Hamlet at Willow Cr. Dev. Co., LLC v Northeast Land Dev. Corp.

[*1] Hamlet at Willow Cr. Dev. Co., LLC v Northeast Land Dev. Corp. 2010 NY Slip Op 50293(U) [26 Misc 3d 1227(A)] Decided on February 16, 2010 Supreme Court, Nassau County Warshawsky, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through April 21, 2010; it will not be published in the printed Official Reports.

Decided on February 16, 2010
Supreme Court, Nassau County

The Hamlet at Willow Creek Development Co., LLC, MT. SINAI ASSOCIATES, LLC and THE HOLIDAY ORGANIZATION, INC., Plaintiffs,

against

Northeast Land Development Corporation, PAV-CO ASPHALT, INC., CARL ZORN, WILLIAM FEHR, and FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendants.



007536/2005

Ira B. Warshawsky, J.

This Motion by Plaintiff is addressed solely at the counterclaims in the Northeast Answer. They move to dismiss them, while Northeast cross-moves for summary judgment on them. The counterclaims are set forth in the Amended Verified Answer [FN1], and involve of a claim by Northeast for $477,396.91 for additional work, making the total due on a July 2, 2002 excavation contract $1,977,396.91, of which $1,743,136.61 has been paid, leaving a balance due and owing in the amount of $230,260.31. The First Counterclaim alleges breach of contract, while the Second is based on an Account Stated. [*2]

Movant relies upon the recent decision of the Appellate Division in this action [FN2] which determined that Northeast was guilty of conversion for the unauthorized removal of some 236,438 cubic yards of fill in excess of the approximately 1.6 million cubic yards called for in the excavation contract. As a consequence of their having committed the tort of conversion, Plaintiff claims that they (Northeast) are not entitled to recover for any additional claims in the counterclaims under the "faithless agent" principle. In addition, Plaintiff claims that Northeast has breached the contract by failing to pay in excess of $1,000,000 Environmental Fund Fees to Town of Brookhaven, as it is obligated to do under the terms of the contract, thereby substantially defeating the purpose of the contract and relieving Plaintiff of further liability.

Cross-movant contends that the agreement between Holiday and Northeast involved the removal of 1,665,000 cubic yards of soil, for which payment was to be the right to retain the fill. Additional site work in the form of drainage and sewer excavation called for the payment of $1,500,000 plus $90,000 to enable Northeast to purchase a GPS driven surveying and grading system. During the course of the project, Northeast and Holiday negotiated a number of change orders which added $387,396.91, bringing the total due to $1,977,396.91, of which $1,743,136.61 has been paid, leaving a balance due Northeast of $234,260.31.

Plaintiff's reply to the cross-claim is that the amount claimed as extras based upon change orders are not extras at all, but rather records of the progress of work performed on the original contract so as to justify progress payments. They claim that the contract was for a fixed fee of $1,500,000 and Plaintiff never authorized performance of work in excess of the agreed-upon figure. They contend that as work progressed in this, as in any large project, certain grading changes from the original plans proved necessary. As site conditions required such changes, Northeast, to avoid being found to have deviated from the original plans, require Plaintiffs' on-site representative sign "Additional Work Authorization" documents, but they were, in fact, not additional work, but only changes to the original grades and specifications, not requiring additional work beyond that originally called for in the agreement.

DISCUSSION

To the extent relevant in connection with the determination of this motion, the Second Department concluded that Northeast is liable to Hamlet on the First Cause of Action for breach of contract in the amount of the Environmental Fund fees and engineering costs paid by Hamlet to the Town of Brookhaven; Hamlet is entitled to judgment as a matter of law against Northeast and Pav-co on the cause of action for conversion, with factual issues remaining on the amount of damages.[FN3] The balance of the Decision, dealing with the responsibilities of Pav-Co and Fidelity under the bond, and the lack of individual liability of Zorn and Fehr are not relevant on this motion.

Plaintiffs' Claim for Relief based upon Unfaithful Servant Principle

With respect to the claim of conversion, the amount of excess fill removed from the site was approximately 14% greater than authorized. The issue is whether such conduct was of such [*3]nature and extent so as to warrant forfeiture of further payments, even if earned, based on the faithless servant doctrine. The Court has reviewed the cases relied upon by Plaintiff and comments upon them as follows:

Feiger v. Iral Jewelry, 41 NY2d 298 (1977). Plaintiff was found entitled to commissions during the period 1972 — 1973, even though he was planning, during that period, to form a competing business with one of the partners in Iral, his employer. The Court determined that he was not guilty of any breach of fidelity to his employer, since his level of work during that period did not diminish, and he did not misappropriate to his use any business secrets or special knowledge;

William Floyd Union Free School District v. Wright, 61 AD3d 856 (2d Dept. 2009). The former assistant superintendent for business in the school district pled guilty to systematically stealing from his employer between April 4, 2000 and January 24, 2003. He falsified his retirement as of August 31, 1998, but continued to serve in the same position under the guise of a consulting company. The Court affirmed the lower court's conclusion that the school district was entitled to summary judgment but held that limiting the forfeiture of future benefits to 10 years was error. "Where, as here, defendants engaged in repeated acts of disloyalty, complete and permanent forfeiture of compensation, deferred or otherwise, is warranted under the faithless servant doctrine".

In re Blumenthal, 32 AD3d 767 (1st Dept. 2006). The former executor of an estate, Kingsford, who was hired under an employment agreement authorized in the will, made systematic, unauthorized transfers to himself, his wife and entities with which his wife was affiliated.The Court rejected his argument that he was entitled to his salary or commissions actually earned "(i)n light of respondent's repeated disloyalty throughout his tenure . . .".

Soame Corp. v. Trane Co., 202 AD2d 162 (1st Dept. 1994). Plaintiffs claims for commissions earned as an agent for sales of heating and air conditioning equipment in the Soviet Union were denied when it was revealed that they also served as an agent for Chrysler, a direct competitor. The Court stated that "(a)n agent is held to the utmost good faith in his dealings with his principal, and forfeits any right to compensation for his services if he acts adversely to his employer in any part of the transaction' ". [FN4]

Prote Contracting Co., Inc. v. Board of Educ. Of the City of New York, 230 AD2d 32. A contractor who installed replacement windows in New York City schools was successful in his action for non-payment under the contract, despite counter-claims of shoddy workmanship. After the verdict, a federal investigation revealed a City-wide scheme of corruption involving inspectors for the Board of Education. [*4]Prote turned on the issue as to whether the contract required "back-puttying", to prevent water seepage between the panes of glass and the sashes. The contractor testified that this procedure was not required and produced a memorandum produced by the Deputy Director of Maintenance, undated, not on Board stationery, and the original of which was found in plaintiff's files, that "back-puttying" was not required in accordance with the contracts let for window replacement. It was later determined that the Deputy Director was bribed to write the memorandum, and he was subsequently indicted. The judgment in favor of the contractor was reversed and the matter remanded to trial court for a determination of the factual issues relating to the reported bribe, stating "(a) party will be denied recovery even on a contract valid on its face, if it appears that he has resorted to gravely immoral and illegal conduct in accomplishing its performance".[FN5]

Black v. MTV Networks, Inc., 172 A.D.8 (1st Dept. 1991). Black was an independent contractor who supplied executive search and other placement, and recruiting for cable television. He had a two-year contract, with automatic renewal unless MTV terminated the agreement not less than 90 days prior to the expiration of the two years. When MTV sought to terminate the agreement, Black commenced the action. In the course of discovery MTV learned that prior to the two-year contract, while Black was performing for them under a series of short-term agreements, he made substantial gifts to MTV's director of personnel and made an interest-free $30,000 loan to another MTV employee. The lower court was swayed by the testimony that Black and the beneficiaries of his largesse were long-time friends, that there was no evidence of intent to influence them, and that the strictures of the crime of commercial bribing had not been met. The First Department, on the other hand, determined that "regardless of intent, motive, illicit purpose, or pecuniary loss, such secret payments improperly create interests for agents that are adverse to that of their principal' and the principal's complete knowledge and approval is required of any substantial advantage received by an agent' from third persons".[FN6]

A common thread running through each of the foregoing cases is systematic and repeated misconduct over a substantial period of time which exhibits fundamental immorality evincing a high degree of disloyalty. There is a significant question as to whether the over-excavation of 14% of the amount authorized constitutes the type of disloyalty which justifies the denial of payments, even for unrelated services to which the contractor claims entitlement. Plaintiff takes the position at ¶¶ 17 et seq. of the affirmation in support of the motion that the conduct of Northeast was "so substantial and material, going to the very core of the obligations to be performed by it, as to amount to a repudiation which relieves The Hamlet of any further [*5]reciprocal legal or financial obligations to Northeast, as a matter of law". Plaintiff cites three cases in support of this position.[FN7]

Callanan v. Keeseville, Ausable Chasm and Lake Champlain Railroad Company, et al., 199 NY 268 (1910). Heavily steeped in procedural issues, the relevant issue resolved in the matter was to what extent the failure of the contractors, Powers and Mansfield to substantially perform their obligations under a contract with the Railroad Company to acquire land, extend electrification, and construct a railway to create linkage with Lake Placid was sufficient to warrant rescission of the contract. At the risk of verbosity, the Court sets forth the language which it believes captured the essence of the decision:

There is no hard and fast rule on the subject of rescission, for the right usually depends on the circumstances of the particular case. It is permitted for failure of consideration, fraud in making the contract, for inability to perform it after it is made, for repudiation of the contract or an essential part thereof and for such a breach as substantially defeats its purpose. It is not permitted for a slight, casual or technical breach, but, as a general rule, only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. Failure to perform in every respect is not essential, but a failure which leaves the subject of the contract substantially different from what was contracted for is sufficient. If the party who seeks rescission has an adequate remedy at law, ordinarily he is not entitled to rescind, but in case of repudiation, or of a breach going to the root of the contract, unless the damages can be ascertained with reasonable certainty, rescission is a matter of right, with restitution instead of compensation. In this case the failure to perform was of a most substantial character and pervaded almost the entire contract. The road was not transformed into an electric road, nor extended to Keeseville, nor connected with the dock at Port Kent. It was still a steam road and for all practical purposes in the same condition as before the contract was made, but it had been incumbered for nearly three times the amount of the original issue of stock and bonds and the proceeds converted to their own use by Powers and Mansfield. There was such a failure to perform the substance of the contract as to defeat its purpose in nearly every essential respect.[FN8]

Fink v. Friedman, 78 Misc 2d 429, (Sup. Nass. App. Term, 1974 [Harnett, J.]). This matter involved the construction of a garage too close to the boundary line of the adjoining property so as to require the homeowner to drive over the neighbor's land for ingress and egress. The homeowner sought rescission of the contract with the builder of the garage. The Court determined that the facts were insufficient to create an easement over the adjoining property or to entitle plaintiff [*6]to rescission of the contract with the builder. Rather, plaintiff was entitled to monetary damages of $7,100 against the erring builder. Citing Callanan, the Court noted that "(r)escission is permitted where a breach is so substantial as to defeat the purpose of an entire transaction.The breach must go to the very root of the contract, rendering performance different in substance than that agreed upon and depriving one of the parties of the fruits of the agreement".[FN9]The Court concluded that the failure of the two-car garage to provide access for two cars did not go to the essence of the contract, in that it was simply remedied, at least as to use by one car.

Babylon Associates v. Suffolk County, 101 AD2d 207 (2d Dept., 1984). This matter involves the infamous Southwest Sewer District in Suffolk County, replete with fraud on the part of subcontractors in the supplying of defective pipe, and their conviction for fraud against the United States. The action was by the general contractor for extra work and expenses, allegedly as a result of delay and interference by the County after the conviction of the subcontractor supplier. The County counterclaimed that based upon the fraudulent actions of the subcontractor, the entire contract with Plaintiff was subject to rescission. In reversing the lower court, the Appellate Division held that, under the terms of the contract, the general contractor could be held responsible for the illegal conduct of the subcontractor. The issue then, was whether the County was entitled, under its Sixth counterclaim, to recover all funds paid to the general contractor. Citing Callanan, the Court reiterated that "(i)f rescission is based upon a breach of the contract, the breach must be material and willful', or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract". [FN10] The Court concluded that the breach of contract was not willful as to Plaintiff, nor was it "so substantial and fundamental as to necessarily defeat the very purpose of the parties' contract".[FN11]

This Court draws as its conclusion from a reading of the foregoing cases that in order to justify the extraordinary relief of rescission, it must be satisfied that the conduct of Northeast relied upon by Plaintiff-movant must go to the very heart of the agreement between the parties and be such as to defeat the purpose of the agreement between them, or, constitute intentional conduct which is so morally reprehensible as to deprive Northeast of its entitlement even to payment for work which it legitimately performed.

The Court finds that the over-excavation of the property by approximately 236,438 cubic yards (14% greater than authorized) does not frustrate the very purpose of the agreement. In fact, the project has been completed, with the only significant remaining problems the [*7]apportionment of financial responsibility for the conduct of Northeaset, and claimed entitlement for extra work based upon change orders. Plaintiff is not entitled to rescission on the grounds that the misconduct struck at the heart of the agreement.

The question as to whether or not the misappropriation of some 236,438 cubic yards of clean fill, a valuable commodity as determined by the Appellate Division,[FN12] was the product of intentional misconduct, involving a regular course of conduct, detrimental to the principal, cannot be determined by the Court on the basis of the record before it. There is presently no evidence before the Court as to whether Northeast or Pav-Co, it's sub-contractor under an oral agreement, actively planned to convert the excess soil, or if when they became aware that they had taken a greater amount of soil than that to which they were entitled, the affirmatively chose to continue on the course. Facts as yet unrevealed to the Court may show that they acted with the requisite scienter and moral turpitude as to warrant the denial to them of further recovery.

The Court directs that the parties communicate with the Court for the purpose of scheduling a factual inquiry on this subject.

Plaintiffs' Motion to Dismiss Conterclaims based upon Contract Interpretation

To reiterate the counterclaim, Northeast claims that, in addition to the contract for soil

excavation, they contracted with Plaintiffs for work in connection with sanitary and drainage excavation, for which they were to receive $1,500,000. They further claim, that at the request of Plaintiffs, they performed additional work amounting to $477,396.9, bringing the total value of services to $1,977,396.91. They acknowledge receipt of $1,743,136.61, leaving an unpaid balance of $234,230.61. The Second Counterclaim is for the same amount based on an account stated.

Aside from Plaintiffs' claim that Northeast has forfeited entitlement to further payment based upon the unfaithful servant doctrine, they claim that the July 1, 2002 contract for $1,500,000 was a "fixed fee" agreement,[FN13] and that what Northeast contends are "Additional Work Authorizations"[FN14] are nothing more than modifications necessarily incurred in a project of this magnitude, requiring no additional work, and would more accurately be described as documented milestones to warrant payment under a progress payment schedule. In the face of this claim, Plaintiff nevertheless paid more than $1,743,000 for the work.

The contract calls for the Contractor to provide excavation, drainage and sewer-related work on a 186-acre parcel, to be developed with a 177-home residential subdivision and golf course. It provided for the Contractor to remove approximately 1.665 million cubic yards of excess material, for which the fee would be the retention of the material, and for the drainage and sewer-related excavation for $1,500,000. It required the contractor to pay any municipal fees in the form of Environmental Preservation Capital Reserve Fund of the Town of Brookhaven, and [*8]required the Contractor to complete the work within 21 months. It also provided that the "CONTRACTOR SHALL NOT OVER EXCAVATE ANY AREA".

The Court does not find any language in the contract which would preclude payment for additional work. Plaintiff points to language in the contract that "Developer shall compensate the Contractor in the amount of One Million, Five Hundred Thousand Dollars ($1,500,000) for completed and approved work" and that Developer agrees to Prepay Contractor for all of the above referenced surveying services in the amount of Ninety Thousand Dollars ($90,000.00), and this Addendum to the Contract Agreement shall be a lump sum price with no extras".

Neither clause precludes the payment for additional work, if approved. The second clause providing for "lump sum price with no extras" refers only to the $90,000 advance for surveying costs. The Court is not in a position to evaluate the approximately 235 Additional Work Authorizations, and determine whether they are a component of, or an addition to, the proposal of All County Paving Corporation, with which the work was to comply. The proposal is not annexed to the contract, although it was undoubtedly made a part of the original. The claimed fees for additional work amount to some 32% of the original contract amount, which is certainly substantial.

The motion to dismiss the counterclaims for the balance of payments for additional work in the amount $234,230.61 is denied. The parties are to communicate with the Court to schedule a factual hearing to provide expert testimony as to the nature of the work referred to in the Additional Work Authorizations, and whether or not they relate to work not included in the All County Paving Corporation proposal, an integral part of the contract.

The Cross-Motion for Summary Judgment

When presented with a motion for summary judgment, the function of a court is "not to determine credibility or to engage in issue determination, but rather to determine the existence or non-existence of material issues of fact."[FN15] To grant summary judgment, it must clearly appear that no material and triable issue of fact is presented.[FN16] It is a drastic remedy, the procedural equivalent of a trial, and will not be granted if there is any doubt as to the existence of a triable issue.[FN17]

There are two critical factual issues which preclude the grant of summary judgment on the counterclaims. The first is whether Defendant is precluded from any recovery in light of the possible determination that the removal of excess material from the site was a violation of the duty Defendant had to Plaintiff of such a degree to warrant rescission, and excuse Plaintiff from any further payment under the contract. The second factual issue is whether the Additional Work [*9]Authorizations represent work different from that called for in the original proposal upon which the contract was based.

Account Stated

In order to constitute an account stated, there must be a mutual examination of the claims of the respective parties, a balance struck, and an agreement, either express or implied, that the claimed balance is correct, and that the party against whom it is found will pay it.[FN18]

As was stated many years ago by Chief Judge Folger, "[a]n account stated is an account balanced and rendered, with an assent to the balance express or implied; so that the demand is essentially the same as if a promissory note had been given for the balance". [FN19] A dispute as to the legitimacy or the amount of the amounts claimed will preclude the summary judgment on an account stated.[FN20]

Here, the Statements contained in Exh. "D" to Cross-motion, labeled "Additional Work Authorization", do not include a specific monetary amount to which the parties could possibly agree. The Statements in Exh. "E", including the June 18, 2009 Summary, do reflect total invoices of $1,977,396.91, payments of $1,636,936.80, and a balance of $340,460.11. Plaintiff's contention that these statements were intended only to represent progress of work so as to justify time payments, is at least in part borne out by some of the statements, such as Invoice No. 171 dated 9/22/2003, which reflects the "Contract Amount" of $1,500,000, the "% Complete this Period" of 5.093%, and "Total Billed for This Period" of $76,400.

There is no evidence that the parties agree even on the nature of the statements, much less on the amount due thereunder. Under these circumstances, the cross-motion for summary judgment on the First and Second Causes of Action on the basis of an account stated is denied.

To the extent relief has not been granted, it is denied.

This constitutes the Decision and Order of the Court.

Dated:February 16, 2010______________________________

J.S.C.

Footnotes

Footnote 1: Exh. "B" to Motion.

Footnote 2: Hamlet at Willow Creek Development Col, LLC v. Northeast Land Development Corp., 64 AD3d 85 (2d Dept. 2009).

Footnote 3: Id. at 117.

Footnote 4: Citing Beatty v. Guggenheim Exploration Co., 223 NY 294, 304 (1918); mod. on other grounds, 225 NY 380 (1919). Employee, whose employment precluded him from performing work for anyone else in same field of locating mining properties, was, while working for employer, providing similar services for another.

Footnote 5: Quoting from McConnell v. Commonwealth Pictures Corp., 7 NY2d 465, 471 (1960).

Footnote 6: Quoting from American Assur. Underwriters Group v. MetLife Gen. Ins. Agency, 154 AD2d 206, 208 (1st Dept. 1990).

Footnote 7: County of Suffolk v. Babylon Associates, 101 AD2d 207, (2d Dept. 1984); Fink v. Friedman, 78 Misc 2d 429 (Sup. Ct. Nass. Co., 1974 [Harnett, J.]); Callanan v. Keeseville, Ausable Chasm and Lake Champlain RR., etc. Co., 199 NY (1910).

Footnote 8: Callanan at 284.

Footnote 9: Fink at 434 — 435 (internal citations omitted).

Footnote 10: Callanan at 284.

Footnote 11: Babylon Associates at 215.

Footnote 12: Hamlet at Willow Creek, 64 AD3d 85, 115.

Footnote 13: Contract is Exh. "C" to Cross-Motion.

Footnote 14: Exh. "D" to Cross-Motion.

Footnote 15: Quinn v. Krumland, 179 AD2d 448, 449 — 450 (1st Dept. 1992); S.J. Capelin Associates, Inc. v. Globe Mfg. Corp., 34 NY2d 338, 343 (1974).

Footnote 16: Stillman v. Twentieth Century-Fox Corp., 3 NY2d 395, 404 (1957).

Footnote 17: Moskovitz v. Garlock, 23 AD2d 94 (3d Dept. 1965); Crowley's Milk Co. V. Klein, 24 AD2d 929 (3d Dept. 1965).

Footnote 18: Block v. Bbreindel, 5 AD2d 1007 (2d Dept. 1958).

Footnote 19: Volkening v. DeGraaf, 81 NY 268, 270 (1880).

Footnote 20: Reade v. Cardinal Health, Inc., 12 AD3d 224, (1st Dept. 2004).