CONSTRUCTION & REAL ESTATE BLOG

In McCarthy v. Turner Construction, Inc., 17 N.Y. 3d. 369 (2011), Boston Properties, Inc. and Time Square Tower Associates, LLC (collectively “Property Owners”) leased a retail storefront to Ann Taylor, Inc. (“Ann Taylor”). Subsequently, by agreement (the “Agreement”), Ann Taylor engaged a general contractor, John Gallin & Son, Inc. (“Gallin”) to perform construction on its storefront.  The Agreement stated that Gallin was solely responsible for and in control of the construction and was required to take reasonable safety precautions to protect the workers from injury. Id. at 372.

However, Gallin did not perform the construction itself; Gallin engaged Linear Technologies Inc. (“Linear”) as its subcontractor.  Shortly thereafter, Linear hired Samuels Datacom, LLC (Samuels) as its sub-subcontractor. An electrician employed by Samuels (“Plaintiff”) was injured when he fell from a ladder while working on the project site. Subsequently, he brought an action in the Supreme Court of New York (“Lower Court”) for his injuries against Gallin and the Property Owners. Id. The Property Owners asserted a cross claim against Gallin for common law indemnification. Id. at 373. Indemnification is a legal concept that enables a defendant the right to be reimbursed for some or all costs associated with the suit by another person or entity.

The Lower Court held that the Property Owners and Gallin were vicariously liable for Plaintiff’s injuries. Vicarious liability is a legal concept that holds a third party responsible for the acts of another solely because of his or her relation to the actual wrongdoer. For example, under certain circumstances an employer could be held vicariously liable for his or her employee’s unlawful conduct.

Property Owners and Gallin  reached a settlement under which they each paid the Plaintiff $800.000.00. The settlement itself was not in dispute. Instead, the question before the Court was whether the Property Owners could recoup some or all of that money from Gallin.

The Lower Court rejected the Property Owners’ cross claim for common law indemnification because Gallin was not actively at fault in bringing about the injury. Id. at 373. Thus, the Lower Court held that Gallin was not required to reimburse the Property Owners for some or all of the $800,000.00 they paid to Plaintiff.

The Property Owners appealed to the Supreme Court of New York, Appellate Division (“Appellate Court”). The Appellate Court affirmed the Lower Court’s holding.

The Property Owners appealed to the Court of Appeals of New York (the “Court of Appeals”). In their appeal, they argued that they were entitled to common law indemnification by Gallin, whether or not Gallin directly supervised and controlled Plaintiff’s work, based upon the Agreement. Id. at 374. That was the central issue before the Court of Appeals: whether a person or entity that does not supervise or control another can be liable to indemnify for the damages that party causes.

First, the Court of Appeals considered Labor Law §240(1) which imposes upon owners and general contractors and their agents a nondelegable duty to provide safety devices necessary to protect workers from the risks inherent in elevated work sites. Further, the Court of Appeals noted that  §240(1) holds owners and general contractors absolutely liable for any breach of the statute, even if the job was performed
by an independent contractor whom they did not supervise nor control.

Having said all of that, the Court of Appeals nevertheless held that a general contractor’s authority to supervise the work and implement safety procedures was not a sufficient basis for requiring common law indemnification. It explained that liability for indemnification may only be imposed against parties who exercised actual supervision. Thus, the Court asserted that a common law indemnification claim did not lie against a party who had contractual authority to direct and supervise the work at a job site but never exercised that authority because it subcontracted its contractual duties to another.  Id. at 378.

The Court of Appeals also noted that an owner or general contractor, who was not at fault for the misconduct, still has the right to seek full indemnification from the party who was actually responsible for the accident.  Id.  A party’s right to indemnification may not only arise from a contract but may have also be based upon equity (what is fair and proper between the parties). Common law indemnification is generally
available in favor of an innocent party who was held vicariously liable for the wrongdoing of another.  Id. at 375.

In its analysis, the Court explained that although the Agreement required Gallin to supervise and direct the work at the worksite, such a provision was insufficient to establish that Gallin actually supervised or directed
Plaintiff’s work. The Court noted that this was especially so considering the following facts:

1.  Gallin had no supervisory authority over Samuels’ (Plaintiff’s employer’s work) work.
2. Gallin would not have directed Plaintiff as to how to perform his work.       and 
3. Gallin did not provide any tools or ladders for the subcontractors that worked at the
   site.

Id.

Therefore, the Court affirmed the dismissal of Plaintiff’s cross claim for common law indemnification, holding that Gallin did not actually supervise, nor direct, Plaintiff’s work. Id. Thus, Gallin did not have to compensate the Property Owner for any of the $800,000.00 they paid to Plaintiff in order to settle his personal injury claim.

In Seta Artunian Nassif, et. al. v. Jelmac, L.L.C., No. A-4100-10T2 (N.J. Super. Ct. App. Div. July 11, 2012), the Appellate Division of the Superior Court of New Jersey was presented with the following legal issue: what constitutes a fraudulent transfer under the New Jersey Fraudulent Transfer Act (Act)? N.J.S.A. 25:2-26.

That case involved a business that was late in paying its rent. The landlord alleged that the entity that was responsible for the rent had transferred its assets to insiders who were individuals that had a relationship to the entity. The plaintiff alleged that the purpose had been to frustrate the landlords ability to collect a judgment for the rent. The Court was asked to determine whether the admitted transfer of those assets constituted a fraudulent transfer under the Act.

The Act sets forth the following factors to determine whether a fraudulent transfer occurred:

The Court determined that no fraudulent transfer had occurred. In reaching that holding, it focused on the fact that no evidence had been adduced as to when the transfers took place. Therefore, there was no way
of knowing whether the transfers were done knowing that they would render  the tenant insolvent. As the court stated, [i]n  other words, no evidence demonstrates whether the alleged cash transfer was made before or after plaintiff’s claim arose. Id. at 20.

This case is instructive for those individuals who control entities that may owe money to others.  The Act should be taken into account when moving funds from such an entity to be sure the transfer does not run afoul of it.

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2012 Nissenbaum Law Group, LLC

In Great Am. Restoration Services, Inc. v. Patricia Lenti, et al., 2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012), the Supreme Court of New York, Appellate Division (Second Judicial Department), addressed whether, under New York City’s Administrative Code, a contractor is required to possess a license to perform work on a house.

The facts were straightforward. After a fire at the defendants’ house, they hired Plaintiff to temporarily “cover holes in the roof, remove water from the premises, remove both salvageable and unsalvageable personal property, store such property, and remove debris.” Id. at 2.  One of the issues was whether the Plaintiff needed to be licensed under the NY Administrative Code.

In that case, the Supreme Court (Nassau County) had granted the Contractor’s (“Plaintiff”) motion for summary judgment on the issue of liability in an action to recover damages for breach of contract.  The lower Court also denied defendants’ cross motion to dismiss the complaint pursuant to CPLR 3211(a)(7).  The Plaintiff appealed.

The Appellate Division upheld the lower Court’s decision because the Appellate Division felt Plaintiff established its prima facie entitlement to judgment as a matter of law. Id.  Plaintiff submitted the contract between the parties that laid out the work that Plaintiff was to perform.  The contract clearly stated that defendants would be responsible for any charges not covered by the defendants’ insurance policy.  Plaintiff also submitted proof that it satisfactorily completed the work and never got paid for that work pursuant to the contract.  Id.

The Appellate Court stated that since the defendants failed to “raise a triable issue of fact in response [to the evidence Plaintiff submitted for review], the Supreme Court properly granted the plaintiff’s motion for summary judgment on the issue of liability.” Id.   The Appellate Division also stated that the lower Court properly determined that the work Plaintiff performed on the defendants’ home did not constitute “home improvement” as defined in Administrative Code of City of New York (“Code”) § 20-386(2).  Under § 20-386(2), “home improvement” is defined as

“The construction, repair, replacement, remodeling, alteration, conversion, rehabilitation, renovation, modernization, improvement, or addition to any land or building, or that portion thereof which is used or designed to be used as a residence or dwelling place and shall include but not be limited to the construction, erection, replacement, or improvement of driveways, swimming pools, terraces, patios, landscaping, fences, porches, garages, fallout shelters, basements and other improvements to structures or upon land which is adjacent to a dwelling house.  “Home improvement” shall not include (i) the construction of a new home or building or work done by a contractor in compliance with a guarantee of completion of a new building project, (ii) the sale of goods or materials by a seller who neither arranges to perform no performs directly or indirectly any work or labor in connection with the installation of or application of the goods or materials, (iii) residences owned by or controlled by the state or any municipal subdivision thereof, or (iv) painting or decorating of a building, residence, home or apartment, when not incidental or related to home improvement work as herein defined.  Without regard to the extent of affixation, “home improvement” shall also include the installation of central heating or air conditioning systems, central vacuum cleaning systems, storm windows, awnings or communication systems.”

Administrative Code of City of New York § 20-386 (2).

As determined by the lower Court, since Plaintiff did not perform work that rose to the level of that constituting home improvement, it was not required to possess a license pursuant to the Code § 20-387(a).  Consequently, Plaintiff was not required to plead that it was duly licensed by the Department of Consumer Affairs of the City of New York as a home improvement contractor.  This finding justified the lower Court’s denial of defendants’ cross motion to dismiss the complaint “pursuant to CPLR 3211 (a)(7) for failure to plead that it was so licensed.”  Great Am. Restoration Services, Inc. v. Patricia Lenti, et al.,  2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012).

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© 2012 Nissenbaum Law Group, LLC

In Frontier Ins. Co. v. Nat’l Signal Corp. et. al., Civ. Action No. 98-4265 (E.D. Penn. November  9, 1998), the Federal District Court for the Eastern District of Pennsylvania addressed the circumstances under which  a party who is not domiciled in the forum state may overcome a motion to dismiss for lack of personal jurisdiction.

In that case, Frontier Ins. Co (“Plaintiff”) brought a diversity action seeking to recover monies paid and expended under the terms of a Performance and Payment Bond (“Bond”). It was filed after judgment was rendered against Plaintiff in a prior suit.  The prior suit was filed against Plaintiff by a supplier of National Signal Corp. (“National”) seeking payment for equipment sold to National.  National contracted with another company for “design, refurbishment, and construction work on several railroad grade crossing signals in Pennsylvania” Id. at 1, and Plaintiff issued a Bond as security for that work.  Plaintiff had a General Agreement of Indemnity (“Agreement”) with National, Joseph S. Banasiak and Kimberly A. Banasiak (collectively “Defendants,” individually “Defendant”). The Defendants were the owners, officers, and directors of National. The Agreement held National and the Defendants liable for indemnifying Plaintiff from any claims, payments or judgments that Plaintiff may incur because of the Bond.  Id. at 2.   As a result, Plaintiff initiated a lawsuit and Defendants filed a motion to dismiss, for among other things, lack of personal jurisdiction.

The motion was denied for the following reasons. The Court noted that when a defendant raises the defense of the court’s lack of personal jurisdiction, the plaintiff bears the burden of showing that there are sufficient contacts between the defendants and the forum to justify proper jurisdiction. See id. at 3.  Under Pennsylvania law, “a court exercises jurisdiction to the fullest extent permitted by the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States.” Id. at 3; 42 Pa. Con. Stat. Ann. § 5322(b). Pursuant to the Due Process Clause, the Defendants were responsible for establishing minimum contacts with Pennsylvania, the forum state, to establish that allowing the suit to continue forward in Pennsylvania would not “offend traditional notions of fair play and substantial justice.” Id. at 3.

To do this, the Defendants needed to first show that they acted in Pennsylvania thereby purposefully availing themselves of the benefits and protections of Pennsylvania law.  See id.  The Court mentioned that establishment of minimum contacts came when the connection and conduct within the forum state was such that the Defendants could reasonably anticipate being brought into court there.  The court found that the Defendants had minimum contacts with Pennsylvania because the Defendants entered into the Agreement in their individual capacities thereby “stepp[ing] into [Plaintiff’s] shoes and themselves guaranteed the Pennsylvania construction work performed by National.  Serving as a guarantor may amount to minimum contacts where, as in the instant case, the guarantor has a financial interest in the business or person whose obligation it guarantees.”  Id. at 5.  The Court noted that “[t]he Agreement itself is a contact by both of [the Defendants] individually with the construction work and therefore with Pennsylvania, and is sufficient to establish specific jurisdiction on a lawsuit arising out of the Agreement.” Id. at 6.  Further, because performance of the Agreement was centered in Pennsylvania, the very purpose of the Agreement focused on Pennsylvania, and the Bond that was issued to support the transaction between National and the other construction company came as a result of that transaction being for work to be performed in Pennsylvania, the Court found that it was reasonable for the Defendants to have anticipated being haled into court in Pennsylvania in a “dispute over the indemnity Agreement.” Id. at 7.

Once minimum contacts were established, the Court needed to address whether assertion of personal jurisdiction comported with “fair play and substantial justice.” Id. at 7.  To do this, the Court evaluated the “burden on the defendants, the forum’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the states in furthering fundamental substantive social policies.” Id. at 7.  The burden was on the Defendants to evince that rendering jurisdiction in the forum state would be unreasonable. It was found that the Defendants did not carry their burden and did not offer any reason why being subjected to jurisdiction in Pennsylvania would be “so burdensome or so offensive to the interstate judicial system as to offend fair play and substantial justice.” Id. at 7.  Ultimately, the Court concluded that Pennsylvania had personal jurisdiction over the Defendants and dismissed the motion on that ground.

The contacts a defendant establishes with a state in which a plaintiff seeks to file a complaint is important when assessing that states jurisdictional right over that defendant.  If a defendant purposefully conducts business in a state and avails himself of the benefits of that state’s laws, he may have difficulty later contesting that state’s jurisdictional power.

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© 2012 Nissenbaum Law Group, LLC

In Emigrant Mtge. Co., Inc. v. Greenberg, NY Slip Op 50387(U) (D. Nassau County, 1^st District March 8, 2012), the court considered a very important issue for co-op owners: whether the co-op owner could be evicted if he no longer owned his shares in the co-op itself.

The difference between owning a co-op and owning a condominium is that the co-op owner is given shares in the cooperative itself.  On the other hand, the condominium owner is given a deed for the actual apartment that he purchases.

In the Emigrant case, the co-op owner pledged his stock as collateral for a debt.  He defaulted and the creditor obtained the stock.  The question was whether that also allowed the creditor to evict the former owner.

The Emigrant court first held that it had jurisdiction to evict the former co-op owner, notwithstanding the fact that the co-op itself (as opposed to the stock) was not owned by him.  Even though the actual ownership solely involved stock, not realty, the court cited a number of cases that indicate that the ownership of stock in a co-op is effectively the same as ownership of real estate.

The court cited such examples as the fact that the sale of a co-op has been held to require writing under the Statute of Frauds, because it is a conveyance of realty.  See Statute of Frauds (General Obligations Law 5-703); Maloney v. Weingarten, 118 AD2d 836, 837, 837, 500 N.Y.S.2d 320, lv. to appeal denied, 69 NY2d 608, 516 N.Y.S.2d 1023, 509 N.E.2d 358.  Likewise, the shares of a co-op are not deemed to be securities for purposes of The Securities Act of 1933 and The Securities Exchange Act of 1934.  See United Hous. Found v. Forman, 421 U.S. 837, esp854-860, 95 S.Ct. 2051, 2061-64, 44 L.Ed.2d 621 reh. Den., 423 U.S. 884. 96 S.Ct. 157, 46 L.Ed.2d 115.

In sum, the court held [a]s between the secured party and the defaulting tenant, the secured party has a superior right to the apartment and may seek to evict the defaulting tenant when his/her interest has been extinguished. Id. at 5.

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2012 Nissenbaum Law Group, LLC

What constitutes a “pay-if-paid” construction contract clause? The United States Court of Appeals for the Third Circuit recently addressed this question in Sloan v. Liberty Mutual Insurance Company, 653 F.3d 175 (3d Cir. 2011).

That case involved a waterfront condominium in Philadelphia.  Isla of Capri Associates LP, the developer of the condominiums (“IOC”), contracted with Shoemaker Construction Co. (“Shoemaker”) to be the contractor for the project (“Contractor Contract”).  Subsequently, Shoemaker hired subcontractor Sloan & Co. (“Sloan”) to perform construction involving drywall and carpentry (“Subcontract”).  Liberty Mutual Insurance Co. (“Liberty”) issued a surety bond guaranteeing payment for the subcontractors work.  After the work was completed, IOC refused to pay Shoemaker for monies owed under the contractor contract because IOC was unhappy with some of the subcontractors’ work.  As a result, Shoemaker withheld the remaining balance due to Sloan.

Sloan filed a claim against Liberty for payment pursuant to the surety bond. Id. at 177.  Liberty denied any payment obligation under the premise that Paragraph 6.f of the subcontract contained a provision that conditioned Sloan’s right to payment on IOC’s payment to Shoemaker (a pay-if-paid clause). See id.  Therefore, Sloan was not entitled to payment since Shoemaker never received payment from IOC. Id.  The United States District Court for the Eastern District of Pennsylvania entered partial summary judgment for Sloan, rejecting Liberty’s view of the contract. Id. at 178.

The dispute here centered on the interpretation of Paragraph 6.f of the subcontract, which dealt with final payment.  The first subparagraph provided: ‘Final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment . . .’ Id. at 179.  There were seven (7) conditions precedent, one of which was that ‘[IOC] shall have accepted the Work and made final payment thereunder to [Shoemaker].’ Id.  Another provided that Shoemaker “shall have received final payment from [IOC] for [Sloan’s] work.’ Id.

Paragraph 20’s liquidating provision in the subcontract further clarified the extent of Shoemaker’s responsibility for payment to Sloan:

“In the event [Sloan] asserts a claim for payment of the Subcontract Sum or a portion therof . . . and in the event that [Shoemaker] in its sole, exclusive and arbitrary discretion submits said . . . Claim to [IOC] . . . for a decision or determination, then all decisions and determinations made by [IOC] or its representative shall be binding upon [Sloan] even though [Sloan] may not be a party thereto.”

Id. at 182.

When Liberty appealed the United States District Court for the Eastern District of Pennsylvania’s judgment, the Third Circuit was satisfied that the contract stipulated a pay-if-paid compensation policy for Sloan. See id. at 184.  The Third Circuit concluded that “Paragraphs 20 and 6.f create a mechanism for passing through Sloan’s remaining claims for final payment and peg Sloan’s recovery to the amount that Shoemaker receives from IOC for Sloan’s work.” Id.   Sloan, therefore, received a proportional/pro rata share of the recovery Shoemaker gained from its separate lawsuit against IOC rather than receiving the full balance it was owed under the contract. See id.

The lesson here for subcontractors is to be aware of the pay-if-paid issue when drafting the subcontractor agreement.

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© 2012 Nissenbaum Law Group, LLC