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. 2007 NY Slip Op 52305(U) [17 Misc 3d 1136(A)] Decided on November 27, 2007 Supreme Court, Orange County Giacomo, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 27, 2007
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



Counsel for Plaintiffs

Sean M. Kemp, Esq.

McCabe & Mack LLP

63 Washington Street

P.O. Box 509

Poughkeepsie, New York

12602-0509

Counsel for Defendants K. Hovnanian at Monroe II, Inc and DBD, LLC

Stuart A. Blander, Esq.

Heller, Horowitz & Feit, P.C.

292 Madison Avenue

New York, New York 10017

No appearance by Defendant Breese Corporation

William J. Giacomo, J.

Lien Law §73 (hereinafter "Section 73") creates an affirmative defense to an action to recover diverted trust assets from a Lien Law trustee or a transferee of such assets. As recognized by the Court of Appeals in Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A. (1 NY3d 324,331 [2004], rearg. denied 2 NY3d 760 [2004]), the filing of a Notice of [*2]Lending or Notice of Assignment, as required by Section 73, is not the only "device" that will entitle a Lien Law trustee or a transferee of trust funds to rely upon that defense. In this case, on a motion seeking summary judgment which presents an issue that has been the subject of only limited reporting, this Court concludes that one of the alternative modes of satisfying the notice provisions of Section 73 is 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.

I. FACTUAL AND PROCEDURAL BACKGROUND

Defendant K. Hovnanian at Monroe II, Inc. (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 (collectively hereinafter "the Breese Subcontracts") with several subcontractors (collectively hereinafter "the Breese Subcontractors") whereby those subcontractors provided labor, materials and equipment for the Project. The Breese Subcontractors included, inter alia, Dick's Concrete Co., Inc. (Dick's), B. DeVries & Sons Concrete Pumping, Inc. (DeVries), Alexander Wagner Company, Inc. (Wagner) and Eastern Concrete Materials, Inc. (Eastern).

Commencing in August 2005 and continuing into December of that year, Breese and Dick's entered into several contracts pursuant to which Dick's provided concrete and related products, labor and services to Breese in connection with the Project. The total cost of the materials, labor and services provided by Dick's was $582,328.06. Of that amount, Dick's was paid only $409,771.46, resulting in a $172,556.60 balance.

Despite its repeated demands for payment of that balance, Dick's received no further payments from Breese. Consequently, on December 20, 2005, Dick's filed a mechanic's lien against the real property comprising Meadow Glen. Then, Dick's engaged in discussions with Hovnanian in an effort to obtain the latter's payment of the balance owed by Breese. In the course of those discussions, Hovnanian served Dick's with a copy of an agreement (the Indemnity Agreement) executed by Breese, defendant DBD, LLC (DBD), and Hovnanian and certain of its related entities (collectively hereinafter "the Hovnanian Entities").

The purpose of the Indemnity 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. In furtherance of that goal, the Indemnity Agreement required the Hovnanian Entities to pay $601,000 to DBD (the Breese Debt Payment) within five days from the April 17, 2006 date of the agreement. [*3]

Although the Breese Debt Payment resolved Breese's obligation to DBD, as explicitly acknowledged by the parties to the Indemnity Agreement, they were aware of the fact that "Breese has failed to perform its obligations under the Breese Subcontracts, by ... not paying the Breese Subcontractors" (Kemp Affirm., Exh.6, p.3). In obvious recognition of the claims that could arise from the payment to DBD of funds owed to Breese by Hovnanian at a time when the Breese Subcontractors were still owed considerable sums by Breese, the Indemnity Agreement contains a broad provision protecting the Hovnanian Entities (the Indemnification Clause). Specifically, the Indemnification Clause provides that it is DBD's obligation:

... to defend, indemnify and hold harmless the Hovnanian Entities ... from and against any and all liens (including but not limited to mechanic's liens, construction lien claims and notices of unpaid balance and right to file lien), claims, costs, ... penalties, interest, damages and expense, court costs, ... and reasonable attorneys' fees and disbursements suffered or incurred by any of the Hovnanian Entities, ... which any person or entity, including but not limited to ... the Breese Subcontractors, ... have had, now have, or may in the future have, against the Hovnanian Entities ..., arising out of, resulting from, or relating to payment to DBD of monies owed from Hovnanian to Breese pursuant to the Breese Contracts. * * *." (Kemp Affirm., Exh.6, p.4).

As further set forth in the Indemnity Agreement, the Indemnification Clause was agreed to by DBD in consideration of the Breese Debt Payment.

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 (collectively hereinafter "defendants") seeking to impress and enforce a trust, by filing its summons and complaint on August 16, 2006. In its complaint, Dick's set forth five causes of action. The first, second and third causes of action assert the diversion of trust funds by DBD, Breese and Hovnanian, respectively. The fourth and fifth causes of action are claims of tortious interference with contract by Hovnanian and DBD, respectively. By way of relief, Dick's sought:

(1) a judgment declaring that the Disputed Funds are trust assets within the meaning of Article 3-A of the Lien Law and that defendants are trustees of those funds;(2) a judgment declaring that "Dick's and all others who have been or shall be joined in this action ... [are] beneficiaries entitled to share in the [Disputed Funds]";(3) a judgment requiring defendants "to produce the books, records and papers in connection with the [Project] to ascertain the identity of all [*4]job creditors and to determine the extent and validity of their claims arising out of work performed in connection with the [Project]";(4) an accounting by defendants as to the disposition of the Disputed Funds;(5) a determination of the shares and interests of all beneficiaries of the Disputed Funds; and(6) money damages together with an award of costs and interest. (Kemp Affirm., Exh.1, Complaint, p.7-9).

Although all defendants were served with the summons and complaint, Breese defaulted in answering. Hovnanian and DBD, however, served and filed a joint answer (the Joint Answer).

The Joint Answer, inter alia, puts forth four affirmative defenses to the four causes of action asserted by Class Plaintiffs against Hovnanian and DBD. Specifically, Hovnanian and DBD assert that:

1. "All payments made by [] Hovnanian to [] DBD were properly made pursuant to DBD's fully perfected and prior security interest in the accounts receivable of Breese ... . The rights of [] Hovnanian and DBD with respect to these monies are superior to any rights of plaintiff as a purported beneficiary' under Article 3-A of the Lien Law." (Hereinafter "the First Affirmative Defense").2. "Maintenance of this action is barred by the good faith purchaser provisions of Section 72 of the Lien Law." (Hereinafter "the Second Affirmative Defense").3. "Upon information and belief, plaintiff had actual and/or constructive knowledge of DBD's superior rights to the accounts receivable of Breese." (Hereinafter "the Third Affirmative Defense").4. "Maintenance of this action is barred by limitations." (Hereinafter "the Fourth Affirmative Defense"). (Kemp Affirm., Exh.2, p.2).

One month after serving the Joint Answer, Hovnanian and DBD served a joint Notice to Take Deposition of a representative of Dick's who has "personal knowledge of the matters set forth in the Complaint" (Blander Affirm., Exh.B, p.1 [hereinafter "the Deposition Notice"). The Deposition Notice also demanded the production of certain documents.

Then, on January 3, 2007, Dick's moved for an order determining that this lawsuit would be maintained as a class action. On January 10, 2007, former Justice Lawrence I. Horowitz rendered a decision granting that motion on default. On February 27, 2007 Justice Horowitz issued an order which, inter alia, "permitted [Dick's] to maintain the [] action as a class action on its behalf and on behalf of all other persons similarly situated having provided labor and/or materials to [] Breese [] in connection with the [Project] and [who] are thereby beneficiaries entitled to share in the funds received by [] DBD" (Kemp Affirm., Exh.10, p.1).

Thereafter, it was determined that the entities that [*5]comprised the class were Wagner, Eastern, DeVries and Dick's. As a result of the later settlement of the claims of Wagner and Eastern, the remaining class members in the action are Dick's and DeVries (together hereinafter "Class Plaintiffs").

With the lawsuit now certified as a class action and with the the Class Plaintiffs identified, but prior to any pretrial discovery being conducted by the parties, Class Plaintiffs move this Court for partial summary judgment against Hovnanian and DBD.[FN1] In addition, Class Plaintiffs seek a default judgment against Breese.[FN2] The determination of those applications turns upon the sufficiency of Class Plaintiffs' proof that defendants have diverted trust funds that Class Plaintiffs were entitled to receive in satisfaction of their claims against Breese under their subcontracts.

II. DISCUSSION

"[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 [1996] [internal citation omitted]). In furtherance of that goal, "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'" (Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., supra , 1 NY3d, at 328 quoting Caristo Construction Corp. v. Diners Financial Corp., 21 NY2d 507,512 [1968]). More specifically, "the Lien Law establishes that designated funds received by owners, contractors and subcontractors in connection with improvements of real property are trust assets and 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., supra , 1 NY3d, at 328 [*6][internal citations omitted]).

The Lien Law also establishes the procedures and remedies that are available when there has been a diversion of trust funds. In this regard, Lien Law §72(1) provides that:

Any transaction by which any trust asset is paid, transferred or applied for any purpose other than a purpose of the trust as stated in subdivision one or subdivision two of section seventy-one, before payment or discharge of all trust claims with respect to the trust, is a diversion of trust assets, whether or not there are trust claims in existence at the time of the transaction, and if the diversion occurs by the voluntary act of the trustee or by his consent such act or consent is a breach of trust. (Emphasis added).[FN3]

Where there has been a diversion of trust funds, "[the] trust ... may be enforced by the holder of any trust claim, including any person subrogated to the right of a beneficiary of the trust holding a trust claim, in a representative action brought for the benefit of all beneficiaries of the trust" (Lien Law §77[1]).[FN4] The forms of relief that may be granted in such an action are, inter alia, recovery of the diverted funds, an accounting, an order distributing any available trust funds and compensatory damages (Lien Law §77[3][a]). In addition, in an appropriate case, punitive damages may be awarded (Pinnacle Environmental Systems Inc. v. R.W. Granger & Sons Inc., 245 AD2d 773,775 [3d Dept. 1997] ["Notably, this court has recognized that the unauthorized disbursement of trust assets, without satisfying the [*7]claims of contractors or subcontractors, constitutes larceny punishable under the Penal Law and thus, would clearly satisfy the high threshold of moral culpability necessary to support a punitive damages award'"] [internal citations omitted]).

On their motion for partial summary judgment, Class Plaintiffs have offered proof that Hovnanian came into possession of the Disputed Funds 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 and that those monies constituted trust funds. Finally, Class Plaintiffs have demonstrated that rather than paying the Disputed Funds to Breese, pursuant to the Indemnity Agreement Hovnanian paid those funds to DBD. Taken together, that proof 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 to Hovnanian and DBD to demonstrate that a factual issue exists which requires a trial of those claims (see Joseph Davis Industrial Services v. Sicoli & Massaro, Inc., 289 AD2d 984,985 [4th Dept. 2001] [Affirming grant of summary judgment on diversion of trust fund claim]; cf. J. Petrocelli Construction, Inc. v. Realm Electrical Contractors, Inc., 15 AD3d 444,447 [2d Dept. 2005] ["Supreme Court properly denied the plaintiff's motion for summary judgment on its trust diversion claim, finding that there were issues of fact as to whether, and to what extent, if any, trust funds may have been diverted"]).

Endeavoring to meet their burden on this motion, Hovnanian and DBD rely solely upon the Third Affirmative Defense.[FN5] In sum, [*8]it is their position that "[t]his is certainly the case where the subcontractor has actual knowledge of the lender's rights, but nevertheless elects to render services and materials to the Project", and "[u]nder these circumstances, the subcontractor is acting with his eyes open'- whether or not a Notice [of Lending or Notice of Assignment as provided for by Section 73] has been filed" (Blander Affirm., par.5). Building upon that position, Hovnanian and DBD contend that Class Plaintiffs' "motion must be denied in order to give [them] an opportunity to probe plaintiff's knowledge through discovery" (id., par.9).

In response, Class Plaintiffs maintain that "[t]he Lien Law as well as case law interpreting the Lien Law do not recognize actual knowledge' as a defense to a motion for summary judgment in a trust diversion action" (Kemp Reply Affirm., par.6). In Class Plaintiffs' view, a lender or creditor of a Lien Law Article 3-A trustee can only defend against a diversion claim if it has filed a Notice of Lending or Notice of Assignment as required by Section 73.

A. AVAILABILITY OF ACTUAL KNOWLEDGE DEFENSE

Section 73(1) provides that:

In any action against a person to whom trust assets have been transferred, to recover assets diverted from the trust or to recover damages for the diversion, a transferee named in a "Notice of Lending" filed as provided in subdivision three of [*9]this section shall be entitled to show by way of defense that the transfer was made as security for or in consideration of or in repayment of advances made to or on behalf of the trustee in accordance with such notice of lending and that prior to the making of such advances the transferee procured from the trustee the written agreement of the trustee that he will receive the advances and will hold the right to receive such advances as trust funds to be first applied to the payment of trust claims as defined in section seventy-one of this chapter, and that he will apply the same to such payments only, before using any part of such advances for any other purpose. Subject to subdivision four of this section, if such defense is established, the transferee shall be entitled to a credit for the amount of the advances with respect to which it is so established, to the extent that such amount does not exceed the maximum amount specified in the notice of lending filed as provided in subdivision three. (Emphasis Added).[FN6]

Under Section 73(3)(d), "[a] Notice of Assignment' meeting the requirements of subdivision two of section fifteen of this chapter and filed pursuant to subdivision one of said section shall be deemed for all purposes a Notice of Lending' complying with the requirements of this section."[FN7] [*10]

The obvious impact of Section 73 is that it provides a Lien Law trustee, such as an owner of the improved property, a contractor or a lender, with a defense against a claim that it has diverted trust funds by, inter alia, using them to satisfy another obligation owed by a Lien Law trustee (Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., supra , 1 NY3d, at 330). Conversely, by failing to file a Notice of Lending or a Notice of Assignment, an owner, contractor or lender is denied that defense absent some other sufficient notice to the beneficiaries of the trust (Raisler Corp. v. Uris 55 Water Street Co., 91 Misc 2d 217,220 [Sup. Ct. NY Co. 1977] ["Absent compliance with the notice of lending requirements set forth in section 73 of the Lien Law, the transfer can be set aside as an unlawful diversion and the affirmative defense that the transfer was made as security for, or in consideration of, or in repayment of previous advances made to or on behalf of the trustee and actually applied for a purpose of the trust is not available unless it is shown that adequate notice was otherwise brought home to the beneficiaries"] [emphasis added]).

In this case, neither a Notice of Lending nor a Notice of Assignment was filed. Consequently, Hovnanian and DBD have a defense to Class Plaintiffs' diversion claims only if: (1) actual knowledge is a form of notice to a Lien Law trust beneficiary that is sufficient to trigger the protection of Section 73; and (2) they can establish that Class Plaintiffs did, in fact, have actual knowledge of the assignment of Breese's accounts receivable to DBD before Class Plaintiffs provided any labor or materials to Breese pursuant to the Breese Subcontracts.[FN8] [*11]

As the parties concede, in Aspro the Court of Appeals recognized that "the filing ... of a notice of lending ... [is] not necessarily the only device available ... [to] satisf[y] [a] fiduciary['s] duty to provide notice to the trust beneficiaries of its use of trust assets to discharge [a trustee's] debt [to another]" (supra , 1 NY3d, at 331). The central disagreement at bar is as to the form of the other "devices" that also allow resort to the Section 73 defense.According to Class Plaintiffs, in Aspro, "[a]t most, the Court of Appeals was intimating that other recorded devices, such as a mortgage that identified the mortgagee as a trustee of trust assets or [*12]otherwise contained information found in a notice of lending, could satisfy a trustee's obligations under Article 3-A" (Kemp Reply Affirm., par.8 [underlining in original]). In Class Plaintiffs' view, "[the Aspro] opinion is absolutely devoid of any suggestion that a subcontractor's actual knowledge' is a defense to a trust diversion action" (id., par.7), and "[the quoted] dicta does not lend any credit to Defendants' assertion that actual knowledge' is a defense to a trust diversion action" (id., par.8). This Court believes that Class Plaintiffs' view of the other sufficient forms of notice under Section 73 is too narrow.

Certainly, as noted by Class Plaintiffs, the Aspro Court recognized that:

The[] [Section 73] filing provisions promote the legislative intent to assure "public notice of any transaction of the owner, contractor or subcontractor that may lead to depletion of funds available for future trust claims, even where the depletion merely repays advances that were in fact used to pay trust claims accruing at an earlier [d]ate". Such record notice provides "persons who furnish materials and services in reliance on the trust assets receivable by the trustee at a later stage of the improvement ... notice that those assets have been anticipated for current expense". (Supra, 1 NY3d, at 330 [internal citations omitted]).

So too did that Court reject the argument "that the inclusion of the reference to the assignment [of the owner's rights to receive periodic construction payments] in [the lender's] mortgages was the equivalent of record notice to potential claimants of [the lender's] priority interest in the trust assets" (id., at 330-331). And having rejected that position, the Aspro Court concluded that "[the lender] failed to file any document that served as adequate notice to beneficiaries of its status as a trustee and its depletion of trust funds to repay its loans" (id., at 331).

That conclusion, however, does not constitute a holding that only "record notice" will suffice to provide a defense to a diversion action in the context that is involved at bar. To the contrary, since there was no claim of actual knowledge put forth by the lender in Aspro, that decision cannot be viewed as any support for the position asserted by Class Plaintiffs on this motion. Nor can this Court find any basis for rejecting actual knowledge as a sufficient trigger of the Section 73 defense.

As Hovnanian and DBD correctly observe, "[t]he notion that a party's actual knowledge' of facts constitutes a fully adequate substitute for the constructive notice' created by recordation is hardly foreign to the law" (Blander Affirm., par.6). Indeed, although examples of this principle abound in the law, the [*13]citation of only three suffices. Thus, "[f]or the purposes of determining whether a purchaser is entitled to the protection of the [Real Property Law] recording act, actual knowledge and notice of any facts which would lead a reasonably prudent purchaser to make inquiries precludes a claim of good faith" (Ithaca Associates Co. v. Plataniotis, 274 AD2d 640,642 [3d Dept. 2000]). Similarly, "[t]he mere filing of a notice of pendency will not suffice to permit its holder to prevail over a prior unrecorded interest of which he has knowledge" (LaMarche v. Rosenblum, 50 AD2d 636,636 [3d Dept. 1975]). Likewise, knowledge of a prior unperfected security interest in personal property will defeat a claim that a subsequent purchaser of the property took it free of the security interest (Snow Machines, Inc. v. South Slope Development Corp., 300 AD2d 906,908-909 [3d Dept. 2002]).

No valid reason exists why the same principle should not apply in the context of a diversion of trust assets claim. Indeed, if a subcontractor has actual knowledge that the funds that may be owed to a contractor to which it supplies labor or material are subject to a prior assignment as payment for a debt owed by the contractor to a creditor which is permitted to be satisfied from trust assets, the subcontractor has received, in the most direct and best possible form, the same notice that it would receive if the contractor or the creditor had filed a Notice of Lending or a Notice of Assignment, i.e., "notice of [a] transaction of the ... []contractor that may lead to depletion of funds available for future trust claims" (see Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., supra , 1 NY3d, at 330 [internal citation omitted]).

Struggling to avoid that conclusion, Class Plaintiffs argue that "[i]f actual knowledge' was a defense to a trust diversion action, then the knowledge of one class member could be imputed onto the class and a trustee/lender could be relieved of its fiduciary obligations to the entire class on this basis alone", a "result [which] would render Lien Law §73 and, more importantly, Article 3-A of the Lien Law[,] meaningless" (Kemp Reply Affirm., par.10). Building upon that contention, Class Plaintiffs proclaim that "[t]he defense of actual knowledge' in a trust diversion action is, therefore, inconceivable" (ibid.).

Tellingly absent from Class Plaintiffs' papers, however, is a citation to any authority supporting the position that actual knowledge of one class member may be imputed to another class member in the context of an action to recover Lien Law trust funds. That is hardly surprising, since this position appears to be contrary to existing law (see e.g. Glens Falls Ins. Co. v. Schwab Bros. Trucking Inc., 29 AD2d 836 [4th Dept. 1968] [Court observed that because a defense of actual knowledge was applicable only as against one job-creditor, it "could not be [*14]regarded as grounds for the dismissal of the action to the prejudice of the remaining members of the class for whose benefit the action was brought"]).

Finally, although the reported authority relevant to the actual knowledge issue is scant, that which this Court's research has disclosed supports the conclusion that actual knowledge suffices as another form of notice sufficient to trigger the Section 73 defense. In particular, in Glens Falls Ins. Co. v. Schwab Bros. Trucking Inc., the Appellate Division, Fourth Department stated that "it would appear" that a defense of actual knowledge "if proven[,] would be sufficient to prevent [certain claimants from] sharing in the trust fund" (supra , 29 AD2d 836). Similarly, in Merit Plumbing & Heating v. Eastern National Bank (supra , 221 NYS2d, at 146), the Trial Court observed that "it is true that actual notice might substitute for constructive notice" in a trust asset diversion proceeding.[FN9]

Based upon this analysis, the Court agrees with Hovnanian and DBD that actual knowledge is one of the forms of "other notice" (Raisler Corp. v. Uris 55 Water Street Co., supra , 91 Misc 2d, at 220) that will suffice to provide a defense to a cause of action for diversion of Article 3-A trust assets (see Glens Falls Ins. Co. v. Schwab Bros. Trucking Inc., supra ; see also Merit Plumbing & Heating v. Eastern National Bank, supra ). Consequently, the remaining question is whether Hovnanian and DBD are entitled to conduct pretrial discovery with respect to their actual knowledge defense.

B. DENIAL OF MOTION TO PERMIT DISCOVERY

CPLR 3212(f) (hereinafter "Section 3212[f]") provides that:

Should it appear from affidavits submitted in opposition to the motion that facts essential to justify opposition may exist [*15]but cannot then be stated, the court may deny the motion or may order a continuance to permit affidavits to be obtained or disclosure to be had and may make such other order as may be just.

Relying upon Section 3212(f), Hovnanian and DBD argue that the motion must be denied so that they have the opportunity to obtain pretrial discovery that includes an inquiry into Class Plaintiffs' " knowledge of DBD's superior rights to the accounts receivable of Breese'" (Blander Affirm., par.7).

In opposition to that argument, Class Plaintiffs take the position that "even if actual knowledge' was a defense to [their] motion, ... the affidavit of Barbara Penaluna, President of [] Dick's", which is submitted in Class Plaintiffs' reply papers, "establishes that [] Dick's [] did not have any knowledge of the relationship between DBD and Breese" (Kemp Reply Affirm., par.14 [underlining in original]). More specifically, as expressed by Penaluna, throughout the period when it provided concrete and other products for the Project, Dick's "did not have any knowledge that an agreement between [] DBD and [] Breese [] existed which granted [] DBD [] rights to the accounts receivable of [] Breese" (Penaluna Reply Affid., par.4). As viewed by Class Plaintiffs, Penaluna's affidavit forecloses the need for any further discovery into the actual knowledge defense. Clearly, Class Plaintiffs' position as to the discovery issue is without merit.

"It is axiomatic that a summary judgment motion is properly denied as premature when the nonmoving party has not been given reasonable time and opportunity to conduct disclosure relative to pertinent evidence that is within the exclusive knowledge of the movant" (Metichecchia v. Palmeri, 23 AD3d 894,895 [3d Dept. 2005]). In this case, the actual knowledge defense relied upon by Hovnanian and DBD turns upon the knowledge, if any, possessed by Class Plaintiffs as to the existence of the Indemnity Agreement or any other agreement between DBD and Breese that would have conferred upon DBD a priority in the collection of the debt owed to it by Breese over the claims of any of the Breese Subcontractors. Obviously, whether, and to what extent, Class Plaintiffs possessed such knowledge, is information that is exclusively within Class Plaintiffs' knowledge. For that reason, Hovnanian and DBD must be afforded the opportunity to conduct the pretrial discovery that they seek with regard to their actual knowledge defense (see ibid. [Affirming denial of summary judgment motion as premature because "plaintiffs surely [we]re entitled to ascertain, through discovery, [defendant]'s knowledge of the allegedly dangerous condition"]; see also Yu v. Forero, 184 AD2d 506,507-508 [2d Dept. 1992] [Summary judgment properly denied "as the information necessary to oppose the summary [*16]judgment motion, i.e., whether the appellant had knowledge of and intentionally interfered with the plaintiff's contract with the seller, was exclusively within the appellant's knowledge"]).[FN10] Therefore, Class Plaintiffs' motion for summary judgment on the first and third causes of action is denied as premature (see Procter & Gamble Distributing Co. v. Lawrence American Field Warehousing Corp., 16 NY2d 344,362 [1965] ["[S]ummary judgment is not justified where there are likely to be defenses that depend upon knowledge in the possession of the party moving for judgment, which might well be disclosed by cross-examination or examination before trial"]).[FN11] Based upon that determination, the Court also denies the motions to sever the fourth and fifth causes of action and to schedule a hearing to assess the attorneys' fees that Class Plaintiffs may recover under CPLR 909.

C. DEFAULT JUDGMENT

As noted, although Hovnanian and DBD answered Class Plaintiffs' complaint, Breese did not. Based upon that failure, Class Plaintiffs move for a default judgment against Breese.

In support of this application, Class Plaintiffs have offered proof that Breese was properly served with the summons and complaint and failed to serve an answer. And, as discussed above, Class Plaintiffs have made a prima facie showing that [*17]trust assets were diverted by defendants, including Breese, by virtue of the transfer of the Disputed Funds to DBD. Finally, Class Plaintiffs have established that they moved for this relief within one year of the default by Breese.

Taken together, Class Plaintiffs' evidence is sufficient to entitle them to a default judgment against Breese (see Silberstein v. Presbyterian Hospital in City of New York, 96 AD2d 1096,1096 [2d Dept. 1983] ["A plaintiff seeking a default judgment under ... CPLR 3215 must present prima facie proof of a cause of action"]; see also Brokaw v. Cohen, 117 Misc 2d 31,32 [Sup. Ct. NY Co. 1982] ["For plaintiff to succeed in this motion she must show that the defendant was properly served, that the defendant is in default, that the plaintiff has a meritorious cause and either that plaintiff took proceedings for the entry of judgment within one year or that her neglect to do so is excusable"]). Since that showing has not been opposed by Breese, this branch of the motion is granted to the extent that Class Plaintiffs are awarded a default judgment against Breese on the issue of the latter's liability for the diversion of the Disputed Funds. Class Plaintiffs' damages as against Breese shall be determined at an inquest that shall be conducted at the trial of this action.

III. FURTHER PROCEEDINGS

It appears that there has been no judicial intervention requested in this action except for the filing of this motion. Consequently, a preliminary conference must be conducted to establish a schedule for the completion of all pretrial discovery to which the parties are entitled. Counsel for the parties shall appear before this Court for

that conference at 9:30 a.m. on January 8, 2007.

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

Dated: Goshen, New York

November 27, 2007

Hon. William J. Giacomo, J.S.C. Footnotes

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

PAPERS NUMBERED

Notice of Motion/Affirmation/Affidavit/Memorandum of Law1-4

Affirmation in Opposition21

Reply Affirmation24

Exhibits5-20,22-23

Footnote 2: 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.

Footnote 3: The recognized uses of trust assets are defined by Lien Law §71, subdivisions 1 and 2. At least for the purposes of this motion, there has been no claim asserted by Class Plaintiffs that the payment of Breese's debt to DBD does not come within the scope of permissible uses of Lien Law Article 3-A trust assets.

Footnote 4: Dick's was compelled to seek class action certification in this case because Lien Law §77[1] further provides that:

"In any such action, except as otherwise provided in this article, the practice, pleadings, forms and procedure shall 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; provided, however, that in determining whether the prerequisites of a class action have been satisfied, the provisions of paragraph one of subdivision (a) of section nine hundred one of such law and rules may be waived at the discretion of the court." (Emphasis added).

Footnote 5: In support of their motion, Class Plaintiffs have also offered proof that none of the other three affirmative defenses have any legal or factual support. As relates to the First Affirmative Defense, they have established that even if DBD perfected its security interest pursuant to the Uniform Commercial Code (UCC), that filing would not suffice to give DBD priority over Class Plaintiffs' claims because its UCC notices would not have provided notice that DBD was a trustee of Lien Law trust assets (cf. Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., supra , 1 NY3d, at 330-331 [Rejecting lender's argument "that the inclusion of the reference to the assignment [of monies owed to lender by building owner which constituted trust funds] in its mortgages was the equivalent of record notice to potential claimants of [lender's] priority interest in the trust assets", because "nothing in the mortgage documents identified [lender] as a trustee of the article 3-A assets"]). In addition, Class Plaintiffs have demonstrated that the Second Affirmative Defense is unavailing because DBD's actual knowledge that the Disputed Funds were Lien Law trust funds, as admitted in the Indemnity Agreement, denies it the status of a purchaser in good faith for value who was without notice that the transfer to it was a diversion of trust assets (see LeChase Data/Telecom Services, LLC v. Goebert, 6 NY3d 281 [2006] [Good faith purchaser defense unavailable to lender which had sufficient notice that it received trust assets from its access to contractor's business plan and copies of its business records]). Finally, as to the Fourth Affirmative Defense, Class Plaintiffs have offered proof that they commenced their action within the one-year limitations period measured from "the date on which final payment under the claimant's contract became due" (Lien Law §77[2]). Tellingly, faced with those showings, Hovnanian and DBD fail to address any of these three defenses. Accordingly, Class Plaintiffs are granted summary judgment dismissing each of the First, Second and Fourth Affirmative Defenses (see Smithtown Galleria II, LLC v. Gmytrasiewicz, 18 AD3d 533,534 [2d Dept. 2005] [Affirming grant of summary judgment dismissing affirmative defenses "since the documentary evidence clearly refuted those affirmative defenses"]).

Footnote 6: Section §73(2) provides a similar defense "[i]n any action in which it is sought to charge a trustee personally with liability by reason of a diversion of trust assets". Like Section 73(1), Section 73(2) requires the filing of a Notice of Lending or Notice of Assignment in order for the defense to be available to the trustee. As noted below, Section 73(2) also requires a showing, inter alia, "that the transfer was made as security for or in consideration of or in repayment of advances made to him as trustee or on his behalf as trustee in accordance with such notice of lending, and that such advances were actually applied for a purpose of the trust ... ."

Footnote 7: Insofar as relevant, Lien Law §15(1) provides that:

1. No assignment of one or more contracts for the performance of labor or the furnishing of materials for the improvement of real property or of the money or any part thereof due or to become due therefor, ... shall operate to reduce the lien of a subcontractor, laborer or materialman, ... nor shall any such assignment ... be valid for any purpose, unless a "Notice of Assignment" meeting the requirements of subdivision two ..., be filed within ten days after the date of such assignment ..., in the office of the county clerk of each county wherein real property improved or to be improved to which the assignment ... relates is situated ... . * * *.

Under Lien Law §15(2), the use of a Notice of Assignment is limited to those instances where money is "advanced or to be advanced to a contractor or subcontractor upon the assignment of one or more contracts for the performance of labor or the furnishing of materials for the improvement of real property, or of the money or any part thereof due or to become due therefor." Lien Law §15(2) also sets forth the specific information that must be contained in a Notice of Assignment.

Footnote 8: In addition, DBD and Hovnanian would each be required to satisfy the second part of the defenses created by Section 73(1) and (2), respectively. For DBD, that would require a showing that:

... the transfer was made as security for or in consideration of or in repayment of advances made to or on behalf of the trustee in accordance with such notice of lending and that prior to the making of such advances the transferee procured from the trustee the written agreement of the trustee that he will receive the advances and will hold the right to receive such advances as trust funds to be first applied to the payment of trust claims as defined in section seventy-one of this chapter, and that he will apply the same to such payments only, before using any part of such advances for any other purpose. (Lien Law §73[1]).

Similarly, Hovnanian would be required to prove that:

... the transfer was made as security for or in consideration of or in repayment of advances made to him as trustee or on his behalf as trustee in accordance with such notice of lending, and that such advances were actually applied for a purpose of the trust as stated in subdivision one or subdivision two of section seventy-one of this chapter. (Lien Law §73[2]).

On this motion, neither Class Plaintiffs nor Hovnanian and DBD have in any manner addressed either of these additional requirements for reliance upon the Section 73 defense. For that reason, the Court does not reach the question whether either Hovnanian or DBD is barred from relying upon the Section 73 defense because of a failure to satisfy its respective additional requirement (but see Merit Plumbing & Heating v. Eastern National Bank, 221 NYS2d 143,146-147 [Sup. Ct. Suffolk Co. 1961] [Court noted that even if the bank relying upon the Section 73 defense "[h]ad ... duly filed its Notice of Lending, it was still required to affirmatively establish that the advances made were 'actually applied for a purpose of the trust.'"]).

Footnote 9: But cf. Travelers Indemnity Co. v. Central Trust Co. of Rochester, NY, 47 Misc 2d 849,853-854 [Sup. Ct. Monroe Co. 1965], affd. without opinion 27 AD2d 803 [4th Dept. 1967] [In action brought by plaintiff-surety to recover monies paid under its surety bonds issued to contractor, based upon its claim that the contractor paid defendant monies it received which were trust funds under the Lien Law to satisfy prior obligations to defendant, Court held that "although plaintiff's knowledge, at the times it became surety for [the contractor], of the financial transactions between defendant and [the contractor] cannot excuse defendant's failure to file [a Notice of Assignment under Lien Law §§15 and 16 or a Notice of Lending under Section 73] and its disregard of the Lien Law, under the circumstances of the allegations of the third defense, the plaintiff may be equitably estopped to claim damage against the defendant"] [emphasis added]).

Footnote 10: Here, as noted, Hovnanian and DBD have served the Deposition Notice, which demands that Class Plaintiffs produce a witness for a deposition and produce certain documentary discovery. Thus, this is not an instance in which the opponent of the motion failed to seek the discovery upon which it bases its claim for relief pursuant to Section 3212(f) (see Cruz v. Otis Elevator Co., 238 AD2d 540,540 [2d Dept. 1997] ["A party who claims ignorance of critical facts to defeat a motion for summary judgment must first demonstrate that the ignorance is unavoidable and that reasonable attempts were made to discover the facts which would give rise to a triable issue"] [internal citation omitted]).

Footnote 11: Class Plaintiffs' effort to preclude discovery based upon the yet untested assertion of lack of knowledge put forth in Penaluna's reply affidavit is, of course, unavailing. As should be apparent to Class Plaintiffs, and more importantly, to their counsel, a party may not bar pretrial discovery by an adverse party by the mere ipse dixit approach taken by Class Plaintiffs in their reply papers. Indeed, the Court can readily predict what Class Plaintiffs' view of such an approach would have been if the parties' positions were reversed.