H&L Ironworks Corp. v McGovern & Co., LLC

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H&L Ironworks Corp. v McGovern & Co., LLC 2018 NY Slip Op 30108(U) January 19, 2018 Supreme Court, New York County Docket Number: 153853/2016 Judge: Carol R. Edmead Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 1] / NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ' I -------------------------------------------------------------------------)( DECISION/ORDER H&L IRONWORKS CORP., on behalf of itself and on behalf of all persons entitled to share in the funds received by McGovern & Company LLC in connection with a project identified as 10 East 53rd Street, New York, New York, Index no.~ I 153853/2016' ' Mot Seq.,006 Plaintiff, -against- ! MCGOVERN & COMPANY, LLC, 10E53 OWNER LLC, ATLANTIC SPECIAL TY INSURANCE COMP ANY, DANIEL G. MCGOVERN, and "JOHN DOE NO. l" through "JOHN DOE NO. 10'', defendants being fictitious and unknown to plaintiff but intended to be parties liable for the diversion of trust funds pursuant to Article 3-A of the Lien Law, Defendants. ' I ----------------------------------------------------------------------)( HON. CAROL R. EDMEAD, J.S.C.: MEMORANDUM DECISION This is a lien foreclosure.action. Plaintiff, H&L Ironworks Corp. ("Plaintiff'), now moves for an order pursuant to CPLR 3212 granting Plaintiff and all persons entitle~ to share in the r r funds received by McGovern & Company LLC in connection with a project-identified as 10 East l 53rd Street, New York, New York summary judgment of the fourth and fifthI causes of action .. I contained in its amended complaint ("Complaint"), interim relief pursuant t~ Lien Law§ 77(3), I and to sever its fourth and fifth causes of action. Defendants, McGovern & <Zompany, LLC and Daniel G. McGovern (collectively "Defendants"), now cross-move to, inter kua, dismiss the I fourth and fifth causes of action under CPLR 3211. ·j I Factual Background According to the Complaint, defendant 10E53 Owner LLC ("10E53'i) is the owner of a I building and construction project (the "Project"). The Complaint further claims that defendant . I . . 3 of 11 I [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 2] NYSCEF DOC. NO. 224 .I INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 I I i ' McGovern & Co. was hired by 1OE53 as a general contractor for the Project and that Plaintiff t .I . was hired by defendant McGovern & Co. to perform work at the Project. Defendant Daniel G. McGovern is the president of defendant McGovern & Co. Plaintiffs fourth Jd fifth causes of action allege that defendant McGovern & Co. ;eceived funds in connection Jith the Project for . l labor, constituting trust assets under Lien Law article 3-A. Plaintiff further alleges that it I ' furnished labor arid materials, but that it was not paid. Additionally, Plaintiff alleges that · 1 Defendants diverted trust assets from the trust in violation of Lien Law article 3-A. I i I Plaintiff's Motion In support of its motion for partial summary judgment, Plaintiff first argues that defendant McGovern & Co. has failed to furnish an. adequate verified statemJnt of trust assets . I I pursuant to Lien Law§ 75(3) and is therefore presumptively liable for diverting trust assets. I . I l Plaintiff also argues that defendant McGovern & Co. diverted funds.from the trust. In ' support of its argument, Plaintiff claims that 1OE53 paid defendant McGoverh & Co. a total of , $17 ,590,802.43 for work to be done on the Project. Plaintiff further argues thlt defendant i I McGovern & Co. paid in excess of $11,519,604.50 of trust funds for purpose's other than the I trust. Further, Plaintiff claims that as of August 31, 2016, the bank account which once held the ' . I trust assets had a balance of $187.09. Moreover, Plaintiff submits the affida'vit of Robert DeWitt, I a represent Senior Vice President of Construction for SL Green Realty Corp.! which is a fully integrated real estate investment trust with an ownership interest in IOE53, wherein he states that ' l four of the nine agreements between 1OE53 and defendant McGovern & Co. !involved steel work ' where defendant McGovern & Co. hired Plaintiff as a subcontractor (Wood Aff., Ex. K, DeWitt Aff., ~8). Further, Plaintiff argues that defendant Daniel McGovern should bl held personally liable for defendant McGovern & Co.'s alleged diversion of the Project trust!funds, since he is I the managing member with financial control over the defendant McGovern·& Co.'s finances. '' I 2 4 of 11 [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 3] NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 I J . I Additionally, Plaintiff argues that if its application for partial summary judgJent is granted, that that the fourth and fifth claims be severed and that a trial be held on damages,on those claims. Finally, Plaintiff argues that immediate. interim relief should be granted pursjant to Lien Law§ :I . i 77(3)(a)(i), (iv)-(v). ' Defendants' Cross-Motion and Opposition In support of its cross-motion, Defendants argue that Plaintiffs fourtli and fifth causes of I . action should be dismissed for failure to state a claim. Specifically, Defendarits argue Plaintiff t f should have alleged four separate causes of action, since there were four contracts between I defendants McGovern & Co. and 1OE53, and four separate contacts between !defendant McGovern & Co. and Plaintiff, and thus four separate trust funds. Defendantl further contend that the Complaint fails to identify each alleged trust fund and what agreem~t Plaintiff claimed I I to perform. Next, Defendants argue that the stipulation of partial discontinuabce dated May 9, I 2017, discontinuing the claims asserted against defendants I OE53 and Atlantic Specialty ·1 Insurance Company ("ASIC") (the "Stipulation") should be vacated, since i.tjwas filed without counsel for Defendants' signatures. Moreover, Defendants argue that allowidg the Complaint to I be discontinued as against 1OE53 and ASIC would prejudice defendants in 6~mpleting I discovery. Further, Defendants argue that they should be granted leave to a~end their answer to add counterclaims and cross-claims. I In opposition to Plaintiffs motion, Defendants argue that there is a material issue of fact I . I as to whether Plaintiff is entitled to payments pursuant to its agreements with defendant I McGovern & Co., since Plaintiff failed to complete the work contemplated by the agreements. Further, Defendants argue that Plaintiff failed to show an improper diversi~J of trust assets. I I Moreover, Defendants argue that there is no presumption of a trust diversion', since it complied I I with the Court's August 30, 2016 order requiring that it furnish a supplemen;tal verified I I 3 I 5 of 11 I ' [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 4] NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 I statement as to trust accounts payable only and that the Court ruled that Defendants substantially ' i complied with the Court's July 19, 2016 order requiring that it furnish Plaintiff with a verified I statement. Finally, Defendants argue that PI.aintiff speculated that the money ti hat was distributed from the bank account was a trust asset diversion. l Plaintiff's Opposition and Reply .I Plaintiff argues that only one trust exists, since, first, the work it performed and the i monies at issue were regarding the Project, and second, Defendants' verified~statement does not . ' reference to multiple trust funds. Plaintiff argues that partial summary judgmlent is appropriate, since defendant McGovern & Co. diverted trust assets from the trust. Furth~J. Plaintiff contends I I that Plaintiff is entitled to a surety bond and forensic accounting since Defenpants have not explained the location of the trust assets. Finally, Plaintiff argues that the branch of Defendants . I motion to amend its answer should be denied, as they failed to clearly show the changes or I additions to be made to the pleading, and that the affidavit of defendant McGovern fails to offer a basis to alleging damages incurred by Plaintiff. Defendants' Reply In reply, Defendants first argue that the subcontracts between Plaintiff and Defendants I I created four separate trust funds. Defendants next argue that Plaintiff is not entitled to partial ,I summary judgment of the fourth and fifth causes of action, since Plaintiff failed to establish their .right to receive payment on their underlying construction claim. Defendants !further argue that they should be granted leave to amend their answer. Finally, Defendants arghe that Plaintiff is I not entitled to relief under Lien Law § 77, since it failed to prove its assets. Discussion Lien Law 4 6 of 11 entitle~ent to the trust funds .' [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 5] NYSCEF DOC. NO. 224 ' I INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 ~ I I · • c. · "Article 3-A of the Lien Law creates 'trust 1unds out o f certain construct10n payments or . I funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as .I specified taxes and expenses of construction' "(Aspro Mech. Contr., Inc. v.' Fleet Bank, NA, 1 N. Y.3d 324, 328 [2004], quoting Caristo Cons tr. Corp. v. Diners Fin. Corp. J21 N. Y .2d 507, . ! 512 [1968], citing Lien Law§§ 70, 71). "[T]he primary purpose of the Lien faw is to ensure that 1 'those who have directly expended labor and materials to improve real prope rty . . . at the . . I direction of the owner or a general contractor' receive payment for the work :actually performed" .! . ( Canran Corp. v. City afNew Yark, 89 N. Y .2d 147, 15 5, [ 1996]). "To ens;i this end, the Lien Law establishes that designated funds received by owners, contractors and subcontractors in I 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 lny beneficiary of . .I the trust'" (Aspro Mech. Contr., Inc., 1 N.Y.3d at 328, quoting Lien Law§ 70[1], [3]; see also . .1 City of New York v. Cross Bay Contr. Corp., 93 N.Y.2d 14, 19 [1999]). LienlLaw § 70(2) . . I I l ~~~: "[t]he funds received by a contractor or subcontractor and the rights 6f action with respect thereto, under or in connection with each contract or subconttact, shall be - I a separate trust and the contractor or subcontractor shall be the trustee thereof." Here, it is undisputed that there were four contracts between 1OE53 ~nd defendant .I McGovern & Co. under which McGovern & Co. received funds from 10E53 for the improvement ofreal property (i.e. construction at the Project). As a result, elch contract between I t . 1OE53 and defendant McGovern & Co. established a separate trust (Lien La'Yv § 70( 1), (2); see ! j also In re !DI Const. Co., Inc., 345 B.R. 60, 65 [Bankr. S.D.N.Y. 2006], citing Canron Corp., 89 N.Y.2d 147 [''If the contractor is engaged in multiple projects, the funds reJived in connection with each contract comprise a separate trust"]; Colonia Ins. Co. v. United StLes, 1996 WL I ! 5 7 of 11 l I ! [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 6] NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 I I • 68533, at *3 (E.D.N.Y. Jan. 25, 1996] ("The funds received on each contractconstitute separate I ~ trusts of which the contractor becomes a trustee"]; In re Colby Const. Corp.", 176 B.R. 50, 52 [Bankr. S.D.N.Y. 1987]; In re Grosso, 9 B.R. 815, 821 [Bankr. N.D.N.Y. 1981]). Since each contract wherein defendant McGovern & Co. received ruJds established a , I I separate trust, Plaintiff was required to state a separate cause of action for.each claim in which it alleges that a trust fund has been established (see§ 70[2]; Hamburg Bros. v. . ~achles, 210 A.D.2d I 985, 985 [4th Dept 1994] [affirming trial court's order directing plaintiff to "amend its complaint I I to state a separate cause of action for each claim in which plaintiff alleges a trust fund has been ! established" pursuant to Lien Law article 3-A]). The Court in its discretion grants Plaintiff leave to amend the Complaint to state a . .I I separate cause of action for each action in which Plaintiff contends that a tru~t fund has been I established, as there is no prejudice or surprise to Defendants in doing so (s·ee CPLR 3025[b]; ·1 JPMorgan Chase Bank, NA. v. Low Cost Bearings NY Inc., 107 A.D.3d 643, 644 [1st Dept · l I 2013]; Hamburg Bros., 210 A.D.2d 985, 985). Indeed, while the Complaint feferences "[t]rust ' I funds created in connection with the Project" (~~39, 47), Defendants' opposition acknowledges . .l that Plaintiff alleges that four agreements between 1OE53 and defendant McGovern & Co. I involved steelwork where Plaintiff was engaged to perform (Cheng Opp. Aff., ~11). I Further, Plaintiffs opposition argues that if separate trust funds did exist in this mattyr, "an amendment I of the Article 3-A Claims would be appropriate" (Reply MOL, Opp. 6-7). M'oreover, Defendants' citation to Hamburg Bros. does not support the outright dismisJal of Plaintiffs I . i claims. Accordingly, the branch of Plaintiffs motion for partial summary judgment of its fourth •I t and fifth causes of action is denied and to sever and to hold a trial on damages on those claims is denied, without prejudice. 6 8 of 11 [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 7] INDEX NO. 153853/2016 NYSCEF DOC. NO. 224 RECEIVED NYSCEF: 01/22/2018 I I Interim relief under.Lien Law§ 77(3)(a)(i), (iv)-(v) is preconditione~lby a valid trust being determined and established (see Canron Corp. v. City of New York, 891N.Y.2d 147, 153 [1996]; Brooklyn Navy Yard Dev. Corp. v. JM ' Dennis Const. Corp., 12 A.~.3d 630, 631-632 . I [2d Dept 2004]; S. C. Steel Corp. v. Miller, 170 A.D.2d 592, 594 [2d Dept 1991 ]; Joseph Davis Indus. Servs. v. Sico/i & Massaro, Inc., 289 A.D.2d 984 [4d Dept 2001]Jr0~tier Excavating, Inc. v. Sovereign Const. Co., 30 A.D.2d 487, 491 [4d Dept 1968], which, as i ~iscussed above, has I not occurred in this matter. Accordingly, Plaintiffs request for interim reliefrat is premature at this juncture. Stipulation of Discontinuance : I CPLR 3217(a)(2) requires that a discontinuance by stipulation be a ~·kiting signed by all atto~eys of record for all parties." The requirement for the signature of the 1uomeys for all parties is mandatory, without w~ich the discontinuance must be sought by mLion (Phillips v. Trammel Const., 101A.D.3d1097, 1098 [2d Dept 2012]; C. W Brown, Inc. t HCE, Inc., 8 AD3d I . I 520, 521 [2d Dept 2004]; [holding that the failure of all attorneys ofrecord for all the parties I renders the stipulation ineffective]). Defendants correctly argue, and Plaintiffs opposition does I not argue contrary, that the Stipulation fails to include the signatures of . Def~ndants or counsel .I for Defendants. Accordingly, the action has not been properly discontinued ~y Plaintiff against 1OE53 and ASIC, and thus is deemed to still be viable as asserted against thJm. Leave to Amend . ! I A motion for leave to amend, pursuant to CPLR 3025(b), is committ~d to the sound · 1 discretion of the trial court (Edenwald Contr. Co. v. City ofNew York, 60 N.:Y.2d 957, 959 :l [1983]; Oil Heat Inst. of Long Is. Ins . Trust v. RMTS Assocs., LLC, 4 A.D.39 290 [1st Dept I 2004]). In the absence of prejudice or surprise, leave to amend is freely granted (see CPLR . t ' 3025[b]). The court should examine, but need not decide, the merits of the proposed pleading 7 I I I I 9 of 11 ! ,I [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 8] NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 I j unless it is patently insufficient (see Hospital for Joint Diseases Orthpaedic Inst. v. James Katsikis Envtl. Contrs., Inc., 173 A.D.2d 210 [!st Dept 1991]). CPLR 3025(~) requires that "[a]ny motion to amend or supplement pleadings shall be accompanied by th~ proposed amended . ·1 or supplemental pleading clearly showing the changes or additions to be made to the pleading." Here the affidavit of defendant Daniel McGovern submitted in suppJrt of the motion for ' .l leave to amend sufficiently demonstrates that the counterclaims and cross-claims are not ·.'I palpably lacking in merit and the record fails to demonstrate any prejudice tci Plaintiff or defendants 1OE53 and ASIC in granting the leave to amend. Moreover, Defehdants' failure to .1 clearly show the changes made in the attached answer is not fatal to their application. CONCLUSION Accordingly, it is hereby I ORDERED that the motion of Plaintiff H&L Ironworks Corp. is denied, without prejudice. It is further . I ORDERED that the branch of the cross-motion of defendants McGovern & Company, • LLC and Daniel G. McGovern to vacate the May 9, 2017 stipulation of partial discontinuance (E-File Doc. No. 186) is granted, and the Complaint as against 1OE53 Owner LLC, Atlantic Specialty Insurance Company is reinstated. It is further .1 t ORDERED that the branch of the cross-motion of defendants McGovern & Company, LLC and Daniel G. McGovern for leave to amend their answer is granted. It!is further I ORDERED that the branch of the cross-motion of defendants McG~vern & Company, LLC and Daniel G. McGovern to dismiss the Complaint of Plaintiff H&L Ironworks Corp. is granted, to the extent that Plaintiff shall file a second amended complaint within twenty (20) days of notice of entry. Defendants McGovern & Company, LLC, Daniel GJMcGovern, 10E53 Owner LLC, and Atlantic Specialty Insurance Company shall file their resp~ctive amended answers twenty (20) days after receipt of the second amended complaint. It is further ORDERED that the parties shall appear for an in-court status confeJence on March 20, ' 2018 at 2:15 p.m. It is further l I I 8 10 of 11 [*FILED: NEW YORK COUNTY CLERK 01/22/2018 12:15 PM 9] NYSCEF DOC. NO. 224 INDEX NO. 153853/2016 RECEIVED NYSCEF: 01/22/2018 ORDERED that plaintiff H&L Ironworks Corp. shall serve a copy of this order with notice of entry upon all parties within ten (10) days of entry. This constitutes the decision and order of the Court. Dated: January 19, 2018 9 11 of 11

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