Opinion
24321/07.
Decided June 11, 2008.
MINTZ LEVIN COHN FERRIS GLOVSKY and POPEO, P.C., By: Robert I. Bodian, Francis J. Early, Attorneys for Plaintiffs, New York, New York.
FRIEDMAN, HARFENIST, LANGER KRAUT, By: Steven J. Harfenist, Attorneys for Defendants, Lake Success, NY.
Defendants H. DiMarzo, Inc. ("HDI"), Harry DiMarzo ("DiMarzo"), TNJ Maintenance Corporation ("TNJ"), and Joseph Duffy ("Duffy") move, pursuant to CPLR 3211(a) (1), (5), and (7), to dismiss the Verified Complaint as follows: (a) to dismiss all claims against DiMarzo and Duffy; dismissing the First Cause of Action as against TNJ; dismissing the Second, Third, Fourth, Fifth and Sixth Causes of Action as against all Defendants; and dismissing the Seventh Cause of Action as against HDI and TNJ. Plaintiffs James Stern and Jane Stern oppose the motion.
PROCEDURAL HISTORY
This action was commenced by the service and filing of the Summons and Verified Complaint on November 28, 2007. According to the Verified Complaint, the action, at its core, involves systematic, fraudulent billing practices of Defendants with respect to a substantial renovation project at Plaintiffs' home in Harrison, New York.
Defendants served their motion to dismiss on January 7, 2008. The action was assigned to Hon. Richard B. Liebowitz. Plaintiffs served their opposition papers, consisting solely of a memorandum of law, on January 31, 2008. Defendants served a reply affirmation of their counsel and a reply memorandum of law on February 15, 2008. Plaintiffs served a sur-reply memorandum of law on February 26, 2008. The motion was submitted to Justice Liebowitz for decision. Neither side requested that the action be assigned or re-assigned to the Commercial Division of the Supreme Court, Westchester County.
On April 8, 2008, an order was signed by Justice Liebowitz, and entered with the County Clerk, transferring the action to the Commercial Division. Justice Liebowitz premised the transfer on his assessment of the action as being an action for "breach of contract and fraud allegedly arising out of business dealings, which action is well in excess of $100,000."
Upon the transfer, the action was randomly assigned to the undersigned, one of two Justices presiding in the Commercial Division. Neither side objected to the transfer of the action to the Commercial Division.
While the action does meet the monetary threshold of the Commercial Division, Westchester County (which presently is $75,000), the Court has serious doubts as to whether the action qualifies as a "commercial case" as defined by 22 N.Y.C.R.R. § 202.70 (b). While commercial cases which involve claims of breach of contract and fraud arising out of business dealings are commercial cases, the phrase "arise out of business dealings" is not open-ended and without qualification. Rather, the court rule qualifies the phrase by example, the examples given being: sales of assets or securities; corporate restructuring; partnership, shareholder, joint venture, and other business agreements; trade secrets; restrictive covenants; and employment agreements. This case does not fall within any of these categories. While the examples are not exclusive or exhaustive, it remains that any time the parties to a dispute have a contract does not mean that the dispute arises out of a business dealing. If that were so, a simple case involving an effort to obtain damages for non-payment of a contractual obligation would be "commercial", even if the contract was one to build a house, cater a party, or obtain a brokerage commission.
This Court has the discretion to reject the assignment of a case if the Court finds that the case does not meet the criteria for Commercial Division cases. See 22 N.Y.C.R.R. § 202.70 (f). However, the Court is mindful of the fact that the present motion has been pending for five months and the progress of the action has been delayed. Rejection of the assignment would only further delay the day when the motion is resolved and the case proceeds (it being undisputed that, no matter what, Plaintiffs' claims for breach of contract against HDI and TNJ will survive). Since the attorneys have not objected to the assignment to the Commercial Division, the Court will take it that the attorneys are willing to have the case heard in the Commercial Division and, further, that the attorneys are willing to abide by the rules of practice for the Commercial Division as applied by this Court. (Such practices include a prohibition on the submission of sur-reply papers without prior authorization from this Court).
The Court will not reject the sur-reply papers filed on this motion by Plaintiffs because such papers were submitted prior to the transfer of the action to this Court and were not rejected by Justice Liebowitz, the Justice before whom the papers were submitted. Further, by letter dated February 20, 2008, counsel for Plaintiff advised Justice Liebowitz that Defendants' counsel had agreed to Plaintiffs' submission of a sur-reply.
Accordingly, this Court will retain the case and proceed to determine Defendants' motion.
THE VERIFIED COMPLAINT
The facts set forth below are drawn from the Verified Complaint. In 2005, the Sterns purchased property located at 38 Taylor Lane, Harrison, New York and intended to renovate the house situated on the property. They met with Duffy, who is the principal of TNJ, to discuss the renovations and obtain an estimate of the costs. DiMarzo was present. DiMarzo and Duffy represented that the renovations would cost approximately $3.7 million, including overhead and profit.
According to the Sterns, the parties did not enter into a written contract. However, in January 2006, the parties agreed that the Sterns would pay the Defendants their cost, plus 15% overhead and 10% profit. Defendants estimated that the renovations would take 15 to 18 months. On September 23, 2007, Defendants walked off the job without having finished it. Plaintiffs allege that they paid Defendants approximately $4.8 million, with Plaintiffs charging that their payments were grossly in excess of the value of the services provided, particularly since the services were not provided properly. Plaintiffs contend that Defendants: charged Plaintiffs for work on other, unrelated projects; intentionally inflated their costs in order to cover the diversion of funds from the project; and took substantially more profit than they were entitled to. Plaintiffs seek: the return of their overpayments, damages for the costs to correct Defendants' poor work; and the return of the funds used by Defendants on other, unrelated projects.
In particular, Plaintiffs allege that, in January 2006, based upon Defendants' representation of themselves as experienced contractors, Plaintiffs agreed to retain HDI as the general contractor on their project with the understanding that Duffy and TNJ would perform and manage the majority of the work. In support of their claim that there was an agreement by which Defendants would be paid their costs plus 15% overhead and 10% profit, Plaintiffs annex to their pleading a copy of a "Pricing Memorandum" dated January 16, 2006.
Plaintiffs contend that Defendants agreed, as stated in the Pricing Memorandum, that, before selecting any subcontractors, they would obtain bids from three separate subcontractors and that selection of subcontractors would be subject to Plaintiffs' approval. Plaintiffs aver that Defendants never obtained bids from three subcontractors.
According to Plaintiffs, Defendants walked off the job on August 9, 2007, the day after Plaintiffs sold their existing residence and moved into a hotel. Defendants walked off a second time, apparently for good, on September 23, 2007, without having obtained a certificate of occupancy for the property and with significant work left to do.
Plaintiffs claim that, throughout the renovations, they repeatedly told Defendants that they did not agree with many of the costs set forth in Defendants' invoices and that Plaintiffs intended to undertake a complete accounting of their payments when the work was complete.
Plaintiffs state that it is HDI's practice to use a separate account for each of its projects and that such an account was created for this project. Plaintiffs allege that, from January 30, 2006 to September 4, 2007, they deposited $4,783,816 into the account. Plaintiffs charge that Defendants wrote checks out of the account totaling $714,649.75 for work at other projects. In paragraphs 28 through 118 of the Verified Complaint, Plaintiffs set forth the checks that they claim were written for other projects or purposes.
At paragraphs 120 through 210 of the Verified Complaint, Plaintiffs set forth that various expense reports were filed by Defendants and that Defendants paid themselves such expenses out of the account for the project. Plaintiffs allege that both TNJ and HDI were paid for expenses in connection with other projects or received payments that were otherwise improper or unsupported by appropriate documentation.
Plaintiffs allege that Defendants significantly overcharged them for work at the property, including millwork, masonry, and painting. (See Verified Complaint, ¶¶ 219-264). Plaintiffs assert that Defendants' work failed to comply with industry standards, including issues with plumbing, carpeting, the installation of a generator, and the drainage in a virtual golf room in the basement. (See Verified Complaint, ¶¶ 266-288). Plaintiffs contend that Defendants failed to complete the project in a timely way (See Verified Complaint, ¶¶ 289-300), that Defendants ordered numerous items of equipment which they took or have not accounted for and that Defendants damaged some of Plaintiffs' personal items, such as an antique chandelier (See Verified Complaint, ¶¶ 301-306).
Based on these factual allegations, Plaintiffs assert seven causes of action against all Defendants: a First Cause of Action which is predicated upon breach of contract; a Second Cause of Action which sounds in fraud in relation to overpayments; a Third Cause of Action which sounds in fraud in relation to Defendants' use of Plaintiffs' funds for unrelated work and to take profits; a Fourth Cause of Action based upon the poor or improper work done by Defendants; a Fifth Cause of Action based upon Defendants' inflating their costs and using the money to pay for unrelated work and expenses and failing to return items that were never delivered or which are missing; a Sixth Cause of Action in negligence in relation to the failure to perform services in a timely and professional manner; and a Seventh Cause of Action based upon improper use of funds that should have been in trust pursuant to the Lien Law. Plaintiffs seek $2 million in damages, punitive damages, an accounting, and the return of all improperly diverted funds.
The Causes of Action will be considered in more detail in connection with the analysis of the legal arguments proffered in support and in opposition to the motion to dismiss.
THE LEGAL STANDARDS
Defendants premise their motion principally on two paragraphs of CPLR 3211(a), CPLR 3211(a) (7) and (1). Neither side has submitted any affidavits from persons with knowledge of the facts.
The legal standards to be applied in evaluating a motion to dismiss are well-settled.
In determining whether a complaint is sufficient to withstand a motion to dismiss pursuant to CPLR 3211(a)(7), the sole criterion is whether the pleading states a cause of action. Cooper v. 620 Properties Associates, 242 AD2d 359 (2d Dept. 1997), citing Weiss v. Cuddy Feder, 200 AD2d 665. If from the four corners of the complaint, factual allegations are discerned which, taken together, manifest any cause of action cognizable at law, a motion to dismiss will fail. 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144, 152 (2002). Cooper v. 620 Properties Associates, supra, 242 AD2d at 360. The question is whether, accepting the facts alleged in the complaint as true, the plaintiff can succeed upon any reasonable view of the facts stated. Campaign for Fiscal Equity, Inc. v. State of New York, 86 NY2d 307, 319 (1995). The court's function is to "accept *** each and every allegation forwarded by the plaintiff without expressing any opinion as to the plaintiff's ability ultimately to establish the truth of these averments before the trier of the facts". Id., citing 219 Broadway Corp. v. Alexander's, Inc., 46 NY2d 506, 509, citing Becker v. Schwartz, 46 NY2d 401, 408 (1978); see also, Carney v. Memorial Hosp. Nursing Home of Greene County, 64 NY2d 770 (1985); 6A Carmody-Wait 2d, NY Prac. § 38:41, at 290-291. A plaintiff is at liberty to stand on the pleading alone and, if the allegations are sufficient to state all of the necessary elements of a cognizable cause of action, will not be penalized for not making an evidentiary showing in support of the complaint. Kemp v. Magida, 37 AD3d 763 (2d Dept. 2007); see Rovello v. Orofino Realty Co., 40 NY2d 633, 635-636 (1976). The pleading is to be liberally construed and the pleader afforded the benefit of every possible favorable inference. 511 West 232nd Owners Corp. v. Jennifer Realty Co., supra . While the allegations of the complaint are to be accepted as true, Leon v. Martinez, 84 NY2d 83, 87-88 (1999), allegations consisting of bare legal conclusions and allegations which are flatly contradicted by documentary evidence are not entitled to that treatment. Maas v. Cornell University, 94 NY2d 87, 91 (1999); Garber v. Board of Trustees of State University of New York , 38 AD3d 833, 834 (2d Dept. 2007).
To succeed on a motion to dismiss pursuant to CPLR 3211(a)(1), the documentary evidence that forms the basis of the defense must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim. AG Capital Funding Partners, L.P. v. State Street Bank and Trust Co. , 5 NY3d 582, 590-591 (2005); 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144, 152 (2002); Cohen v. Nassau Educators Federal Credit Union , 37 AD3d 751 (2d Dept. 2007); Sheridan v. Town of Orangetown , 21 AD3d 365 (2d Dept. 2005); Teitler v. Pollack Sons, 288 AD2d 302 (2d Dept. 2001); see, Held v. Kaufman, 91 NY2d 425, 430-431; Leon v. Martinez, 84 NY2d 83, 88 (1999); Museum Trading Co. v. Bantry, 281 AD2d 524; Jaslow v. Pep Boys — Manny, Moe Jack, 279 AD2d 611 (2d Dept. 2001); Brunot v. Eisenberger Co., 266 AD2d 421 (2d Dept. 1999).
If the documentary evidence disproves an essential allegation of the complaint, dismissal is warranted even if the allegations, standing alone, could withstand a motion to dismiss for failure to state a cause of action. Peter F. Gaito Architecture, LLC v. Simone Development Corp. , 46 AD3d 530 , 846 NYS2d 368 (2d Dept. 2007).
While Defendants also cite CPLR 3211(a)(5) as a basis for their motion, nothing contained in that paragraph — arbitration and award, collateral estoppel, discharge in bankruptcy, infancy or other disability of the moving party, payment, release, res judicata, statute of limitations, statute of frauds — seems to be even remotely applicable.
FIRST CAUSE OF ACTION
(Breach of Contract )
In their First Cause of Action, Plaintiffs allege that, in January 2006, they "entered into an agreement that Defendants would charge Plaintiffs for the cost of the work performed at the Property plus 15% overhead and 10% profit". (Verified Complaint, ¶ 308). They also alleged that "Defendants' obligations under that agreement were to bill Plaintiffs honestly for the cost of the work done at the Property, plus 15% overhead and 10% profit and provide general contracting services in a professional manner that, at least, complied with industry standards. (Verified Complaint, ¶ 309). Plaintiffs then allege that Defendants failed or refused to perform their obligations, despite due demand, because they overcharged Plaintiffs, took more profit than they were entitled to, and performed substandard work. Plaintiffs claim that they have suffered damages in excess of $2 million.
In the introductory portion of the Verified Complaint, Plaintiffs allege that they "agreed to retain" HDI "as the general contractor with the understanding that Mr. Duffy and his company . . . [TNJ] would perform and manage the majority of the work at the Property."
TNJ, Duffy and DiMarzo move to dismiss the First Cause of Action as against it. While Defendants assert that vague and conclusory allegations are insufficient to sustain a breach of contract action, they do not assert that the First Cause of Action fails to state a cognizable claim as against HDI.
1.TNJ
Defendant TNJ moves to dismiss the First Cause of Action as against it, contending that Plaintiffs do not allege that TNJ was a party to the contract and do not allege that they had any independent contract with TNJ. TNJ asserts that the pleading charges TNJ as being an agent or employee of HDI.
Plaintiffs assert that the agreement they allege is not limited to HDI and that their pleading "makes it clear that the Sterns' agreement was with both Corporate Defendants as they sold themselves as working together". Plaintiffs point to an invoice annexed to the Complaint that they contended listed the names and addresses of both TNJ and HDI on the letterhead. Actually, the invoice (Ex. 49 to the Complaint) lists the name of HDI and, underneath HDI's name, appears "Joseph Duffy, Construction Management" and "John Burton, Project Management". While the addresses at the bottom of the page correspond to what Plaintiff alleges are the address of HDI and TNJ, the letterhead does not bear out Plaintiffs' contention that the letterhead has TNJ's name on it. Plaintiffs also assert that both HDI and TNJ each made monthly withdrawals from the project, relying on Exhibit 2 to the Complaint, which consists of what appears to be a check register of checks written on the account.
TNJ, in a reply affirmation from defense counsel, submits what counsel describes as a "true copy" of "AIA Document A101-1997 Standard Form of Agreement between Owner and Contractor", a document which, according to defense counsel, is referenced in the Pricing Memorandum, which is annexed to the Complaint. The Pricing Memorandum is typed on HDI letterhead and states that it is to Claus Rademacher from John Burton. The Pricing Memorandum is on HDI letterhead and appears to have been signed by Burton. In any event, the Pricing Memorandum, signed by Burton, states "[a]s addendum to the Standard Form of Agreement between Owner and Contractor, AIA Document A101-1997, please accept the following budget."
The document submitted by defense counsel bears the same date as the Pricing Memorandum — January 16, 2002 and purports to be an agreement between the Sterns and HDI and lists Rademacher as the architect. It appears to have been created using a standard form of the American Institute of Architects. The document contains vertical lines in various places along the left margin which, according to a legend on the first page, indicate where the author added to or deleted from the AIA form. The document indicates that it, together with other documents, would form the "Contract Documents" and specifically provides that the Pricing Memorandum is a Supplementary and other Condition of the Contract. On the other hand, most of the material portions of the standard form are left blank, except for a provision that the Contract Sum would be $3,724,113.00. The document appears to have been signed by Burton who signed it "John Burton" in the line for signature by "CONTRACTOR" and set forth "John Burton, Partner" in the next line for printed name and title. The lines for the owner's signature are blank.
Defense counsel argues that, because Plaintiffs' rely on the Pricing Memorandum it is appropriate for the Court to consider the underlying documentation referred to in the Pricing Memorandum. Counsel argues that the document identifies the parties to the contract as the Sterns and HDI.
Plaintiff, in their sur-reply, argue that the submission of the document in reply papers is improper and that the document is only a draft as indicated by the vertical lines on the left margin.
Defendants' argument based on the document submitted with their reply papers fails for multiple reasons. First, it is well-settled that it is improper to raise a new argument for the first time in reply papers. Haggerty v. Quast , 48 AD3d 629 (2d Dept. 2008). The purpose of reply papers is to respond to an opponent's argument, not to make a new argument. Lumbermens Mutual Casualty Co. v. Morse Shoe Co., 218 AD2d 624, 625 (1st Dept. 1995); see Tray Wrap, Inc. v. Pacific Tomato Growers Ltd, 18 Misc 3d 1122(A), 2008 WL 222495 (Sup.Ct. Bronx County 2008). The argument based on the document could have — and should have — been presented with the motion papers and will not now be considered. Second, while the law supports the principle that where the plaintiff annexes a document to its complaint, it makes the document part of its pleading for all purposes, 805 Third Ave. Co. v. M.W. Realty Associates, 58 NY2d 447, 451 (1983); New York Factors, Inc. v. Seid, 28 Misc 2d 753 (Sup.Ct. NY County 1961), no authority has been cited for the extension of that proposition that Defendants would have this Court make — that any document referred to in a document annexed to a complaint is also to be considered part of the pleading. Third, defense counsel has not shown that he has such knowledge of the facts as to be able to authenticate the document as being a"true copy" of what it purports to be and that the signature thereon is Mr. Burton's. Fourth, even assuming that the document is authentic and admissible, it bears the signature as Contractor of John Burton, who gave his title as Partner. This raises more questions than answers since HDI is a corporation, not a partnership, and, thus, while HDI is named in the document as Contractor, the document, on its face, does not appear to have been signed on behalf of HDI. Fifth, the document is not signed by an Owner or any one on their behalf and, in the absence of any evidence from any person with knowledge of the facts, no basis has been provided that would warrant a conclusion that Plaintiffs are bound by it.
Defendants also argue that the check register annexed as Exhibit 2 to the Complaint shows that HDI maintained the account in question, not anyone else, and that HDI paid TNJ for its services and expenses. Actually, the check register does not identify by whom the account was maintained and reflects that both HDI and TNJ received payments out of the account. The account is alleged to contain funds of the Sterns. It is at least arguable that, if TNJ was a subcontractor or employee, it would have been paid directly by HDI, after HDI accessed the funds from the Sterns. In any event, since both HDI and TNJ received payments out of the account, the check register does not conclusively establish that the allegations in the Complaint are untrue. See Mendelovitz v. Cohen , 37 AD3d 670 (2d Dept. 2007). Dismissal cannot be predicated upon an ambiguous document. R.I. Island House, LLC v. North Town Phase II Houses, Inc., ___ AD3d ___, 2008 WL 2130837 (2d Dept. 2008).
In their memorandum of law, Defendants assert that the check register attached as Exhibit 2 represents the entire HDI operating account and not the account of the Sterns. Defendants state that the check register was improperly taken by a former HDI employee and improperly turned over to the Sterns. There are no allegations in the Verified Complaint to this effect (at least, the Court has not found any) and no evidentiary support for these assertion has been provided. Accordingly, the Court will ignore these contentions for purposes of this motion.
The gist of Plaintiffs' allegations as to the formation of a contract is that: (a) there was no written contract; (b) "in January 2006, the parties agreed that Plaintiffs' would pay the Defendants' costs, plus 15% overhead and 10% profit"; and (c) "Defendants would perform the general contracting work at the Property and would be paid for the cost of work at the Property (including subcontractors), plus 15% overhead and 10% profit. (Verified Complaint, ¶¶ 3, 15).
Plaintiffs also allege that they agreed to retain HDI as "general contractor with the understanding that Mr. Duffy and his company [TNJ] would perform and manage the majority of the work at the Property". (Verified Complaint, ¶ 14). The Court notes that, while Plaintiffs cite the Pricing Memorandum as supporting their version of the oral agreement (see, e.g., Verified Complaint, ¶¶ 16, 18), the Court reads the Pricing Memorandum as reflecting a proposal by Burton to the Sterns' architect, and the Court has not been furnished with any affidavits (and the Complaint does not allege facts) that would indicate when, or even if, the proposal was accepted and, if so, by whom.
It is, of course, true, as Defendants argue, as a general rule, a person or entity who is not a party to a contract cannot be held liable for its breach. HDR, Inc. v. International Aircraft Parts, Inc., 257 AD2d 603 (2d Dept. 1999); National Survival Game of New York, Inc. v. NSG of LI Corp., 169 AD2d 760 (2d Dept. 1991). Where a written agreement identifies the parties to the contract and the contract is annexed to the complaint, the identification of the parties in the contract will prevail over allegations in the complaint that claim that there were other parties. La Potin v. Julius Lang Co., 30 AD2d 527 (1st Dept. 1968).
Here, Plaintiffs allege that there is no written agreement between the parties and that there were agreements made with "Defendants", by which Plaintiffs refer to all Defendants. Plaintiffs also allege that they agreed to retain HDI as general contractor "with the understanding that Mr. Duffy and [TNJ] would perform and manage the majority of the work at the Property". (Verified Complaint, ¶ 14). Defendants read this allegation as indicating that TNJ would be acting as HDI's agent or employee of HDI. That construction is most certainly reasonable. But, more important, while it is alleged that there was an "understanding" that TNJ was to perform and manage most of the work, it is not alleged whether this "understanding" was unilateral (and if so, by whom) or multi-lateral and said to give to rise to an agreement. It is entirely unclear whether the understanding alleged was that HDI was to hire TNJ to do most of the work or whether TNJ was to be working directly for the Sterns. If the Sterns seek to assert that they made an agreement with TNJ, or that TNJ was a party to the agreement that they claim they made with HDI, then they must so state.
Accordingly, TNJ's motion to dismiss the First Cause of Action will be granted, with leave to Plaintiffs to replead.
2.Duffy and DiMarzo
Defendants contend that Duffy and DiMarzo, as corporate officers, are not personally liable for the contracts made by their respective corporations. The allegations made against Duffy are different from those made against DiMarzo.
As to Duffy, there is an allegation that there was an understanding that Duffy and TMJ would perform and manage the majority of the work at the property. (Complaint, ¶ 14). However, as with TNJ, it is unclear whether Plaintiffs are claiming that Duffy was hired by HDI or by Plaintiffs themselves.
As to DiMarzo, there is no specific allegation that he, personally, agreed to do anything. To the contrary, the Complaint, in the same paragraph that contains the allegation regarding Duffy and TNJ, claims that HDI was retained as the general contractor. Thus, there is no claim that DiMarzo personally obligated himself to Plaintiffs. The omission of any reference in that paragraph to DiMarzo is particularly noteworthy since the same paragraph alleges a personal commitment on the part of Duffy.
Plaintiffs seek to hold DiMarzo liable for breach of contract, as opposed to holding him liable for inducing HDI to breach the contract. This seems to be a distinction without a difference. The plain truth is that Plaintiffs, in their detailed, 53 page, 354 paragraph Complaint, have not alleged any facts which would support a finding that DiMarzo agreed to the alleged oral contract in his personal, rather than corporate, capacity. See Steelmasters, Inc. v. Household Mfg. Co., 40 AD2d 963 (2d Dept. 1972) and Robinson v. Paramount Pictures Corp., 112 AD2d 208 (2d Dept. 1985). There is no allegation that DiMarzo agreed to bind himself individually. See Westminster Construction Co. v. Sherman, 160 AD2d 867 (2d Dept. 1990); see also Metropolitan Switch Board Co. v. Amici Associates, Inc. , 20 AD3d 455 (2d Dept. 2005).
It is clear that a corporate officer may not be held personally liable merely because, while acting for the corporation, he made decisions and took steps that resulted in the corporation's breaching its contract. Murtha v. Yonkers Child Care Association, Inc., 45 NY2d 913, 915 (1978); Merritt v. Hooshang Construction, Inc., 216 AD2d 542, 543-544 (2d Dept. 1995); 431 Conklin Corp v. Rice, 181 AD2d 716 (2d Dept. 1992); Citicorp Retail Services, Inc. v. Wellington Mercantile Services, Inc., 90 AD2d 532 (2d Dept. 1982); Matter of Brookside Mills, Inc., 276 A.D. 357, 518 (1st Dept. 1950). The law permits incorporation for the purpose of limiting the liability of the corporate owners and managers. See generally, Morris v. New York State Department of Taxation and Finance, 82 NY2d 135, 140 (1993). In order to hold a corporate official liable for inducing the corporation to breach its contract, it must be alleged and proved that the official's actions were taken outside the scope of employment, that the official personally profited from the acts, or that the officer committed any independently tortious acts. Britvan v. Sutton Edwards, 226 AD2d 490, 491 (2d Dept. 1996); New Dimensions Spa, Inc. v. Fitness Place Rockville Centre, NY, 187 AD2d 493,495 (2d Dept. 1992); Courageous Syndicate, Inc. v. People-to-People Sports Committee, Inc., 141 AD2d 599, 600-601 (2d Dept. 1988); see also Burger v. Brookhaven Medical Arts Building, 131 AD2d 622 (2d Dept. 1987).
The courts have recognized that if attempts to invoke these limited exceptions are treated liberally and allowed to proliferate, the risk is that corporate officers and directors will be regularly hailed into court to defend their personal assets and the general principle permitting the corporate form to be used to limit liability will be significantly undermined. See Potter v. Minskoff, 2 AD2d 513, 515 (4th Dept. 1956), affirmed, 4 NY2d 695 (1958). Therefore, the courts will require the dismissal of actions alleging tortious interference with contract where the allegations are devoid of a factual basis and are vague and conclusory. Black Car and Livery Insurance, Inc. v. H W Brokerage, Inc., 28 AD3d 595 (2d Dept. 2006). The courts will apply "an enhanced pleading standard" in judging the sufficiency of such claims. Joan Hansen Co. v. Everlast World's Boxing Headquarters Corp., 296 AD2d 103, 109-110 (1st Dept. 2002), cited in Cafaro v. Emergency Services Holding, Inc., 11 AD3d 496 (2d Dept. 2004); accord, Zapin, Endlich Lombardo, Inc. v. CBS Coverage Group., Inc. , 26 AD3d 231 (1st Dept. 2006); Hoag v. Chancellor, Inc., 246 AD2d 224 (1st Dept. 1998).
The Appellate Division, First Department, in a seeming extension of these principles, has held that, where the corporate officer acted in bad faith, the officer may be held liable for the corporation's breach of contract. First Bank of the Americas v. Motor Car Funding, Inc., 257 AD2d 287 (1st Dept. 1999); accord, Ledy v. Wilson, 38 AD2d 214 (1st Dept. 2007). The parties have not cited, and the Court has not found, any Second Department decision which either agrees or disagrees with this First Department view, though there is trial court authority within the Second Department that has applied the First Department's rule. Parklex Associates v. Parklex Associates, 15 Misc 3d 1125(A), 2007 WL 1203616 (Sup.Ct. Kings County 2007) (Demarest, J.).
In the absence of a Second Department decision directly on point, this Court is bound to follow the First Department's precedents. "The Appellate Division is a single statewide court divided into departments for administrative convenience . . ., and therefore, the doctrine of stare decisis requires trial courts in the Second Department to follow precedents set by the Appellate Division of another department until the Court of Appeals or the Supreme Court, Appellate Division, Second Department, pronounces a contrary rule." Mountain View Coach Lines, Inc. v. Storms, 102 AD2d 663, 664 (2d Dept.,1984) (Titone, J.).
The "Factual Background" section of the Verified Complaint, and the specific allegations regarding improper payments, for the most part, charge that Defendants engaged in certain conduct, without specificity as to what activity, if any, is alleged to have been undertaken by DiMarzo personally and there are only sporadic references to Duffy personally. (See Verified Complaint, ¶ 221). To the extent that the "bad acts" complained of were the acts of persons other than DiMarzo (and Duffy), then such acts could not form part of any basis for holding DiMarzo (and Duffy) liable for the breach of contract.
DiMarzo and Duffy are entitled to be put on notice of the allegations that are claimed to constitute "bad faith" on their part giving rise to personal liability for any corporate breach of contract. The present Complaint does not give them notice of acts personally committed by them.
Thus, the motion by DiMarzo and Duffy to dismiss the First Cause of Action as against them should be granted, with leave to replead.
THE SECOND CAUSE OF ACTION (Fraud )
In the Second Cause of Action, Plaintiffs allege that "[a]s set forth above", Defendants invoiced and overcharged Plaintiffs for work performed at the Property, intending to deceive Plaintiffs as to the costs and knowing that their representations were false when made and that Plaintiffs would rely upon them. (Verified Complaint, ¶¶ 313). Plaintiffs claim that, "[a]s set forth above", Defendants overcharged for the work in order to cover up the fact that Defendants used the Sterns' funds for work and expenses on unrelated projects to and increase their profits on the Sterns' project. (Verified Complaint, ¶¶ 314). Plaintiffs say that, in reasonable and justifiable reliance on Defendants' representations, Plaintiffs overpaid Defendants and were damaged thereby. (Verified Complaint, ¶¶ 315, 316). The damages they seek under the Second Cause of Action are the same as those sought under the First Cause of Action, except that, under the Second Cause of Action, Plaintiffs also seek punitive damages. All Defendants move to dismiss this Cause of Action.
It is well established that a claim of fraud may not be maintained where the only fraud claimed relates to an alleged breach of contract. See, e.g., Benedict Realty Co. v. City of New York , 45 AD3d 713 (2d Dept. 2007); Lee v. Matarrese , 17 AD3d 539 (2d Dept. 2005). Merely alleging scienter in a cause of action to recover for breach of contract, unless the representations alleged to be false are collateral or extraneous to the agreement, does not convert a breach of contract cause of action into one sounding in fraud. Lo v. Curis , 29 AD3d 525, (2d Dept. 2006). Thus, where the only fraud related to breach of an alleged oral agreement that formed the basis of a breach of contract claim (which was itself barred by the statute of frauds), plaintiff could not recast her breach of contract claim as a fraud claim. Weitz v. Smith, 231 AD2d 518 (2d Dept. 1996).
A legal duty, enforceable through a tort action, may arise independently of contract. See Sommer v. Federal Signal Corp., 79 NY2d 540, 551-552 (1992). A tort obligation is a duty imposed by law to avoid causing injury to others. It is apart from the promises made in a contract and, therefore, a defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations or has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. New York University v. Continental Insurance Co., 87 NY2d 308, 316 (1995). For example, a legal or other professional may be subject to tort liability for failure to use due care, irrespective of contractual duties. Likewise, a misrepresentation of a material fact which is collateral to the contract but served as an inducement to enter into it is sufficient to support a fraud claim. See Mendelovitz v. Cohen , 37 AD3d 670 (2d Dept. 2007). An example of this situation is Richmond Shop Smart, Inc. v. Kenbar Development Center, LLC, 32 AD2d 423 (2d Dept. 2006). In that case, a former tenant stated a cause of action in contract by alleging that the lease termination agreement prohibited the landlord from leasing space to a competing business and that the landlord breached that agreement by entering into an agreement with another prospective tenant to provide a lease for a competing business in the near future. But the former tenant was also permitted to maintain a fraud claim based on allegations that the landlord induced the tenant to terminate the lease and give up possession of the premises prematurely in reliance upon fraudulent misrepresentations and omissions. But, absent such an independent duty, where the plaintiff is essentially looking to enforce the bargain struck between the parties, the remedy is generally in contract, not tort. Sommer v. Federal Signal Corp., supra, 79 NY2d at 551-552.
It is readily apparent that the Second Cause of Action, as now pleaded, is a repetition of the First, except for the addition of allegations of scienter, i.e., that Defendants intended to deceive Plaintiffs as to the cost of the project and to cover up Defendants' use of Plaintiffs' funds for unrelated work and expenses to "increase their profits" on the Stern project. That the Second Cause of Action, as pleaded, is duplicative of the First is readily seen in the allegations that Defendants "invoiced and overcharged Plaintiffs for the work performed at the Property", "charged inflated costs", and were acting to "increase their profits". All of these allegations hinge upon the alleged agreement of the parties. The Second Cause of Action, as pleaded, seeks to do no more than enforce the bargain that the parties' struck — that is Defendants were to be paid only the costs of the work, a percentage overhead, and percentage profit.
The allegations of the Second Cause of Action are, in the main, breach of contract allegations which do not give rise to a fraud claim independent of the main contract claim. For example, in Tucker v. Am Sutton Associates, 16 AD3d 670 (2d Dept. 2005), the project owners sued contractors for breach of contract to construct an addition to their house and for fraudulent misrepresentation. It appears that plaintiffs disputed the contractors' bills and the contractors ceased work. Upon searching the record, the Appellate Division held that the fraud claim should be dismissed because "the only fraud alleged related to the cause of action to recover damages for breach of contract." 16 AD3d at 671; see also Valentin v. Chong , 36 AD3d 896 (2d Dept. 2007).
In Delta Dallas Omega Corp. v. Wair Associates, 189 AD2d 701, 702 (1st Dept. 1993), relied upon by Plaintiffs, the First Department held that assertions that parties "failed to keep their promises as represented prior to execution of the written contract, over-billed or double-billed for labor and materials, used inferior materials, and failed to pay subcontractors", were claims that related to breach of contract and did not give rise to a fraud claim. On the other hand, the First Department ruled that "to the extent that it is alleged that the corporation or its principals embezzled or diverted funds for their own use or for purposes unrelated to the project, and that they acted to conceal with purported diversion", a claim for fraud was stated. In the absence of any contrary authority from the Appellate Division, Second Department, this Court is obliged to follow the First Department precedent.
Plaintiffs' Second Cause of Action contains elements of what is permissible under Delta Dallas Omega and what is impermissible. For example, to the extent that Plaintiffs are claiming that Defendants' charged "inflated costs", such claim be precluded by Delta Dallas Omega, as would Plaintiffs' claim that Defendants were trying to "increase their profits" above the amount provided for by the agreement. Indeed, while the Second Department has not excluded a theory of recovery for fraud based on embezzlement or diversion of funds, it has plainly prohibited the maintenance of a fraud theory of liability "based on the same allegations that give rise to a breach of contract cause of action." Merritt v. Hooshang Construction, Inc., 216 AD2d 542, 543 (2d Dept. 1995). The Second Department has consistently ruled that where a claim to recover damages for fraud is premised upon an alleged breach of contractual duties and the supporting allegations do not concern allegations which are collateral or extraneous to the terms of the parties' agreement, a cause of action sounding in fraud does not lie. Sporza v. Health Insurance Plan of Greater New York, Inc., 210 AD2d 214, 215 (2d Dept. 1994).
Plaintiffs' Second Cause of Action consists solely of a reference to the prior allegations ("[a]s set forth above", i.e., in their background and contract allegations) coupled with conclusory allegations of scienter, reliance and damages. As a result, it is difficult, if not possible, to determine what, if any, allegations are collateral or extraneous to the terms of the contract. The Court notes, though not pressed by Defendants, that the allegations of fraud contained within the four corners of the denominated Second Cause of Action are merely conclusory and do not meet the requirement of CPLR 3016(b) that the pleading specify the details concerning the wrong. Sporza v. Health Insurance Plan of Greater New York, Inc., 210 AD2d 214, 215 (2d Dept. 1994). While the Complaint is replete with detail as to what was paid to whom, it does not specify the representations that were allegedly made and relied upon by Plaintiffs.
On the other hand, while Plaintiffs do not charge Defendants with embezzlement, they do allege that funds were diverted for Defendants' own use and or to pay for work and expenses incurred on unrelated purposes, allegations which, if supported by a factual basis, would be sufficient under Delta Dallas Omega.
As to the individual defendants, corporate officers and directors are not liable for fraud unless they personally participate in the misrepresentation or have actual knowledge of it. I. Towjer, Inc. v. Tarran, 236 AD2d 518 (1997), citing Marine Midland Bank v. Russo Produce Co., 50 NY2d 31, 44 (1980). The present Second Cause of Action is barren of any allegations as to DiMarzo and Duffy's personal acts or as to their personal knowledge of the claimed wrongdoing.
Accordingly, as pleaded, the Second Cause of Action is legally insufficient and should be dismissed, with leave to replead.
THIRD CAUSE OF ACTION
(Negligent Misrepresentation )
Plaintiffs' Third Cause of Action is something of a mystery. Apart from reliance upon the preceding allegations of the Complaint, it consists of four paragraphs. The first substantive two paragraphs are similar in substance to the first two substantive paragraphs of the Second Cause of Action, to wit: it is alleged that Defendants invoiced and overcharged Plaintiffs, "knowing that those representations were false when made", and that Defendants charged inflated costs to cover up their diversion of Plaintiffs' funds for work and expenses incurred on unrelated projects and increase their profits. (Verified Complaint, ¶¶ 319, 320). Plaintiffs also allege, in the third paragraph, that they reasonably and justifiably relied on Defendants'"false actions", and over paid them. (Verified Complaint, ¶¶ 321). Like the Second Cause of Action, this Cause of Action is also predicated on the allegations "set forth above".
The fourth substantive paragraph contains the same damage allegations as the First Cause of Action and the Second (except for punitive damages). (Verified Complaint, ¶¶ 322). However, this paragraph veers from its counterparts in that it opens with the phrase: "As a direct and proximate result of Defendants' negligent misrepresentations . . ." ( Id.). Thus, while Plaintiffs allege in Paragraph 319 that Defendants made knowingly false representations, in Paragraph 322, Plaintiffs allege that the misrepresentations were merely negligent. Defendants characterize the Third Cause of Action as sounding in negligent misrepresentation; Plaintiffs do not disagree.
The tort of negligent misrepresentation cannot be independently asserted within the context of a breach of contract action unless a special relationship exists between the parties and the alleged misrepresentation concerns a matter which is extraneous to the contract itself. Alamo Contract Builders, Inc. v. CTF Hotel Co., 242 AD2d 643, 644 (2d Dept. 1997); accord, Fresh Direct, LLC v. Blue Martini Software, Inc. , 7 AD3d 487 , 489 (2d Dept. 2004). Further, a cause of action for negligent misrepresentation requires proof that the defendant had a duty to use reasonable care to impart correct information due to a special relationship existing between the parties, that the information was false and that the plaintiff reasonably relied upon it. Id. Further, in the commercial context, liability for negligent misrepresentation is imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance is justified. Id., citing, Kimmell v. Schaefer, 89 NY2d 257 (1996). But not all representations made by a provider of goods or services gives rise to a duty to speak with care. 89 NY2d at 263.
Here, the only allegation that touches on the existence of a special relationship is the allegation that, prior to January 2006, Defendants held themselves out as contractors with significant experience with projects of comparable size and nature and that Plaintiffs relied on Defendants' representations. (Verified Complaint, ¶¶ 13, 14). However, there is no allegation that Defendants were involved with assessing Plaintiffs' needs and it appears that at least one other person, Claus Rademacher, was involved with Plaintiffs in their project. Thus, Plaintiffs have not alleged facts sufficient to meet the special duty requirement. Moreover, Plaintiffs, as above noted, have not set forth the statements claimed to be misrepresentations and, as noted previously, rely on the same allegations as form the basis of their contract claim. Accordingly, Plaintiffs have failed to identify alleged misrepresentations which are extraneous to the contract itself.
Accordingly, the motion to dismiss the Third Cause of Action should be granted, with leave to replead.
THE FOURTH CAUSE OF ACTION
(Unjust Enrichment )
In their Fourth Cause of Action, Plaintiffs allege that they paid Defendants approximately $4.8 million, but that Defendants did poor work, requiring Plaintiffs to hire a series of contractors to correct Defendants' substandard work, Defendants overcharged Plaintiffs, and Defendants removed many valuable and important items of property from the premises. (Verified Complaint, ¶¶ 324-329). Plaintiffs demand at least $2 million in damages, plus interest, attorneys' fees, and a full accounting of Defendants' books and records. (Verified Complaint, ¶¶ 331-332).
Defendants argue in support of their motion to dismiss the Fourth Cause of Action is the contention that the factual allegations in the complaint do not support the claims against DiMarzo and Duffy because the funds were paid to HDI, not to the individuals personally. The Court disagrees.
The essence of unjust enrichment is that one party has received money or a benefit at the expense of another. Wolf v. National Council of Young Israel, 264 AD2d 416 (2d Dept. 1999). To prevail on a claim of unjust enrichment, a plaintiff must establish that it conferred a benefit upon the defendant, and that the defendant will obtain that benefit without adequately compensating the plaintiff therefor. See, e.g., MT Property, Inc. v. Weinstein, 50 AD3d 751 (2d Dept. 2008). Stated somewhat differently, a plaintiff must show that: (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered. Cruz v. McAneney , 31 AD3d 54 , 59 (2d Dept. 2006). Plaintiff need not establish a wrongful act by the person enriched. Id.
The Court concludes that Plaintiffs have adequately set forth a cause of action for unjust enrichment. The Complaint, read liberally and taken as a whole, alleges that Defendants were enriched by the receipt of substantial funds, said to be $4.8 million, though they did not provide comparable value. Contrary to Defendants' contention, the Complaint alleges that monies were improperly taken by all of the Defendants for use in connection with unrelated projects or to enrich themselves. It is alleged that the enrichment of Defendants occurred at Plaintiffs' expense. Further, if the facts alleged by Plaintiffs are proven, it may well be that it would be against equity and good conscience to permit Defendants to retain what is sought to be recovered.
Defendants also contend that the claim for unjust enrichment does not lie because Plaintiffs have alleged the existence of an express contract. This argument fails also.
It is most certainly true that unjust enrichment is a quasi-contract claim as it is an obligation that the law creates in the absence of any agreement. Goldman v. Metropolitan Life Insurance Co. , 5 NY3d 561 , 587 (2005). Thus, the existence of a valid and express agreement with respect to the same subject matter will preclude a claim for unjust enrichment. R.I. Island House, LLC v. North Town Phase II Houses, Inc., ___ AD3d ___, 2008 WL 2130837 (2d Dept. 2008). However, unlike Goldman and R.I. Island House, there is no signed writing of unquestioned validity in this case. Defendants have not answered the Complaint and, accordingly, it cannot be determined whether they contest the existence of contract or contest the terms of the contract. Since the agreement alleged by Plaintiffs is an oral agreement, the Court believes that it is fair to conclude that there is, or soon will be, a bona fide dispute as to the existence of an agreement or as to the scope and terms of any such agreement. Thus, Plaintiffs are not presently required to elect between a contract or quasi-contract remedy. Sforza v. Health Insurance Plan of Greater New York, Inc., 210 AD2d 214 (2d Dept. 1994); accord, IIG Capital, LLC v. Archipelago, LLC , 36 AD3d 401, 404-405 (1st Dept. 2007); American Telephone Utility Consultants, Inc. v. Beth Israel Medical Center, 307 AD2d 834 (1st Dept. 2003). These are alternative theories which are viable given the fact that Defendants have conceded that there is an agreement with the terms that Plaintiffs allege. Loheac, P.C. Children's Corner Learning Center, ___ AD3d ____, 857 NYS2d 143 (1st Dept. 2008). Clearly, Plaintiffs cannot be fairly required to put all their eggs in a contract basket and run the risk that Defendants will deny the existence of the contract. Accordingly, this branch of the application should be denied.
Likewise, Firtell v. Update, Inc., 17 Misc 3d 1011(A), 2007 WL 275695 (Sup.Ct. NY County 2007), cited by Defendants, presented a situation in which it was undisputed that there were valid, signed and enforceable writings that covered the subject matter.
THE FIFTH CAUSE OF ACTION
(Conversion )
The Fifth Cause of Action asserts that Defendants wrongfully and intentionally used the monies that the Sterns deposited into the account, not for the work on the Sterns' property, but for work and expenses on other projects. (Verified Complaint, ¶ 337). Plaintiffs also charge that numerous items that were to be installed at their property were either never delivered or were delivered but subsequently went missing. (Verified Complaint, ¶ 338). Plaintiffs say that they requested the return of their funds and the missing items but Defendants refused to comply, resulting in denying Plaintiffs the rightful possession of their property. (Verified Complaint, ¶ 339). Plaintiffs state that they did not know of and did not authorize Defendants to use their money for unrelated projects or to remove any of the missing items from their property. (Verified Complaint, ¶ 340). Plaintiffs seek $2 million in damages and punitive damages. (Verified Complaint, ¶¶ 341-342).
Defendants contend that the Fifth Cause of Action, sounding in conversion, should be dismissed because a conversion claim cannot be based upon the same allegations as a breach of contract claim. However, the cases they cite, Automobile Coverage, Inc. v. American International Group, Inc. , 42 AD3d 405 (1st Dept. 2007) and Interstate Adjusters, Inc. v. First Fidelity Bank, N.A., 251 AD2d 232 (1st Dept. 1998), both involved situations in which there was a written agreement which controlled the rights of the parties. Here, there is no written agreement and, therefore, for the reasons previously stated, Plaintiffs are not now precluded from pursuing alternate theories of recovery.
Defendants also argue that the claim must be dismissed as against DiMarzo and Duffy as they individually owed no duty to the Sterns.
A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person's right of possession. Two key elements of this tort are: (1) plaintiff's possesssory right or interest in the property; and (2) defendant's dominion over the property or interference with it, in derogation of plaintiff's rights. Colavito v. New York Organ Donor Network, Inc. , 8 NY3d 43 , 49-50 (2006). Where money is turned over by a plaintiff to a corporate defendant to be used for a specific purpose for the benefit of the plaintiff but is not used for that purpose, an action for conversion may be maintained. An individual, though acting for the corporation, may be held liable for the conversion, provided that the individual consummated the conversion through his personal action. Melnick v. Sable, 11 AD2d 1075 (2d Dept. 1960). When Plaintiffs turned over specific, identifiable funds, the recipients had an obligation to either utilize the funds in a specific manner or return them. Manufacturers Hanover Trust Co. v. Chemical Bank, 160 AD2d 113 (1st Dept. 1990).
The allegations of the Complaint fail to allege the personal actions taken by DiMarzo and Duffy, such as whether they wrote, authorized or even had knowledge of the unauthorized withdrawals claimed by Plaintiffs to constitute the conversion.
Accordingly, the motion addressed to the Fifth Cause of Action will be granted as against DiMarzo and Duffy, with leave to replead, and denied as to the Corporation H. DiMarzo, Inc. and TNJ Maintenance Corp.
SIXTH CAUSE OF ACTION
(Negligence )
The Sixth Cause of Action asserts that Defendants owed Plaintiffs a duty to perform general contracting services in a timely and professional manner that complied with industry standards and that Defendants breached this duty. (Verified Complaint, ¶¶ 344-346).
A simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated. The legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract. Clark-Fitzpatrick, Inc v. Long Island Rail Road Co., 70 NY2d 382, 389 (1987). An allegation that a defendant failed to use due care in carrying out contractual obligations is not sufficient as such an allegation is merely a restatement of an implied obligation of the contract itself. 70 NY2d at 390.
Thus, a negligence complaint was held insufficient, as to a general contractor and its principal, where it is alleged that they failed to use reasonable care and skill in the construction of a building. 431 Conklin Corp. v. Rice, 181 AD2d 716 (2d Dept. 1992). The Second Department held that the allegedly negligent acts were nothing more than allegations of a breach by the corporate general contractor of its implied contractual obligations and that the individual defendant could not be held liable merely for the fact that, while acting for the corporation, he made decisions and took steps that resulted in the corporation's promise being broken. Likewise, in Merritt v. Hooshang Construction, Inc., 216 AD2d 542 (2d Dept. 1995), the Second Department held that allegations against a corporation and an officer for negligent construction of a house state a breach of contract cause of action and not a tort cause of action. Simply put, New York law does not recognize a cause of action for negligence performance of a contract. Megaris Furs, Inc. v. Gimbel Brothers, Inc., 172 AD2d 209, 211 (1st Dept. 1991). This is not a case involving professional liability, see Municipal Housing Authority of City of Schenectady v. Crozier Philippi Associates P.C., 190 AD2d 893 (3d Dept. 1993) nor is it one involving a service affected with a significant public interest in which failure to perform would have devastating consequences to the public at large. See New York University v. Continental Insurance Co., 87 NY2d 308, 315-316 (1995); Sommer v. Federal Signal Corp., 79 NY2d 540, 551-553 (1992); Mindset Limited v. Quality Controlled Biochemicals, Inc., 2000 WL 28167 (S.D.NY 2000).
Accordingly, the Sixth Cause of Action will be dismissed.
SEVENTH CAUSE OF ACTION
(Lien Law )
In the Seventh Cause of Action, the Sterns allege that, once they deposited money into the account, a statutory trust was created by operation of the New York State Lien Law. (Verified Complaint, ¶ 349). They assert that Defendants are statutory trustees, that they diverted funds to other, unrelated projects, and that this diversion is a violation of the Lien Law. (Verified Complaint, ¶¶ 350,351, 353). Plaintiffs also allege that, a result of the diversion, some subcontractors remain unpaid. (Verified Complaint, ¶ 352). On this Cause of Action, Plaintiffs seek an accounting and recovery of all of their funds improperly diverted for work and expenses on other, unrelated projects. (Verified Complaint, ¶ 354).
Article 3-A of the Lien Law creates trust funds out of certain construction payments or funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, taxes and expenses of construction. Caristo Construction Corp. v. Diners Financial Corp., 21 NY2d 507, 512 (1968). The primary purpose of Article 3-A is to ensure that those who have directly expended labor and materials to improve real property at the direction of an owner or contractor receive payment for work actually performed. Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 1 NY3d 324, 328 (2004). The trustee must maintain books and records of the trust (see Lien Law, § 75), which the beneficiaries are entitled to examine. See Lien Law, § 76. Any transaction by which a trust asset is paid, transferred or applied for a purpose other than one stated in the statute is a diversion of trust assets. Lien Law, § 72.
1.Standing
Defendants contend that the Sterns, as owners of the property, are not beneficiaries of a Lien Law trust and lack standing to maintain an action predicated upon breach of the trust provisions of the statute. Defendants rely upon Select Construction Corp. v. 502 Old Country Road, LLC , 11 Misc 3d 1078(A), 2006 WL 948127 (Sup.Ct. Nassau County 2006).
Prior to 1988, owners were not included as beneficiaries of trust funds under the Lien Law and, therefore, did not have a trust claim. People v. Hollowell, 168 AD2d 970, 971 (4th Dept. 1990). However, the Legislature amended the Lien Law in 1987, effective with respect to contracts entered into after March 1, 1998, to protect consumers who contract for home improvements. Id. Under the amended statute, contractors who receive money in advance for the construction of home improvements are required to place the money in a bank account and hold the money as the property of the owner until the money is paid for purposes of the home improvement. Lien Law, § 71-a subd. (4). The funds deposited remain the property of the owner until: (1) the proper payment by the contractor for the purposes of the home improvement project; or (2) default or breach by the owner which excuses the contractor's performance, but only to the extent of any reasonable liquidated damage amount and only after 7 days prior written notice to the owner; or (3) substantial performance of the contract. Lien Law, § 71-a subd. (4)(a), (d). Further, the list of permitted payments of trust funds was expanded to allow "payments to which the owner is entitled" under the statute. Lien Law, § 71(2)(f).
As a result of these amendments, "trust claims' were extended to include claims of owners to funds advanced by them to contractors for the construction of home improvements." People v. Hollowell, supra, 168 AD2d at 971. Consequently, where a home improvement contract is entered into after the March 1, 1998 effective date of the amendments, a home owner has a valid trust claim against the moneys advanced by the owner for a home improvement. Id. In Hollowell, the Appellate Division, Fourth Department, held that, because a home improvement contract was made after the effective date, a contractor could be subject to a charge of grand larceny based on allegations that the contractor deposited funds received from the home owner into the contractor's business checking account, used the money for business and personal expenses, had no money left to purchase supplies to perform the work, and never did the work. Likewise, in People v. Lincoln, 272 AD2d 945 (4th Dept. 2000), the Fourth Department again observed that the Lien Law requires contractors who receive money in advance for home improvements to hold them in trust, for the benefit of suppliers and owners, until the money is paid out for the purpose of the home improvement. In Lincoln, the court held an indictment charging grand larceny was legally sufficient where the evidence before the Grand Jury indicated that homeowners had advanced some $45,000 to defendant-contractor for the construction of an addition to their home, defendant never provided the homeowners with the windows and doors for that addition, the value thereof being over $8,000, and defendant admitted to the homeowners that he had used the funds allocated for the windows and doors for his own personal use or for other projects.
In Select Construction Corp. v. 502 Old Country Road, LLC , 11 Misc 3d 1078 (A), 2006 WL 948127 (Sup.Ct. Nassau County 2006), the defendant retained plaintiff as general contractor to construct a building that was to be used for Patio.com. Disputes arose and when the plaintiff received reports that defendant was critical of work being done by certain subcontractors, defendant stopped paying these subcontractors. Plaintiff eventually was terminated and sued defendant-owner seeking to recover payment for its work, lost profits and other damages; the owner counterclaimed for Lien Law violations. The Supreme Court, Nassau County, dismissed these counterclaims on the ground that, because the owner was not a beneficiary of the Lien Law, it lacked standing to maintain them.
It is clear that Select Construction has no application to this case. Select Construction involved the construction of a commercial building. The 1987 amendments were intended to protect, and are addressed to the rights of, owners of homes who entered into home improvement contracts. The construction contract involved in Select Construction was obviously not a home improvement contract and, therefore, the court in that case had no reason to refer to the statutory provisions regarding home improvement contractors. While Select Construction states generally and without qualification that owners of property are not beneficiaries of Article 3-A of the Lien Law, there simply was no reason for the court to deal with the statutory exception for home improvement contracts.
The Select Construction court relied upon In re Griffin, 111 B.R. 42 (W.D.NY 1990) which, though it involved a home improvement contract and was decided after the 1987 statutory amendments, involved a home improvement advances made in November, 1987, prior to the March 1, 1988 amendment effective date. The precise holding of Griffin was that a home improvement contractor's obligation to return unused funds to the owner was dischargeable in bankruptcy. While the statute has been amended to protect homeowners, it should be noted that there are bankruptcy courts who disagree with Griffin and view the owners of commercial property as beneficiaries under trusts created by statutes such as Article 3-A of the New York Lien Law. See, e.g., Matter of Dobrayel, 287 B.R. 3, 18-19 (Br. Ct. S.D.N.Y).
Because the events at issue here occurred long after the effective date of the 1987 amendments to the Lien Law which conveyed beneficiary status upon home owners, Plaintiffs here have standing to pursue Lien Law claims. Matter of Glisenti v. New York Kitchen Bathroom Corp., 2007 WL 2815179 (Sup.Ct. NY County 2007). The interest of the contractor in the funds is only an equitable interest which becomes full title only upon performance of the statutory conditions. See Clancy v. Goldberg, 183 B.R. 672, 676-677 (N.D.NY 1995).
2.Diversion is Alleged
Defendants contend that "the complaint does not allege that the Sterns advanced money under the contract and [HDI] is holding any funds in escrow." They assert that, even if a statutory trust was created, "any trust would have terminated since there are no outstanding claims by subcontractors or materialmen and [HDI] properly applied payments to the costs of the Stern Project." (Def. Mem. at 18). Defendants also assert that Plaintiffs "have failed to allege any improper diversion of trust assets." (Def. Mem. at 19).
On the contrary, the Verified Complaint does allege that the Sterns advanced money (Verified Complaint, ¶ 18) and that there are certain subcontractors who remain unpaid. (Verified Complaint, ¶ 352). Defendants' claim that HDI properly applied payments to the cost of Plaintiffs' project is unsupported by any evidentiary support on this motion and, even if an affidavit to this effect had been supplied, Plaintiffs' Verified Complaint, sworn to by James Stern, alleges to the contrary ( see, e.g., Verified Complaint, ¶¶ 27,351) and, therefore, would, at best, create only an issue of fact. And the Complaint repeatedly alleges that trust assets were diverted to other projects or for Defendants' personal use or profit. (see, e.g., Verified Complaint, ¶¶ 27,28-217, 351). The claim by Defendants that Exhibit 2 represents the checks written on the HDI operating account and, therefore, is not confined to the checks written for the Stern project is not supported by an affidavit and, in any event, since Plaintiffs characterize it differently, would present a question of fact.
3. Class Action
Defendants also assert that an action asserting a Lien Law violation must be pursued as a class action pursuant to Section 77 of the Lien Law. Plaintiffs assert that they "move under Lien Law § 71; therefore, any requirement under Section 77 does not apply." (Pltf. Mem. at 23 n. 5).
Section 77 (subd. 1) of the Lien Law states that a trust arising under Article 3-A may be enforced by the holder of any trust claim "in a representative action brought for the benefit of all beneficiaries of the trust". It also provides for the practice, pleadings, forms and procedure to be used in the action. Section 77(subd. 2) states that the action may be maintained at any time during the home improvement but that no action be maintained if commenced more than one year after the completion of the improvement, except that subcontractors and materialmen must sue within one year from the date on which final payment became due, which ever is later. Section 77(subd. 3) sets forth the relief that may be granted in the action, including the compelling of an accounting, the determination of the existence and amount of any trust asset or any trust claim, distribution of any trust assets available for distribution, and settlement of the trustee's account.
In contrast to the extensive provisions of Section 77 of the Lien Law which create a right of action and regulate the procedure to be followed and the relief that may be granted, Section 71 addresses the purpose of the statutory trust, the purposes for which trust assets may be used, the definition of "trust claims", and the identification of trust beneficiaries. Of moment, Section 71 (subd. 5) states that, except as provided in Sections 76 and 77, "the rights of each member of the class of beneficiaries accrue at the making of the contract or the occurrence of the transaction out of which the claim arises." Thus, Section 71 also recognizes that an action on a trust claim necessarily involves the rights of "each member of the class of beneficiaries". Nothing in Section 71 authorizes the commencement of litigation. That is covered by
Section 77. It would be strange, indeed, for the Legislature to have insisted upon an action to enforce the trust be brought as a class action, as it did in Section 77, but to allow a single claimant to maintain an action, without notice to other potential claimants, as Plaintiffs claim Section 71 provides. The Court disagrees. Indeed, since Plaintiffs themselves allege that there are unpaid subcontractors, it would be fundamentally unfair, and contrary to the statutory purpose, to allow the owner to enforce the owners' trust rights while not giving notice and an opportunity to be heard to others who have interests, perhaps greater interests, in the statutory trust.
An action to enforce a trust pursuant to Section 77 of the Lien Law must be brought as a class action. However, the failure to bring the action as a class action is not fatal and may be cured. Adco Electrical Corp. v. McMahon, 38 AD2d 805 (2d Dept. 2007). Accordingly, the Court will afford Plaintiffs the opportunity to amend their pleading so as to assert it as a class action and will further afford Plaintiffs to seek class certification pursuant to Lien Law, § 77 (subd. 1) and CPLR Article 9. See Adco Electrical Corp. v. McMahon, supra .
CONCLUSION
The Court has considered the following papers in connection with this motion:
1)Notice of Motion to Dismiss Complaint by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp., and Joseph Duffy, dated January 7, 2008; Affirmation of Steven J. Harfenist, Esq., dated January 7, 2008, 2007, together with the exhibit annexed thereto;
2)Defendants' Memorandum of Law in Support of Motion to Dismiss, dated January 7, 2008
3)Affidavit of Service of Notice of Motion and Memorandum of Law of Loren Basso, sworn to January 7, 2008;
4)Plaintiffs' Memorandum of Law in Opposition to Motion to Dismiss, dated January 31, 2008, submitted with proof of due service;
5)Affirmation of Steven J. Harfenist, Esq., dated February 15, 2008;
6)Defendants' Reply Memorandum of Law In Support of Motion to Dismiss, dated February 15, 2008;
7)Affidavit of Service of Affirmation and Reply Memorandum of Law of Loren Basso, sworn to February 15, 2008;
8)Plaintiffs' Sur-Reply In Opposition to Defendants' Motion to Dismiss, dated February 26, 2008, submitted with proof of service.
Based upon the foregoing papers, and for the reasons set forth above, it is hereby
ORDERED that the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy to dismiss, made pursuant to CPLR 3211, is granted in part and denied in part, as hereinafter set forth; and it is further
ORDERED that the branch of the motion by Defendants Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the First Cause of Action insofar as asserted against said Defendants is granted, with leave to Plaintiffs James Stern and Jane Stern to replead; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Second Cause of Action is granted, with leave to Plaintiffs James Stern and Jane Stern to replead; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Third Cause of Action is granted, with leave to Plaintiffs James Stern and Jane Stern to replead; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Fourth Cause of Action is denied; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc, Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Fifth Cause of Action is denied as to Defendants H. DiMarzo, Inc. and TNJ Maintenance and is granted as to Defendants Harry DiMarzo and Joseph Duffy, with leave to Plaintiffs James Stern and Jane Stern to replead; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Sixth Cause of Action is granted and said Cause of Action is dismissed; and it is further
ORDERED that the branch of the motion by Defendants H. DiMarzo, Inc., Harry DiMarzo, TNJ Maintenance Corp. and Joseph Duffy as seeks the dismissal of the Seventh Cause of Action is granted, with leave to Plaintiffs James Stern and Jane Stern to replead; and it is further
ORDERED that Plaintiffs James Stern and Jane Stern are granted leave to serve an amended complaint, if they be so advised, in accordance with the provisions of this Decision and Order, with such amended complaint to be served and filed within twenty (20) days of the date of this Decision and Order; and it is further
ORDERED Plaintiffs James Stern and Jane Stern, in the event that they timely serve an amended complaint which contains a class action pursuant to Section 77 of the New York Lien Law, are granted leave to serve and file a motion for class certification, which motion shall be served and filed within the time specified in CPLR 902; and it is further
ORDERED that counsel for all parties are directed to appear before this Court for a Preliminary Conference on July 11, 2008 at 9:30 a.m., which date may not be adjourned without the prior approval of this Court.
The foregoing constitutes the Decision and Order of this Court.