TLH Constr. Corp. v Arkay Constr., Inc.

[*1] TLH Constr. Corp. v Arkay Constr., Inc. 2013 NY Slip Op 50879(U) Decided on April 24, 2013 Supreme Court, Kings County Demarest, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 April 24, 2013
Supreme Court, Kings County

TLH Construction Corp., Plaintiff,

against

Arkay Construction, Inc. and COLONIAL SURETY COMPANY, Defendants.



39436/2007



Attorney for Plaintiff:

George A. Marco, PLLC

825 East Gate Boulevard, Suite 308

Garden City, NY 11530

Attorney for Defendant Arkay Construction, Inc.:

La Reddola, Lester & Associates, LLP

600 Old Country Road, Suite 224

Garden City, NY 11530

Attorney for Defendant Colonial Surety Company:

McElroy, Deutsch, Mulvaney & Carpenter, LLP

1300 Mount Kemble Avenue

PO Box 2075

Morristown, NJ 0796

Carolyn E. Demarest, J.

In this motion to restore the case to the Court's calendar, plaintiff subcontractor TLH Construction Corp. ("TLH") seeks recovery of $75,980.00 from surety defendant Colonial Surety Company ("Colonial") to satisfy a judgment entered in plaintiff's favor against Colonial's principal, contractor Arkay Construction, Inc. ("Arkay"), upon Arkay's default upon a settlement entered on the Court record.[FN1]

[*2]BACKGROUND

In late 2002, Arkay contracted with New York City to do work for the City's Department of Sanitation (the "Project"). In connection with the Project, Colonial issued a payment bond dated March 12, 2003.[FN2] The bond states, in part, (at page 2) that:

The Principal and Surety agree that this bond shall be for the benefit of any materialmenor laborer having a just claim, as well as the City itself.

All persons who have performed labor, rendered services or furnished materials andsupplies, as aforesaid, shall have a direct right of action against the Principal and his, its or their successors and assigns, and the Surety (Sureties) herein, or against either or both or any of them and their successors and assigns.

The bond further reads, in part: And the Surety (Sureties), for value received, for itself and its successors and assigns, hereby stipulates and agrees that the obligation of said Surety (Sureties), and its bond shall be in no way impaired or affected by an extension of time, modification, omission; [sic] addition, or change in or of the said Contract or the Work to be performed thereunder . . . Surety (Sureties) does hereby waive notice of any and all such extensions, modifications, omissions, additions, changes, payments, waivers, assignments, subcontracts and transfers, and hereby expressly stipulates and agrees that any and all things done and omitted to be done by and in relation to assignees, subcontractors, and other transferees shall have the same effect as to said Surety (Sureties) as though done or omitted by or omitted to be done by or in relation to said Principal.

Arkay then entered into an agreement with TLH in August 2003, and the parties signed a subcontract on October 27, 2004, whereby TLH was to provide labor and materials for the installation of a metal wall panel for the Project. A dispute over payment arose between TLH and Arkay, so on July 9, 2007, TLH sent a letter to Colonial notifying Colonial that it intended to formally file a claim against the bond. On October 23, 2007, TLH initiated an action under this index number against Arkay and Colonial, for, among other things, breach of contract, quantum meruit, unjust enrichment, and account stated. TLH claimed that an outstanding balance of $139,409.35 was owed to it. Defendants answered on January 1, 2008, and asserted a counterclaim, seeking an offset of the amount TLH demanded.

After the conclusion of discovery, at a settlement conference on January 26, 2010, an agreement was reached, and put on the record before this Court, whereby Arkay was to pay TLH $75,000 in 12 monthly installments commencing with an initial payment of $5,000 on March 15, 2010, and thereafter $10,000 monthly ending March 2011 ("the Settlement"). The presidents of TLH and Arkay were present and put their appearances on the record, along with their attorneys. Arkay's attorney acknowledged that he represented both Colonial and Arkay and defended Arkay pursuant [*3]to a defense agreement between Colonial and Arkay. The Settlement, as stated by defendants' attorney, provided that "Arkay is making all the payments on this." The Settlement did not expressly address whether Colonial remained obligated under the payment bond. It was agreed that the case would only be discontinued following the exchange of releases following payment.

When Arkay did not make any of the payments, TLH filed a statement of judgment against Arkay on October 19, 2010. The Court takes notice that annexed to the statement of judgment filed with the Clerk is a copy of a facsimile sent by TLH's attorney to defendants' attorney on June 17, 2010, giving Arkay five days to make the first payment and cure its default. By Order to Show Cause dated July 9, 2012, TLH moved to restore the case to the trial calendar so that it could obtain a judgment against Colonial. Colonial opposed the motion. After oral arguments held October 3, 2012, the Court permitted supplemental briefing addressing one of the issues raised at oral arguments. Subsequently, additional oral arguments were heard on January 9, 2013, and the parties were again permitted to submit additional supplemental letter briefs.

DISCUSSION

Colonial argues that restoration of the case is improper because the Settlement reached at the settlement conference extinguished all prior claims and became the sole basis upon which TLH could seek relief. As Colonial was not a party to the Settlement, it argues, TLH can no longer maintain any claims against it. "Where the parties enter into a stipulation recorded in the minutes of the court, the settlement agreement terminates all of the claims of the parties heretofore made in the action, and the agreement becomes enforceable as a contract binding on all the parties thereto" (Skosberg Constr. Co. v Hawthorne Indus. Park, 94 AD2d 766, 767 [2d Dept 1983])(citations omitted). Nonetheless, a settlement agreement entered into between a principal and an obligee does not preclude such obligee from enforcing a surety's obligation (see e.g., Better Engineered Sys. Tech., Inc. v Sound Elec. Corp., 289 AD2d 174, 175 [1st Dept 2001]; Tadco Constr. Corp. v Centennial Ins. Co., 2008 NY Misc LEXIS 10259 [Sup Ct, NY County 2008]); but see Burns Bros. v. Solomon, 150 Misc 802, 803-04 [City Court, NY 1933] (defendant's obligation on personal guaranty was discharged by operation of law when settlement of the original action resulted in new agreement between creditor and principal).

In Town of Huntington v American Manufacturers Mutual Insurance Company (32 Misc 3d 1240(A) [Sup Ct, Suffolk County 2011]), the town had brought an action against a contractor and surety seeking recovery under performance bonds issued by the surety. The town entered into a settlement agreement with the defendant principal, but when its terms were not adhered to, the town brought an action against both defendants, seeking enforcement of the agreement. The court determined that, despite the fact that the surety was not a party to the settlement agreement, it remained liable based on the performance bond because "as a surety its liability is derived from that of its principal"(Id. at *5 citing MacKennan v American Cas. Co., 169 AD2d 709, 710 [2d Dept 1991]). Accordingly, absent an express release of the surety's obligations, it remained liable to plaintiff, despite the formation of the Settlement. There is nothing in the record in this case to suggest that, under the Settlement, any such release of Colonial's obligations occurred. Moreover, Colonial's attorney, who also represented Arkay, was present when the Settlement was entered on the record and had the opportunity to provide for the express release of Colonial's obligations but failed to do so. Thus, the fact that the Settlement provided that Arkay would pay $75,000 to plaintiff, but was silent as to Colonial's obligation, did not release Colonial's obligation to TLH as a surety. [*4]

Colonial further argues that the Settlement extinguished its obligations as a surety by operation of law because it altered the underlying contract between TLH and Arkay. "Suretyship is a contractual relation and thus the rule is stated that the creditor and the principal debtor may not alter the surety's undertaking to cover a different obligation without the surety's consent. If they do so the surety is discharged because the parties have substituted a new contract, to which it never agreed, for the original" (Bier Pension Plan Trust v Estate of Schneierson, 74 NY2d 312, 315 [1989]). However, the formation of a superseding settlement agreement does not necessarily release a surety from its liability to an obligee (see, e.g., Better Engineered, 289 AD2d at 175)(because settlement agreement between creditor and principal did not materially alter the terms of the original contract, surety's obligation to pay under the payment bond had not been released.). In Metropolitan Steel Indus. v Fidelity & Deposit Co. of Md., (68 AD2d 935 [2d Dept 1979]), the plaintiff subcontractor and contractor entered into a written settlement agreement as here, reducing the price of plaintiff's work. When the principal contractor failed to make the payments pursuant to the agreement, the subcontractor commenced an action against the surety for payment under the payment bond, based upon the original contract price. The appellate court found that the written agreement constituted a new agreement, not merely an executory accord, and held that the subcontractor was entitled to recover from the surety under the terms of the superseding settlement agreement, but not the original subcontract (see also Tadco, 2008 NY Misc LEXIS 10259 (surety was obligated to pay under payment bond based upon settlement agreement between subcontractor and principal); Town of Huntington, 32 Misc 3d 1240(A)).[FN3]

Moreover, in the case of a compensated surety, that is, an entity that is "engaged in the business of becoming surety for pay and presumably for profit" (St. John's Coll., Fordham v the Aetna Indem. Co., 201 NY 335, 342 [1911]), "discharging the surety is inappropriate where the purported alteration cannot be said to affect the surety adversely or to have any effect whatever upon the contract or the defendant's obligation'" (Mt. Vernon City School Dist. v Nova Cas. Co., 19 NY3d 28, 36 [2012] (citing St. John's, 201 NY at 342). In Mt. Vernon, the Court of Appeals rejected the application of the earlier New York rule, that the obligation of a surety is strictly limited to the original terms of the contract and is discharged by any alteration thereof, where the bond is upon a construction contract and the surety is compensated, holding that such surety may only be discharged upon a demonstration of actual prejudice arising out of the acts of the obligee such that its obligation has been impaired (19 NY3d at 36). Thus, while in New York a "surety's rights are accorded the [*5]jealous protection of the law" (Congregation Ohavei Shalom v Comyns Bros, 123 AD2d 656 [2d Dept 1986]), the principle of strictissimi juris is inapplicable to a compensated surety like Colonial (see Timberline Elec. Supply Corp. v Ins. Co. of North America, 72 AD2d 905 [4th Dept 1979](ambiguities in a payment bond should be resolved against a compensated corporate surety because it is not a favorite of the law); Novak & Co. v Travelers Indem. Co., 85 Misc 2d 957, 958 [Sup Ct, Kings County 1976]("the bond of a compensated surety is to be construed liberally in the interest of the promisee and beneficiaries rather than strictissimi juris").

Here, it is undisputed that Colonial is a compensated surety that issued a bond for "[a]ll persons who have performed labor, rendered services or furnished materials and supplies" in connection with Arkay's project with the City. At the settlement conference, the parties agreed upon an amount Arkay owed TLH for such labor and materials. As Arkay has not paid TLH the $75,000, Colonial, as surety, is obligated to pay the outstanding amount pursuant to the terms of the payment bond.

Colonial's contention that the Settlement should release its obligation because it prejudiced its rights is unavailing. Notably, the terms of the Settlement actually reduced Colonial's obligation under the bond from $139,409.35 to $75,980.[FN4] Moreover, the language of the payment bond states that a modification of an agreement between Arkay and an obligee under the bond would not affect Colonial's liability, as Colonial "expressly stipulates and agrees that any and all things done . . . in relation to . . . subcontractors . . . shall have the same effect as to said Surety as though done or omitted to be done by or in relation to said Principal." The bond further contains an express waiver by Colonial of notice as to any extensions of time or other modification.

Colonial argues that because the Settlement extended the time period by which Arkay had to pay TLH, its rights were prejudiced because its risk was increased. Generally, an extension of time granted to a principal by an obligee, to which a surety does not consent, releases a surety from its obligations (see, e.g., Congregation Ohavei Shalom, 123 AD2d at 657 (obligation discharged "since a surety cannot be held to a contract he has not made and because the extension of time typically increases the surety's risk"); see also, Hall & Co. v Continental Cas. Co., 34 AD2d 1028 [3d Dept 1970]; Ray Weil Chevrolet v Warmus, 163 Misc 2d 752 [Sup Ct, Erie County 1955]).[FN5] Here, however, the rule is inapplicable where it cannot be said that Colonial was a stranger to the [*6]Settlement and did not consent to it. Colonial was clearly involved in the settlement negotiations that led to the Settlement and was aware of its terms. It is undisputed that Colonial's attorney was the same attorney who represented Arkay and was present when the settlement was put on the record and confirmed that he was "speaking for both" defendants. Moreover, in its February 8, 2013, letter submission, Colonial admits that it "was involved in the settlement" and that the settlement agreement was "executed between Arkay, TLH and Colonial." Yet, when the Settlement was put on the record before this Court, Colonial's attorney did not object to its terms. In these circumstances, where Colonial was actively involved in the formation of the Settlement, and where its attorney was present when the Settlement was put on the record, it is estopped from now claiming that the Settlement's terms were prejudicial.

In light of the above, including Colonial's active involvement in the settlement negotiations, as well as the fact that its monetary obligation was reduced significantly under the Settlement, it cannot be said that Colonial was prejudiced by the Settlement so as to extinguish its obligations under the payment bond.

Colonial also argues that it is prejudiced by the fact that TLH has waited more than two years since the date of the Settlement to restore its claims against Colonial because, had it realized it was obligated to TLH, it would have required Arkay to immediately deposit collateral in an amount sufficient to secure Colonial against any claim made against its bond, pursuant to its indemnification agreement. This argument is unavailing as Colonial was notified as early as July 9, 2007, that TLH was intending to file a claim against the bond. Colonial could have, at that point or any point thereafter, taken measures to secure itself against TLH's claim by requiring Arkay to deposit collateral, yet it appears that it did not do so. Colonial supplies an affidavit from its president, Wayne Nunziata, along with a copy of the indemnification agreement. Nothing in the indemnification agreement suggests, nor does Colonial argue, that Colonial is now contractually precluded from seeking relief pursuant to the indemnification agreement or from pursuing its right to subrogation upon payment to TLH. Colonial contends that, as Arkay has not paid plaintiff, it likely does not have the funds to indemnify Colonial. However, the facsimile of June 17, 2010, sent by plaintiff's attorney to defendants' attorney clearly indicated that Arkay was in default and had not made a single payment under the Settlement. Accordingly, Colonial was on notice, as early as July 2010, that Arkay was in default, at which point Colonial could have demanded collateral from Arkay to protect itself. It cannot now avoid its obligation to TLH by claiming that it was prejudiced by plaintiff's delay when it had ample opportunities to seek protection under its indemnification agreement. Such a result would be inconsistent with the public policy reflected in the governing caselaw.

While plaintiff should have sought payment from Colonial when Arkay first defaulted, rather than waiting almost two years to initiate this motion, in the absence of a showing of any actual prejudice to Colonial, a compensated surety engaged in the businesses of becoming a surety for profit, and in light of the timely notice of Arkay's default, the equities favor the restoration of the matter and the entry of judgment against Colonial upon the agreed debt of its principal Arkay. Although plaintiff did not originally move to enter judgment against Colonial, the letter briefs exchanged between counsel and submitted to the Court do address such relief. Colonial has not objected to the entry of judgment and has fully briefed the legal issues in this case. As it is clear that plaintiff is entitled to judgment as indicated, further litigation is not necessary.

CONCLUSION[*7]

Accordingly, plaintiff's motion to restore the matter to the calendar is granted, and plaintiff is granted leave to enter judgment against defendant Colonial in the amount of $75,980.00, with interest from July 9, 2012.

The foregoing constitutes the decision and order of the Court.

E N T E R:

__________________________________

HON. CAROLYN E. DEMAREST, J.S.C. Footnotes

Footnote 1: TLH initially sought to recover $139,409.35, the sum originally demanded in the Complaint, from Colonial, but in its letter of January 29, 2013, conceded that its recovery would be limited by law to the settlement sum (see Metro Steel Indus., Inc. v Fidelity & Deposit Co., 68 AD2d 935 [2d Dept 1979]) and amended its demand to $75,980.00. Upon this concession, plaintiff requests that, upon restoring the case for the purpose of obtaining relief upon the bond, the Court enter judgment against Colonial.

Footnote 2: Colonial and Arkay also previously entered into an indemnification agreement on November 12, 2002.

Footnote 3: Colonial's reliance on Shomar Constr. Servs. v Lawman Constr. Co. (262 AD2d 956 [4th Dept 1999]) is misplaced. In that case, a subcontractor and contractor entered into a liquidation agreement, which was deemed a novation of the underlying subcontract and became the sole basis upon which plaintiff could seek relief, thus eliminating the surety's liability. That case is distinguishable from that at bar in that the general contractor's obligation was made contingent upon payment from the owner, and the amount of plaintiff's claim, and its recovery, was no longer based upon the original contract for which the surety had posted bond. Here, TLH asserts a claim directly against Arkay, Colonial's principal, not against the City. Moreover, the Court notes, from the record before the Trial Court, that the liquidation agreement in Shomar expressly released the surety's obligation. Here there is no evidence suggesting the Settlement released Colonial's liability.

Footnote 4: The $75,890.00 represents the amount agreed to in the Settlement, plus interest, costs and disbursements.

Footnote 5: These cases, relied upon by Colonial, are also distinguishable because, in these cases, the sureties assumed an obligation based on a specific underlying agreement or proposed agreement of which they had knowledge and to which they had consented. Here, the payment bond covered, in addition to the City as owner, "[a]ll persons who have performed labor, rendered services or furnished materials and supplies, as aforesaid." The bond does not even state that a contract is required between a subcontractor and Arkay. Notably, the bond was issued in March of 2003, many months before the August 2003 agreement between Arkay and TLH. Thus, Colonial's argument would only be applicable to the modification of the underlying contract between Arkay and the City. However, even in that scenario, the plain language of the payment bond seems to preclude a discharge of Colonial by modification of the terms of the contract.