Opinion
01 Civ. 3008 (CM)
December 4, 2002
MEMORANDUM DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR CLASS CERTIFICATION
Plaintiff United States Fidelity and Guaranty Company ("USFG") sues defendants Madison Financial Corporation ("Madison Corp."); Madison Financial, LLC ("Madison LLC"); Service Capital Corporation; Westway Industries, Inc. ("Westway"); Westchester Fine Grade, Inc. ("WFG"); Stephen Nigro; Christopher Maguire; and John Marozzi for alleged diversions of trust fund assets in violation of Article 3-A of the New York Lien Law ("Lien Law"). USFG moves the Court to certify a class pursuant to Rule 23 of the Federal Rules of Civil Procedure, consisting of it and "all other persons similarly situated," and to certify a number of sub-classes as well. USFG also moves for summary judgment on the issue of liability as to its claims against Madison Corp., Madison LLC, Westway, WFG, Stephen Nigro, and John Marozzi. Defendant Marozzi cross-moves for summary judgment on the claim against him, individually.
Madison Corp. and Madison LLC have also filed a cross-claim against all of their co-defendants except John Marozzi. That cross-claim is not at issue in the motions currently before
Default judgment is currently pending as against Christopher Maguire and Service Capital Corporation.
USFG's motion for class certification is denied. For the reasons set forth below, I decline to entertain either USFG's or Marozzi's motions for summary judgment.
BACKGROUND
A. Facts
Defendants Westway and WFG (collectively "Westway Companies") acted as a general contractor for public improvement and private construction projects in the greater New York area. USFG issued or procured the issuance of surety bonds, both payment and performance bonds, for more than twenty of the Westway Companies' construction projects. Around June of 1999, Madison Corp. and WFG entered into an Accounts Receivable Purchase Agreement, otherwise known as a "factoring agreement." The agreement provided that Madison Corp. would advance monies to WFG in exchange for WFG's assignment (to Madison Corp.) of specific construction receivables, as well as a fee ranging from 4%-15%. [Judd Aff. Ex. C]. On September 9, 1999, the factoring agreement was modified to include Westway. And the Court. around June of 2000, Madison LLC entered into a similar Accounts Receivable Purchase agreement (collectively "Factoring Agreements") with both of the Westway Companies. Id.
Through these Factoring Agreements, Madison obtained at least $12.7 million in contract funds paid to the Westway Companies from construction project owners (mostly local governments and state agencies). Those funds were earned, on a project-by-project basis, in large part through the efforts of the Westway Companies' subcontractors, suppliers, and workers.
Though not contained in its 56.1 Statement of Undisputed Facts, USFG explains in its motion papers that once "the factored construction receivable became payable, Madison would take that payment directly from the project owner, pursuant to written assignments or notices of purchase of accounts, or indirectly through the Westway Companies." [USFG Mem. in Supp. of Class Certification 3].
According to USFG, those subcontractors, suppliers, and workers should have received those funds for their work, but many did not. As a result, USFG, as surety to the Westway Companies, has paid approximately $6.3 million in claims. USFG contends that additional claimants may come forward and seek payment in the future. It does not estimate either the number or dollar amount of these potential future claims.
B. The New York Lien Law
"[T]he primary purpose of the Lien Law is to ensure that `those who have directly expended labor and materials to improve real property [or a public improvement] at the direction of the owner or a general contractor' receive payment for the work actually performed." Canron Corp. v. City of New York, 89 N.Y.2d 147, 155, 674 N.E.2d 1117, 1121 (1996) (quoting West-Fair Elec. Contractors v. Aetna Cas. Sur. Co., 87 N.Y.2d 148, 157, 661 N.E.2d 967, 970 (1995)). To that end, Article 3-A of the Lien Law creates "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 N.Y.2d 507, 512, 236 N.E.2d 461, 463 (1968). The trust funds include assets received by a contractor "under the contract for the improvement of real property, or home improvement or the public improvement." N.Y. Lien Law § 70(6)(a) (McKinney 2002).
"Lien Law article 3-A mandates that once a trust comes into existence its funds may not be diverted for non-trust purposes. Use of trust assets for any purpose other than the expenditures authorized in Lien Law § 71 before all trust claims have been paid or discharged constitutes an improper diversion of trust assets, regardless of the propriety of the trustee's intentions." Matter of RLI Ins. Co. v. New York State Dept. of Labor, 97 N.Y.2d 256, 276, 766 N.E.2d 934, 938 (2002); see also N.Y. Lien Law § 72 (McKinney 2002) (prohibiting diversion of trust funds). A transferee who is a purchaser in good in good faith for value and without notice, however, cannot be found to have diverted trust assets. Id. at § 72(1).
Factoring agreements, like those the defendants entered into, are not per se illegal. But the Lien Law establishes stringent standards for such agreements. "The applicable provisions of the Lien Law were enacted to protect suppliers of labor and materials to contractors from diversion of funds which are not used to pay creditors on such jobs and to place upon the lender to the contractor the burden of showing that the advances were actually used to pay trust claims." Aetna Cas. Sur. Co. v. Perrotta, 62 Misc.2d 252, 255, 308 N.Y.S.2d 613, 616-17 (N.Y.Sup.Ct. 1970). Three provisions of the Lien Law, in particular, work toward these goals. First, Sections 15 and 16 establish filing requirements for assignments in the context of private and public work projects, respectively. N.Y. Lien Law §§ 15-16 (McKinney 2002). Assignments of public improvement contract receivables, for example, must be filed with specific local government official within twenty days after the assignment occurs. N.Y. Lien Law § 16. Second, Section 25(5) provides that:
Every assignment of moneys, or any part thereof, due or to become due under a contract for a public improvement shall contain a covenant by the assignor that he will receive any moneys advanced thereunder by the assignee and will hold the right to receive such moneys as a trust fund to be first applied to the payment of trust claims as defined in section seventy-one of the lien law, and that he will apply the same to such payments only, before using any part of the moneys for any other purpose.
Id. at § 25(5). Failure to include the covenant mandated by Section 25(5) in an assignment tends to establish that the assigned funds were diverted. See Canron Corp. v. City of New York, 631 N.Y.S.2d 642, 648, 214 A.D.2d 115, 122 (1st Dep't 1995), aff'd, 89 N.Y.2d 147, 674 N.E.2d 1117 (1996); Nat'l Sur. Corp. v. Fishkill Nat'l Park, 61 Misc.2d 579, 583, 306 N.Y.S.2d 122, 128 (N.Y.Sup.Ct. 1969).
Third, Section 73 establishes the filing of a "notice of lending" as an affirmative defense in an action where a transferee is charged with diverting assets from a trust. Id. at § 73. In other words, if a contractor assigns construction receivables to an assignee in exchange for an advance of funds, that assignee cannot be found to have diverted trust fund assets as long as he files a "notice of lending" in the office of the County Clerk where the construction project takes place. See Caristo Constr. Corp., 21 N.Y.2d at 514, 236 N.E.2d at 464
These requirements are "not merely formal elements," Id., and failure to comply with them "may touch very deeply upon substantial rights of interested parties." Nat'l Sur. Corp., 61 Misc.2d at 584, 306 N.Y.S.2d at 128.
C. USFG's Claims
USFG alleges that (1) the funds the Westway Companies assigned to Madison under the Factoring Agreements constituted trust assets under Article 3-A; (2) Madison had notice that they were trust assets; (3) Madison failed to comply with none of the Lien Law's three provisions that serve to validate factoring transactions; and, as a result (4) Madison unlawfully diverted trust assets. It therefore seeks to enforce the trust under Section 77 of the Lien Law and asks the Court to grant various forms of relief available under that provision. N.Y. Lien Law § 77 (McKinney 2002).
USFG also seeks to hold Stephen Nigro and John Marozzi personally liable under Section 79-a of the Lien Law. That provision states that:
Any trustee of a trust under this article, and any officer, director or agent of such trustee, who applies or consents to the application of trust funds received by the trustee as money or an instrument for the payment of money for any purpose other than the trust purposes of that turst, as defined in section seventy-one, is guilty of larceny and punishable as provided in the penal law.
N.Y. Lien Law § 79-a(1) (McKinney 2002).
THE PRESENT ACTION
After it paid various subcontractors and suppliers left unpaid by the Westway Companies, USFG became subrogated to their rights as trust fund beneficiaries. In Nat'l Sur. Corp. v. Fishkill Nat'l Park, the court explained:
In addition to its common law rights of exoneration and indemnification, the surety has been authorized by Section 77 of the Lien Law, upon effecting its payment to an obligee or beneficiary, to turn toward an alleged diverter to seek recovery for the diversion of monies appropriated for the particular improvement, and is thus enabled to prosecute a trust fund action as if it were itself one of the stated beneficiaries.61 Misc.2d at 581, 306 N.Y.S.2d at 126.
Although USFG has the right to bring this action, Section 77 also obliges it to "conform as nearly as may be to the practice pleadings, forms and procedure in a class action as provided in article nine of the civil practice law and rules." N.Y. Lien Law § 77 (McKinney 2002). USFG therefore seeks class certification.
More specifically, plaintiff asks this Court to certify separate subclasses consisting of the trust beneficiaries for each of the Westway Companies' twenty-three projects. That is because, under the Lien Law, funds become assets of a trust when received by a contractor "under the contract for the improvement of real property, or home improvement or the public improvement." N.Y. Lien Law § 70(6)(a) (McKinney 2002). As a result, the funds that individual project owners paid to the Westway Companies each constituted a separate trust. "Article 3-A mandates that these unpaid workers, subcontractors and suppliers be grouped in sub-classes by project," USFG explains, "given that their rights, under Article 3-A, as to the Defendants, are limited to the amount of the diverted funds from that project-specific trust." [USFG Mem. in Supp. of Class Certification 5].
The trust beneficiaries for those projects consist of all unpaid subcontractors and suppliers that worked on those projects. Insofar as USFG has paid any subcontractors and suppliers, their rights are subrogated to USFG and they are no longer trust beneficiaries. The remaining unpaid subcontractors and suppliers can then be separated into two categories. First, there are those subcontractors and suppliers who have made claims to USFG but have not yet been paid. Second, there are those subcontractors and suppliers who were unpaid and have not made claims to USFG, but may do so in the future.
A. Class Certification is Denied
1. Rule 23 Applies USFG brought this action in federal court on the basis of diversity. Nonetheless, USFG argues that because a state statute, Section 77 of the Lien Law, mandates that this action be brought in a representative capacity, the requirements of Federal Rule of Civil Procedure 23 need not be met. To support this argument, USFG directs the court to Ingalls Iron Works Co. v. Fehlhaber Corp., 327 F. Supp. 272 (S.D.N.Y. 1971). In that case, the court ruled that "[s]ince diversity is the basis of the Court's jurisdiction and the underlying state cause of action has to be a representative action this action must be maintainable as a class action notwithstanding the failure to meet the requirements in Rule 23." 327 F. Supp. at 287 (citing Hanna v. Plumer, 380 U.S. 460 (1965)).
Subsequent decisions, however, reach the opposite conclusion. In Universal Maint., Inc. v. Amherst Painting, Inc., for example, the court found that "[i]n light of Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), this Court applies [Rule] 23 in the stead of the similar state requirements of Lien Law § 77 and CPLR Art. 9." 1995 WL 737927, at *3 n. 4 (W.D.N.Y. Dec. 7, 1995). See also Syro Steel Co. v. Mellon Bank, No. 90-Civ-1321M, 1993 WL 173439, at *2 (N.D.N.Y. May 17, 1993); In re Oot, 112 B.R. 497, 502 (Bankr.N.D.N.Y. 1990); In re Peters, 90 B.R. 588, 594-95 (Bankr.N.D.N.Y. 1988); In re Grosso, 9 B.R. 815, 823 (Bankr.N.D.N.Y.).
I find these later cases persuasive. In Hanna v. Plumer, the Supreme Court held that "[w]hen a situation is covered by one of the Federal Rules . . . the court has been instructed to apply the Federal Rule, and can refuse to do so only if the Advisory Committee, this Court, and Congress erred in their prima facie judgment that the Rule in question transgresses neither the 8 terms of the Enabling Act nor constitutional restrictions." 380 U.S. at 471. As a result, "[f]ederal and not local standards . . . determine the various procedural elements of the class action." 7B Charles A. Wright Arthur R. Miller, Federal Practice and Procedure, § 1758 (2d ed. 1986). USFG must satisfy Rule 23's requirements before I will certify a class.
2. Rule 23 is Not Satisfied Rule 23 allows an action to be certified as a class action only if the plaintiff can satisfy four prerequisites: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Fed.R.Civ.P. 23(a). These prerequisites are commonly referred to as numerosity, commonality, typicality, and adequacy of representation. See, e.g., Marisol A. v. Giuliani, 126 F.3d 372, 375 (2d Cir. 1997).
In addition, the proposed class must also satisfy one of the following conditions imposed by Fed.R.Civ.P. 23(b): (1) separate actions would create a risk of inconsistent adjudications; (2) injunctive or declaratory relief is sought; or (3) common questions predominate over the individual questions and a class action is superior to other methods of bringing the suit.
The plaintiff who seeks to be a class representative bears the burden of showing that class treatment is appropriate. See General Tel. Co. v. Falcon, 457 U.S. 147, 160 (1982). And though Rule 23 must be "liberally interpreted" and read to "favor maintenance of class action," Woe v. Cuomo, 729 F.2d 96, 107 (2d Cir. 1984), this Court may certify a class only after undertaking "rigorous analysis" to assure that the requirements of the Rule are satisfied. General Tel. Co., 457 U.S. at 161.
a. Each of USFG's Proposed Subclasses Must Satisfy Rule 23
The Federal Rules of Civil Procedure provide that "a class may be divided into subclasses and each subclass treated as a class, and the provisions of [Rule 23] shall then be construed and applied accordingly." Fed.R.Civ.P. 23(c)(4)(B). Thus, each subclass must independently meet Rule 23's requirements for maintenance of a class action, and a failure to do so requires "the dismissal of the action with respect to the subclass or the action going forward with regard to the subclass on an individual basis." 7B Charles A. Wright Arthur R. Miller, Federal Practice and Procedure, § 1790 (2d ed. 1986); see also Twelve John Does v. Dist. of Columbia, 117 F.3d 571, 575 (D.C. Cir. 1997); Burka v. New York City Transit Auth., 110 F.R.D. 595, 601 (S.D.N.Y. 1986).
b. The Proposed Subclasses Fail to Satisfy the Numerosity Requirement
In order to certify a class (or subclass), Rule 23(a) requires a court to find that the class contains so many members that joinder of all class members becomes "impracticable." See Robidoux v. Celani, 987 F.2d 931, 935 (2d Cir. 1993). Impracticable does not mean impossible, but simply difficult or inconvenient. Id.; In re Market-Makers Antitrust Litigation, 169 F.R.D. 493, 508 (S.D.N.Y. 1996).
As the bearer of the burden to show joinder is impracticable, USFG must show some evidence or reasonable estimate of the number of class members. Robidoux, 987 F.2d at 935 (citing Barlow v. Marion County Hosp. Dist., 88 F.R.D. 619, 625 (M.D.Fla. 1980)). USFG has not provided this Court with estimates of the proposed subclasses' numerical sizes. "Precise quantification of the class members is not necessary," however, "because the court may make `common sense assumptions' to support a finding of numerosity." German v. Fed. Home Loan 10 Mortg. Corp., 885 F. Supp. 537, 552 (S.D.N.Y. 1995) (internal citation omitted); Maywalt v. Parker Parsley Petroleum Co., 147 F.R.D. 51, 55 (S.D.N.Y. 1993). There need only be evidence in the record to suggest that a class exists and that a rough estimate of its size can be made. German, 885 F. Supp. at 552; Clarkson v. Coughlin, 783 F. Supp. 789, 798 (S.D.N.Y. 1992); McNeill v. New York City Hous. Auth., 719 F. Supp. 233, 252 (S.D.N.Y. 1989).
Even the most liberal interpretation of the evidence in the record, however, does not establish numerosity. Exhibit B to USFG's Judd Declaration sets forth (1) the amounts plaintiff has paid on past claims, as well as those claimants' identities; and (2) the amount of pending claims by unpaid contractors and suppliers, as well as their identity. The exhibit sets forth this information on a project-by-project (or subclass-by-subclass) basis.
Persons whose claims have already been paid are not class members, because their rights against defendants are subrogated to USFG. Therefore, the however-many claimants who have been paid are not counted for numerosity purposes. This leaves thirty-four claimants who have claims pending with USFG. However, that is thirty-four claimants across twenty-three subclasses. No subclass has more than six unpaid pending claims, and some projects have no pending unpaid claims. According to Exhibit B, seven projects have one unpaid pending claim, six have two, one has three, two have six, and seven have zero. For three of the seven projects that have no pending claims, USFG has not paid any claims nor have any claims been filed. But USFG anticipates that it will receive, and have to pay, claims arising from Westway's failure to pay trust beneficiaries on these projects. There is no evidence in the record of how large those three subclasses might be. [Judd. Aff. ¶¶ 5, 9, 13]. In addition, USFG asserts that it may receive additional claims in the future from heretofore unknown trust beneficiaries on each of these 11 twenty-three projects. Unfortunately, not only does USFG fail to identity who those putative class members might be, it fails to offer an estimate of how many there are.
There is no magic minimum number that establishes numerosity, Bruce v. Christian, 113 F.R.D. 554, 556 (S.D.N.Y. 1986), and courts have certified classes with as few as 14 members. See Grant v. Sullivan, 131 F.R.D. 436, 446 (M.D.Pa. 1990), quoted in Robidoux, 987 F.2d at 935-36. "Generally speaking, courts will find that the `numerosity' requirement has been satisfied when the class comprises 40 or more members and will find that it has not been satisfied when the class comprises 21 or fewer." Ansari v. New York Univ., 179 F.R.D. 112, 114 (S.D.N.Y. 1998) (citations omitted); see also Consol. Rail. Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995) (holding that 40 or more prospective class members raises a presumption of numerosity). Counting USFG as a member of each proposed subclass, no proposed subclass has as many as 21 members, or anything close to that. In fact, no subclass has as many as 10 members. However, this court is not aware of any decision certifying a class of five, six, or seven members.
Courts do consider factors other than raw numbers when determining whether joinder is impracticable, including (1) judicial economy arising from the avoidance of a multiplicity of actions; (2) the geographic dispersion of class members; (3) class members' financial resources; (4) the ability of claimants to institute individual lawsuits; (5) knowledge of the names and existence of the potential class members; (6) the amount of each member's individual claim; and (7) requests for prospective injunctive relief that would involve future class members. See Robidoux, 987 F.2d at 936; see also Familienstiftung v. Askin, 178 F.R.D. 405, 410 (S.D.N.Y. 1998) (explaining that "[w]hether joinder is impracticable does not depend on hard numbers" and setting forth additional factors to consider). USFG argues that the geographical dispersion of trust fund beneficiaries, the inability of individual class members to bring individual actions, and the fact that putative class members remain unidentified, taken together, counsel a finding of numerosity. I disagree that these considerations make joinder impracticable.
First, USFG alleges that the proposed class members are scattered throughout New York and New Jersey. Geographic dispersion generally supports a finding of numerosity. See, e.g., Brown v. Giuliani, 2000 WL 869491, at *6 (S.D.N.Y. June 19, 2000) (geographic dispersion throughout New York supports finding of numerosity); Boyland v. Wing, 2001 WL 761180, at *7 (E.D.N.Y. Apr. 6, 2001) (geographic dispersion when prospective class members were located throughout all five boroughs). But "although the proposed class is geographically dispersed, and this dispersion weighs in favor of finding that joinder is impracticable, dispersion is not dispositive," Ansari v. New York Univ., 179 F.R.D. at 115, especially where the absolute number of class members (here, subclass members) is small to begin with. USFG has not demonstrated that it would be difficult to effect service on any trust beneficiary — indeed, out-of-state corporations working on projects in New York should have designated the New York Secretary of State as agent to receive service of process.
USFG also argues that the inability of individual class members to bring individual actions supports a finding of numerosity. Section 77 of the Lien Law requires that an action to enforce a trust under Article 3-A "conform as nearly as may be to the practice, pleadings, forms and procedure in a class action." N.Y. Lien Law § 77 (McKinney 2002). Although the provisions language is exhortatory, courts have interpreted it to preclude individual suits to enforce a trust. See Scriven v. Maple Knoll Apartments, Inc., 361 N.Y.S.2d 730, 734, 46 A.D.2d 210, 215 3d 13 Dep't 1974); Ryan Stone Co., Inc. v. Cent. Sch. Dist. No. 3, 257 N.Y.S.2d 648, 650, 23 A.D.2d 625, 626 (4th Dep't 1965); In re Indus. Laundry Mach. Co., 161 N.Y.S.2d 547, 3 A.D.2d 843 (2d Dep't 1957). This means that any such suit must name all of a trust fund's putative beneficiaries before it will be entertained by a court. See Syro Steel Co., 1993 WL 173439, at *2 (explaining that it "was the implicit holding in Caristo that if all beneficiaries are parties to the action, the representative requirement is therefore satisfied"); Caristo Constr. Corp., 21 N.Y.2d at 515, 236 N.E.2d at 465. That, of course, does not address the impracticability of joinder.
Finally, USFG argues that joinder is impracticable because there may be putative class members whose identities are unknown. See Doe v. Charleston Area Med. Ctr., Inc., 529 F.2d 638, 645 (4th Cir. 1975); Reynolds v. Giuliani, 118 F. Supp.2d 352, 388 (S.D.N.Y. 2000); State of New York v. Salem Sanitary Carting Corp., 1989 WL 86997, at *1 (E.D.N.Y. July 24, 1989). According to USFG, it has been able to set determine, on a project-by-project basis, (1) the identity of the unpaid workers, workers' benefit funds, subcontractors, and suppliers paid by USFG and the amount paid to each; and (2) the identity of only some of the workers, workers' benefit funds, subcontractors, and suppliers remaining unpaid. [USFG Mem. in Supp. of Class Certification 5-6]. However, USFG has not demonstrated that it is unable to determine the identity of all the workers, subcontractors, and suppliers who worked on the 23 projects at issue and who were not paid — only that it has not done so. Nor does USFG provide the Court with any estimate of how many such workers, subcontractors, or suppliers there might be for any of the twenty-three separate Westway jobs. The Court is left to conjecture, with no guidance whatever. I decline to certify classes based on an uninformed guess.
In sum, USFG has not convinced me that joinder is impracticable for any of the proposed subclasses. USFG's failure to satisfy Rule 23's requirements does not necessarily terminate its claim. USFG may join all the alleged trust beneficiaries. Indeed, joinder is the only way that USFG can satisfy both Section 77 and the Federal Rules of Civil Procedure. I acknowledge that this court might not have jurisdiction over such an action (or actions), because it may be impossible to join all of a particular trust fund's beneficiaries without destroying diversity. If that is the case, then "the action simply cannot proceed here." Syro Steel Co., 1993 WL 173439, at *2. Fortunately, there is a perfectly satisfactory alternative forum in the New York State Supreme Court.
3. The Motions for Summary Judgment are Premature In view of the above, it would be inappropriate for me to rule on the pending motions for summary judgment.
CONCLUSION
Plaintiff's motion for class certification is denied. This is the decision and order of the Court.