Opinion
5657/07.
Decided August 4, 2008.
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.
Nova Casualty Company ("Defendant" or "Nova") moves, pursuant to CPLR 3212, for an order granting it summary judgment against the Mount Vernon City School District ("Plaintiff" or "MVCSD") dismissing Plaintiff's complaint as against Nova based upon documentary evidence. Plaintiff opposes the motion and requests that the Court search the record and grant partial summary judgment establishing Nova's liability.
BACKGROUND AND FACTS
On December 22, 2003, Plaintiff entered into a contract (the "Contract") with DJH Mechanical Associates, Ltd. ("DJH") in which DJH agreed to provide HVAC work in connection with renovations at the A.B. Davis Middle School (the "Project"). The price for the work was set at $919,000.00. One of the conditions of the Contract was that DJH:
The documents submitted on this motion suggest that the contract price increased to $973,000.00 based on change orders.
furnish a Performance Bond in an amount equal to one hundred per cent (100%) of the Contract Sum as security for the faithful performance of this Contract and also a Labor and Material Payment Bond in an amount not less than one hundred per cent (100%) of the Contract Sum as security for the payment of all persons performing labor on the Project under this Contract. The value of each bond shall be adjusted during the Project construction period to reflect changes in the Contract Sum (Contract at ¶ 11.4.1.1, Supplementary Conditions, attached to Affidavit of Thomas A. Joyce, sworn to May 8, 2008 ["Joyce Aff."], Ex. C).
DJH obtained the performance bond from Nova; an unexecuted copy is attached as Nova's Ex. D (the "Performance Bond").
It is undisputed that the work that DJH was to perform was not completed by either DJH or Nova. What is disputed is whose responsibility it is that the work was not completed. Plaintiff blames DJH for not performing and Nova for breaching its performance bond. Nova blames Plaintiff for causing the work to be stopped, and the Contract terminated by DJH, by providing defective plans and specifications and not correcting these defects in a timely fashion.
In this action, Plaintiff seeks reimbursement from Nova and DJH for the costs incurred in completing HVAC work at the Project. Plaintiff's First Cause of Action is for breach of contract against Nova based on its alleged failure to comply with its obligations under the performance bond for which Plaintiff 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" (Joyce Aff., Ex. A at ¶ 12). Plaintiff's Second Cause of Action is for beach of contract against the contractor, DJH, based on its alleged failure to perform its work in a workmanlike manner and complete all work specified under the Contract for which Plaintiff seeks damages "in an amount to be determined at trial, but not less than $154,000" ( id. at ¶ 16).
In its answer, Nova denies all material allegations and asserts several affirmative defenses that are the subject of the present motion for summary judgment.
In its second, fifth and sixth affirmative defenses, Nova asserts that Plaintiff materially breached the DJH Contract by causing delay and/or work stoppage by failing to provide the necessary plans and specifications to correct defective plans and specifications for over one year, which, in turn, allowed DJH to rightfully terminate the Contract. These acts are alleged to constitute "a cardinal change" in the underlying Contract that discharged Nova's obligations on its performance bonds (Joyce Aff., Ex. B at ¶ 18). Nova's third affirmative defense alleges that Plaintiff's wrongful payment of $214,000.00 to the New York Department of Labor ("DOL") for claims that did not arise or relate to the Contract "was a breach of plaintiff's non-delegable fiduciary duty to maintain and use the Contract funds only for the benefit of and for payment of the Contract work in accordance with the mandates of the New York Lien Law," which effectively discharged Nova from its obligations under the Performance Bond (Joyce Aff., Ex. B at ¶¶ 9-11).
A. Nova's Contentions
Nova claims that it is discharged from fulfilling its surety obligations and offers two arguments in support of this position. First, Nova claims that DJH justifiably terminated the Contract on June 12, 2006 (which termination became effective 7 days later on June 19, 2006) after there had been an 18-month work stoppage, which was caused by Plaintiff's failure to timely provide the needed drawings/specifications to resolve a "dunnage issue" dating back to July 2004. The dunnage (or steel beams that would be used to support the additional weight on the roof) was deemed necessary because the existing roof, supported by wooden beams, could not support the weight of the specified air handling units (Joyce Aff. at ¶ 10). Second, Nova asserts that Plaintiff wrongfully paid the New York State Department of Labor ("DOL") $214,000.00 of funds subject to the trust provisions of New York's Lien Law, Article 3-A. Nova contends that "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).
With respect to its first contention, Nova claims that the dunnage was unjustifiably delayed by Plaintiff when it failed to provide the revised drawings for a period of 18 months, postponing the dunnage work until Summer 2006 (Joyce Aff. at ¶ 13). Nova submits certain documents in support of this contention. For example, a letter from DJH to Turner/Luster Joint Venture ("Turner Luster"), Plaintiff's construction management company, dated August 2, 2004 in which DJH asserts that at July 27, 2004 construction meeting, "project management" specified that the dunnage drawings would be delivered to the General Contractor on August 22, 2004 and the dunnage was projected to be completed by September 1, 2004 (Joyce Aff., Ex. E). To show that the dunnage was not resolved until early 2006, Nova submits a March 23, 2006 letter from DJH to Turner Luster memorializing a conversation between DJH's President, Dennis Hazelhurst and Noel Green (Turner Luster) wherein Mr. Green "indicated that the steel dunnage will be completed during the summer of 2006 while the school is on vacation" (Affirmation of Neil B. Connelly, Esq. ["Connelly Aff."], Ex. K). Nova also submits what Plaintiff claims (and which appears to the Court to be) a privileged attorney/client and/or work product document for which Plaintiff claims the privilege has not been waived through its inadvertent production during discovery. In this Memorandum to File from "RJA" of Aiello Cannick (counsel to Plaintiff), dated August 15, 2006, "RJA" states "[i]n early 2006, Noel Green notified DJH that the District had resolved the dunnage issue and was looking to complete the HVAC project by September 1. 2006" (Joyce Aff., Ex. F at 3).
In this letter, DJH states "[t]he incurred delays were caused by late decisions by Project Management such as the steel dunnage, which we have been asking for the last two months. Just today we had news that an approved design has been issued and will be picked up on August 3" ( id.).
Nova maintains that the above evidence irrefutably shows a delay caused by Plaintiff's failure to provide dunnage specifications between July 2004 and March 2006 and that this "work stoppage" entitled DJH to terminate the Contract.
The relevant provision of the Contract, Article 14.1.3, provides:
If the Work is stopped for a period of 60 days through no act or fault of the Contractor or a Subcontractor or their agents . . . the Contractor may, upon seven additional days' written notice to the Owner, Construction Manager and Architect, terminate the Contract and recover from the Owner as provided in Subparagraph 14.1.2 (Joyce Aff., Ex. C at 26).
Nova argues that because the Performance Bond is expressly conditioned on there being no owner default ( see Performance Bond at § 3, Joyce Aff., Ex. D), and because Plaintiff defaulted under the Contract's terms, Nova was discharged from its obligation under the Performance Bond to complete DJH's performance under the Contract.
Nova contends the performance bond "was conditioned upon the absence of any breach or prejudice to Nova's rights, as surety, by [Plaintiff]" (Joyce Aff. at ¶ 8), and because DJH rightfully terminated the Contract "Nova's obligations under the performance bond have been discharged" (Joyce Aff. at ¶ 16).
According to Nova, Plaintiff received a "Notice of Cross-Withholding" from DOL on or about dated June 7, 2004, which requested that Plaintiff refrain from paying DJH any Contract sums due because of unresolved labor payment issues involving an unrelated project for the Mahopac School District (Joyce Aff. at ¶ 19, see Ex. H). Nova states that thereafter, in January 2005, long before the Contract was completed, Plaintiff paid DOL $214,000.00 from trust funds to be earned on the Project in order to satisfy the DOL's charge that DJH had underpaid workers in violation of New York's wage laws (Joyce Aff. at ¶ 20 and Ex. F). Because neither DJH nor the Mahopac School District were beneficiaries of the Project (as defined by New York's Lien Law, Article 3-A), and because the Project was not completed at the time of the payment, Nova contends that the payment violated New York's Lien Law and New York General Municipal Law. Furthermore, Nova argues that the payment violated the terms of the Contract and was not authorized pursuant to the Performance Bond. Nova argues that because this payment was a material alteration to the terms of the Contract, Nova should be discharged from its surety obligations.
B. Plaintiff's Contentions
Plaintiff argues (1) while Nova's surety obligations were conditioned on no default by the owner under the underlying construction Contract, the obligation was not "conditioned upon the absence of any alleged prejudice' to Nova's rights" (Plaintiff's Memorandum of Law at 2), (2) Nova has no right to seek the benefit of trust monies created under New York's Lien Law since it has not performed its obligations under the Performance Bond and is not a subrogee of the owner and the Lien Law Article 3-A trust beneficiaries ( id. at 16); (3) Plaintiff did not default under the Contract since there is "indisputable evidence that up until the time DJH and Nova conspired to issue an improper notice of termination of the construction contract in June 2006 . . . there was outstanding work for DJH to perform in addition and unrelated to work pertaining to the dunnage. . . ."( id. at 8) (emphasis in original) and it was DJH's financial difficulties resulting from its criminal conviction in 2003 that caused its failure to perform under the Contract due to its financial inability to pay its subcontractors; and (4) the documentary evidence establishes that there was no work stoppage, and further, DJH had no right to seek delay costs since the Contract contained an explicit waiver of any delay claim ( id. at 9; citing Supplementary Conditions at ¶ 4.7.10).
In support of its claim that DJH's termination was a contrived response to Plaintiff's January 2006 Notice of Intent to Terminate, Plaintiff suggests that it was only after Nova's representatives met with DJH on March 21, 2006 that DJH began claiming damages incurred as a result of the two-year delay caused by the dunnage issue. Thereafter, Nova's investigators drafted a report dated March 31, 2006 setting forth DJH's version of the Project's history, which concludes with the idea that if this version is accurate, a "reasonable man' interpretation would be that the year-and-one-half delay in design may constitute abandonment' of the project and entitle DJH to either walk away from the project, or negotiate a significant favorable delay package . . ." (Affirmation of Andrea Tersigni, Esq. dated May 23, 2008 ["Tersigni Aff."], Ex. 12). Plaintiff contends that DJH and Nova thereafter conspired to assert a work stoppage claim to support the June 2006 Termination letter.
Plaintiff attaches a Press Release issued by the United States Department of Justice, dated February 13, 2003, which announces that DJH had pled guilty to money laundering, alleged to have arisen out of DJH's failure to pay non-union employees the prevailing wage supplemental benefits as required by New York State law. As a result of the plea, DJH was required to forfeit $1.2 million to pay these workers and faced a maximum fine of $500,000 (Tersigni Aff., Ex. 12). While a Press Release is not proper documentation of a criminal conviction and sentence, Defendants have not disputed the facts asserted in the Press Release and there is deposition testimony in which Nova's representative attested to his awareness that DJH had a significant issue with DOL and been assessed "very heavy fines". (Tersigni Aff., Ex. 11).
In support of its position that DJH's criminal conviction impacted its ability to pay it subcontractors, which in turn caused its failure to perform under the Contract, Plaintiff attaches (1) a Notice of Lien from one of DJH's subcontractors dated January 6, 2005 in an amount of $35,775.00 (Green Aff., Ex. 5 at MVCSD 002578); (2) correspondence dated March 3, 2005, March 10, 2005 and May 17, 2005 from J.M. Haley, a subcontractor, to DJH stating that once it received the outstanding amount due (approximately $64,000) it would be ready to complete the Project ( id. at MVCSD 002629-30, 002620).
To counter Nova's argument that Plaintiff unlawfully paid DOL $214,000 to satisfy DJH's debt for unpaid wages on an unrelated project, Plaintiff submits an affidavit from the Program Manager from Turner Luster, Noel N. Green, sworn to May 21, 2008 ("Green Aff."). Mr. Green avers that in June 2004, the District received a Notice of Cross-Withholding from DOL dated June 1, 2004, a copy of which is attached as Exhibit 1. In the Notice of Cross-Withholding, DOL requested that Plaintiff withhold the sum of $863,197.40 in connection with DOL's investigation of a possible underpayment by DJH of wages and supplements to workers "employed on the contract identified below," identified as contract # 66-09-00-01-0-001-010. According to Plaintiff, the contract number for the Project at issue in this action is the same number indicated on the DOL form and, therefore, the DOL notice was specifically directed to possible wage violations on this Project. Furthermore, Plaintiff contends that the notice it received from DOL did not contain the page concerning the Mahopac project that is found in Exhibit H to the Joyce Affidavit. It is Plaintiff's position that Nova has manufactured this document to show that Plaintiff diverted trust fund monies to pay DJH's debt for unpaid wages on an unrelated project. The Court notes that the page which Plaintiff claims was not part of the Notice bears a date of March 10, 2004, while the Notice itself is dated June 1, 2004. In any event, Plaintiff admits that it thereafter released $214,000.00 to the Commissioner of Labor, after being directed to do so by DOL and authorized to do so by DJH pursuant to a Notice to Withhold/Release Payment from DOL in January 2005 (Green Aff., Ex. 2). The Notice further authorized Plaintiff to release to DJH the amount of $649,197.40 "unless these funds are needed to satisfy additional withholdings, or cross-withholdings and/or for the underpayment of wages and supplements on other cases involving this contractor" (Green Aff., Ex. 2 at MVCSD 002583).
Mr. Green states that at around the same time Plaintiff received the DOL notice, DJH asserted that it may incur costs for the delays caused by the School's design of a dunnage framing plan for the fourth floor of the school (Green Aff. at ¶ 4). Turner Luster responded to DJH's delay claim in a Memorandum dated July 10, 2004 by stating "DJH should continue to complete all remaining work while the Owner resolve [sic] the dunnage issue. There can be no delay claim as long as there is outstanding contract work to be completed" (Green Aff., Ex. 4).
Documentary support for Plaintiff's position that there was work in addition and unrelated to the dunnage issue that remained outstanding during the relevant time period is attached as Exhibit 5 to the Green Affidavit. These documents include: (1) punch lists of outstanding items to complete for the various contractors, including DJH; (2) memoranda memorializing Contractor Meetings on October 5, 2004, November 2, 2004 wherein outstanding work items for DJH are listed; (3) a letter from DJH to its subcontractor, Glendale Contracting, dated February 24, 2005 wherein DJH contends that the "[t]otal work completed to date is 24% from the total contract price including change order work;" (4) a memorandum dated March 16, 2005 from Turner Luster to DJH which outlines outstanding work to be completed by DJH; (5) a facsimile from DJH dated June 27, 2005 wherein DJH states that it was unable to install refrigerant piping because the floors were being waxed; and (6) a memorandum dated April 19, 2006 from Brinjac Engineering (the Project's engineer) outlining outstanding items to be completed by DJH ( i.e., install heat exchanger in the mechanical room; provide screws/rivets to secure radiation covers; complete piping and pipe insulation; complete ductwork and duct insulation; install return duct for auditorium air handler and start unit; install condensing unit for auditorium air handler; arrange for service and inspection of all equipment; arrange for startup service of all equipment, clean, test, adjust and balance all units) (Green Aff., Ex. 5, MVCSD 002897-2898). Additional evidence suggesting that DJH had outstanding work to be performed unrelated to the dunnage issue is found in the seven day notice of termination dated January 30, 2006 from Tuner Luster to DJH threatening termination based on DJH's "failure to provide adequate forces to achieve substantial completion and persistently failing to carryout work in accordance with the contract documents" (Green Aff., Ex. 6).
Plaintiff also calls into question whether it failed to provide dunnage drawings until March 2006. Instead, it is Plaintiff's position that the dunnage specifications were final by July 29, 2004 (Green Aff. at ¶ 4), which is supported by (1) the architectural drawing dated July 8, 2004, and (2) a cover memorandum from Shahab Sakib of G G Engineering Associates to Lourdes Peña of Roberta Washington Architects dated July 29, 2004, which states that the attached drawings relating to the dunnage issue should be considered final design drawings (Green Aff., Ex. 3).
Nova objects to Plaintiff's use of this document, which Nova claims was not produced in discovery, and asserts that it is entitled to an "Order striking those documents from the record in this matter" (Nova's Reply Memorandum at 6). Since Plaintiff has not had an opportunity to respond to this assertion, and since evidence that may not be admissible at trial may be considered in denying a motion for summary judgment provided that it is not the sole basis for the court's determination ( Hammett v Diaz-Frias , 49 AD3d 285 [1st Dept 2008]), the Court need not address this issue.
To show Nova's bad faith and failure to investigate the facts prior to reneging on its surety obligations, Plaintiff appends excerpts from the Examination Before Trial of Nova's Surety Claims Consultant, Mr. Joyce, who testified that, among other things, (1) he relied on advice of counsel (rather than any documentary support) to support the allegation that the Contract had been in a state of suspense for 18 months, (2) he did not review the two DOL notices with respect to the $214,000 payment to DOL, (3) he did not independently investigate whether DJH's criminal conviction had been a major cause for the delay on the Project; (4) that as a result of the heavy fines imposed in the criminal conviction, Nova did receive subcontractor claims on an unrelated Coney Island job; (5) that it would not be the responsibility of Plaintiff if DJH could not perform its work because it did not have the money to pay its contractors because of the heavy fines; and (6) that while DJH's version of the events may not be 100% accurate, it is nevertheless substantially accurate (Tersigni Aff., Ex. 11).
C. Nova's Reply
In reply, Nova contends that Plaintiff misrepresents that the DOL Notice of Cross-Withholding had to do with the Project at issue in this action. Instead, a clear reading of the Notice shows that they had to do with DOL's investigation of DJH's underpayment of wages on an unrelated project for the Mahopac School District (Joyce Aff., Ex. H). Therefore, whether or not Plaintiff breached a fiduciary duty to Nova, Plaintiff violated New York's Lien Law by using Article 3-A trust funds to pay DOL — an entity that is not an Article 3-A trust beneficiary — before all the trust beneficiaries of the Project had been paid in full (Nova's Reply Memorandum of Law at 3). Thus, Nova argues Plaintiff "breached the Contract by illegally reducing the contract funds, to which the surety is entitled upon its principal's default. Had [Plaintiff] not made the illegal payment to [DOL] from contract trust funds, the missing $214,000.00 would have been enough to complete the project . . . [since Plaintiff] in its Note of Issue, alleges approximately $130,000.00 in damages, significantly less than the $214,000.00 in contract trust funds that [Plaintiff] paid to [DOL] prior to the completion of its own Project" ( id. at 9).
With regard to Plaintiff's production of drawings pertaining to the necessary dunnage for the roof which Plaintiff contends were approved on July 8, 2004, Nova concedes that the architect's plans for the steel dunnage were apparently approved on this date but argues that this only further supports Nova's argument that Plaintiff stopped the Project for 18 months without justification. Nova asserts that, despite the existence of these drawings for two years, Plaintiff did not have the dunnage installed until the summer of 2006 (two years later) and did not advise DJH that an approved plan for the dunnage existed until the Spring of 2006 (18 moths later). Nova contends that the work could not proceed because the HVAC units remained in storage and they were needed in order for DJH to install the ductwork and piping ( id. at 6).
Finally, Nova contends that Plaintiff's request that the Court search the record and grant it summary judgment is based on the erroneous position that DJH's default in this action somehow creates a presumption of liability against Nova. Instead, because the default judgment was not on the merits, it has no collateral estoppel effect for the purposes of the present motion ( id. at 12).
THE SUMMARY JUDGMENT STANDARD
The proponent of a motion for summary judgment carries the initial burden of production of evidence as well as the burden of persuasion ( Alvarez v Prospect Hosp., 68 NY2d 320). The moving party must tender sufficient evidence to demonstrate as a matter of law the absence of a material issue of fact. Failure to make that initial showing requires denial of the motion, regardless of the sufficiency of the opposing papers ( Winegrad v New York University Med. Center, 64 NY2d 851, 643-644; St. Luke's-Roosevelt Hospital v American Transit Ins. Co., 274 AD2d 511 (2d Dept 2000); Greenberg v Manlon Realty, Inc., 43 AD2d 968 [2d Dept 1974]). Once the moving party has made a prima facie showing of entitlement of summary judgment, the burden of production shifts to the opponent, who must now go forward and produce sufficient evidence in admissible form to establish the existence of a triable issue of fact or demonstrate an acceptable excuse for failing to do so ( Zuckerman v City of New York, 49 NY2d 557, 562; Tillem v Cablevision Sys. Corp. , 38 AD3d 878 [2d Dept 1007]; Fleming v Graham , 34 AD3d 525 [2d Dept 2006]).
There is no requirement that proof be submitted in the form of an affidavit, as opposed to other acceptable forms, such as deposition testimony ( Muniz v Bacchus, 282 AD2d 387 [1st Dept 2001]).
The court's function on a motion for summary judgment is issue finding rather than issue determination ( Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395). Since summary judgment is a drastic remedy, it should not be granted where there is any doubt as to the existence of a triable issue ( Rotuba Extruders, Inc. v Ceppos, 46 NY2d 223). Thus, when the existence of an issue of fact is even arguable or debatable, summary judgment should be denied ( Stone v Goodson, 8 NY2d 8; Sillman v Twentieth Century Fox Film Corp., supra).
NOVA'S MOTION FOR SUMMARY JUDGMENT
A. Plaintiff's $214,000.00 Payment to DOL for Unpaid Wage Claims
Nova's motion for summary judgment concerning Plaintiff's $214,000.00 payment to the DOL Commissioner in January 2005 to satisfy a debt owed by DJH on unpaid wages involving either this Project (as Plaintiff contends) or on an unrelated project for the Mahopac School District (as Nova contends) is based primarily on its arguments that (1) the payment was wrongful as violative of the Lien Law, Article 3-A and General Obligations Law § 106-b, and (2) the payment constituted a material or cardinal breach of the Performance Bond and/or the underlying Contract such that Nova should be discharged from its surety obligations.
The claim based on an alleged violation of General Municipal Law § 106-b(1) is readily disposed of. While this statute entitles a municipality to withhold funds, it does not create a private right of action for surety to recover from the municipality, and, therefore, cannot provide a basis for Nova's discharge defense ( see, e.g., Murnane Assoc., Inc. v Harrison Garage Parking Corp., 239 AD2d 882, 883 [4th Dept 1997], lv denied 95 NY2d 751 [2000] [General Muncipal Law § 106-b "creates no private right of action for a municipality's failure to retain, and no such cause of action may be implied'); see also General Municipal Law § 106-b(2) ["Nothing provided herein shall create any obligation on the part of the public owner to pay or to see to the payment of any moneys to any subcontractor or materialman from any contractor nor shall anything provided herein serve to create any relationship in contract or otherwise, implied or expressed, between the subcontractor or materialman and the public owner"]).
B. The $214,000.00 Payment as Violative of New York's Lien Law, Article 3-A
New York's Lien Law § 70 "was designed to create trust funds out of certain construction payments or funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as specified taxes and expenses of construction" ( Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507, 512; see also Lien Law § 70). The Court of Appeals has pronounced that the Lien Law's purpose is "to ensure that those who have directly expended labor and materials to improve real property [or public improvement] at the direction of the owner or a general contractor' receive payment for the work actually performed" ( Matter of RLI Ins. Co. v New York State Dept. of Labor, 97 NY2d 256). Thus, funds received by a general contractor in performance of a public improvement contract, and the rights to receive those funds, are held by the contractor in trust for the benefit of his subcontractors and suppliers. "An article 3-A trust commences when any asset thereof comes into existence' and continues until all trust claims have been paid or discharged, or all assets have been applied for trust purposes" ( RLI Ins. Co., 97 NY2d at 262). 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. ( RLI Ins. Co., 97 NY2d at 264).
Nova relies primarily on RLI Ins. Co. to support its position that Plaintiff's payment to DOL was an improper diversion of trust assets because DOL "did not have priority to the trust fund assets that were used to pay the intended Article 3A trust fund beneficiaries, such as the contractor who completed the work after DJH terminated the Contract" (Nova's Memorandum of Law at 10). Furthermore, Nova contends that since DJH had acquired no property rights with respect to the trust assets, when Plaintiff paid $214,000.00 to satisfy a debt owed by DJH on an unrelated construction project, the trust fund "was severely depleted . . . in contravention of the rights of Article 3-A trust fund beneficiaries" ( id. at 11).
The Court notes that while DJH would have held the funds received in trust pursuant to the provisions of the Lien Law, the fact remains that at the time Plaintiff made the $214,000 payment on DJH's behalf to DOL, DJH was entitled to these funds as a progress payment pursuant to the Contract's terms.
In RLI Ins. Co., a surety who, unlike Nova in this case, had undertaken the defaulting contractor's performance, brought an Article 78 proceeding: (1) to compel DOL to withdraw its notice of cross-withholding issued as a result of the contractor's underpayment of wages on an unrelated public improvement project, and (2) to enjoin the owner-School District from releasing any funds to DOL. In RLI Ins. Co., the New York Court of Appeals held that the surety's right to funds that were still in 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. Likewise, 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. Critical to the court's decision was the fact that the contractor does not take title to any funds until the legal requirements of the trust have been met.
In holding that the DOL's notice of cross-withholding on a public improvement project was subject to the superior rights of both the intended beneficiaries under Article 3-A of the Lien Law, and the surety's subrogation rights on the project at issue, the New York Court of Appeals explained "an Article 3-A trust . . . [which is] broader and may arise prior to the existence of any funds to which DOL's notice of cross-withholding could attach . . . [since] cross-withholding would not extend to unmmatured rights of the contractor to payment. It necessarily follows that for purposes of cross-withholding to pay laborers' wages on an unrelated public improvement project, DOL is in a secondary position with respect to the Article 3-A trust beneficiaries" ( RLI Ins. Co., 97 NY2d at 263).
The factual and procedural posture of RLI Ins. Co. is vastly different from the present case where (1) Nova is not a completing surety, (2) the $214,000.00 funds are no longer in the possession of Plaintiff-School District, and (3) the parties offer conflicting evidence as to whether the $214,000.00 was used to pay underpaid workers on this Project or an unrelated project in Mahopac.
The Court would be somewhat more receptive to Nova's claim of prejudice if it had actually completed DJH's performance under the Contract. In such a case "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 if the $214,000.00 payment involved payment of underpaid wages on an unrelated job, 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, 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.
By contrast, Nova would have no basis to contest the $214,000.00 payment if the facts are as Plaintiff suggests. It is well settled that "[a]t the awarding of the contract, the successful bidder agrees to comply with the Prevailing Wage Law . . . [and] [t]his payment clearly has a priority" ( Oriska Ins. Co., supra). Therefore, if the $214,000.00 payment was made in satisfaction of DJH's underpayment of its workers on this Project, even if Nova had standing as subrogee to sue for diverted trust funds, the claim would fail because funds that are withheld under Labor Law § 220-b(2) for the benefit of workers underpaid by a contractor constitute a statutory trust and the rights of the workers to these funds are superior to the claims of a surety which made payments under the performance and payment bonds ( City of New York v. Cross Bay Contracting Corp., 235 AD2d 10 [1st Dept. 1997], reversed on other grounds 93 NY2d 14).
In City of New York, the New York City Department of Sanitation (DOS) awarded a contract to Cross Bay Contracting Corp. ("Cross Bay") for construction work at its Fresh Kills Landfill. Colonia Insurance Company ("Colonia") issued the performance and payment bonds. After DOS terminated the contract for convenience and Cross Bay defaulted on certain obligations arising under the contract, Colonia made payments under the payment bond to three subcontractors and a union benefits fund in the amount of $127,631.29. Other subcontractors filed liens and restraining notices against the City. Furthermore, laborers working for Cross Bay on the Fresh Kills Landfill had filed claims with the City alleging Cross Bay had not paid them the prevailing rate of wages. Based on these complaints, New York City's Comptroller issued a stop payment order which directed the City to withhold $100,000.00 pending the Comptroller's determination as to whether Cross Bay violated Labor Law § 220.
To resolve the Article 78 proceeding instituted by Cross Bay and Colonia to compel payment of sums they claimed were due under the Fresh Kills project, the City entered into a stipulation that provided that the City would "make prompt payment in [the] amount of $171,917.38 to Colonia upon the satisfaction, discharge, release, or cancellation of all those valid liens, levies, restraints and encumbrances . . . which have a superior or greater legal or equitable right than Colonia to [the] earned funds" ( id. at 12-13). The City thereafter instituted an interpleader action in the amount of $171,917.38 to resolve the competing claims. However, when the City realized that it had forgotten about the $100,000 stop payment order, it moved for leave to amend to reduce the amount in controversy by that amount arguing that it was required by Labor Law § 220 to hold the $100,000 in trust for the benefit of the workers allegedly underpaid by Cross Bay. The trial court granted the City's motion to amend holding that it had established "a prima facie right under Labor Law § 220-b(2) to withhold $100,000 in payments under [the Fresh Kills Landfill contract] in trust for the benefit of workers allegedly underpaid by Cross Bay'" ( id. at 13). The trial court denied Colonia's motion for summary judgment on the remaining $71,917.38 finding that Colonia had not established its entitlement to these interpleaded funds. The Appellate Division, First Department, affirmed that part of the trial court's order allowing the reduction in the amount of interpleaded funds where the City established the right to withhold the $100,000 "in a statutory trust for the benefit of workers allegedly underpaid by Cross
Bay" ( id. at 14), but modified the order to the extent of granting Colonia's motion for summary judgment. It was this second part of the order that was reversed by the Court of Appeals. While Colonia argued that the $71,917.38 was not part of an Article 3-A trust because Cross-Bay never received or had the right to receive the contested funds, the Court of Appeals rejected that contention. In reversing the Appellate Division's grant of summary judgment, the Court stated "[w]here, as here, it appears that the surety has not even completed payment of all claims, the surety should not be accorded an automatic priority over the claims of Article 3-A trust beneficiaries" ( Cross Bay Contracting Corp., 93 NY2d at 22).
The Court did not reach the issue regarding the $100,000, on account of funds due to allegedly due to underpaid workers, as, during the pendency of appellate proceedings, the City moved to restore the $100,000 to the interpleader pot because the $100,000 had been paid by sums withheld from Cross Bay on another, unrelated project, rendering the issue moot. 93 NY2d at 18. Therefore, the Court of Appeals dismissed the appeal by the surety from the portion of the Appellate Division order which challenged the reduction of $100,000 from the interpleader pot. Id.
Here, it is undisputed that Nova is not a completing surety and, therefore, Nova has no right as a subrogee to unpaid contract monies and trust fund monies. Furthermore, even if Nova was a completing surety, the net effect of a finding that Plaintiff illegally diverted trust assets by paying underpaid wage claims on an unrelated contract would simply be to discharge Nova's liability up to the amount of the $214,000 that was not preserved ( see, e.g., Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507). The Complaint seeks damages against Nova in excess of $300,000 and, therefore, Nova is incorrect in asserting that there is no basis for it to have any further liability under the performance bond. Because there are questions of fact surrounding the $214,000 payment, including whether the wages related to this Project or an unrelated Project, there is no basis for this Court to find as a matter of law that there was an illegal diversion of trust fund assets entitling Nova to discharge any future liability in this action up to the amount of the illegal diversion.
C. The $214,000 Payment as a Material Alteration of the Contract Terms
Nova contends 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" (Nova's Memorandum of Law at 14). In addition to the breach of the Contract's payment terms, Nova states that the payment violated the provision of the performance bond paragraph 7 which provided that "the surety shall not be liable to the Owner or others for obligations of the Contractor that are unrelated to the Construction Contract, and, the Balance of the Contract Price shall not be reduced or set off on account of any such unrelated obligations" (Nova's Memorandum of Law at 15). Therefore, Nova argues that under well-established authority "a material departure by the owner, without the consent of the surety, from the express requirements of a construction contract with regard to the times or amounts of payments made to the contractor . . . operates to release or discharge the surety on the contractor's bond from liability to the owner, at least to the extent that such unauthorized payments result in injury or prejudice to the surety'" ( id. at 14, quoting Aniero Concrete Co. v New York City School Constr. Auth., 1998 WL 148324 at 12 [SD NY 1998], affd 404 F3d 566 [2d Cir 2005]).
In opposition, Plaintiff argues (1) the payment provision cited by Nova is inapplicable because it deals with final payment upon substantial completion — an event that never occurred in this case, (2) even if the provision were applicable, Plaintiff did not violate it since it "does not create any prohibition against payment made pursuant to statutory directives, as occurred in this case" (Plaintiff's Memorandum of Law at 19), and (3) pursuant to the performance bond's terms, Nova "waived notice of any alleged change' or material alteration' in the contract terms allegedly effectuated by the payment by the [School] to [the DOL]'" ( id.)
The law is clear that "[b]ecause the surety's obligation is distinct, the parties to the underlying contract may not unilaterally augment the surety's liability" without the surety's consent and if they do so "the surety is discharged because the parties have substituted a new contract, to which the surety never agreed, for the original'" ( Midland Steel Warehouse Corp. v Godinger Silver Art Ltd., 276 AD2d 341 [1st Dept 2000]). However, under New York Law, if a surety agrees in advance to waive objections to modifications, such an agreement is valid and enforceable" ( Aetna Cas. Surety Co. v New York School Constr. Auth., 1997 WL 272404 at 3 [SD NY 1997]), rearg denied 1997 WL 471044); Aniero Concrete, 1998 WL 148324 at 13 ["However, in a case such as this, where a surety explicitly agrees in the bond that prepayments by the obligee will not discharge its liability, the surety cannot later be heard to complain that the obligee made a prepayment without relying in good faith on the certificate of progress"]).
The Court agrees that the payment provision of the Contract cited by Nova is inapplicable to the payment that occurred in this case since the provision, by its terms, has to do with the Contractor's "requisition for payment of the remaining amount of the Contract balance." Upon such requisition, the Owner must pay "the Contract balance less two times the value of any remaining items to be completed and an amount necessary to satisfy any claims, liens or judgements against the Contractor which have not been suitably discharged. Any claims, liens and judgements referred to in this clause shall pertain to the Project and shall be filed in accordance with the terms of the Contract, and applicable laws" (Joyce Aff., Ex. C, Supplementary Conditions at 12). Here, it is undisputed that there was never a request for final payment since DJH terminated the Contract prior to the Project's completion. With regard to Plaintiff's claims that Nova expressly waived its right to assert that its obligations have been discharged based on Plaintiff's wrongful diversion of trust assets to DOL, the provision at issue provides
The Surety hereby waives notice of any change, including changes of time to the Construction Contract or to related subcontracts, purchase orders and other obligations (Joyce Aff., Ex. D at ¶ 8).
Nova counters Plaintiff's argument by claiming that the "clause refers to the surety's agreement that it need not receive notice of, or grant its consent to, extensions of time, change orders, and additions/reductions in the scope of the contract" and cannot be construed as a waiver by Nova of any future claim it may have against Plaintiff for diversion of trust fund assets (Nova's Reply Memorandum of Law at 10). While the Court believes the provision is broader in scope than Nova's characterization, the Court does not read the provision as providing for Nova's waiver of a future claim based on diversion of trust assets, so both Plaintiff's and Nova's arguments fail.
D. The Propriety of DJH's Termination of the Contract
Nova contends that [i]t is undisputed that MVCSD failed to fulfill its obligations under the Contract, thereby causing the subject project to be stopped for a period of over sixty (60) days" in violation of Article 14.1.3 of the Contract (Nova Memorandum of Law at 18). Thus, Nova argues that the following facts are conclusively established (1) the original contract completion date was September 16, 2004, (2) in July 2004 Plaintiff was advised of the need to address additional support for the roof in order to support the weight of the air handling units, (3) dunnage was not included in the original scope of the Contract, (4) Plaintiff failed to provide the dunnage drawings until March 2006, (5) that without the air handling units in place, DJH's "completion of the Project, including, inter alia, piping, ducts, controls and related items, was impossible" (Nova's Memorandum of Law at 18), and (6) after DJH justifiably terminated the Contract in June 2006, Nova's surety obligations were discharged. By contrast, Plaintiff cites to numerous documents, which memorialize not only outstanding work DJH could have performed during the alleged 18 month work stoppage, but also document that DJH's subcontractors were not performing their work based on DJH's failure to pay them for monies owed. And there are also documents suggesting that based on the timing of DJH's termination, DJH decided to terminate after Plaintiff had put DJH on notice that it was on the verge of terminating the Contract based on DJH's failure to provide adequate forces to achieve substantial completion and failure to carry out the work in accordance with the contract documents.
"Generally, when parties agree on a termination procedure, the clause must be enforced as written" ( J. Petrocelli Constr., Inc. v Realm Elect. Contr., Inc. , 15 AD3d 444 , 446 [2d Dept 2005]). Article 14.1.3 provides "[i]f work is stopped for a period of sixty daysthrough no act or fault of the Contractor or Subcontractor or their agents or employees . . . because the Owner has persistently failed to fulfill the Owner's obligations under the Contract Documents with respect to matters important to the progress of the Work the Contractor may, upon seven days additional days written notice to the Owner, Construction Manager and Architect, terminate the Contract and recover from the Owner as provided in Subparagraph 14.1.2" (Joyce Aff., Ex. C at 26).
Leaving aside the issue whether the Contract required 7 days advance notice prior to termination (as Nova contends) or 30 days (as Plaintiff contends) pursuant Article 14.1.3, there are numerous triable issues of fact concerning DJH's performance under the Contract and whether Plaintiff was at fault for interfering with DJH's performance. There are also issues of fact concerning whether there was indeed a "work stoppage" within the meaning of the Contract, or whether there was simply a delay in the completion of the Project, which was contemplated by the parties based on ¶ 4.7.10 of Supplementary Conditions where DJH waived any right to assert a delay claim. Contrary to Nova's assertions, there are numerous documents showing that Plaintiff requested DJH to perform outstanding items that were unrelated to the dunnage issue during this alleged 18-month work stoppage. Plaintiff has submitted evidence suggesting that DJH's criminal convictions may have been the cause for its continued failure to perform its obligations under the Contract.
Despite the provision of the Contract requiring DJH to waive any claim for delay, DJH sought, by letter dated March 23, 2006, $295,000 in impact charges allegedly incurred because of the delay in Project, and thereafter on July 24, 2006, DJH upped the ante to over $400,000 in delay charges ( see Green Aff., Ex. 7 and Tersigni Aff., Ex. 12 at 20).
In view of the documents upon which Plaintiff and Nova rely, it is clear that questions of fact exist as to whether (1) Plaintiff's failure to timely provide drawings for dunnage caused a work stoppage for over six months justifying DJH's termination of the Contract, and (2) there were numerous outstanding items of work unrelated to the dunnage issue that DJH could have performed such that there was no work stoppage caused by Plaintiff and DJH's termination was unjustified.
PLAINTIFF'S REQUEST FOR PARTIAL SUMMARY JUDGMENT
Although not cross-moving, Plaintiff requests that the Court search the record (CPLR 3212[b]) and grant partial summary judgment in favor of it by establishing Nova's liability. In support Plaintiff asserts that (1) there is indisputable evidence "that extensive delays in the performance of DJH's work were caused by DJH and that the School, as admitted by Nova, is not responsible for DJH's great hardship' and inability to pay its subcontractors to perform its work, which resulted from the enormous fines and penalties imposed for DJH's criminal conduct" (Plaintiff's Memorandum of Law at 24); (2) Nova has no legal basis to disclaim liability under New York Lien Law or General Municipal Law; and (3) "because an order of default has been entered against DJH in this matter, there is a presumption of liability against Nova, and to survive summary judgment, Nova must come forward and contest its . . . liability by establishing affirmatively that . . . [it is] not liable'" ( id., citing S.D.I. Corp. v Fireman's Fund Ins. Companies, 208 AD2d 706, 708 [2d Dept 1993]).
Plaintiff's first two points may be summarily denied for the same reasons Nova's motion for summary judgment on these two points fail. As to Plaintiff's third point, the Court does not agree with Plaintiff's characterization of the law with regard to a default judgment against a principal as creating a presumption of liability for the surety. Indeed, the case upon which Plaintiff relies directly contradicts plaintiff's position. In S.D.I. Corp., plaintiff-subcontractor obtained summary judgment against the general contractor based on the general contractor's default in opposing plaintiff's summary judgment motion. The surety in that case, Fireman's Fund Insurance Companies ("Fireman's Fund"), opposed plaintiff's summary judgment motion against the general contractor. Plaintiff then moved for summary judgment against Fireman's Fund and argued that the judgment against the general contractor should have a collateral estoppel effect such that plaintiff should not have to relitigate the issue over whether it fully performed under the contract. The Appellate Division, Second Department, noted the general rule that "a judgment entered against a principal upon default is only prima facie evidence against the surety . . . [and] the latter remains at liberty to contest its own liability by establishing affirmatively that the principal was not liable'" ( S.D.I. Corp., 208 AD2d at 708, quoting Firedoor Corp. of America v Merlin Indus., Ltd., 86 AD2d 577 [1st Dept 1982]). The Court held that there could be no collateral estoppel effect afforded the judgment on default because there was "no basis for determining from the . . . record exactly what specific issues were litigated or decided in that prior motion. . . ." ( S.D.I. Corp., 208 AD2d at 709).
Even if the Court were to find DJH's default prima facie evidence of its breach of the Contract, Nova has submitted sufficient evidence creating triable issues of fact concerning possible defaults by Plaintiff, which may have impacted DJH's performance under the Contract.
CONCLUSION
The Court has considered the following papers in connection with this application:
1)Notice of Motion dated May 8, 2008; Affidavit of Thomas A. Joyce, sworn to May 8, 2008, together with the exhibits annexed thereto, submitted with proof of due service;
2)Affirmation of Neil B. Connelly, Esq., together with the exhibits annexed thereto, submitted with proof of due service;
3)Memorandum of Law In Support of Defendant's Motion for Summary Judgment, dated May 9, 2008, submitted with proof of due service;
4)Affidavit of Noel N. Green, sworn to May 21, 2008 and the Affirmation of Andrea Tersigni dated May 23, 2008, together with the exhibits annexed thereto, submitted with proof of due service;
5)Memorandum of Law in Opposition to Defendant's Motion for Summary Judgment and In Support of Grant of Partial Summary Judgment in Favor of Plaintiff, submitted with proof of due service; and
6)Reply Memorandum of Law dated May 30, 2008.
Based upon the foregoing papers, and for the reasons set forth above, it is hereby
ORDERED that Defendant Nova's motion for summary judgment is denied; and it is further
ORDERED that Plaintiff's request that the Court search the record and grant partial summary judgment establishing Nova's liability as a matter of law is denied; and it is further
ORDERED that counsel for the parties shall appear before this Court for a conference on August 22, 2008 at 9:30 a.m. for the purpose of scheduling further proceedings in this action and establishing a date for trial; and it is further
ORDERED that the status conference hereinabove provided for may not be adjourned without the prior written approval of the Court.
This constitutes the Decision and Order of the Court.