St. Paul Fire and Marine Ins. Co. v. State

Decision Date13 April 1979
Docket Number60598-A,Nos. 62098,s. 62098
Citation415 N.Y.S.2d 949,99 Misc.2d 140
PartiesST. PAUL FIRE AND MARINE INSURANCE COMPANY, on its own behalf and on behalf of all others similarly situated under Article 3-A of the Lien Law of the State of New York, Claimant, v. The STATE of New York, the New York State Department of Taxation and Finance, and the New York State Income Tax Bureau, Defendants. Claim
CourtNew York Court of Claims

Hart & Hume, New York City by William Hart and Robert Beau Leonard, New York City, of counsel, for claimant.

Robert Abrams, Atty. Gen. by Suzanne H. Loveys and Donald P. Hirshorn, Asst. Attys. Gen., for defendants.

GERARD M. WEISBERG, Judge.

The defendants (hereinafter collectively referred to as "State") have moved to dismiss this claim, contending that it fails to state a cause of action (CPLR 3211, subd. (a)(7)), that the Court of Claims lacks jurisdiction over the subject matter of the action (CPLR 3211, subd. (a)(2)), and that the claim is untimely (Court of Claims Act, § 10, subd. 4). Claimant has cross-moved for summary judgment and for permission to file a late claim (CPLR 3212; Court of Claims Act, § 10, subd. 6).

The claim is predicated upon Article 3-A of the Lien Law which provides that all funds paid to a contractor in connection with the improvement of real property constitute assets of a trust for the benefit of subcontractors, laborers, materialmen, tax claimants and their subrogees. Section 77 of the Lien Law states that a cause of action may be maintained by trust beneficiaries to enforce the trust, to set aside diversions of trust assets, to recover money damages and for various other types of relief. Procedurally, the action is required to conform ". . . as nearly as may be to the practice, pleadings, forms and procedure in a class action." (Lien Law, § 77, subd. 1.)

In December, 1973 and February, 1974, Electorque Associates, Inc. (Electorque) contracted to perform electrical work for the New York City Board of Education (Board) in connection with the construction of I.S. 324 and I.S. 383 in Brooklyn, New York (Contract Nos. 221416 and 222044). St. Paul Fire and Marine Insurance Company (St. Paul) executed performance and payment bonds in connection therewith as Electorque's surety in the amount of $2,002,000.00. Subsequently, on June 17, 1975, Electorque was declared in default and St. Paul was called upon to complete the contracts. St. Paul thereafter engaged the Sheldon Electric Company, Inc. and the David Coyne Co., Inc., to complete the contracts for the sums of $164,187.80 and $59,002.57, respectively. Claimant also disbursed $110,348.01 to unpaid subcontractors, laborers and materialmen of Electorque.

The gravamen of the claim is that prior to Electorque's default, the State levied upon contract balances due from the Board to pay taxes accrued by Electorque in the sum of $169,561.64. The State has furnished the Court with an affidavit which indicates that at least $77,700.51 was received by the State from tax levies upon the Board on October 22, 1974 and March 25, 1975, which funds were applied to Electorque's outstanding tax liability. The State denies knowledge of the source of any other funds paid to it by Electorque, stating merely that it was paid by check.

The State's liability is predicated on the theory that St. Paul is a beneficiary of an Article 3-A trust, the assets of which comprise all sums due or received by Electorque from the Board, that Electorque had no proprietary interest in these funds except as trustee, and that consequently, the State's tax levies were invalid. Further, St. Paul contends that the State's entitlement to trust assets is limited to taxes accrued specifically in connection with Contracts 221416 and 222044, and that the amounts actually collected by the State out of Board payments exceeded that amount. The State admits that Electorque's tax liability was never computed on a job-by-job basis and that the precise amount of taxes accrued under these contracts has never been administratively determined because the tax forms do not request such information.

The rights and liabilities of the parties are governed by Aquilino v. United States of America, 10 N.Y.2d 271, 219 N.Y.S.2d 254, 176 N.E.2d 826. In that case, the Federal government filed a tax lien against a general contractor for unpaid Social Security and withholding taxes. The Court stated per Judge FULD at page 282, 219 N.Y.S.2d at page 262, 176 N.E.2d at page 832:

". . . as a matter of New York law, a contractor does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give him a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid. This being so, it follows that the tax lien herein asserted by the Government against the property of the contractor-taxpayer is ineffective to reach such moneys and that the plaintiff subcontractors are entitled to the court-deposited fund."

The State correctly points out that Aquilino was decided under the Lien Law as it existed prior to 1959, and that subsequently, the State was designated a trust beneficiary to the extent of unpaid taxes, and was given a priority in distribution of trust assets. (Lien Law, § 77, subd. 8, (L.1959, ch. 696, § 2, amended L.1962, ch. 310, § 263 effective September 1, 1963).) Possibly, these statutory changes would have necessitated a different disposition of the funds in Aquilino. Nevertheless, under the present statute, tax claimants are only beneficiaries to the extent of taxes accrued on the particular job which is the subject of the trust. (Harman v. Fairview Associates, 25 N.Y.2d 101, 302 N.Y.S.2d 791, 250 N.E.2d 209; Lien Law, § 71, subd. 2(c).) Consequently, trust assets are not available for payment of the general contractor's tax liability arising from any other sources. To this end, the Lien Law requires that separate books and/or accounts be kept by the contractor indicating the beneficiaries of each trust and to whom payments have been made. (Lien Law, § 75; Caristo Constr. Corp. v. Diners Fin. Corp., 21 N.Y.2d 507, 512, 289 N.Y.S.2d 175, 178, 236 N.E.2d 461, 463.) Each trust is a separate entity composed of all funds paid by an owner to anyone in satisfaction of the contract. (Onondaga Commercial Dry Wall Corp. v. 150 Clinton St., Inc., 25 N.Y.2d 106, 302 N.Y.S.2d 795, 250 N.E.2d 211.) Therefore, the statement in Aquilino, that the general contractor possesses no proprietary rights in the trust assets which can be subject to a tax levy is still a viable principle. Stated another way, present proceeds may not be applied to the past debts of the contractor. (General Crushed Stone Company v. State of New York, 23 A.D.2d 250, 260 N.Y.S.2d 32.)

St. Paul's claim is precisely that funds paid by the Board under Contracts 221416 and 222044 were used to satisfy Electorque's tax liability arising, at least in part, from activities unconnected with those contracts. As indicated in Caristo, supra, p. 512, 289 N.Y.S.2d p. 178, 236 N.E.2d p. 463: "(p)ersons dealing with those handling trust funds, who may be charged with notice of the trust, may share in liability for unlawful diversions ( §§ 72, 73, 79-a)." Accordingly, the allegations of the claim state a cause of action for diversion of trust assets under Article 3-A of the Lien Law.

The State argues, however, that St. Paul has no subrogation rights to the trust fund since in its view the "completion contractors," i. e., those contractors whom St. Paul commissioned to complete the contracts after Electorque's default, are not beneficiaries of the fund. This assertion is premised on the lack of contractual relations between Electorque and the completion contractors and the fact that the alleged diversions took place prior to default.

This theory is totally erroneous. As Justice HELMAN stated in National Surety Corp. v. Fishkill National Bank, 61 Misc.2d 579, 581, 306 N.Y.S.2d 122, 125-126:

"Since every public improvement contract is bonded, the surety succeeds to the right of his principal, under well-established legal doctrines, from the date of the execution of the bond. (Citations omitted.) In addition to its common law rights of exoneration and indemnification, the surety has been authorized by section 77 of the Lien Law, upon effecting its payment to an obligee or beneficiary, to turn toward an alleged diverter to seek recovery for the diversion of moneys appropriated for the particular improvement, and is thus enabled to prosecute a trust fund action as if it were itself one of the stated beneficiaries. (Citations omitted.)"

There is no necessity for privity of contract among the various beneficiaries or between the defaulting general contractor and the surety's completion contractors. As Judge BERGAN stated in Onondaga Commercial Dry Wall, Inc., supra, 25 N.Y.2d p. 111, 302 N.Y.S.2d p. 798, 250 N.E.2d p. 213: "(c)ertanly money paid by the owner To anyone in satisfaction of the contract would be impressed with this broadly inclusive trust." (Emphasis added.) (See also, Wilson v. Moon, 240 App.Div. 440, 270 N.Y.S. 859, affd. 265 N.Y. 640, 193 N.E. 423; Carpenter's Backhoe & Dozer Service, Inc. v. Dewittsburg Housing Development Fund Corp., App.Div., 410 N.Y.S.2d 717 (3d Dept., 1978).)

The completion subcontractors are no less beneficiaries of the trust than those commissioned by Electorque. St. Paul, as their subrogee, is therefore empowered to maintain this action. We also note that St. Paul has alleged that it paid a number of Electorque's subcontractors the sum of $110,348.01. This allegation alone establishes St. Paul's standing. The State's motion to dismiss the claim under subdivision (a)(7) of section 3211 of the Civil Practice Law and Rules is therefore denied.

The State further contends that the claim is untimely. Defendants' position is that the present action is...

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