DocketNumber： CV 13-7207 (LDW) (GRB)
Judges： Wexler
Filed Date： 7/31/2017
Status： Precedential
Modified Date： 11/7/2024
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiffs Delco Electrical Corp., SAT Contracting, Inc., GM Data Communications, Inc., Expertel Communications Ltd., Starcom Communication Services-,. Inc., Data Comm Consulting Group,' Inc., and Weather Wise Conditioning Corp. (“Weather Wise”) (collectively, “Plaintiffs”) assert claims under New York Lien Law Article 3-A and for common-law conversion against defendants Wells Fargo'Capital Finance, Inc. (“WFCF”) and Wells Fargo Bank, N.A. (“WF”) (collectively, “Defendants”) seeking recovery for telecommunications-related work performed as subcontractors on various New York City public schools. Having concluded a bench trial, the Court makes the following findings of fact and conclusions of law.
L BACKGROUND AND FINDINGS OF FACT
The parties have -stipulated to the essential material facts in this action, as reflected in their Post Trial Joint Stipulated Findings of Fact (“JS”), which is incorporated herein. See Docket Entry 58. It is undisputed, inter alia, that: (1) Teltron-ics, Inc. (“Teltronics”) contracted with the New York City Department of Education (“DOE”) (the “DOE- Contract”)' and IBM (the “IBM Contract”) to provide various telecommunications-related products and/or services at hundreds of New York City public schools (collectively, the “DOE Projects”), JS ¶¶ 20-21, 24-25; (2) Plaintiffs performed improvements on numerous DOE public school buildings as subcontractors to Teltronics on the DOE Projects from 2007 to 2011 pursuant to purchase orders issued to them by Teltronics, JS ¶¶ 10, 22, 26-2.9, 34; Trial Transcript (“Tr.”) 34; (3) Plaintiffs are owed in aggregate more than $1.7 million, without interest, for subcontract work they performed for Teltronics on the DOE Projects, JS ¶¶ 58-66; (4) Teltronics
Based on these facts, Plaintiffs assert claims under New York Lien Law Article 3-A and for common-law conversion, seeking $1,700,878.16, plus interest, costs and disbursements, and attorney’s fees. Although Defendants concede that Plaintiffs performed improvements at more than 58 DOE buildings, that payment by the DOE
II. DISCUSSION AND CONCLUSIONS . OF LAW
A. Waiver/Release and Res Judicata Defenses
Defendants argue that Plaintiffs’ 'claims against WFCF are barred by waiver, and release based on both the Final Order and the Confirmation Order issued in the Tel-tronics Bankruptcy Case. Plaintiffs argue that neither of these orders bars their claims against WFCF.
As for the Final Order, that order authorized Teltronics, inter alia, to obtain post-petition financing from WFCF. Paragraph 14 of the Final Order established deadlines for the Creditors Committee or “any other party in interest’ to object to any prepetition claims that WFCF had against Teltronics and to assert any claims against WFCF. Defendants argue that, each' of the' Plaintiffs qualified as “any other party in interest” for purposes of the waiver/release provision. Thus, Defendants maintain, Plaintiffs waived/released any claims that they may have had individually against WFCF, including any claim related to funds from the DOE Projects deposited in the Lock Box Account at WF and transferred by WF to WFCF. Plaintiffs argue that paragraph 14’s protection of non-debtors must be narrowly construed and, as such, does not bar third-parties (such as Plaintiffs) from bringing claims against non-debtors (such as WFCF).
The Court concludes that paragraph 14 does not preclude PMintiffs’ claims against non-debtor WFCF. Claims that the Creditors Committee or parties-in-interest could have asserted against WFCF on behalf of the bankruptcy estate are distinct from those claims each of the Plaintiffs held on its own behalf against WFCF-such as those concerning “trust” funds paid into the Lock Box Accounts on the DOE Projects. Plaintiffs did not knowingly and deliberately waive their individually-held claims against WFCF, as paragraph 14 did not provide sufficient notice that such individually-held claims were subject to that provision. Thus, Plaintiffs’ claims against Defendants were not waived/released by the Final Order.
Defendants also argue that Plaintiffs’ claims are barred by res judicata, in that Plaintiffs’ claims arise out of the same set of facts as their claims in the Teltronics Bankruptcy Case, all of which were subject to the provisions of the Final Order and the Confirmation Order. As noted above, Plaintiffs’ claims herein are, not subject to the Final Order and the Confirmation Order. Nor do they arise from the same facts and circumstances as any claim in the Teltronics Bankruptcy Case,
Accordingly, Plaintiffs’ claims are not barred by waiver and release or res judica-ta.
B. Lien Law Claim
Defendants argue that Plaintiffs’ Lien Law claim is barred by the one-year statute of limitations, in § 77(2) of the Lien Law. See N.Y. Lien Law § 77(2). Defendants have the burden of establishing this affirmative defense. See Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008) (“The lapse of a limitations period is an affirmative defense that a defendant must plead and prove.” (citing Fed. R. Civ. P. 8(c)(1))). Section § 77(2) provides, in relevant part, that an action under Lien Law Article 3-A
may be maintained at any time during the ... public improvement.... No such action shall be maintained if commenced more than one year after the completion of such improvement or, in the case of subcontractors or material-men, after the expiration of one year from the date on which final payment under the claimant’s contract became due, whichever is later.
N.Y. Lien Law § 77(2). Thus, the one-year limitations period began to run from the later of “the completion of [the public] improvement” or “the date on which final payment under the [subcontractor’s] contract became due.”
Defendants maintain that the only contracts between Plaintiffs and Teltronics were purchase orders, resulting in the statute of limitations being measured from the later of the completion of the subcontract work pursuant to a particular purchase order or when payment was due on the invoice generated upon completion of that specific work. Thus, according to Defendants, the one-year limitations period began to run no later than 2011, by which time Plaintiffs had completed their subcontract work and payment to each became due, and the one-year period expired before this action was filed in state court on November 20, 2013. Plaintiffs argue that the one-year limitations period began to run not when the subcontract work was completed, but when the projects of the DOE Contract and IBM Contract were completed. According to Plaintiffs, those projects were not completed more than one-year before this action was commenced.
Contrary to Defendants’ contention, “completion of [the public] improvement” within the meaning of Lien Law § 77(2) refers to completion of the project, not
C. Conversion Claim
Defendants argue that Plaintiffs cannot maintain a conversion claim, and that Plaintiffs assert this claim only because their Lien Law claim is barred by a one-year statute of limitations. Plaintiffs argue that the Lien. Law is not the exclusive remedy for a subcontractor seeking recovery of trust fund money. “While Defendants concede that the Lien Law .is not an exclusive remedy, they,argue that Plaintiffs’ conversion claim fails because it is not independent of the Lien Law claim. Plaintiffs respond that their conversion claim is
Under New York law, “[a] conversion tákes 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." Colavito v. N.Y. Organ Donor Network, Inc., 8 N.Y.3d 43, 49-50, 827 N.Y.S.2d 96, 860 N.E.2d 713 (2006). The “[t]wo key elements of conversion are (1) plaintiffs pos-sessory right or interest in the property and (2) defendant’s dominion over the property or interference with it, in derogation of plaintiffs rights.” Id. at 50, 827 N.Y.S.2d 96, 860 N.E.2d 713 (citations omitted).
Plaintiffs have demonstrated that payments on the DOE Projects in excess of the amounts owed to Plaintiffs for their subcontract work were deposited in the Lock Box Account during the relevant period. By virtue of the Lien Law, those payments were trust fund money, over which Plaintiffs had an interest as beneficiaries. Lien Law Article 3-A is “designed to protect subcontractors ... who expend labor or extend financing in construction projects, by impressing with a trust any funds paid to a contractor or received by an owner in connection, with an improvement of real property in the state.” Interworks Sys. Inc. v. Merch. Fin. Corp., 604 F.3d 692, 695 (2d Cir. 2010) (citing N.Y. Lien Law § 71(5)). “[A] trust arises auto matically by operation of law when fees are paid to the contractor or received by the owner in connection with an improvement of real property.” Id. Notably, the statute of limitations in § 77(2) “is considered to be a procedural, rather than substantive condition to the enforcement of a claim.” In re Tripp, 189 B.R. 29, 35 (Bankr. N.D.N.Y. 1995) (citing Davis & Warshow, Inc. v. S. Iser, Inc., 30 Misc.2d 528, 539, 220 N.Y.S.2d 818, 830 (Sup. Ct., N.Y. Cnty. 1961)). Consequently, expiration of the statute of limitations merely bars the Lien Law remedy and does not extinguish the substantive right, as the trust continues until all claims for services and material on the improvement have been paid. See In re Tripp, 189 B.R. at 35.
Plaintiffs have also demonstrated that Defendants exercised dominion and control over those trust funds, receiving them in the Lock Box Account and transferring them to WFCF, pui-suant to the Credit Agreement and Lock Box Account Control Agreement, in derogation of Plaintiffs’ rights and without Plaintiffs’ authority.
During opening statements at trial, Defendants’ counsel stated that a three-year statute of limitations . applies to the conversion claim, - and maintained that Plaintiffs have. to show that funds were converted within three years before November 20, 2013-the date the action was filed in state court. See Trial Transcript (“Tr.”) at 27. Defendants did not urge this defense in their initial post-trial brief, arguably waiving the defense. However, Plaintiffs raised it in their post-trial submission, arid Defendants then addressed it in their reply. See Plaintiffs’ Post Trial Memorandum of Law, at 21-22; Defendants’ Post Trial Reply Memorandum of Law (“Defendants’ Reply”), at 14-15. Even assuming the defense was not waived, it fails. Under New York law, a conversion claim is governed by a three-year statute of limitations, running from the date of the conversion. Vigilant Ins. Co. of Am. v. Housing Auth. of El Paso, TX, 87 N.Y.2d 36, 44, 637 N.Y.S.2d 342, 660 N.E.2d 1121 (1995). To the extent Defendants imply that Plaintiffs have the burden of proof, see Tr. 27; Defendants’ Reply, at 14-15, they are wrong. Rather, as noted above, Defendants have the burden of establishing this affirmative defense. See Staehr,
Accordingly, Plaintiffs have established their conversion claim.
D. Liability of WF
Defendants argue that a bank may be liable only if it was a “knowing participant” in the diversion, and maintain that WF was not á knowing participant but a “mere conduit” following instructions from its account holder, Teltronics. Plaintiffs maintain that WF was no “mere conduit,” but that it and/or its predecessor, Wachovia, knew or should have known of the trust nature of the funds in the Lock Box Account.
A bank, such as WF, may be liable for diversion if it participated in the diversion by either acquiring an advantage or benefit directly from or through the diversion or joining in the diversion when it knew or should have known of the trust nature of the funds it received — that is, if the circumstances are such that it should have inquired into the origin of the funds and thereby discovered the trust nature of those funds. Bischoff v. Yorkville Bank, 218 N.Y. 106, 112, 112 N.E. 759 (1916); Fogarty v. City of Albany, 157 Misc.30, 31, 283 N.Y.S. 228, 229 (Sup. Ct., Albany Cnty. 1935); see also Grace v. Corn Exch. Bank Trust Co., 287 N.Y. 94, 105, 38 N.E.2d 449 (1941) (“If the bank chooses to ignore com pletely the facts which indicate that the debtor is using moneys which may not belong to him, and accepts payment careless whether or not the moneys paid belong to him, it becomes morally and legally a participant in the debtor’s wrong.”); Ben Soep Co. v. Highgate Hall of Orange Cnty., Inc., 142 Misc.2d 45, 51, 535 N.Y.S.2d 1018, 1022 (Sup. Ct., Monroe Cnty. 1988) (“[T]his Court holds that a bank, which participates in'a diversion of trust assets, under the Lien Law, may be held' liable to the beneficiaries premised upon either actual or constructive knowledge.”); cf. Fleck v. Perla, 40 A.D.2d 1069, 1070, 339 N.Y.S.2d 246, 248-49 (4th Dep’t 1972) (observing that knowledge “of a trustee’s violation of trust conditions and requirements will be chargeable to one dealing with the trustee, if the facts are such as, in reason, should put a reasonably intelligent and diligent person on inquiry, and require him to make an investigation, the result of which would reveal the true situation,” and holding that defendant— officer of corporate transferee — may be personally liable for converting trust funds if “defendant knowingly participated in the diversion of trust funds, or that at least the facts were such that he should have inquired into the origin of the funds he received” (quotation marks omitted)). The facts demonstrate that WFCF should have known — through appropriate inquiry — of the trust nature of funds it received from WF through the Lock Box Account, particularly given its awareness that Teltronics was a telecommunications contractor to, among others, public entities in New York, and that Teltronics contracts serving as collateral for Teltronics loans included contracts for construction of New York City public schools. Likewise, WF should have known — through appropriate inquiry — of the trust nature of millions of dollars in funds it received in the Lock Box Account and dispersed to WFCF, particularly given (1) the sophisticated banking relationship that- it (and its predecessor Wachovia) established and maintained with Teltronics
E. Laches Defense
Defendants argue that Plaintiffs’ claims are barred by laches based on Plaintiffs’ failure to raise their claims in the Teltronics Bankruptcy Case, resulting in material prejudice to WFCF and WF. The defense of laches requires a defendant to establish that a plaintiff, in asserting its rights, “was guilty of unreasonable delay that prejudiced the defendant ].” Stone v. Williams, 873 F.2d 620, 623 (2d Cir.), vacated on other grounds, 891 F.2d 401 (2d Cir. 1989); Moreschi v. DiPasquale, 58 A.D.3d 545, 545, 872 N.Y.S.2d 108, 109 (1st Dep’t 2009). Defendants have failed to show that any delay by Plaintiffs has been “unreasonable” and caused them to suffer material. prejudice, making recovery- by Plaintiffs inequitable.
Accordingly, Plaintiffs’ claims are not barred by.laches.
CONCLUSION
For the above reasons, Plaintiffs are entitled to judgment against Defendants for $1,700,878.16, plus applicable interest, together with costs and disbursements. The parties have not fully briefed the issue of Plaintiffs’ entitlement to an award of attorney’s fees. Accordingly, the parties are directed to contact Chambers regarding further proceedings.
SO ORDERED.