New York State Court of Claims

New York State Court of Claims

THE ORISKA INSURANCE COMPANY v. THE STATE OF NEW YORK, #2008-032-127, Claim No. 112919, Motion Nos. M-75096, M-75097


Case Information

Claimant short name:
Footnote (claimant name) :

Footnote (defendant name) :

Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
Motion number(s):
M-75096, M-75097
Cross-motion number(s):

Claimant’s attorney:
Kernan Professional Group, LLPBy: Martin J. Kernan, Esq.
Defendant’s attorney:
Hon. Andrew M. Cuomo, NYS Attorney GeneralBy: C. Michael Reger, Assistant Attorney General, Of Counsel
Third-party defendant’s attorney:

Signature date:
December 4, 2008

Official citation:

Appellate results:

See also (multicaptioned case)


This is an action to recover $60,232.98 that claimant Oriska Insurance Company (Oriska or claimant) contends is owed by the New York State Department of Transportation (DOT) for work performed on a bridge repainting project. The original contract for this project (Contract No. D258222) was between DOT and GBE Contracting Corp. (GBE) and provided that GBE would paint certain bridges within DOT’s Region 8. The contract also required GBE to secure a performance bond, and that bond (Bond No. JK1003339) was purchased from claimant insurer in March 2002 (Kernan Affirmation, Exhibit 6).

On September 19, 2003, before the project was completed, claimant was notified that GBE had defaulted on its contractual obligations. Under the terms of the performance bond, claimant became responsible for completing the project, and a takeover agreement between DOT and claimant was executed on March 12, 2004. In September 2004 claimant hired another painting contractor, Matsos Contracting Corp. (Matsos), to take over the remaining work, and Matsos was accepted as a subcontractor by DOT in October 2004 (Gold Affidavit, Exhibit D, last attachment). The last three estimates of work performed, covering the time period from December 8, 2004 to March 4, 2005 and totaling $60,232.99, were fully approved for payment by DOT (Wehmeyer Affidavit, ¶ 4). This money was not paid out by the Comptroller, however, because a lien or withholding had been placed on Contract No. D258222 by the Department of Labor (DOL) (id. ¶ 4; Gold Affidavit).

Claimant has instituted this action to recover the amount of those final payments, $60,232.99, an amount that it acknowledges is owed by it to Matsos for the work performed in completion of Contract No. D258222 (Kernan Affirmation, Exhibit 4 [Affidavit of Frederick K. Davis, an Oriska vice president]; Gold Affidavit, ¶ 6, Exhibit D). The claim sets forth the following causes of action: 1) breach of contract; 2) unjust enrichment; and 3) violation of Article 3-A of the Lien Law.[1] Both parties have now moved for summary judgment. Claimant contends that it is entitled to the sum in question, as a matter of law, because its right to the money is superior to the lien filed by DOL. Defendant asserts that the Court of Claims lacks subject matter jurisdiction to determine the matter.
The Notice of Withholding that established the cross-withholding lien on Contract No. D258222 was issued by DOL’s Bureau of Public Works on May 14, 2003. GBE was the entity against whom the lien was imposed, and the notice stated that the proceeds of Contract No. D258222 were to be withheld because of an ongoing investigation relating to a different public work project “where sufficient funds are not available to satisfy the underpayment” (Gold Affidavit, Exhibit C). Tsvi J. Gold, a DOL attorney, states that the investigation in question relates to allegations that on the earlier DOT project (Contract No. D212833), GBE had underpaid the wages and/or supplementary benefits of workers (Gold Affidavit, ¶ 1). He further states that the administrative proceeding is not completed.

The Notice of Withholding was already in place when claimant and DOT executed the March 2004 takeover agreement, an agreement that provided, in relevant part:
NYSDOT agrees that it will process payments of the benefit of Surety [claimant] as the same shall become progressively payable in accordance with payment provisions of the Contract. All sums now due and payable and to become due and payable upon the Contract, including all retainage percentages, all outstanding unpaid progress estimates for work accomplished before termination and all money to be paid under the Contract as would have been payable to the Original Contractor, subject to applicable liens and setoffs, if any, shall be paid to Surety.
(Gold Affidavit, Exhibit B, 7th page, 2nd ¶ [emphasis supplied].)[2]

On December 20, 2004, in a letter to claimant, DOT acknowledged that all remedial work on Contract D258222 had been completed and deemed properly performed, and on January 27, 2005, DOT provided claimant with a final report indicating that the remaining payments owed to claimant on the contract totaled $60,232.98 (Kernan Affirmation, Exhibit 3, pp 5 and 7). On November 7, 2005, claimant’s Assistant General Counsel wrote to DOL to request that the Notice of Withholding be removed and final payment be made (Gold Affidavit, Exhibit B). The following February, final payment was approved by DOT but payments totaling $60,232.98 were paid into the Comptroller’s Account rather than to claimant (Wehmeyer Affidavit, Exhibit A). Gold wrote to both GBE and Matsos on May 1, 2006, with a copy to claimant, informing them that the lien would be applied to the project proceeds because Matsos appeared to be an alter ego, successor, or substantially-owned affiliated entity for GBE. Consequently, Matsos was being subjected to the same sanctions that would apply to GBE (Gold Affidavit, Exhibit A; see Labor Law § 220-b [2.a][2][i]). To explain DOL’s determination, Gold indicated that – according to information provided by both companies on questionnaires required by DOT, bank records, bond records, and correspondence – the companies had shared an address, telephone numbers, and fax numbers for several years and Matsos had paid the payroll for GBE employees for several weeks on a third DOT project. The contractors were given an opportunity to challenge the determination of the DOL Administrative Adjudication Unit, which they did in connection with the administrative hearing referenced above (Gold Affidavit, ¶¶ 1, 7). In this proceeding, Gold states, claimant “was and continues to be involved as an interested party . . . as this surety claims the balance payable” on the contract “over any rights [DOL] claims by its cross-withholding on this contract” (id. ¶ 3). In the event that the initial findings of DOL (including the finding that the project money can be withheld because Matsos is an alter ego of GBE) are upheld, that determination would be subject to judicial review pursuant to an Article 78 proceeding (Labor Law §§ 220[8], 220-b[c]).
As noted above, the claim in the instant action sets forth three causes of action: 1) breach of contract; 2) unjust enrichment; and 3) violation of Article 3-A of the Lien Law. Defense counsel asserts, however, that the critical issues of law and fact relevant to each of those causes of action are subject to the DOL’s determination and, thus, that the Court of Claims lacks subject matter jurisdiction over the dispute (Reger Affidavit, ¶ 8). Claimant, perhaps inadvertently, appears to recognize the force of this argument in the following statement:
The State argues that it should keep Oriska’s $60,232.98 (the “funds”) because Matsos Contracting Corp. (“Matsos”) may be found at some later date to be the alter ego of GBE Contracting Corp. (“GBE”). This argument improperly assumes that Matsos is the alter ego of GBE, ignores that payment to Oriska is not payment to Matsos and fails to recognize the full extent of Oriska’s rights to the funds.
(Kernan Affirmation in Opposition, ¶5). Thus claimant acknowledges that the critical questions that must be determined to resolve the instant motion are whether the central issue is properly determined in an administrative proceeding and whether claimant would have standing to challenge any determination involving Matsos (id. ¶¶ 14, 15).

In Lantry v State of New York ( UID #2001-001-027, Claim Nos. 102258, 102455, Motion Nos. M-62951, CM-63167 [Ct Cl June 28, 2001]), a contractor commenced a Court of Claims action to recover money that was owed to it under a public construction contract but withheld because of a DOL withholding or cross-withholding lien. That claim was dismissed as falling outside the subject matter jurisdiction of this Court, with former Court of Claims Judge (and current Court of Appeals Judge) Susan Phillips Read determining that “[a] party whose funds have been withheld pursuant to Labor Law § 220-b is entitled to an administrative hearing [and that a] contractor or subcontractor aggrieved by the administrative determination may next seek review by way of a CPLR article 78 proceeding to be commenced in the Appellate Division” (referencing Labor Law §§ 220[8], 220-b[e]; other citations omitted).

In that action, the contractor was the subject of a pending DOL prevailing wage investigation but, nevertheless, commenced a Court of Claims action asserting several legal causes of action: due process, constitutional tort, interference with claimant’s contractual obligations, breach of contractual or quasi-contractual obligations, tortious interference with claimant’s contracts the project owners and prime contractors, and conversion. Judge Read held, however, that the question of whether the Court of Claims has subject matter jurisdiction to entertain a particular claim does not hinge upon “how a claimant characterizes the action in the pleadings” but, rather on “the actual issues presented” (citing to Sidoti v State of New York, 115 AD2d 202, 203 [3d Dept 1985 ] and Matter of Gross v Perales, 72 NY2d 231, 236 [1988]). In that action, the essential nature of the relief sought was “reimbursement” of the money that had been withheld and claimant’s entitlement to that money would “unquestionably turn upon the administrative determinations made by the DOL in making its initial decision that claimant had not utilized the correct prevailing wage rate.” Challenges to such determinations must be made administratively and, if judicial review is sought, by an Article 78 proceeding in Supreme Court (see e.g., Pav-Lak Contracting, Inc. v New York State Dept. of Labor, 285 AD2d 511 [2d Dept 2001]; Palmer Const., Inc. v Hines, 154 Misc 2d 248 [Sup Ct, Albany Co. 1992]).

The result is the same where the party from whom the payments are withheld is not the party who is alleged to have underpaid its workers. For example, project payments were withheld from a contractor because of a DOL determination that one or more of its subcontractors violated the prevailing wage rates. In a series of related decisions, a portion of a general contractor’s contract payment for a particular project (at Cornell University) were withheld because DOL determined that one of its subcontractors had underpaid workers on a different project (at SUNY Oswego). The general contractor initially sought to challenge this withholding in the Court of Claims, but that action was dismissed for lack of subject matter jurisdiction (Sarbro IX d/b/a Sheldon Hall Assocs. v State of New York (unreported decision, Motion No. M-57503, Ct Cl, July 27, 1998, McNamara, J.). The contractor then sought, unsuccessfully, to annul the cross-withholding lien by bringing an Article 78 proceeding (Matter of Sarbro IX v McGowan, 271 AD2d 829 [3d Dept 2000]). Despite these adverse rulings, the contractor again attempted to bring a Court of Claims action, and this time, the claim was dismissed because of stare decisis and, again, because it fell outside the subject matter jurisdiction of this Court since the central issue was whether the DOL’s withholding was proper (Sarbro IX v the State of New York, UID #2002-001-069, Claim No. 104627, Motion Nos. M-65021, CM-65310 [Ct Cl Sept. 6, 2002], Read, J.).

Claimant places a great deal of reliance on a Court of Appeals decision, Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor (97 NY2d 256 [2002]), in which a surety (i.e., a party in the same position as claimant) challenged the retention of funds because of a DOL cross-withholding notice that had been issued against a defaulting general contractor to which it had issued a performance bond. In that case, the surety was successful, and the Court of Appeals ultimately determined that, in the circumstances of that particular action, the surety’s right to the contract proceeds was superior to the lien imposed by the DOL cross-withholding notice. Claimant has not established that the same circumstances are present in this case, however. More importantly, claimant’s argument that the result of RLI Ins Co., supra should control here ignores a critical fact of that case: that the surety’s challenge was made by way of an Article 78 proceeding. Rather than supporting claimant’s position, therefore, this decision confirms that a DOL cross-withdrawal lien must be challenged in an Article 78 proceeding and, in addition, recognizes that a surety has standing to challenge DOL’s determination in such a proceeding.

This conclusion is consistent with the principles governing when a matter is to be litigated in the Court of Claims and when it must be resolved by way of an Article 78 proceeding. As both parties acknowledge, the relevant inquiry is “ ‘[w]hether the essential nature of the claim is to recover money, or whether the monetary relief is incidental to the primary claim’ ” (Ozanam Hall of Queens Nursing Home v State of New York, 241 AD2d 670, 671[3d Dept 1997], quoting Matter of Gross v Perales, 72 NY2d 231, 236 [supra]; CPLR 7806). It has been suggested that a dispute that must be resolved in an Article 78 proceeding if: (1) “a natural or automatic result of a favorable determination on the issues would be reimbursement, restitution or payment of the sums in question, without the necessity of a separate judicial order or direction,” and/or (2) “in order to award the money judgment, the court must engage in the type of inquiry and analysis that is appropriate to such a proceeding and inappropriate to an action at law” (Safety Group No. 194-New York State Sheet Metal Roofing & Air Conditioning Contractors Association, Inc. v State of New York, 2001 WL 939747, 2001 N.Y. Slip Op. 40099 [NY Ct Cl April 11, 2001], affd 298 AD2d 785 [3d Dept 2002]).[3] Both tests support the conclusion that the dispute presented in this action is one that must be resolved in an Article 78 proceeding, not a Court of Claims action. If it should be determined in the pending administrative proceeding that claimant is correct, and thus that the final payment of $60,232.98 should not be withheld, then the full amount would be paid out to claimant automatically, without any additional order or direction being necessary: the lien would be lifted and the Comptroller’s Office would carry out the direction it already received as a result of DOT’s approval of the final estimates. Furthermore, for this Court to rule on whether the money was being properly withheld, it would have to decide whether DOL’s determination, that Matsos was an alter ego of GBE, was a decision made in excess of the agency’s jurisdiction, had been arbitrary or capricious, or lacked substantial evidence to support its decision. The Court concludes, therefore, that the dispute raised by claimant’s challenge to the DOL lien falls outside the subject matter jurisdiction of the Court of Claims.

Claimant’s motion for summary judgment is denied; defendant’s motion for summary judgment is granted; and Claim No. 112919 is dismissed.

December 4, 2008
Albany, New York

Judge of the Court of Claims

Papers Considered:

1. Notice of Motion (Motion No. M-75096) of C. Michael Reger, AAG;

2. Supporting Affidavit of C. Michael Reger, AAG, with Annexed Exhibits and Memorandum of Law;

3. Supporting Affidavit of Tsvi J. Gold, Esq.;

4. Supporting Affidavit of Susan Wehmeyer;
5. Affirmation in Opposition to Defendant’s Motion of Martin J. Kernan, Esq., with annexed Affidavit of Frederick K. Davis and annexed Exhibit;

6. Notice of Motion (Motion No. M-75097) and Supporting Affirmation of Martin J. Kernan, Esq., with annexed Affidavit of Frederick K. Davis and annexed Exhibits;

7. Affidavit in Opposition to Claimant’s Motion of C. Michael Reger with Memorandum of Law;

8. Letter Reply of Martin J. Kernan, Esq.

Filed papers: Claim, Answer

[1].Article 3-A of the Lien Law, entitled “Enforcement of Trusts,” governs the statutory trusts created to assure that those who have directly expended labor and materials to improve real property, including public improvements, receive payment for work actually performed (Lien Law §70; LeChase Data/Telecom Services, LLC v Goebert, 6 NY3d 281 [2006]).
[2].Claimant argues that the phrase “applicable liens and setoffs” was intended to be limited to liens and setoffs relating solely to work actually performed on the contract in question (No. D258222) (Kernan Affirmation, ¶¶ 13-14). There is no ambiguity in this phrase, however, and the DOL cross-withholding lien was attached to Contract No. D258222 in accordance with applicable law. Consequently, the Court concludes that the lien was “applicable” to that contract within the meaning of that term as it was used in the takeover agreement.

[3].The questions that are appropriately asked in an Article 78 proceeding are the following: 1) whether the body or officer failed to perform a duty enjoined upon it by law; 2) whether the body or officer proceeded * * * without or in excess of jurisdiction; 3) whether a determination was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion * * * ;(4) whether a determination made as a result of a hearing held, and at which evidence was taken, pursuant to direction by law is, on the entire record, supported by substantial evidence (CPLR 7803).