United States District Court, E.D. New York
September 27, 2004.
PRINCETON RESTORATION CORP., Plaintiff,
INTERNATIONAL FIDELITY INSURANCE CO., Defendant/Third-Party Plaintiff, v. LAWRENCE E. SCHWARTZ, et al., Third-Party Defendants.
The opinion of the court was delivered by: NINA GERSHON, District Judge
The Report and Recommendation of the Honorable Steven M. Gold,
Magistrate Judge, dated September 1, 2004, to which no objections
have been filed, is adopted in its entirety. For the reasons so
clearly and persuasively set forth by Judge Gold, plaintiff's
motion for leave to file a second amended complaint is granted,
plaintiff's motion for partial summary judgment is denied, and
defendant's motion for summary judgment is also denied.
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
PRINCETON RESTORATION CORP.,
Plaintiff, REPORT AND
against 00-CV-6591 (NG)
LAWRENCE E. SCHWARTZ, et al.,
Gold, S., U.S. Magistrate Judge:
Princeton Restoration Corporation ("Princeton") seeks in this
action to recover amounts it claims are due to it under a
performance bond issued by defendant International Fidelity
Insurance Company ("IFIC"). Princeton has moved for leave to file
a second amended complaint adding a cause of action to reform the
bond issued by IFIC, and for partial summary judgment dismissing
certain affirmative defenses asserted by IFIC against it. IFIC
has cross-moved for summary judgment dismissing each of
The performance bond issued by IFIC does not name Princeton as
an obligee. The dispute between the parties hinges upon whether
Princeton's attempt to amend its complaint to assert a claim that
the IFIC bond should be reformed to name it as an obligee is
futile or should be permitted to proceed. United States District
Judge Gershon has referred the parties' cross-motions to me for
report and recommendation. For the reasons stated below, I
respectfully recommend that Princeton's motion for leave to amend be granted,
that its motion for partial summary judgment be denied, and that
IFIC's motion for summary judgment be denied as well.
In November of 1997, Princeton was hired to be the general
contractor on a school construction project known as the Public
School 104 Exterior & Roof Project (the "project"), to be
performed in Brooklyn, New York. Princeton was retained by a
joint venture formed by the Tishman Construction Corporation of
New York and Jet Resources, Inc. ("Tishman/Jet"), which had in
turn been selected to serve as the construction manager for the
project by the New York City School Construction Authority
("SCA"). Pl. R56.1 ¶ 1; Def. R56.1 ¶¶ 1-2.*fn1
In January of 1998, Princeton, as general contractor,
subcontracted with L&M Larjo ("Larjo") to perform certain roofing
and masonry work. Pl. R56.1 ¶ 7; Def. R56.1 ¶ 3. The negotiations
leading to the subcontract were conducted, at least in part, by
Princeton's former vice president, Peter Lacagnina, and Larjo's
president, Jeffrey Schwartz. Pl. R56.1 ¶ 6.
Princeton had previously begun the process of obtaining
performance and payment bonds as principal naming Tishman/Jet and
the SCA as obligees. Pl. R56.1 ¶ 2; Affidavit of Peter Lacagnina
("Lacagnina Aff."), ¶ 3. As a condition of issuing these bonds to
Princeton, Princeton's bond broker insisted that the masonry and
roofing subcontractor on the project be bonded as well. Pl. R56.1
¶ 3; Affidavit of Robert Scavetta, Vice President of Princeton's
former bond broker ("Scavetta Aff."), ¶¶ 3-4. Accordingly,
Princeton obtained Larjo's agreement to provide performance and
payment bonds in connection with its subcontract on the project. Pl. R56.1 ¶ 7; Def. R56.1 ¶ 5.
It is undisputed, however, that Princeton failed to inform
Larjo who the obligee named in its payment and performance bonds
should be. Pl. R56.1 ¶ 12; Def. R56.1 ¶ 6; Lacagnina Dep. at 21.
It is also undisputed that Princeton provided Larjo with a
specification book which contained, among other things,
preprinted bond forms designating Tishman/Jet, rather than
Princeton, as the performance bond obligee. Def. R56.1 ¶¶ 8, 13;
Lacagnina Dep. at 22-23.
Larjo's president, Jeffrey M. Schwartz, arranged for his
assistant to send a "bond request form" to Larjo's bond broker.
Schwartz had no understanding of who was intended to be the
obligee on the bonds. Pl. R56.1 ¶ 11. Because Schwartz used the
bond forms supplied by Princeton, the request form forwarded by
his assistant to Larjo's broker designated Tishman/Jet as the
obligee and made no mention of Princeton. Pl. R56.1 ¶ 19; Def.
R56.1 ¶¶ 11-14. As a result, at the time IFIC approved the bonds,
its underwriter was not aware that Larjo was a subcontractor to
Princeton, or that Larjo did not have a contract with
Tishman/Jet. Pl. R56.1 ¶ 20. The performance bond issued by IFIC
on behalf of Larjo accordingly designates Tishman/Jet and the SCA
as the obligees on the bond, and furthermore states that "[n]o
right of action shall accrue on this bond to or for the use of
any person or corporation other than Tishman/Jet and the [School
Construction] Authority." Def. R56.1 ¶ 23.
When Lacagnina of Princeton received the Larjo performance and
payment bonds, he did not review their text, and he thus did not
become aware at that time that they incorrectly named Tishman/Jet
and the SCA as obligees. Pl. R56.1 ¶ 17. The performance and
payment bonds are five and six pages long, respectively. The
substantive language of each bond appears on its first two pages,
and in each case identifies Tishman/Jet as the obligee in four
separate paragraphs. Lacagnina Aff., Ex. D. The bonds explicitly refer to a contract
between Larjo and Tishman/Jet, and incorporate the terms of that
contract by reference. Id. Nevertheless, it was only months
later, when Larjo was about to default, that Princeton became
aware that Larjo's performance bond named Tishman/Jet and not
Princeton as the obligee. Lacagnina Dep. at 32; Lacagnina Aff. ¶¶
6-7; Def. R56.1 ¶¶ 25-26. Princeton asked to have the bond
changed to reflect its status as the intended obligee, but IFIC
refused its request. Pl. R56.1 ¶¶ 24-25; Def. R56.1 ¶ 29;
Lacagnina Dep. 32-33.
In October of 1998, Larjo abandoned the project, and Princeton
and Larjo agreed at that time that Princeton would take
responsibility for completion of the remaining work on Larjo's
subcontract. Pl. R56.1 ¶ 26. Princeton retained a new
subcontractor to finish Larjo's work at a cost which exceeded the
outstanding balance of the subcontract price. Pl. R56.1 ¶ 27.
Although Princeton has demanded payment from IFIC for these
excess costs, IFIC has refused to pay.
IFIC seeks summary judgment on the grounds that Princeton is
not a named obligee on the Larjo performance bond, and that the
bond expressly disclaims liability to any potential unnamed
third-party beneficiary. In response, Princeton does not contend
it is entitled to recover on the bond as it is currently written.
Rather, Princeton's opposition to summary judgment rests upon its
position that the bond should be reformed to name Princeton as an
Princeton's reformation claim is set forth only in its proposed
second amended complaint. Thus, whether Princeton may
successfully oppose defendant's motion depends upon the outcome
of its own motion for leave to amend. Accordingly, I address
Princeton's motion first. A. Standards Governing Motions for Leave to Amend
A party may amend its pleading by leave of court, which "shall
be freely given when justice so requires." Fed.R. Civ. P. 15(a).
Leave to amend may properly be denied, however, if the proposed
amendment would be futile. Milanese v. Rust-Oleum Corp.,
244 F.3d 104, 110 (2d Cir. 2001) (citing Foman v. Davis,
371 U.S. 178, 182, 83 S. Ct. 227, 230 (1962)).
Generally, when a party seeks leave to file an amended
pleading, futility is measured by whether the proposed amendment
is sufficient to withstand a motion to dismiss for failure to
state a claim; put another way, a proposed amended complaint will
not be considered futile unless it appears beyond doubt that
plaintiff could prove no set of facts entitling him to relief.
Ricciuti v. N.Y.C. Transit Authority, 941 F.2d 119, 123 (2d
Cir. 1991) (citing Conley v. Gibson, 355 U.S. 41, 45-46,
78 S.Ct. 99, 101-02 (1957)). However, where, as here, a plaintiff
seeks leave to amend in a cross-motion made in response to a
defendant's motion for summary judgment, and
the parties have fully briefed whether the proposed
amendment could raise a genuine issue of fact and
have presented all relevant evidence in support of
their positions . . . [then] even if the amended
complaint would state a valid claim on its face, the
court may deny the amendment as futile when . . . the
defendant would be entitled to judgment as a matter
of law under Fed.R. Civ. P. 56(c).
Milanese, 244 F.3d at 110.
B. Grounds for Reformation of Written Instruments
New York law recognizes that, "[i]n the proper circumstances,
mutual mistake or fraud may furnish the basis for reforming a
written agreement." Chimart Assoc. v. Paul, 66 N.Y.2d 570, 573 (1986).*fn2 Princeton does not claim to have been
defrauded, but instead contends that reformation is warranted
here because of mutual mistake. A case of "mutual mistake" arises
when "the parties have reached an oral agreement and, unknown to
either, the signed writing does not express that agreement."
Because the law presumes that a signed written agreement
reflects the true intention of the parties to it, it imposes a
high burden on a party seeking reformation. Id. at 574.
Reformation is not granted for the purpose of
alleviating a hard or oppressive bargain, but rather
to restate the intended terms of an agreement when
the writing that memorializes that agreement is at
variance with the intent of both parties. . . . It
follows that a petitioning party has to show in no
uncertain terms, not only that mistake or fraud
exists, but exactly what was really agreed upon
between the parties.
George Backer Mgmt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211,
219 (1978). Following this reasoning, courts have required
parties seeking to reform contracts to establish mutual mistake
by clear and convincing evidence. See Healy v. Rich Products
Corp. 981 F.2d 68
, 73 (2d Cir. 1992); Seebold v. Halmar Constr.
Corp., 536 N.Y.S.2d 871, 872 (3d Dept. 1989).
When deciding a motion for summary judgment, courts must take
into account the evidentiary burden of proof applicable at a
trial on the merits and measure the evidence submitted against
that burden of proof. Anderson v. Liberty Lobby, Inc,
477 U.S. 242, 254-55, 106 S.Ct. 2505, 2513 (1986). New York courts have
therefore "required a party resisting pretrial dismissal of a
reformation claim to tender a `high level' of proof in
evidentiary form." Chimart, 66 N.Y.2d at 574 (citing Sagan
v. Sagan, 53 N.Y.2d 635, 637 (1981)). C. Plaintiff's Claim for Reformation
A surety bond reflects an agreement between three parties: the
principal, whose debt or default is the subject of the bond; the
obligee, to whom the principal owes either a debt or a duty of
performance; and the surety, who undertakes to pay the debt or
perform the obligation if the principal fails to do so. Estate
of Camarda, 425 N.Y.S.2d 1012, 1015 (Surr. Ct. 1980). Thus, to
defeat summary judgment, Princeton must adduce sufficient proof
to support a finding, by clear and convincing evidence, that it,
Larjo and IFIC agreed that IFIC would issue a surety bond naming
Princeton as the obligee.
Princeton argues that IFIC must have intended for it to be the
obligee on the Larjo bond because Princeton, as the general
contractor on the project, was the party responsible for seeing
that the work subcontracted to Larjo was completed in the event
of Larjo's default. Princeton also emphasizes that, although the
performance bond explicitly refers to a contract regarding the
project between Larjo and Tishman/Jet, and even incorporates the
terms of that contract by reference, the only contract Larjo made
was its subcontract with Princeton; there is no contract between
Larjo and Tishman/Jet.*fn3 Thus, argues Princeton, the
performance bond must reflect a mistake, because it refers to and
incorporates the terms of a contract which does not exist.
IFIC contends that Princeton has failed to present any evidence
of mutual mistake. Rather, IFIC maintains that it intended to
issue the performance bond precisely as written, naming Larjo as
the principal and Tishman/Jet as the obligee. IFIC points out
that no one from Princeton ever told anyone at Larjo who was to
be named as the obligee, and that no one from Larjo told IFIC anything about Princeton whatsoever. IFIC, in
short, had no reason to believe Princeton was even involved in
the project in any way at the time it issued the Larjo
performance bond, and certainly never agreed to issue a bond
naming Princeton as the obligee.
Clearly, the parties intended that the performance bond issued
by IFIC would guarantee Larjo's performance on the project.
Because Larjo's subcontract was with Princeton, and because
Princeton was responsible for completing Larjo's work in the
event of Larjo's default, Princeton's argument that it, and not
Tishman/Jet, was the intended obligee on the bond even if IFIC
did not explicitly know of Princeton's involvement in the project
As Princeton points out, courts addressing errors in insurance
policies have held that reformation may be proper even when the
insurer was not explicitly aware that the policy as written
failed to name a party or describe property as intended by the
policyholder. For example, in Court Tobacco Stores, Inc. v.
Great Eastern Ins. Co., 43 A.D.2d 561, 349 N.Y.S.2d 8 (2d Dept.
1973), a fire insurance policy covering a tobacco shop identified
the shop owner as "Court Tobacco Co., 1110 Eastern Parkway,
Brooklyn, New York" rather than by its true name, "Court Tobacco
Stores, Inc." The defendant insurance company opposed reformation
of its policy on the grounds that it was the plaintiff insured's
broker who had requested coverage in the incorrect name, and that
the insurer had thus not erred or made any mistake when it
prepared the policy. The court rejected the insurance company's
argument, holding that
[w]hen it is established that, through innocent
mistake of an applicant for insurance, the nature of
the ownership of the property to be insured . . . is
misdescribed, the error is mutual for purposes of
reformation, even though the insurer is not aware of
43 A.D.2d at 561 (emphasis added). A similar holding was reached in Cheperuk v. Liberty Mut. Fire
Ins. Co., 263 A.D.2d 748
, 693 N.Y.S.2d 304 (3d Dept. 1999).
Cheperuk involved a homeowner's insurance policy which provided
coverage to a properly named mortgagee. Apparently, the original
holder of the mortgage had assigned its interest in the property
to another entity, but the insurance company was never advised of
the assignment, and the policy therefore incorrectly identified
the entity holding the mortgage. The house covered by the policy
was later destroyed in a fire, and plaintiff sued to obtain
payment on behalf of the current mortgage holder. The court held
that it was proper to reform the insurance policy to name the
mortgagee correctly, holding, as in Court Tobacco, that an
error may be deemed mutual for purposes of reformation "even
though the insurer was not aware of the error."
263 A.D.2d at 749. See also Blakeslee v. Royal Ins. Co., No.
93-Civ-1633(MBM), 1996 WL 694346, at *3 (S.D.N.Y. Dec. 4, 1996)
(holding that "where through unilateral mistake of the insured
party the policy misidentifies some detail, such as the identity
of the insured or the mortgagee, the mistake is converted to a
mutual mistake and the policy may be reformed to reflect the true
intention of the insured"); Crivella v. Transit Cas. Co.,
116 A.D.2d 1007, 498 N.Y.S.2d 627 (4th Dept. 1986) (allowing
reformation where an insurance policy on a nightclub incorrectly
identified a subtenant as the club's owner, even though the
insurer was unaware of the error, because the insurer intended to
insure the building housing the nightclub and its contents).
Despite these holdings, IFIC argues that Princeton's
reformation claim is futile because the risk IFIC agreed to cover
in the Larjo performance bond as written is different from the
risk which would be covered by the performance bond if it were
reformed as Princeton seeks; in other words, IFIC contends that
the risk that Larjo would fail to perform a subcontract with Tishman/Jet is different from the risk that Larjo would fail to
perform a subcontract with Princeton. To make this point, IFIC
relies upon the testimony of its underwriter, John Briguglio.
Briguglio testified at his deposition that he would have taken
additional underwriting steps had he known that Princeton was to
be an obligee on the bond. These additional steps would have
included reviewing the contract between Princeton and Larjo and
focusing in particular upon the contract's payment terms, any
liquidated damages provisions, and any hold harmless agreements;
investigating Princeton's creditworthiness; and reviewing any
payment bonds issued on behalf of Princeton. Briguglio Dep.
52-53, 56-57.*fn4 IFIC has also submitted a declaration of
John Briguglio dated August 5, 2003. Briguglio states in his
[a]lthough I cannot definitively state whether IFIC
would or would not have bonded the subcontract
between Princeton and Larjo had such a bond been
requested because to do so would require that I
speculate on what the results of a contemporaneous
due diligence review might have revealed, I can
definitively state that I would not have authorized a
performance bond on such a subcontract without first
being supplied with a copy of the contract and
completing appropriate due diligence.
Briguglio Decl. ¶ 6 (emphasis added).
Briguglio's testimony demonstrates only that IFIC's due
diligence efforts would have been more extensive had it known
that Princeton was to be the obligee on the performance bond.
This showing is inadequate to demonstrate that Princeton's
reformation claim, if permitted to proceed, would inevitably
prove futile. Rather, to defeat Princeton's claim for
reformation, IFIC must demonstrate that it would not have issued
a performance bond to Larjo had it known that Larjo's subcontract was with Princeton rather than with
In Court Tobacco, the trial court ruled against a plaintiff
seeking reformation. Reversing, the Appellate Division pointed
out that there was no evidence at trial "that defendants would
not have issued the policies" if they had known the true name of
the insured. 43 A.D.2d at 562. Relying on Court Tobacco, the
court in Blakeslee granted summary judgment in favor of a
plaintiff seeking reformation of a homeowner's insurance policy,
and held that a defendant may defeat a reformation claim only
with evidence either that the true identity of the party to be
named in the policy was concealed by the plaintiff, or that
"defendant would not have insured the premises if it was aware of
the identity of the true mortgagee." 1996 WL 694346, at *3.
Similarly, in Pena v. N.Y. Prop. Ins. Underwriting Assn.,
172 A.D.2d 393, 570 N.Y.S.2d 909 (1st Dept. 1991), the court denied a
defendant insurer's motion for summary judgment dismissing a
reformation claim because it found there was a triable issue of
fact regarding "whether knowledge of the facts misrepresented
would have led to a refusal by the insurer to issue the policy as
to which issue defendant carrier bears the burden of proof."
See also Cheperuk, 263 A.D.2d at 749 (holding plaintiff was
entitled to reformation in part because "defendant [did] not
claim that it would have discontinued coverage had it been
informed of the change of mortgagee"); Testa v. Utica Fire Ins.
Co., 203 A.D.2d 357, 610 N.Y.S.2d 85 (2d Dept. 1994) (holding
that "[r]eformation has been allowed in insurance cases where the
insured's premises are not as described in the policy but the
insurer has not shown that it would not have insured the premises
had it known the true facts"); Abulaynain v. N.Y. Merchant
Bakers Mut. Fire Ins. Co., 128 A.D.2d 575, 513 N.Y.S.2d 5 (2d
Dept. 1987) (same); Union Station Rest., Inc. v. N. Am. Co.,
59 A.D.2d 270, 275, 399 N.Y.S.2d 497, 500 (4th Dept. 1977) (same).
Cf. First Financial Ins. Co. v. Allstate Interior Demolition Corp.,
193 F.3d 109, 119 (2d Cir. 1999) (noting that, in a case of alleged
misrepresentation by an applicant for insurance, "[t]he burden is
on the insurer to establish that it would have rejected the
application if it had known the undisclosed information").
IFIC's final argument is that Princeton failed to review the
Larjo performance bond when it was issued, and accepted the bond
as written without objection. However, this argument fails as
well; "[t]he retention of the [bond] without discovery of the
error until the happening of the loss is not of itself fatal" to
a reformation action. Court Tobacco, 43 A.D.2d at 562.
For all these reasons, I conclude Princeton's reformation claim
is not futile. Because futility is the sole basis on which IFIC
opposes Princeton's motion for leave to file a second amended
complaint, I respectfully recommend that this aspect of
Princeton's motion be granted.
D. Remaining Motions
Princeton also moves for partial summary judgment dismissing
IFIC's fifth and sixth affirmative defenses to Princeton's First
Amended Complaint, which assert respectively that Princeton lacks
standing to make a claim under the performance bond and that its
claim under the bond is barred by the bond's express language
providing that only Tishman/Jet and the SCA may sue under it.
Both of these affirmative defenses are based upon the bond's
failure to identify Princeton as the obligee, and would be
defeated if Princeton prevails on its reformation claim. However,
Princeton has thus far sought only leave to plead a claim for
reformation; it has not sought summary judgment on that claim.
Indeed, defendant has not yet been called upon even to answer the
reformation claim, much less to adduce evidence raising a
question of fact with respect to Princeton's right to relief.
Dismissing defendant's affirmative defenses based upon standing and the bond language would be tantamount to granting
Princeton summary judgment on a claim it has not yet even filed.
I therefore conclude that Princeton's motion for partial summary
judgment dismissing IFIC's fifth and sixth affirmative defenses
be denied, without prejudice to its renewal at a later stage in
Finally, IFIC's motion for summary judgment is premised upon
the fact that Princeton is not a named obligee on the Larjo
performance bond. If Princeton is permitted to amend its
complaint to add a reformation action, and it prevails on that
action, it will become the named obligee on the bond. IFIC's
summary judgment motion should, therefore, be denied.
For all the reasons stated above, I respectfully recommend that
plaintiff's motion for leave to file a second amended complaint
be granted, and that both plaintiff's motion for partial summary
judgment dismissing certain affirmative defenses and defendant's
motion for summary judgment be denied. Any objections to the
recommendations made in this report must be filed with the Clerk
of the Court and the Chambers of the Honorable Nina Gershon
within ten days of receiving this Report and Recommendation, and
in any event, no later than September 22, 2004. Failure to file
timely objections may waive the right to appeal the District
Court's Order. See 28 U.S.C. § 636(b)(2); Fed.R. Civ. P. 6(a),
6(e), 72; Small v. Secretary of Health and Human Servs.,
892 F.2d 15, 16 (2d Cir. 1989).
Steven M. Gold
United States Magistrate Judge
Brooklyn, New York
September 1, 2004