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TOWN OF SAUGERTIES v. EMP. INS.

United States District Court, Northern District of New York


July 19, 1990

TOWN OF SAUGERTIES, PLAINTIFF,
v.
EMPLOYERS INSURANCE OF WAUSAU, A MUTUAL COMPANY, AND D'ANNUNZIO CONSTRUCTORS CORP., DEFENDANTS.

The opinion of the court was delivered by: McCURN, Chief Judge.

MEMORANDUM-DECISION AND ORDER

Introduction

This action arises out of a contract entered into in 1984 by the Town of Saugerties and a contractor, D'Annunzio Constructors Corp. ("D'Annunzio" or "contractor"), for the construction of a sewer project in the town. Disputes over performance of the contract developed between the town, D'Annunzio, and Employers Insurance of Wausau ("Wausau"), the holder of a performance bond on which D'Annunzio was the principal and the town the obligee. The disputes culminated in two lawsuits that have been consolidated and are now before the court.

In counterclaims against the town, the defendants D'Annunzio and Wausau seek recovery of a sum of money they contend they are owed under a change order in the contract, and/or recovery in quantum meruit for services rendered to the town. The town now moves for summary judgment dismissing the counterclaims on the ground that the defendants failed to comply with Section 65(3) of the New York Town Law, which requires that a party bringing a contract action against a town must first file a notice of claim with the town within six months of the accrual of its cause of action, and must not commence the action until 40 days have elapsed from the filing of the notice of claim.

The defendants argue that a timely notice of claim was filed with the town, and that, in addition, Section 65(3) does not apply to those counterclaims which seek quasi-contractual remedies. The defendants cross-move for leave to amend their counterclaims to include an allegation that a timely notice of claim was filed, and for the court to deem that the 40-day waiting period for commencement of their action has passed.

Background

On June 25, 1984, the plaintiff, Town of Saugerties, entered into a contract with defendant D'Annunzio for the construction of a sewer project. In connection with the contract, defendant Wausau, as the surety, issued performance and payment bonds on behalf of the contractor, as principal, and in favor of the town, as obligee. The parties agree that the contractor entered into performance of the contract, and that disputes eventually arose over, among other things, the contractor's contention that certain subsurface conditions unknown to the parties at the time of contracting made it impossible for the contractor to complete the contract as originally agreed.

On November 22, 1985, the contractor commenced an action in this court against the town, seeking damages for (1) moneys due but unpaid under the contract; (2) extra work performed at the request of the town; and (3) interference and other acts by the town including the careless and negligent preparation of plans and specifications for the contract. See Wallach affid., Exh. 1. On or about December 20, 1985, the town commenced an action against defendant Wausau, as surety on the performance bonds. Around this time, the contractor stopped work on the project.

Negotiations began between the town and D'Annunzio toward resolution of the disputes and the two pending lawsuits. As a result of the negotiations, the town and D'Annunzio entered into a change order, known as Change Order 3-12. The important alterations made by the change order were that the time to complete the contract was extended to December 1, 1987, and that the contract was changed from a unit price contract to a stipulated sum contract, with the contract amount set at $3,600,000.00. At the same time, attorneys for the town, D'Annunzio, and Wausau entered into a stipulation signed as "so ordered" by the court and dated September 5, 1987, which, among other things, provided for the dismissal of the two lawsuits upon completion of the work to be performed under the contract, including Change Order 3-12. The contractor then resumed work on the sewer project.

The contractor submitted estimates for payment to the town in October and November 1987. Estimate No. 20, submitted in November, showed that the value of the work completed was $3,600,000.00, the total contract amount. The town, however, withheld payment of approximately $427,000, because it contended the contractor did not comply with the plans and specifications of the original contract or with Change Order 3-12. Couch affid., para. 21. Nevertheless, the sewer system is functional, and has been used by the town since December 1987.

  Through 1988, the town and contractor continued to meet and
exchange correspondence regarding work the town felt was
required to complete the contract, and the disposition of the
$427,000 withheld by the town. For example, in a May 17,
1988, letter from Mr. Wallach, the attorney for the
defendants, to Mr. Couch, attorney for the town, Mr. Wallach
refers to a meeting at which a settlement proposal was
discussed:

   . . The work under the contract has long been
  completed, the sewer system has been in operation
  for quite some time, and the Town is holding in
  excess of $428,000 in contract balances and
  retainages for reasons which remain unclear to
  me. At the meeting on March 31, 1988 among
  representatives of the Town, D'Annunzio and
  surety, we made what we believed, and still
  believe, to be a fair, reasonable and practical
  proposal, namely, that the Town agree to take a
  $60,000 total credit against the $428,000
  remaining to be paid under the contract for all
  its claims, including, but not limited to, claims
  for incomplete and defective work, punchlist
  items, prospective maintenance, and engineering
  costs. . . .

Couch affid., Exh. F.

In a letter dated September 8, 1988, from Mr. Wallach to Mr. Couch, Mr. Wallach states:

    The time has come for a decision by the Town
  with respect to our most recent, and final,
  settlement proposal.

    You have indicated that the Town will accept a
  credit of $150,000 and I have advised you that
  D'Annunzio and the Surety will agree to such a
  credit provided that it is in full and final
  settlement of all matters, claims and disputes of
  any kind under or in connection with the Contract
  and performance bond, and that no issues, claims or
  matters are left open or pending. . . .
  Accordingly, you are hereby advised that unless
  this matter has been resolved among the parties by
  September 26, 1988, we will proceed to take such
  action as we deem appropriate, including
  litigation, to protect and enforce D'Annunzio's and
  the Surety's interests. . . .

Couch affid., Exh. F.

Again, in a letter dated October 19, 1988, Mr. Wallach writes
to Mr. Couch:

   . . D'Annunzio and the Surety renew their offer
  set forth in my letter of September 8, namely,
  that they will accept a credit of $150,000
  against the contract balance and retainages, in
  full and final settlement of all matters, claims
  and disputes of any kind or nature among the
  parties arising out of or in connection with the
  Contract and the performance bond, including, but
  not limited to, all matters involving the DEC
  and/or EPA.

    The Town of Saugerties is hereby advised that
  unless the Contract is closed out on or before
  November 7, 1988, on the terms and conditions set
  forth in my letter of September 8, and above,
  D'Annunzio and the Surety intend to take such
  action as they deem appropriate to enforce their
  rights, including seeking relief from the United
  States District Court, Northern District of New
  York, on the grounds that the Town has breached
  the settlement agreement and

  stipulation entered into in connection with the
  litigation pending in that Court. . . .

Couch affid., Exh. F.

  Indeed, in a letter dated November 8, 1988, Mr. Wallach
requested the court to schedule a conference to discuss
settlement or resumption of litigation:

   . . The purpose of this letter is to request a
  conference before the Court to discuss settlement
  of both the captioned actions and the underlying
  disputes, or, in the alternative, [if] settlement
  is not possible, to establish a schedule for the
  completion of discovery proceedings and the trial
  of the actions.

  . . . In the circumstances, we respectfully
  request that the Court schedule a conference in
  order to discuss settlement of the matter and/or
  to establish a discovery and trial schedule.

Couch affid., Exh. E.

  A conference was scheduled and the parties met with the
court on March 8, 1989. In the meantime, the town had
declared the contractor in default on the contract on March
2, 1989, by resolution of the town council. At the
conference, the parties informed the court that resolution of
many of the disputes between the parties might well depend
upon how the New York State Department of Environmental
Conservation responded to the town's request for funding of
the contract and Change Order 3-12. Wallach affid., p. 7. The
attorneys for the town and contractor exchanged
correspondence over the next few months, dealing primarily
with testing to be done on the sewer project to receive
reimbursement for part of the cost from the state.
See Wallach affid., Exh. 3 and 4. In a letter dated August 18,
1989, regarding certain testing being done on the sewer
project, Mr. Couch wrote to Mr. Wallach that:

   . . The Town is taking what steps it can to
  convince the DEC that even though D'Annunzio did
  not comply with its contract, or meet the ten
  state standards, the Federal and State
  governments should fund the project to the
  maximum percentage of cost allowed by law.
  Without the cooperation of your client or your
  clients [sic] principal, this funding will not be
  available.

    The Town is also seeking full funding for
  Change Order 3-12. Again, without cooperation
  from your client or its principal, this funding
  will not be available.

    Given that Federal and State funding is the
  only way to mitigate the Town's damages, I don't
  understand your clients [sic] attitude.

    I suggest we schedule a meeting with the Court
  to get the litigation back on track and dispose
  of this matter. . . .

Wallach affid., Exh. 5.

  Mr. Wallach sent a letter to the court, dated October 5,
1989, summarizing the status of negotiations:

   . . In response to your letter dated September
  27, 1989 requesting counsel to advise you as to
  the current status of the actions, settlement
  discussions have so far been unproductive and the
  status of the matter remains as it was when we
  last met with Judge McCurn in March, 1989.

    In the circumstances, we respectfully request
  that another pretrial conference be scheduled, in
  Albany if possible, in mid-November, for the
  purpose of discussing settlement and/or fixing a
  timetable for the continuation of the actions. .

Wallach affid., Exh. 8.

Another pretrial conference was conducted on December 6, 1989. According to Mr. Wallach in his affidavit, Mr. Couch stated at the meeting that he had met with representatives from the DEC and they had indicated that the DEC might deduct some $390,000 from its funding of the contract. Mr. Couch also stated that the town would not pay any portion of the $427,000 it withheld from the contractor, and that since D'Annunzio and Wausau were unwilling to sign releases, he would continue litigation. The court also fixed dates for the town to amend its complaint to include allegations arising subsequent to service of the original complaint, and for filing of an answer, and conducting discovery and motions.

The town filed an amended complaint on or about January 9, 1990, seeking damages against the contractor and Wausau in the approximate amount of $2,750,000, and including four causes of action alleging that Change Order 3-12 was void and unenforceable because, among other reasons: (1) the change order was entered into at a time when the town was under severe economic duress; (2) the change order was contrary to public policy; (3) the change order was contrary to public bidding laws; and (4) there was no consideration given for the change order. In the defendants' answer, they asserted four counterclaims. In the first counterclaim, defendants seek to recover $425,000 from the plaintiff under the contract, less an amount defendants estimate at $25,000 for certain "punchlist" items remaining to be performed. The second, third and fourth counterclaims assert quasi-contractual claims for the reasonable value of the services performed and unjust enrichment of the plaintiff, conditioned upon the court's finding that Change Order 3-12 is void and unenforceable.

The defendants did not allege in their answer or counterclaims that they timely filed a notice of claim with the town, which is a jurisdictional prerequisite to bringing a contract action against a town. N.Y. Town Law § 65(3); Wa-Wa-Yanda, Inc. v. Town of Islip, 25 A.D.2d 762, 269 N.Y.S.2d 154 (2d Dept. 1966); aff'd 21 N.Y.2d 1013, 290 N.Y.S.2d 932, 238 N.E.2d 332 (1968); Montauk-Caribbean Airways, Inc. v. Hope, 132 Misc.2d 496, 505 N.Y.S.2d 297 (Sup.Ct. Suffolk Co.), cert. denied, 479 U.S. 872, 107 S.Ct. 248, 93 L.Ed.2d 172 (1986); Franza's Universal Scrap Metal, Inc. v. Town of Islip, 89 A.D.2d 843, 453 N.Y.S.2d 24 (2d Dept. 1982). Mr. Wallach states in his affidavit, however, that a notice of claim was filed with the town on or about April 4, 1990. The town now moves to dismiss the counterclaims on the ground that no notice of claim was filed, and that the time within which the defendants could file a notice of claim has expired. The defendants contend, on the other hand, that their notice of claim was timely filed, and that their cause of action for the difference, if any, between the amount which would have been payable to D'Annunzio if the contract had been completed, and liquidated damages and the town's cost of completing the work allegedly uncompleted, has not yet accrued. The defendants also argue that the notice provisions of Town Law § 65(3) do not apply to the quasi-contractual remedies sought in the second, third and fourth counterclaims. Defendants cross-move for leave to amend their counterclaims to assert that a timely notice of claim was filed, and asking the court to deem the 40-day waiting period under Town Law Section 65(3) has elapsed.

Discussion

New York Town Law § 65(3) provides:

    On and after the first day of September,
  nineteen hundred thirty-nine, no action shall be
  maintained against a town upon or arising out of
  a contract entered into by the town unless the
  same shall be commenced within eighteen months
  after the cause of action thereof shall have
  accrued, nor unless a written verified claim
  shall have been filed with the town clerk within
  six months after the cause of action shall have
  accrued, but no such action shall be brought upon
  any such claim until forty days have elapsed
  after the filing of the claim in the office of
  the town clerk.

N Y Town Law § 65(3).

As discussed supra, the timely filing of a notice of claim is a condition precedent to filing suit against a town, and failure to file a timely notice of claim is a jurisdictional bar to an action. See, e.g., Wa-Wa-Yanda, Inc., 25 A.D.2d 762, 269 N.Y.S.2d 154; Montauk-Caribbean Airways, 132 Misc.2d 496, 505 N.Y.S.2d 297; Franza's Universal Scrap Metal, 89 A.D.2d 843, 453 N.Y.S.2d 24. In addition, Town Law § 65(3), unlike some other notice statutes, contains no provision allowing the court to excuse compliance with its requirements, and the court lacks authority to do so. See Aqua Dredge, Inc. v. Little Harbor Sound Civic Improvement Ass'n, 114 A.D.2d 825, 826, 494 N.Y.S.2d 736, 737 (2d Dept. 1985). The town contended that the counterclaims should be dismissed because no notice of claim has been filed. It should be noted here that the defendants allege a notice of claim was filed with the town clerk on or about April 4, 1990, two days before the filing of the town's motion to dismiss, and that counsel for the town conceded at oral argument that a notice of claim has been filed. The court will proceed, therefore, under the assumption that a notice of claim was filed on April 4, 1990.

The town contends, nevertheless, that defendants' cause of action under the contract, if any, accrued when the contractor submitted his final request for payment on the project on November 24, 1987, or in any event, no later than March 2, 1989, when the town declared the contractor in default under the contract. Thus, if the defendants' cause of action accrued on either of these dates, or any date in between, even the notice of claim filed on April 4, 1990, would not have been filed within six months of accrual, and would therefore be untimely.

The defendants contend, however, that the parties continued negotiations on a settlement of their contractual disputes after the contractor's final request for payment and the town's declaration of default by the contractor, up until the pretrial conference on December 6, 1989, and therefore, the April 4, 1990, notice of claim was timely filed. In New York, a contractor's cause of action accrues when he should have viewed his claim as being rejected. Arnell Const. Corp. v. Village of North Tarrytown, 100 A.D.2d 562, 473 N.Y.S.2d 489, 491 (2d Dept. 1984), aff'd, 64 N.Y.2d 916, 488 N.Y.S.2d 379, 477 N.E.2d 620 (1985); Memphis Const., Inc. v. Village of Moravia, 59 A.D.2d 646, 398 N.Y.S.2d 386, 389 (4th Dept. 1977). The town relies on Arnell Const. Corp., in which the court held that a contractor's cause of action accrued when his request for final payment was rejected by the village, and the village indicated it would be willing to pay a lesser amount. The court ruled that the contractor should have viewed its claim as having been rejected on the date its request for final payment was denied, and that a notice of claim filed over two years later was untimely under CPLR § 9802, which contains the notice of claim provision that applies to villages. The contractor's action was thus barred, and its claim was dismissed.

Arnell Const. Corp. is distinguishable from the case at bar, however, in that the defendants assert that settlement negotiations continued up until December 6, 1989, after the contractor submitted its final payment and after the town's declaration of the contractor's default. It is important to note here that, although the contractor did not receive payment on his final request for payment, the papers do not show any formal rejection of the contractor's claim, at least until the town's declaration of default on March 2, 1989. The court must determine, then, if at any time, the contractor "should have viewed his claim as having been constructively rejected, thus giving rise to the accrual of a cause of action." Memphis Const., Inc., 59 A.D.2d 646, 398 N.Y.S.2d at 388 (citing City of New York v. State of New York, 40 N.Y.2d 659, 668, 389 N YS.2d 332, 339, 357 N.E.2d 988, 995 (1976)).

Certainly, in most cases, the town's declaration that the contractor was in default would indicate that the contractor "possesse[d] the legal right to be paid and to enforce its right to payment in court," thus giving rise to the accrual of the contractor's cause of action. City of New York, 40 N Y2d at 668, 389 N.Y.S.2d at 339, 357 N.E.2d at 995. However, as indicated by the correspondence between the parties, they continued thereafter to seek reimbursement from the state under Change Order 3-12, a part of the contract, and the part under which payment is claimed, in hopes of settling their disputes without resort to the judicial process. In the court's view, and as the Court of Appeals noted in City of New York, "it cannot be said as a matter of law that the [contractor's] failure to regard its claims as having been rejected earlier than it did was not justified by the facts surrounding" its communications with the town. Id. at 669, 389 N.Y.S.2d at 340, 357 N.E.2d at 996. The rulings by the courts in City of New York and Memphis Const., Inc. indicate that, although the notice provisions must be strictly adhered to, a party should not be prejudiced by its pursuit of settlement when the circumstances suggest it is possible. See City of New York, 40 N.Y.2d at 669-70, 389 N YS.2d at 340-41, 357 N.E.2d at 996-97; Memphis Const., Inc., 59 A.D.2d 646, 398 N.Y.S.2d at 388; see also J.G. Georg Serv. Corp. v. Town of Summit, 28 A.D.2d 578, 279 N.Y.S.2d 674 (3d Dept. 1967). As the Court of Appeals stated in City of New York, ". . . a disagreement which was never resolved and which was treated by the parties as on-going and capable of nonjudicial resolution . . . argue[s] strongly that the city acted properly in basing its conduct on the supposition that something could be worked out short of a lawsuit." Id. at 669, 389 N.Y.S.2d at 340, 357 N.E.2d at 996. Concededly, both City of New York and Memphis Const., Inc. are distinguishable in that they involved delays by the municipalities in performing audits which were statutory conditions precedent to the plaintiffs' claims. However, this difference does not bear on those courts' position that negotiations or other circumstances suggesting the possibility of settlement may delay the accrual of the claimant's cause of action.

The town also points to the holding in Memphis Const., Inc. that the plaintiff's claims there were constructively rejected and its claims thus accrued on the date set for the commencement of litigation by the plaintiff's attorney. Plaintiff's attorney wrote to defendant's attorney that: "I now say that we will commence an action against the Village of Moravia in 30 days from this date." Id., 59 A.D.2d 646, 398 N YS.2d at 388. The town here notes that the defendants' attorney sent three letters in 1988 threatening the commencement of litigation. However, the defendants refrained from doing so, apparently because circumstances, including the scheduling of a conference with the court and continuing communications with the state regarding reimbursement, indicated the possibility of settlement.

Notwithstanding the foregoing, the defendants also argue that their claim to the difference between the amount which would have been payable under the contract to D'Annunzio if it had completed the work, and liquidated damages and the town's cost of completing the unfinished work, pursuant to Arts. 51 and 52 of the contract,*fn1 has not yet accrued. Defendants maintain that the town has not advised them that such work has been completed or of its cost. Wallach affid., p. 9. This assertion is not addressed by the town in reply papers, but the defendants appear to be correct in asserting that a cause of action for such amounts has not yet accrued, and thus they would retain the right to that claim.

With respect to defendants' second, third and fourth counterclaims, the defendants correctly contend that the notice provisions of Town Law § 65(3) do not apply to them, since they are for quasi-contractual remedies in quantum meruit and for unjust enrichment in the event Change Order 3-12 is declared void and unenforceable. Loughman v. Town of Pelham, 126 F.2d 714, 717 (2d Cir. 1942); cf. Accredited Demolition Const. Corp. v. City of Yonkers, 37 A.D.2d 708, 324 N.Y.S.2d 377 (2d Dept. 1971) (in action grounded in quasi-contractual principle of unjust enrichment, plaintiff need not comply with notice provisions of Gen.Mun. Law § 50-e); Rochester-Genesee Regional Transp. Dist. v. Trans World Airlines, Inc., 86 Misc.2d 1011, 383 N.Y.S.2d 856 (Sup.Ct. Monroe Co. 1976) (filing of notice of claim under CPLR § 203 unnecessary where defense founded on equitable principles). In addition, as defendants' counsel urged at oral argument, the causes of action in the second, third and fourth counterclaims cannot be said to have accrued until the plaintiff raised claims in its amended complaint in January 1990 that Change Order 3-12 was void. The defendants had no basis to raise counterclaims with respect to Change Order 3-12 until that time. Thus, even if the notice of claim provision was to apply to these counterclaims, which in the opinion of the court it does not, the filing of a notice of claim on April 4, 1990, would have been timely.

Finally, although the town does not raise this issue, the defendants apparently run afoul of the provision in Town Law § 65(3) which requires that 40 days must elapse from the filing of the notice of claim before commencement of the action. Here, the notice of claim was filed on April 4, 1990, approximately two months after defendants' answer and counterclaims were filed. Although the court could locate no caselaw on this point pertaining to the Town Law, the courts have ruled that, under the analogous provisions of Gen.Mun. Law § 50-i, the service of a notice of claim after, rather than prior to, commencement of the action is a procedural defect only, and is not fatal to the cause of action. Runyan v. Bd. of Educ., 121 A.D.2d 708, 504 N YS.2d 146, 147 (2d Dept. 1986); Kelly v. Kane, 98 A.D.2d 861, 470 N.Y.S.2d 816, 818 (3d Dept. 1983). Thus, the court may allow the defect to be corrected if there is no showing of prejudice to the other party. Id. Since no showing of prejudice has been made here, the court will allow this procedural defect to be corrected.

Conclusion

By reason of the foregoing, the town's motion for summary judgment dismissing the counterclaims is denied. Conversely, the defendants' cross-motion for leave to amend the counterclaims to include the allegation that a notice of claim was filed, and for the court to deem the 40-day period for commencement of the action after the filing of the notice of claim as elapsed, is granted.

IT IS SO ORDERED.


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