# 2013-015-455 Claim No. 120992 Motion No. M-83608 Cross-Motion No. CM-83757
Defendant's allegations of fraud in both the inducement and performance of the contract were permitted under the doctrine of equitable recoupment pursuant to CPLR 203 (d).
UID: 2013-015-455 Claimant(s): TUTOR PERINI CORPORATION, f/k/a PERINI CORPORATION Claimant short name: TUTOR PERINI Footnote (claimant name) : Defendant(s): THE STATE OF NEW YORK Footnote (defendant name) : Third-party claimant(s): Third-party defendant(s): Claim number(s): 120992 Motion number(s): M-83608 Cross-motion number(s): CM-83757 Judge: FRANCIS T. COLLINS Duane Morris, LLP Claimant's attorney: By: Mark Canizio, Esquire, Allen J. Ross, Esquire Jessica Singh, Esquire Honorable Eric T. Schneiderman, Attorney General Defendant's attorney: By: Eidin Beirne, Esquire Assistant Attorney General Third-party defendant's attorney: Signature date: December 9, 2013 City: Saratoga Springs Comments: Official citation: Appellate results: See also (multicaptioned case) Decision
Claimant, Tutor Perini Corporation, seeks damages for breach of a public improvement contract allegedly arising from extra work and delays incurred during the performance of the project. Defendant moves to amend and supplement its answer, and to expand upon its allegations of fraud in both inducing the contract award (first proposed defense and counterclaim) as well as in performance of the contract work (second proposed defense and counterclaim). Claimant opposes the motion and cross-moves for summary judgment dismissing the first affirmative defense and first and second counterclaims in the defendant's original answer relating to defendant's allegations of fraud.
In June 2000, Perini Corporation (Perini) entered into a contract with the New York State Department of Transportation (NYSDOT) for the reconstruction of 3.2 kilometers of highway and 14 bridges on Interstate 495 in Douglaston, New York (defendant's Exhibit 5). Among the contract's Standard Specifications is the requirement that Perini utilize Minority and Women's Business Enterprises (M/WBEs) in accordance with the goals set forth in the contract proposal (see claimant's Exhibit 5, Standard Specifications, § 102-21; see also Executive Law article 15-A; former 5 NYCRR 143.4, 143.5, 143.9). The Standard Specifications make clear that in the event of a bidder's failure to comply with the M/WBE requirements "the bid may be declared incomplete and the deposit may be subject to forfeiture" (claimant's Exhibit 5, Standard Specifications, § 102-21; see also Executive Law article 15-A; former 5 NYCRR 143.4, 143.5. 143.9). A partial or total waiver of the M/WBE requirements is available where the contractor establishes that its good faith efforts to meet the M/WBE goal requirements have failed (claimant's Exhibit 5, Standard Specifications, § 102-21; see also Executive Law § 313 ; 5 NYCRR 143.7).
The first affirmative defense in the answer, dated May 4, 2012, alleges the claimant fraudulently induced the defendant to enter the contract by representing in its schedule of utilization (AAP 19-C) and associated forms that claimant would utilize Northeast Construction., Inc. (Northeast), a minority enterprise, to perform a portion of the work. Defendant asserts this representation was false and that it was fraudulently induced to enter the contract in reliance thereon (see claimant's Exhibit 3, Verified Answer and Counterclaim, pp. 4-5). Defendant seeks rescission of the contract and the return of all monies paid to the claimant in the amount of $151,842,985.61. Based upon these same facts, the defendant alleges as its first counterclaim that the contract is void ab initio and demands the return of all monies paid on the contract.
In its second counterclaim, defendant alleges that after being awarded the contract, claimant advised the defendant that it intended to substitute Fairview Contracting Corp. (Fairview), which claimant represented to be a qualified minority business enterprise, as a subcontractor in place of Northeast. However, notwithstanding claimant's representations, defendant alleges that "[c]laimant permitted the work purportedly subcontracted to Fairview to be performed by an entity known as Walter Construction Associates or Walter Bale or [c]laimant's own forces" (claimant's Exhibit 3, Verified Answer and Counterclaim, p. 11, ¶ 16). Defendant alleges further that claimant knew or should have known that its representations were false and that the work subcontracted to Fairview was not performed by that entity. It is alleged that claimant intended to and did mislead and deceive the defendant, and accepted payments under the contract with knowledge that they were based upon its false misrepresentations. Defendant contends that claimant's fraudulent conduct violated public policy and the statutes enacting the M/WBE contracting requirements thereby entitling it to punitive damages in a sum of not less than $151,842,985.61 (claimant's Exhibit 3, Verified Answer and Counterclaim, p. 12, ¶¶ 19, 24).
In its proposed Supplemental Verified Answer and Counterclaim (defendant's Exhibit A), defendant alleges as its first affirmative defense that in June-July 2000 claimant represented that it intended to satisfy the M/WBE goals established in the contract documents "by engaging the services of certain subcontractors, including Northeast Construction, Inc., ('Northeast'), Landsite Contracting ('Landsite') and Andrea Doreen Construction, Inc. ('Andrea Doreen'), which entities [c]laimant represented were certified minority/women's business enterprises" (defendant's Exhibit A, proposed Supplemental Verified Answer and Counterclaim, ¶ 30). According to the defendant, these representations were made on or about June 6, 2000 in a schedule of utilization form, in various M/WBE worksheets dated June 7, 2000, in an "updated M/WBE goal plan" presented on or about July 7, 2000 and in worksheets dated July 12, 2000 (id. at pp. 5-6, ¶ 31). Defendant alleges that "[a]t the time [c]laimant furnished [d]efendant with its schedule of utilization, its worksheets and its various representations, [c]laimant had no intention of engaging the services of Northeast, Landsite or Andrea Doreen to perform work on the contract" (id. at p. 6, ¶ 35). Defendant alleges that it was induced to enter the contract in reliance upon claimant's representations, which it would not have done had it known the claimant's representations were false (id. at p. 7, ¶ 37). Defendant alleges in the first proposed affirmative defense that as a result of claimant's false and fraudulent conduct, the contract was rendered void and claimant is estopped from seeking recovery under the parties' contract.
As its second proposed affirmative defense, defendant alleges that at the time claimant presented its bid, claimant was "engaged in a criminal conspiracy with Landsite and with other subcontractors, including Fairview Construction ('Fairview') and A. Morrison Trucking ('A. Morrison') to defraud governmental entities, including [d]efendant, by circumventing and evading the M/WBE and/or Disadvantaged Business Enterprise requirements of several public construction contracts, including the subject contract, through means of knowingly false representations that said subcontractors were performing work when, in fact, they were not so doing" (id. at p. 7, ¶ 40). Defendant contends the claimant knew or should have known that the work of Fairview was performed by Walter Bale or Walter Construction or by the claimant; that the work purportedly performed by Landsite was actually performed by either Seneca Contracting, Charles Kupfer, William Gelson or Perini's own forces, and that the work purportedly performed by A. Morrison was actually performed by Morrison Trucking and other unknown parties, none of whom were qualified M/WBEs (id. at pp. 7-8, ¶ 41). Defendant further alleges that claimant facilitated payment to Fairview's steel supplier in a fraudulent scheme to obtain credit toward its M/WBE goals (id. at p. 8, ¶ 43). With respect to the machinations of the alleged scheme, defendant sets forth the following:
"47. In the course of performance of its contract and in furtherance of the aforesaid scheme, [c]laimant knowingly accepted false billings and/or invoices for work purportedly performed by certain subcontractors, to wit, Fairview, Landsite and A. Morrison and [c]laimant further made payments to said subcontractors in the knowledge that neither Fairview no[r] Landsite had performed the work for which [c]laimant had been billed and that A. Morrison had not performed all of the work for which [c]laimant had been billed."
48. In furtherance of its contract performance and for the purpose of securing payments from [d]efendant, [c]laimant furnished false and fraudulent documentation, including subcontractor certified payrolls and AAPHC-89 forms, to Defendant containing representations that certain work ('the reported work') had been performed by certain purported M/WBE subcontractors, to wit, Fairview, Landsite and A. Morrison, when, in fact, the reported work had not been performed by these subcontractors" (id. at p. 9, ¶¶ 47-48).
Defendant alleges that the aforesaid conspiracy and fraud involving representatives of the claimant, Fairview and Landsite formed the basis for federal criminal indictments against Zohrab Marashlian, President of Perini's Civil Division, and John Athanasiou, the Director of Purchasing for claimant's Civil Division (id. at p. 10, ¶ 49). Defendant asserts in its proposed second affirmative defense that claimant is estopped from recovery under the contract.
The factual allegations forming the basis for defendant's proposed defenses of fraud in the inducement (first affirmative defense in defendant's proposed Verified Answer and Counterclaim) and fraud in the performance of the contract (second affirmative defense in defendant's proposed Verified Answer and Counterclaim) also form the factual predicate for its first and second proposed counterclaims. Defendant's first proposed counterclaim alleges that claimant's "representations were made with the intention that [d]efendant should act upon them and were false and fraudulent to the knowledge of [c]laimant in that at the time it made such representations [c]laimant had no intention of engaging the services of any of the aforesaid subcontractors" (defendant's Exhibit A, proposed Verified Answer and Counterclaim, p. 15, ¶ 8). Defendant alleges that it entered into the contract with claimant in reliance on these representations, which it would not have done had it known the claimant's representations were false (id. at p. 15, ¶ 9). Defendant alleges further that, as the result of these fraudulent representations, it was prevented from identifying the lowest responsible bidder (id. at pp. 15-16, ¶¶ 11, 12) and paid claimant $151,842,985.61 in discharge of its obligations under the contract (id. at p. 15, ¶ 10). In its first proposed counterclaim defendant alleges, as it did in its first proposed affirmative defense, that the contract is void ab initio (id. at p. 16, ¶ 13). In addition, defendant seeks affirmative relief in a sum equal to that which it paid the claimant for work performed under the contract ($151,842,985.61) (id. at p. 16, ¶ 14).
Defendant's proposed second counterclaim, like its proposed second affirmative defense, alleges claimant committed fraud in the performance of its contractual obligations by submitting records and reports regarding its compliance with the M/WBE requirements that it knew or ought to have known were false, resulting in payment which was not merited under the terms of the parties' contract. Defendant alleges claimant's fraudulent representations were "directed at [d]efendant, the taxpayers of the State of New York and the public generally and were intended by [c]laimant to deprive legitimate qualified M/WBEs of the opportunity to participate in the contract, to circumvent the policy and statutes of the State of New York and to deceive and mislead the [d]efendant" (id. at p. 20, ¶ 37). As a result of this alleged conduct, defendant seeks punitive damages in the sum of $151,842,985.61 (id. at p. 21, ¶ 43).
In opposition to the defendant's motion and in support of its dismissal motion, claimant first argues that the fraud defenses and counterclaims are barred by the applicable statute of limitations (see CPLR 213 ).
CPLR 213 (8) provides that "the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it."
Claimant contends that defendant knew or should have known of the purported fraud years before its fraud claims and defenses were asserted in 2012 but, in any event, no later than January 13, 2009 when indictments against two of Perini's employees, Zohrab B. Marashlian and John Athanasiou were unsealed (claimant's Exhibit 18). Both Marashlian and Athanasiou were indicted on charges of conspiracy to commit mail fraud, mail fraud and money laundering in the United States District Court, Eastern District of New York, on December 18, 2008 (id.). The indictment included charges that Marashlian and Athanasiou devised a scheme to defraud government contracting agencies, including the NYSDOT, by falsely representing in proposals and other documents submitted by Perini to the NYSDOT that Landsite and Fairview would perform commercially useful functions in satisfaction of the M/WBE requirements of the subject contract, among others, when in fact these M/WBE contractors served merely as fronts for the performance of the work by other non-M/WBE contractors (id. at pp. 5-9). Marashlian was found guilty and reportedly committed suicide following the verdict on or about March 11, 2011. Athanasiou pled guilty to one count of the indictment on October 29, 2010 (defendant's Exhibit 14).
The contract's Standard Specifications require that an M/WBE perform a "commercially useful function". The "commercially useful function" standard is met when an M/WBE "is responsible for the execution of a distinct element of work on a contract and carries out his/her responsibilities by actually performing, managing, and supervising the work involved . . . [I]f the arrangement erodes the ownership, control or independence of the M/WBE or in any other way does not meet the commercially useful function requirement, the Contractor shall receive no credit toward the goal" (claimant's Exhibit 5, Standard Specification, p. 1-38, §102-21 [E]). The contract also makes clear that "[t]he M/WBE firm must employ a workforce separate and apart from that employed by the Prime Contractor" and prohibits "routine transfer of work crews from another employer to the M/WBE" (id.).
Mr. Athanasiou described the scheme in his plea colloquy as follows: "From 1988 to 2007 I work[ed] for this company Perini Corporation and . . . I understood that every contract we got with the City or the State or the DEP or the Port Authority have requirements for minority [participation]. And what the company did . . . they were using no[n] minorities to do the job but they put the contract to a minority and they were paying those guys three to five percent of the job. So these guys, they made all the payrolls, they made all the required forms for the owner. It was just like a front. And I was there" (defendant's Exhibit 14, p 26).
Aside from the indictments of Perini personnel, claimant contends that defendant could
have discovered the fraud as early as 2002 when it notified the NYSDOT that counting the work of Landsite, Fairview and J. Blanco in meeting the contracts M/WBE goals "may not be consistent with applicable M/WBE regulations" and that no M/WBE credit would be taken for work performed by those entities (see claimant's Exhibit 12). Thereafter, by letter dated November 1, 2002, Gerard Bassi, Perini's Vice President, Chief Engineer and EEO Officer, requested a meeting to discuss M/WBE compliance issues for several construction projects that were then underway - the subject project on the LIE/Cross Island Interchange in Queens, a State funded project, as well as two projects that were funded, in part, by the federal government and administered by the New York City Department of Transportation (NYCDOT). The other projects involved the reconstruction of the Queens Boulevard Bridge over the Sunnyside Railroad Yard and replacement of the connector ramp to the Williamsburg Bridge (defendant's Exhibit 3, annexed to Maestri affidavit). The meeting held on November 25, 2002 was attended by personnel from each of the projects, including Ann Maestri, Civil Rights Compliance Manager for the Office of Construction and the Local Programs Bureau of the NYSDOT, and representatives of the New York City Department of Transportation (NYCDOT) and their respective legal counsel (claimant's Exhibit 39). Maestri admittedly was informed at the meeting that Perini would not seek M/WBE credit for either Landsite or Fairview but states that when pressed for an explanation "Perini's lawyer[ ] intervened and stated that for reasons of privilege Perini could not elaborate" (Maestri affidavit, ¶ 10). Defendant admitted in response to an interrogatory, however, that during the meeting it "learned of a potential investigation by the United States Justice Department involving [c]laimant's participation in [M/WBE] programs in connection with New York public construction projects" (claimant's Exhibit 40, interrogatory response no. 20).
On November 11, 2002, shortly before the meeting regarding Perini's M/WBE compliance under both the NYSDOT and NYCDOT contracts, both Maestri and Kathy Ingalls, another NYSDOT employee, attended a meeting to discuss "General Contractor's (Perini) Failure with Contract Compliance" in meeting the M/WBE goals on the NYCDOT's Queens Boulevard Bridge project (claimant's Exhibit 36, p. 1 of 4). At the meeting, the following information was shared with respect to Perini's M/WBE compliance on NYSDOT projects:
"6. NYS/FHWA expressed to NYCDOT their dissatisfaction with Perini's filing of paperwork and explanation on the shortfall of DBE goal, which were reviewed by NYSDOT and FHWA and described Perini's actions as follows:
a. Perini has demonstrated a 'total lack of good faith effort'.
b. Perini has made 'no effort' whatsoever to make good on his contractual obligation of the DBE goals.
c. Perini has provided 'contrived paperwork in an effort to prove higher DBE participation'.
d. Perini has 'blazed through work without regard to DBE participation'.
e. Perini is 'acting as a compliance specialist', especially, with respect to the non-accounting of Fairview's actual work performed as a DBE" (id. at p. 2 of 4).
In 2003, Perini notified the NYSDOT that "[i]n order to meet the project's needs, A. Morrison Trucking employed other trucking firms to supplement his trucks. Therefore, to comply with the provisions for M/WBE participation, the only amounts that Perini will count toward the goals are those associated with trucks specifically provided by A. Morrison Trucking or a certified M/WBE firm" (claimant's Exhibit 13, ¶ 3).
In 2004, NYSDOT was served with a subpoena requiring production of documents relating to several NYSDOT contracts and was advised by the United States Department of Transportation, Office of the Inspector General (IG), that D/M/WBE (Disadvantaged, Minority or Women's Business Enterprise) practices were being investigated in the New York City area (Maestri affidavit, ¶ 13). According to Maestri, she was not advised that Perini was the subject of an investigation or that the investigation was criminal in nature (id.).
On September 29, 2004, a criminal information was filed in the United States District Court, Eastern District of New York, charging Stephen Funny, President of Fairview, with conspiring with Perini and non-M/WBE subcontractors to "transfer all invoices and expenses related to Non-DBE Subcontractor to the books and records of Fairview, a certified DBE, so that Perini could falsely represent to NYSDOT that Fairview was actively performing the subcontracting work" (claimant's Exhibit 23, p. 4, ¶ 11). The criminal information included work performed on the subject contract as well as others (id. at p. 6, ¶ 18). Mr. Funny pled guilty, as reported in a press release by the IG's office on September 29, 2004 (claimant's Exhibit 24).
According to Ms. Maestri, it was not until 2005 that she learned from the IG's office that Stephen Funny of Fairview and Walter Bale, President of Walter Construction, had pled guilty in the illegal "fronting" scheme (Maestri affidavit, ¶ 14). Maestri states further that she learned in 2007 that Adraino Lott, principal of Landsite, pled guilty in connection with the scheme (id.; see also claimant's Exhibit 29, 2007, indictment against Lott).
On October 2, 2007, an article published in Newsday.com revealed not only the indictment against Adriano Lott, but that "Perini Corp., one of the nation's major construction firms . . . is under investigation as part of an ongoing national probe into suspected fraud in the granting of government contracts intended for minority-owned businesses, according to court papers" (claimant's Exhibit 30).
In e-mail correspondence dated December 13, 2007 William Howe, the Director of the NYSDOT Contract Management Bureau, acknowledged his awareness that indictments had been filed against several "sham DBE's [Disadvantaged Business Enterprises] who were working on Perini jobs" and that the NYSDOT has "been following the matter quite closely" (claimant's Exhibit 31). Although Mr. Howe stated in the e-mail that "[w]hen we found sufficient evidence to indicate potential criminal activity we referred it to the appropriate enforcement agencies" (id.), he states the following in an affidavit submitted in opposition to claimant's cross motion:
"I believe that I misspoke when I stated that the indictments resulted from the Department's review of DBE compliance. They were actually the results of a federal inquiry. My statement was based on the fact that federal investigators had requested and been furnished with Department records documenting the participation of various subcontractors on more than one project. At that time I had no knowledge of criminal activity, potential or otherwise, by Perini" (Howe affidavit, p. 5, ¶ 7).
Defense counsel points out that although Perini's counsel had been informed by letter dated January 8, 2007 from the U.S. Department of Justice (USDOJ) that Perini was the subject of an investigation relating to M/WBE fraud (defendant's Exhibit 13), the NYSDOT was not advised of this fact until April 3, 2008 in a Uniform Contracting Questionnaire submitted in connection with another contract (see claimant's Exhibit 20).
By letter dated January 30, 2009, Perini informed the NYSDOT that the United States Attorney's Office (USAO) had been conducting a broad investigation concerning subcontracting arrangements between general contractors, including Perini, and M/WBE firms in the New York City area which, with regard to Perini, focused on the activities of Marashlian and Athanasiou. The letter, which references in the subject line a different contract than the one at issue here, advised that "[o]n January 13, 2009, an indictment was unsealed in the EDNY against these two former employees for subcontracting irregularities between 1998 and 2003" (claimant's Exhibit 19). The letter also advised that the USAO had determined not to bring any criminal charges against Perini and "the matter would best be resolved by a purely civil settlement" (id. at p. 1-2).
In a press release dated November 5, 2009, the USAO announced a $9.75 million settlement "of claims that Tutor Perini Corporation, formerly Perini Corporation . . . falsely and fraudulently reported that certain minority and disadvantaged business enterprises ('DBEs') were performing subcontracted work on federally funded public works contracts with the City and State of New York, when in fact non-DBE subcontractors were performing the work" (claimant's Exhibit 22).
Ms. Maestri indicates that she did not learn that Marashlian and Athanasiou had been indicted until 2010; however, with respect to Perini's participation in the fronting scheme, Maestri avers that "it was not until the Marashlian trial [in 2011] that I or, to the best of my knowledge, anyone at the Department became aware of the nature, scope and details of Perini's involvement in the scheme uncovered by the federal investigation that had infected multiple projects, including the LIE contract" (Maestri affidavit, ¶ 16).
Claimant contends the defendant's fraud counterclaims are barred by the applicable statute of limitations since the defendant knew or should have known of the facts giving rise to the alleged fraud as early as 2002, but no later than January 13, 2009 when the indictments against Marashlian and Athanasou were unsealed. In addition, claimant contends that recoupment is not permitted under CPLR 203 (d) because the allegations of fraud in the inducement do not arise from the same transaction or occurrence or series of transactions or occurrences upon which the claim depends. Defendant, on the other hand, contends that it could not have known the "nature, scope and details" of Perini's involvement in the fraud until the Marashlian trial in 2011, thereby rendering its fraud claims timely (Maestri affidavit, p. 8, ¶ 16). Defendant further asserts that, separate and apart from its claims for affirmative relief, its fraud defenses and counterclaims permit an offset against any recovery to which claimant may be otherwise entitled under the doctrine of equitable recoupment. Claimant's contrary assertion notwithstanding, defendant asserts that its defense and counterclaim alleging fraudulent inducement of the contract award arise from the same transaction and occurrence as the claimant's breach of contract claim, which, at the very least, gives rise to an equitable recoupment claim under CPLR 203 (d).
Timeliness aside, claimant contends the defendant's first defense and counterclaim are duplicative of a breach of contract claim and therefore must be dismissed. Claimant asserts in this regard that defendant's allegations of fraudulent inducement amount to nothing more than an insincere promise to perform a future act, which is not collateral to the contract and therefore insufficient to support a fraud cause of action. As to the factual allegations underlying the defendant's fraud allegations, claimant contends that its representations regarding M/WBE subcontractors were immaterial because the M/WBE utilization plan was subject to modification and did not require the use of particular M/WBE contractors. For this same reason claimant contends the defendant did not rely upon its pre-award utilization plan, because it was not a representation of existing fact but, rather, merely a representation that Perini might subcontract with certain firms in the future. Claimant supports this contention with reference to the contract's standard specifications and the utilization form itself (claimant's Exhibits 5 and 6), both of which permit changes in the utilization plan with the approval of the Director of the Division of Minority and Women's Business Development. Claimant asserts that any deviations in the procedure for modifying the M/WBE utilization plan amount to a claim for breach of contract, not fraud. Claimant also argues that no fraud occurred because its utilization plan was revised to exclude Landsite and Fairview and reduce its claimed M/WBE credit for A. Morrison Trucking.
Defendant counters claimant's argument that its allegations of fraud in the inducement constitute no more than a breach of contract claim with the contention that the contract award was induced by claimant's misrepresentations contained in certain forms (AAP-19C and AAPHC-89). William Howe, Director of the NYSDOT Contract Management Bureau, states that once the lowest bidder on a contract has been identified, a responsibility review is undertaken which includes an assessment of whether or not the bidder has met the M/WBE goals or otherwise established a good faith effort to meet them (Howe affidavit, ¶ 3). He avers that "[f]ailure by the lowest bidder to provide the utilization forms within seven days of opening of bids or attainment of the goal and to demonstrate its good faith effort to do so, may result in the bid being declared incomplete and forfeiture of the contractor's bid deposit" (id.; see alsoformer 5 NYCRR 143.4). Mr. Howe states that although the contract contains no restriction on the contractor's ability to replace one subcontractor for another, any such action requires approval by the NYSDOT (Howe affidavit at ¶ 5; see also defendant's Exhibit 1 attached to the Howe affidavit, § 108-05 of contract's Standard Specifications). To the extent claimant contends that its representations regarding its intent to contract with any particular M/WBE contractor was merely a "proposed plan" and not a representation of existing fact, Mr. Howe points to the statement on the pre-award D/M/WBE Utilization Worksheet, which was submitted by Perini together with the AAP-19C schedule of utilization, that "[t]he Contractor and Subcontractor hereby certify that the subcontract is in writing, and contains all the pertinent provisions of the prime contract in regard to Federal and State Laws and Regulations" (claimant's Exhibit 6, D/M/WBE Utilization Worksheet dated July 7, 2000). Defendant contends, therefore, that Perini's misrepresentations regarding its pre-award intent to retain M/WBE contractors to fulfill its M/WBE goals under the contract were collateral to the contract itself and served as a material inducement to the contract award.
Highway Law § 38 (3) requires that a contract for the construction of a "highway or section thereof shall be awarded to the lowest responsible bidder, as will best promote the public interest."
To the extent defendant seeks rescission of the contract and the return of all monies paid to Perini, claimant argues that such a remedy is inappropriate inasmuch as the contract work was fully completed in December 2004 and formally accepted by the State in February 2006. In opposition defendant relies upon the rule of law applicable to public contracts that where work is done pursuant to a contract induced by fraud, no recovery may be had by the contractor and the return of all monies paid to the contractor is required.
Claimant contends that punitive damages are not recoverable where the claim has its genesis in a contractual relationship and no tort independent of the contract itself is alleged. In opposition to this branch of claimant's motion, defendant argues that punitive damages are appropriate where the breach of a duty arising independent of a contractual obligation is part of a pattern of similar conduct that results in damage to the public generally.
Lastly, claimant argues that the Executive Law provisions governing the M/WBE requirements for State contracts affords an aggrieved party no private right of action for violations of its provisions.
Timeliness of the Defendant's Fraud Defenses and Counterclaims
An action based upon fraud must be commenced "six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it" (CPLR 213 ; 203 [g]; Delaware County v Leatherstocking Healthcare, LLC, 110 AD3d 1211 [3d Dept 2013];Sandpebble Bldrs. Inc. v Mansir, 90 AD3d 888, 889 [2d Dept 2011]; Oggioni v Oggioni, 46 AD3d 646, 648 [2d Dept 2007]). "The inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was 'possessed of knowledge of facts from which [the fraud] could reasonably be inferred' " (Sargiss v Magarelli, 12 NY3d 527, 532 , quoting Erbe v Lincoln Rochester Trust Co., 3 NY2d 321, 326 ). While this inquiry is ordinarily a mixed question of law and fact (Trepuk v Frank, 44 NY2d 723, 724-725 ; House of Spices (India), Inc. v SMJ Servs., Inc., 103 AD3d 848, 849 [2d Dept 2013]), it may be decided as a matter of law where the evidence unequivocally establishes the date the party asserting the claim possessed facts sufficient to put him or her on notice of a potential fraud (Elhannon, LLC v Brenda J. DeLuca Trust, 108 AD3d 911, 913 [3d Dept 2013]). As a result, a party seeking the benefit of the discovery provision set forth in CPLR 213 (8) may not ignore circumstances suggesting he or she has been defrauded:
Actions brought by the State are subject to the time limitations set forth in Article 2 of the CPLR (see CPLR 201).
"[W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him" (Higgins v. Crouse, 147 NY 411, 416 ; see also CSAM Capital, Inc. v Lauder, 67 AD3d 149 [1st Dept 2009]; Prand Corp. v County of Suffolk, 62 AD3d 681 [2d Dept 2009]; Prestandrea v Stein, 262 AD2d 621 [2d Dept 1999]).
Here, claimant met its burden of establishing as a matter of law that defendant's first and second counterclaims alleging fraud both in the inducement and performance of the contract are barred by the Statute of Limitations applicable to fraud actions set forth in CPLR 213 (8) (see Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065, 1067-1068 ; Vilsack v Meyer, 96 AD3d. 827, 829 [2d Dept 2012];). It is undisputed that defendant's fraud counterclaims were asserted more than six years after the fraudulent inducement or performance of the contract allegedly occurred. To the extent defendant asserts that it was not until the Marashlian trial in 2011 that the "nature, scope and details of Perini's involvement" in the fraud became known (Maestri affidavit, p. 8, ¶ 16), the Court finds that, upon the facts related previously herein, the record evidence supports the conclusion that the NYSDOT possessed facts putting it on notice of potential fraud involving the subject contract as early as November 25, 2002. The evidence is unequivocal, however, that on January 30, 2009 Perini advised the NYSDOT that as the result of the USAO's investigation of Perini's subcontracting arrangements with M/WBE firms in the New York City area, Marashlian and Athanasiou, Perini employees, had been indicted (claimant's Exhibit 19). Review of the indictment against these employees, which was unsealed on January 13, 2009, would have clearly revealed that the charges against Marashlian and Athanasiou were based, in part, on their alleged fraudulent conduct relating to the subject contract. The indictment asserts the two Perini employees:
"devised a scheme to defraud government contracting agencies, to wit: the USDOT, the NYSDOT, the City of New York and the NYCDOT, by falsely representing in proposals and other documents submitted by Perini to those agencies for public works contracts , to wit: . . . the Long Island Expressway project in Queens, New York, . . . that Land-Site, VVSS and Fairview . . . would perform commercially useful functions in satisfaction of the DBE requirements of those public works contracts" (claimant's Exhibit 18, p. 5).
Thus, the Court concludes that claimant established as a matter of law that defendant knew or should have known of Perini's alleged fraud no later than January 30, 2009. Furthermore, because the defendant's fraud counterclaims were time barred by the Statute of Limitations set forth in CPLR 213 (8) at the time the causes of action asserted in the claim were interposed on March 6, 2012, the provisions of CPLR 203 (d)
CPLR 203 (d) states the following: "Defense or counterclaim. A defense or counterclaim is interposed when a pleading containing it is served. A defense or counterclaim is not barred if it was not barred at the time the claims asserted in the complaint were interposed, except that if the defense or counterclaim arose from the transactions, occurrences, or series of transactions or occurrences, upon which a claim asserted in the complaint depends, it is not barred to the extent of the demand in the complaint notwithstanding that it was barred at the time the claims asserted in the complaint were interposed."
do not operate to save defendant's claims for affirmative relief arising from the alleged fraud.
To the extent defendant's defenses and counterclaims asserted in both its existing answer and proposed supplemental answer allege fraud as a basis for recoupment, a different result is reached.
"Recoupment is an equitable doctrine similar to the older 'failure of consideration' doctrine, which looks to the whole contract, and the things to be done and/or stipulated to be done on both sides . . . It is really a defense, as it denies the validity of plaintiff's claim in the amount claimed, and does not entitle defendants to any affirmative relief or any amounts in excess of the amount demanded by plaintiff" (Enrico & Sons Contr. v Bridgemarket Assoc., 252 AD2d 429, 430 [1st Dept 1998]; see also Matter of Watson, 8 AD3d 1092, 1094 [4th Dept 2004];Constantino v State of New York, 99 Misc2d 362 [Ct Cl 1979]).
A defense or counterclaim is not barred by the applicable Statute of Limitations to the extent of the demand in the complaint if it "arose from the transactions, occurrences, or series of transactions or occurrences, upon which a claim asserted in the complaint depends" (CPLR 203 [d]; Bloomfield v Bloomfield, 97 NY2d 188, 192-193 ; Carlson v Zimmerman, 63 AD3d 772, 774 [2d Dept 2009]). Here, the defenses and counterclaims relating to defendant's allegations of fraud in the inducement of the contract bear directly upon the validity of the contract itself and clearly arise from the same transaction upon which the claim depends (see Bloomfield v Bloomfield, 97 NY2d at 192-193 [defendant was not time-barred from challenging the validity of a prenuptial agreement because her argument directly related to plaintiff's claim that the agreement precluded equitable distribution]; Fortin v Hill & Markes, 2 AD3d 934, 936 [3d Dept 2003] [counterclaim and affirmative defenses alleging both reformation and fraud arose out of the same transaction that formed the basis for plaintiff's breach of contract claim and were revived under CPLR 203 [d] to the extent they sought no more than to rely upon the doctrine of equitable recoupment]; National States Elec. Corp. v City of New York, 225 AD2d 745, 747 [2d Dept 1996] [counterclaim alleging fraudulent inducement was not barred by the statute of limitations to the extent that it sought to offset any claims by plaintiff under the contract]; but see Haller v 360 Riverside Owners Corp., 273 AD2d 52 [1st Dept 2000]; 182 Franklin St. Holding Corp. v Franklin Pierrepont Assoc., 217 AD2d 508 [1st Dept 1995]; Levy v Kendricks, 170 AD2d 387 [1st Dept 1991]; Davis v Davis, 95 AD2d 674 [1st Dept 1983]). This conclusion is clear upon consideration of the fact that "the injury [resulting from fraudulent inducement] is the inducement to make a contract which otherwise would not have been made" (Sager v Friedman, 270 NY 472, 481 ).
Likewise, defendant's defense and counterclaim alleging fraud in the performance of the contract clearly arise out of the same transaction on which the claim depends and no contrary argument has been made. To the extent defendant's counterclaims and affirmative defenses alleging fraud seek no more than to rely upon the equitable doctrine of recoupment, therefore, they are permissible under CPLR 203 (d) (id.; see also United States Fid. & Guar. Co. v Delmar Dev. Partners, LLC, 22 AD3d 1017 [3d Dept 2005]).
Claimant's contrary argument is based primarily on the Court of Appeals decision in Matter of SCM Corp. (Fisher Park Lane Co. (40 NY2d 788 ). In that case, the Court held that a landlord's reformation "defense" was time-barred and not revived by the savings provision of CPLR 203 (c) (currently CPLR 203 [d]) because its "defense" in fact sought a "rewriting of the terms of the lease agreement with a concurrent determination of liability on the part of the tenant for additional rent in consequence of such revision of the instrument" (id. at 790-791). The court held, therefore, that although denominated a defense, i.e., a bar to the claim asserted by the tenant, it was in the nature of a counterclaim grounded on allegations as to the intention of the parties prior to and at the time the lease was executed, which was a separate and distinct claim for affirmative relief in favor of the landlord. As a result, the claim was not in the nature of recoupment for which CPLR 203 (d) (formerly CPLR 203 [c]) excludes the bar of the Statute of Limitations.
Unlike the reformation claim at issue in SCM Corp., here, the defendant's allegations of fraud in the inducement and performance of the contract may be asserted as defenses in the nature of recoupment because a favorable adjudication will not result in a rewriting of the contract with a concurrent determination of liability on the part of the claimant for compensation in consequence of such revision. In other words, whereas the reformation claim in SCM Corp., if successful, would have resulted in affirmative relief to the landlord, the fraud defenses and claims asserted here may serve only to reduce any recovery to which the claimant may otherwise be entitled. Inasmuch as defendant's fraud defenses and counterclaims arise from the same transaction upon which Perini's claim depends, they may be asserted as an offset under the equitable doctrine of recoupment pursuant to CPLR 203 (d).
The Fraud Cause Of Action
"It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated" (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 389 , citing Meyers v Waverly Fabrics, 65 NY2d 75, 80, n 2 ; North Shore Bottling Co. v Schmidt & Sons, 22 NY2d 171, 179 ; Rich v New York Cent. & Hudson Riv. R. R. Co., 87 NY 382, 390 ). Thus, "[g]eneral allegations that a defendant entered into a contract while lacking the intent to perform it are insufficient to support the [fraud] claim" (New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 ). On the other hand, "[w]hile '[m]ere promissory statements as to what will be done in the future are not actionable' . . . it is settled that, if a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of 'a material existing fact' upon which an action for rescission may be predicated" (Sabo v Delman, 3 NY2d 155, 160 ). As long ago explained by the Court of Appeals in Rich v New York Cent. & Hudson Riv. R.R. Co. (87 NY 382, 399 ): "[A] mere contract obligation may establish no relation out of which a separate or specific legal duty arises, and yet extraneous circumstances and conditions, in connection with it, may establish such a relation as to make its performance a legal duty, and its omission a wrong to be redressed" (87 NY at 399; see also North Shore Bottling Co. v Schmidt & Sons, 22 NY2d 171, 179-180 ). That being the case, "[w]here a party has fraudulently induced the plaintiff to enter into a contract, it may be liable in tort . . . or where a party engages in conduct outside the contract but intended to defeat the contract, its extraneous conduct may support an independent tort claim" (New York Univ. v Continental Ins. Co., 87 NY2d at 316). For example, in Deerfield Communications Corp. v Cheesbrough-Ponds, Inc. (68 NY2d 954 ) the Court of Appeals held that the defendant's fraud counterclaim, which alleged that the plaintiff had no intention of abiding by geographic restrictions agreed to orally as an inducement to the contract, sufficiently alleged " 'a representation of present fact, not of future intent' . . . collateral to, but which was the inducement for the contract," and thus was not duplicative of the breach of contract claim (id. at 956 [citations omitted]; see also Graubard Mollen Dannett & Horowitz v Moskovitz, 86 NY2d 112, 122 ["A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties"]; Channel Master Corp. v Aluminium Ltd. Sales, 4 NY2d 403  [defendant's misrepresentation as to the quantity of aluminum ingot it was capable of supplying the plaintiff was a statement of existing fact as opposed to an expression of future expectation sufficient to state a cause of action for fraudulent inducement]; 84 Lbr. Co., L.P. v Barringer, 110 AD3d 1224, 1226 [3d Dept 2013] [misrepresentation as to skill and competence of contracting company in order to induce contract were not redundant of breach of contract cause of action]; Calabrese Bakeries, Inc., v Rockland Bakery, Inc., 102 AD3d 1033 [3d Dept 2013] [representation that certain commercial clients would become customers was sufficiently discrete from breach of contract claim to withstand dismissal]; MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287 [1st Dept 2011] [misrepresentation of present facts, though also giving rise to a breach of contract claim, is collateral to the contract and therefore involves a separate breach of duty]; J & D Evans Constr. Corp. v Iannucci, 84 AD3d 1171 [2d Dept 2011] [collateral misrepresentation as to material fact regarding insurance coverage alleged claim for fraudulent inducement]).
Other cases in which allegations of fraudulent inducement to enter the contract were upheld include the following : Introna v Huntington Learning Ctrs., Inc., 78 AD3d 896 [2d Dept 2010] [misrepresentations in brochures and materials other than contract itself may form basis for cause of action sounding in fraud]; WIT Holding Corp. v Klein, 282 AD2d 527 [2d Dept 2001] [misrepresentation of material fact which was collateral to contract and served as inducement to contract is sufficient to sustain a cause of action alleging fraud]; First Bank of Ams. v Motor Car Funding, 257 AD2d 287 [1st Dept 1999] [alleged misrepresentations regarding pertinent facts of loans plaintiff purchased may form the basis for a claim alleging fraudulent inducement although the same circumstances gave rise to breach of contract claim]).
Likewise, in both the Rich and North Shore Bottling Co. cases the plaintiffs' allegations that defendant and others conspired to defeat the contract sufficiently stated a fraud cause of action separate and distinct from the breach of contract claim (see also Kosowsky v Willard Mtn., Inc., 90 AD3d 1127 [3d Dept 2011] [allegation that after contract was entered into tenant and his principal misrepresented or concealed facts by falsifying income reports in order to deceive landlord as to true amount of rent owed stated a fraud cause of action]; S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp., 108 AD2d 351 [1st Dept 1985] [plaintiff alleged breach of legal duty sufficiently independent of contractual relations]; Albemarle Theatre v Bayberry Realty Corp., 27 AD2d 172 [1st Dept 1967] [defendants' conduct in conspiring to destroy lessor's interest in theater alleged fraud cause of action sufficiently distinct from breach of contract claim]).
Here, defendant's allegation that Perini's pre-award representations regarding its intent to fulfill the contract's M/WBE goals is more than a conclusory allegation of a future intent not to perform under the contract. Defendant alleges in its proposed first affirmative defense and counterclaim that (i) Perini represented in its pre-award schedule of utilization forms and various worksheets that it intended to utilize certain certified M/WBE subcontractors, including Northeast, Landsite and Andrea Doreen, (ii) that at the time these representations were made it had no intention of engaging the services of these contractors and (iii) that defendant was induced to enter the contract in reliance on these misrepresentations. Such allegations sufficiently allege a misrepresentation of a present fact, which was collateral to and not duplicative of the contract, so as state a cause of action for fraudulent inducement. Notably, where a party alleges it was induced to enter the contract because of a material misrepresentation of fact, the plaintiff has stated a cause of action for fraud although the same circumstances may also give rise to a breach of contract claim (First Bank of Ams. v Motor Car Funding, 257 AD2d 287, 291-292 [1st Dept 1999]; MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 294 [1st Dept 2011]).
Defendant's allegations set forth the necessary elements of a cause of action for fraud: "representation of a material existing fact, falsity, scienter, deception and injury" (New York Univ. v Continental Ins. Co., 87 NY2d at 318 , quoting Channel Master Corp. v Aluminum Ltd. Sales, 4 NY2d at 407). Claimant alleges that Perini's pre-award representations of its intent to utilize M/WBE contractors, contained in its schedule of utilization and associated forms, were merely expressions of future expectation insufficient to form the basis for a fraud cause of action. The Court disagrees. The D/M/WBE Utilization Worksheet, signed by both Perini and its subcontractor before the contract award, stated that "the Contractor and Subcontractor hereby certify that the subcontract is in writing, and contains all the pertinent provisions of the prime contract in regard to Federal and State Laws" (claimant's Exhibit 6). Thus, Perini's alleged pre-award misrepresentations that it intended to satisfy the contract's M/WBE goals by engaging the services of Northeast, Landsite and Andrea Doreen were not merely expressions of future expectation, but a representation of present fact, which was collateral to the contract and allegedly served as an inducement for the contract award. As the Court of Appeals recognized in Channel Master Corp. v Aluminium Ltd. Sales (4 NY2d at 407-408):
Moreover, defendant's allegations of fraud were sufficiently particular to meet the pleading requirements of CPLR 3016 (b).
" 'the allegations in the complaint describe a case where a defendant has fraudulently and positively as with personal knowledge stated that something was to be done when he knew all the time it was not to be done and that his representations were false. It is not a case of prophecy and prediction of something which it is merely hoped or expected will occur in the future, but a specific affirmation of an arrangement under which something is to occur, when the party making the affirmation knows perfectly well that no such thing is to occur. Such statements and representations when false are actionable' " (citing Sabo v Delman, 3 NY2d 155, 160 ).
As a result, defendant's allegations regarding Perini's alleged pre-award misrepresentations state a cause of action for fraudulent inducement.
Defendant's allegations regarding Perini's alleged fraud in the performance of the contract likewise state a fraud cause of action based upon alleged conduct outside the contract, which was intended to defeat the contract (New York Univ. v Continental Ins. Co., 87 NY2d at 316; North Shore Bottling Co. v Schmidt & Sons, 22 NY2d 171; Rich v New York Cent. & Hudson Riv. R.R. Co., 87 NY 382; Kosowsky v Willard Mtn., Inc., 90 AD3d 1127; S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp., 108 AD2d 351; Albemarle Theatre v Bayberry Realty Corp., 27 AD2d 172). In particular, defendant alleges that Perini conspired with Fairview, Landsite and A. Morrison to falsify records substantiating their performance of a "commercially useful function" (defendant's Exhibit A, p. 17, ¶ 20; claimant's Exhibit 5, Standard Specifications, p. 1-38, § 102-21 [E]) when, in fact, the work was performed by others. These allegations sufficiently state a cause of action for fraud in the performance of the contract.
Claimant's contention that Perini's representation regarding the performance of the work by any particular M/WBE subcontractor was immaterial, or that the defendant could not have relied upon such representations because changes in the M/WBE schedules were permitted (citing claimant's Exhibit 5, Standard Specifications, p. 1-40, § 102-21 [K]), misses the point. At the heart of defendant's fraud allegations is the claim that Perini represented that the work would be and was performed by M/WBE-certified firms when, in fact, it was not. Thus, changes in the M/WBE utilization plan, while permissible with the approval of the NYSDOT, have no bearing on the defendant's central claim that Perini never intended to satisfy the contract's M/WBE goals and conspired with others to deceive the defendant as to its M/WBE compliance by using non-certified M/WBE firms to perform the work without the knowledge or approval of the NYSDOT.
Affording defendant's answer and proposed answer and counterclaims the benefit of a liberal construction, the allegations state a cause of action for fraud in the inducement and performance of the contract (Simkin v Blank, 19 NY3d 46, 52 ). To the extent claimant moves for summary judgment pursuant to CPLR 3212, it failed to refute the defendant's allegations of fraud or otherwise establish its prima facie entitlement to summary judgment as a matter of law (see Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065 ).
Defendant's Request for Rescission
The law is settled that a contract induced by fraud is voidable and subject to rescission (VisionChina Media Inc. v Shareholder Representative Servs., LLC, 109 AD3d 49, 56 [1st Dept 2013];Wood v Dudley, 188 AD 136, 140 [1st Dept 1919]). As a general rule, however, a party abandons its rescission rights when, cognizant of the fraud, it accepts the benefits of the contract and thereby affirms it (Clearview Concrete Prods. Corp. v S. Charles Gherardi, Inc., 88 AD2d 461, 466 ). While "affirmance does not . . . either waive recovery of fraud damages or deprive the victimized party of the ability to achieve compensation for the aftermath of the fraud", it does, generally, foreclose rescission and the return of all monies paid under the contract (id. at 466-467; see also VisionChina Media Inc. v Shareholder Representative Servs., LLC, 109 AD3d at 56-57; Big Apple Car v City of New York, 204 AD2d 109 [1st Dept 1994];Augsbury v Adams, 135 AD2d 941 [3d Dept 1987]). There is, however, an exception to this rule that is applicable here.
Where the State or municipality is induced to enter a contract on account of fraud, no recovery may be had by the contractor and the State or municipality can recover all amounts paid under the contract (S.T. Grand, Inc. v City of New York, 32 NY2d 300, 305 ; Jered Contr. Corp. v New York City Tr. Auth., 22 NY2d 187 ; Omni Contr. Co., Inc. v City of New York, 84 AD3d 763 [2d Dept 2011], lv denied 17 NY3d 716 ); Christ Gatzonis Elec. Contr. v New York City School Constr. Auth., 297 AD2d 272 [2d Dept 2002]). Likewise, "contracts although legal in their inducement and capable of being performed in a legal manner, which have nonetheless been performed in an illegal manner, will not be enforced" (Prote Contr. Co. v Board of Educ. of City of N.Y., 230 AD2d 32, 40 [1st Dept 1997], citing McConnell v Commonwealth Pictures Corp., 7 NY2d 465 ; cf. Babylon v County of Suffolk, 101 AD2d 207 [2d Dept 1984] [the harsh remedy of total forfeiture should be limited to situations where the party seeking to enforce the contract was directly involved in or had knowledge of the illegal activity). As stated by the Court of Appeals in McConnell v Commonwealth Pictures Corp., "[W]hatever be the law in other jurisdictions, we in New York deny awards for the corrupt performance of contracts even though in essence the contracts are not illegal" (7 NY2d at 470).
The policy underlying application of the rule requiring forfeiture of a vendor's interest arising from a contract induced by fraud is to deter violation of the bidding statutes and assure, to the extent possible, "absolute honesty in the procuring of a public contract" (S.T. Grand, Inc. v City of New York, 32 NY2d at 305, quoting Jered Contr. Corp. v New York City Tr. Auth. 22 NY2d at 193). As noted by the Court of Appeals in Jered:
"If we are to effectively deter the unscrupulous practice of fraudulent and collusive bidding on public contracts, we cannot look alone to existing penal sanctions. The nature of the wrong is such that it is not easily discovered but, when it is, we make it quite clear that courts of this State will decline to lend their aid to the fraudulent bidder who seeks recovery" (22 NY2d at 193).
The rule precluding enforcement of a contract legal in its inception but illegally performed is similarly supported by deeply rooted public policy considerations which recognize that "[n]o one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime" (McConnell v Commonwealth Pictures Corp., 7 NY2d at 469 [internal quotation marks and citation omitted]).
Here, it need not be decided whether the defendant had knowledge of the fraud and abandoned its right to rescission upon its acceptance of the contract work since the law applicable to public contracts permits rescission and the return of all monies paid so as to protect the public fisc and the integrity of the competitive bidding statutes. Where, however, the State's fraud counterclaims were not timely asserted, as is the case here, recoupment is the only available remedy. Whether or not recoupment is, in fact, appropriate and, if so, the amount thereof, are questions of fact not capable of resolution on the instant motion (compare S.T. Grand, Inc. v City of New York, 32 NY2d 300  with Gerzof v Sweeney, 22 NY2d 297 ).
The Availability of Punitive Damages
The Court of Appeals has made clear that unlike compensatory damages, which are
intended to make the injured party whole, punitive damages are intended to "punish the tortfeasor and to deter this wrongdoer and others similarly situated from indulging in the same conduct in the future" (Ross v Louise Wise Services, Inc., 8 NY3d 478, 489 ). In the ordinary contract case, therefore, punitive damages are unavailable (Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 613 ). "However, where the breach of contract also involves a fraud evincing a 'high degree of moral turpitude' and demonstrating 'such wanton dishonesty as to imply a criminal indifference to civil obligations', punitive damages are recoverable if the conduct was 'aimed at the public generally' " (id., quoting Walker v Sheldon, 10 NY2d 401, 404-405 ; see also New York Univ. v Continental Ins. Co., 87 NY2d at 315; Ross v Louise Wise Services, Inc., 8 NY3d at 489). In New York Univ. the Court of Appeals emphasized that "[w]here a lawsuit has its genesis in the contractual relationship between the parties, the threshold task for a court considering defendant's motion to dismiss a cause of action for punitive damages is to identify a tort independent of the contract" (id. at 316). The elements required to state a claim for punitive damages were re-stated by the New York Univ. Court as follows:
"(1) defendant's conduct must be actionable as an independent tort; (2) the tortious conduct must be of the egregious nature set forth in Walker v Sheldon (10 NY2d 401, 404-405, supra); (3) the egregious conduct must be directed to plaintiff; and (4) it must be part of a pattern directed at the public generally" (87 NY2d at 316, citing Rocanova, 83 NY2d, at 613).
As set forth previously, this first requirement is met here as the defendant's allegations set forth causes of action for fraud that are not simply redundant of a breach of contract claim.
The second and third elements are fulfilled as the alleged conduct underlying defendant's fraud claims is sufficiently egregious under the standard set forth in Walker and was directed at the defendant in this case. Defendant's allegation in its second counterclaim and proposed second counterclaim, that Perini committed fraud during performance of the contract by submitting records and reports regarding its M/WBE compliance that it knew or ought to have known were false, sufficiently alleges conduct that "evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations" (Walker v Sheldon, 10 NY2d at 405). Indeed, both the President of claimant's Civil Division and its Director of Purchasing were indicted and convicted for fraud arising, in part, from the conduct complained of in this case (cf. Reads Co., LLC v Katz, 72 AD3d 1054 [2d Dept 2010];Tartaro v Allstate Indem. Co., 56 AD3d 758 [2d Dept 2008]).
The last element necessary to prevail on a claim for punitive damages - that the alleged conduct be part of a pattern directed at the public generally - is also sufficiently alleged. Defendant alleges in this regard that Perini's fraudulent scheme was "directed at [d]efendant, the taxpayers of the State of New York and the [p]ublic generally and [was] intended by [c]laimant to deprive legitimate qualified [M/WBEs] of the opportunity to participate in the contract, to circumvent the policy and statutes of the State of New York and to deceive and mislead the [d]efendant" (defendant's Exhibit A, proposed Verified Answer and Counterclaim, P. 15, ¶ 8).
Article 15-A of the Executive Law, which sets forth the M/WBE requirements for public contracts, was enacted in 1988 based upon the following legislative findings:
"It is hereby found and declared that it has been and remains the policy of the state of New York to promote equal opportunity in employment for all persons, without discrimination on account of race, creed, color, national origin, sex, age, disability or marital status, to promote equality of economic opportunity for minority group members and women, and business enterprises owned by them, and to eradicate through effective programs the barriers that have unreasonably impaired access by minority and women-owned business enterprises to state contracting opportunities" (L. 1988, c. 261, § 62, eff. July 19, 1988).
Thus, any scheme to undermine or defeat the policy objectives underlying the enactment of Executive Law Article 15-A harms not only the State, but the public generally. Moreover, the allegations in defendant's second counterclaim and proposed second counterclaim make clear that Perini's alleged conduct, and the criminal charges against its employees, involved multiple public contracts in the New York City area, in addition to the contract in the case at bar (see claimant's Exhibit 18). Notably in this regard, Perini has been the subject of law suits involving similar allegations elsewhere (see e.g Perini Corp. v City of New York, 2013 WL 4397490 [Sup Ct, NY County, 2013]; City and County of San Francisco v Tutor-Saliba Corp., (2005 WL 645389 [US Dist Ct, ND, Calif 2005]). A pattern of similar conduct directed at the public generally is therefore sufficiently alleged. As a result, in addition to rescission and forfeiture of some or all of the contract proceeds as a defense against claimant's claims, punitive damages are a permissible offset should the fact-finder conclude that Perini committed a fraud (see Katz v Bach Realty, 192 AD2d 307 [1st Dept 1993] [proposed fraud counterclaims arose from same transactions as the causes of action alleged in the complaint and thus, at the very least, were permitted to be interposed as offsets pursuant to CPLR 203 (d)]; H. Novinson & Co. v City of New York, 53 AD2d 831 [1st Dept 1976] [both forfeiture and punitive relief were available remedies where right to recover on the counterclaim did not depend upon contract enforcement]).
Inasmuch as CPLR 203 (d) expressly provides for the assertion of both defenses and counterclaims to the extent of the demand in the claim where the allegations arise from the same transaction or occurrence, the imposition of punitive damages as an offset does not violate the rule that a demand for punitive damages "is parasitic and possesses no viability absent its attachment to a substantive cause of action" (Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d at 616; cf. Prote Contracting Co., Inc. v Bd. Of Educ. Of City of N.Y., 276 AD2d 309 [2d Dept 2000] [punitive damages award in favor of defendant was dismissed where claimant recovered nothing and fraud counterclaim had been dismissed as untimely]).
The Statutory Enforcement Provision
The law is well settled that " 'when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless made exclusive by the statute' " Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc., 18 NY3d 341, 350-351 , quoting Burns Jackson Miller Summit & Spitzer v Lindner, 59 NY2d 314, 324 ). No such exclusivity provision was included in the enforcement provision of Executive Law § 316.
Prior to 2010, Executive Law § 316 provided for arbitration of disputes in the event a complaint regarding M/WBE compliance was received by the Director of the Division of Minority and Women's Business Development (the Division) from either a contracting agency or contractor. The statute provided for article 75 review of an arbitrators' award and article 78 review of a determination of the Director regarding the imposition of fines, sanctions or penalties. In 2010, § 316 was amended to provide for the resolution of complaints by a Hearing Officer of the Division rather than an arbitrator, and judicial review pursuant to CPLR Article 78, among other changes. In addition, a new section 316-a was added to require that State contracts expressly include a provision providing for the imposition of liquidated damages or other appropriate damages for willful or intentional breaches of a contract's M/WBE provisions. Section 316-a also provides that "[a] contracting agency that elects to proceed against a contractor for breach of contract as provided in this section shall be precluded from seeking enforcement pursuant to section three hundred sixteen of this article." Nothing in the statutory enforcement provision of § 316 indicates a legislative intent to supplant traditional common law remedies and the addition of § 316-a in 2010 supports the conclusion that the State may elect to pursue either its statutory or common law remedies.
Prior to 2010, it was recognized that although the public policy supporting M/WBE goals was laudable, "when put to the pragmatic test involving principles of contract damages, the damages . . . are not ascertainable under any recognized method" (Sevenson Envtl. Servs. v New York State Thruway Auth., 149 Misc 2d 268, 272 [Ct Cl 1990]).
Based on the foregoing, the Court concludes the defendant sufficiently alleged fraud, both in the inducement and performance of the contract, to withstand claimant's motion to dismiss the defenses and counterclaims for failure to state a cause of action (see Nonnon v City of New York, 9 NY3d 825, 827 ; Guggenheimer v Ginzburg, 43 NY2d 268, 275 ; McDonnell v Bradley, 109 AD3d 592, 593 [2d Dept 2013]).
Turning to defendant's motion to amend its answer to supplement its fraud allegations, it is well settled that absent prejudice or surprise, leave to amend a pleading shall be freely granted where the proposed amendment is not plainly lacking in merit (CPLR 3025 [b]; McCaskey, Davies & Assoc. v New York City Health and Hosps. Corp., 59 NY2d 755,757 ; Shelton v New York State Liq. Auth., 61 AD3d 1145, 1149 [3d Dept 2009]). To defeat a motion to amend, the opponent of the motion must show that it would be "significantly prejudiced" by the amendment (Henry v MTA, 106 AD3d 874, 875 [2d Dept 2013]; Garrison v Clark Mun. Equip., 239 AD2d 742, 742 [3d Dept 1997]). "Prejudice in this context means that the party opposing the amendment has been hindered in the preparation of its case or has been prevented from taking some measure in support of its position" (Garrison v Clark Mun. Equip., 239 AD2d at 742-743, quoting Pritzakis v Sbarra, 201 AD2d 797, 799 ). "Mere lateness is not a barrier to the amendment. It must be lateness coupled with significant prejudice to the other side, the very elements of the laches doctrine" (Edenwald Contr. Co. v City of New York, 60 NY2d 957, 959  [internal quotation marks and citation omitted]). Here, Perini has been aware of the criminal investigation into its M/WBE compliance since at least 2002 and the fraud allegations in defendant's original answer afforded it the requisite notice of the transaction to be proved pursuant to the amended answer (see CPLR 203 [f]). Thus, neither the 2007 death of Gerard Bassi, Perini's EEO Officer, nor the 2010 death of Mr. Marashlian following his guilty verdict, provide a basis for a denying defendant's motion.
Accordingly, defendant's motion to amend and supplement its answer is granted and claimant's motion is denied.
December 9, 2013
Saratoga Springs, New York
FRANCIS T. COLLINS
Judge of the Court of Claims
The Court considered the following papers:
Notice of motion dated June 21, 2013; Affirmation of Eidin Beirne dated June 21, 2013 with exhibit; Notice of cross motion dated July 22, 2013; Affidavit of Gaby Abou Antoun sworn to July 17, 2013 with exhibits; Memorandum of Law by Allen J. Ross, Mark A. Canizio and Jessica Singh dated July 22, 2013; Affidavit of William Howe sworn to August 9, 2013 with exhibits; Affidavit of Ann Maestri sworn to August 9, 2013 with exhibits; Affirmation of Eidin Beirne dated August 9, 2013 with exhibits; Memorandum of Law by Eidin Beirne dated August 12, 2013; Reply affidavit of Mark Canizio sworn to August 20, 2013 with exhibits; Memorandum of Law of Mark Canizio, Charles Fastenberg, Derek Mekkawy dated August 20, 2013; Letter dated August 28, 2013 from Eidin Beirne.