Dimarco Constructors, LLC v. Top Capital of N.Y. Brockport, LLC

• Decision Date: 30 April 2021
• Docket Number: CA 19-01875,860
• Citation: Dimarco Constructors, LLC v. Top Capital of N.Y. Brockport, LLC, 193 A.D.3d 1375, 147 N.Y.S.3d 774 (N.Y. App. Div. 2021)
• Parties: DIMARCO CONSTRUCTORS, LLC, Kennedy Mechanical Plumbing & Heating, Inc., Landmark Electric, Inc., U.S. Ceiling Corp., Swan Tile & Marble, Inc., Kornerstone Kitchens, LLC, BBT Construction Services, Inc., Northeast Commercial Flooring, Inc., and James C. Delly, Doing Business as James C. Delly Custom Painting, on Their Own Behalf and on Behalf of Others Similarly Situated, Plaintiffs-Appellants-Respondents, v. TOP CAPITAL OF NEW YORK BROCKPORT, LLC, Persistence Path, LLC, Zheng Zhou, Timothy Cooper, Timothy Poley, Michael Palumbo, Defendants-Respondents-Appellants, and Louis Giardino, Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

193 A.D.3d 1375

147 N.Y.S.3d 774

DIMARCO CONSTRUCTORS, LLC, Kennedy Mechanical Plumbing & Heating, Inc., Landmark Electric, Inc., U.S. Ceiling Corp., Swan Tile & Marble, Inc., Kornerstone Kitchens, LLC, BBT Construction Services, Inc., Northeast Commercial Flooring, Inc., and James C. Delly, Doing Business as James C. Delly Custom Painting, on Their Own Behalf and on Behalf of Others Similarly Situated, Plaintiffs-Appellants-Respondents,

v.TOP CAPITAL OF NEW YORK BROCKPORT, LLC, Persistence Path, LLC, Zheng Zhou, Timothy Cooper, Timothy Poley, Michael Palumbo, Defendants-Respondents-Appellants, and Louis Giardino, Defendant-Respondent.

860

CA 19-01875

Supreme Court, Appellate Division, Fourth Department, New York.

Entered: April 30, 2021

ADAMS LECLAIR, LLP, ROCHESTER (RICHARD T. BELL, JR., OF COUNSEL), FOR PLAINTIFFS-APPELLANTS-RESPONDENTS.

BOYLAN CODE LLP, ROCHESTER (ROBERT J. MARKS OF COUNSEL), FOR DEFENDANTS-RESPONDENTS-APPELLANTS.

PRESENT: WHALEN, P.J., SMITH, CURRAN, TROUTMAN, AND DEJOSEPH, JJ.

MEMORANDUM AND ORDER

It is hereby ORDERED that the order so appealed from is modified on the law by denying the motion in its entirety and as modified the order is affirmed without costs.

Memorandum: Plaintiffs, the general contractor and subcontractors in a construction project, commenced this action seeking, inter alia, to recover the balance allegedly due under a construction contract between defendant Top Capital of New York Brockport, LLC (Top Capital) and the general contractor, i.e., plaintiff DiMarco Constructors, LLC (DiMarco). Plaintiffs allege that $1,783,320.22 remains due, and assert causes of action including breach of contract, diversion of trust funds against Top Capital, and participation in diversion of trust funds against the individual defendants (see Lien Law art 3-A). Supreme Court granted in part the motion of defendants-respondents-appellants (defendants) for partial summary judgment dismissing the causes of action asserting diversion of trust funds and participation in diversion of trust funds (diversion causes of action) by limiting plaintiffs’ potential damages on those causes of action to a maximum of $104,205.99, and otherwise denied defendants’ motion. Furthermore, insofar as relevant here, the court denied that part of plaintiffs’ cross motion seeking partial summary judgment on the issue of liability with respect to the cause of action asserting diversion of trust funds against Top Capital. Plaintiffs appeal and defendants cross-appeal.

"[T]he primary purpose of [Lien Law] article 3-A and its predecessors ... [is] to ensure that those who have directly expended labor and materials to improve real property [or a public improvement] at the direction of the owner or a general contractor receive payment for the work actually performed" ( Matter of RLI Ins. Co., Sur. Div. v. New York State Dept. of Labor , 97 N.Y.2d 256, 264, 740 N.Y.S.2d 272, 766 N.E.2d 934 [2002] [internal quotation marks omitted]). "Use of trust assets for any purpose other than the expenditures authorized in Lien Law § 71 before all trust claims have been paid or discharged constitutes an improper diversion of trust assets, regardless of the propriety of the trustee's intentions" ( id. at 263, 740 N.Y.S.2d 272, 766 N.E.2d 934 ). Under Lien Law article 3-A, a trust beneficiary may maintain an action "to recover trust assets from anyone to whom they have been diverted with notice of their trust status" ( LeChase Data/Telecom Servs., LLC v. Goebert , 6 N.Y.3d 281, 289, 811 N.Y.S.2d 317, 844 N.E.2d 771 [2006] ; see Lien Law § 77 ).

Initially, with respect to the appeal and cross appeal, the parties dispute the total amount of assets that are subject to the protection of the Lien Law's trust provisions. Defendants contend on their cross appeal that the trust fund consisted of only $12,728,764 and that the diversion causes of action should have been dismissed in their entirety because it is undisputed that Top Capital made payments totaling $13,230,794 to DiMarco for plaintiffs’ services related to the construction contract. We agree with plaintiffs, however, that, as a matter of law, "[t]he trust fund is that portion of the [building] loan [contract] received by the owner or contractor" ( Caledonia Lbr. & Coal Co. v. Chili Hgts. Apts. , 70 A.D.2d 766, 766, 417 N.Y.S.2d 536 [4th Dept. 1979], citing Lien Law § 70 [1] ; see also § 70 [5] [a] ), and the parties do not dispute that Top Capital received disbursements totaling $13,334,999.99 as a result of the relevant building loan contract between Top Capital and a nonparty bank.

We further agree with plaintiffs on their appeal that the court erred in granting defendants’ motion in part by limiting the potential damages in the diversion causes of action to a maximum of $104,205.99 based on Top Capital's alleged restoration of trust assets through payments made with non-trust assets, and we therefore modify the order by denying defendants’ motion in its entirety. Plaintiffs allege that approximately $1.4 million in trust assets was improperly diverted by defendants. The court, in limiting the potential recovery on the diversion causes of action, credited not just Top Capital but all defendants for the approximately $1.3 million Top Capital paid DiMarco from non-trust assets after the trust fund was depleted. That was error because defendants failed to establish their entitlement to a restoration defense as a matter of law. Contrary to defendants’ assertion, the Court of Appeals has rejected the argument that a defendant can cure an improper diversion of trust assets, and therefore avoid liability for that diversion, by a subsequent payment from non-trust assets (see Caristo Constr. Corp. v. Diners Fin. Corp. , 21 N.Y.2d 507, 512-513, 289 N.Y.S.2d 175, 236 N.E.2d 461 [1968] ). Defendants rely on dicta in that case wherein the Court of Appeals posited that, if non-trust fund assets are used "to pay trust claims and there had been no loss to anyone , [then] there would have been no ultimate diversion or loss for which the [defendant] would be liable" ( id. at 513, 289 N.Y.S.2d 175, 236 N.E.2d 461 [emphasis added]). Under such circumstances, "the salutary purposes of the rather rigorous regulations of the Lien Law [would not be] avoided or blunted" ( id. ). Here, however, plaintiffs allege that $1,783,320.22 remains due for labor and materials and that approximately $1.4 million of the trust assets intended to pay for the same was improperly diverted by defendants. Thus, this is not the hypothetical double-recovery situation envisioned by the Court of Appeals where "there ha[s] been no loss to anyone" even assuming funds were improperly diverted ( id. ). Indeed, to hold otherwise would open the door to "the practice of ‘pyramiding,’ in which [owners or] contractors use loans or payments advanced in the course of one project to complete another," one of the very evils that the Lien Law was intended to guard against ( RLI Ins. Co., Sur. Div. , 97 N.Y.2d at 264, 740 N.Y.S.2d 272, 766 N.E.2d 934 ; see generally Aquilino v. United States of Am. , 10 N.Y.2d 271, 275, 219 N.Y.S.2d 254, 176 N.E.2d 826 [1961] ).

Finally, we conclude that, contrary to plaintiffs’ contention on their appeal, the court properly denied that part of their cross motion seeking partial summary judgment on the issue of liability with respect to the cause of action asserting diversion of trust funds against Top Capital inasmuch as there are "triable issues of fact as to whether, and to what extent, trust funds may have been diverted" ( Roos v. King Constr. , 179 A.D.3d 857, 859, 116 N.Y.S.3d 344 [2d Dept. 2020] ).

All concur except Curran, J., who dissents and votes to affirm in the following memorandum:

I respectfully dissent and would affirm Supreme Court's order. I agree with the majority that, with respect to the appeal and cross appeal, the trust fund in this case "is that portion of the [building] loan [contract] received by the owner or contractor" ( Caledonia Lbr. & Coal Co. v. Chili Hgts. Apts. , 70 A.D.2d 766, 766, 417 N.Y.S.2d 536 [4th Dept. 1979] ), and that therefore the amount of the trust fund is, as a matter of law, valued at $13,334,999.99. I also agree with the majority that, contrary to plaintiffs’ contention on their appeal, the court properly denied that part of their cross motion seeking partial summary judgment on the issue of liability with respect to the cause of action asserting diversion of trust funds against defendant Top Capital of New York Brockport, LLC (Top Capital) because there exist triable issues of material fact "whether, and to what extent, trust funds may have been diverted" under Lien Law...