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Nobel Insurance Co. v. City of New York

September 29, 2006


The opinion of the court was delivered by: Kenneth M. Karas, District Judge


This case arises from a payment bond ("Bond") issued by Plaintiff Nobel Insurance Co. ("Nobel"), as surety, on behalf of Zollo Construction Corporation ("Zollo"), as principal, and the Defendant City of New York ("City") as obligee. Nobel asserts a right of equitable subrogation, and claims that the City is liable for breaching its duty as a "stakeholder" to the contract funds. The City moves for summary judgment on three grounds: (1) the Bonds contain the surety's express waiver of any and all notice of payments by the City; (2) the City's payments to Zollo were permissible under New York law because, inter alia, New York Lien Law provides the exclusive remedy, and Nobel had made no payments to any claimant and therefore was not yet subrogated to Zollo's right to payment; and (3) the claim is barred by a six-month contractual statute of limitations period. Moreover, the City maintains that to the extent Noble is entitled to any recovery, such recovery should be limited to the $86,743.31 related to the specifically identified contract, and not the entire $492,229.77 that Nobel seeks in its Complaint. For the reasons outlined below, the motion for summary judgment is DENIED in part and GRANTED in part.

I. Background

A. The Shore Boulevard Project and Nobel's Bond

The basic facts are uncontested.*fn1 On November 30, 1995, Zollo executed and delivered an Agreement of Indemnity in favor of Nobel, as indemnitee. (Nobel's Statement of Material and Uncontested Facts ("Nobel's 56.1 Statement") ¶¶ 1-2 (citing Moskow Decl. Ex. A)) On May 22, 1996, Nobel, as surety, issued the Bond on behalf of Zollo, as principal, in favor of the City, as obligee, for the Shore Boulevard Bulkhead Rehabilitation from Quentin Street to Langham Street, Borough of Brooklyn, New York, Pin. No. 84195BK543RW (HWK692) ("Shore Boulevard Project" or "Shore Boulevard Contract" or "Contract"). (Nobel's 56.1 Statement ¶ 3 (citing Guest Aff. ¶ 2; Moskow Decl. Ex. B))

On or about June 23, 1997, the New York City Department of Design and Construction ("DDC") terminated the Shore Boulevard Contract for convenience.*fn2 (City's 56.1 Statement ¶ 9; Nobel's 56.1 Resp. ¶ 9) On February 24, 1998, Nobel faxed and mailed a letter to the Department of Transportation (DOT) (from Scott J. Guest, Bond Claim Manager), providing, in pertinent part:

Dear Sir or Madam:

Nobel Insurance Company is the payment and performance bond surety for Zollo Construction Corp. with regard to the above-referenced construction [Shore Boulevard Rehabilitation] project. Claims for payment have been asserted against our payment bond by subcontractors and suppliers of Zollo Construction Corp. As a consequence of these circumstances and events, Nobel is being exposed to potential losses under its bonds furnished for this project.

We are attempting to communicate with the appropriate representatives of Zollo Construction Corp. to investigate the facts concerning this matter. As of this time, however, we hereby demand, on behalf of Nobel that no further funds be released under the above-referenced contract without written consent and direction of Nobel. This request is being made on the basis of and to protect its interests under it [sic] bonds furnished for this project. Please note that any failure or refusal to observe the foregoing demand may be prejudicial to the surety.

Should you have any questions with regard to this demand, please contact the undersigned as soon as possible. Your cooperation is appreciated. (Levy Decl. Ex. G; City's 56.1 Statement ¶¶ 10-12; Nobel's 56.1 Resp. ¶ 12)

On or about March 3, 1998, DDC paid Zollo a termination payment of $492,229.77 for work performed and materials supplied in the prosecution of the Contract. (City's 56.1 Statement ¶ 13; Nobel's 56.1 Resp. ¶ 13)

On March 9, 1998, David Fenichel, Associate General Counsel for DOT, faxed a copy of Nobel's February 24, 1998 letter to Neil Murphy, General Counsel of DDC. (City's 56.1 Statement ¶ 14 (citing Levy Dec. Ex. H); Nobel's 56.1 Resp. ¶ 14)

The parties further agree that, during a period from 1998 to 2001 (with the earliest payments appearing to be on June 25, 1998), Nobel made a number of payments in connection with the Shore Boulevard Contract (City's 56.1 Statement ¶ 5; Nobel's 56.1 Resp. ¶ 5), and other payments in connection with "another, unidentified, contract." (City's 56.1 Statement ¶ 6; Nobel's 56.1 Resp. ¶ 6)

On February 1, 1999, Nobel filed a Notice of Claim ("Notice") with the Comptroller of the City of New York. (City's 56.1 Statement ¶ 1 (citing Levy Decl. Ex. A); Nobel's 56.1 Resp. ¶ 1) The Notice indicates that Nobel seeks an "amount of not less than $492,229.77 released by the City of New York to Zollo after notification by Nobel, as surety, of claims for payment against its bonds by subcontractors and suppliers of Zollo." (City's 56.1 Statement ¶ 2; Nobel's 56.1 Resp. ¶ 2)

B. Procedural History

The Complaint in this case was filed on February 18, 2000. On November 16, 2000, the City moved to dismiss, pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state a claim. On July 23, 2001, Judge Berman denied the motion to dismiss ("Berman Order"). First, Judge Berman rejected the City's claim that Nobel's actions should be dismissed because, under the language of the Bonds, Nobel waived its right to object to payment by the City, concluding that "it seems desirable to have discovery to determine whether Nobel has, in fact, waived its claim." (Id. at 7) In reaching this conclusion, Judge Berman explained that "[n]either the Complaint, the Bonds attached to it, the Contract, or Nobel's February 24, 1998 letter makes clear whether the City's payment to Zollo was, in fact, a 'premature payment.'" (Id. at 6) Moreover, Judge Berman suggested that "[t]he following facts, as yet not established, might be helpful in determining the nature of the payment: (1) whether the work involved in the construction Contract was fully completed; and (2) other circumstances surrounding payment." (Id.) Judge Berman, however, emphasized that "[t]he Court in this Order is in no way ruling upon the ultimate merit(s) of the Plaintiff's claim." (Id. at 5 n.5)

Second, Judge Berman rejected the City's argument that Nobel's action should be dismissed because, under New York Lien Law, the City did not have an obligation to withhold moneys due the contractor Zollo for the benefit of the surety Nobel. Again, Judge Berman noted the motion was premature because of the need for discovery:

. . . At least limited inquiry (discovery) would be helpful to determine whether there were outstanding claims on which to file a lien, i.e. whether Nobel had paid all claims. Discovery needs to be conducted on the issue, among others, of whether or not all claims of laborers, suppliers, and subcontractors were satisfied by Nobel.

Similarly, the Court is presented with a factual dispute as to whether (i) all claims of trust beneficiaries have been paid and (ii) whether or not there was malicious intent by the City. (Id. at 9)

Third, Judge Berman rejected the City's argument that Nobel's claim was time barred because it was commenced after (a) the six month contractual limitations period provided for in Article 53 of the Contract (incorporated by reference into the Bonds); and/or (b) the one year and ninety day statute of limitation for the commencement of action in tort against a municipality provided for in Section 50-I of the General Municipal Law. Judge Berman concluded that "on these facts, [the Court] cannot determine if Nobel's action would be time barred because, among other things, the Court does not know if the 'condition' of a final payment voucher was satisfied." (Id. at 11)

Following denial of the motion to dismiss, the City appears to have served an answer on or about August 20, 2001 ("Answer"), although the Answer has not been docketed. (City's 56.1 Statement ¶ 4 (citing Ex. D))*fn3 The parties subsequently conducted discovery. After the completion of discovery, the City filed the instant motion for summary judgment.

II. Discussion

A. Summary Judgment Standard

Pursuant to Federal Rule of Civil Procedure 56(c), "[s]ummary judgment is appropriate when after viewing all the facts in the record in a light most favorable to the non-moving party, there is no genuine issue of material fact present, so that 'the moving party is entitled to judgment as a matter of law.'" Forsyth v. Fed'n Employment & Guidance Serv., 409 F.3d 565, 569 (2d Cir. 2005) (quoting Fed. R. Civ. P. 56(c)); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). "Such relief for the moving party may be appropriate after discovery if the non-moving party cannot prove an 'essential element of her case,' that is, one for which she bears the burden of proof." Forsyth, 409 F.3d at 569 (citing Powell v. Nat'l Bd. of Med. Exam'rs, 364 F.3d 79, 84 (2d Cir. 2004)).

The burden is on the movant to show that there is no genuine factual dispute. See Giannullo v. City of New York, 322 F.3d 139, 140 (2d Cir. 2003) (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970)). "In deciding a motion for summary judgment, all ambiguities must be resolved and all reasonable inferences drawn in favor of the party opposing the motion." EMI Catalogue P'ship v. Hill, Holliday, Connors, Cosmopulos Inc., 228 F.3d 56, 61 (2d Cir. 2000) (citing Anderson, 477 U.S. at 255); see also Giannullo, 322 F.3d at 140. "If the evidence is such that, when viewed in the light most favorable to the nonmoving party, a reasonable fact finder could return a verdict for that party, then a genuine issue of material fact exists, and summary judgment is not warranted." Magan v. Lufthansa German Airlines, 339 F.3d 158, 161 (2d Cir. 2003) (citing Green Door Realty Corp. v. TIG Ins. Co., 329 F.3d 282, 286-87 (2d Cir. 2003)).

In this case, the central facts are agreed upon by the parties and the motion presents almost exclusively legal questions. "Summary judgment is appropriate where the factual predicates of each legal question are undisputed." Grumman Allied Indus. v. Rohr Indus., 748 F.2d 729, 739 (2d Cir. 1984); see also Vera v. Saks & Co., 424 F. Supp. 2d 694, 702 (S.D.N.Y. 2006) ("As . . . there are no disputed material issues of fact, the matter is ripe for summary judgment.").

B. Law of the Case

The law of the case doctrine "posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case." In re PCH Assocs., 949 F.2d 585, 592 (2d Cir. 1991) (quoting Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 815-16 (1988)); see also 1B James W. Moore, Jo D. Lucas & Thomas S. Currier, Moore's Federal Practice ¶ 0.404[1], at 117 (1991), quoted in DiLaura v. Power Auth. of N.Y., 982 F.2d 73, 76 (2d Cir. 1992) ("Under the doctrine of law of the case, a decision on an issue of law made at one stage of a case becomes a binding precedent to be followed in successive stages of the same litigation."). "'The purpose of [the law of the case] doctrine is to promote the judicial system's interest in finality and in efficient administration.'" Lillbask ex rel. Mauclaire v. Sergi, 193 F. Supp. 2d 503, 511 (D. Conn. 2002) (quoting Hayman Cash Register Co. v. Sarokin, 669 F.2d 162, 165 (3d Cir. 1982) (internal quotation marks omitted)).

The law of the case doctrine, however, does not preclude this Court from reconsidering issues on summary judgment that have initially been raised in the context of a motion to dismiss. See Day Springs Enters. v. LMC Int'l, Inc., No. 98-CV-0658A(F), 2004 WL 2191568, at *13 (W.D.N.Y. Sept. 24, 2004) ("Although the arguing of a motion for summary judgment on the same legal issue which has already been denied on a motion to dismiss for failure to state a claim potentially may be barred under the 'law of the case' doctrine, 'where a party has argued an issue during one motion before a given judge, the doctrine does not necessarily preclude a different judge from considering the same argument proffered during a subsequent motion [for summary judgment].'" (quoting Dawes v. Leonardo, 885 F. Supp. 375, 376-77 (N.D.N.Y. 1995))). "Rather, that a complaint has been found, on a motion to dismiss, to state a claim on its face does not guarantee that resolution of such claim will require a trial. Significantly, as a ruling in favor of a plaintiff on a motion to dismiss does not address the merits of a case, such ruling will not preclude a subsequent ruling in favor of a defendant on the same issue on a motion for summary judgment following discovery." Id; accord McKenzie v. Bellsouth Telecomms., Inc., 219 F.3d 508, 513 (6th Cir. 2000) ("[O]ur holding on a motion to dismiss does not establish the law of the case for purposes of summary judgment, when the complaint has been supplemented by discovery."); Golden Pac. Bancorp. v. FDIC, 95 Civ. 9281, 2003 WL 21496842, at *5 n.14 (S.D.N.Y. June 27, 2003) (noting that prior denial of motion to dismiss did not foreclose consideration of later summary judgment motion).As outlined above, many of Judge Berman's conclusions were based on his view that resolution of the issues presented in the motion to dismiss was premature before the completion of discovery. Thus, a reevaluation of many of these issues in the context of summary judgment is appropriate. To the extent, however, that Judge Berman made legal conclusions which are not in any way altered by discovery, or by subsequent developments in the law, this Court will not here reconsider those prior rulings.

C. Nobel's Theory of Recovery

1. Doctrine of Equitable Subrogation

Before examining the specific grounds for summary judgment, the Court reviews Nobel's theory of recovery. Nobel primarily seeks relief under the doctrine of equitable subrogation. The Second Circuit has generally summarized the doctrine of equitable subrogation as follows:

Subrogation is the right one party has against a third party following payment, in whole or in part, of a legal obligation that ought to have been met by the third party. The doctrine of equitable subrogation allows insurers to "stand in the shoes" of their insured to seek indemnification by pursuing any claims that the insured may have had against third parties legally responsible for the loss. In short, one party known as the subrogee is substituted for and succeeds to the rights of another party, known as the subrogor. The doctrine of subrogation, which is based upon principles of equity, has a dual objective as stated by New York courts: It seeks, first, to prevent the insured from recovering twice for one harm, as it might if it could recover from both the insurer and from a third person who caused the harm, and second, to require the party who has caused the damage to reimburse the insurer for the payment the insurer has made.

Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 258 (2d Cir. 1999) (internal citations omitted); see also St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 409 F.3d 73, 84 (2d Cir. 2005) ("Subrogation is an 'equitable doctrine [that] allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse.'" (quoting Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 687 N.E.2d 1330, 1332 (N.Y. 1997))); Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37 (1962) ("[P]robably there are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed."); Memphis & L.R.R. Co. v. Dow, 120 U.S. 287, 302 (1887) (noting that the right to subrogation is a creature of equity, and is "enforced solely for the purpose of accomplishing the ends of substantial justice"). The determination of whether to apply equitable subrogation is committed to the discretion of the Court. See United States v. Baran, 996 F.2d 25, 29 (2d Cir. 1993).

As applied to the particular circumstances of this case, Nobel, as the insurer/subrogee/ surety, seeks to stand in the shoes of Zollo, as the insured/subrogor/principal, and recover from the City as obligee/stakeholder. In other words, Nobel argues that it is entitled to recover the losses it sustained when it paid Zollo's subcontractors pursuant to its obligations as a surety. Nobel further argues that the City became a stakeholder for remaining contract proceeds when Nobel notified the City in its February 24, 1998 letter that its interests were in jeopardy, and that the City failed to fulfill its obligations as a stakeholder. In other words, even before Nobel paid any of the subcontractor's claims, and therefore before its subrogation rights were triggered, Nobel contends that by virtue of its notice to the City of the claims by unpaid subcontractors, the City was bound by equitable subrogation principles to act as a stakeholder of the payments allegedly due to the contractor.

In support of this theory of recovery, Nobel cites to a number of cases for the proposition that "the government becomes a 'stakeholder' for remaining contract proceeds when a payment and performance bond surety notifies the government that the surety's interest is in jeopardy because of default by the contract or . . . based upon the reasoning that once the surety notified the government of the contractor's default, the surety could assert the equitable doctrine of subrogation." Ransom v. United States, 900 F.2d 242, 245 (Fed. Cir. 1990) (citing Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160-63 (Fed. Cir. 1985)); see also Newark Ins. Co. v. United States, 169 F. Supp. 955, 957 (Ct. Cl. 1959) (denying defendant's motion for summary judgment on the grounds that if government officials, after due notice of facts giving rise to equitable right in surety, paid out the money without a valid reasons for doing so, surety would be entitled to judgment against the United States). That is, "a surety has an equitable right of subrogation to contractor funds retained by the government when the surety pays debts of the contractor to subcontractors pursuant to a payment bond." Int'l Fid. Ins. Co. v. United States, 25 Cl. Ct. 469, 473 (1992) (citing Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141-42 (1962)).*fn4

"Equitable subrogation is one of a surety's principal mechanisms for reducing loss." Pa. Nat. Mut. Cas. Ins. Co. v. City of Pine Bluff, 354 F.3d 945, 951 (8th Cir. 2004) (citing Prairie State Bank v. United States, 164 U.S. 227, 231 ...

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