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Broadway Houston Mack Development LLC v. Kohl

December 22, 2008

BROADWAY HOUSTON MACK DEVELOPMENT LLC, PLAINTIFF,
v.
TED KOHL, JAMES STUMPF, LESLIE KOHL, BRIAN MARLOWE AND DOE, DEFENDANTS 1-10, DEFENDANTS.



The opinion of the court was delivered by: Emily Pines, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

This case presents a classic collision between law and equity. It is ancient hornbook law that where the underlying issue to be determined is governed exclusively by legal principles, the Court lacks the authority to utilize equity to provide a "better" remedy. Donovan v Finn, Hpk. Ch. 59, 2 NY Ch. Ann. 342, 14 Am. Dec. 531 (1823). Having paid a general contractor in full covering the fees of all that entity's trust beneficiaries - the subcontractors - on a construction project, an owner then pays several of the subcontractors upon their threat of filing mechanics' liens. The general contractor, having filed for Bankruptcy protection, is not reachable before this Court; yet its principals have plead guilty and are currently serving criminal sentences for conversion and diversion of the general contractor's funds for their personal use. The owner now seeks redress against these individuals, as an asserted subrogee of the rights of the subcontractors. Can it do so; and is that answer different from the one of whether it should be permitted to do so?

ORDERED, that the motion (motion sequence number 008) by plaintiff for partial summary judgment and the motion (motion sequence number 009) by defendants for summary judgment dismissing the Complaint are decided as set forth below.

FACTUAL AND PROCEDURAL HISTORY

Plaintiff, Broadway Houston Mack Development, LLC, ("BHMD"), commenced this action against defendants for violations of Article 3-A of the Lien Law, diversion and conversion of trust funds for defendants' own purposes, and breach of fiduciary duty by the filing of a Summons and Verified Complaint on or about June 9, 2005. The gravamen of the Complaint is that defendants, Ted Kohl ("Kohl") and James Stumpf ("Stumpf"), in their capacity as principals and/or officers of IDI Construction, Inc. ("IDI"), diverted certain trust funds paid to them in conjunction with the development and construction of a multi-story office building on property located at 610 Broadway, New York, New York (the "subject premises"). The record reflects that plaintiff was the ground lessee of the subject premises and by Construction Management Agreement (the "Agreement") dated June 17, 2003, retained IDI as the general contractor for the construction project. In accordance with the Agreement, IDI retained certain subcontractors to perform work on the project.

Plaintiff alleges that it paid IDI in excess of $7 million dollars, which was intended to be used for the payment of the subcontractors for work performed under the project. This is not a disputed fact. However, plaintiff asserts that defendants diverted these trust funds to their own use and failed to pay the subcontractors the full amounts due and owing.*fn1 Plaintiff states that the subcontractors, upon failure of the general contractor to make payment, threatened to file mechanics' liens on the subject premises, demanded payment from plaintiff for the work and threatened to cease performance on the construction project. Therefore, although plaintiff admits it paid IDI in full under the Agreement, plaintiff made certain direct payments to some of the subcontractors on the project. Plaintiff states that in or about July 28, 2004, it made"direct payments in total amount of $902,370.10 to certain subcontractors for all outstanding invoices through May of 2004 in order to discharge or waive mechanic's liens as well as keep the Project going."

The submissions further reflect that both defendants plead guilty to criminal charges of grand larceny arising out of their activities with IDI. Copies of the plea agreements are annexed to the moving papers.*fn2

The Complaint sets forth four causes of action; the First Cause of Action alleges that plaintiff was the beneficiary of the trust funds held by IDI and that defendants have diverted the trust funds to their own personal use in violation of Lien Law §71; the Second Cause of Action alleges that defendants converted the trust funds for their own purposes in violation of the Lien Law; the Third Cause of Action alleges that defendants breached their fiduciary duty by using the trust funds for their own purposes instead of paying the trust fund beneficiaries (i.e, the subcontractors); and the Fourth Cause of Action sought injunctive relief on the ground that assets of the trust fund were being used for the improvement of defendants' real property and sought to restrain the distribution of the proceeds of the sale of the real property.

THE MOTIONS

Plaintiff now moves for an Order granting partial summary judgment on the First Cause of Action of the Complaint and defendants move for summary judgment dismissing the Complaint in its entirety. Plaintiff argues that it is entitled to summary judgment on the sole legal issue of whether it has been subrogated to the rights of the subcontractors by the virtue of its making direct payments to those subcontractors once defendants diverted the trust funds. Plaintiff argues that it was forced to make these payments to the subcontractors for two reasons: (1) plaintiff was required to clear and avoid future mechanics' liens to avoid defaulting on contractual obligations to third parties, including the landlord and lender; and (2) plaintiff was required to prevent these subcontractors from ceasing performance on the construction project in order to mitigate its own damages.

Plaintiff states that between June of 2003 and June of 2004, it advanced to IDI a total of $7,514,750 in connection with the construction project and that such funds constituted trust funds pursuant to the Lien Law for the benefit of the subcontractors and suppliers on the project. During this time period however, plaintiff argues that defendants Kohl and Stumpf diverted several million dollars of these trust funds, as evidenced by certain checks annexed to the moving papers, and the plea agreements in which Kohl and Stumpf admitted they had received monies entrusted to IDI for the payment of subcontractors on another project. Plaintiff asserts that after it made payments to IDI, in July of 2004, several subcontractors began demanding payment directly from BHMD and threatened to cease work on the construction project and/or file mechanics' liens. Plaintiff states that it decided to pay the subcontractors directly, despite having already advanced all such funds to IDI, because it believed if it did not make such payments, it would be in violation of certain contracts with third parties. Specifically, plaintiff alleges that it believed it would be in breach of the following contracts: (1) Cash Collateral Agreement with North Fork Bank, dated June 9, 2003; (2) Completion Guarantee in favor of North Fork Bank, dated June 9, 2003; (3) Nomura Credit & Capital Agreement, dated July 15, 2005; (4) Ground Lease dated May 29, 2003; and (5) Amended and Restated Leasehold Mortgage with North Fork Bank, dated June 9, 2003. Plaintiff argues that each of these agreements contained covenants placing plaintiff in default if mechanics' liens were filed against the construction project, resulting in possible foreclosure and eviction from the subject premises.

Based on the foregoing, plaintiff argues that the direct payments to the subcontractors were not voluntary or gratuitous but rather plaintiff was protecting its legal interests when making these payments. Thus, plaintiff argues, it is subrogated to the rights of the subcontractors (the trust beneficiaries), and is entitled to recover for the amounts paid. Plaintiff urges the Court to recognize that there is no genuine issue of fact that IDI was the trustee of the Lien Law trust funds, held for the benefit of the subcontractors, that Kohl and Stumpf diverted and/or converted the trust funds for their own personal benefit, that plaintiff paid the subcontractors directly to protect their legal interests and thus are entitled to recover the amounts paid.

Defendants oppose the motion and cross-move for summary judgment dismissing the Complaint in its entirety. Defendants submit, inter alia, a copy of the pleadings, discovery demands and responses, a Statement of Uncontested Facts Pursuant to Rule 19-a, an affirmation by counsel and a Memorandum of Law. Defendants argue, in sum, that plaintiff lacks standing to bring an action on the basis of diversion, conversion or breach of fiduciary duty and has failed to ...


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