United States District Court, S.D. New York
May 19, 2005.
TRAVELERS CASUALTY & SURETY COMPANY as Administrator for Reliance Insurance Company Plaintiffs,
THE DORMITORY AUTHORITY OF THE STATE OF NEW YORK, TDX CONSTRUCTION CORPORATION, and KOHN, PEDERSON, FOX & ASSOCIATES, P.C., Defendants. THE DORMITORY AUTHORITY OF THE STATE OF NEW YORK Third-Party Plaintiffs, v. TRATAROS CONSTRUCTION, INC. and TRAVELERS CASUALTY AND SURETY COMPANY Third-Party Defendants.
The opinion of the court was delivered by: HAROLD BAER, JR., District Judge[fn*] [fn*] Mychii Snape, a spring 2005 intern in my Chambers, and currently a second-year law student at Columbia University School of Law, provided substantial assistance in the research and drafting of this Opinion.
OPINION & ORDER
On June 28, 2004, Plaintiffs, Travelers Casualty & Surety
Company ("Travelers"), as administrator for Reliance Insurance
Company ("Reliance"), filed the instant action which alleged,
inter alia, negligent misrepresentation against Defendant,
Kohn, Pederson Fox & Associates, P.C. ("KPF") in connection with
the Site B campus construction project at Baruch College. (See
Tr. 2:11-17.) Pursuant to Fed.R.Civ.P. 12(b)(6), KPF moves to
dismiss the Complaint for lack of privity of contract, or its
"functional equivalent," between Travelers and KPF. The Court
heard oral arguments on the motion on May 4, 2005. For the
foregoing reasons, Defendant's motion to dismiss is DENIED. I. BACKGROUND
A. Pre-Building Relationship
The Dormitory Authority of the State of New York ("DASNY")
contracted with KPF to perform "programming, design, and certain
construction phase services for the construction of Baruch
College Site "B", consisting of a building of approximately
700,000 gross square feet, near the existing school site, to
house classrooms, a theater, lecture halls, and other educational
facilities." (Peter Catalano, Att'y for Def. KPF ("Catalano"),
Aff. at ¶ 3) ("the Project"). The terms of the contract define
the nature of the relationship between DASNY and KPF as an
The relationship created by this Agreement between
the OWNER and ARCHITECT is one of independent
ARCHITECT and it is in no way to be construed as
creating any agency relationship between the OWNER
and the ARCHITECT nor is it to be construed as, in
any way or under the circumstances, creating or
appointing the ARCHITECT as an agent of the OWNER for
any purpose whatsoever.
(Catalano Aff. Ex. A, KPF/DASNY Contract Agreement (herein, "Ex.
A"), at App. D ¶ 13.) KPF, or "Architect," was obligated to
"prepare and supply the necessary set of Contract Documents for
bidding, and eventual award of contracts, between the owner and
the Contractors for approximately ten separate contract?
packages." (Catalano Aff. Ex. A at ¶ G.1.) KPF was contractually
obligated to "investigate questions posed by bidders or any other
questions, and issue written replies to all bidders in the form
of supplemental bulletins, addenda, or bid instructions."
(Catalano Aff. Ex. A at ¶ G.2.) The contract between KPF and
DASNY included language to the effect that KPF:
[S]hall assist the owner in reviewing and analyzing
bids, including any investigation that may be
required of qualifications and capabilities of low
bidders [and] [i]nspect on a bi-weekly basis, or as
required by the OWNER, the Work in progress to
determine compliance with the requirements of the
contract drawings and specifications or approved shop
(Catalano Aff. Ex. A at ¶ G.4.) As such, KPF was required to both
review approved submissions from contractors and monitor the
construction of the Project.
Throughout the bidding process, bidders were instructed that
all communication regarding Project questions and concerns should
be directed to KPF as a final decision-maker. Specifically, the
document entitled "Information for Bidders" stated that before
bidding, the prospective bidder "shall make written requests to the Architect,
with a copy forwarded to the owner, for an interpretation or
correction of any ambiguity, inconsistency or error [in the
bidding materials]." (David Dreifuss, Att'y for Pl. ("Dreifuss"),
Aff. Ex. C, DASNY Notice to Bidders, at § 1A.) Furthermore, "only
interpretations, corrections or additional Contract provisions
made in writing by the Architect as addenda shall be binding."
(Dreifuss Aff. Ex. C at § 1J.)
B. Building the Project
Trataros Construction, Inc. ("Trataros") successfully bid on
construction Contract No. 15 and Contract No. 16. (John
Scarpellino, Att'y for Pl. ("Scarpellino"), Aff. at ¶ 3 a-b.) In
accordance with the terms of the construction contracts,
Trataros' obtained four separate surety bonds from
Reliance.*fn1 Each performance surety bond named Trataros as
the principal and DASNY as the obligee or beneficiary. (Compl. at
¶ 12.) Similarly, each labor surety bond named Trataros as the
principal and their subcontractors as the obligee. (Scarpellino
Aff. Ex. 2, ¶ 1.) The surety bond for Contract No. 15 was valued
at $50,222,000. (Scarpellino Aff. ¶ 3a.) The surety bond for
Contract No. 16 was valued at $24,140,000. (Scarpellino Aff. ¶
3b.) Subsequently, Travelers became surety for the bonds and, in
this role, Travelers retained the right to act with power of
attorney for Reliance on any matter relating to these bonds.
(Compl. at ¶ 14.)
The Project commenced in 1998, but never stayed on schedule.
Nonetheless, the entire Project has since been completed. (Compl.
at ¶ 17.) Travelers and DASNY, as a counterclaim defendant, both
allege that KPF made considerable design errors which led to
significant delays and increased costs during the course of
construction. (Compl. at ¶¶ 52-56; see also DASNY Ans. ¶¶
110-116.) As a result, and according to DASNY's pleading,
Travelers will incur substantial expense. In particular, DASNY
KPF failed to exercise the required standard of care,
competence and skill in the completion of its duties
as architect of record for the Project. Among other
things, KPF improperly and negligently (1) failed to
complete and coordinate the Design Documents, (2)
failed to properly oversee and perform the
professional services that were required to complete
the Designed Documents, (3) failed to supervise and
coordinate the work of its subcontractors and consultants and integrate their work into the Design
Documents, (4) refused to acknowledge its Design
Defects and/or implement the necessary remedial
corrections in a timely or professionally competent
fashion, and (5) failed to satisfy other elements of
the required standard of care.
(Scarpellino Aff. ¶ 10, citing to DASNY Counterclaims.)
According to Travelers, KPF may be responsible for some or all
II. STANDARD OF REVIEW
When ruling on a motion to dismiss pursuant to Fed.R.Civ.P.
12(b)(6), the Court must construe all factual allegations in the
complaint in favor of the non-moving party. See Krimstock v.
Kelly, 306 F.3d 40, 47-48 (2d Cir. 2002). The Court's
consideration is limited to facts stated on the face of the
complaint and in documents appended to the complaint or
incorporated in the complaint by reference, as well as to matters
of which judicial notice may be taken. See Allen v.
WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991).
Dismissal of a claim is proper only where "it appears beyond
doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Shakur v. Selsky,
391 F.3d 106, 112 (2d Cir. 2004) (quoting Conley v. Gibson,
355 U.S. 41, 45-46 (1957)).
III. CHOICE OF LAW
When a district court's jurisdiction is based upon diversity of
citizenship, as it is here, the court applies the choice-of-law
rules of the forum state. Md. Cas. Co. v. Cont'l Cas. Co.,
332 F.3d 145, 151 (2d Cir. 2003) (citing to Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). Thus,
pursuant to New York choice of law rules, I will apply a "`center
of gravity' or `grouping of contacts'" analysis to resolve
conflicts of law. Id. Application of the center of gravity test
in contract cases requires that the court consider the locus of
contract negotiation, formation, performance and subject matter,
as well as "the domicile or place of business of the contracting
parties." Id. (internal citation omitted.)
Here, it is undisputed that the bidding process, contract
award, and construction of the Project, occurred in New York.
(Compl. at ¶¶ 9-13; ¶¶ 51-55.) In addition, the defendant is
domiciled in New York. (Compl. at ¶ 5.) While Travelers and
Reliance are out-of-state entities, their domicile cannot
override the significant relationship of New York State to this
dispute because alone it "is simply insufficient to outweigh the
contacts to New York." Gerling Am. Ins. Co v. Steadfast Ins.
Co., No. 00 Civ. 7907, 2001 WL 936288, at *2 n. 5 (S.D.N.Y. Aug.
17, 2001) (Baer, J.). In accordance with Maryland Casualty., 332 F.3d at 151, and
the center of gravity analysis, New York law governs the
adjudication of this matter.
KPF moves to dismiss the complaint on two grounds. First, KPF
contends that Travelers, as insurer, lacks standing to vindicate
the rights or pursue the claims of its principal, Trataros.
Second, KPF asserts that, assuming Travelers has standing to
pursue its claim, the KPF and Trataros relationship fails to
manifest the "functional equivalent" to privity of contract.
Therefore, Travelers lacks the requisite relationship to seek
indemnity from KPF for economic losses incurred as a result of
KPF's alleged negligent misrepresentations.
A. Travelers Has Standing to Pursue its Claim Against KPF
Pursuant to New York law, a surety is bound by the obligations
of its principal. West-Fair Elec. Contractors v. Aetna Cas. &
Sur. Co., 49 F.3d 48, 50 (2d Cir. 1995) ("Under New York law a
surety's duty generally is coextensive with that of the principal
on the bond."). With permission of the principal, a surety has
the right to assert any claim or defense of its principal. See
DCR Trucking & Excavating, Inc. v. Aetna Cas. & Surety Co., No.
96 Civ. 3995, 2002 WL 32096594 (E.D.N.Y. Oct. 31, 2002) (citing
cases); see also Durable Group, Inc. v. De Benedetto,
444 N.Y.S.2d 662 (1st Dep't 1981) (citing Walcott v. Clevite
Corp., 13 N.Y. 2d 48, 56 (1963).
Here, Travelers, as surety, is obligated to cover any
unexpected economic loss related to Trataros's performance with
regards to Contract No. 15 and Contract No. 16. Travelers' claim
is brought on behalf of Trataros, which has standing to collect
from KPF for damages resulting from KPF's alleged negligent
misrepresentations. Trataros has consented to Travelers pursuing
that claim on its behalf. (Compl. at ¶ 38.)
Accordingly, Travelers has the right to present any claim and
use any argument available to Trataros against KPF in this
B. The Trataros KPF Relationship is "Functionally
Equivalent" to Privity of Contract
Travelers seeks indemnification for economic losses it has
suffered, or will suffer, as a result of KPF's alleged negligent
misrepresentations. "The long-standing rule is that recovery may
be had for pecuniary loss arising from negligent
[mis]representations where there is actual privity of contract
between the parties, or a relationship so close as to approach
that of privity." Ossining Union Free Sch. Dist. v. Anderson
LaRocca Anderson, 73 N.Y. 2d 417, 424 (1989); see also Bd.
of Managers of Astor Terrace Condo. v. Schuman, Lichtenstein,
Claman & Efron, 583 N.Y.S.2d 398, 400 (1st Dep't 1992). Such a broad test has the
potential to create nearly unlimited liability for service
In Ossining, the New York Court of Appeals defined the scope
of a defendant's potential liability in the absence of a
contract. 73 N.Y. 2d at 420. There, a school district had brought
a negligence and malpractice action against both an architectural
firm with whom the school district contracted and two engineering
firms with whom the architect had contracted. Id. While the
district was unequivocally in contractual privity with the
architect, the issue before the Court of Appeals was whether the
school district could assert negligence and misrepresentation
claims against the engineers, with whom the district lacked
contractual privity. The Court of Appeals determined that a
relationship will be "so close as to approach that of privity" if
the plaintiff can demonstrate:
(1) awareness that the reports were to be used for a
particular purpose or purposes; (2) reliance by a
known party or parties in furtherance of that
purpose; and (3) some conduct by the defendants
linking them to the party or parties and evincing
defendant's understanding of their reliance.
Id. at 425; see also Credit Alliance Corp. v. Arthur
Andersen & Co., 65, 493 N.Y.S. 2d 435, 445 (1985). The Court of
Appeals determined that because the engineers were aware that the
reports they drafted for the architect would, in turn, be
transmitted to, and relied upon by, the school district, the bond
between the district and the engineers was the "functional
equivalent of contractual privity." Ossining,
73 N.Y. 2d at 419.
1. KPF's Awareness of Use for a Particular Purpose
The first prong of the Ossining test requires that a
defendant be on notice and that the only logical end for its
services is a particular purpose. See Doehla v. Wathne Ltd.,
Inc., No. 98 Civ. 6087, 1999 WL 566311 (S.D.N.Y. Aug. 3, 1999).
For example, New York courts have determined that professional
distribution or submission of instructional material to a client,
with the knowledge that the materials will be utilized by a third
party (e.g., KPF's submission of material to DASNY with the
knowledge that the materials will be utilized by Trataros),
provides sufficient notice that such materials will be utilized
for a particular purpose. See generally, Prudential-Bache
Sec., Inc. v. Resnick, 555 N.Y.S.2d 367 (1st Dep't 1990) (law
firm had sufficient notice); Ossining, 73 N.Y. 2d at 426
(engineering firm had sufficient notice); Credit Alliance
Corp., 65 N.Y. 2d at 554 (accounting firm had sufficient
This is not the first time that KPF has raised the lack of
privity argument. In Stratagem Dev. Corp. v. Heron Intern. N.V., 153 F.R.D. 535 (S.D.N.Y.
1994), Heron Properties, Inc. ("Heron"), and Stratagem
Development Corporation ("Stratagem"), executed an agreement to
develop two office towers. Id. at 538. As part of the
agreement, Stratagem agreed to act as the "owner's
representative" for the building project. In addition, Heron
hired the architectural firm, KPF, to design one of the office
towers. Id. at 538. Heron was ultimately dissatisfied with the
services provided by Stratagem and commenced litigation. In the
third party complaint, Stratagem alleged that KPF "was
responsible for any miscalculations in the construction cost and
square footage estimates, . . . delays in construction . . . [and
that] Stratagem relied on KPF . . . to provide underlying
data. . . ." Id. at 540. KPF moved to dismiss the complaint. As it
does here, Stratagem argued that it did not enter into any
contracts with Stratagem and, therefore, there was a lack of
contractual privity between KPF and Stratagem. Id. at 548. There,
in accordance with Ossining, the court held that Stratagem
adequately demonstrated all three prongs of the Ossining test:
First, KPF knew that its drawings were to be used for
a particular purpose, namely, the construction of
Heron Towers I and II. Second, [Stratagem] relied on
figures provided by KPF in drafting the Viability
Studies, and submitting construction cost and square
footage estimates to Heron. Finally, [Stratagem]
alleged facts establishing a sufficiently close
relationship between themselves and KPF for the Court
to find an equivalent of privity.
Stratagem, 153 F.R.D at 550. As such, the court determined that
Stratagem adequately pled the functional equivalent of privity
and denied KPF's motion to dismiss. Id.
More recently, in Marcellus Const. Co., Inc. v. Vill. of
Broadalbin, 755 N.Y.S.2d 474 (3rd Dep't 2003), the Appellate
Division expanded upon the concepts articulated in Stratagem
and concluded that by its very nature, architects are put on
notice that the designs which they create will be utilized by
contractors or construction workers. Id. at 476. While the
court ultimately determined that the plaintiff failed to
demonstrate the functional equivalent of privity for other
reasons, it concluded that since the "design of the project was
part of the final bid package for all interested construction
bidders . . . the first prong of the tripartite test" was
Here, KPF was employed to help achieve a common goal: the
building of the Project. As in Stratagem and Marcellus, KPF's
designs and obligations were intended to benefit Trataros. Beyond
its design obligations, KPF was responsible for "[i]nspect[ing]
on a bi-weekly basis, or as required by the OWNER, the Work in progress to determine
compliance with the requirements of the contract drawings and
specifications or approved shop drawings" during construction.
(Catalano Ex. A at ¶ H.7.) In addition, KPF was obligated to
review and oversee the construction to ensure that the
contractors adhered to KPF's designs and parameters while
building of the Project.
Accordingly, KPF was on sufficient notice that its designs, bid
responses and cite management would be used for a particular
2. Trataros's Reliance In Furtherance Of a Purpose
In accordance with the second prong of the Ossining test, the
court is required to limit potential liability to "known"
parties. See Ossining, 73 N.Y. 2d at 425. The purpose of the
second prong is "to protect a defendant from being subjected to
liability for lawsuits brought over an indeterminate time by the
members of an indeterminate class." Vanguard Mun. Bond Fund,
Inc. v. Cantor, Fitzgerald L.P., 40 F. Supp. 2d 183, 191
(S.D.N.Y. 1999) (internal citation omitted); see Credit
Alliance Corp., 65 N.Y. 2d at 548 (known party requirement was
designed to ensure that defendant will not be liable to "any
member of an indeterminate class . . . present and prospective,
known and unknown"). A plaintiff is required to establish that
the plaintiff relied upon that the materials produced by the
defendant. See Ossining, 73 N.Y. 2d at 424-425 (internal
citation omitted) (emphasis added). In Ossining, the Court of
Appeals held that if the defendants worked with the knowledge
that it was for the sole benefit of the school district, and
represented to others that plaintiff was their employer, then a
motion to dismiss should be denied. Id. at 425-426.
For instance, in IT Corp. v. Ecology and Envtl. Eng'g, P.C.,
713 N.Y.S.2d 633 (4th Dep't. 2000), a plaintiff sought damages
for negligence and malpractice from defendant, an engineering
firm retained by the New York State Department of Environmental
Conservation (DEC) to design, prepare, and manage a project.
Plaintiff alleged, inter alia, that they relied on the
studies conducted by the defendant before it bid on the State
Department of Environmental Conservation project. Id. at 635.
The Appellate Division held that "while defendant may have known
that potential bidders would rely upon its work to prepare their
bid . . . plaintiff cannot be considered a known party merely
because it was a potential bidder." Id. at 636. The defendant's
interaction with plaintiff was insufficient and the Appellate
Division refused to expand the functional equivalent of privity
to an "indeterminate class of persons who, presently or in the future, might act in reliance on defendant's
As opposed to the interaction between the parties in IT
Corp., KPF cannot maintain that Trataros was an unknown party.
As part of KPF's relationship with DASNY, KPF was contractually
obligated to interact with Trataros pre- and post-bid. Pre-bid,
KPF maintained a list of the parties expected to bid on the
contract and solicited such bids. During the bidding process,
pursuant to the terms of the contract between DASNY and KPF, KPF
was obligated to examine contract bids. Most importantly, and in
stark contrast to IT Corp., KPF's contractual obligations to
DASNY did not end with the bidding process. While in IT Corp.
the engineering company's obligations to the State Department of
Environmental Conversation appeared not to include communications
between the plaintiff and engineering company, Id. at 636,
here, KPF was required to inspect the progression of construction
and ensure compliance with the designs created and submitted.
(Catalano Ex. A at ¶¶ 1-12; Supp. Aff. Rogers Ex. A.) Trataros
relied on both KPF's designs and calculations, as well as
architectural expertise, as the Project unfolded. See Dorking
Genetics v. United States, 76 F.3d 1261, 1271 (2d Cir. 1996)
("[I]t is enough if the complaint shows reliance by the plaintiff
that was the end and aim of the transaction.") (internal citation
omitted). Indeed, Trataros's services were performed in concert
with KPF's instructions regarding the building of the Project.
Accordingly, KPF's duties to oversee and instruct Trataros
about the design of the Project clearly indicate that Trataros
was not a "member? of an indeterminate class," Vanguard Mun.
Bond Fund, 40 F. Supp. 2d at 191, and, therefore, the second
factor of the Ossining test is satisfied.
3. Conduct Between KPF and Travelers
The third prong of the Ossining test requires "linking
conduct," Williams, 983 F.2d at 1183, and "courts have
uniformly required more than phone calls, general communications
or unacknowledged assertions of reliance in order to establish
linking conduct." BHC Interim Funding, L.P. v. Finantra Capital,
Inc., 283 F. Supp. 2d 968, 986 (S.D.N.Y. 2003).
Relying on Williams, 983 F.2d at 1183, KPF argues that any
contact or communications between KPF and Trataros occurred only
at the direction of DASNY, and KPF only acted as a representative
of DASNY. As such, according to KPF, the contact between Trataros
and DASNY fails to establish a direct relationship of its own
that would link it with Trataros. See Id.
In Williams, the Second Circuit noted that contacts made at
the request of the owner do not establish liability because in such situations the defendant
is acting as an agent of the owner, and not in their own
capacity. Id. According to the Second Circuit, an architect's
limited interaction at the direction of the owner "directed to
all prospective bidders . . . is insufficient to establish the
relationship required for the imposition of liability under New
York law." Id.
However, in a post Williams decision, Dorking Genetics, the
Second Circuit held that "direct dealings" is only one approach a
party may employ to establish a sufficient nexus so as to
demonstrate the "functional equivalent of privity." Dorking
Genetics, 76 F.3d at 1270. In Dorking Genetics, The Second
Circuit reversed a district court's decision to dismiss a
Complaint "on the ground that Dorking could not prove a
relationship sufficiently close to privity of contract." Id. at
1263. Relying on the New York Court of Appeals decision in
Credit Alliance, a decision which preceded Ossining, the
Second Circuit held that "direct dealings" were "one of several
factors that might establish a relationship sufficiently close to
privity" and "that an action could be brought by plaintiffs if
the contract for services was tailored to the plaintiffs'
requirements (thus demonstrating that the defendant understood
the plaintiffs' reliance) even if the plaintiffs had never
interacted directly with the defendant." Id. As a result, the
Second Circuit held, if plaintiff's reliance on defendant's
services was within the contemplation of the parties, the
plaintiff was entitled to bring this cause of action. Id. at
Here, Trataros's reliance on KPF's services was well within the
contemplation of the parties. Not only did KPF design the
Project's plans and specifications, but solicited bids, answered
inquiries, reviewed submissions, amended plans and specifications
from contractors such as Trataros, and most importantly, oversaw
the actual construction of the Project by contractors such as
Trataros. (Catalano Ex. A at ¶¶ G1-G4, H; Supp. Aff. Rogers Ex.
A.) Indeed, KPF's contractual obligations required KPF's
continual communication and oversight of contractors such as
Trataros. For example, among other construction phase
obligations, KPF was required to:
Review and approve or disapprove all shop drawings
and samples submitted by the Contractor for adherence
to the intent and requirements of the Contract
Documents. . . . All submittals shall be reviewed
promptly and completely. . . .
Inspect on a bi-weekly basis, or as required by the
OWNER, the Work in progress to determine compliance
with the requirements of the contract drawings and
specifications or approved shop drawings. A report
shall be issued detailing the inspection. . . . Upon completion of each prime contract, make a final
inspection of the Work and upon completion of each
Phase of Work, represent to the OWNER, in writing,
that the Work is complete and in accordance with the
Contract Documents. . . .
(KPF Ex. A. at ¶¶ H1, H7, H11.) Moreover, the plain language of
KPF's contract with DASNY specifically reject KPF's claim that it
acted as DASNY's agent: "[t]he relationship created by this
Agreement [is] in no way to be construed as creating any agency
relationship between the OWNER and the ARCHITECT . . ." (Catalano
Aff. Ex. A at ¶ 13.). KPF's design of the Project, oversight
obligations throughout the building phase of the Project, and
involvement in the bidding process, clearly satisfy the linking
requirement of the Ossining Test. Therefore, KPF's defense that
it was merely acting as an agent of the owner becomes untenable.
In accordance with Ossining and its progeny, Travelers' has
sufficiently pled the functional equivalent of privity.
For the reasons set forth above, KPF's motion to dismiss for
failure to state a claim upon which relief may be granted is
DENIED and the Clerk of the Court is instructed to Close this
motion and remove it from my docket.
IT IS SO ORDERED.