNEYS' FEES
A. Plaintiff's Contentions
In support of its request for attorneys' fees, Plaintiff submits an affirmation from its litigation counsel, Anthony L. Tersigni, Esq., as well as an affirmation from its counsel, Robert J. Aiello, Esq. who "arranged for the completion of the work left undone by . . . DJH and facilitating the litigation of this matter by Cohen Perfetto LLP to recover the School's damages resulting from DJH's default under the subject construction contract and the failure of Defendant Nova Casualty Company ('Nova') to perform its obligations under the subject performance bond" (Affirmation of Robert J. Aiello, Esq. dated March 25, 2009 at ¶ 3). The amount sought in connection with Mr. Aiello's services is $3120.00, and Mr. Aiello attaches a detailed time sheet of the work he performed on behalf of MVCSD at Exhibit 1, which includes reductions in the reimbursement sought from the actual time spent. Mr. Tersigni's affirmation outlines the work his law firm performed in the litigation against Nova and DJH — the litigation against DJH resulted in a default judgment. According to Plaintiff, by the end of January 2008, counsel had charged approximately $37,000 but due to "Nova's tenacious defense," Mr. Tersigni's law firm expended "more than $100,000 in additional legal fees" through the trial of this action (Affirmation of Anthony L. Tersigni, Esq. dated March 26, 2009 ["Tersigni Aff."] at ¶ 7). Attached as Exhibit 3 to the Tersigni Affirmation is a copy of all legal bills submitted to MVCSD, including detailed descriptions of the services performed from September 2006 through February 2009. Mr. Tersigni separately attaches time sheets for unbilled services for March 2009. The total amount sought in attorneys' fees is $144,366.12, but Mr. Tersigni requests that the Court maintain jurisdiction over this action in the event that attorneys' fees continue to be expended after March 25, 2009, including fees incurred in any appeal taken by Nova.
Plaintiff also submits a Memorandum of Law. In it, Plaintiff argues that under the Contract and Performance Bond, attorneys' "fees and litigation expenses are recoverable as damages resulting from termination of the contract — in this case, resulting from the School's termination of the contract because of DJH's default" (Pltf. Mem. of Law at 1). It is Plaintiff's contention that the Contract's Supplementary Conditions that were incorporated by reference into the Performance Bond (paragraph 1) provide that the "costs of finishing the work include, without limitation, all reasonable attorneys' fees . . . and all other direct and indirect and consequential damages incurred by the Owner by reason of the termination of the Contract as stated herein" (Pltf. Mem. of Law at 2 [emphasis added], quoting Contract, Supplementary Conditions at ¶ 14.2.4.1). Accordingly, Plaintiff argues it is entitled to be reimbursed for the attorneys' fees it has incurred in enforcing its rights in connection with its termination of DJH due to its default. In addition, Plaintiff points to the language of the Performance Bond which provides that "[t]he Surety is obligated without duplication for [a]dditional legal, design, professional and delay costs resulting from the Contractor's Default, and resulting from the actions or failure to act of the Surety under Paragraph 4" (Pltf. Mem. of Law at 2). Pursuant to Paragraph 4, Nova may (1) arrange for DJH's completion of the work, (2) complete the work itself, (3) arrange for a new contractor (acceptable to MVCSD) to complete the work on behalf of DJH, (4) determine the amount of liability and tender payment to MVCSD or (5) deny liability. Because it is Plaintiff's position that Nova wrongfully chose option 5, Plaintiff asserts that Nova is responsible for the attorneys' fees Plaintiff has incurred in enforcing its rights.
Plaintiff attempts to cast Nova's decision as completely unjustified because (1) the jury determined that DJH breached and improperly attempted to terminate, and (2) Plaintiff "complied with all contractual and statutory obligations when, at DJH's request, the School forwarded to the Department of Labor $214,000 of funds DJH earned for work performed on the School's project . . ." (Pltf. Mem. of Law at 3).
B. Defendant's Opposition
Nova contends that since it has established that it should be completely discharged of any liability based on Plaintiff's wrongful diversion of Section 3A Trust Funds, "[t]he issue of attorney's fees claimed by the School District in litigating this matter is moot where the surety properly denied liability because of the School District's breach of the bond" (Nova's Post Trial Mem. at 7). Alternatively, Nova argues that if the Court does not find that Plaintiff's release of $214,000 to DOL discharges Nova's liability, then, in any event, the only fees that may be recovered under the Performance Bond are "those legal fees necessary to finish the Work, e.g., drafting the completion contract. . . ." ( id. at 3) since "there is nothing in the performance bond language that makes any reference to attorney's fees incurred by the bond obligee in litigating a claim against the performance bond" ( id.). Nova also tries to negatively portray Plaintiff's litigation posture by suggesting that Plaintiff was in bad faith by "originally alleg[ing] $300,000 in damages, put[ting] the court and the defendant through lengthy discovery and a jury trial, only to seek recovery of substantially less than half or its alleged damages" ( id.).
Nova's argument is predicated on its position that since the parties have stipulated that the cost to complete was $105,000 and Plaintiff is seeking $140,000 in attorneys' fees, "when the School District filed its Complaint, it sought damages it verified were going to exceed $300,000, . . . [which] could only be the case if the School District intended to run up attorney's fees exceeding $200,000, and then attempt to recover those attorney's fees from the surety" ( id. at 7).
From a legal standpoint, much of Nova's Memorandum is focused on the American Rule that "attorneys' fees . . . are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule'" ( id. at 5, quoting Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5; Buffalo v J.W. Clement Co. 28 NY2d 241, 262-263). As such, Nova argues that a court "should not infer a party's intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise" ( id., citing Tokyo Tanker Co. v Etra Shipping Corp., 142 AD2d 377 [1st Dept 1989], lv denied 75 NY2d 702; Carr v First Fed. Sav. Loan Assn. of Rochester, 132 AD2d 513, 514 [2d Dept 1987]). And to the extent there is an ambiguity, Nova argues that the language of the contract should be construed against the drafter — which it claims was Plaintiff (although Nova provides no evidence in support of this position).
According to Nova, in a contract for a public improvement, the party seeking to obtain the bids (MVCSD) controls the terms and conditions of both the Contract and the Bond ( id. at 6).
Nova also defends itself not only against Plaintiff's claims that Nova and DJH coordinated DJH's bad faith attempt at terminating the Contract, but also its decision to deny liability under the Performance Bond because (1) at the time of DJH's termination letter, the Contract could not be completed, and (2) Plaintiff wrongfully diverted $214,000 in Trust Funds. Therefore, it argues that its decision not to complete DJH's performance was neither factually nor legally unfounded ( id. at 7).
It is Nova's position that if this Court were to decide that Plaintiff is entitled to attorneys' fees, the only fees that may be recovered under the terms of the Contract and Performance Bond are those paid to Mr. Aiello in completing the work ( i.e., $1,170.00). Nova does not believe the amount billed by Mr. Aiello in helping MVCSD to choose its litigation counsel is properly recoverable ( i.e., $1,950.00). Finally, in the event this Court were to find Nova responsible for MVCSD's litigation fees, Nova states that it "does not contest the reasonableness of the rate and hours reflected" in the invoices submitted in the Affirmation of Anthony Tersigni, Esq., but only objects to paying the fees billed in obtaining the default judgment against DJH, which amounted to $5,225.50.
C. Plaintiff's Reply
In its Reply Memorandum of Law, Plaintiff argues that Nova's arguments miss the mark as it relies on case law involving the American Rule, which has no application here since there is a contractual provision allowing for attorneys' fees. Further, that the cases upon which Nova relies which it contends are "a litany of cases" requiring that the attorneys' fee provision expressly use the word "litigation" in order recover for fees incurred in litigation, are entirely inapposite as they do not involve a contractual provision allowing the recovery of attorneys' fees. Instead, according to Plaintiff, all of the cases had to do with the recovery of attorneys' fees by parties for the costs of defending claims made against them by insurance companies (Plaintiff's Reply Mem. of Law at 3). As to the $300,000 in damages originally sought in the Complaint, Plaintiff points out that its estimation of $300,000 was fairly accurate since "[b]y the time of trial . . . the School District alleged $132,000 in completion costs and . . . almost $150,000 in attorney's fees . . ." ( id. at 2, n. 3).
Plaintiff also points out that the Contract refers to attorneys' fees "as among the damages recoverable by the School, damages the School can recover only by way of a litigation. Thus, the provision that attorney's fees are included as damages clearly and unmistakably shows that the recovery of attorney's fees in a litigation was contemplated. Any other interpretation would render meaningless the provision that damages includes attorney's fees" ( id. at 6). And to the extent there is any ambiguity in the provision, Plaintiff argues that it must be construed in a manner most favorable to the School since "[a] compensated, corporate surety . . . is not a favorite of the law and its contract of suretyship will be construed in a manner most favorable to the claimant . . .'" ( id., quoting Davis Wallbridge, Inc. v Aetna Cas. and Sur. Co., 103 AD2d 1010, 1011 [4th Dept 1984]).
In further support of its position that any ambiguity be construed against Nova, Plaintiff notes that it was not the drafter of the Contract and Performance Bond and both were the AIA standard forms of which the Court may take judicial notice. Plaintiff points out that there was no evidence presented at trial that Plaintiff selected the Performance Bond form and given that Plaintiff was not even a signatory to the Performance Bond (Plaintiff being merely the third-party beneficiary), Plaintiff argues that the Court should not find Plaintiff to be the drafter of the Performance Bond for the purpose of resolving any ambiguities contained therein (Plaintiff's Reply Mem. at 7, n. 8).
Plaintiff also devotes much of its Reply in attempting to show that Nova was in bad faith when it colluded with DJH in DJH's termination of the Contract.
With regard to Nova's argument that it should not be charged for the time Mr. Aiello spent in choosing litigation counsel for Plaintiff, Plaintiff first points out that it is not seeking to be reimbursed for this time and supports this point with the fact that these time charges are not among the entries circled by Mr. Aiello as the ones for which Plaintiff seeks reimbursement. Plaintiff also disputes Nova's attempt to excise out the time spent in obtaining the default judgment against DJH since "[h]ad Nova chosen to perform under its Bond, there would have been no need to seek such a default, as there would have been no need for litigation. Therefore, attorney's fees for these tasks are recoverable as a result of the School's termination of the contract, DJH's default, and Nova's action and/or failure to act under the Bond, the grounds set forth under the contract and Bond for recovery of attorney's fees" ( id. at 10).
Plaintiff alternatively argues that if it had sought such reimbursement, those fees would have been recoverable since "[t]he necessity to obtain litigation counsel was required as a result of DJH's default, which Nova refused to cure" ( id. at 9).
Finally, Plaintiff explains how the parties have decided the appropriate date from which pre-judgment interest shall run which is September 1, 2007 (the mid-point between the first and last payments made by the School). As to prejudgment interest on the attorneys' fees, "authority supports using the midpoint between the respective dates that services commenced and ended prior to judgment, which in this case, would be approximately February 1, 2008" but that MVCSD "has proposed an accrual date of August 1, 2008, which is the point at which [MVCSD] had paid approximately half of the attorney's fees incurred to date" ( id. at 11). These last points have been rendered moot by the parties' stipulation as to the dates from which interest is to run in the event of an award of damages and/or attorneys' fees in Plaintiff's favor.
LEGAL DISCUSSION
A. The $214,000.00 Payment Does Not Discharge Nova's Liability
The Court has already rendered a decision on this issue in its Decision and Order on Nova's Motion for Summary Judgment dated August 4, 2008, and the Court refers back to that decision for a full recitation of the facts and law underlying its decision to deny Nova's motion for summary judgment. Briefly stated, with regard to Nova's request that it be discharged of liability based on Plaintiff's violation of New York's Lien Law § 70(1) by paying the $214,000 it owed to DJH to DOL for use on an unrelated project, this Court found that the facts underlying the cases upon which Nova relied were a far cry from the facts underlying this case — to wit, the surety had performed under the Performance Bond and was subrogated to the Contractor's rights such that the surety had priority over DOL with respect to funds remaining on a contract ( i.e., Article 3-A Trust Fund monies). Moreover, in those cases, the funds had not been paid out so the owner was not penalized at all by the Court's decision to grant priority over those monies to the performing surety, rather than to DOL, with respect to DOL's request for payment of underpaid wages on an unrelated project.
Pursuant to Article 3-A of New York's Lien Law "funds . . . received by a contractor under or in connection with a contract for . . . a public improvement . . . and any right of action for any such funds due or earned or due to become due or earned, shall constitute assets of a trust" (Lien Law § 70[1]). The statute prohibits the diversion of funds to unrelated purposes in order to eradicate "pyramiding" by which contractors would use funds from one project to complete another ( Matter of RLI Ins. Co. v New York State Dept. of Labor, 97 NY2d 256, 264 [2002]).
Here, DJH earned the right to be paid the $214,000 at issue. Rather than paying DJH directly, DJH requested Plaintiff to pay the $214,000 over to DOL based on a notice of cross-withholding involving underpaid workers of DJH on the Mahopac project. At the time Plaintiff paid over the funds, it had no idea that it would be terminating its contract with DJH nor was there any evidence presented that it had actual knowledge that it was paying monies over to DOL on an unrelated project (although as Nova correctly points out, the Mahopac project was a matter of public record and Plaintiff cannot avoid liability based simply on its ignorance of the actual facts). Nevertheless, the fatal flaw in Nova's argument that it be granted the rights the Court of Appeals' afforded the completing surety in Matter of RLI Ins. Co., supra, is that Nova is not a completing surety and has not been subrogated to DJH's rights. As such, Nova's request that it be discharged of its liability under the Performance Bond based on Plaintiff's payment of $214,000 to DOL is denied.
According to Nova, "[t]he School District knew that paying Article 3-A trust funds for a non-trust purpose was a diversion of trust funds prohibited by Article 3-A. The School District knew that one charged with knowledge of the trust nature of the Contract Balance, such as the School District itself, is equally liable with the Contractor when it participates in a diversion of trust funds" (Nova's Post Trial Mem. of Law at 5).
In RLI Ins. Co., supra, the Court of Appeals held that the surety's right to funds that were still in the possession of the school district was superior to the claim filed by the Department of Labor for underpayment of wages by the contractor in connection with an unrelated public improvement project. In Oriska Ins. Co., Inc. v Onondaga County Water Auth. (2001 NY Slip Op 40022 [U], 2001 WL 856432 [Sup Ct Onondaga County 2001]), the court held that DOL's request to obtain a priority lien pursuant to Labor Law § 220-b(2)(a)(1) on claims involving the contractor's failure to pay the prevailing wage rate to its employees on unrelated contracts failed because that claim does not attach to the trust funds held pursuant to the Lien Law, and therefore, that claim cannot be recognized until all Article 3-A trust beneficiaries have been paid.
It is well settled that "a completing surety succeeds under equitable subrogation principles to all rights that the obligee/owner has against the contractor, including the right to use the unpaid contract balance to complete the project or satisfy outstanding claims for labor and materials furnished" ( RLI Ins. Co., 97 NY2d at 265). However, it is axiomatic that subrogation rights only accrue upon the payment of outstanding claims ( Federal Ins. Co. v Arthur Andersen Co., 75 NY2d 366). Here, if Nova had undertaken to complete DJH's performance, it would have been subrogated to the rights of both Plaintiff and DJH, and as the $214,000.00 payment involved payment of underpaid wages on an unrelated project, Nova would have a claim against Plaintiff for improper diversion of trust assets ( Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507).
In Caristo, supra, New York's Court of Appeals held that a contractor-obligor who satisfied the claims of unpaid contractors and suppliers under a payment bond succeeded to the Lien Law article 3-A rights of those trust beneficiaries and, thus, could maintain an action to recover diverted trust funds.
However, it is undisputed that Nova is not a completing surety and, therefore, Nova has no right as a subrogee to unpaid Contract Price or any Trust Fund monies that were wrongfully diverted ( see, e.g., Caristo Constr. Corp., supra, 21 NY2d at 513 [completing surety has standing to assert claim for diversion of trust funds]).
With regard to Nova's argument that Plaintiff's payment violated paragraph 7 of Nova's performance bond, which states "[t]he surety shall not be liable to the Owner or others for obligations of the Contractor [DJH] that are unrelated to the Construction Contract, and the Balance of the Contract Price shall not be reduced or set off an account of any such unrelated obligations'" (Performance Bond at ¶ 7), the Court notes that it previously addressed this argument in its August 2008 Decision, which denied this branch of Nova's motion for summary judgment. Suffice it to say, because it is undisputed that the $214,000 payment was for money owed to DJH based on work performed in accordance with the milestone payment requirements of the Contract, those funds in the amount of $214,000 did not fall within the meaning of "Balance of the Contract Price" set forth in paragraph 7 of the Performance Bond. Thus, Nova's request that the amount of its liability be reduced pro tanto by this $214,000 payment has no basis under the law and shall be denied.
The Court notes that Nova raised a second argument in its summary judgment motion which it has not revisited in connection with this post-trial decision — i.e., that the $214,000.00 payment violated the payment terms of the Contract (Article 9.3, as amended under the Supplementary General Conditions of the Contract), which required Plaintiff to pay DJH based on its payment applications, but also required Plaintiff to retain "an amount necessary to satisfy any claims, liens or judgments against the Contractor which have not been suitably discharged" providing that the claims, liens and judgments "pertain to the Project."
B. Plaintiff's Right to Its Litigation-Related Attorneys' Fees
Plaintiff is seeking reimbursement for all of the attorneys' fees it has expended to date in completing DJH's performance and in litigating this action to enforce its rights under the Contract and Performance Bond (as well as all legal fees incurred since March 25, 2009 and any additional fees incurred in the event Nova appeals).
The parties agree that there are provisions of the Contract and Performance Bond govern Plaintiff's right to attorneys' fees.
For the Contract, the relevant provision is found in the Paragraph 14 of the Contract and Supplementary Conditions which is entitled "Termination By The Owner For Cause." Pursuant to this provision, Plaintiff could terminate DJH based on DJH's default in performance under the Contract and if Plaintiff elected to terminate, Plaintiff would be entitled to (1) finish the Work by whatever reasonable method the Owner may deem expedient; (2) retain the unpaid balance of the Contract until such time as the work is completed and if the costs of finishing the work "exceed the unpaid balance, the Contractor shall pay the difference to the Owner" (Contract at ¶ 14.2.4). The Supplementary Conditions then define "costs of finishing the Work" as including, "without limitation, all reasonable attorney's fees, additional title costs, insurance, additional interest because of the delay in completing the Work, and all other direct and consequential damages incurred by the Owner by reason of the termination of the Contract as stated herein" (Supplementary Conditions at ¶ 14.2.4.1 [emphasis added]).
The relevant paragraph of the Performance Bond provides
[t]o the limit of the amount of this Bond, but subject to commitment by the Owner of the Balance of the Contract Price to mitigation of costs and damages on the Construction Contract, the Surety is obligated without duplication for . . . Additional legal, design, professional and delay costs resulting from the Contractor's default and resulting from the actions or failure to act of the Surety under Paragraph 4 (Performance Bond at ¶ 6.2).
"Under the general rule in New York, attorneys' fees are ordinary incidents of litigation and a prevailing party may not collect from the losing party unless such an award is authorized by agreement between the parties, statute, or court rule" ( Bourne Co. v MPL Communications, Inc., 751 F Supp 55, 57 [SD NY 1990], citing Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12). Thus, since there is no statute or court rule that would impose on Defendants the payment of Plaintiff's attorneys' fees, Plaintiff is only entitled to attorneys' fees if the Contract and Performance Bond provide for the payment of such fees ( see Crispino v Greenpoint Mtg. Corp., 2 AD3d 478 [2d Dept 2003]; Glatter v Chase Manhattan Bank, 239 AD2d 68 [2d Dept 1998]). And it is Plaintiff "who bears the heavy burden of persuading . . . [a court] to depart from the American Rule. . . ." ( United States Fid. and Guar. v Braspertro Oil Servs. Co., 369 F3d 34, 78 [2d Cir 2004]).
As Nova points out, since the payment of the other party's attorneys' fees is contrary to the general rule, the Court should not infer the waiver of this rule unless it unmistakenably clear from the language of the agreement ( Hooper Assoc., Ltd. v AGS Computers, Inc., 74 NY2d 487). Under New York law, whether a contract is ambiguous is a question of law for the Court ( W.W.W. Assoc., Inc. v Giancontieri, 77 NY2d 157). Contract terms are ambiguous if they are "capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business'" ( Sayers v Rochester Tel. Corp. Supplemental Mgt. Pension Plan, 7 F3d 1091, 1095 [2d Cir 1993], quoting Walk-In Med. Ctr., Inc. v Breuer Cap. Corp., 818 F2d 260 [2d Cir 1987]). A court's task is "to determine whether such clauses are ambiguous when read in the context of the entire agreement' . . . By examining the entire contract, we safeguard against adopting an interpretation that would render any individual provision superfluous . . . Parties to a contract may not create an ambiguity merely by urging conflicting interpretations of their agreement'" ( Sayers, 7 F3d at 1095 [citations omitted]).
In general, "the surety bonds attaches to the principal contract and must be construed with it" ( Carrols Equities Corp. v Villnave, 57 AD2d 1044, 1045 [4th Dept 1977], lv denied 42 NY2d 810). And "[t]he interpretation of a contract of suretyship is governed by the standards which govern the interpretation of contracts in general" ( General Phoenix Corp. v Cabot, 300 NY 87, 92 [1949]). Furthermore,
[t]he rule that the liability of a surety is strictissimi juris does not . . . mean that a suretyship contract is subject to rules of interpretation different from those applicable to any other contract. It simply means that once the intention of the parties to a suretyship agreement has been ascertained, the courts will guard the right of the surety, and protect him . . . against a liability which is not strictly within the terms of his . . . contract ( International Fid. Ins. Co. v County of Rockland, 98 F Supp 2d 400, 405 [SD NY 2000], citing 63 NY Jur 2d, Guaranty Suretyship § 117).
However, "[u]nder New York law, it is well established that "[a] compensated, corporate surety . . . is not a favorite of the law and its contract of suretyship will be construed in a manner most favorable to [the] claimant"'" ( United States Fid. and Guar. v Braspetro Oil Servs. Co., 369 F3d 34, 74 [2d Cir 2004], quoting Cam-Ful Indus., Inc. v Fidelity and Dep. Co. of Maryland, 922 F2d 156, 163 [2d Cir 1991], quoting Timberline Elec. Supply Corp. v Insurance Co. of N.A., 72 AD2d 905, 906 [4th Dept 1979), affd 52 NY2d 793; see also McClare v Massachusetts Bonding Ins. Co., 266 NY 371, 377 [1935] ["where a compensated surety has issued a standard form of bond, it is to be interpreted liberally, and all ambiguities are to be resolved in favor of those for whose benefit the bond is given"]; Novak Co. v Travelers Indem. Co., 85 Misc 2d 957, 957 [NY Sup Ct 1976], affd 56 AD2d 418 [2d Dept 1977], lv denied 42 NY2d 806 ["bond of compensated surety is to be construed liberally in the interest of promisee and beneficiaries rather than strictissimi juris . . . and that ambiguities are to be resolved in favor of the beneficiaries thereof"]).
The Court reads the referenced provisions of the Contract and the Performance Bond as the parties' means of agreeing that in the event DJH and/or Nova were in default, Plaintiff would be entitled to the legal expenses incurred in completing the Contract — but not in enforcing the Contract and Performance Bond through litigation. Thus, it was a way of agreeing by contract to repay those legal expenses that were incurred in re-bidding and awarding the HVAC Contract to another contractor who would be charged with completing DJH's performance — i.e., "recoverable expenditures directly occasioned and made necessary by' the breach" ( City of Elmira v Larry Walter, Inc., 150 AD2d 129, 133 [3d Dept 1989], affd on other grounds 76 NY2d 912, quoting Kinney v Massachusetts Bonding Ins. Co., 210 App Div 285, 293 [3d Dept 1924]).
The Second Circuit case of United States Fidelity and Guaranty Co., supra, had a clause identical to the paragraph 7 of the Performance Bond. There, the Second Circuit held that the obligees under the surety bond had not carried their heavy burden of showing that the parties entered into a contract which provided for an award of litigation attorneys' fees based on the sureties' default. The bond clause provided that the surety was "obligated without duplication for . . . [a]dditional legal, design professional, and delay costs resulting from the Contractor's Default, and resulting from the actions or failure to act of the Suret[ies] under Paragraph 4. . . ." ( United States Fid. and Guar. Co., 369 F3d at 74-75). There, the Second Circuit declined to allow the award of attorneys' fees incurred in the action because "[i]t was not unmistakably clear that the use of the term legal costs' in the Bonds was intended to obligate the Sureties to pay the Obligees' attorneys' fees in litigation between the Sureties and the Obligees over the Bonds" ( id. at 77).
This Court finds the Second Circuit's decision to be persuasive authority, especially in light of Plaintiff's failure to provide any other New York authority holding to the contrary. Accordingly, the Court holds that Plaintiff is only entitled to the attorneys' fees expended in "finishing DJH's performance," which fees would encompass those fees incurred in obtaining the services of the HVAC contractor that was employed to finish DJH's job.
Because the parties have conflicting points of view as to the amount of attorneys' fees incurred to complete DJH's performance, the Court directs that, unless the parties stipulate to the amount of attorneys' fees owed within the scope delineated by this Decision, a hearing be held to determine the amount and reasonableness of such fees. The Court, therefore, will direct counsel and the parties to appear for an attorneys' fee hearing on August 13, 2009 at 10:00 a.m., at the Westchester County Courthouse, 111 Dr. Martin Luther King Jr., Blvd, Annex Courtroom 105.
CONCLUSION
The Court has considered the following papers in connection with this Post Trial Decision:
1)Affirmation of Anthony L. Tersigni, Esq. dated March 26, 2009, and the exhibits annexed thereto; Affirmation of Robert J. Aiello, Esq. dated March 25, 2009, and the exhibits annexed thereto, submitted with proof of due service;
2)Plaintiff's Memorandum of Law in Support of Award of Attorneys' Fees dated March 26, 2009, submitted with proof of due service;
3)Plaintiff's Reply Memorandum in Support of Award of Attorney's Fees dated May 8, 2009, submitted with proof of due service;
4)Defendant Nova Casualty Company's Post Trial Memorandum of Law dated March 27, 2009, submitted with proof of due service;
5)Plaintiff's Response to Defendant's Post-Trial Memorandum of Law dated April 23, 2009, submitted with proof of due service; and
6)Defendant Nova Casualty Company's Post-Trial Reply Memorandum of Law dated May 7, 2009, submitted with proof of due service.
Both Plaintiff and Defendant incorporated the arguments made in their Pre-Trial Memoranda as a part of their submissions post-trial, and the Court has considered those Memoranda as well in deciding the damages to be awarded herein ( see Plaintiff's Response to Defendant's Post-Trial Memorandum at n. 1 and Defendant Nova's Post Trial Memorandum of Law at 1). The Court, however, has not reviewed the parties' submissions on the motion for summary judgment and, accordingly, while Plaintiff incorporated the prior arguments it made in those submissions, they have not been considered by the Court in rendering this decision.
Plaintiff is granted leave to settle a judgment, on notice, returnable before this Court on August 13, 2009, at 10:00 a.m., against Nova Casualty and DJH Mechanical Associates, in accordance with this Decision, with such judgment to leave blank the amount to be awarded for attorneys' fees, interest and allowable costs.
Unless, prior to 3:00 p.m. on August 12, 2009, the parties file a stipulation as to the amount of attorneys' fees owed within the parameters set by this Decision,, Counsel shall appear before this Court on August 13, 2009 at 10:00 a.m. for an attorneys' fee hearing.
The foregoing constitutes the Decision of this Court pursuant to CPLR 4213.