New York State Court of Claims

New York State Court of Claims

LUMBERMENS v. THE STATE OF NEW YORK, #2006-015-077, Claim No. 109321, Motion Nos. M-70880, M-70960, CM-71015


Synopsis


Surety brought action to recover monies due to principal but paid to comptroller by DOT to satisfy principal's withholding tax deficiency. Court of Claims has no jurisdiction over an action to enforce a lien under Lien Law § 42 nor over an action for diversion of monies subject to a Lien Law article 3-A trust. Dismissal of claim rendered academic motion by principal's attorney's seeking to recover attorney's fees incurred by principal and surety in earlier claim.

Case Information

UID:
2006-015-077
Claimant(s):
LUMBERMENS MUTUAL CASUALTY COMPANY
Claimant short name:
LUMBERMENS
Footnote (claimant name) :

Defendant(s):
THE STATE OF NEW YORK
Footnote (defendant name) :

Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
109321
Motion number(s):
M-70880, M-70960
Cross-motion number(s):
CM-71015
Judge:
FRANCIS T. COLLINS
Claimant’s attorney:
Dreifuss Bonacci & Parker, LLP
By: Gary Strong, Esquire

For Proposed Intervener:
Georgoulis & Associates, PLLCBy: Jennifer Redmond, Esquire
Defendant’s attorney:
Honorable Eliot Spitzer, Attorney General
By: Eidin Beirne, EsquireAssistant Attorney General
Third-party defendant’s attorney:

Signature date:
March 29, 2006
City:
Saratoga Springs
Comments:

Official citation:

Appellate results:

See also (multicaptioned case)



Decision

Defendant's motion for summary judgment dismissing the claim for lack of jurisdiction is granted. Claimant's cross-motion for summary judgment awarding it a determination of liability against the State and the non-party (Georgoulis & Associates, PLLC) motion to intervene for the purpose of obtaining attorneys' fees for services rendered in a related action are denied. Claimant Lumbermens Mutual Casualty Company (Lumbermens) as surety posted performance and payment bonds through a subsidiary Universal Bonding Insurance Company on behalf of its principal (Rapid Demolition Company, Inc.) on a public improvement project which included inter alia the demolition of the Wantagh State Parkway Bridge over Sloop Channel in the Town of Hempstead, Nassau County (the project). Rapid assigned any claims arising out of the contract to Lumbermens and the assignment was filed with the Comptroller.

Claimant seeks to recover monies originally payable under the contract between claimant's principal (Rapid Demolition Company, Inc.) and the New York State Department of Transportation (DOT) but which were ultimately paid by the Comptroller to the New York State Department of Taxation and Finance (Tax Department) in two installments ($119,759.27 on December 5, 2003 and $18,225.35 on May 4, 2004) to satisfy a withholding tax deficiency on the part of Rapid Demolition as reflected in a tax warrant filed in the Kings County Clerk's Office on December 5, 2003 (see defendant's Exhibit A attached to Affidavit of Stanley Milstein). Prior to filing the warrant the Tax Department had issued 6 separate notices of deficiency to Rapid during the period January 1, 1997 through December 31, 1999 (see defendant's Exhibit A attached to affidavit of Dorothy Rifkin[1]). The notices of deficiency were mailed to both Rapid Demolition and to Paul A. Mezzo who is identified by Tax Department records as holding a power of attorney for Rapid. The notices advised the taxpayer of its right to request a conciliation conference or to file a petition for a Tax Appeals Hearing and provided forms to be utilized by the taxpayer in seeking such relief. It does not appear that either Rapid Demolition or Mr. Mezzo timely challenged the notices of deficiency which by their terms became assessments subject to collection.

As alleged in the unrefuted affidavit of Kathleen Peek, a principal clerk in the offset unit of the Tax Department's Compliance Division (attached to defendant's motion as an unnumbered exhibit) a notice of pending contract offset was mailed to Rapid Demolition on or about August 25, 2003. The Division's offset unit was subsequently advised in or about December 2003 that the Comptroller was about to release $119,759.27 to Rapid Demolition on a contract Rapid had with the State. The offset unit was similarly advised of a pending release of $18,225.35 to Rapid on or about April 30, 2004. By notices mailed December 5, 2003 and May 3, 2004 Rapid Demolition was advised that the contract payment identified in the cover letter of each notice had been offset and applied to Rapid's past-due debt (see defendant's Exhibit A attached to affidavit of Josephine Manella). Ms. Manella, a calculations clerk employed in the State Expenditures Bureau/Offset Unit of the State Comptroller) avers that the December 5, 2003 and May 3, 2004 letters and notices were returned to the Comptroller by the Post Office as undeliverable. Each of the offset notices contained the following information:
The Office of the State Comptroller, under the powers granted in the Constitution of the State of New York and by the State Finance Law, has the authority to offset a payment due to a contractor from the State by an amount equal to the past-due legally enforceable State debt owed by the contractor. The New York State Tax Law authorizes the Department of Taxation and Finance to act as the Comptroller's agent in identifying those debts owed to State Agencies, and offsetting contract payments against such debts. Based on certifications from the Creditor State Agency (ies) indicated below, the Department of Taxation and Finance has notified the Office of the State Comptroller that you have past-due legally enforceable debt(s) owed to New York State. Accordingly, the contract payment identified on the attached cover letter has been offset and applied to your debt(s), as shown below. If you have any reason to question the debt(s) listed, you should contact the indicated Creditor State Agency directly. Unless and until your debt(s) are resolved, future payments due you from New York State will continue to be offset.

Defendant has moved for summary judgment seeking dismissal of the claim on the ground that the claim lacks merit because neither of two Supreme Court actions commenced by Rapid's subcontractors (Hinck and Asplundh) to secure payment by Lumbermens pursuant to the labor and material payment bond have been concluded by way of settlement or judgment. Supporting affidavits and numerous exhibits submitted on the State's motion focus primarily on the activity of the Tax Department in identifying and offsetting Rapid's withholding tax deficiency.

In her memorandum of law, however, defense counsel argues that this Court lacks jurisdiction to grant the equitable relief specifically provided in article 3-A of the Lien Law based upon a determination of Judge Benza of this Court in Higgins-Kieffer, Inc. v State of New York, 165 Misc 2d 425. Moreover, defense counsel avers that claimant's failure to commence this action in a representative capacity on behalf of all beneficiaries of a Lien Law article 3-A trust renders the claim legally deficient. She argues further that by carefully choosing the language of its claim Lumbermens has intimated without specifically alleging that it has satisfied the claims of Rapid's subcontractors on the project at the same time that it is defending against such subcontractors' claims in Supreme Court. Defendant asserts that absent proof of payment of the subcontractors' claims Lumbermens is not entitled to priority status with regard to article 3-A trust funds citing City of New York v Cross-Bay Contracting Corp., 93 NY2d 14)[2]

By affirmation which fails to allege direct knowledge of the facts, Gary Strong opposed the State's motion and cross-moved for summary judgment in favor of Lumbermens. Neither Strong's affirmation nor his memorandum of law precisely delineates the relief sought by Lumbermens on its cross-motion.

For the reasons set forth below the Court finds that it lacks subject matter jurisdiction over the claim.

The instant claim asserts at paragraph 8 that the claimant "as surety issued a labor and material payment bond and a performance bond on behalf of Rapid Demolition Co., Inc. as principal" (see claimant's Exhibit E). Rapid Demolition was unable to pay certain subcontractors and suppliers (claim, paragraph 10) and the claimant paid the claims of the subcontractors and suppliers and/or issued discharge of lien bonds "pursuant to its payment bond obligations" (claim, paragraph 11).

Two causes of action are asserted. The first alleges that the claimant's right to remaining contract funds upon performance of its payment bond obligations is superior to the right of the State in that:

20. The State of New York knew or should have known that Lumbermens by assignment and as surety was subrogated to the rights of Rapid Demolition as its principal.

21. The State of New York knew or should have known that Lumbermens was subrogated rights of the subcontractors, suppliers and/or Lienors as Lien Law Article 3A beneficiaries to receive payment from contract monies based upon Lumbermens payment bond losses to said parties.

22. The State of New York knew or should have known that Lumbermens was subrogated to the rights of the State of New York for first use of the funds to offset project losses and for unpaid subcontractors and suppliers to complete the contract.

The second cause of action asserts that the State of New York wrongfully diverted monies subject to a Lien Law article 3-A trust for a purpose other than satisfying the claims of trust beneficiaries, including the claimant.

"The doctrine of subrogation is of equitable origin and does not rest upon any right acquired by contract but simply upon the equitable principle that substantial justice should be attained, regardless of form, so that the person primarily liable should be compelled, ultimately, to pay the debt, even though it require the substitution of one creditor for another . . . " (Bell v Greenwood, 229 App Div 550, 552; see Chemical Bank v Meltzer, 93 NY2d 296; Mathews v Aikin, 1 NY 595). To the extent that a surety has performed and subrogation rights have thereby accrued, the surety as subrogee "stands in the shoes of the subrogor and is entitled to all of the latter's rights, benefits and remedies" (United States Fid. & Guar. Co. v Smith Co., 46 NY2d 498, 504). Subrogation does not, however, imbue a surety with any rights not possessed by the creditor to whom payment has been made since "[the] doctrine of subrogation . . . is derivative, comes solely from the assured, and can only be enforced in his right" (American Surety Co. of N.Y. v Town of Islip, 268 App Div 92, 94). The subrogee is also subject to "any claims or defenses which may be raised against the subrogor" (Servidori v Mahoney, 129 AD2d 944). These same principles apply to a surety on a contractor's payment bond in which context the liability of the surety "is measured by the liability of the contractor, its principal" (American Bldg. Supply Corp. v Avalon Props., Inc., 8 AD3d 515, 516; Venus Mech. v Insurance Co. of N. Am., 245 AD2d 559).

With regard to the first cause of action it is clear from the language of the claim that although claimant issued both a performance bond and a separate labor and material bond relative to the subject project, the monies paid by it or its subsidiary were incurred solely under the payment (material and labor) bond.

The particular labor and material bond at issue herein provides, in part, as follows:
NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, that if the said Principal shall promptly pay all moneys due to all persons furnishing labor or materials to him or his subcontractors in the prosecution of the work provided for in said contract, then this obligation shall be void, otherwise to remain in full force and effect:

Provided, however, that the Comptroller of the State of New York having required the said Principal to furnish this bond in order to comply with the provisions of Section 137 of the State Finance Law, all rights and remedies on this bond shall insure [sic] solely to such persons and shall be determined in accordance with the provisions, conditions and limitations of said Section to the same extent as if they were copied at length herein;

In relevant part, State Finance Law § 137 provides the following:
§ 137. Bond to secure payment of certain claims arising from a public improvement; enforcement

1. In addition to other bond or bonds, if any, required by law for the completion of a work specified in a contract for the prosecution of a public improvement for the state of New York a municipal corporation, a public benefit corporation or a commission appointed pursuant to law, or in the absence of any such requirement, the comptroller may or the other appropriate official, respectively, shall nevertheless require prior to the approval of any such contract a bond guaranteeing prompt payment of moneys due to all persons furnishing labor or materials to the contractor or his subcontractors in the prosecution of the work provided for in such contract. . . .

* * *

3. Every person who has furnished labor or material, to the contractor or to a subcontractor of the contractor, in the prosecution of the work provided for in the contract and who has not been paid in full therefor before the expiration of a period of ninety days after the day on which the last of the labor was performed or material was furnished by him for which the claim is made, shall have the right to sue on such payment bond in his own name for the amount, or the balance thereof, unpaid at the time of commencement of the action; . . .

In satisfying its principal's underlying obligation to pay for labor and material furnished on the subject property the claimant succeeded under principles of subrogation to both the rights of the creditor against the principal and the interests which the creditor has in security for the principal's performance (Restatement [First] of Security § 141). As to the former right, this Court does not have jurisdiction of either an action involving rights of the creditor as against the principal or an action brought by the creditor (provider of labor or materials) against the State, as owner, in that "no contract of any kind exists between plaintiff and defendant and there is no recognized theory upon which defendant, as owner, might be held liable to plaintiff, as a third party beneficiary" (Area Masonry v Dormitory Auth. of State of N.Y., 64 AD2d 810, 811). Nor has the claimant succeeded to any alleged right or interest of the State upon fulfilling its obligations under the payment bond since there is no allegation that the State obligated itself to pay laborers or materialmen or to condition payment under the contract upon proof that the claims of persons or entities providing labor or material to the project had been paid ( State Bank of Albany v Dan-Bar Contr. Co., 12 AD2d 416, affd 12 NY2d 804; 4 Bruner & O'Connor Construction Law § 12:99). While the claimant may possess a right to funds remaining due under the contract from the State through either subrogation or assignment, that right, insofar as it is derived from the contractor/principal, is to funds remaining due after payment of all liens, claims and set-offs (U.S. Fidelity and Guar. Corp. v Triborough Bridge Auth., 297 NY 31; Aetna Casualty & Sur. Co. v United States, 4 NY2d 639). In the instant matter it is alleged that a total amount of $137,984.62 in contract funds was wrongfully paid to the State of New York rather than the claimant. Since the claimant has alleged payment in excess of $600,000 under its payment bond there is no basis to believe that a residual cause of action cognizable in the Court of Claims exists.

Alternatively, the claimant herein may pursue any remedies available to the creditors/obligees whose debts it paid in performing under the payment bond. The claimant as subrogee may seek to enforce any lien for labor expended or materials furnished on the project against the funds of the State where it arises from the provision of labor and/or materials on a public improvement project (Lien Law § 42). An action to enforce such a lien is, however, not justiciable in the Court of Claims (Anderson v Hayes Constr. Co. 243 NY 140; Lien Law § § 41, 42; see also Lien Law § § 44 [6], 60).

The crux of the claim herein is the second cause of action for diversion of monies subject to a Lien Law article 3-A trust. Actions to enforce a trust under article 3-A of the Lien Law or to redress an alleged diversion of trust assets are not within the jurisdiction of the Court of Claims. In this regard the Court agrees with the following analysis in Higgins - Kieffer, Inc. v State of New York, 165 Misc 2d 425) in which Judge Benza determined that this Court lacks jurisdiction to enforce an article 3-A trust:
Once an action to enforce an article 3-A trust is instituted, the court before which that action is heard is empowered to do many things in addition to and beyond making an award of any amounts the State has unlawfully acquired. It is empowered to carry out 'any or all' of the steps itemized above, steps which include determinating the existence of any trust asset – not just a trust asset which has improperly been acquired by the State (Lien Law § 77[3][a][iii]). It is quite conceivable that persons and entities other than the State may hold funds that have been improperly paid out from an article 3-A trust, but this court can have no jurisdiction over those parties and would not be able to issue a judgment removing funds from their control and restoring them to the trust. Nor can this court order an accounting, enforce a right of action on behalf of the trust, or oversee the actions of a trustee. For the Court of Claims to exercise its power with respect to the one type of trust asset – an asset in possession and control of the State – and to distribute that one asset among the trust beneficiaries, without being able to reach other types of assets or perform other duties delegated to the court by section 77 (3), would undermine the function and purpose of the statutory cause of action: achieving a comprehensive gathering of all trust assets and fairly distributing those assets among all trust beneficiaries.

The surety herein succeeded upon payment under the labor and material bond to the rights and interests of persons providing labor and materials on the subject project. Those persons have no independent right of action against the State for their losses upon non-payment by the contractor and the claimant/surety garners no such rights through subrogation upon satisfying the contractor's debt in fulfillment of its payment bond obligations. To the extent that the claimant has succeeded to the rights of labor or materialmen under the Lien Law, an action to enforce a lien for the value of labor or materials furnished on a public improvement project is not a matter subject to Court of Claims jurisdiction. Nor is an action to enforce a trust arising under Lien Law article 3-A within the jurisdiction of the Court of Claims. As a result this Court lacks jurisdiction of the causes of action stated and dismissal is, therefore, required.
Claimant's motion for summary judgment is denied. Defendant's motion for summary judgment on the basis that the Court is without jurisdiction of the causes of action set forth in the claim is granted and the claim is dismissed (Matter of Fry v Village of Tarrytown, 89 NY2d 714; Lublin v State of New York, 135 Misc 2d 419, affd 135 AD2d 1155, lv denied 71 NY2d 802; Adebambo v State of New York, 181 Misc 2d 181).


The dismissal of the claim renders academic the motion by which Georgoulis & Associates, PLLC seeks to intervene and that motion is, accordingly, denied.

The defendant's motion to dismiss the claim for lack of jurisdiction is granted.

The trial schedule to begin on April 6, 2006 is cancelled.


March 29, 2006
Saratoga Springs, New York

HON. FRANCIS T. COLLINS
Judge of the Court of Claims


The Court considered the following papers:
  1. Notice of motion dated October 19, 2005;
  2. Affirmation of Eidin Beirne dated October 19, 2005 with exhibits;
  3. Affidavit of Paul Degen sworn to October 5, 2005 with exhibit;
  4. Affidavit of Dorothy Rifkin sworn to October 17, 2005 with exhibit;
  5. Affidavit of Stanley Milstein sworn to October 18, 2005 with exhibit;
  6. Affidavit of Kathleen M. Peek sworn to October 19, 2005 with exhibit;
  7. Affidavit of Josephine Manella sworn to October 18, 2005 with exhibit;
  8. Notice of cross-motion for summary judgment dated November 28, 2005;
  9. Affirmation of Gary Strong dated November 14, 2005 with exhibits;
  10. Notice of motion dated November 17, 2005;
  11. Affirmation of Jennifer A. Redmond dated November 17, 2005 with exhibits;
  12. Affirmation of Gary Strong dated December 27, 2005 with exhibits;
  13. Affirmation of Jennifer A. Redmond dated January 10, 2006 with exhibits;

[1].Rapid's withholding tax deficiency accrued prior to and is unrelated to the project which gave rise to both the instant claim and a separate claim filed by Rapid Demolition (Claim No. 105069).
[2].In his affirmation in opposition to defendant's motion and in support of Lumbermens' motion for summary judgment counsel for claimant inter alia alleges that Hinck Electrical, Inc. settled its case in Supreme Court and executed a release and assignment (claimant's Exhibit G). The release and assignment makes reference to "the surety" but does not name Lumbermens. Claimant's attorney has not alleged settlement of the Asplundh Construction Corp. claim.