Author: Thomas S. Tripodianos

Question. Owner is the sponsor and developer of Condominium’s residential and commercial units. Plumbing performed work on the condo under three contracts, and filed three separate mechanic’s liens regarding the work performed and materials furnished. The liens clearly identified the individual units Plumbing sought to encumber, satisfying Lien Law ¬ß9(7). Liens included 36 residential units Owner did not own at the time the liens were filed. At least 26 of the 243 lots originally owned by Owner were sold and recorded before the liens were filed. Does the identification of “100 XYZ Avenue” in the liens result in a blanket lien so that Owner can seek discharge and cancellation of the liens as “blanket liens” improperly filed against the entire property?

Answer. No.

BACKGROUND

Owner can move to discharge and cancel three notices of mechanic’s liens filed by Plumbing against the subject property but because the liens substantially complied with the law, an amendment of the liens nunc pro tunc (pursuant to Lien Law ¬ß12-a ) to eliminate the lots conveyed before the filing would not prejudice any existing lienor or purchaser and Owner’s petition to discharge and cancel the liens should be denied.

Owner is the sponsor and developer of the Condominium which includes 239 residential apartment units and four commercial units (“Condominium”). According to the declaration establishing a plan for the condominium ownership, the street address of the property is 150 XYZ Avenue, (“Condominium Property”). Plumbing performed work on the Condominium Property pursuant to three separate contracts between Plumbing and Owner’s contractor.

Plumbing filed three separate notices of mechanic’s (“Liens”) with respect to the work allegedly performed pursuant to each of the contracts. The Liens claim a total amount of approximately $715,000.00. In all three Liens, the property subject to the Liens is identified as, “Premises known as 150 XYZ Avenue, more particularly described and as set forth in Exhibit “A” attached and Exhibit “B” pages 1-18 attached.” Exhibit “A” of the Liens identifies two commercial units in the Condominium by block, lot, and unit number while exhibit “B” of the Liens identifies the two remaining commercial units and each of the block, lot, and unit numbers associated with the residential condominium units followed by the description, “SINGLE RESIDENTIAL CONDO UNIT.” Exhibit “B” of the Liens also includes the prior lot number which has been superseded by the Condominium declaration, and is followed by the description, “APARTMENT BUILDING.”

Prior to Plumbing’s filing of the Liens, 36 of the residential units had been sold by the Owner. Owner argues that because the Liens specify the address “150 XYZ Avenue”, the Liens were not limited to specific condominium units in which Owner retained an interest and were therefore “blanket liens.”

A “blanket lien” is created with respect to a condominium development when the description of the property subject to the lien is not limited to the particular units of a condominium which are owned by the party liable to the lienor, thereby creating a lien on the entire property. A blanket lien, which is not valid as against the individual units, including the unsold units retained by the Owner, or the common elements of the condominium, should be summarily canceled pursuant to Lien Law ¬ß19(6) since it fails to adequately describe the property pursuant to Lien Law ¬ß9(7) in conformity with Real Property Law ¬ß339-l. However, as the Liens here clearly identify the individual units Plumbing sought to encumber, Owner’s argument that the identification of “150 XYZ Avenue” resulted in the formation of a “blanket lien” is unavailing.

Where a lien description includes too much property, but nevertheless includes and identifies all the property on which the lien could properly be claimed, the defect is not fatal, as the lien would be limited and restricted only to that part against which it could properly be enforced.

Here, although Plumbing did file each of the Liens against the entire superseded lot number, Plumbing also identified the individual condominium units in the Liens and thereby sufficiently identified the property properly subject to the Liens so as to satisfy the requirements of Lien Law §9(7)

While at least 26 of the 243 lots originally owned by the Owner had been sold and recorded prior to the filing of the Liens, the Liens substantially complied with Lien Law §9(7) and the amendment of the Liens, nunc pro tunc, so as to eliminate the lots conveyed prior to the filing of the Liens will not prejudice any existing lienor or purchaser.

It seems clear from the language in [Real Property Law §339-l(2)] that the Legislature has chosen to distinguish between the rights of those performing labor on or furnishing materials to individual unit owners in a condominium, and the rights of those performing labor on or furnishing materials to the common elements of a condominium. In the case of labor performed or materials furnished to any unit owner, there can be no lien unless the unit owner expressly consents to the lien or unless the lien is for emergency repairs to such unit. As a number of the condominium units were transferred by the Owner prior to the filing of the Liens, and there are no allegations that the new owners consented to the Liens, the work was for emergency repairs, or that the labor and services allegedly provided by Plumbing were requested by the new owners, the Liens may not encumber the units transferred prior to the filing of the Liens even where the recording of the transfers occurred after the filing of the Liens.

Question. Consultant seeks to recover damages from Client in connection with the collapse of their business relationship, alleging breach of contract and breach of the covenant of good faith and fair dealing. Is Consultant’s claim for breach of the covenant of good faith and fair dealing duplicative of his breach of contract action?

Answer. Yes.

Consultant brought an action against Client for its alleged failure to pay various fees to which Consultant was entitled under their agreement. Alleging claims for breach of contract and breach of the covenant of good faith and fair dealing, Consultant seeks “recovery of money damages in connection with the breach of a binding, valid and enforceable contract, and a declaration of its future rights under the contract.”

The covenant of good faith and fair dealing “embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” The covenant is implied in every contract governed under New York law. Accordingly, a “breach of the implied duty of good faith is considered a breach of the underlying contract.” For this reason, “a claim for breach of the implied covenant [of good faith and fair dealing] will be dismissed as redundant where the conduct allegedly violating the implied covenant is also the predicate for breach of covenant of an express provision of the underlying contract.”

Consultant cannot sustain both claims because they are premised on the same set of facts, and “a party may maintain a claim for breach of the implied covenant only if the claim is based on allegations different from the allegations underlying the accompanying breach of contract claim.” Because the success of either claim is dependent upon a finding that Client violated the terms of the contract, the claim for breach of the implied covenant is redundant.

Question. Is an insured entitled to attorney fees incurred in litigating and defending against an insurer’s “late notice” claim, raised for the first time as an affirmative defense in litigation?

Answer. No.  Insured was not entitled to attorney fees incurred in litigating and defending against insurer’s “late notice” claim.

Upon the Carrier disclaiming coverage, the burden shifts to Insured to either file a coverage action or to accept the Carrier’s basis for the disclaimer and forgo the costs of litigation.

Here, Insured commenced a declaratory judgment action seeking defense and indemnification from Carrier under a comprehensive general liability (CGL) policy. In the context of that action Carrier raised for the first time a “late notice” claim, as an affirmative defense. Insured seeks attorneys’ fees for litigating and successfully defending the late notice issue.

The longstanding “American rule” precludes a prevailing party from recouping legal fees from the losing party except where authorized by statute, agreement or court rule.

Under New York law, Carrier can only cast Insured in defensive posture by naming Insured as defendant in an action. Insured would have been placed in a defensive posture if the Carrier commenced a declaratory judgment action against Insured to relieve Carrier from defense obligations under the policy. If Insured prevailed in such an action it may have recovered attorney fees necessarily incurred as result of its defense of that action.

Here Insured commenced its own declaratory judgment action to settle rights to defense under the policy. Insured argues that New York recognizes an exception to the American Rule, permitting insureds to recover attorneys’ fees where the insured has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.

Under the circumstances the late notice defense to support insurer’s declaratory judgment prayer for relief was “mirror image” of insured’s declaratory judgment action, even though defense was not previously asserted in insurer’s declination letter and therefore does not fall within the exception.

Question. Injured Employee was injured during the course of his employment while working at the construction site. General Contractor and General Contractor’s Carrier allege that General Contractor is entitled to coverage from Subcontractor’s Carrier pursuant to a certificate of insurance that was issued by Subcontractor’s insurance broker that stated that General Contractor was an additional insured.

Subcontractor’s Carrier denies liability contending that General Contractor is not entitled to coverage under the policy since General Contractor is neither a named insured nor an additional insured on the policy. According to Subcontractor’s Carrier, the certificate of insurance issued by Subcontractor’s insurance broker, who is not Subcontractor’s Carrier’s agent, is not binding upon it.

General Contractor and General Contractor’s Carrier contend, in substance, that General Contractor is an insured of Subcontractor’s Carrier because the certificate of insurance issued by Subcontractor’s insurance broker noted Subcontractor’s Carrier as such.

Is General Contractor entitled to coverage from Subcontractor’s Carrier?

Answer. No.  A certificate of insurance is merely evidence of a contract for insurance, not conclusive proof that the contract exists, and not, in and of itself, a contract to insure.

General Contractor seeks to impose an obligation upon Subcontractor’s Carrier to defend and indemnify General Contractor against an underlying personal injury action filed by Injured Employee, an employee of Subcontractor.

The Certificate at issue specifically states:

“THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.”

It is well settled that the insured has the burden to establish coverage and for the insurer to prove that an exclusion in the policy applies to defeat coverage. Moreover, it has been held that insurance coverage extends only to named entities and/or individuals defined as insured parties under the relevant terms of the policy.

On summary judgment, a certificate may be sufficient to raise an issue of fact, especially where additional factors exist favoring coverage but it is not sufficient, standing alone as it does here, to prove coverage as a matter of law.

Given the foregoing, the Court finds that General Contractor and General Contractor’s Carrier have failed to cite any facts or factors, policy, declaration, term condition, exclusion or endorsements to establish that General Contractor was either a named insured or an additional insured on the Subcontractor’s Carrier policy or that it had any contractual relationship with Subcontractor’s Carrier.

It should be noted that the issues presented by this particular fact pattern have resulted in conflicting decisions amongst the Court’s of New York. Therefore, depending in the jurisdiction in which the case is litigated a different result may be reached. We are hopeful that this issue will be addressed by the Court of Appeals (the highest court in New York) which should provide a uniformity of result.

Question. I am trying to enforce a judgment I obtained in 2010. I have located the debtors assets in a German Bank. The Bank does business in New York systematically and continuously through a New York branch that is not incorporated and is not a separate entity. Can the Court direct the bank to turn over funds, up to amount of judgment, held in a German bank account?

Answer. YES.  A court in New York had general personal jurisdiction over a foreign bank that did business in New York systematically and continuously through a New York branch that was not incorporated and was not a separate entity. Thus, pursuant to a New York statute, the court could issue a turnover order that directed the bank to turn over the account funds of a judgment debtor, up to the amount of the judgment, regardless of whether the accounts were held in Germany or New York.

Section 5225(b) of the N.Y. CPLR provides the process by which a judgment creditor may compel “a person in possession or custody of money or other personal property in which the judgment debtor has an interest … to pay the money, or so much of it as is sufficient to satisfy the judgment, to the judgment creditor….” N.Y. CPLR 5225(b). Section 5225(b) requires the judgment debtor to proceed by way of special proceeding. Id. A special proceeding is a civil judicial proceeding in which a right can be established or an obligation enforced in summary fashion. Like an action, it ends in a judgment, but the procedure is similar to that on a motion. Speed, economy and efficiency are the hallmarks of this procedure.” Alexander, Comment C401:1 (McKinney’s N.Y. CPLR, 2010) (internal citations omitted).

The Bank contends that it should not be required to turn over any funds it holds in the name of Debtor, because the funds at issue are on deposit in a German bank at a branch in Germany. The New York Court of Appeals in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533, 883 N.Y.S.2d 763, 911 N.E.2d 825 (2009) concluded that “a New York court with personal jurisdiction over a defendant may order [that defendant] to turn over out-of-state property regardless of whether the defendant is a judgment debtor or a garnishee.” Id. at 541.

In this case, the Court has personal jurisdiction over the Bank. Under N.Y. CPLR Sec. 301, New York courts may exercise general jurisdiction over a foreign corporation where that corporation is engaged in such a continuous and systematic course of doing business in NY as to warrant a finding of its presence in this jurisdiction. Bank admits that it does business in New York systematically and continuously through its New York branch, which is not incorporated and is not an entity separate from the German bank. This Court has general personal jurisdiction over Bank, and thus under Koehler, this Court may issue a turnover order under N.Y. CPLR Sec. 5225(b) directing Bank to turn over funds up to the amount of the judgment, regardless of whether those accounts are held in Germany or New York.

Question. Does lack of actual receipt of a summons excuse insured from complying with notice requirement?

Answer. Not where the insured’s failure to keep its address current with the Secretary of State, is why the insured did not actually receive a copy of the underlying personal injury summons. 

The subject insurance policy’s notice of claim condition precedent to coverage required the insured to notify the insurance company of an occurrence which might result in a claim “as soon as practicable.” The receipt of service of a personal injury summons with notice by the Secretary of State, as insured’s designated agent, constituted receipt by the insured itself.  In New York, when you incorporate you register with the New York Secretary of State.  In so registering you are designating the Secretary of State as your agent for service of process (i.e. to receive legal notifications).  It is your obligation to keep the Secretary of State notified of any changes in your address.  The fact that the insured did not actually receive a copy of the summons with notice, due to its failure to keep its address current with the Secretary of State, does not excuse its noncompliance with the notice requirements of the policy. As the insured did not provide notice of the action to its insurer until receipt of a motion for default judgment some five-and-a-half months after service of process, the insurance company was entitled to disclaim coverage.

Question. A & B formed a limited liability company (LLC). Both A & B were managers of the LLC. A accuses B of breaching his fiduciary duties by taking improper cash payments from the LLC distributors, diverting funds to himself, and otherwise looting the LLC. Can A sue B directly for these alleged improprieties?

Answer. No, at least not under these facts.   Under New York law the claims belong to the LLC, rather than a LLC member. Additionally, the harm that the LLC member suffered due to a diminution of value in his ownership interest was indirect harm resulting from the managers’ alleged breach of their fiduciary duty to faithfully represent the LLC’s financial condition, and thus could be remedied only through a derivative claim.

There is no dispute that members and managers of limited liability companies owe fiduciary duties not just to the LLC, but also directly to the members of the LLC. Since fiduciary duties are owed both to an LLC and its members, a court must apply the “direct injury test” to discern whether a breach of these duties gives rise to a claim that may be asserted directly by an LLC member, or that must be asserted on behalf of the LLC. The critical question posed by the direct injury test is whether the damages a plaintiff sustains are derivative of an injury to a third party. If so, then the injury is indirect; if not, it is direct. However, the mere fact that a corporation may also bring an action based on acts that caused an independent injury to a shareholder does not make the shareholder’s suit derivative.

The allegation that B breached his fiduciary duties by (1) taking improper cash payments from LLC distributors, (2) diverting funds to himself, and (3) otherwise looting the LLC, properly belongs to the LLC. Assuming the truth of A’s allegations, Bs’ acts harmed the LLC directly by decreasing its value, and only harmed A indirectly by reducing the worth of his ownership stake in LLC. This is a quintessentially derivative claim.

The issue of whether A may assert a claim for breach of fiduciary duty based on Bs’ alleged failure to faithfully represent the financial condition of the LLC is more complicated. As a general matter, members and managers of an LLC under New York law owe a specific fiduciary duty to other LLC members to fully disclose all information concerning the limited liability company. Thus, under the case law, Bs’ alleged misrepresentations to A of the value of the LLC would ordinarily provide a basis for a direct claim.

However, A expresses a theory of damages that is derivative. He alleges that Bs’ misstatements of the value of the LLC caused A “to suffer damages from the diminution of the value of his company in the amount of $5 million.” Harm that a plaintiff suffers only due to a diminution of value in his ownership interest of an entity is indirect harm, and must be remedied through a derivative claim.

Question. Lienor, filed a mechanics lien against Owner for work performed on property. The lien was based on work Lienor performed under contracts with Owner, which were provided in the verified statement. Owner demanded Lienor produce a verified statement under Lien Law Section 38, including the names and addresses of the subcontractors and the work performed. Lienor argues the information requested goes beyond the scope of Section 38. Owner argues it should be provided with more detailed information to ensure it is not “double liened.” Does the Owner’s request for detailed information go beyond the scope of Section 38’s requirements?

Answer. Yes.  Where the lien is based on a contract, nothing would be accomplished by requiring the lienor to furnish an itemization of materials and labor performed under that contract. Only those items in dispute must be provided in a detailed statement.

Under Section 38 of the Lien Law, “on demand in writing” a lienor must deliver to the owner a verified statement that sets forth “the items of labor and/or material and the value thereof which make up the amount for which he claims a lien, and which shall also set forth the terms of the contract under which such items were furnished.” If the lienor fails to produce this statement within five days of the demand, the lienee may petition the court for an order “directing such compliance.” The intent of these provisions is to ensure that the lienee is apprised of the detail of the lienor’s claim, and of the basis for the statement of value as set forth in the lien.

Section 38, however, does not give a lienee an absolute right to a detailed statement from a lienor as to all the items for which he claims a lien. Itemization of all materials and labor is required only in a case where the lien is based on quantum meruit i.e. the reasonable value of the work. Where the lien is based on a contract for an agreed price, nothing would be accomplished by requiring the lienor to furnish an itemization of materials furnished and labor performed in performance of the contract. Only those items in dispute such as claims for extra work and material must be provided in the detailed statement.

Here, it appears that the lien is based on work that Lienor and its subcontractors performed pursuant to contracts with Owner’s general contractor. The Verified Statement contains copies of these contracts setting forth the work performed and the agreed upon price. Lienor has also provided signed change orders to the contracts. Furthermore, Owner has not indicated that there are specific items in dispute or that Lienor is asking for quantum meruit compensation. Instead, its only argument is that it should be provided more detailed information to ensure it has not been double liened.

If, as it appears here, the claim is based on agreed upon contracts that have been performed, Lienor need only supply enough information to allow Owner to check whether it has been double liened by subcontractors of Lienor. It has no obligation to provide more information than is already in the contracts. Requiring itemization of all material, work performed, and labor rates as Owner requests would accomplish nothing. Lienor’s Verified Statement includes the names of its subcontractors on which the lien is based, providing the information necessary to allow Owner to determine if it has been double liened.

Question. May Lender
seeking to enforce guaranty against nonresident guarantors of loan
attach ownership/membership interests in various out-of-state business
entities?



Answer. Yes.



By agreement dated in 2005, Lender made a loan to borrower for the
purpose of developing and renovating real property. This loan was made
by Lender and accepted by the borrower in New York. Further, the
proceeds of this loan were disbursed from New York. On that same day,
Guarantors executed a guaranty of payment (guaranty) under which they
unconditionally agreed to be jointly and severally liable for the
borrower’s obligations under the loan and submitted to the jurisdiction
of any federal or state court in New York City in any suit, action or
proceeding arising out of or relating to the guaranty. By executing this
guaranty, Guarantors waived all defenses and counterclaims that might
have been asserted against Lender in the event the borrower defaulted on
the loan. In addition to being negotiated in New York, the guaranty was
to be governed by and construed in accordance with the laws of New York
State.


The borrower thereafter defaulted on the loan and filed for bankruptcy
protection. Lender seeks to enforce the guaranty and recover the amounts
due under the loan. Lender sought and obtained a prejudgment order of
attachment seeking to attach Guarantors’ property interests as security
for the collection of any judgment entered against Guarantors.


Attachment simply keeps the debtor away from his property or, at least,
the free use thereof; it does not transfer the property to the creditor.
It is frequently used when the creditor suspects that the debtor is
secreting property or removing it from New York and/or when the creditor
is unable to serve the debtor, despite diligent efforts, even though
the debtor would be within the personal jurisdiction of a New York
court.


The property at issue consisted of Guarantors’ interests in 22 limited
liability companies formed in Delaware, Georgia and Florida and a
Florida corporation solely owned by Guarantor. Unlike stock
certificates, which are tangible property, Guarantors’
ownership/membership interests are intangible and uncertificated.


Lender eventually obtained a judgment against the Guarantor. To date,
the judgment has not been satisfied. Guarantor challenges the
attachment because he does not live in New York and his temporary
presence in New York when he was served was insufficient to support the
attachment and that the Court lacked jurisdiction over the ownership
interests Lender sought to attach because they were not located in New
York and, thus, could not be properly attached.


Guarantor voluntarily submitted to the personal jurisdiction of the
court by executing the personal guaranty. Because personal jurisdiction
was properly asserted over Guarantor the Court had the authority to
order pre-judgment attachment of the property Guarantor owned and/or
controlled, and service of the order upon him while he was in New York
was appropriate.


The next consideration is whether the property sought to be attached was
subject to attachment. The intangible property Lender sought to
attach-Guarantor’s ownership/membership interests in 22 out-of-state
limited liability companies-are akin to intangible contract rights, and
are clearly assignable and transferable. Thus, the interests in question
are “property”.


Here, the intangible interests sought to be attached are not evidenced
by written instruments, such as certificates or negotiable instruments.
If these interests were so evidenced, their situs would be where the
written instruments were physically present. Just as a debt clings to
the debtor when he enters a state other than the state where the debt
was incurred, it follows that Guarantors’ uncertificated ownership
interests, which Guarantor possesses or has custody over, travel with
him, and were attachable in New York based on his presence this state.