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American Manufacturers Mutual Insurance Co. v. Payton Lane Nursing Home

January 27, 2010


The opinion of the court was delivered by: A. Kathleen Tomlinson, Magistrate Judge



This decision concerns the second of three summary judgment motions filed in this action, namely, Plaintiffs' Motion for Partial Summary Judgment [DE 162] seeking dismissal of Defendant's second counterclaim for liquidated damages in the amount of $3,816,123.00. The parties' dispute arises out of the construction of a 280-bed nursing home in Southampton, New York.

In support of their motion, Plaintiffs American Manufacturers Mutual Insurance Company and American Motorists Insurance Company ("Plaintiffs" or "Sureties") rely upon their Local Rule 56.1 Statement of Undisputed Facts ("Pls.' 56.1 Stmt.") [DE 162-1]; Memorandum of Law in Support of Plaintiffs' Motion for Partial Summary Judgment ("Pls.' Mem.") [DE 162-23]; and the Affidavit of Eric Schatz ("Schatz Aff.") [DE 162-2], to which numerous exhibits are annexed [DE 162, Exs. 1-20]. Plaintiffs also submitted a Reply Memorandum of Law in Further Support of the Motion for Partial Summary Judgment ("Pls.' Reply Mem.") [DE 165-3], and the Reply Affidavit of Steven Rittmaster ("Rittmaster Reply Aff.") [DE 165], to which additional exhibits are annexed [DE 165, Exs. 1-2].

In opposition to the motion, Defendant Payton Lane Nursing Home, Inc. ("Payton Lane") relies upon its Responses to Plaintiffs' Rule 56.1 Statement (¶¶ 1-34) and Defendant's Counterstatement of Material Facts (¶¶ 35-66) ("Def.'s 56.1 Counterst.") [DE 163]; Memorandum of Law in Opposition to Plaintiffs' Motion for Partial Summary Judgment ("Def.'s Mem.") [DE 164]; and the Affirmation of Robert C. Angelillo ("Angelillo Aff.") [DE 163-1], with exhibits annexed [DE 163, Exs. A-O]. The Court has considered all of the submissions, the applicable case law, and the positions asserted by counsel during oral argument on the motion. For the reasons set forth below, Plaintiffs' Motion for Partial Summary Judgment is DENIED.


A. Undisputed Facts

The following facts are drawn primarily from the pleadings and the parties' Rule 56.1 Statements where those facts are not disputed. On considering a motion for partial summary judgment, the Court construes the facts in the light most favorable to the non-moving party. See Capobianco v. New York, 422 F.3d 47, 50 (2d Cir. 2001).

1. IDI Contract

On or about November 16, 2001, IDI Construction Company, Inc. ("IDI"), the original contractor, and Payton Lane, as owner, entered into a construction contract dated November 16, 2001 (the "IDI Contract"), to build the Payton Lane Nursing Home in Southampton, New York (the "Project") for the sum of $29,717,385.00. Pls.' 56.1 Stmt., ¶ 4; Schatz Aff., ¶ 3 and Ex. 5; Def.'s 56.1 Counterst., ¶ 4. The IDI Contract was executed, at least in part, on HUD's form 92442. Id.*fn1

Regarding the completion date of the Project, Article 2 of the General Conditions of the IDI Contract provides as follows:

The work to be performed under this Contract shall be commenced within 20 days and shall be completed by April 20, 2003. This time by which the work shall be completed may be extended in accordance with the terms of the said AIA General Conditions only with the prior written approval of the Commissioner.

Schatz Aff., Ex. 5, ¶ 3(A). In addition, with respect to Payton Lane's entitlement to liquidated damages as a result of delay, the IDI Contract provides that if the work is not brought to final completion in accordance with the Drawings and Specifications, including any authorized changes, by the date specified above, or by such date to which the contract time may be extended, the contract sum stated in Article 3A below shall be reduced by $11,257, as liquidated damages, for each day of delay until the date of final completion. When the Owner cost certifies to HUD, the actual cost of interest, taxes, insurance, mortgage insurance premiums, and construction and permanent loan extension fees, as approved by the Commissioner, for the period from the scheduled date of completion through the date construction was actually completed, shall be determined. The lesser of the liquidated or actual damages shall be applied. The applicable amount shall be reduced by the project's net operation income (as determined by the Commissioner) for the damage period.*fn2

Id., ¶ 3(C).

2. Performance Bond and Mortgage

On December 3, 2001, the Sureties issued a performance bond to IDI, for the benefit of Payton Lane, the United States Department of Housing and Urban Development ("HUD"), and PFC Corporation ("PFC" or the "Lender"), as obligees, in the amount of $29,717,385.00.

Pls.' 56.1 Stmt., ¶ 5; Schatz Aff., ¶¶ 4, 15 and Ex. 6*fn3 ; Def.'s 56.1 Counterst., ¶ 5. Then, on December 13, 2001, PFC made a mortgage loan (the "Mortgage") to Payton Lane in the amount of $37,523,000.00, which included an allocation of $29,717,385.00 to be paid to IDI in accordance with the requirements set forth in the IDI Contract. Pls.' 56.1 Stmt., ¶ 6; Schatz Aff., ¶ 4, Ex. 7 (Building Loan Agreement and Mortgage); Def.'s 56.1 Counterst., ¶ 6. HUD insured the Mortgage. Pls.' 56.1 Stmt., ¶ 6; Schatz Aff., ¶ 4, Ex. 8 (HUD Regulatory Agreement).

3. Takeover Agreement

On or about May 11, 2004, Payton Lane terminated the IDI Contract and called upon the Sureties to satisfy their obligations under their performance bond. Pls.' 56.1 Stmt., ¶ 8; Schatz Aff., ¶ 7 and Ex. 1; Am. Compl. [DE 37], ¶ 13; Def.'s 56.1 Counterst., ¶ 8. Then, on July 9, 2004, the Sureties and Payton Lane entered into a Takeover Agreement. Pls.' 56.1 Stmt., ¶ 9; Schatz Aff., ¶ 7 and Ex. 4; Def.'s 56.1 Counterst., ¶ 9. The Takeover Agreement provided that the "Sureties shall complete the work required as set forth on Exhibit A pursuant to this Agreement on or before March 15, 2005 (the "Revised Completion Date").*fn4 Schatz Aff., Ex. 4, ¶ 6. Pursuant to Paragraph 7 of the Takeover Agreement, the Sureties paid $4.25 million to Payton Lane for damages suffered by and dispute related expenses incurred by Payton Lane, in consideration for an assignment of all claims Payton Lane has against Sureties under the Bonds for damages of any kind, except for claims relating to latent construction defects, if any, from the commencement of the Project up to and existing as of the date of the execution of this Agreement (the "Pre-Takeover Claim") . . . .

Schatz Aff. Ex. 4, ¶ 7.*fn5 The Takeover Agreement further provided that Greyhawk would continue as the Sureties' "Authorized Representative with regard to completion of the remaining work" on the Project, and would "supervise the work to be performed by the Completion Contractor." Schatz Aff., Ex. 4, ¶ 12.

4. Discovery of Non-Conforming Work

Following the execution of the Takeover Agreement, Plaintiffs hired E.W. Howell Construction Company, Inc. ("Howell") to complete the work required under the Takeover Agreement. Pls.' 56.1 Stmt., ¶ 11; Schatz Aff., ¶ 8; Def.'s 56.1 Counterst., ¶ 11. After commencing work on the Project, Howell discovered and informed Plaintiffs of certain items of work which were not properly completed by IDI (the "non-conforming work"). Id. Plaintiffs paid more than $2 million to Howell to perform the corrective work (i.e., the work needed to fix the non-conforming work done by IDI). Pls.' 56.1 Stmt., ¶ 12*fn6 ; Schatz Aff., ¶ 9.

Although the Revised Completion Date as set forth in the Takeover Agreement was March 15, 2005, Payton Lane did not obtain a certificate of occupancy until February 17, 2006. Def.'s Am. Answer & Countercls. ("Am. Answer.") [DE 58], ¶¶ 184, 186. In its Second Counterclaim for delay damages (which is the subject of Plaintiffs' motion here and which is discussed further below), Payton Lane alleges that, under the Takeover Agreement, it is entitled for delay damages for the period from March 15, 2005 through February 17, 2006. Id., ¶ 185.

The Sureties, on the other hand, assert they "had achieved substantial completion of the work they were required to perform by August 12, 2005, . . . were entitled to an extension of at least 180 days, and that they are not responsible for any delays after August 12, 2005." Schatz Aff., ¶ 10. In support of this position, the Sureties allege, inter alia, that Howell's "correction of non-conforming work, together with Payton Lane's failure to provide direction when issues arose with the work, caused substantial delays to the Project." Id., ¶ 9. The Sureties further contend that, in any event, the "Court need not determine the actual date of substantial completion on this motion as, regardless of the completion date, Payton Lane is barred from recovery of liquidated damages, based on its certification to HUD and its representations to the [IRS] in its 2006 tax return." Id., ¶ 12.

5. HUD's Section 232 Program

The Payton Lane Nursing Home was built pursuant to Section 232 of the National Housing Act (the "Section 232 Program"), which was passed by Congress "to assist in the provision of facilities for [inter alia] . . . [t]he development of assisted living facilities for the care of frail elderly persons." 12 U.S.C. § 1715w(a)(3). The Section 232 Program is further intended "to insure mortgages made by private lending institutions[, which] are used to finance construction or renovation of nursing homes, and assisted living and rest homes for the elderly." HUD Audit Case No. 2002-KC-2, Nationwide Survey of HUD's Office of Housing § 232 Nursing Home Program (Schatz Aff., Ex. 9); see also 12 U.S.C. § 1715w(d) (authorizing the HUD Secretary "to insure any mortgage which covers a new or rehabilitated nursing home, assisted living facility, or intermediate care facility . . ." subject to certain conditions, including that the "mortgage shall be executed by a mortgagor approved by the Secretary . . . ."). Under Section 232, HUD will insure a non-recourse mortgage loan (i.e., the personal assets of the owner are not at risk in the event of a mortgage loan default (with certain exceptions not applicable here)) (Schatz Aff., ¶ 14 and Ex. 8, ¶ 17), for up to 90% of the cost of the Project (so that the mortgagor is required to put up only 10% of the equity). 12 U.S.C. § 1715w(d)(2). Schatz Aff., ¶ 14. For the Payton Lane Nursing Home, HUD approved the original mortgage commitment of $39,708,951. Pls.' 56.1 Stmt., ¶ 26; Schatz Aff., ¶ 24 and Exs. 14-15.

6. Defendant's Counterclaim

After the Sureties commenced this action, Payton Lane filed its Answer with Crossclaims against co-Defendant Perkins Eastman Architects, P.C. ("Perkins") and Counterclaims against the Sureties.*fn7 Payton Lane's second counterclaim is for liquidated damages stemming from the Sureties' purported failure to complete the Project by the agreed-upon date (the "Second Counterclaim"). Am. Answer, ¶¶ 182-187; Pls.' 56.1 Stmt., ¶ 13; Def.'s 56.1 Counterst., ¶ 13. Specifically, Payton Lane alleges that (1) the Sureties, acting in concert with Greyhawk and Howell, "delayed the performance of, or refused to perform, the work necessary to complete the Project . . . ."; (2) the Sureties agreed to complete the Project by March 15, 2005; and (3) when the Project "was not brought to final completion in accordance with the Drawings and Specifications (as defined in the [IDI] Contract) by March 15, 2005, Payton Lane became entitled to liquidated damages in the amount of $11,257.00 per day. Am. Answer, ¶¶ 182-185. Payton Lane further alleges that the Sureties "never performed the work that was required to bring the Project to completion[,]" and so it "was forced to hire its own contractor to complete the Project." Id., ¶ 186. According to Payton Lane, the Project was completed on February 17, 2006, thereby entitling Payton Lane to liquidated damages in the amount of $3,816,123.00 (for a total of 339 days). Id.

Thereafter, Plaintiffs retained a scheduling expert, Donald Lefler, who issued a report dated March 9, 2009 concerning, inter alia, Payton Lane's allegations as to Plaintiffs' liability for delay damages. Pls.' 56.1 Stmt., ¶ 14; Schatz Aff., ¶ 10.*fn8


A. The Sureties' Position

The Sureties move for partial summary judgment seeking to dismiss Payton Lane's Second Counterclaim for liquidated damages for the Sureties' alleged delays in completing the Project. The Sureties argue that Defendant is estopped from seeking liquidated damages in this action because Payton Lane's previous financial representations to the Internal Revenue Service (the "IRS") and to HUD regarding the Project did not include the approximately $3.5 million which Payton Lane is now claiming in liquidated damages. Specifically, Plaintiffs allege that in its 2006 tax returns, Payton Lane represented that it owed $3,910,913.00 in current liabilities --and this amount did not include Payton Lane's claim for $3.5 million in liquidated damages. The Sureties also maintain that in the Certificate of Actual Cost submitted to HUD, Payton Lane represented that $3,910,913.00 was the full retainage to be paid to the Sureties, and this amount did not include the claim for liquidated damages. According to Plaintiffs, because (1) Payton Lane made these quasi-judicial representations which did not include the liquidated damages claim, and (2) Payton Lane incurred benefits as a result of such representations, then Payton Lane should not now be permitted to assert its liquidated damages claim in contravention of these prior representations.

1. Payton Lane's 2006 Tax Returns

The Sureties assert that in its 2006 Federal Income Tax Return, Payton Lane represented that it owed $3,910,913.00 to the Sureties, and that this amount did not include any offset or deduction for liquidated damages. Pls.' Mem. at 10. Specifically, Plaintiffs contend that in Schedule L, Statement 7 of Payton Lane's 2006 Federal Income Tax Return (Schatz Aff., Ex. 18 at 15), Payton Lane represented that $3,910,913.00 was owed to the Sureties as "OTHER CURRENT LIABILITIES." Pls.' 56.1 Stmt., ¶ 32; Schatz Aff., ¶ 27 and Ex. 18 at 15. Plaintiffs state that the $3,910,913.00 consists of two components. The first is the "RETAINAGE PAYABLE" of $2,948,306.00, which is set forth in the first line of Schedule L, Statement 7 of Payton Lane's 2006 tax return. Pls.' 56.1 Stmt., ¶ 33; Schatz Aff., ¶ 27 and Ex. 18 at 15. The second component is $962,602.00 for certain of the Sureties' change orders, which, according to the Sureties, is part of the $1,508,537.00 reported as "ACCRUED ITEMS PAYABLE" in the third line of Schedule L, Statement 7. Id. Plaintiffs point to the "Schedule of Accrued Construction Costs Payable As of March 2, 2006" (Schatz Aff., Ex. 19), which was produced by Payton Lane's accountants, and which shows that "Disputed Surety Change Orders" of $962,607.00 is one component of the $1,508,537.00 in "Total Accrued Items Payable" which appears in Schedule L of Payton Lane's tax return. Pls.' 56.1 Stmt., ¶ 33; Schatz Aff., ¶ 27 and Exs. 18, 19.

Plaintiffs contend that Payton Lane received a benefit from reporting $3,910,913.00 as a "current liability." Specifically, according to Plaintiffs, reporting $3,910,913.00 as a liability increased the amount of depreciation claimed by Payton Lane, which ultimately resulted in a ...

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