In the Matter of Mayrich Construction Company, Appellant,v.Oliver LLC,, Respondent.BriefN.Y.February 12, 2013State of New York Court of Appeals REPLY BRIEF OF PETITIONER-APPELLANT DICK BAILEY SERVICE (212) 608-7666 (718) 522-4363 (516) 222-2470 (914) 682-0848 Fax: (718) 522-4024 1-800-531-2028 - Email: appeals@dickbailey.com -Website: www.dickbailey.com Appellate Division, First Department Supreme Court, New York County, Index No. 116517/09 In the Matter of the Petition of MAYRICH CONSTRUCTION COMPANY, Petitioner-Appellant, -against- OLIVER LLC, c/o ALEXICO GROUP, LLC, Respondent-Respondent. TO BE ARGUED BY: HOWARD S. JACOBOWITZ, ESQ. TIME REQUESTED: 10 MINUTES COURT OF APPEALS NO. 2012-129 THE MCDONOUGH LAW FIRM, LLP Attorneys for Petitioner-Appellant Mayrich Construction Company 145 Huguenot Street New Rochelle, New York 10801 (914) 632-4700 KRMarcus@mmcthk.com Dated Completed: August 22, 2012 TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................1 ARGUMENT ............................................................................................................5 POINT I ................................................................................................................5 THE PROCEEDS OF THE MORTGAGES WERE TRUST FUNDS PURSUANT TO THE MORTGAGES’ TRUST FUND COVENANTS AND OLIVER’S OPPOSITION IS WITHOUT MERIT.........................................................................................5 POINT II .............................................................................................................10 THE PROCEEDS OF THE MORTGAGES WERE TRUST FUNDS PURSUANT TO THE LIEN LAWAND OLIVER’S OPPOSITION IS WITHOUT MERIT........................................................10 CONCLUSION.......................................................................................................14 ii TABLE OF AUTHORITIES Cases A&V 425 LLC Contr. Co. v. RFD 55th St. LLC, 15 Misc.3d 196, 202 (Sup. Ct. NY County 2007) ............................................5, 6 Amsterdam Savings Bank v. Terra Domus Corp., 97 A.D.2d 41, 43, 44 (3d Dep’t 1983)................................................................13 Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 1 N.Y.3d 324, 328 (2004) .....................................................................................4 Church E. Gates & Co., v. B.N. Builders, Inc., 238 A.D. 163 (1st Dep’t 1933) .................................................................... 7, 8, 9 Monroe Sav. Bank v. First Natl. Bank of Waterloo, 50 A.D.2d 314, 318 [1976] ...............................................................................6, 7 Nanuet National Bank v. Eckerson Terrace, Inc., 47 N.Y.2d 243, 247 (1979) ...................................................................................7 Palm Beach Realty Co., Inc. v. Harry J. Kangieser, Inc., 36 Misc.2d 1058 (Sup. Ct. N.Y. County 1962) aff’d. 19 A.D.2d 862 (1st Dep’t 1963) .........................................................................................8, 9 Roland J. Down, Inc., v. Park-Clif Enterprises, Inc., 86 A.D.2d 741 (3d Dep’t 1982)........................................................................7, 8 Spruck v. McRoberts, 139 N.Y.193, 197 (1893) ......................................................................................3 Standard Sand & Gravel Co. v. City of New York, 172 A.D. 80, 82 (1st Dep’t 1916) aff’d., 224 N.Y. 687 (1918).............................3 Waldman v. New York City, 10 Misc. 3d 1075, p.13 (Sup. Ct. N.Y. County 2005) ........................................10 Weber v. Welch, 246 A.D.2d 782 (3d Dep’t 1998)..........................................................................9 Statutes Article 1.17.............................................................................................................1, 5 Article 3-A ...................................................................................... 3, 4, 8, 11, 12, 13 Lien Law §13 .................................................................................... 3, 5, 8, 9, 10, 12 Lien Law §13(2).........................................................................................................6 Lien Law §13(3)........................................................................................ 2, 5, 6, 7, 8 Lien Law §13(5).........................................................................................................5 iii Lien Law §2(5).................................................................................................... 2, 13 Lien Law §70 ...........................................................................................................10 Lien Law §70(1).................................................................................. 1, 2, 10, 11, 12 Lien Law §70(5).........................................................................................................1 Lien Law §71 ...........................................................................................................10 Lien Law §71(1).................................................................................................. 1, 13 Lien Law §76 ...................................................................................................... 1, 14 PRELIMINARY STATEMENT This brief is submitted in reply to Oliver’s opposition to Mayrich’s petition to secure a Lien Law §76 verified statement setting forth the distribution of the proceeds of two (2) mortgages received by Oliver. The issue before the Court is whether the proceeds of the mortgages, recorded by Oliver subsequent to the commencement of the improvement to Oliver’s real property, were Lien Law trust funds. Mayrich contends that such mortgage proceeds were Lien Law trust funds by reason of a provision in the mortgages (hereinafter, the “Trust Fund Covenant”), that provides that such proceeds are trust funds. Article 1.17 of the mortgages provides: Mortgagor will receive the advances secured hereby 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,” as such quoted term is defined in the New York Lien Law, and will apply the same first to the payment of such costs before using any part of the total of same for any other purpose.... Mayrich further contends that, independent of the mortgages’ Trust Fund Covenants, Lien Law §§70(1), 70(5) and Lien Law §71(1) provide that the proceeds of the mortgages were trust funds. Oliver does not dispute that the mortgages were recorded subsequent to the commencement of the improvement to its real property. However it argues that the 2 proceeds of the mortgages were not assets of a Lien Law trust, as they were intended to be used solely to purchase additional real property, the 953 parcel to complete the land requirements for its intended improvement of Oliver’s property. Therefore, Oliver alleges that the proceeds were not received “in connection with an improvement of real property” as required by Lien Law §70(1). The purchase of the 953 parcel was not a cost of improvement as defined in Lien Law §2(5). Oliver states, that in 1996 it “began to assemble a series of contiguous lots on First Avenue in Manhattan. (R. 143). 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.” Oliver brief at 1, 2. Oliver’s improvement of its property was not complete until it “owned all of the contiguous lots and air rights. With reference to the mortgages’ Trust Fund Covenants, Oliver argues that such Covenants were required to be set forth in the mortgages by virtue of Lien Law §13(3) and that such statute “... determines the relative priority among liens, not the creation of a trust ...,” and “the mere presence of the §13(3) language in a mortgage does not transform the underlying funds into trust funds.” (Oliver brief at “20”). 3 Oliver cites to Spruck v. McRoberts, 139 N.Y.193, 197 (1893), holding that while the Lien Law “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,” and therefore, Mayrich’s interpretation of Article 3-A, is not within the statutes’ general scope and purview. The Appellate Division agreed with Oliver and held that: Although article 3-A is a remedial statute and is to be liberally construed to carry out its purpose, the courts are not authorized to enlarge that clearly defined purpose. However, the “clearly defined purpose” of article 3-A is not enlarged by holding that the mortgage proceeds were received “in connection with the improvement” of Oliver’s real property when considering that Courts have long held that the Lien Law should be liberally and not strictly construed, see, Standard Sand & Gravel Co. v. City of New York, 172 A.D. 80, 82 (1st Dep’t 1916) aff’d., 224 N.Y. 687 (1918) ... in construing a statute [Lien Law §13], and especially a remedial one like the Lien Law, we should not always confine ourselves to the strict legal definition of the terms used, but are at liberty to seek out the intention of the legislature and to give effect to that intention, if by any reasonable construction the language used will permit us to do so. 4 The 1942 Report of N.Y. Law Rev. Comm. pp. 298-306 notes: Section 36-a1 was among a series of provisions of the Lien Law directed against various injurious and irresponsible practices in the construction industry. Chief among the evils sought to be eradicated was that of “pyramiding,” a practice whereby owners ... use money advanced in the course of one project as loans ... to commence or complete another project. (See, 1942 Report of N.Y. Law Rev. Comm., pp. 298-306. The “primary purpose” of article 3-A was stated by this Court in Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A., 1 N.Y.3d 324, 328 (2004): We have repeatedly recognized that the primary purpose of Lien Law article 3-A ... [is] to ensure that “those who have directly expended labor and materials to improve real property ... at the direction of the owner or general contractor” receive payment for the work actually performed (Matter of RLI Ins. Co. v. New York State Depart. Labor, 97 N.Y.2d 256, 264 ... quoting Canron Corp. v. City of New York, 89 N.Y.2d 147, 155 ...; see also West-Fair Elec. Contrs. v. Aetna Cas. & Sur. Co., 87 N.Y. 2d 148, 156-157.) As the Law Revision Commission noted in its 1959 Report recommending numerous amendments to the law, “enactment of the trust fund provisions was prompted by the frequency of cases in which laborers and materialmen were in fact not paid. The trust concept was intended precisely to forbid that an owner, contractor or subcontractor act merely as entrepreneur and was intended to require that he act, instead, as fiduciary 1 Section 36-a of the Lien Law was repealed in 1959, its provisions, with modifications, were transferred to a new article 3-A (L. 1959, ch. 696, enacting Lien Law §§70-79). 5 manager of the fixed amounts provided for the operation” (1959 Report of NY Law Rev. Comm, at 214, reprinted in 1959 NY Legis Doc No. 65, at 30). ARGUMENT POINT I THE PROCEEDS OF THE MORTGAGES WERE TRUST FUNDS PURSUANT TO THE MORTGAGES’ TRUST FUND COVENANTS AND OLIVER’S OPPOSITION IS WITHOUT MERIT Oliver argues that the Trust Fund Covenants set forth in article 1.17 of the mortgages were required to be inserted into the mortgages by virtue of Lien Law §13(3) and “§13 govern[s] the priority between mechanic’s liens and mortgages; they do not govern the creation of trust funds.” Oliver cites to the Appellate Division’s decision below, which was based upon A&V 425 LLC Contr. Co. v. RFD 55th St. LLC, 15 Misc.3d 196, 202 (Sup. Ct. NY County 2007), for authority for its allegation that Lien Law §13(3) does “not govern the creation of trust funds.” In A&V the defendant, who has purchased real property and received a deed with a covenant that the grantor received the consideration for such conveyance as a trust fund, moved to dismiss A&V’s mechanic’s liens pursuant to Lien Law §13(5), which liens were filed subsequent to the recording of the deed. The, A&V Court held that Lien Law §13(5) and not Lien Law §13(3) was applicable, and 6 dismissed the plaintiff’s mechanic’s liens. While A&V does in dicta, state that “[s]ection 13(3), in conjunction with subdivision (2), simply sets forth the requirements that must be met for a mortgage to gain priority over a mechanic’s lien claimant,” id. at 203, it does not hold, discuss nor refer to whether Lien Law §13(2) and (3) “governs the creation of trust funds.” Further, Oliver cites to the Appellate Division’s holding, that the Trust Fund Covenants were set forth in the mortgages pursuant to Lien Law §13(3) and that “... The mere presence of Lien Law §13(3) language in the mortgages [does not] transform the underlying acquisition loans into trust funds (see Monroe Sav. Bank v. First Natl. Bank of Waterloo, 50 A.D.2d 314, 318 [1976].”) However, Monroe Savings does not stand for the principle for which it was cited. The Court in Monroe Savings, id. at 317, 318 commented: ... the subdivision (3) trust covenant is without effect in this case since the Corporation could not agree to receive as a trust fund money that was previously advanced to it and which was spent long before the execution of the mortgage which included the trust fund covenant. The mere fact that the mortgage contains the required trust fund covenant should not afford the Bank a priority over subsequently filed mechanics’ liens when in fact no trust fund was created.... (citations omitted). 7 The absence of contemporary funding of the mortgage in Monroe Savings was the reason for holding that a trust fund was not created. In the instant matter there was contemporary funding of the mortgages and, as a consequence Monroe Savings is inapplicable. To affirm the Appellate Division’s decision in this case that Lien Law §13(3) does “not govern the creation of trust funds” is in conflict with this Court’s holding in Nanuet National Bank v. Eckerson Terrace, Inc., 47 N.Y.2d 243, 247 (1979), wherein this Court held that: subdivision (3) of §13 of the Lien Law was amended to strengthen the statutory provisions under which such funds were deemed to be held in trust. Lien Law §13(3) does not exclusively address “priority.” It affords a mortgage priority, Subject To and Only If, a Trust Fund Covenant is inserted in the mortgages. If the parties desire that their mortgage have a priority over mechanic’s liens, they must, as provided by Lien Law §13(3) create and hold the proceeds of the mortgages as a trust fund. While there is no prior authority for holding that Lien Law §13(3) does not create trust funds, there is ample authority that it does create trust funds, see, Roland J. Down, Inc., v. Park-Clif Enterprises, Inc., 86 A.D.2d 741 (3d Dep’t 1982); Church E. Gates & Co., v. B.N. Builders, Inc., 238 A.D. 163 (1st Dep’t 8 1933); and Palm Beach Realty Co., Inc. v. Harry J. Kangieser, Inc., 36 Misc.2d 1058 (Sup. Ct. N.Y. County 1962) aff’d. 19 A.D.2d 862 (1st Dep’t 1963). In Down, the Court, id. at 741, held that: Upon their receipt of the proceeds of their mortgage, the Zorzis became trustees of that money which, pursuant to a clause in their mortgage mandated by subdivision (3) of section 13 of the Lien Law, was to be applied first for the purpose of paying the costs of the improvements to the premises. Such holding is in accord with the facts that the covenant required by Lien Law §13(3) creates trust funds out of mortgage proceeds. In an attempt to distinguish Down, Oliver alleges in its brief at “22”, that the loan in Down “was made to pay for improvements to property,” thereby making the proceeds article 3-A trust funds. However, such allegation is at variance with the facts in Down. Down, id. at 741 reads: ... Zorzi purchased a one-family residence ... for the sum of $82,500. Upon receiving the deed to the premises, the Zorzis simultaneously executed a bond and mortgage ... and received in return $62,825. There is no mention or reference in Down, that the loan was made to pay for improvements to the property, as alleged here by Oliver. To the same effect, see, Gates, where the defendant entered into mortgages containing a trust fund covenant pursuant to Lien Law §13 and a portion of the 9 mortgage proceeds were used to purchase certain other real property, without first paying all contractors. In Gates, the Court found that the defendant had diverted trust funds in that “... the mortgage contained the trust fund covenant for the benefit of mechanics’ lienors.” Id., at 166. And, in Palm Beach, the Court held that pursuant to a deed which “contained the usual covenant pursuant to §13 of the Lien Law, which requires the grantor to receive the consideration as a trust fund to be applied first to the payment of the cost of the improvement”: The defendant “improperly used the consideration paid to it. It was obligated to first pay the cost of the improvement.... it appears that Palm Beach is asserting denomination and control over the trust funds received, and not protecting the position of the supplies and contractors who have first entitlement to the funds.” Oliver’s attempt to distinguish Weber v. Welch, 246 A.D.2d 782 (3d Dep’t 1998) holding that the mortgage proceeds were trust funds by reason that the mortgage “denominated [the mortgage proceeds] as trust funds,” is, likewise, unavailing. The fact that the mortgage proceeds were trust funds does not change the Court’s finding that the parties’ denomination of the mortgage proceeds to be trust funds, as here present, makes them trust funds. 10 Further, notwithstanding whether Lien Law §13 “govern[s] the creation of trust funds,” the mortgages specifically contained a covenant providing that the mortgage proceeds were Lien Law Trust Funds. Mayrich was a third party beneficiary of such covenant and had a right to rely thereon. In Waldman v. New York City, 10 Misc. 3d 1075, p.13 (Sup. Ct. N.Y. County 2005), the Court opined that: ‘The inviolability of contracts, and the duty of performing them, as made, are foundations of all well- ordered society, and to prevent the removal or disturbance of these foundations was one of the great objects for which the constitution was framed’ (... United States Constitution, article I, § 10; see also Matter of East 56th Plaza, Inc. [NYC Conciliation and Appeals Board], 56 N.Y.2d 544, 546... [1982]). To ignore and not to give effect to the clear language of the mortgages’ Trust Fund Covenant, denominating the mortgage proceeds to be trust funds, violates the above constitutional mandate. POINT II THE PROCEEDS OF THE MORTGAGES WERE TRUST FUNDS PURSUANT TO THE LIEN LAWAND OLIVER’S OPPOSITION IS WITHOUT MERIT Oliver argues that Lien Law §§70 and 71 are not applicable because Lien Law §70(1) requires that the proceeds of the mortgages be received “in connection 11 with an improvement of real property” and the proceeds of the mortgages were not received in connection with Oliver’s real property. The Appellate Division agreed and rejected Mayrich’s argument that the proceeds of the mortgages were received “in connection with an improvement of real property,” as required by Lien Law §70(1). The Appellate Division’s decision reads: “[w]e reject petitioner’s argument that the loan proceeds were received in connection with a contract for an improvement of real property....” (emphasis added) The meaning and import of the additional non-statutory language “a contract for” is not known, only that there is no requirement in Lien Law §70(1) that the loan proceeds be received in connection with a “contract.” However, any mortgage funding received by Oliver to further its intended purpose, to develop the combined properties “once it owned all of the contiguous lots,” was received in connection with the improvement of its real property. The Appellate Division’s reasoning for its rejection that the mortgage proceeds used to acquire the 953 parcel was not in connection with the improvement of the real property was that “[a]lthough article 3-A is a remedial statute and is to be liberally construed to carry out its purpose, the courts are not authorized to enlarge that clearly defined purpose....” and, “[t]o hold that funds 12 received for the purpose of purchasing real property became part of a trust constituted for the purpose of improving property would unduly enlarge this clearly defined purpose.” However, the Appellate Division, in coming to its determination, failed to consider the primary purpose of article 3-A; the legislative intent requiring that the Lien Law be liberally construed; and that: a. Lien Law §70(1) does not require that the funds received be used to finance the construction, only that they be used in connection with the improvement. b. Notwithstanding whether Lien Law §13 was a “priority” statute, the parties provided in the mortgage that the acquisition of the additional real property was an “improvement” to the real property and denominated the proceeds of the mortgages to be trust funds. Improvements are defined in the mortgages [R 45, 86] to mean: “Improvements means all structures or buildings... to be erected or now or hereafter located on the premises....” Premises is defined to include parcel 953 the parcel purchased with the mortgage proceeds [R 45, 76]. c. If Oliver is correct and the mortgage proceeds were not trust funds by reason of being intended to purchase additional real property, not related to the improvement, then Oliver was guilty of “pyramiding,” a practice that article 3-A was meant to eradicate. Therefore such funds became trust funds. d. The mortgages not only encumbered the 953 parcel, but in addition they encumbered the previously unencumbered 951, 957, 959 and 961 parcels, upon which Mayrich performed work. Such decreased Oliver’s equity in the unencumbered parcels and the security that Mayrich could have pursued upon Oliver’s non-payment by $21,411.079. 13 The encumbrances placed on the previously unencumbered parcels as security for the mortgages to purchase the 953 parcel was done to acquire the remaining land to develop a complete and unified project. It was done for or “in connection with an improvement” to Oliver’s property. Oliver argues that to hold that mortgage proceeds, intended to be used to purchase real property after the commencement of an improvement, to be trust funds, leads to an absurd result in that “...the developer in such a case could never use borrowed money to buy the property....” See, Oliver brief at 16, 17. However, there are other avenues within which a developer may fund the purchase of real property pursuant to which either such funds are considered a cost of improvement or article 3-A is inapplicable. Lien Law §71(1) provided that the trust assets “of which are owner is trustee ... shall be held and applied for the payment of the cost of improvement.” A developer may purchase real estate with a purchase money mortgage and such sums “paid to take by assignment prior existing mortgages, which are consolidated with building loan mortgages” are a “cost of improvement,” Lien Law §2(5). A noted in Amsterdam Savings Bank v. Terra Domus Corp., 97 A.D.2d 41, 43, 44 (3d Dep’t 1983): 14 a “cost of improvement” includes “sums paid to take by assignment prior existing mortgages, which are consolidated with building loan mortgages” (Lien Law §2, subd. 5), thus providing a borrower with an avenue for using building loan funds to purchase property.... (emphasis added). In addition, the developer’s use of its own funds, monies borrowed from investors and monies borrowed from a lending institution, based upon the developer’s credit, would not quality as trust funds. Oliver’s argument is therefore inaccurate and without substance. CONCLUSION The proceeds of the mortgages were trust funds and Oliver should be compelled to provide Mayrich with a Lien Law §76 verified statement. Dated: Westchester, New York August 22, 2012 Respectfully submitted, THE McDONOUGH LAW FIRM, L.L.P. By: ____________________________________ K. Richard Marcus Attorney for Petitioner-Appellant Mayrich Construction Company 145 Huguenot Street, Suite 320 New Rochelle, New York 10801 (914) 632-4700 Of counsel: Howard S. Jacobowitz, Esq.