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

• Decision Date: 10 December 2012
• Docket Number: Bankruptcy No. 11–11593 (SMB).,Adversary No. 11–02248.
• Citation: 483 B.R. 601
• 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

483 B.R. 601

In re WATERSCAPE RESORT LLC, Debtor.Pavarini McGovern, LLC, Plaintiff,

v.Waterscape Resort LLC, et al., Defendants.

Bankruptcy No. 11–11593 (SMB).

Adversary No. 11–02248.

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

Dec. 10, 2012.

Holland & Knight LLP, Frederick R. Rohn, Esq., Henry A.H. Rosenzweig, Esq., New York, NY, Special Litigation Counsel for the Debtor and Debtor in Possession.

Barton LLP, Eric W. Sleeper, Esq., New York, NY, for Pavarini McGovern.

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

STUART M. BERNSTEIN, Bankruptcy Judge.

The plaintiff Pavarini McGovern, LLC (“Pavarini”) was retained as general contractor by the debtor and defendant Waterscape Resort LLC (“Waterscape”) to construct a building (the “Project”) in Manhattan. Allegedly owed approximately $11 million, Pavarini commenced this class action adversary proceeding contending that Waterscape diverted certain trust fund monies owed to Pavarini and, ultimately, the subcontractors that worked on the Project. ( See Complaint, dated June 10, 2011 (ECF Doc. # 1).) ¹ Pavarini has moved for partial summary judgment on the first two counts of the Complaint. For the reasons that follow, the motion is granted in part and denied in part.

BACKGROUND

A. The Deal

1. The Loan Agreements

On or about June 11, 2007, U.S. Bank, National Association and USB Capital Resources, Inc. f/k/a USB Capital Funding Corp. (collectively “US Bank”) made the following loan facilities available to Waterscape to refinance pre-existing debt and fund the construction of the Project, a 45–story hotel and condominium building located at 66–70 West 45th Street in Manhattan:

+--------------+
                ¦Loan  ¦Amount ¦
                +--------------+
                

+-----------------------------------------+
                ¦Construction Loan   ¦$100,112,566        ¦
                +--------------------+--------------------¦
                ¦Project Loan        ¦$ 9,180,486         ¦
                +--------------------+--------------------¦
                ¦Acquisition Loan 2  ¦$ 31,321,306        ¦
                +--------------------+--------------------¦
                ¦USB Loan            ¦$ 8,653,589         ¦
                +-----------------------------------------+
                

( Affidavit of Gary D. Houston in Connection with Pavarini McGovern LLC's Motion for Summary Judgment, sworn to Aug. 3, 2012 (“ Houston Affidavit ”), at ¶ 4 (ECF Doc. # 60).) The Acquisition and USB Loans were fully funded at the closing; the Construction and Project Loans were advanced as construction progressed. ( Id.) The Construction Loan was to fund “a portion of the actual hard costs” ( see Amended and Restated Construction Loan Agreement, dated June 11, 2007 (“ Construction Loan Agreement ”), at 1, ¶ C),³ and the Project Loan was to fund “certain indirect construction costs ... that do not qualify as cost of improvements under the Lien Law.” ( See Acquisition and Project Loan Agreement, dated June 11, 2007 (“ Project Loan Agreement ”), at p. 1, second paragraph.) ⁴ The Construction Loan was secured by a mortgage, and the Project Loan was secured by a Project Mortgage, Assignment of Rents and Security Agreement. ( Houston Affidavit at ¶ 6.)

2. Funding the Project

Pursuant to the Construction Loan and Project Loan Agreements, U.S. Bank agreed to make monthly advances to Waterscape to fund Project costs. ( See Construction Loan Agreement at §§ 3.1 & 3.2; Project Loan Agreement at §§ 3.1 & 3.2.) Waterscape requested advances by submitting monthly Draw Requests to U.S. Bank containing copies of, among other things, invoices of the Project contractors and vendors. ( Houston Affidavit at ¶ 9.) The Draw Requests had to be accompanied by a Draw Request Certification that contained affirmative representations by Waterscape to U.S. Bank that, among other things, the funds being drawn would be applied to fund the Project as specified in the requisition. ( Id. at ¶ 10.) Once approved, U.S. Bank transferred the funds to Waterscape.

3. The Construction Agreement

On June 28, 2007, Waterscape entered into a contract with Pavarini that designated Pavarini as the Construction Manager for the Project. ( See Construction Management Agreement, dated June 28, 2007 (“ CM Agreement ”).) ⁵ Pavarini entered into subcontracts with various trade contractors and vendors to perform the necessary work. ( Frederick Affidavit at ¶ 7.) Pavarini was responsible for managing and hiring subcontractors, and was entitled to a fee of 2.75% of the entire cost of construction exclusive of the fee itself. ( See CM Agreement at Art. 9.5.1.)

Waterscape was not in privity with the subcontractors; it paid Pavarini and Pavarini was responsible for paying the subcontractors. Pavarini agreed to provide Waterscape with the necessary paperwork to submit Draw Requests to U.S. Bank for funds with which Waterscape could make periodic payments to Pavarini as work was completed. ( See id. at Art. 12.) Among other things, Pavarini was required to submit monthly requests for payment (requisitions) to Waterscape. These monthly requests constituted an express representation by Pavarini, inter alia, that to the best of its knowledge, the payment requested was for work on the Project and that the work performed thus far complied with the CM Agreement. ( See id. at Art. 12.1.4.) Within five business days after receipt of Pavarini's request for payment, Waterscape had to issue a Certificate for Payment or notify Pavarini in writing why it was withholding the Certificate. ( See id. at Art. 12.2.) If Waterscape issued a Certificate of Payment, it was required to pay Pavarini within five but no later than thirty days of receipt of the Application of Payment, in full, irrespective of whether it disputed the amounts due Pavarini. ( See id. at Arts. 12.3.1 & 19.5.) ⁶ Any disputes were committed to a dispute resolution board (“DRB”). ( See id. at Art. 19.5.)

B. The Dispute Between the Parties

The dispute between the parties centers on two sets of events. First, U.S. Bank funded certain requisitions but Waterscape failed to remit all of the funded proceeds to Pavarini. Second, Waterscape sold condominium units and paid the proceeds to U.S. Bank rather than Pavarini in satisfaction of its loan obligations. In a nutshell, Pavarini alleges that the funded requisitions and sales proceeds were trust funds under New York's Lien Law that Waterscape illegally diverted.

1. The Funded Requisitions

Pavarini submitted forty-two correspondingly numbered requisitions to Waterscape. Waterscape submitted Draw Requests to U.S. Bank for the first forty requisitions. US Bank funded all or part of the forty Draw Requests, but Waterscape did not turn over the entire funded portion to Pavarini. The shortfall, $4,458,616.97 (the “Shortfall”), represents what Pavarini has characterized as diverted trust funds. ( See Frederick Affidavit at ¶ 15.) Pavarini also submitted a draft of Requisition no. 41 in the amount of $815,022, which U.S. Bank did not fund and Waterscape did not pay. ( Id. at ¶ 16.) On December 22, 2010, after Waterscape terminated the CM Agreement,⁷ Pavarini sent Requisition no. 42 in the amount of $5,145,809, and the total amount owing under all of the unpaid requisitions aggregates $10,833,132.59.⁸ ( Id. at ¶ 17.)

Although Waterscape has not specifically accounted for the Shortfall, it has offered evidence that it used all monies received by U.S. Bank per the Draw Requests to pay trust fund expenses. According to Waterscape, it received $85,157,163.64 in advances from U.S. Bank pursuant to the Construction Loan. ( See Verified Statement Pursuant to Lien Law sworn to Nov. 11, 2011 (“ Verified Statement ”), at 16 & Ex. E (p. 57 of 91).) ⁹ It paid out the aggregate sum of $85,226,259.57 for trust fund purposes, ( id. at 17 & Ex. G (pp. 59–89 of 91)), or $69,095.93 more than it drew from U.S. Bank. Pavarini concedes for the purpose of its motion that Waterscape paid this amount and that the payments were for legitimate trust fund expenditures. ( See Memorandum of Law in Support of Pavarini McGovern, LLC's Motion for Partial Summary Judgment, dated June 25, 2012 (“ Pavarini Memo ”), at 7 ( see ECF Doc. # 35).)

2. The Condominium Sales Proceeds

In addition to the funded Draw Requests, Waterscape received $14,510,340.00 from the sale of certain condominium units. ( See Verified Statement at 17 & Ex. F (p. 58 of 91).) As noted earlier, it paid the net proceeds to U.S. Bank at each closing to reduce U.S. Bank's loans. ( Id. at 16.) Although the Verified Statement does not indicate how the proceeds were applied, Waterscape's disclosure statement said that they were used to pay back the entire principal and interest due on the Project Loan. ( Debtor's Second Amended Disclosure Statement Pursuant to § 1125 of the Bankruptcy Code, dated July 21, 2011 (“ Disclosure Statement ”), at 17 (ECF/Main Case Doc. # 296).) It appears that there was little if any repayment of the Construction Loan. According to the Disclosure Statement, the balance as of March 1, 2011, was $94,871,542. ( Id. at 18.)

C. This Bankruptcy

Waterscape commenced this chapter 11 case on April 5, 2011. On June 9, 2011, Pavarini filed a proof of secured claim in the amount of $10,833,132.59, plus interest, and commenced this adversary proceeding the next day. The Complaint includes seven counts, but the last four were directed at U.S. Bank and have been dismissed by stipulation. ( See Stipulation and Order Dismissing Claims Against U.S. Bank National Association and USB Capital Resources, Inc. f/k/a USB Capital Funding Corp., dated Aug. 13, 2012 (ECF Doc. # 51).)

Three counts remain against Waterscape as well as other defendants, and Pavarini has moved for partial summary judgment on Counts I and II. In Count I, Pavarini seeks a declaration that the estate holds only bare legal title to any and all trust funds, including the Trust Assets,¹⁰ and has no equitable interest in those funds until the claims of Pavarini and the subcontractors are fully satisfied. ( Complaint at ¶ 63.) Consequently, Waterscape...