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GREENWICH DEVELOPMENT ASSOCIATES v. RELIANCE INS. CO.

June 7, 2004.

120 GREENWICH DEVELOPMENT ASSOCIATES, LLC, Plaintiff, -against- RELIANCE INSURANCE COMPANY, Defendant


The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

Plaintiff, 120 Greenwich Development Associates LLC ("120 Greenwich" or "plaintiff), commenced this diversity action seeking to recover damages under a performance bond issued by defendant Reliance Insurance Company ("Reliance" or "defendant"). Defendant now moves for summary judgment dismissing this action on numerous grounds. Because the Court finds that plaintiff failed to comply with the notice requirements of the Bond, defendant's motion is granted.

  BACKGROUND

  The factual background to this action is relatively straightforward, and, unless otherwise noted, undisputed. 120 Greenwich is a limited liability company organized under the laws of the state of New York with its principle place of business located at 120 Greenwich Street, New York, New York. In April 1998, 120 Greenwich, as owner, entered into a $7,422,077 construction contract ("Contract" or "Construction Contract") with Thomsen Construction Co., Inc. ("TCCI"), the contractor, to perform the work necessary for the rehabilitation and conversion of a warehouse located at 120 Greenwich Street into a residential space ("the Project"). TCCI, in turn, obtained a $7,422,077 performance bond ("Bond" or "Performance Bond") from Reliance, naming TCCI as principal and 120 Greenwich as obligee.

  The Bond itself is a form document promulgated by the American Institute of Architects, identified as an AIA Document 312 Performance Bond ("AIA 312"). Under the Bond, "The Contractor [TCCI] and the Surety [Reliance], jointly and severally bind themselves . . . to the Owner [120 Greenwich] for the performance of the Construction Contract, which is incorporated herein by reference." (Aff. of Stephen S. Thomsen, sworn to on Oct. 12, 2002 ("Thomsen Aff."), Ex. B ¶ 1.) If there is no Owner default, Paragraph 3 of the Bond provides that, the Surety's obligation under this Bond shall arise after:
3.1 The Owner has notified the Contractor and the Surety at its address described in Paragraph 10 below that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to be held not later than fifteen days after receipt of such notice to discuss methods of performing the Construction Contract. If the Owner, the Contractor and the Surety agree, the Contractor shall be allowed a reasonable time to perform the Construction Contract, but such an agreement shall not waive the Owner's right, if any, subsequently to declare a contractor Default; and 3.2 The Owner has declared a Contractor Default and formally terminated the Contractor's right to complete the contract. Such Contractor Default shall not be declared earlier than twenty days after the Contractor and the Surety have received notice as provided in Subparagraph 3.1; and 3.3 The Owner has agreed to pay the Balance of the Contract Price to the Surety in accordance with the terms of the Construction Contract or to a contractor selected to perform the Construction Contract in accordance with the terms of the contract with the Owner.
(Id. ¶ 3.)
  Under Paragraph 4,
When the Owner has satisfied the conditions of Paragraph 3, the Surety shall promptly and at the Surety's expense take one of the following actions:
4.1 Arrange for the Contractor, with the consent of the Owner, to perform and complete the Construction Contract; or
4.2 Undertake to perform and complete the Construction Contract itself, through its agents or through independent contractors; or
4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the Owner and the contractor selected with the Owner's concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the bonds issued on the Construction Contract, and pay to the Owner the amount of damages as described in Paragraph 6 in excess of the Balance of the Contract Price incurred by the Owner resulting from the Contractor's default; or 4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:
.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment therefore to the Owner; or
.2 Deny liability in whole or in part and notify the Owner citing reasons therefore.
(Id. ¶ 4.)

  The Bond further provides that if the surety does not proceed under Paragraph 4 with reasonable promptness, the Surety shall be deemed to be in default, and the Owner shall be entitled to pursue any remedies available to it. (Id. ¶ 5.) Likewise, if the Owner rejects the payment tendered by the Surety pursuant to Subparagraph 4.4 or if the Surety has denied liability, the Owner is entitled to pursue all available remedies. (Id.) However, "[a]fter the Owner has terminated the Contractor's right to complete the Construction Project, and if the Surety elects to act under Subparagraph 4.1, 4.2 or 4.3," the surety is liable for the responsibilities of the contractor under the Construction Contract, including the "correction of defective work and completion of the Construction Contract; [a]dditional legal, design and delay costs resulting from the Contractor's Default, and resulting from the actions or failure to act of the Surety under Paragraph 4; and [l]iquidated damages, or, if no liquidated damages are specified in the Construction Contract, actual damages caused by delayed performance or non-performance of the Contractor." (Id. ¶ 6.)

  The Bond defines "Contractor Default" as "[f]ailure of the Contractor, which has neither been remedied or waived, to perform or otherwise comply with the terms of the Construction Contract" (Id. ¶ 12.3), and states that "[a]ny proceeding, legal or equitable, under this Bond . . . shall be instituted within two years after Contractor Default or within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under this Bond, whichever occurs first." (Id. ¶ 9).

  Shortly after entering into the Construction Contract, TCCI began its work on the Project. The parties agree that, in performing the Contract, TCCI did not directly engage in construction work, but rather arranged for subcontractors to perform virtually all of the actual construction. Thus, TCCI effectively played a supervisory role in the Project; overseeing and coordinating the efforts of the various subcontractors and laborers who performed the physical work.

  At this point, the parties' respective versions of the events leading up to this lawsuit diverge. In support of its motion, defendant submits the affidavit of Stephen S. Thomsen, the president of TCCI, and supporting documentation. In his affidavit Thomsen states that, prior to the spring of 1999, he personally provided much of the actual site supervision and coordination of the various subcontractors and laborers working on the Project. (Thomsen Aff. ¶ 4.) However, Thomsen further states that in March 1999 he approached Larry Devine, the principal of 120 Greenwich, and informed him that TCCI was experiencing financial difficulties in connection with other, unrelated, projects and that, although sufficient funds existed under the Construction Contract to complete the project, he did not believe that TCCI could continue operating. As a result, Thomsen states, he informed Devine that he planned to seek other employment. (Id. ¶ 6.)

  According to Thomsen, he and Devine continued their discussions relating to TCCI's financial problems for several months, culminating in an agreement in June of 1999 that TCCI would cease performance under the Construction Contract and that 120 Greenwich would complete the Contract work. (Id. ¶ 7.) Although TCCI would no longer be involved in the Project under this agreement, Thomsen states that he committed to assist with the Project in his personal capacity as a consultant to 120 Greenwich. (Id.) Accordingly, on June 1, 1999, Thomsen states that he began full-time employment with a separate company and TCCI "ceased operating." (Id. ¶ 8.)

  Defendant contends that under the new agreement 120 Greenwich took over TCCI's obligations under the Construction Contract, including managing the Project's subcontractors and supervising and paying TCCI's former employees. (Id. ¶ 8.) Reliance claims that this agreement was later memorialized in a written agreement, executed by Thomsen on behalf of himself and TCCI, and delivered to 120 Greenwich on or about September 1, 1999. (Id. ¶ 9 and Ex. C.) According to Thomsen's affidavit, however, Devine insisted that the modification agreement be kept secret and held in escrow by 120 Greenwich's counsel to prevent notice of the agreement from reaching 120 Greenwich's lender, its liability insurer or Reliance. (Id. ¶ 10.)

  In support of its motion, Reliance has produced an unsigned copy of this alleged modification agreement. Paragraph 1 of the agreement, entitled "Amendment to Contract," provides, inter alia, that,
1.1 Contractor shall, subject to Contractor's continuing obligations below, be relieved of its obligations as general contractor under the project.
1.2 Owner shall (i) make all decisions with respect to the Contract that were formerly made by the Contractor; (ii) assume all of the administrative, financial, and operating responsibilities for completing the Project; and (iii) generally act as the general contractor in place of the Contractor.
1.3 Notwithstanding the above, Contractor shall remain the nominal Contractor under the Contract.
1.5 Contractor hereby assigns to Owner and Owner agrees to assume from and after the date hereof, all of Contractor's right, title and interest in and to all subcontracts, change orders, purchase orders and contracts. 1.6 Provided all of the terms of this agreement have been complied with by Contractor, Owner assumes the following costs and obligations with respect to the Project: Approximately $60,000 due to Local 79 (Mason Tenders Union), and approximately $11,600 less amounts paid by Barrington Development Corp. or by 120 Greenwich Development Associates, LLC, only to the extent that Stephen Thomsen is personally liable to pay these bills and $85,000 to Premier PEO Group only to the extent that Stephen Thomsen is personally liable to pay this bills [sic].
(Id., Ex. C ¶ 1.) The agreement further states that 120 Greenwich will directly pay all employees, subcontractors, suppliers and other vendors necessary to complete the Project. (Id. ¶ 1.4(i).)

  The modification agreement also provides for Thomsen to remain involved in the Project as a construction consultant for a fee of $100,000. (Id. ¶ 3.) In that capacity, the agreement obligates Thomsen to: (1) devote 5 hours a week to the Project under the supervision of the Owner; (2) attend lender "walk throughs" and assist with lender construction funding requisitions; (3) sign and obtain all documentation required by the Owner and necessary to complete the Project; (4) keep insurance policies identified by Owner in effect, "it being; understood that Owner will defer the cost of said policies;" (5) cooperate with the owner regarding the removal of mechanic's liens filed against the Project; (6) maintain the Bond initially issued for the Project; and (7) provide "`approval for payment' signatures" for payments to be made directly by the Owner for Project work, including the cosigning of checks and / or signing of letters indicating approval of such payments. (Id. ¶ 1.) Finally, the modification agreement provides for a release of TCCI and Thomsen from claims relating to the Project upon conclusion of their responsibilities under the modified agreement. (Id. ¶ 6.1.) Consistent with Thomsen's affidavit, the modified agreement also forbids TCCI and Thomsen from disclosing "any information whatsoever regarding the terms of the agreement." (Id. ¶ 7.2(c).) Plaintiff, not surprisingly, tells a different story based primarily on an affidavit by Devine and supporting documentation. Devine states that in March of 1999, Thomsen informed him that TCCI was experiencing cash flow problems and might have to cease work on the Project. (Aff. of Lawrence I. Devine, sworn to on Dec. 20, 2002 ("Devine Aff") ¶ 7.) According to Devine, however, 120 Greenwich did not agree to take over TCCI's responsibilities under the Construction Contract, but, in order to address TCCI's cash flow problems, agreed to: "(a) fund a [TCCI] /120 Greenwich joint bank account from which subcontractors and suppliers would be paid directly, (b) fund a ...


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