Benderson Development Co., Inc. v. Schwab Bros. Trucking, Inc.

• Decision Date: 10 November 1978
• Citation: 409 N.Y.S.2d 890,64 A.D.2d 447
• Parties: BENDERSON DEVELOPMENT COMPANY, INC., Respondent, v. SCHWAB BROS. TRUCKING, INC., et al., Defendants, Glens Falls Insurance Company, Appellant, David D. Baker, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 890

409 N.Y.S.2d 890

64 A.D.2d 447

BENDERSON DEVELOPMENT COMPANY, INC., Respondent, v. SCHWAB BROS. TRUCKING, INC., et al., Defendants, Glens Falls Insurance Company, Appellant, David D. Baker, Respondent.

Supreme Court, Appellate Division, Fourth Department.

Nov. 10, 1978.

Brown, Kelly, Turner, Hassett & Leach, Buffalo, for Glens Falls Ins. Co. (Frederick D. Turner, Buffalo, of counsel).

Duke, Holzman, Yaeger & Radlin, Buffalo, for Benderson Development Co. (Emanuel Duke, Buffalo, of counsel).

Miserendino, Krull & Foley, Buffalo, for David D. Baker (Samuel R. Miserendino, Buffalo, of counsel).

Before MARSH, P. J., and CARDAMONE, SIMONS, DILLON and SCHNEPP, JJ.

DILLON, Justice:

Defendant Glens Falls Insurance Company (Glens Falls) appeals from a monetary judgment in favor of plaintiff Benderson Development Company, Inc. (Benderson) following a nonjury trial. The action arises out of two agreements, one dated October 16, 1964, and another nearly identical agreement dated December 4, 1964, between Benderson and Glens Falls. Both agreements were made in connection with a series of short-term loans made to Schwab Bros. Trucking, Inc. (Schwab Bros.) by Benderson.

Schwab Bros. was the successful bidder on a public improvement project to build a section of the Kensington Expressway in the City of Buffalo. Glens Falls issued performance and materialmen's bonds guaranteeing to the State of New York faithful performance of the contract by Schwab Bros., as well as the payment of subcontractors', laborers' and materialmen's claims under the contract. As security for the bonds, Glens Falls took from Schwab Bros. an assignment for all moneys due or to become due under the Kensington Expressway contract.

Prior to obtaining the award of the Kensington Expressway project, Schwab Bros. began work on other public improvement contracts both in the State of New York and in the State of Michigan. Glens Falls had also provided performance and materialmen's bonds to the public entities on those projects. As it became apparent that Schwab Bros. was unable to finance this expanding series of public improvements, Philip Schwab, the principal in Schwab Bros., with the assistance of David D. Baker (Baker), the agent and manager of the Glens Falls Buffalo branch, obtained a series of short-term loans to cover the costs of continuing work on the projects. To secure these loans, Schwab Bros. assigned to the lenders the progress payments, earned or to be earned, under the respective public improvement contracts. However, since Schwab Bros. had previously assigned the same progress payments to Glens Falls in connection with the surety bonds for the same projects, agreements were entered into between Glens Falls and the lenders, giving the lenders first rights to any progress payments made under the contracts. One such agreement was executed by Schwab Bros., Benderson and Glens Falls on October 16, 1964 in relation to the Kensington Expressway contract. In pertinent part, the agreement reads as follows:

"WHEREAS, Surety has obligated and bound itself upon the following bonds, to wit:

"(a) Performance bond No. 97-16-87 in the amount of Two Million Seven Hundred Thirty-One Thousand Eight Hundred Thirty Dollars ($2,731,830.00) guaranteeing unto the State of New York (hereinafter called 'Owner'), the faithful performance by SCHWAB BROS. TRUCKING, INC. (hereinafter called 'Contractor') (on the Kensington Expressway Contract) and

"(b) Bond No. 97-16-87 in the amount of Two Million Seven Hundred Thirty-One Thousand Eight Hundred Thirty Dollars ($2,731,830.00) guaranteeing unto Owner the payment of Subcontractor's laborer's and materialmen's claims upon and under the aforesaid contracts; and

"WHEREAS, under and by virtue of said bond, Surety has been granted an assignment of certain proceeds, monies, accounts and contract rights due or to become due from Owner to Contractor; and

"WHEREAS, Lender has and will advance funds to Contractor to defray the costs of performing said contracts with Owner; and

"WHEREAS, Lender has received from Contractor, as security, an assignment of all proceeds, monies, accounts and contract rights, due or to become due, from Owner to Contractor; and

"WHEREAS, Lender and Surety wish to clarify their respective rights to the proceeds, monies, accounts, and contract rights, due or to become due, to Contractor from Owner and assigned to each of them as security, and also wish to secure the Lender from and out of all funds howsoever arising under the said contract;

"NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties hereto, the parties agree as follows:

"1. Lender shall have the first and prior right to all proceeds, monies, accounts and contract rights earned or to be earned by Contractor or by the Surety by reason of work done by either of them under the aforesaid contracts, including the right to progress payments, retained percentages, funds earned but retained by the Owner, and funds unearned and retained by the Owner until performance by the Contractor and/or Surety.

"2. Surety hereby waives, subordinates, subrogates and assigns to the Lender any and all liens, security interests and rights in and to any proceeds, monies, accounts and contract rights, due or to become due, to Contractor and/or Surety from Owner, to the extent necessary for Lender to obtain a first and prior lien and security interest therein and thereto, superior to Surety, whether Surety's rights and interests arise by virtue of the assignment to Surety under the aforesaid bonds, or by virtue of work done under the contracts or bond by the Surety, or by virtue of its right to subrogation, if any.

"3. It is specifically understood between the parties hereto that any funds and amounts earned by Contractor and/or Surety shall be paid to or used for the benefit of Lender as security for amounts loaned to Contractor (including all interest and charges thereon) and Surety shall execute any and all instruments necessary to effectuate the foregoing."

Attached to the agreement was a power of attorney issued to Baker by Glens Falls.

Benderson ultimately advanced one million dollars to Schwab Bros. under this agreement. Schwab Bros., by Philip Schwab, gave Benderson a demand note for the full sum. In addition, Philip Schwab and his wife Mary Louise Schwab executed a separate instrument in which they personally guaranteed payment of the loan.

A similar loan transaction was arranged with respect to public improvement contracts in Pahokee and Belle Glade, Florida on which Schwab Bros. was the successful bidder and Glens Falls was the surety. Schwab Bros. made assignments of progress payments under these public improvement contracts to both Glens Falls and Benderson, and on December 4, 1964 Glens Falls and Benderson executed an agreement concerning the Florida projects which is indistinguishable in terminology from the agreement of October 16, 1964. Shortly thereafter Benderson advanced Schwab Bros. $50,000 on the Florida contracts.

In February, 1965 Schwab Bros. defaulted on the Kensington Expressway and Florida projects. Glens Falls elected not to perform for Schwab Bros. on the Kensington Expressway job although demands to do so were made by Benderson and the State of New York. Additionally, on February 20, 1965 C. Irving Bush, Glens Falls' vice-president, wrote a letter to Benderson in which he asserted that Baker lacked authority to execute the agreements with Benderson on behalf of Glens Falls.

Benderson alleges that during the course of discussions preceding the execution of the assignments by Schwab Bros. and the agreements with Glens Falls, numerous representations were made by Baker to the effect that the surety, Glens Falls, was guaranteeing repayment of the loans. It is alleged that Baker repeatedly stated that Glens Falls would perform the contracts in the event of default by Schwab Bros thereby generating a fund to repay the loans made by Benderson. Benderson alleges several alternative causes of action. It asserts that a reasonable reading of the October 16 and December 4 agreements establishes Glens Falls' obligation to step in and perform in the event of a default; or that the contract language is ambiguous and that the conduct of the parties as revealed by the circumstances surrounding the drawing and execution of the agreements evidences an intent to bind Glens Falls to an agreement to perform in the event of Schwab Bros.' default; or that the court should reform the agreements on the basis that they are the product of mutual mistake by the parties in omitting a specific term obligating Glens Falls to perform; or that reformation is required on the ground of unilateral mistake in such omission induced by fraud and misrepresentation on the part of Glens Falls.

Glens Falls alleges that its agent Baker lacked authority to execute the October 16 and December 4 agreements, and that the agreements to subordinate Glens Falls' interests in the progress payments were beyond the scope of Baker's power of attorney. Glens Falls contends that Benderson knew or, with reasonable care, could have learned that Baker was operating beyond the scope of his authority. Glens Falls further alleges that the failure to memorialize Baker's alleged promise that Glens Falls would answer for Schwab Bros.' debt or default is in derogation of the statute of frauds (General Obligations Law, § 5-701). Additionally, Glens Falls contends that the agreements do not, by their express terms, guarantee repayment to Benderson, nor to they require Glens Falls to perform in the event of Schwab's default. Glens Falls also charges Benderson with inequitable conduct, thus foreclosing its entitlement to reformation, and contends that Benderson is not a proper party to assert a claim for $300,000 of the sum advanced to Schwab Bros.

In his answer, Baker denied making representations that...