Pavarini McGovern, LLC v. Waterscape Resort LLC (In re Waterscape Resort LLC)

• Decision Date: 14 January 2016
• Docket Number: Case No. 11–11593 (SMB),Adv. Proc. No. 11–02248 (SMB)
• Citation: 544 B.R. 507
• Parties: In re: Waterscape Resort LLC, Debtor. Pavarini McGovern, LLC, Plaintiff, v. Waterscape Resort LLC, et al. Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

544 B.R. 507

In re: Waterscape Resort LLC, Debtor.

Pavarini McGovern, LLC, Plaintiff,
v.
Waterscape Resort LLC, et al. Defendants.

Case No. 11–11593 (SMB)
Adv. Proc. No. 11–02248 (SMB)

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

Signed January 14, 2016

544 B.R. 510

SILVERBERG P.C., 320 Carleton Avenue, Suite 6400, Central Islip, N.Y. 11722, Karl J. Silverberg, Esq. Of Counsel and MEDINA LAW FIRM LLC, 405 Lexington Avenue, Thirteenth Floor, New York, N.Y. 10174, Eric S. Medina, Esq. Of Counsel, Attorneys for Defendant Waterscape Resort LLC

RICHARD J. MIGLIACCIO, ESQ., 410 Park Avenue–Suite 1630, New York, N.Y. 10022, Attorney for Other Defendants

BARTON LLP, 420 Lexington Avenue, New York, N.Y. 10170, Eric W. Sleeper, Esq. Of Counsel and JOHN E. OSBORN, P.C., 841 Broadway, Suite 500, New York, N.Y. 10003, Daniel H. Crow, Esq. Of Counsel, Attorneys for Plaintiff Pavarini McGovern, LLC

MEMORANDUM DECISION GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Plaintiff Pavarini McGovern, LLC ("Pavarini") moves for partial summary judgment to dismiss the counterclaim asserted by Waterscape Resort LLC ("Waterscape") and the "Other Defendants"¹ (collectively,

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the "Defendants"² ) for purportedly misrepresenting that Pavarini had obtained subguard insurance to protect it from default by a certain subcontractor. Pavarini also moves for summary judgment striking³ the Defendants' second, third, fourth, eleventh, and twelfth affirmative defenses. For the reasons stated, Pavarini's motion is granted.

BACKGROUND

The background and procedural history of this chapter 11 case and this adversary proceeding are discussed at length in Pavarini McGovern, LLC v. Waterscape Resort LLC (In re Waterscape Resort LLC ), 483 B.R. 601 (Bankr.S.D.N.Y.2012) (" Waterscape I "), interlocutory appeal denied, No. 13 Misc. 47, 2013 WL 658152 (S.D.N.Y. Feb. 21, 2013) ; In re Waterscape Resort LLC, No. 11–11593(SMB), 2014 WL 1389762 (Bankr.S.D.N.Y. Apr. 9, 2014) (" Waterscape II "); and Pavarini McGovern, LLC v. Waterscape Resort LLC (In re Waterscape Resort LLC ), 520 B.R. 424 (Bankr.S.D.N.Y.2014) ( " Waterscape III "), interlocutory appeal denied, Nos. 15 cv 356, 15 cv 460(LTS) slip op. (S.D.N.Y. Feb. 26, 2015). I assume familiarity with those decisions and discuss only the facts relevant to the instant motion.

A. The CM Agreement

This adversary proceeding concerns the construction of a 45–story hotel and condominium building located at 66–70 West 45th Street in Manhattan (the "Project"). On June 28, 2007, Waterscape and Pavarini entered into a Construction Management Agreement⁴ ("CM Agreement ") under which Pavarini provided construction management services to Waterscape, the Project's owner. (See Statement of Undisputed Facts Pursuant to Local Rule 7056–1(b) In Support of Pavarini's Motion for Partial Summary Judgment, dated Mar. 18, 2015 at ¶ 8 ("Pavarini Facts ") (ECF Doc. # 224–2) and Waterscape's Responsive Statement of Material Facts, dated Apr. 21, 2015 at ¶ 8 ("Waterscape Facts ") (ECF Doc. # 238).)

Among its provisions, the CM Agreement outlined the circumstances under which Pavarini would obtain subguard insurance. Subguard insurance is a two-party agreement between a construction contractor and an insurer, and similar to a payment and performance bond, provides loss protection in the event of a subcontractor's default. (Frederick Affidavit at ¶ 11.) The CM Agreement provided that

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Pavarini would obtain subguard insurance for certain of its trade contractors (i.e., the subcontractors Pavarini hired to perform the various aspects of the work on the Project), as long as they qualified for coverage (Pavarini Facts at ¶ 15; Waterscape Facts at ¶ 15):

Owner [Waterscape] and Construction Manager [Pavarini] have agreed that all required Trade Contractor and Vendor bonding may be accomplished through and under Construction Manager's Sub–Guard Insurance Program, at Owner's option. Upon Owner's election and subject to the last sentence of this Section, Construction Manager shall include each Trade Contractor or Vendor whose Trade Contract or Purchase Order amount is equal to or exceeds One Hundred Thousand Dollars ($100,000.00) in its Sub–Guard program, provided such Trade Contractors and Vendors qualify (as properly determined by Construction Manager).... To the extent that Owner directs Construction Manager to use a Trade Contractor or Vendor who is excluded from Sub–Guard and cannot provide the required Bonds, Construction Manager shall not be liable for any non-Construction Manager caused failure or performance by that Trade Contractor or Vendor or the resulting costs arising therefrom.

(CM Agreement at § 14.3.1.) In addition, the CM Agreement required Pavarini, "from time to time as required," to provide appropriate documentation to Waterscape confirming that its subguard program covered all subcontractors and vendors. (Id. at § 14.3.2.)

The CM Agreement also provided that a dispute resolution board ("DRB") would resolve disputes between the parties arising during the construction of the Project. (See CM Agreement, Art. 18.) The proceedings before the DRB are discussed in greater detail below.

B. Subguard Insurance

On September 26, 2007, Pavarini submitted payment application # 4 to Waterscape in the aggregate amount of $1,858,228. (Frederick Affidavit, Ex. 6 at "Requisition Summary" page.) The premium for subguard insurance constituted $690,899 of the total request, and when added to previously billed amounts, Pavarini had billed Waterscape a total of $782,437 for subguard insurance premiums. (Id. ) Waterscape paid application # 4 by check dated October 2, 2007. (Id., Ex. 7.)

On January 25, 2008—subsequent to the payment of the subguard premiums—Pavarini executed a trade contract with a superstructure concrete subcontractor, 160 Broadway Concrete Corp. d/b/a Broadway Concrete ("Broadway Concrete"). (Pavarini Facts at ¶ 19; Waterscape Facts at ¶ 19; Frederick Affidavit, Ex. 8.) Although the subcontract exceeded the contractual threshold, Pavarini did not obtain subguard insurance for Broadway Concrete and eventually returned the portion of the subguard premium that had been allocated to superstructure concrete—$199,296.94—to Waterscape. (Pavarini Facts at ¶ 20; Waterscape Facts at ¶ 20; Frederick Affidavit, Ex. 9 at "Requisition Summary" page.) On September 11, 2009, Waterscape executed a written change order accepting the $199,297 credit. (Pavarini Facts at ¶ 21; Waterscape Facts at ¶ 21; Frederick Affidavit, Ex. 10.)

C. State Court Action

Waterscape commenced a lawsuit in the Supreme Court of the State of New York, County of New York against Pavarini's principals, Eric McGovern and William Frederick (the "Principals"), asserting fraud in connection with their alleged misrepresentation

544 B.R. 513

to Waterscape that Pavarini had obtained subguard insurance for Broadway Concrete when it had not (the "State Court Action"). The State Court Action is described in more detail in the later discussion relating to res judicata. For present purposes, it suffices to say that Justice Braun granted summary judgment to the Principals and the Appellate Division affirmed. Waterscape Resort LLC v. McGovern, 107 A.D.3d 571, 967 N.Y.S.2d 368, 369 (2013).

D. The DRB Action

In addition to the State Court Action, Waterscape filed a claim against Pavarini on May 29, 2012 with the DRB (the "DRB Action") alleging breach of the CM Agreement and fraud in connection with its failure to obtain subguard insurance for Broadway Concrete. (See Frederick Affidavit, Ex. 5.) In a thirty-four page decision, the DRB concluded that (i) Waterscape's damages for breach of contract were capped at the contractual liquidated damages amount of $450,000 (id. at 31), and (ii) "fraud could not have occurred at the time of billing as no superstructure concrete contract was in existence.... [Pavarini's] reluctance to tell [Waterscape] in 2009 that it had not included [Broadway Concrete] in Subguard does not bode well for [Pavarini]; yet there is no evidence that [Pavarini] engaged in fraud, misrepresentation, bad faith or gross negligence." (Id. at 33.)

The DRB further concluded that the existence or non-existence of subguard insurance was immaterial to Waterscape's damages. Pavarini had the contractual right to look to its subguard insurer for indemnity, but Waterscape did not. Instead, Waterscape's right to recover damages was governed by the CM Agreement with Pavarini. (Id. at 24–25.)

E. The Bankruptcy and This Adversary Proceeding

Waterscape commenced this chapter 11 case on April 5, 2011, and Pavarini commenced this adversary proceeding two months later. The original complaint, inter alia, charged the Defendants with two types of diversions of trust funds under Article 3–A of the New York Lien Law. First, Pavarini contended that Waterscape failed to pay $4,458,616.97 (the...