EFCO Corp. v. Liberty Mut. Ins. Co., 2009 NY Slip Op 31551 (N.Y. Sup. Ct. 7/9/2009)

• Decision Date: 09 July 2009
• Docket Number: Motions Seq. No. 003.,Motions Seq. No. 002.,No. 600146/07.,600146/07.
• Citation: 2009 NY Slip Op 31551
• Parties: EFCO CORP., Plaintiff, v. LIBERTY MUTUAL INSURANCE CO., GRAYSTONE CONSTRUCTION CORP., and TWO STAR ASSOCIATES, INC., Defendants.
• Court: New York Supreme Court

Page 1

2009 NY Slip Op 31551

EFCO CORP., Plaintiff, v. LIBERTY MUTUAL INSURANCE CO., GRAYSTONE CONSTRUCTION CORP., and TWO STAR ASSOCIATES, INC., Defendants.

No. 600146/07.

Motions Seq. No. 002.

Motions Seq. No. 003.

Supreme Court, New York County.

July 9, 2009.

DECISION

BARBARA R. KAPNICK, Judge.

Motion sequence numbers 002 and 003 are consolidated for disposition.

In this breach of contract action, plaintiff EFCO Corp., ("EFCO"), a material supplier, moves (under motion sequence number 002) pursuant to CPLR § 3212 for summary judgment on its claim against defendant Liberty Mutual Insurance Co., ("Liberty Mutual"), the surety under a labor and material payments bond (the "payment bond"), seeking recovery of $560,346.12¹ plus interest and attorneys' fees. Defendant Liberty Mutual moves (under motion sequence number 003) for partial summary judgment reducing EFCO's claims to $93,593.62.²

Background

The facts of this case are not in dispute. On or about July 2002, defendant Graystone entered into a public improvement contract with the New York City Housing Authority to act as the general contractor for the construction of a community center at the James Weldon Johnson Houses in Manhattan. At Graystone's request, Liberty Mutual, as surety, issued a $9,037,186.08 payment bond to Graystone, as principal.³ Under the terms of the bond, if Graystone failed to pay its subcontractors and suppliers, Liberty Mutual would make payment provided certain conditions were met.

Graystone retained Two Star as its concrete subcontractor on the project. In 2003 and 2004, EFCO entered into several agreements with Two Star for the rental of steel forms for concrete construction on the project. Sometime in 2004, Two Star defaulted under its obligations at the project and Graystone assumed all of Two Star's obligations, including its obligations pursuant to the rental agreements with EFCO. Thereafter, Graystone entered into approximately seven additional rental agreements with EFCO. Pursuant to the terms of the rental agreements, from June 2 003 through July 2005, both Two Star and Graystone received monthly invoices from EFCO. However, despite due demand, Two Star and Graystone paid only a portion of the amount due under their agreements and, according to EFCO, in July, 2005, $560,346.12 remained due and owing.

Graystone and EFCO then met in July, 2005 and executed a Settlement Agreement ("the Agreement") dated July 14, 2005. The Agreement provides as follows:

1. Graystone agrees to pay EFCO $100,000.00 in total for balance for EFCO's rental of all forms for the concrete work at this project.

2. These funds shall be released to EFCO as follows;

a. $25,000.00 at delivery of satisfaction of lien and

b. three installments of $25,000.00 each every month thereafter.

3. EFCO agrees to accept these payments with terms as full and final payment from Graystone on this project for all rental from the beginning of the job through July 31, 2005.

4. Graystone agrees to return all equipment it has directly rented from EFCO.

5. EFCO agrees to remove the lien on the project and release bond claim on Graystone in reference to the monies owed by Two-Star to EFCO.

6. Graystone shall pay $3,500.00 per month additional rent from August 1st, 2005 to the time the equipment is returned to EFCO.

Graystone paid the first installment of $25,000 when EFCO delivered satisfaction of the lien and made one additional $25,000 payment, but Graystone failed to pay the remaining $50,000. Moreover, it did not pay the $3,500 monthly equipment rental as required in paragraph 5. In addition, Graystone only returned a portion of the equipment it had rented from EFCO.

EFCO then commenced this action in January, 2007, seeking, inter alia, recovery against Liberty Mutual under the payment bond for the amounts owed by the two defaulting contractors.

Contentions

In support of its motion for summary judgment and in opposition to defendant Liberty Mutual's motion for partial summary judgment, EFCO argues that Liberty Mutual is liable for approximately $560,000 owed by the defaulting contractors because the Agreement was an executory accord, also known as an accord and satisfaction, and that since Graystone failed to perform its obligations under the Agreement, EFCO is entitled to sue on the original claim. Plaintiff also contends that because of the specific language in the payment bond, it is entitled to payment for unreturned materials; that it complied with State Finance Law Section 137's notice provision and that, pursuant to the clear language of the payment bond, Liberty Mutual is obligated for all contractual costs, including interest from the date of its demand for payment under the bond and attorneys' fees.

Liberty Mutual argues that the parties intended the Settlement Agreement to be a substituted agreement that replaced the earlier rental agreements between EFCO and the defaulting contractors. Alternatively, Liberty Mutual argues that there is at least a question of fact about whether the parties intended the Settlement Agreement to be a substituted agreement. In addition, it claims that the unreturned equipment is not recoverable under the terms of the payment bond and that the interest charges that predate the commencement of this action are not recoverable.⁴

Discussion

In this instance, plaintiff EFCO has established its prima facie case by submitting the rental agreements and project summaries that demonstrate that the defaulting contractors failed to pay invoices totaling $560,346.12. It is a well settled rule in this state that the liability of the surety is measured by the liability of the principal. American Bldg. Supply Corp. v. Avalon Props., Inc., 8 A.D.3d 515, 516 (2^nd Dept 2004); Venus Mech. v Insurance Co. Of N. Am., 245 A.D.2d 559 (2^nd Dept 1997); Dimancopoulos v. Consort Dev. Corp., 158 A.D.2nd 658 (2nd Dept 1990) and here, the rental agreements and the payment bond establish that the principal, and thus by extension Liberty Mutual, is liable for rent for the leased equipment, interest, replacement costs of the unreturned equipment and attorneys' fees.

EFCO has also made a prima facie showing that the Settlement Agreement is an executory accord. In Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375, 383 (1993) the Court of Appeals discussed the distinction between "the settlement devices of `accord and satisfaction' and `substituted agreement.'"

An accord is an agreement that a stipulated performance will be accepted, in the future, in lieu of an existing claim (citations omitted). The distinctive feature of an accord and satisfaction is that the obligee does not intend to discharge the existing claim merely upon the making of the accord; what is bargained for is the performance, or satisfaction. If the satisfaction is not tendered, the obligee may sue under the original claim or for breach of the accord (citations omitted).

By contrast, the parties may intend that a new agreement, though executory, will immediately discharge the existing obligation, (citation omitted). That is a substituted agreement.

Whether the parties intended a particular agreement to be an executory accord or a substituted agreement involves a determination which may be aided by certain presumptions. (See Denburg v. Parker Chapin Flattau & Klimpl, supra at 384.) "`Generally, it is assumed that one does not surrender an existing obligation for a promise to perform in the future .... It is generally more reasonable to suppose that he bound himself to surrender his old rights only when the new contract of accord was performed.'" Albee Truck Inc. V. Halpin Fire Equipment Inc., 206 A.D.2d 789, 790 (3^rd Dept 1994) citing Goldbard v. Empire State Mut. Life Ins., 5 A.D.2d 230, 236 (1^st Dept 1958).

There is an additional presumption, or canon of contract construction, that provides that where a contract is made for the satisfaction of a pre-existing contractual duty to pay a liquidated sum of money, only performance of the subsequent contract discharges the pre-existing duty because "a creditor generally will not enter into a bargain for an immediate cancellation of his claim without obtaining satisfaction and not merely a promise of it." Restatement of Contracts, § 419, Comment a.; 6 Williston on Contracts, (rev. ed.) § 1847.

In general, to overcome these presumptions, a court will scrutinize the language of the subsequent agreement to determine whether it contains any of the indicia of a substituted agreement, that is, whether the creditor intended to relinquish his/her claim prior to satisfaction. For example, if the subsequent agreement states that it expressly supersedes and replaces the prior agreements, it constitutes a novation. See, Leeward Isles Resorts, Ltd. v. Hickox, 49 A.D.3d 277 (1^st Dept 2008), lv to app. dism'd 11 NY3d 914 (2009), rearg. den. 12 NY3d 803 (2009); Northville Indus. Corp. v. Fort Neck Oil Terms Corp., 100 AD2d 865 (2nd Dep't 1984), aff d 64 NY2d 930 (1985). Also, if it expressly releases the prior claim, a court may find a substituted agreement. C3 Media & Marketing Group, LLC v. Firstgate Internet, Inc., 419 F.Supp. 2d 419 (S.D.N.Y. 2005). However, as the court stated in Wyatt v. N.Y., O & W.R. Co., 45 F.2d 705, 708 (2^nd Cir. 1930), "the intention must be clear, and the presumption is otherwise."

In this case, the Settlement Agreement is devoid of any indicia that it should be considered a substituted agreement. It does not state that it supersedes or is a substitute for the prior agreements, nor does it contain a release or any other language that demonstrates that EFCO intended to cede its rights under the rental agreements simply in exchange for Graystone's promise to perform in the future.

[W]here a question of...