Dick's Concrete Co., Inc. v K. Hovnanian at Monroe II, INC.

[*1] Dick's Concrete Co., Inc. v K. Hovnanian at Monroe II, Inc. 2008 NY Slip Op 51886(U) [20 Misc 3d 1145(A)] Decided on September 17, 2008 Supreme Court, Orange County Giacomo, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through September 23, 2008; it will not be published in the printed Official Reports.

Decided on September 17, 2008
Supreme Court, Orange County

Dick's Concrete Co., Inc., on behalf of itself and all persons entitled to share in the trust funds received by the named, defendants pursuant to Lien Law Article 3-A, in connection with the Meadow Glen at Monroe Project in Monroe, Orange County, New York, Plaintiffs,

against

K. Hovnanian at Monroe II, Inc., BREESE CORPORATION and DBD, LLC, Defendants.



6734/06



cc:Sean M. Kemp, Esq.

McCabe & Mack LLP

For Plaintiffs

63 Washington Street

P.O. Box 509

Poughkeepsie, New York

12602-0509

Stuart A. Blander, Esq.

Heller, Horowitz & Feit, P.C.

For Defendants

292 Madison Avenue

New York, New York 10017

William J. Giacomo, J.

"[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 NY2d 147, 155, 652 NYS2d 211(1996). [*2]

By Decision and Order dated November 27, 2007 (the "November Order"), this Court denied Class Plaintiffs'[FN1] motion for partial summary judgment on their causes of action asserting diversion of trust funds by the defendants. Finding the motion "premature", the Court held that defendants K. Hovnanian at Monroe II, Inc. ("Hovnanian") and DBD, LLC ("DBD") (Hovnanian and DBD collectively referred to as the "defendants") had not been given reasonable time and opportunity to conduct disclosure relative to evidence to oppose the summary judgment motion.

While the Court addressed the factual and procedural background of this matter at length in the November Order, a more brief recitation of the background of this matter is still necessary.

FACTUAL AND PROCEDURAL BACKGROUND

Defendant Hovnanian is the owner of a residential condominium identified as Meadow Glen at Monroe (Meadow Glen). Hovnanian retained defendant Breese Corporation ("Breese") as its general contractor on a project to develop Meadow Glen (the "Project"). In turn, Breese entered into agreements with several subcontractors among them the Class Plaintiffs, Dick's Concrete Co., Inc. (Dick's) and B. DeVries & Sons Concrete Pumping, Inc. ("DeVries")[FN2].

On December 20, 2005, Dick's filed a mechanic's lien against the real property comprising Meadow Glen. Subsequently, in the course of discussions between Dick's and Hovnanian, Hovnanian served Dick's with a copy of an agreement (the "Agreement") executed by Breese, defendant DBD, Hovnanian and certain of its related entities (collectively hereinafter "the Hovnanian Entities"). The purpose of the Agreement was to satisfy a debt owed by Breese to DBD pursuant to a loan agreement under which Breese's accounts receivable were assigned to DBD. Pursuant to the Agreement the Hovnanian Entities were to pay $601,000 to DBD (the "Breese Debt Payment) within five days of April 17, 2006. In the Agreement the parties acknowledged Breese owed outstanding sums to subcontractors. Indeed, recognizing claims could arise from the payment to DBD of funds owed to Breese by Hovnanian at a time when Breese still owed considerable sums to its subcontractors, the Agreement contained a broad indemnification clause protecting the Hovnanian Entities.

After learning that DBD had received the funds representing the Breese Debt Payment (hereinafter "the Disputed Funds"), Dick's commenced this action against Hovnanian, Breese and DBD seeking to impress and enforce a trust.

In the November Order this Court acknowledged that Lien Law §73 created an affirmative defense to an action to recover diverted trust assets from a Lien Law trustee or a transferee of such assets, and concluded that one of the alternative modes of [*3]satisfying the notice provisions of Lien Law §73 was by proof that prior to supplying goods or services to a contractor, a subcontractor which was a Lien Law trust beneficiary had actual knowledge that the contractor had assigned its rights to trust assets to another creditor. Thus the November Order held that summary judgment was premature and directed the parties to complete discovery in order to explore the validity of Hovnanian and DBD's Lien Law §73 affirmative defense, that Dick's had actual and/or constructive knowledge of DBD's superior rights to the accounts receivable of Breese.

Now after disclosure is complete, Class Plaintiffs bring a second motion [FN3] for partial summary judgment against DBD on the first cause of action and Hovnanian on the third cause of action asserting diversion of trust funds [FN4]. Class Plaintiffs also ask for severance of the fourth and fifth causes of action and an order directing the parties to appear for a hearing to determine the amount of attorneys' fees to which Class Plaintiffs are entitled under CPLR 909.

Hovnanian and DBD oppose the motion and cross move for summary judgment dismissing the complaint.In addition to arguing that the evidence establishes their Lien Law §73 affirmative defense, they contend for the first time that the monies paid by Hovnanian to DBD pursuant to their Agreement did not constitute "trust funds" and therefore the claim of trust fund diversion must fail.

DISCUSSION

Lien Law Article 3-A 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. Lien Law §§ 70, 71. These trusts are creatures of statute and certain mandated procedures must be respected in order to make the statutory trusts effective.

First, funds constituting "trust assets" must be received. By definition "trust funds" are not simply any monies in the possession of an owner, contractor or subcontractor, but are funds actually received by an owner, a contractor, or a subcontractor in a manner specified in the Lien Law.

"[T]he Lien Law establishes that designated funds received by owners, contractors and subcontractors in connection with improvements of real property are trust assets and [*4]that a trust begins when any asset thereof comes into existence, whether or not there shall be at that time any beneficiary of the trust'". Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 1 NY3d 324, 328, 805 NE2d 1037, 1039, 773 NYS2d 735, 737 (2004), quoting, Lien Law § 70 (emphasis supplied).

The Lien Law designates different types of funds for different types of trusts. Lien Law § 70, subsection 5 provides that the trust of which an owner is trustee consists of the following funds, including any right of action to receive these types of funds:

1. Building loan contract and mortgage proceeds;

2. Home improvement loan proceeds;

3. Proceeds of any mortgage recorded after the improvement was begun but within four months of its completion;

4. Sale proceeds recorded after the improvement was begun but within four months of its completion;

5. Consideration for or assignment of rents of existing or future leases on the property being improved, if the assignment is executed after the improvement was begun but within four months of its completion and if the assignment contains an express promise to make the improvement;

6. Insurance proceeds payable due to destruction of the property being improved by casualty, less sums paid by the owner as premiums for the policy; and

7. Executory contract sale proceeds where the contract includes the improvement of the real property.

Nonetheless, a trust of which an owner is trustee is not the only type of trust Lien Law Article 3-A recognizes. The Lien Law also recognizes a contractor's trust lien. More specifically, Lien Law § 70, subsection 6 provides that a contractor's trust consists of the following funds, including any right of action to receive these funds:

1. Payments under a contract for the improvement of public or private real property and for home improvement

2. Assignments of funds due, earned, or to become due or earned, under the contracts and

3. Insurance proceeds payable due to destruction of the improvement by casualty, less premiums paid by the contractor

Basically, any funds that a contractor receives or is owed from the owner pursuant to a contract to improve public or private real property are trust assets and the contractor [*5]holds these assets in trust for those parties with whom the contractor directly contracts, including subcontractors, materialmen, and laborers. See, RLI Ins. Co. v. New York State Dept. of Labor, 97 NY2d 256, 262, 766 NE2d 934, 938, 740 NYS2d 272, 276 (2002)["Lien Law § 70(1)(a) provides that a right of action' includes any right to receive payment at a future time' even where such right is contingent upon performance or upon some other event.']; Canron Corp. v. City of New York, 89 NY2d 147, 157, 652 NYS2d 211, 674 NE2d 1117 (1996)[Section 70(1)(a) "extend(s) the right of action as a trust asset to contingent, not fully matured rights to receive payment for work in progress"]. "Accordingly, contractor's trust assets may come into existence before funds are actually due and earned by a contractor. " RLI Ins. Co. v. New York State Dept. of Labor, supra .

On this motion for partial summary judgment, Class Plaintiffs have offered proof that Hovnanian paid the Disputed Funds to DBD at a time when Breese owed $172,556.60 to Dick's and $1,500.00 to DeVries pursuant to its subcontracts with those subcontractors. Class Plaintiffs have also proffered evidence that the Disputed Funds were owed to Breese for its work as contractor on the Project. They have also demonstrated that rather than paying the Disputed Funds to Breese, pursuant to the Indemnity Agreement Hovnanian paid those funds to DBD.

Nevertheless, Hovnanian and DBD assert that Class Plaintiffs have offered no proof that the Disputed Funds constituted trust funds. Specifically, Hovnanian and DBD argue that since the monies paid by Hovnanian to DBD pursuant to their Agreement were from the general operating funds of Hovnanian [FN5], they do not constitute "trust funds" and therefore the claim of trust fund diversion must fail. In one respect defendants are correct, but in another their argument must fail.

Here, there is uncontroverted evidence, by way of sworn affidavit, that the Disputed Funds were from the general operating funds of Hovnanian, the owner of the real property. As such, defendants correctly argue that the Disputed Funds are not one of the types of designated funds defined by Lien Law § 70, subsection 5 as "trust assets" for which an owner is trustee. Accordingly, to the extent Class Plaintiffs' seeks to recover the Disputed Funds as diverted trust funds from an owner's trust, that action must fail. See, Tri-State Sol-Aire Corp. v. DDC Contracting Co., Inc., 251 AD2d 651, 676 NYS2d 481 (2nd Dept., 1998); Pellic Dev. Corp. v. Whitestone Equities Farmingdale Corp., 199 AD2d 483, 606 NYS2d 32 (2nd Dept., 1993).

The result is different when the claim is against a contractor's trust, where the types of funds designated as trust assets are set forth in Lien Law § 70, subsection 6, instead of Lien Law § 70, subsection 5.

Here, the Disputed Funds represented payments due from Hovnanian to Breese under a contract for the improvement of private real property. Accordingly, though not an asset of the owner's trust, the Disputed Funds constitute a trust asset of the contractor's trust. It is well settled that the Lien Law may not be evaded by the device of assigning offsetting amounts to different accounts, even where the intent is to satisfy [*6]an outstanding debt. Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507, 512, 289 NYS2d 175 (1968)[FN6].

"An improper diversion of the contractor's trust assets occurs when any such trust asset is paid, transferred or applied for a nontrust purpose, that is, for any purpose other than the expenditures authorized in section 71 (2), before all of the trust claims have been paid or discharged (Lien Law § 72 [1]). A trust beneficiary may enforce its rights against any nonbeneficiary who receives trust assets with knowledge of their trust status." Canron Corp. v. City of New York, supra , 89 NY2d at 154, citing, Lien Law § 77 [3] [a] [i], [vi] and Caristo Constr. Corp. v Diners Fin. Corp.,supra .

In the matter at bar, this Court previously found that Class Plaintiffs demonstrated Hovnanian was fully aware that it was paying the Disputed Funds to DBD at a time when Breese owed significant amounts to its subcontractors. Taken together, the foregoing is sufficient to establish that defendants diverted trust assets and that Class Plaintiffs are entitled to summary judgment as to liability on the First and Third Causes of action, thereby shifting the burden once again to Hovnanian and DBD to demonstrate that a factual issue exists which requires a trial of those claims.

Endeavoring to meet their burden on this motion, Hovnanian and DBD rely solely upon two pages that they have extracted from the transcript of the examination before trial ("EBT") of Barbara Penaluma, Dick's principal. The Court notes that defendants failed to annex a complete copy of the EBT, failed to submit signed transcripts, and failed to provide proof that these unsigned transcripts had previously been forwarded to the witness for review pursuant to CPLR 3116(a). As such it is not admissible as evidence on Class Plaintiffs summary judgment motion [FN7] or the cross-motion. Martinez v. 123-16 Liberty Ave. Realty Corp., 850 NYS2d 201, 203 (2nd Dept., 2008); Pina v. Flik Intern. Corp., 25 AD3d 772, 808 NYS2d 752 (2nd Dept., 2006).

Nonetheless, nothing contained in the transcript submitted constitutes evidence that Dick's had actual knowledge of the Agreement, or the payment of the Disputed Funds to DBD, or Breese's assignment of any accounts receivable. Hovnanian and DBD's counsel concede this point. (See Blander Affirmation at ¶3.) In an effort to circumvent that obstacle, Hovnanian and DBD argue that Dick's had "constructive notice" derived from its own business practice of obtaining credit information which [*7]should suffice to raise a question of fact with regard to their Lien Law §73 affirmative defense. They argue that if Dick's had followed its own established business practice of credit checking, they would have had actual notice of the Agreement.

While this Court concluded that one of the alternative modes of satisfying the notice provisions of Lien Law §73 [FN8] was "by proof that prior to supplying goods or services to a contractor, a subcontractor which was a Lien Law trust beneficiary had actual knowledge that the contractor had assigned its rights to trust assets to another creditor" (see November Order, emphasis supplied) this Court will not extend its holding to cases which allege facts which may establish constructive notice as argued by these defendants.

Indeed, as correctly noted by Class Plaintiffs, constructive notice by means other than the recorded device permitted by Lien Law §73 is not recognized as a defense to a trust diversion action. See, Aspro, supra . See also, Utica Sheet Metal Corp. v. J. E. Schecter Corp., 262 NYS2d 583, 47 Misc 2d 290 (Sup. Ct., Schenectady Cty., 1965), modified on other grounds,25 AD2d 928, 270 NYS2d 259(3d Dept., 1966)[Bank in which contractor maintained general business account containing proceeds of more than 20 different projects, and on which contractor relied for financing lacked knowledge of existence of unpaid claims of subcontractors suing bank and had no duty to inquire as to existence thereof despite full knowledge that some trust assets would be deposited in the account, and affirmative defense provisions of Lien Law §73 did not apply.] This Court holds that to impose an obligation such as the one proposed by defendants on the Class Plaintiffs and others in their position is unreasonable [FN9]. As this Court previously held in this matter, the notice requirement of the Lien Law can be satisfied by filing Notice of Lending or Notice of Assignment as specifically provided by Lien Law §73 or by a showing that a subcontractor which was a Lien Law trust beneficiary had actual knowledge that the contractor had assigned its rights to trust assets to another creditor. The notice must be provided to the trust beneficiaries. See generally, Spectrum Painting Contractors, Inc. v. Kreisler Borg Florman General Const. Co., Inc., 2008 WL 4164113, 1 (2nd Dept., 2008)[Property owner "failed to file a notice of lending pursuant to Lien Law § 73(3) or provide any other notice to the trust beneficiaries of the payments; therefore, with respect to the diversion claim, [property owner] could not assert the affirmative defense set forth in Lien Law § 73(2)"]

Defendant's final argument against summary judgment, that Breese is owed no money, and therefore the Class Plaintiffs cannot maintain a trust fund cause of action is also rejected. As previously set forth, at the time the Agreement was entered into, Hovnanian owed Breese monies, which they paid over to DBD when they explicitly knew that monies were owed to subcontractors. Lien Law § 77 provides that the relief that may be granted in an action to impose a trust may include "to identify and recover trust assets in the hands of any person together with interest accrued thereon from the [*8]time of the diversion...to recover damages for breach of trust or participation therein". Lien Law § 77(3)(a)(i)(emphasis added); see also, LeChase Data/Telecom Services, LLC v. Goebert, 6 NY3d 281, 844 NE2d 771, 811 NYS2d 317 (2006); Canron Corp. v. City of New York, supra [Receipt of insurance proceeds from insurer of lessee of city-owned marine terminal for terminal repair work became subject to trust impressed by Lien Law in favor of unpaid subcontractors as soon as they were credited to lessee, as contractor, in compensation for completed repair work.]

Based on the foregoing, this Court grants the Class Plaintiffs' motion for partial summary judgment on the first and third causes of action. Class Plaintiffs' damages as against Breese, Hovnanian and DBD shall be determined at an inquest [FN10].

FURTHER PROCEEDINGS

Counsel for the parties shall appear before this Court for conference at 9:30 a.m. on October 9, 2008.

The foregoing shall constitute the decision and order of the Court.

Dated: Goshen, New York

September 17, 2008

HON. WILLIAM J. GIACOMO, J.S.C.

For Court purposes only:Final Disp: No

Appearance: Yes (10/7/08)

Number of Motions: 2

C:\htformat\f5188680.txt Footnotes

Footnote 1:As before, "Class Plaintiffs" are identified as Dick's Concrete Co., Inc. and B. DeVries & Sons Concrete Pumping, Inc.

Footnote 2:It is alleged that Dick's is owed approximately $172,556.60 while De Vries is owed approximately $1,500.

Footnote 3:The following papers numbered 1 to 24 were read on this motion and cross motion.

PAPERS NUMBERED

Notice of Motion/Affirmation/Affidavit/Exhibits 1-191-22

Notice of Cross Motion/Affidavit/Affidavit/Exhibits A-E23-30

Reply Affirmation31

Footnote 4:The second cause of action, also asserting diversion of trust funds, is against Breese who failed to answer the complaint. In the November Order this Court awarded Class Plaintiffs a default judgment against Breese on the issue of liability for the diversion, deferring the issue of damages as against Breese to an inquest at the trial of this action.

Footnote 5:As has been sworn to in the affidavit of Stephen M. Dahl, Vice President and Group Counsel for Hovnanian.

Footnote 6:Parties dealing with those handling trust funds, who are charged with notice of the trust, "may share in liability for unlawful diversions". Caristo Const. Corp. v. Diners Financial Corp., 21 NY2d at 512, 289 NYS2d at 178, citing, Lien Law §§ 72, 73, 79-a.

In Caristo, a subcontractor that owed money to its suppliers assigned money due to it under construction contracts to a third party, which then issued checks in the same amounts back to the subcontractor who used the funds to pay debts to entities other than beneficiaries specified in Lien Law § 71. As the Court of Appeals noted in Caristo, "[i]n accepting the assigned trust funds ... the factor, therefore, participated in a diversion of trust assets under section 72 of the Lien Law". Id. at 513.

Footnote 7:Class Plaintiffs also submitted a copy of the unsigned EBT transcript.

Footnote 8:Which constitute constructive notice.

Footnote 9:It should be noted that none of the cases cited by defendants in support of their argument were Lien Law Article 3-A cases.

Footnote 10:Hovnanian and DBD devote a portion of their cross-motion to an argument that there is no basis to permit Dick's to collect late charges, punitive damages or legal fees pursuant to CPLR §909. These matters are more appropriately raised at the inquest.