Canron Corp. v. City of New York

OPINION OF THE COURT

Rubin, J.

This appeal presents a question with respect to the interpretation of section 70 (1) of the Lien Law. Specifically at issue is when funds are considered "received by a contractor under or in connection with * * * a contract for a public improvement in this state” so as to be impressed with a trust in favor of a subcontractor. It is clear from the facts stipulated by the parties and submitted to Supreme Court for decision (CPLR 3222) that the contractor received valuable consideration for the disputed check at its full face value. The dissenter, however, construing the statute literally, finds it dispositive that the contractor did not physically have possession of the proceeds of the check. Therefore, he reasons, it is not the funds themselves but only a "right of action for * * * funds due or earned” (Lien Law § 70 [1]) which is subject to the trust impressed by the Lien Law. And since plaintiff subcontractor, as the beneficiary of the trust (Lien Law § 71 [2] [a]), can assert no greater claim than the contractor (Lien Law § 70 [1] [a]), defendant City can offset against the amount it owes to the contractor the contractor’s rent arrears under a lease of City property. As the total of the contractor’s rent arrears exceeds the amount due under the contract, the dissenter concludes that the funds in the City’s possession are not assets of which the contractor is trustee (Lien Law § 70 [6]).

Because the equities of this matter predominate greatly in favor of plaintiff subcontractor, and because the contractor had at least constructive receipt of the funds at issue, this Court declines to adopt such a mechanistic approach. The disputed check was received from an insurance company as final payment for repair work, performed at the City’s behest and approved by it for payment by the insurer. As such, the proceeds are clearly identified to the construction project and, indeed, the check was issued to the City and the contractor, as joint payees. Pursuant to a written agreement with the contractor, the City thereupon credited the contractor with the full face value of the check and transferred this amount to City coffers by applying it to the contractor’s rent arrears. This Court will not permit the City to evade the operation of the Lien Law by means of a transaction that assigns to the City a sum not only due but fully credited to the contractor in connection with its repair contract.

This controversy arises as a result of storm damage to a marine terminal owned by the City of New York and rented to Northeast Marine Terminal Co. Under the terms of the lease, the City retained the option to repair, rebuild or replace any destroyed portion of the premises. Exercising its option, the City engaged Northeast to oversee the necessary repairs to two Starporter cranes located at the terminal. Pursuant to the express terms of its contract with the City, Northeast retained plaintiff Canron Corporation to perform the bulk of the work.

In effecting the repairs, plaintiff furnished material and labor valued at $797,549. All invoices submitted by plaintiff were approved for payment by Northeast, as lessee and contractor, by the City, as owner, and by Northeast’s insurance carrier, a component of Chubb & Sons. With respect to the Starporter cranes, the policy of insurance provides that "the City of New York Department of Ports and Terminals is included as an additional Insured and loss payee.” As the repair work proceeded, Chubb issued six checks totalling $942,816 payable to the City and Northeast jointly. Northeast endorsed and delivered the checks to the City. The City, upon approval of the work and plaintiff’s supporting invoices, remitted payment of the first check to plaintiff and the subsequent four checks to Northeast. The sixth and final check is the subject of this controversy.

During the course of the repair work, Northeast accumulated rent arrears under its lease with the City in the amount of $722,150. Northeast entered into negotiations with the City, which culminated in an agreement dated July 9, 1981 by which Northeast undertook to "assign all our right title and interest in said Chubb draft” (the last check issued in the amount of $290,579.03) to the City, to be applied to rent arrears in accordance with a contemporaneous stipulation. Plaintiff received no payment on its final invoice totalling $265,271.90. In November 1981, Northeast filed for bankruptcy, and the City deposited the proceeds of the final check from Chubb into a segregated account (see, Lien Law § 75).

Canron commenced this action in February 1982 under article 3-A (§§ 70—79-a) of the Lien Law. The case was submitted to Supreme Court for decision on stipulated facts. The court found that the City conceded the repair work performed by Northeast constitutes a public improvement under Lien Law § 70 (1). It determined that, although Northeast is an "owner” pursuant to Lien Law § 2 (3), as the party engaged to undertake the repairs, it is also a contractor pursuant to section 2 (9) of the statute (citing Burns Elec. Co. v Walton St. Assocs., 136 AD2d 291, 294-295, affd 73 NY2d 738). The court held that, by endorsing the final insurance check and requesting that the City apply the proceeds to rent arrears, Northeast diverted trust assets (Lien Law § 72 [1]) from their intended use for the benefit of beneficiaries designated in section 71, including "payment of claims of subcontractors” (Lien Law § 71 [2] [a]). The judgment appealed from orders the City to account to plaintiff for the segregated funds (Lien Law § 77 [3] [a] [i]) and directs that plaintiff recover against the account to the extent of its claim, a sum of $265,271.90, together with interest pursuant to statute (Lien Law § 77 [3] [a] [i], as amended eff July 18, 1985).

On appeal, defendant City advances the single argument embraced by the dissenter—that the claim of Northeast to the insurance proceeds received from Chubb is subordinate to the concurrent debt of the contractor to the City. Therefore, it contends, it was free to enter into the agreement with Northeast to apply the proceeds to rent arrears without transgressing the provisions of the Lien Law. The stipulated facts emphasize a provision in the insurance policy which recites: "It is hereby agreed that The City of New York Department of Ports and Terminals is a named insured under this Policy with respect to the 70 ton and 50 ton Starporter Cranes, and loss, if any, is payable to them.” The City contends that plaintiff, as subcontractor, can assert no greater right to the funds than Northeast, as contractor. Since the City was owed a valid debt by Northeast representing rent arrears, defendant concludes that the money was properly applied to this obligation.

This contention is without merit. It is apparent that if Northeast had assigned the amount due to it under the contract to a creditor, the assigned funds would be subject to the trust imposed by the Lien Law (Wade v Nassau Suffolk Lbr. & Supply Corp., 275 App Div 864). The transaction is no less subject to the statute because the City contrived to have funds that it originally owed to the contractor assigned to it by the contractor in payment of the contractor’s debt.

Even accepting, merely for the sake of argument, that the City’s receipt of funds from Chubb was entirely outside the operation of the Lien Law, those funds became subject to the trust impressed by Lien Law § 70 (1) as soon as they were credited to Northeast, as contractor, in compensation for completed repair work on the cranes. Irrespective of which party, Northeast or the City, might be said to have received payment from the carrier, once that portion of the insurance proceeds was identified to the construction project by crediting the amount to the general contractor, it became a trust asset (Land-Site Contr. Corp. v Marine Midland Bank, 177 AD2d 413, 414).

It is settled that the Lien Law may not be evaded by the device of assigning offsetting amounts to different accounts, even where the intent is to satisfy an outstanding debt (Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507). In Caris to, a subcontractor that owed money to its suppliers assigned money due to it under construction contracts to a third party (a factor), which then issued checks in like amounts to the subcontractor that were used to pay debts to entities other than beneficiaries specified in Lien Law § 71. As the Court of Appeals noted, "In accepting the assigned trust funds * * * the factor, therefore, participated in a diversion of trust assets under section 72 of the Lien Law” (supra, at 513). In the matter at bar, a contractor that owed money to its subcontractor assigned money due to it under a construction contract to a third party (the City), which then issued payment to an entity (lessor Department of Ports and Terminals) other than a beneficiary specified in Lien Law § 71. Although the dissenter purports to distinguish Caris to from the matter before this Court, the circumstances are remarkably similar. It is impossible to view the City’s involvement in this matter, in which it is both assignee of funds due to its contractor and ultimate acquisitor of those funds, as anything less than participation in a diversion of trust assets.

The purpose of the trust imposed by the Lien Law is "to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as specified taxes and expenses of construction (§§ 70, 71)” (supra, at 512). Simply expressed by this Court, "the statute was designed to protect parties who performed the construction work” (Land-Site Contr. Corp. v Marine Midland Bank, supra, at 414). In keeping with the remedial purpose of article 3-A of the Lien Law, a contractor may not pay itself or any of its valid business expenses prior to payment of subcontractors and materialmen (Donjon Mar. Co. v Mergentime Corp., 203 AD2d 129). The broad protection afforded to subcontractors by the comprehensive statutory trust provisions of the Lien Law requires, in the first instance, that trust assets be used for the benefit of trust beneficiaries designated in the statute before being applied to any other purpose (Lien Law § 71 [2] [a]).

In Aquilino v United States (10 NY2d 271), the Court of Appeals held that a Federal tax lien could not be satisfied out of funds representing payment for remodeling work on an owner’s property. The Court concluded (supra, at 282), "as a matter of New York law, a contractor does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give him a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid.” Amendment of the statute in 1959 did not attenuate the public policy of this State to protect those that actually supply the labor and materials for an improvement of real property or a public improvement project (supra, at 281).

We have no quarrel with the dissenter that the City is not, ordinarily, a trustee pursuant to Lien Law § 70 (1). Under "a contract for a public improvement”, this provision impresses a trust only upon funds received by the contractor and not upon those received by the State or municipality, as the owner of public property upon which an improvement is erected. However, while the City is entitled to hide behind the shield afforded by the statutory exemption from the obligation of trustee, it is not entitled, as a matter of equity if not law, to wield that exemption as a sword to defeat the protection otherwise afforded to a subcontractor by the statute. By taking assignment of funds due to the contractor under the construction contract, the City became the holder of trust funds (Caristo Constr. Corp. v Diners Fin. Corp., supra, at 510, 512; Wade v Nassau Suffolk Lbr. & Supply Corp., supra; see also, Land-Site Contr. Corp. v Marine Midland Bank, supra; Shore Bridge Corp. v Utica Structural Steel, 268 App Div 714, affd 295 NY 619). Our point of departure from the analysis performed by the City and adopted by the dissenter is that, in order for Northeast to have "waived” its right to the final check tendered by Chubb, it had to have a property right in the proceeds that it could waive (or "assign”, as Northeast accurately characterizes it).

The best reasoned theory is no more sound than the fundamental presumptions upon which it rests. The otherwise logical reasoning of the dissenting opinion is entirely dependent, for its conclusion, on the assumption that the contractor never had anything more than a right of action against the City for the amount due to it under the contract to improve public property. The hypothecated right of action, however, is simply not reflected in the facts stipulated or the documentary evidence of record. The contractor clearly assigned a sum certain to the City—viz., a chose in possession—and not merely a right to assert a claim uncertain as to either recovery or amount—viz., a chose in action. If the right of the contractor to receive payment of the final check issued by the insurer was ever in any doubt, it was resolved when the City stipulated to credit Northeast with the full face value of the instrument. That the contractor assigned all "right title and interest” in the draft to the City, rather than its face value, does not evince a valid controversy either as to Northeast’s right to receive payment or the amount due. Any nascent right of action the contractor might be said to have had against the City ripened into a sum certain and paid when the City agreed to take assignment of the full amount of the check and, as the stipulation of facts recites, "directed The Department of Ports and Terminals to credit as rent the final Chubb payment of $290,579.03 against the balance then due on [Northeast’s] rent account under the Lease.” Thus, this transaction discharged a valid debt completely unrelated to the performance of the repair contract and owed by Northeast to an entity other than a permissible beneficiary under Lien Law § 71.

The only obligation imposed on the City to credit any payment to Northeast arises out of the contract to repair the storm damage to the City’s marine terminal. The disputed sum of money, whatever its origin, is therefore an amount "due or to become due from the owner under the contract” (Aquilino v United States, supra, at 282) and constitutes a trust asset within the purview of the Lien Law. While a subcontractor remains unpaid for work it has performed, the assignment by a contractor to a party, other than one designated as a statutory beneficiary, of funds due under a contract for a public improvement is contrary to law (Lien Law § 70 [1]; § 71 [2]; § 72 [1]). By assigning money due to Northeast under the contract to defendant City, the contractor violated the statutory proscription. For the City’s part, it is settled that the assignee of funds payable to a contractor is liable for diversion of those funds (Caristo Constr. Corp. v Diners Fin. Corp., supra, at 512), unless the assignment is duly filed (Lien Law §§ 16, 25 [5]), irrespective of whether those funds physically come into the possession of the assignor or not (compare, Wade v Nassau Suffolk Lbr. & Supply Corp., supra, with Shore Bridge Corp. v Utica Structural Steel, supra).

Contrary to the position taken in its appellate brief, the claim of the City to the disputed check is not equivalent to the interest of plaintiff subcontractor. Pursuant to the statutory scheme, the nature of the claim advanced by plaintiff is superior to the claim asserted by the City. "One asserts the right of a cestui que trust against a trustee; the other asserts a contractual obligation of a debtor to his creditor” (Matter of People [Consolidated Indem. & Ins. Co.], 287 NY 34, 38-39). It is the avowed purpose of the Lien Law to elevate the claim of the statutory beneficiary above that of the mere creditor, even if that creditor is a governmental entity (Aquilino v United States, supra).

The thesis postulated by the dissenter must fail because the contractor could not have asserted a claim against the City for payment of a check for which it had already received full value. Moreover, if the Lien Law could be avoided by the simple artifice of assigning to a creditor all "right title and interest” in an amount due under a contract subject to its provisions, the law would be eviscerated and its salutary intent subverted. While it is not necessary to the determination of this appeal, it warrants emphasis that the City would be unjustly enriched at the expense of plaintiff subcontractor if allowed to reap the benefit of the improvement to its property resulting from plaintiff’s work (which the City, its contractor and its carrier have in all respects approved) without compensating plaintiff for its efforts.

This Court rejects the City’s attempt, in a footnote, to place Northeast beyond the scope of the Lien Law by portraying it “as an owner and not as a contractor.” A private corporation cannot be construed as an owner of City property by any stretch of the imagination. It is considered as such for statutory purposes only where the private corporation, as lessee of public property, hires a contractor to perform work, in which case any trust impressed by the statute extends only to the interest of the lessee in the premises and does not extend to the reversionary interest of the public corporation (Knapp v Brown, 45 NY 207 [1871]; Sager v Renwick Park & Traffic Assn., 172 App Div 359). Here, the City hired its lessee to undertake the repair work and prepare the necessary documentation to ensure payment by the insurance carrier. The City paid Northeast out of the insurance proceeds as the repair work progressed and, thus, clearly contracted for the work as owner in fee (Lien Law § 2 [3]). Furthermore, no claim is asserted against the City’s interest in the premises. Finally, if the statutory exemption is not limited to the owner of public land, any lessee of public property acting as a contractor will be exempted from compliance with the Lien Law.

Under the stipulated facts of this case, Northeast was engaged by the City to perform repairs, paid and treated in all respects, both by the City and by plaintiff, as a contractor throughout the course of its performance. To indulge in the fiction that Northeast is not a contractor and thereby place Northeast beyond the scope of the statute is both contrary to its protective intent and offensive to principles of equity.

Accordingly, the judgment of the Supreme Court, New York County (Stuart Cohen, J.), entered May 3, 1994, upon stipulated facts and documentary evidence, which adjudged that the City account to plaintiff for the total amount maintained in a segregated account, and which awarded plaintiff a total of $487,697.37, should be affirmed, without costs.