In the Matter of Mayrich Construction Company, Appellant,v.Oliver LLC,, Respondent.BriefN.Y.February 12, 2013To be Argued by: JAMES J. TERRY (Time Requested: 10 Minutes) New York County Clerk’s Index No. 116517/09 Court of Appeals of the State of New York In the Matter of the Petition of MAYRICH CONSTRUCTION COMPANY, Petitioner-Appellant, – against – OLIVER LLC, c/o ALEXICO GROUP, LLC, Respondent-Respondent. BRIEF FOR RESPONDENT-RESPONDENT ZETLIN & DE CHIARA LLP Attorneys for Respondent-Respondent 801 Second Avenue, 17th Floor New York, New York 10017 Tel.: (212) 682-6800 Fax: (212) 682-6861 Dated: August 8, 2012 NEW YORK STATE COURT OF APPEALS In the Matter of the Petition of MA YRICH CONSTRUCTION COMPANY, Petitioner- Appellant, -against- OLIVER, L.L.C., c/o ALEXICO GROUP, LLC, Respondent- Respondent. New York County Clerk's Index No. 116517/09 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 500.1(f) of the Rules of Practice of the Court of Appeals, the Respondent-Respondent in the above-captioned matter here~y advises the Court that it is a limited liability company and that its sole parent, affiliate or subsidiary is 951, LLC, which is Respondent-Respondent's wholly owned subsidiary. Dated: New York, New York August 8, 2012 ZETLIN & DE CHIARA LLP Attorneys for Respondent-Respondent Oliver, LLC TABLE OF CONTENTS TABLE OF AUTHORITIES ........................................................................................ iii PRELIMINARY STATEMENT ....................................................................... 1 STATEMENT OF FACTS ................................................................................ 1 ARGUMENT .................................................................................................... 4 POINT 1: THE PROCEEDS OF THE 953 BUILDING MORTGAGE AND THE 963 AIR RIGHTS MORTGAGE LOANS ARE NOT TRUST FUNDS UNDER ARTICLE 3-A OF THE LIEN LAW ............................ 4 A. Funds Borrowed for the Purpose of Acquiring Real Estate Are Not Trust Funds under the Lien Law ............................................................ 5 1. The Appellate Division Correctly Interpreted and Applied the Plain Language of the Lien Law .................................................... 6 2. The Appellate Division's Holding is Consistent with the Legislative Purpose of the Trust Fund Provisions ........................ 7 B. New York Courts have Never Adopted Mayrich's Strained Construction of the Lien Law .............................................................. 10 1. The Authorities Relied upon by Mayrich are Inapposite ............. 10 2. Relevant Case Authority and Public Policy are Contrary to Mayrich's Position ..................................................... 14 C. The Trust Fund Covenant Required for a Mortgage to have Priority over Subsequently Filed Liens does not Convert Acquisition Loan Proceeds into Lien Law Trust Funds ...................... 17 D. The Proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage are not Lien Law Trust Funds .................. 25 POINT II: MA YRICH IS NOT ENTITLED TO A VERIFIED STATEMENT PURSUANT TO LIEN LAW§ 76, BECAUSE THE LOAN PROCEEDS ARE NOT TRUST FUNDS ........................... 27 1 CONCLUSION .............................................................................................. 28 11 TABLE OF AUTHORITIES Cases Aquilino v. United States, 10 N.Y.2d 271 (1961) ................................................. 12 Aspro Mechanical Contracting, Inc. v. Fleet Bank, NA., 1 N.Y.3d 324 (2004) ................................................................................ 8, 10, 12 Augman & Candarelli, Inc. v. Bernard Associates, 234 N.Y.S.2d 156 (Sup. Ct. West. Co. 1962) .................................................................................. 13 A & V 425 LLC Contracting Co. v. RFD 55th Street LLC, 15 Misc.3d 196 (Sup. Ct. N.Y. Co. 2007) ............................................................................. 19, 20 Canron Corp. v. City of New York, 89 N.Y.2d 147 (1996) .............................. 8, 10 Collard v. Incorporated Village of Flower Hill, 52 N.Y.2d 594 (1981) .............. 21 County ofSuffolkv. Alcorn, 266 F.3d 131 (2d Cir. 2001) .................................... 20 Glazer v. Allison Homes Corp., 62 Misc.2d 1017 (Sup. Ct. Kings Co. 1970) ..... 11 Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) ............................ 17-18 HanilBankv. PT. BankNegaraindonesia, 148 F.3d 127 (2d Cir. 1998) ...... 13, 14 Innophos, Inc. v. Rhodia, SA., 10 N.Y.2d 25 (2008) ..................................... 17-18 Khatibi v. Weill, 8 A.D.3d 485 (2nd Dep't 2004) ................................................. 23 Matter of Cromwell Towers Redevelopment Co. v. City ofYonkers, 41 N.Y.2d 1 (1976) ...................................................................................... 18, 22 Matter of Long v. Adirondack Park Agency, 76 N.Y.2d 416 (1990) ................ 7, 17 Matter of RLI Insurance Co. v. New York State Dept. of Labor, 97 N.Y.2d 256 (2002) .............................................................................. 8, 10, 11 Mayrich Construction Co. v. Oliver, LLC, 90 A.D.3d 509 (1st Dep't 2011) ......................................................................................... 5, 8, 23 Monroe Savings Bank v. First National Bank of Waterloo, 50 A.D.2d 314, (4th Dep't 1976) ................................................................................................. 20 iii Mount Vernon City School District v. Nova Casualty Co., 19 N.Y.3d 28 (2012) .......................................................................................... 11 Oden v. Chemung County Industrial Development Agency, 87 N.Y.2d 81(1995) ............................................................................................. 9 Palsgrafv. Long IslandR.R. Co., 248 N.Y. 339 (1928) ....................................... 14 People v. Rosano, 69 A.D.2d 643 (2nd Dep't 1979) ..................................... 14-15 People v. Rosano, 50 N.Y.2d 1013 (1980) ........................................................... 15 Raymond Concrete Pile Co. v. Federation Bank and Trust Co., 288 N.Y. 452 (1942) ............................................................................................ 9 RolandJ. Down, Inc. v. Park-Clif Enterprises, Inc., 86 A.D.2d 741 (3rd Dep't 1982) .......................................................................................... 22, 24 R!S Associates v. New York Job Development Authority, 98 N.Y.2d 29 (2002) .......................................................................................... 20 Schmidt v. Roberts, 74 N.Y.2d 513 (1989) ....................................................... 6, 17 Signature Realty, Inc. v. Tallman, 2 N.Y.3d 810 (2004) ...................................... 20 Spruck v. McRoberts, 139 N.Y. 193 (1893) ........................................................ 8-9 Weber v. Welch, 246 A.D.2d 782 (3rd Dep't 1998) ....................................... 22, 23 W.L. Development Corp. v. Trifort Realty, Inc., 44 N.Y.2d 489 (1978) ............ 13 Statutes Lien Law§ 2(4) ..................................................................................................... 16 Uen Law § 13 ...................................................................................... .......... passim Lien Law§ 13{2) ................................................................................................... 19 Lien Law § 13(3) ............................................................................................ 18, 20 Lien Law § 70 ............................................................................... ................. passim IV Lien Law§ 70(1) ................................................................... 6, 7, 10, 15, 24, 26, 28 Lien Law§ 70(5) ..................................................................................................... 6 Lien Law §70(5)(b) ............................................................................................... 24 Lien Law§ 76 ....................................................................................................... 27 Lien Law§ 76(1) ................................................................................................... 27 Lien Law § 79-a(Z) ................................................................................................ lS McKinney's Cons. Law of NY, Book 1, Statutes§ 94 ........................................... 6 McKinney's Cons. Law of NY, Book 1, Statutes § 301 ......................................... 9 Other Sources 1959 Report of NY Law Rev Comm'n, reprinted in 1959 NY ugis Doc No. 65 ................................................................................. 8 v PRELIMINARY STATEMENT Respondent Oliver, LLC ("Oliver") respectfully submits this brief in opposition to the appeal of Petitioner-Appellant Mayrich Construction Company ("Mayrich") from the Decision and Order (the "Order") of the Appellate Division, First Department, dated December 15, 2011. (R-400-405).1 The Order unanimously affirmed Supreme Court's ruling that the proceeds of two mortgages securing loans for the purchase of real property are not assets of a Lien Law trust. These proceedings arise from Oliver's purchase of real property located at 953 First Avenue, New York, New York and of air rights belonging to a neighboring property. Mayrich seeks a declaration that the proceeds of the acquisition loans used for those purchases are assets of an owner-held trust under the Lien Law, and that Oliver's use of the loan proceeds, as intended, to make those purchases was an unlawful diversion of trust funds. The Appellate Division, First Department, rejected Mayrich's argument, holding that because the proceeds of an acquisition loan are received for the purpose of acquiring property, rather than to fund improvements to property, they are not assets of a Lien Law trust. The Appellate Division's Order was correct and should be affirmed in its entirety. STATEMENT OF FACTS The facts relevant to this appeal are straightforward. In 1996, Oliver 1 All references to "(R-_)" are to the Record on Appeal. began to assemble a series of contiguous lots on First Avenue in Manhattan. (R- 143). Oliver also purchased unused development rights, commonly referred to as air rights, from adjacent properties. (R-144). Oliver intended to develop the combined properties as a multi-use high-rise building (the "Project") once it owned all of the contiguous lots and air rights. (R-143). On October 12, 2007, Oliver purchased 953 First Avenue, completing its assembly of the building lots located from 953 through 961 First Avenue (the "Property"). (!d.). Oliver's purchase of 953 First Avenue was consummated through an acquisition loan from Bank of America (the "Lender"). The mortgage securing the Lender's acquisition loan to Oliver for 953 First Avenue (the "953 Building Mortgage") was recorded on November 9, 2007. (R-123, 144). On April 29, 2008, Oliver purchased air rights belonging to the adjacent property located at 963 First Avenue (the "963 Air Rights"). (R-145). As with Oliver's purchase of 953 First Avenue, its purchase of the 963 Air Rights was consummated with financing provided by the Lender. (!d.). The mortgage securing the acquisition loan for the 963 Air Rights (the "963 Air Rights Mortgage") was recorded on May 9, 2008. (R-125, 145). Both the 953 Building Mortgage and the 963 Air Rights Mortgage contain specifically-negotiated language evidencing that the underlying loans were made pursuant to acquisition loan agreements. The first Recital in the 953 Building 2 Mortgage (R-44) states that the monies were being borrowed pursuant to the "Loan Agreement," which is defined on the following page of the document as "that certain Fee Acquisition Loan Agreement, dated as of the date hereof." (R-45). The first Recital in the 963 Air Rights Mortgage and the definition of the term "Loan Agreement" on the second page of that document similarly evidence that the mortgage secured the proceeds of an acquisition loan to Oliver. (R-85-86). As required by§ 13 of the Lien Law, in order to preserve the mortgage liens' priority over other claimants, the mortgage instruments contain the Lender's standard trust fund covenant. (R-58, 99; see also, R-309, 313, 315, 319, 322, 326, 328). Mayrich began working at the Project site on May 12, 2008, after both the 953 Building Mortgage and the 963 Air Rights Mortgage had been recorded and the loan proceeds had been used to purchase the underlying real property and air rights. (R-356-357, 366). Mayrich performed services until October 2008, when the Project was suspended. (R-34, 356, 366). On or about October 5, 2009, Mayrich served a Demand for a Verified Statement Pursuant to Lien Law §76. (R-33-35). Oliver furnished a Verified Response on October 29, 2009, stating that it "has not received funds and has no rights of action for the payment of funds constituting assets of a trust of which an owner is a trustee as set forth in Article 3-A of the Lien Law." (R-36-37). On November 23, 2009, Mayrich commenced the underlying 3 proceeding, arguing that the loans secured by the 953 Building Mortgage and the 963 Air Rights Mortgage are trust assets under Lien Law § 70 and that Oliver was therefore obligated pursuant to Lien Law § 76 to provide a verified statement accounting for the loan proceeds. (R-25-32). Oliver opposed and requested dismissal of the Petition upon the ground that the proceeds of the acquisition loans are not trust funds under Article 3-A of the Lien Law. (See, e.g., R-141-150). Following argument and upon reargument, Justice 0. Peter Sherwood of Supreme Court, New York County, held that the proceeds of a loan made for the purchase of real property, rather than for the improvement of property, are not assets of a Lien Law trust. (R-6-7). Mayrich appealed to the Appellate Division, First Department, which unanimously affirmed the lower court's ruling after considering and rejecting each of Mayrich's arguments. (R-400-403). For the reasons discussed below, the Appellate Division's Order was correct in every respect and should be affirmed in its entirety by this Court. ARGUMENT POINT I THE PROCEEDS OF THE 953 BUILDING MORTGAGE AND THE 963 AIR RIGHTS MORTGAGE LOANS ARE NOT TRUST FUNDS UNDER ARTICLE 3-A OF THE LIEN LAW The proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage are not Lien Law trust funds, because they were received by Oliver for 4 the acquisition of property, not for the improvement of property. Under § 70 of the Lien Law, for loan proceeds to constitute trust funds, they must be received for the improvement of property. Since a loan that is made to finance the acquisition of property does not meet this statutory requirement, the proceeds of such a loan are not trust funds, regardless of when the mortgages were recorded. In addition, the proceeds of an acquisition loan are not transformed into trust funds merely because the mortgage contains the covenant mandated by Lien Law§ 13. The Appellate Division correctly held, and courts throughout New York have uniformly ruled, that the provisions of § 13 "govern the priority between mechanic's liens and mortgages; they do not govern the creation of trust funds." Mayrich Construction Co. v. Oliver, LLC, 90 A.D.3d 509, 510 (1st Dep't 2011) (Citations omitted). The Appellate Division therefore correctly held that the proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage loans are not trust funds under § 70 of the Lien Law, and this Court should affirm its Order. A. Funds Borrowed for the Purpose of Acquiring Real Estate Are Not Trust Funds under the Lien Law The Appellate Division's determination that the proceeds of a property acquisition loan are not trust funds is consistent with both the language and legislative intent of Article 3-A of the Lien Law. Accordingly, the Appellate 5 Division correctly held that the proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage are not trust funds. 1. The Appellate Division Correctly Interpreted and Applied the Plain Language of the Lien Law The touchstone under the Lien Law for whether mortgage loan proceeds are trust funds is whether the monies were borrowed to finance improvements to property. Section 70 of the Lien Law provides in pertinent part: The funds described in this section received by an owner for or in connection with an improvement of real property in this section ... shall constitute assets of a trust for the purposes provided in section 71 of this chapter. Lien Law§ 70(1) (Emphasis added). Pursuant to § 70(5)(c), the "funds described in this section" include the proceeds of a mortgage recorded after improvements commence. However, § 70(5) is subject to § 70(1)'s requirement that the loan proceeds have been received for the purpose of financing improvements. Well settled principles of law require a statute to be interpreted in accordance with its plain language. See, Schmidt v. Roberts, 74 N.Y.2d 513, 520 (1989) ("A fundamental rule of statutory construction is that the Legislature is presumed to mean what it says and when the language of a statute is unambiguous, it is to be construed 'according to its natural and most obvious sense, without resorting to an artificial or forced construction."') (quoting McKinney's Cons. Laws of N.Y., Book 1, Statutes §94). A statute must also be interpreted, wherever 6 possible, so as to give effect to all of its terms. See, Matter of Long v. Adirondack Park Agency, 76 N.Y.2d 416, 420 (1990) (the "preferred approach" in statutory construction is to give the law "a sensible and practical over-all construction, which ... harmonizes all its interlocking provisions."). Lien Law §70 does not define all funds received "in connection with real property" as comprising assets of a trust. Rather, it defines the trust as including only funds received "in connection with an improvement of real property." Lien Law § 70(1) (Emphasis added). The plain language of the statute thus makes the objective purpose for which funds are received determinative as to whether they are trust funds. If monies are received for purposes of paying for improvements of property, they are trust funds. On the other hand, where, as here, monies are received for some other purpose, such as the acquisition of property, they are not trust funds. Mayrich's proffered interpretation of Lien Law § 70(1), by contrast, requires the Court to ignore the statute's actual- indeed, its critical- language. Established principles of statutory construction therefore require Mayrich' s interpretation of the law to be rejected. 2. The Appellate Division's Holding is Consistent with the Legislative Purpose of the Trust Fund Provisions The Appellate Division's holding that the proceeds of a property acquisition loan are not assets of a Uen Law trust is also consistent with the legislative intent underlying the Lien Law's trust fund requirements. "Lien Law 7 Article 3-A was enacted 'to insure that funds obtained for financing of an improvement of real property . .. will in fact be used to pay the costs of that improvement."' Canron Corp. v. City of New York, 89 N.Y.2d 147, 153-54 (1996) (quoting 1959 Report of NY Law Rev Comm'n, at 209, reprinted in 1959 NY Legis Doc No. 65, at 25) (Emphasis added); Matter of RLI Insurance Co. v. New York State Dept. of Labor, 97 N. Y .2d 256, 263 (2002) (same) (quoting Canron ) . . . . The trust fund concept was intended precise I y to forbid that an owner ... act merely as an entrepreneur and was intended to require that he act, instead, as fiduciary manager of the fixed amounts provided for the operation. Aspro Mechanical Contracting, Inc. v. Fleet Bank, NA., 1 N.Y.3d 324, 328 (2004) (quoting 1959 Report of NY Law Rev Comm'n, at 214, reprinted in 1959 NY Legis Doc No. 65, at 30) (Emphasis added). The statutory requirement that loan proceeds have been received to finance improvements to property in order to qualify as trust funds ensures that Article 3-A's trust fund provisions further the statutory intent, but do not "unduly enlarge th[ e] clearly defined purpose" of the statute. See, Mayrich Construction Co., 90 A.D.3d at 510. As this Court explained long ago: The statute which gives to a contractor, mechanic or material man a lien upon the lands of another, created a remedy in such cases which was unknown to the common law, and while it must receive a liberal construction to secure the beneficial purposes which the legislature had in view, it cannot be extended to a state of facts not fairly within its general scope and purview. 8 Spruck v. McRoberts, 139 N.Y. 193, 197 (1893) (Emphasis added); see also, Raymond Concrete Pile Co. v. Federation Bank and Trust Co., 288 N.Y. 452,463 (1942) ("Though section 23 requires a liberal construction of the provisions of the Lien Law, it does not authorize judicial amendment so as to enlarge its clearly defined scope and purpose.") (Citing, e.g., Spruck). The trust fund provisions of the Uen Law create new rights in derogation of the common law. "[A] statute enacted in derogation of the common law ... is to be construed in the narrowest sense that its words and underlying purposes permit, since the 'rules of the common law must be held no further abrogated than the clear import of the language used in the statute absolutely requires."' Oden v. Chemung County Industrial Development Agency, 87 N.Y.2d 81, 86 (1995) (citing, e.g., McKinney's Cons Laws of NY, Book 1, Statutes § 301 [a], [b]); Spruck, 139 N.Y. at 197. Mayrich's proffered interpretation of the Lien Law, by which acquisition loan funds would be treated as trust funds solely because Article 3-A is generally intended to protect laborers and material suppliers, violates these fundamental principles of statutory construction. The Lien Law does not require that contractors be given absolute protection without regard to the limits set forth in the statute. Thus, while Lien Law § 70 requires that certain loan proceeds be held in trust for contractors' benefit, it does not convert all loan proceeds received by an owner into trust funds. 9 Rather, Lien Law§ 70(1) explicitly limits the class of affected loans to those made for the purpose of funding improvements to property. The statutory prerequisite contained in §70(1) thus ensures that the reach of the trust fund provisions remains consistent with the legislative intent that monies intended to pay for an improvement are used for that purpose. See, Aspro, 1 N.Y.3d at 328 (Citation omitted); RLI, 97 N.Y.2d 256, 263 (2002) (Citation omitted); Canron, 89 N.Y.2d at 153-54 (Citation omitted). B. New York Courts have Never Adopted Mayrich's Strained Construction of the Lien Law 1. The Authorities Relied upon by Mayrich are Inapposite Despite the plethora of cases cited in its brief, many for the first time in this litigation, Mayrich fails to demonstrate that the Appellate Division's Order was erroneous. Mayrich fails to identify a single decision holding that the proceeds of a loan made to acquire property are trust funds under the Uen Law. To the contrary, almost all of the cases upon which Mayrich relies address only the principle that if funds are trust funds they may not be used for non-trust purposes. In RLI, this Court addressed the relative priorities of claims by the Department of Labor ("DOL") and contractors on a public school project to funds that were intended to pay for the improvements. The DOL argued that although the funds were earmarked by the public agency to pay for improvements to property, they did not constitute trust funds to the extent that monies were not due 10 and owing to the contractors when the DOL's claim attached. RLI, at 261-262. The issue before the RLI Court was thus the time at which the Lien Law trust attached relative to the DOL's claim, not whether the underlying funds were trust funds. As to the latter question, there was no dispute, since the funds were intended to pay for improvements to the school district's property. RLI therefore offers no support to Mayrich's claim that the proceeds of loans made to acquire property are trust funds under the Lien Law. The same is true of this Court's recent decision in Mount Vernon City School District v. Nova Casualty Co., 19 N.Y.3d 28 (2012). The only question decided in Mount Vernon was whether a surety that failed to complete performance upon its contractor's default had standing to raise an alleged trust fund diversion as a defense to the owner's claim against the surety's bond. See, Mount Vernon, 19 N.Y.3d at 37. Whether the underlying funds were trust funds was not an issue in Mount Vernon, since the monies were received "in connection with a contract for a public improvement." !d. Thus, while Mayrich is correct that Mount Vernon is "[t]o the same effect" as RLI, the real similarity between the two cases is that neither addresses the issue presented by this appeal. 2 2 Glazer v. Allison Homes Corp., 62 Misc.2d 1017 (Sup. Ct. Kings Co. 1970), like Mount Vernon, addressed only whether the plaintiff was a beneficiary entitled to enforce the Lien Law's trust fund provisions. There was no question that the monies at issue in Glazer, which comprised the proceeds of construction mortgage loans and a down payment by a contract vendee for a house to be constructed, Glazer, 62 Misc.2d at 1017, were Article 3-A trust funds. 11 In Aspro, the New York City Housing Authority ("NYCHA") contracted with a developer to build a turnkey project, for which NYCHA would make periodic payments as the improvements were built. Aspro, 1 N.Y.3d at 326. The issue before the Aspro Court was whether a construction lender to which the developer assigned its rights to payment, and to which NYCHA therefore delivered the progress payments, but which had failed to file a Notice of Lending or Notice of Assignment, had a defense to a trust fund diversion claim arising from its use of the funds to repay its loan before paying contractors for their work. Id., at 330-331. The Aspro Court did not decide whether the underlying funds were trust funds, as there was no question that the monies owed by NYCHA were trust assets. Id. at 330. Aspro does not purport to hold or instruct that the proceeds of an acquisition loan are assets of a Lien Law trust. Nor did Aquilino v. United States, 10 N.Y.2d 271 (1961) address whether monies received for a purpose other than to fund improvements constitute trust funds. The only issue in Aquilino was whether the nature of the Lien Law trust created a property interest to which a federal tax lien could attach or if, instead, the contractor "holds bare legal title to the sum due from the owner, as trustee for the subcontractors .... " /d. at 274. The Aquilino Court's discussion of the trust fund provisions' legislative history addressed the nature of the trust once it exists, not whether a trust existed in the first instance. 12 Mayrich misconstrues the import of Augman & Candarelli, Inc. v. Bernard Associates, 234 N.Y.S.2d 156 (Sup. Ct. West. Co. 1962). There was no dispute in Augman that a trust existed. The question was whether the scope of the trust, for purposes of a contractor's obligation to furnish a verified statement to a subcontractor, was defined by the overall project or, instead, was limited by the scope of the subcontract. Augman, 234 N.Y.S.2d at 157. In ruling that the trust was not so limited, the court emphasized the Legislature's intent that the trust include all assets received "in connection with an improvement of real property." /d. (Emphasis added). Thus, Augman not only fails to support Mayrich's argument, it supports the determination that loan proceeds must be received in connection with an improvement to property in order to constitute trust funds. Mayrich's assertion that W.L. Development Corp. v. Trifort Realty, Inc., 44 N.Y.2d 489 (1978) "opined that Lien Law article 3-A should be liberally construed" (Brief of Petitioner-Appellant, p. 15) is simply false. That case did not involve, and the court did not opine about, any issue concerning Article 3-A of the Lien Law. Rather, W.L. Development concerned only whether the construction of streets, road drainage, curbs, sewer lines and the like constituted improvements to individual lots in a subdivision. W.L. Development, 44 N.Y.2d at 972. In citing Hanil Bank v. PT. Bank Negara Indonesia, 148 F.3d 127 (2d Cir. 1998) Mayrich mis-quotes the case in a way that materially and substantively 13 alters what the court actually said. In Hanil, the Court considered whether it had jurisdiction under the Foreign Sovereign Immunities Act's commercial activity exception. In reviewing the elements of "commercial activity" under the statute, the Second Circuit stated, "Acts are 'in connection' with ... commercial activity so long as there is a 'substantive connection' or a 'causal link' between them and the commercial activity." Id. at 131 (Citations omitted; emphasis added). Mayrich materially misrepresents the Hanil Bank language as requiring only a "casual link," not a "causal link" as the Second Circuit actually stated. As this Court noted long ago, there is a significant and substantive difference between a "casual" and a "causal" connection between events. See, Palsgraf v. Long Island R.R. Co., 248 N.Y. 339 (1928). Lien Law §70 limits the funds that become trust assets to those that come into an owner's hands for the purpose of financing improvements to property. The statute thus requires a direct and causal connection between the assets and the improvement, not, as Mayrich argues, a casual and attenuated one. 2. Relevant Case Authority and Public Policy are Contrary to Mayrich's Position Although this Court has not previously ruled on the specific question now before it, at least one of its previous decisions strongly indicates that funds received "for or in connection with an improvement" of property do not include funds received for or in connection with the purchase of property. In People v. 14 Rosano, 69 A.D.2d 643 (2nd Dep't 1979), aff'd 50 N.Y.2d 1013 (1980), an owner used construction loan proceeds to repay monies that its principals had advanced to purchase the underlying property. Rosano, 69 A.D.2d at 648, 651. The defendants argued that their use of the loan proceeds was protected by Lien Law § 79-a(2), which allows the repayment with trust funds of advances that were applied for trust purposes such as the cost of improvements. /d., at 546-547. The Appellate Division, however, rejected their argument, noting the absence of any "case which characterizes the original purchase price of the land upon which improvements are to be made as such a cost." /d., at 547. This Court affirmed "essentially for the reasons stated in the opinion" of the Appellate Division. People v. Rosano, 50 N.Y.2d 1013, 1016 (1980). For this Court to hold that the proceeds of a loan to acquire property are trust funds, it would necessarily have to conclude that the acquisition of property is an improvement for purposes of the statutory requirement that the funds have been received "for or in connection with an improvement." Lien Law §70(1). As in Rosano, research reveals no case which has so held, for the unsurprising reason that the contrary proposition would run counter to the plain meaning of the words and the statutory definitions of the terms. Furthermore, Mayrich's strained interpretation of the statutory language should be rejected because it necessarily leads to absurd results. Such an 15 interpretation must be avoided, especially where, as here, an alternative statutory interpretation exists that does not lead to absurd results. Under Lien Law § 2(4), an "improvement" includes "the drawing by any architect or engineer ... of any plans or specifications ... for or used in connection with such improvements." Consequently, whenever (as in this case) an architect or engineer begins design work for a future project on property that the developer does not yet own, the improvement will have already commenced for Lien Law purposes when the developer later buys the property. If, as Mayrich argues, the proceeds of any mortgage recorded after improvements commence are trust funds, the developer in such a case could never use borrowed money to buy the property since the mere act of using the acquisition loan for its intended purpose would make him guilty of diverting trust funds. The only way for a developer to avoid liability would be either to forego hiring a design professional until after purchasing all of the property for the project, in order to make sure that the "improvement" has not commenced, or, if his design professionals have already started work, to forego borrowing money to buy the property so as not to be guilty of diverting trust funds. Either option would impose substantial constraints and cause serious disruption to the real estate industry in this State. A developer who could not use the services of a design professional to plan how or to what extent he can improve a property would likely 16 be unable to determine whether the potential return on his investment justifies buying the property at all. Moreover, a rule under which the mere use of borrowed money to purchase property for development could constitute a felony would cast a chilling effect and threaten to disrupt an industry that is critical to the economies of New York, and indeed the world. Such a patently absurd result would do nothing to further the legislative intent that monies borrowed to finance improvements be used for that purpose. See, Matter of Long, 76 N.Y.2d at 420 (a statutory "interpretation [that] would lead to an absurd result [and] would frustrate the statutory purpose" is to be avoided); Schmidt, 74 N.Y.2d at 520 (court should avoid a statutory construction that leads to an "absurd or futile" result). By contrast, the Appellate Division's application of Lien Law § 70 is consistent with the statutory language and the underlying legislative intent, without the absurd and potentially economically crippling results that flow from Mayrich's proffered interpretation of the statute. C. The Trust Fund Covenant Required for a Mortgage to have Priority over Subsequently Filed Liens does not Convert Acquisition Loan Proceeds into Lien Law Trust Funds Mayrich's assertion that the mere presence of a Lien Law § 13 covenant in a mortgage mandates treating its proceeds as trust funds ignores both the principle on which it relies and the context in which the covenant appears. The rule that a contract is to be interpreted in accordance with its language stems from 17 "the fundamental, neutral precept ... that agreements are construed in accord with the parties' intent." Innophos, Inc. v. Rhodia, SA., 10 N.Y.2d 25, 29 (2008) (quoting, Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002)). "In construing [a] contract . .. due consideration must be given to the purpose of the parties in making the contract. A fair and reasonable interpretation, consistent with that purpose, must guide the courts in enforcing the agreement." Matter of Cromwell Towers Redevelopment Co. v. City of Yonkers, 41 N.Y.2d 1, 6 (1976) (Citations omitted). Mayrich's assertion that the trust fund covenant must be mechanistically enforced is misplaced, because it rests upon the fiction that the language employed reflects the parties' intent regarding use of the proceeds, rather than being terminology mandated by statute for an entirely different purpose. Lien Law§ 13(3) provides, in pertinent part: Every such building loan mortgage and every mortgage recorded subsequent to the commencement of the improvement and before the expiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the improvement shall contain a covenant by the mortgagor that he will receive the advances secured thereby and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement, and that he will apply the same first to the payment of the cost of improvement before using any part of the total of the same for any other purpose ... (Emphasis added). A mortgage has priority over subsequently filed mechanic's liens only if it contains the statutorily mandated language: 18 Every mortgage recorded subsequent to the commencement of the improvement and before the expiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the improvement shall, to the extent of advances made before the filing of a notice of lien, have priority over liens thereafter filed if it contains the covenant required by subdivision three hereof. Lien Law § 13(2) (Emphasis added). Section 13 thus requires that either the specified language or an explicit reference to it be included in every mortgage in order for the mortgage to have priority over a later-filed mechanic's lien. In mandating that all mortgages include such a covenant, the statute does not distinguish between mortgages that secure loans borrowed to finance improvements to property and loans borrowed for any other purpose, including acquiring property. Either a mortgage contains a trust fund covenant or it loses priority to subsequently filed liens.3 By itself, therefore, the presence of such a covenant in a mortgage does not evidence the parties' intent with respect to the use of the loan proceeds. Lien Law § 13 "governs the priority between liens, mortgages and deeds." A & V 425 LLC Contracting Co. v. RFD 55th Street LLC, 15 Misc.3d 196, 202 (Sup. Ct. N.Y. Co. 2007). When read together, as they must be,§§ 13(2) and 3 Not surprisingly, the language mandated by Lien Law§ 13(3) is included in standard mortgage forms in New York, regardless of whether the underlying loan was intended to pay for improvements to real property. (See, R-149-150, 306-328). The record reflects that the mandated language is even contained in the Fannie Mae/Freddie Mac-approved standard form of mortgage. (R-150, 308-309, 318, 321, 325, 327). 19 13(3) "simply set[] forth the requirements that must be met for a mortgage to gain priority over a mechanic's lien claimant." ld. at 203 (Emphasis added). Thus, § 13 determines the relative priority among liens, not the creation of a trust; the latter is governed by Lien Law § 70. Consequently, as the Appellate Division correctly discerned in this case (R-402), the mere presence of the § 13(3) language in a mortgage does not transform the underlying funds into trust funds. See, Monroe Savings Bank v. First National Bank of Waterloo, 50 A.D.2d 314, 317-318 (4th Dep't 1976) (proceeds of a mortgage that contained required trust fund covenant, but which involved no new funds and was on account of antecedent debt, were not trust funds because mortgage "created a lien unrelated to the improvement of the property.") (Citations omitted). The cases upon which Mayrich relies in arguing that the § 13 covenant should, instead, be treated like ordinary contract language are inapposite. In each of Signature Realty, Inc. v. Tallman, 2 N.Y.3d 810 (2004) (lease brokerage agreement), R!S Associates v. New York Job Development Authority, 98 N.Y.2d 29 (2002) (language in loan agreement governing method for calculating interest); and County of Suffolk v. Alcorn, 266 F.3d 131 (2d Cir. 2001) (settlement agreement), the court was called upon to interpret negotiated contract language, not the effect of language that was required by law to be included in an instrument in order to achieve a particular effect. 20 In Collard v. Incorporated Village of Flower Hill, 52 N.Y.2d 594 (1981), the plaintiff's predecessors in title, in order to satisfy a condition upon which the village agreed to grant a zoning amendment, entered into and recorded a declaration of covenants prohibiting further improvement to the property "without the prior consent of the Board of Trustees of the Village." Collard, 52 N.Y.2d at 596-598. When the plaintiff's subsequent application to make improvements was denied by the village without reason, id. at 598, the plaintiff asserted that an obligation not to unreasonably withhold consent should be implied by law as part of the recorded covenant. /d. at 603. This Court, rejecting the plaintiff's argument, specifically noted, "The concept that appellants would invoke is not obscure and language to give it effect was readily available had it been the intention of the parties to include this added stipulation." /d. (Emphasis added). In so ruling, this Court demonstrated why Collard does not support Mayrich's argument. Although the language at issue in Collard was included in the recorded document because it was required by a governmental enactment, the similarity between Collard and the matter before this Court ends there. In Collard, the language included in the covenant resulted from the property owner's specific application for a zoning amendment and its interactions with the government in order to achieve that result. Indeed, the language included in the covenant was a specific condition of the village board's granting the relief requested by the 21 property owners. As this Court noted, the subject language effectuated the parties' specific intent and, had their intention been different, they could easily have chosen different language. By contrast, the language at issue here is not included in the mortgages because parties negotiating at arm's length chose such language to express their meeting of the minds. To the contrary, Oliver and its lender had no choice concerning verbiage, because the specific language they used is mandated by a statute, Lien Law § 13, that is generally applicable to all mortgages recorded in New York State for purposes of establishing priority.4 Thus, whereas application of traditional contract principles to the freely chosen language at issue in Collard gave "due consideration ... to the purpose of the parties in making the contract," Cromwell Towers Redevelopment Co., 41 N.Y.2d at 6, an interpretation which treats the ubiquitous and inflexible Lien Law § 13 covenant as though it was contract language negotiated at arm's length would distort, rather than give meaning to, the parties' purpose in executing the subject mortgages. Weber v. Welch, 246 A.D.2d 782 (3rd Dep't 1998) and Roland J. Down, Inc. v. Park-Clif Enterprises, Inc., 86 A.D.2d 741 (3rd Dep't 1982) do not require the result urged by Mayrich, because the underlying loan in both cases was made to pay for improvements to property. The loan proceeds at issue in both 4 Indeed, Mayrich has previously conceded that the covenant "is mandated to be inserted in all mortgages pursuant to Lien Law§ 13(3)." (R-384) (Emphasis added). 22 Weber and Roland J. Down were thus unquestionably Article 3-A trust funds regardless of whether the mortgages contained the Uen Law§ 13 covenant. Not surprisingly, therefore, whether the monies were trust funds ab initio was not the question before the court in either case. The Appellate Division correctly distinguished Weber as involving a loan to construct improvements on the mortgaged property. See, Mayrich Construction Co., 90 A.D.3d at 510 ("The funds at issue [in Weber] were borrowed under a mortgage-secured improvement loan for the construction of a residential dwelling and constituted trust funds."). In Weber, the defendant owners admitted that the funds had been borrowed to pay for construction.5 The issue before the Weber Court was whether the owners, who had paid only a portion of the construction loan proceeds to their general contractor, were thereby liable for diverting trust funds with respect to the balance of the loan. Weber, 246 A.D.2d at 783. Whether those proceeds constituted assets of a Lien Law trust was never an issue before that court. Consequently, Weber does not establish that the mere presence of a trust fund covenant in a mortgage instrument recorded after an 5 The undisputed fact that the loan at issue in Weber was a construction loan is not explicitly stated in the Appellate Division's decision in that case. However, the undisputed record in that case, of which this Court may take judicial notice, see, Khatibi v. Weill, 8 A.D.3d 485 (2nd Dep't 2004) (appellate court may take judicial notice of undisputed court records), includes the defendant owners' judicial admission, in their answer to paragraph 6 of the Complaint, that the underlying loan was borrowed for the purpose of paying for the cost of improvements. The Complaint and Answer in Weber, contained in the certified copy of the record that Oliver's counsel has secured from the Appellate Division, Third Department, are included for the Court's reference as an Addendum to this brief. 23 improvement commences converts the loan proceeds into trust funds without regard to the actual purpose of the loan. Similarly, the issue before the Court in Roland J. Down, 86 A.D.2d 741, was not whether a trust existed but, rather, whether the defendants had complied with their obligations as trustees. This is clear from that Court's citation of Lien Law § 70(5)(b) as the "pertinent statute" governing the question before it. Id., at 742. Pursuant to§ 70(5)(b): The assets of the trust of which the owner is trustee are the funds received by him and his rights of action for payment thereof . .. (b) under a building loan mortgage or a home improvement loan. (Emphasis added). The loan before the court in Roland J. Down was thus a construction loan, the proceeds of which are unquestionably trust funds, and not an acquisition loan. As in Weber, the Roland J. Downs Court's apparent reliance upon the trust fund covenant contained in the mortgage must be considered in context; ripped from that context, it is at most dicta of no relevance in determining whether the proceeds of an acquisition loan are trust funds under the Uen Law. In sum, whether the proceeds of a mortgage recorded after the commencement of improvements are Lien Law trust funds can only be determined by reference to whether the mortgage proceeds were furnished or received, as required by § 70(1 ), "for or in connection with an improvement of real property." Where, as here, the undisputed evidence establishes that the mortgage loans in 24 question were acquisition loans, intended to pay for the purchase of real property and air rights, and not loans made to pay for improvements to the real property, that requirement is not met, and accordingly the proceeds are not trust funds. D. The Proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage are not Lien Law Trust Funds The undisputed evidence in the record demonstrates that neither of the mortgage loans at issue in this case was borrowed to finance improvements to the Property. The 953 Building Mortgage loan was borrowed to purchase one of the parcels that comprise the Property, and the 963 Air Rights Mortgage loan was borrowed to acquire air rights belonging to a nearby property. Consequently, the mortgage loan proceeds are not trust funds as defined by § 70 of the Lien Law. In his affidavit opposing Mayrich's Petition, Oliver's co-Manager, Izak Senbahar, unequivocally stated: "Oliver has not borrowed any monies, and no mortgage has been recorded, to finance improvements to the underlying Property. On the contrary, the two mortgages on which Mayrich relies were intended and used solely to finance (i) Oliver's purchase of a portion of the property on which it has intended to build the Project and (ii) the purchase of air rights from a neighboring building owner." (R-142). As Mr. Senbahar explained, the 953 Building Mortgage secured funds borrowed pursuant to a contemporaneous Fee Acquisition Loan Agreement between Oliver and the Lender (R-143), while the 25 963 Air Rights Mortgage secured funds borrowed pursuant to a Development Rights Acquisition Loan Agreement between Oliver and the Lender. (R-145). Moreover, the mortgage documents themselves identify the respective loans as having been made pursuant to acquisition loan agreements between Oliver and the Lender. Thus, the first Recital in the 953 Building Mortgage (R-44), expressly states that the monies were being borrowed pursuant to a "Loan Agreement identified below". On the following page, the "Loan Agreement" is explicitly defined as "that certain Fee Acquisition Loan Agreement, dated as of the date hereof." (R-45). Similarly, the first Recital in the 963 Air Rights Mortgage, as well as the definition of the term "Loan Agreement" on the second page of that document, clearly reflect that the mortgage secures the loan proceeds that Oliver borrowed to finance its purchase of the 963 Air Rights. (R-85-86). Thus, the undisputed record evidence establishes that both the 953 Building Mortgage and the 963 Air Rights Mortgage secured loans intended for the acquisition of real property, and not for the improvement of real property. As demonstrated above, whether the proceeds of a mortgage recorded after the commencement of improvements are Lien Law trust funds is determined by reference to whether the mortgage proceeds were furnished or received, as required by § 70(1 ), "for or in connection with an improvement of real property." Since the 953 Building Mortgage and the 963 Air Rights Mortgage secured 26 acquisition loans that were intended to be used for the purchase of property, not construction loans intended to be used for improvements to the property, the proceeds of the loans are not trust funds. POINT II MAYRICH IS NOT ENTITLED TO A VERIFIED STATEMENT PURSUANT TO LIEN LAW §76, BECAUSE THE LOAN PROCEEDS ARE NOT TRUST FUNDS The existence of a trust is a prerequisite to a contractor's right to receive a verified statement under Lien Law § 76. Since the proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage are not trust funds, Mayrich is not entitled to a Lien Law§ 76 statement with respect to those proceeds. Lien Law §76(1) provides, "Any beneficiary of the trust holding a trust claim shall be entitled, upon request ... (a) to examine the books or records of the trustee with respect to the trust, and to make copies of any part or parts thereof relating to the trust; or (b) at the beneficiary's option to receive a verified statement setting forth the entries with respect to the trust contained in such books or records." (Emphasis added). By the statute's express terms, a contractor is entitled to a verified statement, and an owner may be required to furnish such a statement, only if a trust, as defined by Lien Law § 70, exists. Since no trust exists with respect to the 953 Building Mortgage and the 963 Air Rights Mortgage, Mayrich has no right to a verified statement with respect to the proceeds of the two loans. 27 CONCLUSION Neither the language of Lien Law Section 70 nor the underlying legislative purpose supports Mayrich's argument that the proceeds of any mortgage recorded after the commencement of improvements constitute trust funds, regardless of the purpose for which the loan was made. On the contrary, the legislative history and the plain language of Lien Law § 70(1) establish that mortgage proceeds become trust funds only if they are borrowed for the purpose of financing improvements to property. Where monies are borrowed to acquire property, rather than to improve property, the proceeds of the mortgage loans are not trust funds. The inclusion in the mortgage instruments of the trust fund covenant required by § 13 of the Lien Law does not convert acquisition loans into trust funds. Section 13 of the Lien Law governs relative priority among liens, not the creation of trusts; the latter is governed by Lien Law § 70, which requires that loan proceeds be received to fund improvements to property in order to constitute trust funds. The record establishes that the proceeds of the 953 Building Mortgage and the 963 Air Rights Mortgage were borrowed for the purpose of acquiring interests in property, and not to finance improvements to the property. Consequently, the proceeds of the two loans are not trust funds, and Mayrich was 28 not entitled to a verified statement, pursuant to Lien Law § 7 6, with respect to the loan proceeds. Finally, as demonstrated above, there are no conflicts among the departments of the Appellate Division in need of reconciliation by this Court, and public policy considerations militate in favor of safeguarding developers' legitimate expectations by upholding the result reached below. respects. Dated: For all of the foregoing reasons, the Order should be affirmed in all New York, New York August 8, 2012 Respectfully submitted, ZETLIN & DE CHIARA LLP Attorneys for Respondent-Respondent Oliver, LLC 801 Secon Avenue New York, New York 10017 (212) 682-6800 29 ADDENDUM - • 'I STATE OF NEW YORK SUPREME COUR'l' COUNTY OF ESSEX ROBERT L. WEBER d/b/a WOODHILL ELECTRIC, on behalf of himself and all others similarly situated, . Plaintiffs, - against - DAVID G. WELCH, MARY A. WELCH, NORTHEAST SAVINGS, F.A., and GEORGE ERWIN, Defendants. -------------------------------------~--- TO THE ABOVE NAMED DEFERD.ur.t'S ( S) : ... 4. • . . .. Record - Page 16 SUMMONS Index Ho.~i'-1~ ~~~~h B/31/fC YOU ARB HEREBY SUMHORED ~o answer the complaint in ~his action and. to sene a copy of your answer, or, if the complaint is not served with this summons, to serve a notice of appearance, on the Plaint!ff•s Atto%ney(s) within 20 days after the service of this summons, exclusive of the day of s•rv1ce (or within 30 days after the service is complete if this summons is not personally delivered to you within the State of New York}r and in case of your failure to appear or answer, judgment will ~ taken against you by default fox the relief demanded in the complaint. Plaintiffs designate Essex County as the place of trial. The basis of the venue is residence and location of affected real property in Essex County. Dated: August 30, 1995 BROOltS & HEYER Attorneys for Plaintiffs 2 Olympic Drive Lake Placid, New York 12946 (518)523-1555 I I I I . . . . STATE OF NEW YORK SUPREME COURT COUNTY OF ESSEX ~-~~~-~--~~---~-~~~~~--------~-----~----- ROBERT L. WEBER d/b/a WOODHILL ELECTRIC, on behalf of himself and all others similarly situated, Plaintiffs, - against - DAVID G. WELCH, MARY A. WELCH, NORTHEAST SAVINGS, F.A., and GEORGE ERWIN, Defendants. ~~~~~--------------------------~-------~~ ... . . . Record - Page 17 COMPLAINT Index No. '1'1/f- fs· ~~~'b e/al/15 Robert L. Weber, d/b/a Woodhill Electric, on behalf of himself Jl and all others similarly situated, by and through his attorneys, Brooks & Meyer, as and for a complaint against the defendants herein, respectfully allege as follows: I I"' I I t 1. At all times hereinafter mentioned, plaintiff Robert L. 'weber was and still is a resident of the Town of Elizabethtown, Essex County, New York, and was and still is doing business under the assumed name of Woodhill Electric with principal offices located in Elizabethtown, New York. 2. This cause of action is brought as a class action pursuant the provisions of Article 3-A of the Lien Law of the State of New York on behalf of the. plaintiff and on behalf of all others . . . .·· .· Record - Page 18 similarly situated who shall seek to be vouched in as party claimants in this action and who desire to contribute to the expense thereof and to participate in the proceeds thereof. 3. At all times hereinafter mentioned, defendants David G. Welch and Mary A. Welch were, and upon information and belief, still are, residents of the Town of Queensbury, Warren county, New York. 4. At all times hereinafter mentioned, defendants David G. Welch and Mary A. ~elch were and still are the owners of certain real property and improvements located in the ~own of North Elba, Essex County, New York, more particularly described in a certain deed ,to said defendants from Joseph J. Barile dated July 14, 1993, and recorded in the Essex County Clerk's office on July 23 1 1993, in Book 1043 of Deeds at Page 110, such property being more particularly described in Schedule A annexed hereto and made a part hereof. 17,& s. At all times hereinafter mentioned defendant Northeast ~savings, F.A. was and still is a corporation or association duly organized and existing under the laws of the United States of America, with offices located at 50 State House Square, Hartford, Connecticut, and upon information and belief said defendant was and still is authorized to do business in the State of New York. 6. On or about October 6, 1994, defendants David G. Welch and Mary A. Welch executed a certain ~uildinq loan mortgage in favor of 2 . . . . . . .·· .· .. Record - Page 19 the defenrtant Northease Savings, F.A., to secure a loan by Northeast savings, F.A. to the defendants David G. welch and Mary A. Welch in the principal amount of $1C'.o,ooo.oo, with s;uch funds to be used to pay for the costs of construction of a residential dwelling on tha aforesaid real property owned by the defendants Welch in the ~own of North Elba, Essex county, New York; and said building loan mortgage was recorded in the Essex County Clerk•s office on October 19, 1994 in Book 718 of Mortgages at Page 182. 1)K\ '. Upon information and belief, at all times hereinafter mentioned, George Erwin was, and upon information and belief still is, a resident of the Town of Ogdensburg, County of St. Lawrence, State of New York. 17 K\ s. At all times here!.nafter mentioned, the defendant George Erwin was and still is engaged in the building construction business and at times used the assumed name of B&E Builders. 9. Prior to Auqust, 1994, the defendants David G. Welch and Mary A. , Welch hired and contracted with the defendant George Erwin to construct a residential dwelling on the property owned by the Welch defendants and located in the Town of North Elba, Essex County, New York, with the costs thereof to be paid from the funds borrowed by the Welch defendants from the defendant Northeast savings, F.A., under the aforesaid building loan mortgage; and the defendant George ~ . .,.y \ -- ... )~::;.~, y;~ ¥' Erwin agreed to const~1ct such residential dwelling 3 - .·· . . Record - Page 20 and furnish all labor and materials in connection therewith • . . 17 10. In or about August, 1994, the defendants Welch and/or defendant George Erwin hired and ~ontracted with the plaintiff Robert L. Weber d!b/a woodhill Electric to provide and furnish labor and materials for electrical wiring, devices, fixtures and appliances, and said plaintiff agreed to provide and furnish such labor and materials. ""9~ \ 11. On August 16, 1994, plaintiff Robert L. Weber, d/b/a Woodhill Electric commenced furnishing the labor and materials for the electrical work. "'\ ·(;i 12. On September 28, 1994, the plaintiff Robert L. Weber d/b/a Woodhill Electric completed all labor and furnished all of the materials which he was contracted to provide and furnish, and the same were accepted by the defendants Welch and defendant George Erwin without complaint or objection. ·., V 13. The agreed price and reasonable value of the work, labor and materials furnished by plaintiff Robert L. Weber was in the total amount of $4 1 731.06 • . ·;P 14. The defendants paid to the plaintiff the sum of $2,600.00, leaving a balance due and owing to plaintiff of $2,131.06, and said balance is still due and owing from the defendants although demand for payment thereof has been duly made. 15. No assignment of monies due or to become due to plaintiff 4 ... • . . .·· . . Record - Page 21 Robert L. Weber has been made, and no such assignments have been filed ~n the off~ce of the Essex County Clerk. v 16. All funds loaned by defendant Northeast savings, F.A., to the defendants Dav~d G. Welch and Mary A. Welch were and still are trust funds within the meaning of Article 3-A of the Lien Law of the state of New York and as such, such trust funds were required to be applied first to the payment of all subcontractors, laborers and materialmen, including but not limLted to plaintiff Robert L. Weber d/b/a Woodhill Electric and all other trust beneficiaries. 'P 17. The defendants have applied the trust funds for a purpose other than the payment of the claims of subcontractors, laborers and materialmeh. and the defendants have wrongfully and unlawfully expended and diverted such trust funds in violation of Article 3-A of the Lien Law of the State of New York. vla. Prior to the commencement of this action, the plaintiff Robert L. Weber duly demanded of the defendants David G. Welch and Mary A. Welch the payment by said defendants to plaintiff of the sum of $2,121.06 plus interest and service charges, but the said defendants have wholly refused and neglected to pay the same notwithstanding that the same is due and payable. There 1) 19. fhis action who may be persons other than those parties named to have some claim upon or interest in the aforesaid trust funds by virtue of being .subcontractors, laborers and 5 . ' . . ' .·· ... Record - Page 22 materialmen having claims arising out of the construction of the aforesaid residential dwelling; but plaintiff is unable to ascertain the names of all such persons who ~ght be or are so ~nterested in such trust funds. 20. By reason of the foregoing, plaintiffs are entitled to enforce the trust and obtain the relief allowed in Lien Law S77, as well as directing the payment to plaintiff of all sums due and owing to plaintiff as aforesaid. Plaintiffs repeat and reallege each and every allegation contained in paragraphs number 1 through 20, inclusive, of this complaint with the same force and effect as though herein set. forth anew. :D 22. on the. first day of December, 1994, and within 4 months after the last item of work was performed or of materials were furnished by plaintiff, the plaintiff filed a notice of lien in compliance with all requirements of the Lien Law in writing in the office of the Essex County Clerk asserting a lien on and against the aforesaid real property owned by the Welch defendants for the amount of the labor and materials furnished, to wit: $2,131.06 plus interest and service charges. A copy of said notice of lien is attached hereto as Exhibit 1 and made a part hereof. 6 ...... W omca • BROOKS A MEYER • I 0\.YMJOIC IHUYC • ...... K& -CID. N&W 'rOJUC Ill .... """Y~\ 23. . . . .. . . . Record - Page 23 Thereafter, a copy of said notice of lien was duly served upon the Welch defendants and the defendant Erwin as required by Lien Law Sll, and proof of such service was thereafter filed with the Essex County Clerk within the time required therefor. 17~\ 24. Said lien has not been cancelled or otherwise discharged. 1/1<'\ 25. No action has been brought by this plaintiff for the foreclosure of said lien, nor has this plaintiff been made a party defendant to any action brought for the foreclosure of another lien or mortgage against said real property or any part thereof. Upon information and belief, no other person or persons have filed mechanic's liens against said r&al property, or any part thereof, nor have subsequent liens or claims by judgment, mortgage, or conveyance been mailed or filed or rendered against said real property or any part thereof, other than the mortgage of the defendant Northeast ·Savings, F.A. p 27. The defendants David G. Welch and Mary A. Welch claim to have, and may have paid to said defendant, George Erwin the full amount claimed by said defendants to be due for the construction of the residential dwelling; but said payment, if made, was, upon information and belief, made in bad faith and/or by collusion with 1 LAW 01'1'1CU - I!IROCIKS It M£V£R - 2 01.\'MI'IC llltiV£ - I.Aq l'lo.ACIO. N&W YCIIIIC 1811._ - . .. .· Record - Page 24 the defendant George Erwin, and/or prior to the time when such payments became due, for the purpose of avoiding the provisions of the Lien Law and of avoiding the plaintiff's claim alleged herein. 1? 28. By reason of the foregoing plaintiff is entitled to judgment against the Welch defendants and the defendant George Erwin for the sum of $2,131.06 plus interest and service charges from September 28, 1994. Plaintiff repeats and reallege each and every allegation contained in paragraphs number 1 through 28, inclusive, of this complaint with the same force and ~ffect as though herein set forth anew. The defendants David G. Welch, Mary A. Welch and George p 30. Erwin, owe plaintiff the sum of $2,131.06 for work, labor, materials and services performed and furnished, together with interest and service charges from September 28, 1994. Plaintiff repeats and reallege each and every allegation contained in paragraphs number 1 thr~ugh 30, inclusive, of this complaint with the same force and effect as though herein set forth 8 I.AW OI'N:£5 - IJROCIICS A MEYER • I OI.YMI'IC OIIIVI: • I.AK& I'I.ACIO. ,.lEW .,_ 1 1114. . . .. Record - Page 25 anew. Jl 32. The work and labor performed, and the materials furnished, by plaint!££ had an agreed price and reasonable value of $4,731.06. yt 33. The defendants did pay to plaintiff the sum of $600a00, leaving a balance due and owing to plaintiff by the defendants of $2,131.06 plus interest and service charges from September 28, 1994. WHEREFORE, plaintiffs demand judgment as follows: (a) On the first cause of action: (i) compelling the defendants to provide a final accounting of all trust funds received and disbursed, (ii) identifying and recovering trust assets in the hands of any person, together with interest accrued thereon from the time of diversion, (iii) setting aside as a diversion any unauthorized payments, assignments or other transfers, whether voluntary or involuntary, (iv) awarding damages to the plaintiffs for breach of trust or participation therein, (v) enforcement on behalf of the trust of any right of action constituting a trust asset, (vi) determining the existence and amount·of any trust asset or of any trust claim; (b) On the second cause of action, ascertaining the amount due on plaintiffs' lien and claims for principal and interest, and determining and adjudging that the plaintiff have a vaiid and subsisting lien for the amount adjudged to be due to the plaintiff, g LAW O'I'ICU - 8AOOK5 4il MEYER - I CK.'I'MII'II; CIIIIVC • I.AICC III.Aca:t. NEW VOiliC t:l .... . . , . • Record - Page 26 and directing the defendants David G. Welch, Mary A. Welch and George Erwin to pay to plaintiff an amount sufficient to satisfy plaintiffs• lien within interest thereon; (c) on the third, fourth and fifth causes of action, judgment in favor of Robert L. Weber d/b/a Woodhill Electric and against the defendants David G. Welch, Mary A. Welch and George Erwin in the sum of $2,131.06, plus interest and service charges from September 28, 1994J and (d) The costs and disbursements of this action. Dated: August 30, 1995 BROOKS 1i MEYER Attorneys for Plaintiffs 2 Olympic Drive Lake Placid, New York 12946 (518)523-1555 I .. "' . ,. .. . R~cord ~ Page 27 I I I I I I I . schedule A I I . ''' . ... • •• .. .. 1 ! gf !r l! I~ ~~~ ir i ~ as - a fl .l [~" !i J : · : f i li 'l B. -- ~~ !!I •• ~ ~a w f ~ !z ls f ~~ lf 4 P 11 r!l f l -t ~ ~~ [ ra 1 ~ !l ~ ~a! fJ f~r ~ r rJ . ~ti !t i ('· 1 i~ Z l5 t I' . f ; ~ fl ; 11 r r l! el l ·~ ~· IE ~ ~~ ~ .. ..... .. -· , ...., .... 00 i: ..... ,.. ... co ::a "' C D . 0 . 0 . a I "tJ •• D ) (Q CD I\ ) co - " ... . . . . •" *• . . Record - Page 30 Exhibit 1 •. • z•·-~· -- ... I . er •n s:""'wt,u . . . . . . . . :.. .. . ' .. ~.· • 4 ! . . .. JJl .. , '. r : I .. IJ- al 'f'! ol .. , · "1 "!2 l· ,. ,h ,1 ., iL i. .! I: IV ' 1= .1 AU ttr 11 41 7( •) Jo r L ia uw ZO :6 l l'l 1- 3I J lrU I • ,_, .. _ , .. .. . _ N I\ J. .T J\ \ I • • • • • ,., .., O fi re A l• ra 1 N • , ._ ,.. ._ c ·~ A7 ;r sv . ... ... ... ,· , • • • . .. ,,, .;. , 0: 1. \1 30 !i\ ~ • • . ! • • : . . ·- . . . . :.. .. . .. .._ ... . • . ... I 1." :1 I .r 1 I li p . . . .. " .... r . .e ..a r r 'l!i l f f l.f 1 fll • J. R I ' HI f . . l . • r 1 , . , . \ .. . ... . : . I. I I .!. S. I. t i : . . • . . . .. 11 0 • ~t -1 I I li ~ L ~ ~ .I -· ~ -, lfl l • ..ff . . . . . . . .. .. . ~ .. " ' .... " . c .. ... 2; i ; :; -< ,, ~ I= .. . .. ;o 8 ': a I • "'0 • ~ II ) (Q !0 (, a ) N . ·I ; e .. 0 • STATE OF NEW YORK SUPREME COURT Record - Page 34 COUNTY OF ESSEX ROBERT L. WEBER d/b/a WOODHILL ELECTRIC, on behalf of himself and all others similarly situated, -against- DAVJ:D G. WELCH, MARY A. WLECH, NORTHEAST SAVXNGS, F.A., and GEORGE ERWIN, - - - ~ - - - - - ~ - Plaintir~s, Det'endants. - ... - - - - .... - ANSWER Index No.: 444-95 Defendants, DAVJ:D G. WELCH and MARY A. WELCH, through their attorneys, NEWELL & TOOMEY, ESQS. , as and for an answer to plaintiff 1 s complaint: AS TO PLAIBTIFF' S FIRST CAP'SI OF ACTXON: J.. Denies having knowledge or information sufficient to form a belief as to paragraphs marked and numbered "1", "2 11 1 "5'', n7n 1 "8 11 and 11 11" of plaintiff 1 s complaint. 2. Denies each and every allegation contained in paragraphs marked and numbered "6", "1.2 .. , 11 1.3", "14", 11 15" 1 "16 11 , "17 11 , "18" 11 19" and 11 2011 of plaintiff's complaint. 3. Denies each and every a11egation contained in paragraph marked and numbered 11 9" of plaintiff's complaint, but admits that defendants, DAVID G. WELCH and MARY A. WELCH, contracted with defendant, GEORGE ERWIN, to construct a residential dwelling on 1; property owned by DAVID G. WELCH and MARY A. WELCH, located in the ;, Town of North Elba, Essex county, New York, utilizing funds .. borrowed by DAVID G. WELCH and MARY A~ewt~cf,agi~gm NORTHEAST SAVINGS, F.A. M WQ PWDD'f'S Ua::um ClVR 0! IC!Zgtf: 4. Defendants, DAVID G. WELCH and MARY A. WELCH, repeats the admissions and denials heretofore set forth as it relates to para- qraph marked and numbered 1121" of plaintiff's complaint. 5. Denies each and every allegation contained in paragaph marked and numbered 1122" of plaintiff's complaint. 6. Denies having knowledge or information sufficient to form a belief as to paragraphs marked and numbered 1123", "24", 1125 11 and "26 11 of plaintiff's complaint. AS TO PLUNUPF 1 S TJIDD CAUSE OF J.CTXOH: 7. Denies each and every allegation contained in paragraphs marked and numbered "27 11 and 11 28 11 of plaintiff's complaint. AS TO PLAINTiFF Is FOURTH CAUSE OF A.CTXON: 8. Repeats and admissions and denials heretofore set forth as it relates to paragraph marked and numbered 11 29 11 of plaintiff's complaint. 9. Denies each and every allegation contained in paragraph marked and numbered "30" of plaintiff's complaint. AS TO PLADrliFF 1 S FifTH CAUSE OF ACTION: 10. Repeats the admissions and denials heretofore set forth as it relates to paraqraph marked and numbered 11 31 11 of plaintiff's complaint. 11. Denies each and every allegation contained in paragraphs marked and numbered 11 32" and "33 11 of plaintiff's complaint • • • Record - Page 36 A& NfQ roB A URSI AfrDMAnD PPPO S'O ALL QUill QF AqnoB Q P:(Al:l'lV''_I gx1PLA:tft MD AS MD lAB A CBQM=QlrADI AGAINST THE QEFENPAHT, QEQRGE EB!qN: 12. The the facts and allegations contained in plaintiff's first and/or second and/or third and/or fourth and/or fifth causes of action fail to state a cause of action. 13. That the causes of action, as set forth in plaintiff's first cause of action and/or second cause of action and/or third cause of action and/or fouth cause of action and/or fifth cause of action are barred by the applicable Statute of Limitation~ • .IS MD FQR A :nmm MnlWAUD DBf"H' '!'0 ALL CAUSP QE AC'IJOlf D :rJAilRDI' s MMPQ\prr MD U MD fOR A tal'UH!JAD .AGAINST THE DEFENDAJIT, GEORGE IRW:Ilf: 1.4. That the plaintiff is precluded from recovering any amounts from the defendants, DAVID G. WELCH and MARY A. WELCH, pursuant to Section 4 of the Lien Law of the State of New York, in that the defendants, DAVID G. WELCH and MARY A. WELCH, paiG to the defendant, GEORGE ERWIN, all amounts due under the contract entered into between the defendants, DAVID G. WELCH and MARY A. WELCH, and the defendant, GEORGE ERWIN. Record - Page 37 AS AHQ lOR A FOYRTH AFFIBMATXVE QE:nNSE TO ALL CAU§ES OF ACTlON XN PLAXtfT:IFP' S CQHPLAXH'l' MD M MD FOR A CRQSS-CLAXM AGAXNST THE DEFENDANT. GEQRGE ERJO:N: 15. That the Third cause of action as set forth in plaintiff's complaint fails to state a cause of action, in that it fails to set forth the particularity and/or specificity as required by Rule 3016(b) of the civil Practice Law and Rules of the State of New York. AS AND FOR A FifTH AlPXRMAT:r:YE DEFEtfSE TO AT.!. MUSES OF ACTION' :IN PLAXN'fXFP 1 S C0MPLAD1'1' AtfD AS AND FOR A CROSS=CLA'XM AGAINST THE DEFENJ)AN'J.' I GEORGE EBWXH: 16. If it is ultimately determined that the defendants, DAVID G. WELCH and/or MARY A. WELCH, is legally responsible in any degree for the damages allegedly sustained by the plaintiff, which legal responsibility the defendants, DAVID G. WELCH and MARY A. WELCH, deny, then the defendants, DAVID G. WELCH and MARY A. WELCH, are entitled to an apportionment of responbility for those damages among the defendant, GEORGE ERWIN, herein, and for judgment accordingly for indemnification and/or contribution. WHEREFORE, defendants, DAVID G. WELCH and MARY A. WELCH, demand judgment as follows: A) Dismissing the complaint of the plaintiff herein as against the defendants, DAVID G. WELCH and MARY A. WELCH, together with the costs and dis- bursements of this actionJ Record - Page 38 B) In the event that the defendants, DAVID G. WELCH and MARY A. WELCH, are ultimately determined to be legally responsible in any degree to the plain- tiff for damages as alleged in plaintiff's complaint, the defendants, DAVI:D G. WELCH and MARY A. WELCH, de- mand that there be an apportionment of responsibilities for those damages, if any, among the defendant, GEORGE ERWIN, in this action, and for judgment accordingly for indemnification and/or contribution; C) For such other and further relief as the Court may deem just and proper. DATED: October 10, 1995 TO: BROOKS & MEYER, BSQS. Attorneys for Plaintiff Office & P.O. Address 2 Olympic Drive Lake Placid, N.Y. 12946 Tel.: (518) 523-1555 NEWELL & TOOMEY, ESQS. Attorneys for Defendants, DAVID G. WELCH and MARY A. WELCH Office & P.o. Address One south Western Plaza P.o. Box 2152 Glens Falls, N.Y. 12801 Telephone: (518) 798-1758