Another Fine MessCopyright (C) 2013 Kevin J. ConnollyIt is no secret that New York’s Lien Law is a complex statute. It has grown amoss-like jurisprudential coating that confirms the statute as a minefield ofobscure traps that occasionally catches even the most distinguished ofconstruction counsel and their clients. Coupling this statute and itsjurisprudence with the cupidity of some contractors and the arrogance of somedevelopers has produced some extraordinary tales.The most recent “perfect storm” appears to be found in Bergassi Group vConsolidated Edison Company (2013 Ny Slip Opn 30398(U)). That case grewout of Con Ed’s award of a contract for patching roads that Con Ed had openedand trenched in laying utility lines. A subcontractor went unpaid, liens werefiled and off to court marched the parties.The tale, as related in the pleadings, begins with the award by Con Ed toQualcom Construction of contracts to patch three roads--one in Westchesterand two in the Bronx--that had been opened for utility work. Qualcom awardeda purchase order to NY Materials for the asphalt patch materials, as well as asubcontract to MVM Construction to perform the patching work. Apparently,the Con Ed contract required the issuance of payment and performance bonds,which were placed by lead plaintiff Bergassi Group.Something went wrong. MVM and other subcontractors were not timely paid.They served lien notices on parties various and sundry, including Con Ed. ConEd held up payments to Qualcom pending the resolution or bonding of theliens. It commenced an interpleader proceeding in Bronx County, anddismissed the proceeding when MVM produced surety bonds that satisfied ConEd’s bureaucracy. Con Ed released some or all of the retained funds on thestrength of the lien discharge bonds.The bonds turned out to be bogus. The contractor’s principal appears to havefled the jurisdiction shortly before a bankruptcy petition was filed.MVM, joinedby the material supplier and broker who placed the payment and performancebonds, sued Con Ed on a variety of theories. Con Ed responded with a motionto dismiss; plaintiff served an amended complaint; and Con Ed moved again fordismissal before joining issue.The Amended Complaint presented six causes of action:1. Breach of Fiduciary Duty;2. Negligence;3. Conversion;4. “Violation of Lien Law Article 3A;”5. Common Law Constructive Trust; and6. Prima Facie Tort.
This is not the usual pattern. In private improvement lien litigation, we areused to seeing the Unholy Trinity of Express Contract, Quantum Meruit, andEnforcement of Lien. None of those causes of action is pleaded. In public lienlitigation, we still see those causes of action, though the enforcementmechanism for a public lien is not a judgment of foreclosure and sale (as it canbe in private lien enforcement).The BondsThe bonds were, to be charitable, not quite right. There was a single bond,addressing the claims of three lienors, covering properties in the Bronx andYonkers. To make matters more interesting, the bond was written to theQueens County Clerk. To add to the mess, the surety on the bonds was“Oceanic Indemnity,” a Bahamas corporation, and none of the supportingdocuments--most notably a certificate of qualification under Insurance Law1111--was present. Nevertheless, Con Ed, ostensibly relying on the bonds,released the funds it was withholding and dismissed the 5239 Proceeding.There was a time when all lien discharge proceedings required courtintervention. First, a special proceeding was brought to fix the amount of thebond to be filed; then the owner or contractor would seek judicial approval ofthe bond, which would be granted by way of an order of discharge. Now, theamount of the bond is the principal amount of the claim plus ten per cent.; andif the bond is accompanied by a Certificate of Qualification issued by theinsurance department, the discharge is effective as soon as the bond is filed.Absent that certificate of qualification, the bond is not effective to discharge thelien until it is approved by the Court. No proceeding was brought by Qualcomto approve the bond. If any lien had been created, the bond was ineffective todo anything.Public or Private?Much of the confusion here stems from the distinction between publicimprovement liens and private improvement liens. Con Ed apparently believedthat the liens were invalid because they were not filed with the County Clerk.Private improvement liens are so filed, while public improvement liens are filedwith the public owner and its financial comptroller(s). However, Con Ed alsoput some faith in the bonds, which faith was misplaced.The distinction is actually quite simple: “public improvement” is one performedon realty that is owned by the State, or a public corporation. Work was beingperformed on public roadways, and while the decision does not drill down tothe question of which public corporations are involved here, it is implicit in thedecision that the road work was a public improvement.
Sorting It OutJustice Shenkman’s monumental memorandum decision is simply the bestdiscussion available of the Trust Fund provisions of the Lien Law. The liensproper, on the other hand, are muddled (though not hopelessly).The road work is a Public Improvement. Title to the roads is in the State or apublic corporation (such as the County or City). No further inquiry is needed,and under Section 2(7) of the Lien Law, this is a Public Improvement.To establish a Public Improvement Lien, one must file the notice of lien withthe head of the State agency or public corporation, and with the financialofficer of that entity in charge of the finances for the project.None of the liens was filed with the State or public corporation. Unless theselienors can make a timely re-filing with the public officers, the liens will fail.Justice Shenkman’s decision seems quietly to recognize that at this time, noneof the plaintiffs has a validly-filed lien. Whether they can redeem that problemis discussed below.Where plaintiffs’ remedies lie, if at all, begin with Article 3-A of the Lien Lawand its Trust Fund provisions. The Trust Fund can arise even when theclaimant has no lien and no right to claim a lien.In this case, the plaintiffs plead claims for breach Breach of Fiduciary Duty;Negligence; Conversion; “Violation of Lien Law Article 3A;” Common LawConstructive Trust; and Prima Facie Tort. In short, they are pleading thekitchen sink. The court held that the claim for prima facie tort was precludedby plaintiffs’ other claims and allegations, and dismissed the Article 3Aproceeding with leave to re-plead as a class action, and otherwise sustained thecomplaint.There are some significant obstacles to trust fund recovery. Among these arethe limited class of beneficiaries. If, as alleged, Con Ed received funds that wereearmarked for this project, then those funds were received in trust, forQualcom. The plaintiffs’ claims as trust fund beneficiaries are againstQualcom. Con Ed does not owe duties as an Article 3A trustee to the plaintiffs.Con Ed also asserts that it paid out the balance of retained funds to Qualcom,and therefore as a matter of law there was no diversion of trust funds. Paymentto a contractor or material supplier is a permitted use of trust funds, and ConEd had no duty to see to Qualcom’s use of the $500,000 trust fund. Moreover,as the “Owner,” it did not receive funds from one of the seven sourcesenumerated in Lien Law 70(5).
The problem in Con Ed’s argument lies in its not being the owner of theproperty. It is a contractor. Although the contracts between Con Ed and theCities of Yonkers and New York have not been filed, there can be little doubtbut that Con Ed had a contract of some kind with the public bodies. Indeed, inthe absence of a “root” contract with the State or public corporation, there canbe no public improvement lien.Now What?Let’s suppose there is no contract with the Cities. Con Ed was performing thiswork for its own benefit, in owning and operating steam distribution lines.There might not be ANY public money here. In that case, since a lien cannot beestablished against a public road, the claimant again hits a brick wall.This overlooks the amendment of Lien Law Section 5, which now provides inpart: Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.There is no sign that Con Ed filed a payment bond or other undertaking. Itshould have. That bond might have made the plaintiffs, or some of them,whole. The lienors probably had a mandamus claim against the Chief FinancialOfficers to require that the bond be posted. They may still have a validmandamus claim.If there is or was a contract with the Cities, then there is a public fund and theliens maybe valid. They do need to be re-filed, but that re-filing is timely untilthirty days after completion and acceptance of the work by the public owner.The odds are that there is no “completion and acceptance” by the City of ConEd’s work, and therefore these plaintiffs have unlimited time to re-file theirliens.It is not to be expected that the liens will “stick.” The “public money,” if everthere was any, is long gone. We are now deep into the thickets of the trustfund.The critical language from the Courts decision shows how the plaintiffs’ trustclaims can still reach Con Edison’s pocket:
"Although an owners liability pursuant to Lien Law article 3-A requires the existence of an obligation on the part of the owner (see Lien Law 71 ), the obligation may be one either imposed by contract or as the result of a mechanics lien" (Spectrum Painting Contr., Inc. v Kreisler Borg Florman Gen. Constr. Co., 64 AD3d 565, 576 [2d Dept 2009], quoting Quantum Corp. Funding v L.P.G. Assoc., Inc., 246 AD2d 320 [1st Dept 1995], Iv denied 91 NY2d 814 ).[fn omitted] As noted by one commentator, "since an owner who has notice of an subcontractors mechanics lien may be required to pay twice if he makes payment to the prime contractor after the lien is filed, the filing of a lien frequently stops the flow of cash from the owner and can therefore operate as a significant pressure device even before litigation is commenced" (4C NY Prac., Com. Litig. in NY State Courts 104:20 [3d ed]).Now the remaining question is whether the notice of lien served by theplaintiffs is sufficient to trigger trust fund liability. The existing cases do notprovide much guidance. One factor to consider is the public policy underlyingthe trust fund, which is to guarantee that those who do the work will be paid.Remember, too, that the trust fund is broader than formal lien priority. Con Edcertainly had notice of the plaintiff’s claims. It undertook to hold the fundssubject to court direction, and then released them upon tender of patentlyinsufficient bonds. This may call for an investigation into just what sort ofimproper blandishments may have induced Con Ed’s risk managers to havemade this mistake.Here, too, the explicit undertakings and pleadings may have proven to be ConEd’s undoing. Justice Shenkman placed great weight on the interpleaderproceeding that Con Ed commenced, as well as on Con Ed’s representationthat the retained sums would be held in trust for distribution to thesubcontractors.In short, we have here an epic saga in the making. There is more--much more--to be mined from Justice Shenkman’s masterful opinion, and likely there willbe internecine proceedings.Con Ed should be mindful that an award for breach of the trust fund willsupport an award of attorney’s fees.