PRICE TRUCKING CORP. v. AAA ENVIRONMENTAL, INC. ( 2013 )

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
1088
CA 12-02386
PRESENT: SMITH, J.P., PERADOTTO, VALENTINO, AND WHALEN, JJ.
PRICE TRUCKING CORP., FOR ITSELF AND ALL OTHER
SIMILARLY SITUATED TRUST FUND BENEFICIARIES OF
CERTAIN TRUST FUNDS PURSUANT TO NEW YORK LIEN
LAW ARTICLE 3-A, PLAINTIFF-RESPONDENT,
V MEMORANDUM AND ORDER
AAA ENVIRONMENTAL, INC., ENVIRITE OF OHIO, INC.,
MIKE LINA PAVING, INC., DEFENDANTS-RESPONDENTS,
FIRST NIAGARA BANK, N.A., DEFENDANT-APPELLANT,
NORAMPAC INDUSTRIES, INC., ET AL., DEFENDANTS.
DAVIDSON FINK LLP, ROCHESTER (DAVID L. RASMUSSEN OF COUNSEL), FOR
DEFENDANT-APPELLANT.
ERNSTROM & DRESTE, LLP, ROCHESTER (THOMAS K. O’GARA OF COUNSEL), FOR
PLAINTIFF-RESPONDENT.
Appeal from an order of the Supreme Court, Erie County (John A.
Michalek, J.), entered December 6, 2012. The order, among other
things, granted in part the motion of plaintiff for partial summary
judgment seeking, inter alia, a determination on its first cause of
action that defendant First Niagara Bank, N.A. was liable for
violations of Lien Law article 3-A, and a determination on its fifth
cause of action that it is entitled to attorneys’ fees.
It is hereby ORDERED that the order so appealed from is
unanimously modified on the law by denying plaintiff’s motion in its
entirety and as modified the order is affirmed without costs.
Memorandum: Defendant AAA Environmental, Inc. (AAA) entered into
a contract with defendant Norampac Industries, Inc. (Norampac) to
perform environmental remediation services at premises owned by
Norampac. AAA thereafter entered into subcontracts with various
entities. Payments issued by Norampac to AAA were deposited into
AAA’s operational account at defendant First Niagara Bank, N.A. (First
Niagara). AAA and First Niagara had an agreement (agreement) whereby
each night funds from AAA’s operational account would be transferred
automatically into AAA’s line of credit account to reduce the amounts
owed by AAA on that account. Conversely, if the amount to be charged
against AAA’s operational account the next business day exceeded the
funds available in that account, funds would be transferred
automatically from the line of credit account to the operational
account pursuant to the agreement. Plaintiff, on behalf of itself and
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CA 12-02386
all other similarly situated subcontractors of AAA on the Norampac
project, commenced this action alleging, inter alia, that First
Niagara’s automatic transfer of funds from the operational account
into the line of credit account constituted a violation of Lien Law
article 3-A. Plaintiff subsequently moved for partial summary
judgment seeking, inter alia, a determination on its first cause of
action that First Niagara was liable as a matter of law for violations
of Lien Law article 3-A, and a determination on its fifth cause of
action that it is entitled to attorneys’ fees pursuant to CPLR 909.
In opposing the motion, First Niagara argued that it was a holder in
due course pursuant to Lien Law § 72 (1) and that it could not be held
liable because it did not have actual notice that it was receiving
diverted Lien Law trust assets. As relevant on appeal, Supreme Court
granted those parts of plaintiff’s motion for partial summary judgment
on liability on the first and fifth causes of action, upon determining
that First Niagara was a Lien Law statutory trustee, and that it had
both actual and constructive notice that the automatic transfer of
funds from AAA’s operational account into AAA’s line of credit account
constituted a diversion of Lien Law trust assets. We conclude that
the court erred in granting those parts of plaintiff’s motion, and we
therefore modify the order accordingly.
Contrary to the court’s determination, First Niagara is not a
Lien Law statutory trustee under the facts of this case and thus
cannot be held liable for a violation of the Lien Law on that basis.
“A lender is not a statutory trustee because ‘[n]o one other than an
owner, contractor, or subcontractor is designated as a prospective
trustee in article 3-A [of the Lien Law]’ ” (Matter of ALB Contr. Co.
v York-Jersey Mtge. Co., 60 AD2d 989, 989; see Caledonia Lbr. & Coal
Co. v Chili Hgts. Apts., 70 AD2d 766, 766). Although the Court of
Appeals has held that a lender may become a statutory trustee when a
contractor assigns its right of payment from the owner to the lender
as security for a loan and the owner makes payments directly to the
lender until the contractor’s debt is repaid (see Aspro Mech. Contr. v
Fleet Bank, 1 NY3d 324, 330, rearg denied 2 NY3d 760), First Niagara
received no such assignment here. Contrary to plaintiff’s contention,
our decision in Local No. 4, Intl. Assn. of Heat & Frost & Asbestos
Workers v Buffalo Wholesale Supply Co., Inc. (49 AD3d 1276) does not
compel a different result. In that case, we did not determine that
all lenders that come into possession of trust assets are statutory
trustees per se; rather, we wrote in the procedural posture of a
motion to dismiss the complaint for failure to state a cause of action
that a lender “may be held liable for diverting [trust] assets” under
that theory (id. at 1278), in accordance with the decision of the
Court of Appeals in Aspro (see 1 NY3d at 330).
We further agree with First Niagara that the court erred in
determining as a matter of law that it had actual notice that it was
receiving diverted Lien Law trust funds, and thus could be held liable
under Lien Law § 72 (1). Plaintiff’s own submissions raise issues of
fact whether First Niagara had actual notice, and thus we need not
consider the sufficiency of First Niagara’s opposing papers (see
Alvarez v Prospect Hosp., 68 NY2d 320, 324).
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CA 12-02386
We also agree with First Niagara that the court erred in applying
a constructive notice standard in determining that First Niagara was
not a holder in due course, and thus could be liable under Lien Law §
72 (1). As the Court of Appeals noted in I-T-E Imperial Corp.—Empire
Div. v Bankers Trust Co. (51 NY2d 811), “[w]ith the adoption . . . of
the Uniform Commercial Code, the concept of notice under [UCC] article
3 (and by analogy under article 4 as well . . . ) has, as we have held
in Chemical Bank of Rochester v Haskell (51 NY2d 85), been changed
from an objective to a subjective standard, and that change must be
deemed to have amended the Lien Law as well” (id. at 813-814; see
LeChase Data/Telecom Servs., LLC v Goebert, 6 NY3d 281, 291-292).
Furthermore, “[t]he purpose of UCC 3-304 (7)—unique to New York and
Virginia—[is] to require that questions of notice . . . be determined
by a subjective test of actual knowledge rather than an objective test
which might involve constructive knowledge” (Hartford Acc. & Indem.
Co. v American Express Co., 74 NY2d 153, 162).
Contrary to plaintiff’s contention, LeChase does not require the
application of a constructive notice standard here. The lender in
LeChase was not a bank but instead was a factor, i.e., a company that
lends money on the security of accounts receivable (see 6 NY3d at 284-
285). The Court of Appeals held that the factor in that case
acknowledged by filing a UCC-1 financing statement that its factoring
arrangement was a UCC article 9 financing transaction and thus the
factor was subject to the constructive notice standard supplied by UCC
1-201 (25) (see id. at 284, 292). In distinguishing its holding in I-
T-E, the Court reiterated that “[a] holder in due course such as the
bank in I-T-E will have customarily accepted trust assets in the form
of an endorsed check, and cannot evaluate the trust status of every
check deposited by all its contractor or construction-related
customers” (id. at 292). Here, First Niagara was not a factor, nor
was it an assignee of AAA’s accounts receivable, and there is no
evidence in the record that First Niagara filed a UCC-1 financing
statement or that the relationship between First Niagara and AAA was
otherwise governed by UCC article 9 (cf. id. at 292). We therefore
conclude that First Niagara is subject “to the ‘concept of notice’ in
articles 3 and 4 of the Uniform Commercial Code, which govern
commercial paper and bank deposits and collections respectively” (id.
at 291), i.e., actual notice. Thus, only actual notice that it was
receiving diverted Lien Law trust funds would preclude First Niagara
from relying on the holder in due course defense provided by Lien Law
§ 72 (1) and subject it to liability under the statute (see id. at
291-292; I-T-E Imperial Corp.—Empire Div., 51 NY2d at 813-814).
Entered: November 8, 2013 Frances E. Cafarell
Clerk of the Court