In re Cavalry Const., Inc.

• Decision Date: 30 March 2010
• Docket Number: No. 09-CV-5122 (KMK),09-CV-5122 (KMK)
• Citation: 428 B.R. 25
• Parties: In re CAVALRY CONSTRUCTION, INC., Debtor, Cavalry Construction, Inc., Plaintiff/Appellee, v. WDF, Inc., WDF, Inc./Cavalry Construction, Inc., Federal Insurance Company, Seaboard Surety Company and St. Paul Fire and Marine Insurance Company as its successor in interest, and Fidelity and Deposit Company of Maryland, Defendants/Appellants.
• Court: U.S. District Court — Southern District of New York

428 B.R. 25

In re CAVALRY CONSTRUCTION, INC., Debtor,Cavalry Construction, Inc., Plaintiff/Appellee,

v.WDF, Inc., WDF, Inc./Cavalry Construction, Inc., Federal Insurance Company, Seaboard Surety Company and St. Paul Fire and Marine Insurance Company as its successor in interest, and Fidelity and Deposit Company of Maryland, Defendants/Appellants.

No. 09-CV-5122 (KMK).

United States District Court, S.D. New York.

March 30, 2010.

Arlene Gordon Oliver, Esq., Rattet, Pasternak & Gordon-Oliver, LLP, Harrison, NY, for Plaintiff/Appellee/Debtor.

Howard S. Jacobowitz, Esq., The McDonough Law Firm, LLP, New Rochelle, NY, for Defendants/Appellants.

OPINION AND ORDER

KENNETH M. KARAS, District Judge.

Appellants appeal from a Final Order of the Bankruptcy Court dated April 24, 2009. For the reasons given herein, the Order of the Bankruptcy Court is vacated in part and affirmed in part, and this case is remanded to the Bankruptcy Court for proceedings consistent with this Opinion.

I. Background

A. Facts

This appeal deals with six public works projects (the "Projects"), known as Forsythe H. S., Julia Richman H. S., P.S. 127, I.S. 84, P.S. 4 and Bronx School for Law ("Bronx Law"). (Defs.' Br. Appealing Final J. of the Bankr.Ct. Dated & Entered Apr. 24, 2009 ("WDF's Mem.") 1, 3.) The relationships between the various Parties were the same for all of the Projects with the exception of Bronx Law. ( Id. at 3.)

For all the Projects except Bronx Law, Appellant WDF, Inc. ("WDF") entered into a prime contract with the owner, The New York City School Construction Authority (the "SCA").¹ ( Id.) Cavalry Construction, Inc. ("Cavalry" or "Appellee") was a subcontractor to WDF. ( Id.)

For the Bronx Law Project, the owner, SCA, entered into a general construction contract with Silverite Construction Co., Inc. ("Silverite"). ( Id.) Silverite then entered into a subcontract with WDF for three trades. ( Id.) WDF, in turn, entered into a second-tier subcontract with WDF, Inc./Cavalry Construction, Inc. (the "Joint Venture"), which is a joint venture, for the masonry work included in those trades. ( Id.) Finally, the Joint Venture entered into a third-tier subcontract with Cavalry. ( Id.)

Cavalry commenced an adversary proceeding against WDF and then amended its complaint to seek recovery against the SCA, the Joint Venture, and Silverite. ( Id. at 4.) Subsequently, Cavalry commenced separate actions against Federal Insurance Company ("Federal"), Seaboard Surety Company ("Seaboard") jointly and severally with St. Paul Fire and Marine Insurance Company ("St.Paul"), as Seaboard's successor in interest, Fidelity and Deposit Company of Maryland ("Fidelity"), and WDF's labor and material payment bond sureties on the Projects. ( Id.) Cavalry then discontinued its Bronx Law action against Silverite. ( Id.)

After a trial, the Bankruptcy Court, per Judge Adlai S. Hardin, Jr., ordered, inter alia, that judgment be awarded to Cavalry on its subcontract claims against WDF, and that Cavalry's public improvement liens against the SCA be foreclosed. ( Id. at 5.) Appellants appealed and present three issues:

(1) Whether the Bankruptcy Court erred in holding WDF in breach of contract and liable for the additional work allegedly performed on [Bronx Law] ...;(2) Whether the Bankruptcy Court erred in relying on an interested party's (president of Cavalry [sic] ) testimony on the issue of the value of the change order work ...; and

(3) Whether the Bankrupcty Court erred in not applying the same standards of proof to WDF's backcharges as it did for Cavalry's damages.

( Id. at 1.)

All of these claims arise under New York law, as no party disputes. (WDF's Mem. 8-18 (repeatedly citing New York law); Appellee's Answering Appeal Br. ("Cavalry's Mem.") 3-28 (same)); see also Postlewaite v. McGraw-Hill, Inc., 411 F.3d 63, 67 (2d Cir.2005) (applying New York law when the parties did not dispute that it applied).

B. Procedural History

Appellants filed a notice of appeal on February 6, 2009. Briefing was completed on September 9, 2009. The Court held oral argument on March 11, 2010. At the same time as Appellants appealed in this case, the SCA appealed from the same Order of the Bankruptcy Court in another case (Case No. 09-CV-5123). At the request of the Parties, the Court is keeping the two cases separate and will issue separate opinions.

II. Discussion

A. Standard of Review

Pursuant to Bankruptcy Rule 8013, a District Court reviews a bankruptcy court's conclusions of law de novo and reviews findings of fact for clear error. See Fed. R. Bankr.P. 8013; Lubow Machine Co. v. Bayshore Wire Prods. Corp. (In re Bayshore Wire Prods. Corp.), 209 F.3d 100, 103 (2d Cir.2000) ("Like the District Court, we review the Bankruptcy Court's findings of fact for clear error, [and] its conclusions of law de novo ...." (internal citations omitted)); Am. Home Assurance Co. v. Enron Natural Gas Mktg. Corp. (In re Enron Corp.), 307 B.R. 372, 378 (S.D.N.Y.2004) ("A bankruptcy court's conclusions of law are reviewed de novo and its findings of fact for clear error.").

Under the clear error standard, "[t]here is a strong presumption in favor of a trial court's findings of fact if supported by substantial evidence," and a reviewing court will not upset a factual finding "unless [it is] left with the definite and firm conviction that a mistake has been made." Travellers Int'l A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1579 (2d Cir.1994); see also Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ("[A] finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." (internal quotation marks omitted)); Ceraso v. Motiva Enters., LLC, 326 F.3d 303, 316 (2d Cir.2003) (stating that an appellate court should not overturn a trial judge's choice "between permissible competing inferences"). In particular, "[t]he decisions as to whose testimony to credit ... [are] solely within the provinces of the trier of fact...." Ceraso, 326 F.3d at 316-17; see also Anderson, 470 U.S. at 575, 105 S.Ct. 1504 ("[W]hen a trial judge's finding is based on his decision to credit the testimony of ... witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error.").

B. The Bronx Law Project

There are two contracts and two issues that are relevant to the Bronx Law Project. The first contract was the agreementthat established the 50/50 Joint Venture between Cavalry and WDF (the "Venture Contract"). (Cavalry's Mem. 3.) The second contract was a third-tier subcontractor agreement between the Joint Venture and Cavalry (the "Masonry Contract"). (WDF's Mem. 3.) The first issue is whether WDF was liable to Cavalry on either contract. The second issue is whether WDF was liable to Cavalry under New York's Lien Law § 42.

The Parties do not agree upon the theory the Bankruptcy Court used to render judgment in Cavalry's favor, nor upon which contract formed the basis for liability. (WDF's Mem. 6 (discussing breach of contract based on the Masonry Contract); Cavalry's Mem. 3 (discussing breach of fiduciary duty based on the Venture Contract).) To clarify the situation, the Court first addresses New York's breach of contract law, and then examines the Bankruptcy Court's holdings in order to demonstrate that breach of the Masonry Contract did not form the basis for Judge Hardin's Order.

1. New York's Breach of Contract Law

WDF seeks to invoke the general rule that one party cannot sue another for breach of contract unless the two parties are in privity. See Yucyco, Ltd. v. Republic of Slovenia, 984 F.Supp. 209, 215 (S.D.N.Y.1997) ("It is well established that a plaintiff in a breach of contract action 'may not assert a cause of action to recover damages for breach of contract against a party with whom it is not in privity.' " (quoting Perma Pave Contracting Corp. v. Paerdegat Boat & Racquet Club, Inc., 156 A.D.2d 550, 549 N.Y.S.2d 57, 58 (App.Div.1989))); Crabtree v. Tristar Auto. Group, Inc., 776 F.Supp. 155, 166 (S.D.N.Y.1991) ("It is hornbook law that a nonsignatory to a contract cannot be named as a defendant in a breach of contract action unless it has thereafter assumed or been assigned the contract."); Spectrum Painting Contractors, Inc. v. Kreisler Borg Florman Gen. Constr. Co., 64 A.D.3d 565, 883 N.Y.S.2d 262, 272 (App.Div.2009) ("[A] subcontractor may not assert a cause of action to recover damages for breach of contract against a party with whom it is not in privity." (internal quotation marks and citation omitted)).

The only signatories to the Masonry Contract were Cavalry and the Joint Venture. (Cavalry's Mem. 3.) Cavalry argues that even though the Masonry Contract was signed only by Cavalry and the Joint Venture, the "functional equivalent of privity" existed between Cavalry and WDF. ( Id. at 7.) Indeed, New York law recognizes privity-like relationships in construction situations under certain circumstances. See, e.g., RLI Ins. Co. v. King Sha Group, 598 F.Supp.2d 438, 443-44 (S.D.N.Y.2009) (stating that, under New York law, the "functional equivalent of privity" may be established when "the prime contract provided that the subcontractors would assume all the obligations and responsibilities" of the contractor, or, when the owner and subcontractor had "direct dealings" and the subcontractor knew that work was being done for the owner's benefit); City Sch. Dist. of Newburgh v. Hugh Stubbins & Assocs., Inc., 85 N.Y.2d 535, 626 N.Y.S.2d 741, 650 N.E.2d 399, 401 (1995) (finding the functional equivalent of privity between the ultimate owner and the subcontractor when the construction company undertook construction on behalf of the ultimate owner, the ultimate owner was the intended beneficiary, and these facts were...