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Mount Vernon City School District v. Nova Casualty Company

April 3, 2012

MOUNT VERNON CITY SCHOOL DISTRICT, RESPONDENT-APPELLANT,
v.
NOVA CASUALTY COMPANY, APPELLANT-RESPONDENT, ET AL., DEFENDANT.



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

This opinion is uncorrected and subject to revision before publication in the New York Reports.

On this appeal, we are called upon to determine whether defendant Nova Casualty Company (Nova) is discharged from its surety obligation to plaintiff the Mount Vernon City School District (the School District) on the bases that the School District allegedly violated New York's Lien Law by improperly diverting construction contract payments constituting trust fund assets to a non-beneficiary and breached the terms of the parties' performance bond. We hold that under the facts of this case, Nova has not demonstrated that discharge of its surety obligation is warranted. We also consider whether the School District is entitled to attorneys' fees expended in the prosecution of this litigation, and conclude that the request for attorneys' fees was properly denied.

I.

On December 26, 2003, the School District and defendant DJH Mechanical Associates, Inc. (DJH) contracted for DJH to perform heating, ventilation and air conditioning (HVAC) work at A.B. Davis Middle School for a price of $919,000. The contract mandated that the School District make progress payments to DJH based upon DJH's application for payment for work performed during the preceding calender month. The School District was permitted to terminate the contract if DJH, among other things, failed to furnish adequate assurance that DJH could complete the work.

The contract also required DJH to obtain a performance bond, which DJH secured from Nova, a compensated surety. The performance bond incorporates the terms of the underlying construction contract and provides that:

"The Surety shall not be liable to the Owner or others for obligations of the Contractor that are unrelated to the Construction Contract, and the balance of the Contract Price shall not be reduced or set off on account of any such unrelated obligations."

As relevant to the School District's cross-appeal, the contract between the School District and DJH further provides:

"The costs of furnishing the Work include, without limitation, all reasonable attorneys' fees, additional interest because of any delay in completing the Work, and all other direct and indirect and consequential damages incurred by the Owner by reason of the termination of the Contract as stated herein[.]"

The performance bond as it relates to legal costs provides that:

"[t]o the limit of the amount of this Bond, but subject to commitment by the Owner of the Balance of the Contract Price to mitigation of costs and damages on the Construction Contract, the Surety is obligated without duplication for . . . [a]additional legal, design, professional and delay costs resulting from the Contractor's default and resulting from the actions or failure to act of the Surety[.]"

In June 2004, while the contract work was underway, the School District received a Notice to Withhold/Release Payments (Notice of Cross-Withholding) from the Department of Labor (DOL). The notice stemmed from DOL's investigation of alleged prevailing wage violations by DJH on a previously performed public works project*fn1 and requested that the School District withhold $863,197.40 in contract payments pending completion of the investigation. A November 2004 application summary indicates that DJH had submitted nine applications for progress payments.

In January 2005, DOL gave the School District notice that it could release $649,197.40 to DJH, but directed the School District to send the balance of $214,000 to DOL in satisfaction of DJH's debt. The president of DJH signed a provision of the notice assigning to DOL $214,000 in earned progress payments. The School District subsequently remitted that amount to DOL. Work ostensibly progressed but at a very slow pace and, in January 2006, the School District terminated its contract with DJH due to the contractor's failure to substantially complete the HVAC work. When the School District turned to Nova to perform under the bond and fund the work left remaining upon DJH's default, Nova disclaimed liability and refused to complete the project.

The School District commenced this breach of contract action against Nova, seeking damages for the cost of completing the project and also attorneys' fees, and against DJH, seeking damages for its failure to complete the contracted-for work. DJH defaulted.

Nova answered and moved for summary judgment, arguing, among other things, that the School District violated article 3-A of the Lien Law*fn2 by diverting $214,000 of trust fund assets reserved for completion of the HVAC work to satisfy debts incurred on the Mahopac project. Nova contended that but for the improper payment to DOL, the School District would have had sufficient funds to complete its HVAC project and Nova's surety obligation would not have been triggered. Nova further alleged that the School District breached the performance bond by "illegally reducing the contract funds," thereby discharging Nova from its duty to perform. In response, the School District ...


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