November 9, 2000.
Defendant New York City School Construction Authority ("SCA") moves for an order, pursuant to CPLR 32 11 and 3212, dismissing the complaint of plaintiff GTS Contracting Corp. ("GTS"), on the grounds that GTS has failed timely to file a notice of claim. SCA further seeks summary judgment on its counterclaims against GTS. SCA also seeks summary judgment against the causes of action asserted by intervening plaintiff New York Surety Co. ("NY Surety") and plaintiff Citywide Factors, Inc. ("Citywide"), also on the ground that Citywide and N Y Surety failed timely to file notices of claim. N Y Surety cross-moves for summary judgment against SCA.
These consolidated actions arise out of a series of school construction contracts made between SCA and GTS. The SCA has refused to pay the balances due under these contracts, and seeks recoupment of amounts previously paid, claiming that the contracts are all tainted by reason of a bid rigging and bribery scheme carried out by GTS personnel and former two SCA officials, Mark Parker ("Parker") and John Dransfield ("Dransfield"). The alleged conspirators for GTS were its president and sole shareholder, defendant Anastasios Samaras ("Samaras"), and defendant Frank Belesi ("Belesi"), a field superintendent.
The SCA provides extensive details and documentation regarding the alleged bid rigging, including affidavits from Parker (who, after being caught, cooperated with government authorities), and from representatives of the SCA's Inspector General and the New York City Department of Investigation. A summary of the alleged bid rigging scheme, as relevant to this action, follows:
(1) Parker was employed by SCA as a contract specialist. He was responsible for opening bids and the administration of the contract award process. In February 1992, Parker opened bids for work to be done at Sheepshead Bay High School in Brooklyn (SCA Contract #C000005880). During the initial bid opening, all of the other bidders had bid over $500,000, but GTS had bid $306,000. After the bids were opened and GTS was announced as the apparent low bidder, Belesi approached Parker and told him that GTS had mistakenly bid too low. Subsequently, all bids were rejected and the project was ordered re-bid.
(2) During the interim period between the initial bid and the re-bid, Parker met with Samaras and Belesi, and explained to them that if they provided Parker with the lowest cost for which they would perform the project ("the baseline"), Parker would appropriately inflate that amount at the bid opening so that GTS would have the lowest bid, yet still make a profit. Parker said he could arrange this by opening all the other contractors' bids first, and the GTS bid last. Parker would then inflate GTS' baseline to an amount slightly lower than the lowest bidder up to that point.
(3) Before the re-bid opening, GTS submitted to Parker a baseline bid of $406,000 for Sheepshead Bay High School. Parker opened GTS' bid last and announced that GTS had bid $506,000, which was lower than the next lowest bidder, yet still inflated from GTS's baseline bid by $100,000. Shortly after the announcement of the inflated bid, Parker received a substitute bid page at the inflated amount. Sometime after the bid opening, Parker, Samaras and Belesi made an agreement as to how much Parker was to receive for his services.
(4) In July 1992, together with Samaras, Belesi and Dransfield, Parker rigged the bidding on another project, this one involving P.S. 151 in Brooklyn. Parker and Dransfield both received money from this transaction.
Parker first came under investigation in 1992 by the Board of Education and federal authorities. In January 1993, the authorities confronted Parker with what they had learned, debriefed him, and entered into a cooperation agreement. Thereafter, he wore a recording device during his conversations with Dransfield, Samaras and Belesi. Excerpts from the taped recordings are in the motion papers.
On April 20, 1993, fourteen people, including Samaras and Belesi, were arrested in connection with the bid rigging scheme. Dransfield pleaded guilty and is currently serving a sentence in a federal prison. For reasons that are not clear, the U.S. Attorney did not go forward with the prosecution of Samaras and Belesi.
Also on April 20, 1993, SCA informed Samaras and GTS that in light of the arrests, SCA was suspending the contract qualification status of GTS, and SCA directed GTS to cease work on a total of seven projects, one of which was the Sheepshead Bay High School project. In July and August 1993, the SCA informed GTS that it was permanently terminating a whole group of projects, including Sheepshead Bay High School and P.S. 151.
SCA's decision to terminate the GTS contracts, if upheld, would cause losses not only to GTS but also to the subcontractors on those contracts, to the surety, N Y Surety, and to Citywide, which had loaned money to GTS under the terms of a factoring agreement.
Procedural Posture of These Actions
In August 1993, plaintiff Extech Industries, Inc. ("Extech") commenced this case as a class action on behalf of subcontractors, seeking to recover sums which GTS had allegedly failed to pay the subcontractors on the terminated school construction contracts. In April 1994, Justice Solomon granted a motion for class action status. Extech `s claims have been reduced to less than $900 by NY Surety's payment to claimants, and this court is informed that Extech intends to withdraw its claims. However, this court still must consider the Lien Law claims asserted by N Y Surety on behalf of other subcontractors.
In December 1993, Citywide commenced an action seeking to recover $545,162.54 and alleging that the SCA had improperly refused to pay it sums due on seven different contracts where it had advanced money to GTS, which had in turn assigned its entitlement to be paid on those contracts to Citywide.
Citywide also brought an Article 78 proceeding in Supreme Court Queens County seeking to compel the SCA to make the payments at issue. Justice Joseph Lane denied the Article 78 petition, and the Appellate Division affirmed Justice Lane' s decision. See Citywide Factors, Inc. v. New York City School Construction Auth., 228 A.D.2d 499 (2d Dep't 1996).
In September 1994, N Y Surety moved before Justice Solomon for leave to intervene. Justice Solomon granted the motion, and later consolidated the Extech action with the rest of the actions arising out of the termination of the school construction authority contracts. GTS is nominally a defendant in the intervenor complaint, but the real party defendant in interest is the SCA.
In its complaint, N Y Surety asserts a first cause of action as subrogee of GTS; a second cause of action under Public Authorities Law Sec. 1735 and Lien Law Section 12; a third cause of action for unjust enrichment; a fourth cause of action under Article 3-A of the Lien Law; a fifth cause of action for fraud in the inducement of bonds; a sixth cause of action for fraud in the inducement in connection with subcontracts; a seventh cause of action for improper administration of contract, and an eighth cause of action for common law indemnification or contribution. N Y Surety thus asserts claims as subrogee of GTS and as representative of subcontractors seeking to enforce liens against the SCA.
The GTS action against SCA asserts eleven causes of action, alleging that the SCA owed it money in connection with the contracts. SCA asserts both defenses and counterclaims, i.e., that it was entitled to all money that had not been paid to GTS on the contracts at issue, and that based upon GTS's corrupt and fraudulent conduct, the SCA was entitled to recover all sums paid to GTS on April 16, 1992, the date of the first known corrupt conduct. The SCA counterclaims sound in fraud, General Business Law Section 340, and Sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and unjust enrichment. In addition, SCA impleaded Samaras and Belesi as third party defendants.
SCA's Motion for Summary Judgment Based on SCA's, Citywide `s and N Y Surety's Failure Timely to File Notices of Claim
In support of its motion for summary judgment, SCA invokes Public Authorities Law § 1744(2), which states in pertinent part:
No action or proceeding for any cause whatever... [other than personal injury or property damage] relating to the design, construction, reconstruction, improvement, rehabilitation, repair, furnishing or equipping of educational facilities, shall be prosecuted against... [the SCA] unless (i) it shall appear by and as an allegation in the complaint... that a detailed, written, verified notice of each claim upon which any part of such action or proceeding is founded was so presented to the board [of the SCA] within three months after the accrual of such claim...
Public Authorities Law § 1744(1) contains a similar rule with respect to personal injury or property damage claims arising out of construction contracts.
SCA contends that the three month period within which to file a notice of claim with respect to the termination of the contracts at issue began, at the latest, in August 1993, when the last notice terminating the contracts was sent. GTS filed unverified notices of claim within the three month period. N Y Surety did not file a notice of claim until January, 2000 (without obtaining leave of court). Citywide has never filed a notice of claim.
The papers filed by GTS and Citywide in opposition to SCA `s motion do not address the notice of claim issue. Nevertheless, the Court must resolve the notice of claim issue with respect to these parties. GTS filed timely notices of claim, however, these notices of claim were unverified. GTS's failure to verify the notices of claim renders them fatally defective. See Berner v. City of New York, 276 A.D. 1069 (1st Dep't 1950); Tannenbaum v. City of New York, 182 Misc. 109 (App. Term 2d Dep't 1944). Although this may appear to be a harsh rule, this Court is bound by established law and precedent. The failure of GTS to serve proper notices of claim effectively precludes GTS from asserting any of its claims against the SCA.
Moreover, the rights of Citywide, as an assignee, are no greater than that of its assignor, GTS. See generally, New York National Bank v. Primalto Development Construction, Inc., 270 A.D.2d 22 (1st Dep't 2000); Caprara v. Charles Court Associates, 216 A.D.2d 722 (3d Dep't 1995). Thus, Citywide is also barred from asserting its claims.
Although, as stated above, Citywide `s claims are barred under the Public Authorities Law, the Court notes that certain of the claims also lack merit under well settled principles of law. Citywide claims to have been an unwitting victim of the alleged illegal acts committed by GTS. Citywide contends that once the SCA learned of the alleged bid rigging on the contract, it had a duty to disclose the situation to Citywide, and that had the SCA fulfilled that duty, Citywide would not have continued to lend money to GTS. Citywide concludes because SCA did not disclose, the SCA has committed fraudulent concealment.
In the absence of a fiduciary relationship between parties, mere silence regarding a particular fact does not constitute fraudulent concealment. Mobil Oil v. Joshi, 202 A.D.2d 318 (1st Dep't 1994). There is no allegation of a fiduciary relationship here, nor are there any allegations that SCA officials made any express representations to Citywide regarding the honesty and integrity of GTS.
Unlike GTS and Citywide, N Y Surety raises numerous arguments in opposition to the SCA's argument that its intervenor complaint should be dismissed for failure timely to file a proof of claim. First, N Y Surety contends that because SCA failed to specifically plead a defense relating to the notice of claim, it is too late for the SCA to raise the issue.
The seventh affirmative defense in the SCA answer to the N Y Surety intervenor complaint did not specifically refer to "notice of claim," but did say that N Y Surety had failed to comply with the "applicable statutory conditions precedent to the filing of this action." See Notice of Motion, Exh. H. The court finds that this language was sufficient to put N Y Surety on notice that the SCA intended to assert defenses related to non-service or late service of a notice of claim.
In any event, even assuming that this language was insufficient to raise a notice of claim defense, the SCA may nevertheless raise failure to file a proof of claim in this motion. It is axiomatic that a notice of claim is a condition precedent to the commencement of an action against a municipal corporation or authority. Popular Construction, Inc. v. New York City School Construction Authority, 268 A.D.2d 467 (2d Dep't 2000) (decided under Public Authorities Law § 1744). The notice of claim defense can be raised by a municipality at any time, even at the eve of trial. Frank v. City of New York, 240 A.D.2d 198 (1st Dep't 1997).
N Y Surety next contends that Public Authorities Law § 1244 does not apply to claims asserted under the Lien Law. Section 12 of the Lien Law states that at any time before the construction or demolition of a public improvement is completed and accepted by the state or public corporation, and within 30 days after such completion and acceptance, a person performing work or furnishing materials to a contractor, a subcontractor, assignee or legal representative, may file a notice of lien with the head of the department having charge of such construction. N Y Surety claims that it filed a notice of lien in November, 1999, and that such filing was timely under the Lien Law.
N Y Surety states that because it filed a notice of lien within the time frame provided in the Lien Law, the three-month notice of claim rule does not apply. However, N Y Surety provides no case authority for this proposition. Public Authorities Law § 1744 contains very broad language which refers to any type of contract-based claim arising out of a construction contract. There is no inconsistency between requiring a party intending to assert a lien against a municipality to comply with both the statutory notice of claim requirement and the Lien Law requirements. Moreover, there is nothing in the Lien Law which states that notice of claim requirements do not apply to lienors. Thus, assuming that N Y Surety's filing of a lien on November 10, 1999 was timely under the Lien Law, this filing does not satisfy the notice of claim time requirement of the Public Authorities Law.
N Y Surety also claims that other actions it has taken, such as serving the intervenor complaint, and sending letters to various individuals at the SCA, satisfy the notice of claim requirement. The Court disagrees. The service of the intervenor complaint by NY Surety does not constitute the service of a notice of claim. Bushwick Housing Systems v. City of New York, 182 A.D.2d 531 (1st Dep't 1992).
N Y Surety contends that a letter its former counsel, Donald Carbone, Esq. sent to Soraya Berg, Esq., counsel for the SCA, on May 2, 1994, constitutes a de facto notice of claim. See Exhibit E to N Y Surety's cross-motion. There are several reasons why this letter can not substitute for a notice of claim. First, the letter is unverified and is addressed to counsel, rather than to the board of the SCA (as required by statute). Moreover, the letter refers generally to the contractual disputes in question and seeks to set up a meeting with SCA counsel to discuss the matter, but gives virtually no details regarding the nature of the claims.
N Y Surety also seeks to bootstrap itself onto the notices of claim served by GTS and Extech. However, N Y Surety may not rely on GTS's notice of claim because, as explained above, GTS's notice of claim is defective. Moreover, Extech's notice of claim, served on September 7, 1993, did not seek to assert claims on behalf of anyone except Extech. Thus, Extech's notice of claim does not help N Y Surety.
Finally, N Y Surety seeks leave from this court to serve a late notice of claim. In effect, it is seeking to have the court deem its January 2000 service of a notice of claim to be valid nunc pro tunc. However, an application to file a late notice of claim must be made within a reasonable time after the claim arises. Here, NY Surety's claim arose when the damages became ascertainable, i.e., when the SCA gave notice that it had rescinded all the contracts at issue, in August 1993. N Y Surety's service of a notice of claim more than six years after that event can hardly be said to have been reasonable.
A claim for breach of contract accrues when a contractors' damages became ascertainable. See P C Giampilis Contracting, Co., Inc. v. New York City School Construction Authority, 211 A.D.2d 524 (1st Dep't 1995).
In sum, the Court finds that GTS's, N Y Surety's and Citywide's claims must all be dismissed for failure to comply with the notice of claim requirements of the Public Authorities Law. Thus, the only part of this consolidated action which remains is SCA's counterclaim to recoup payments previously made on GTS `s contracts.
SCA's Application for Summary Judgment on its Counterclaims
The SCA contends that by reason of the alleged bid rigging and/or bribery in connection with the P.S. 151 and Sheepshead Bay High School contracts, it is entitled to recoup sums paid under these and all other GTS construction contracts. In opposition, GTS contends that it was the victim of extortion on the part of Dransfield and Parker. In his affidavit filed in opposition to this motion, Samaras denies having rigged any contract bids. Although Samaras admits having made payments to Parker, he contends that Parker compelled him to make those payments. See Samaras Aff.
In S.T. Grand, Inc. v. City of New York, 32 N.Y.2d 300 (1973), a city commissioner, who took kickbacks on a contract that had been made without competitive bidding, was convicted of the use of interstate facilities to violate state anti-bribery laws. The court held that illegality tainted the entire contract, and the City was entitled to recover payments that had been made on the contract. Cases following Grand have generally held that illegality results in a forfeiture of the entire contract. See, e.g., City of New York v. Lieberman, 232 A.D.2d 42 (1st Dep't 1997).
In an attempt to avoid the effect of Grand, GTS cites Gerzof v. Sweeney, 22 N.Y.2d 297 (1968). In Gerzof, plaintiff had unsuccessfully sought to sell a generator to a municipality; there had been at least two bids, and plaintiff's bid was not the lowest. Subsequently, through illegal acts, plaintiff's representatives persuaded the village trustees to write the contract specifications to call for a larger generator. The specifications were rigged so that it was difficult, if not impossible, for anyone other than plaintiff to meet them.
When plaintiff sued to recover for amounts due under the contract, the Court of Appeals held that, under these circumstances, plaintiff would not suffer a forfeiture of the entire contract. Instead, plaintiff's recovery was reduced by the difference between the amount of the lowest responsible bid on the original contract specifications and plaintiff `s higher bid on the modified contract specifications. The Court of Appeals explained that in Gerzof, damages occasioned by plaintiff's action were readily ascertainable, and the illegality affected only the final stage of the municipal contract process, while in Grand, the illegality related to the origin of the process.
The SCA's allegations, if ultimately proven, appear to fit more closely to Grand than Gerzof. However, if GTS proves that it is the victim of extortion, it will may well avoid a forfeiture. See Hornstein v. Paramount Pictures, 292 N.Y. 468 (1944).
Here, the SCA has submitted strong evidence of the bid rigging scheme. In addition to Parker's affidavit, the SCA proffers affidavits of its investigators, and Belesi's deposition transcript. Belesi was deposed in 1998. SCA states that Belesi's role, although less than that of Samaras, was also significant. SCA claims that Belesi was involved in whiting out a bid on the P.S. 151 project, and Belesi appears numerous times on the taped conversations obtained by Parker. Most significantly, Belesi admitted that on the Sheepshead Bay project, GTS had changed the bid.
Belesi took the Fifth Amendment numerous times during his deposition. SCA contends that Belesi's invocation of the Fifth Amendment results in an unfavorable inference against GTS. This may well be the case, provided that Belesi is deemed to be the alter ego of GTS.
Although he submitted an affidavit on this motion denying any wrongdoing, Samaras, at his deposition, claimed not to remember many of the events in issue here. This apparent inconsistency damages Samaras' credibility, however, this inconsistency is not itself sufficient for judgment in favor of the SCA as a matter of law.
Similarly, Parker's affidavit, although damaging to GTS, is also not sufficient to establish SCA's entitlement to summary judgment as a matter of law. Parker was most likely facing prison if he did not cooperate with federal investigators, thus he cannot be viewed as a completely objective witness.
Finally, because prosecutors never brought Belesi and Samaras to trial on bid rigging or bribery charges, they have never had their day in court. Under these circumstances, and because credibility determinations must be made to determine the SCA's counterclaims, the Court declines to grant the SCA judgment on its counterclaims.
Accordingly, the motion of the SCA for summary judgment is granted to the extent of dismissing the claims of GTS Contracting Corp., Citywide Factors, Inc. and New York Surety, Inc., and is denied with respect to the counterclaims of SCA against GTS. The cross-motion of the New York Surety, Inc. for summary judgment is denied.
The foregoing constitutes the decision and order of this court.