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In re Cavalry Const., Inc.

United States District Court, S.D. New York

May 13, 2013

In re CAVALRY CONSTRUCTION, INC., Debtor.
v.
WDF, Inc., New York City School Construction Authority, Silverite Construction Co., Inc., WDF, Inc./Cavalry Construction, Inc., Bay Crane Service, Inc. and John Does 1 through 120, Defendants, Cavalry Construction, Inc., Plaintiff, New York City School Construction Authority, Appellant,
v.
WDF, Inc., Appellee.

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[Copyrighted Material Omitted]

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Barbara W. Peabody, Esq., New York City Law Department, Office of the Corporation Counsel, Bronx, NY, for Defendant/Appellant New York City School Construction Authority.

K. Richard Marcus, Esq., The McDonough Law Firm, LLP, New Rochelle, NY, for Defendant/Appellee WDF, Inc.

OPINION AND ORDER

KENNETH M. KARAS, District Judge.

Appellant New York City School Construction Authority (" SCA" ) appeals a final order of the bankruptcy court finding, among other things, that the SCA indemnify

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Appellee WDF, Inc. (" WDF" ) for damages WDF owes Debtor Cavalry Construction, Inc. (" Cavalry" ), and also finding that the SCA is directly liable to Cavalry on two lien foreclosure actions. At the threshold, the SCA contends on appeal that the bankruptcy court did not have jurisdiction to adjudicate the indemnity cross-claims, but this Court holds that jurisdiction was proper because bankruptcy courts in the Second Circuit may exercise supplemental jurisdiction over such cross-claims. On the merits, the Court reverses the judgment of the bankruptcy court on both issues, because, as explained below, (1) the SCA owed no legal duty to Cavalry and so was not liable to WDF on a theory of common-law indemnity, and (2) Cavalry had no direct claims against the SCA because the relevant bonds had been discharged.

I. Background

This appeal concerns work performed on six public works projects (the " Projects" ), known as Forsythe H.S., Julia Richman High School, P.S. 127, I.S. 84, P.S. 4 and the Bronx School for Law (" Bronx Law" ). (Appellee Br. 1.) The Projects were constructed for the SCA. ( Id. ) WDF was awarded contracts by the SCA to perform work on the Projects. (Appellant Br. 4.) For all the projects except Bronx Law, Calvary was a subcontractor to WDF. (Appellee Br. 1.) For the Bronx Law project, WDF was itself the subcontractor, WDF/Cavalry (the " Joint Venture" ), a joint venture, was the second-tier subcontractor, and Cavalry was the third-tier subcontractor. ( Id. )

Cavalry filed a voluntary petition for reorganization on or about July 27, 2007, and it commenced the adversary proceeding that ultimately led to this appeal in November 2007. (Appellant Br. 3.) The SCA was added to the adversary proceeding in January 2008. ( Id. )

On or about November 30, 2007, Cavalry filed notices under Mechanic's Lien Law pertaining to money allegedly owed to it for work performed on the projects. ( Id. at 5.) The mechanic's liens here are " public improvement liens," which are liens against real property that a subcontractor may file with a city when the contractor does not pay the subcontractor for work on a public improvement project; when the lien is filed, the city withholds payment from the contractor. See generally N.Y. Lien Law, art. 2; see also New York City Dep't of Finance, " Public Improvement Lien," http:// www. nyc. gov/ html/ dof/ html/ business/ services_ vendors_ liens. shtml (last visited May 7, 2013) (New York City website explaining public improvement liens and listing liens filed with the City). The mechanic's liens filed for money allegedly owed to Cavalry for work performed on the projects were in the amounts of: $24,036.91 (Forsythe H.S.); $442,550.02 (Julia Richman H.S.); $56,420.12 (P.S. 127); $831,299.59 (I.S. 84); $382,295.30 (P.S. 4); and $2,149,066.97 (Bronx Law). (SCA Letter of May 5, 2010 (Dkt. No. 17), at 1.)

In bankruptcy court, Cavalry brought a breach of contract action against WDF and lien foreclosure actions against WDF and the SCA. (Appellant Br. 6.) WDF cross-claimed against the SCA, asserting contract and common law indemnity claims against the SCA for the monies sought from it by Cavalry. ( Id. ) These claims were later clarified so that it was clear that WDF was attempting to recover from the SCA only on the theory that the SCA was liable to WDF under the principle of common-law indemnification. ( See Tr. of Hr'g 13 (Nov. 10, 2008) Cavalry Construction, Inc. v. WDF, Inc. ( In re Cavalry Construction, Inc. ), Adversary No. 07-8318 (Bankr.S.D.N.Y. Apr. 24, 2009) (Counsel for WDF: " Judge, the claim is, if

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the claim were for breach of contract, perhaps [the SCA] would have something, but the claim is for common law indemnification." ).) [1] On April 24, 2009, the bankruptcy court, per Judge Adlai S. Hardin, Jr., entered a judgment on WDF's indemnity claims for the Projects in WDF's favor. ( Id. at 4; Final Order & J. (" Order" ) ¶¶ 7, 17, 23, 27, 34, 44.)

Regarding the lien foreclosure claims, the SCA asserted that the liens pertaining to I.S. 84, in the amount of $831,299.59, and P.S. 4, in the amount of $382,295.30, were discharged and that " [t]he SCA was no longer a stakeholder since it was not required to withhold money." (Appellant Br. 5.) The SCA moved to dismiss the lien foreclosure action on P.S. 4 for this reason, and it renewed its motion at trial with respect to both P.S. 4 and I.S. 84, but those motions were denied. ( Id. at 8.) In the same order that decided WDF's indemnity claims, Judge Hardin found in Cavalry's favor on the lien foreclosure claims against multiple parties, including the SCA. (Order ¶¶ 34, 44.)

Additionally, in January 2009, WDF asserted breach of contract claims against the SCA in New York state court seeking damages for breach of the contracts relating to I.S. 84 and P.S. 4. (Appellant Br. 9.) On or about April 21, 2009, the SCA asked the bankruptcy court " to abstain from exercising jurisdiction" over the claims before it that related to the same projects, and the bankruptcy court denied the SCA's request. ( Id. )

The SCA appeals from the bankruptcy court's Order and presents four issues: (1) " Whether the bankruptcy court had subject matter jurisdiction to adjudicate WDF's state law [indemnity] claims against the SCA" ; (2) Whether the bankruptcy court was correct on the merits of WDF's indemnity claim; (3) Whether the bankruptcy court should have dismissed " Cavalry's lien foreclosure action against the SCA relating to P.S. 4 and I.S. 84" ; and (4) Whether the bankruptcy court was required to " abstain[ ] from exercising jurisdiction over WDF's claims against the SCA" as a result of WDF's state court action. ( Id. at 11.) This Court answers the questions as follows: (1) the Court affirms that the bankruptcy court had supplemental jurisdiction to hear the indemnity cross-claims; (2) the Court reverses the bankruptcy court on the merits of the indemnity claim, and holds that the SCA is not liable on a common-law indemnity theory to the SCA; and (3) the Court reverses the bankruptcy court on the lien foreclosure issue, and holds that the lien foreclosure claims against the SCA should have been dismissed. Because of its resolution of the issues in this manner, the Court need not resolve the abstention issue presented in question (4). The Court also remands the case to the bankruptcy court for further proceedings consistent with this Opinion.

II. Discussion

A. Standard of Review

Pursuant to Bankruptcy Rule 8013, a District Court reviews a bankruptcy court's conclusions of law de novo and reviews findings of fact for clear error. Fed. R. Bankr.P. 8013; see Lubow Machine Co. v. Bayshore Wire Prods. Corp. ( In re Bayshore Wire Prods. Corp. ), 209 F.3d 100, 103 (2d Cir.2000) (" Like the District Court, [the Court of Appeals] review[s] the Bankruptcy Court's findings of fact for clear error, [and] its conclusions of

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law de novo...." (internal citations omitted)).

Under the clear error standard, " [t]here is a strong presumption in favor of a trial court's findings of fact if supported by substantial evidence," and a reviewing court " will not upset a factual finding unless [it is] left with the definite and firm conviction that a mistake has been made." Travellers Int'l A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1574 (2d Cir.1994) (first alteration in original) (internal quotation marks omitted); see also Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (" [A] finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." (alteration in original) (internal quotation marks omitted)).

B. The Bankruptcy Court's Jurisdiction

District courts have original bankruptcy jurisdiction pursuant to 28 U.S.C. § 1334, and they may refer such cases to a bankruptcy court pursuant to 28 U.S.C. § 157. The statute granting original bankruptcy jurisdiction provides:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive ...

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