The following papers numbered 1 to 12 were marked fully submitted on January 7, 2020 Papers Numbered Notice of Motion to Dismiss (dated July 29, 2019) 1 Affidavit of Andrew Ratner in Support of Defendants’ Motion to Dismiss, with Supporting Exhibits (dated July 29, 2019) 2 Affidavit of Christopher DeLuca in Support of Defendants’ Motion to Dismiss (dated July 29, 2019) 3 Defendants’ Memorandum of Law in Support of Motion to Dismiss (dated July 29, 2019) 4 Affidavit of John W. Dreste, Esq. in Opposition to Motion to Dismiss, with Supporting Exhibits (dated September 12, 2019) 5 Gilbane Building Company’s Memorandum of Law in Opposition to Defendants’ Motion to Dismiss (dated September 12, 2019) 6 Defendants’ Reply Memorandum of Law in Further Support of Motion to Dismiss (dated October 4, 2019) 7 Affirmation in Support of Motion to Dismiss Counterclaims (dated October 4, 2019) 8 Gilbane Building Company’s Supplemental Reply Memorandum of Law As Requested by the Court In Its November 18, 2019 Letter, with Supporting Exhibits (dated December 23, 2019) 9 Affidavit of Daniel Tess on behalf of Gilbane Building Company (dated December 19, 2019) 10 Attorney Affirmation on John W. Dreste on Behalf of Gilbane Building Company (dated December 20, 2019) 11 Defendants’ Supplemental Brief, with Supporting Exhibits (dated December 23, 2019) 12 DECISION AND ORDER Defendants New York Wheel LLC, New York Wheel Owner LLC (“New York Wheel Owner”) (both collectively “New York Wheel”), New York Wheel Investor LLC, Richard A. Marin and Andrew Ratner (collectively “Defendants”) move for an Order pursuant to CPLR §3211(a)(1) to dismiss the New York Lien Law trust diversion action set forth in the Complaint of Plaintiff Gilbane Building Company (“Gilbane” or “Plaintiff”). Defendants’ Motion is hereby denied. FACTS This Action surrounds the incomplete construction of a 630-foot tall Ferris wheel overlooking the New York Harbor in St. George, Staten Island (the “Wheel” or “Project”). The Project was located on real property located at Block 2, Lot 20, Staten Island NY 10301 (the “Property”). On December 24, 2013, the City of New York, a municipal corporation of the State of New York (the “City”) entered into an “lease agreement” with “tenant” New York Wheel LLC. Section 13.1(a) of the Lease Agreement states that New York Wheel LLC “shall perform (or cause to be performed) the Initial Construction Work, in compliance with the Project Commitments…” (Defendants’ Exhibit B, Page 26). The Agreement further provides that New York Wheel LLC “shall (i) commence the Initial Construction Work not later than the Scheduled Commencement Date (subject to Unavoidable Delays), (ii) thereafter continue to prosecute the Initial Construction Work with diligence and continuity (subject to Unavoidable Delays) in accordance with a development and construction schedule approved by Landlord and Tenant, (iii) Substantially Complete the Initial Construction Work on or before the Scheduled Completion Date (subject to Unavoidable Delays)…” (Exhibit B, Page 26-27). Gilbane undertook a Construction Management Agreement (“CMA”) in the initial sum of $197,345,036.00, under which Gilbane, as assignee, would provide construction services in connection with the Project. Gilbane was tasked with constructing certain parts of the Project, including the Wheel’s pad and platform, the terminal building and garage. Gilbane brought this Action for diversion of trust assets under Article 3-A of the Lien Law, alleging that Defendants owe it more than $7,000,000.00 for unpaid construction costs. According to Gilbane, certain funds were “impressed with trust status” and dedicated for costs of improvement of the Project, including proceeds flowing from New York Wheel’s Loan and Security Agreement with Highbridge Principal Strategies, LLC (“Highbridge”), as agent for certain for defined Lenders (the “Lenders”), who undertook to make available $195,000,000.00 to New York Wheel for the Project (“Loan and Security Agreement”). Under the Loan and Security Agreement, New York Wheel allegedly created multiple accounts where trust funds were deposited and used to pay for various costs of improvement on the Project, including the Collateral Account that itself contained several subaccounts. According to Gilbane, payments New York Wheel received from the Lenders under the Loan and Security Agreement were trust funds under Lien Law Article 3-A and are required by law to be first expended and applied for the payment of costs of improvement of the Project, including amounts owed to Gilbane. According to Gilbane, there are other “trust funds” under Lien Law Article 3-A, including a loan made between New York Wheel and “Junior Lender” New York Metropolitan Regional Center, L.P. II (“New York Met. II”). Under a Mezzanine Loan Agreement between New York Met. II. and New York Wheel, New York Met. II undertook to make available a building loan of up to an initial sum of $185,085,433.00 but not less than $150,000,000.00 to New York Wheel for the costs of improvement of the Project (the “Junior Loan”). According to Gilbane, proceeds flowing from the Junior Loan are impressed with trust status under New York Lien Law Article 3-A. Gilbane also argues that deposits made into the New York Wheel Trust Accounts from various Equity Sponsors (as defined in the Loan and Security Agreement) (“Equity Trust Deposits”) are impressed with trust fund status under Article 3-A of the Lien Law, dedicated for costs of improvement of the Project. Gilbane also asserts that the following are trust funds under Article 3-A: “Retainage Funds” (i.e. “a certain percentage of funds owed to Gilbane under the CMA were withheld from each advance made to Gilbane while the Project was ongoing”) “owed to Gilbane under the CMA [that] become available to New York Wheel and/or NYW Investor and or otherwise deposited into any account”; any funds remaining in or that come into New York Wheel’s collateral Account; any funds remaining in or that are made available to New York Wheel under the “Construction Escrow Agreement”; the $3,500,000.00 payment made by New York Wheel to the City of New York as a “Security Deposit” under the Lease; and any refunds of insurance premiums on New York Wheel’s Owner Controlled Insurance Program (“OCIP Premium Refunds”) flowing to New York Wheel now or in the future. Defendants’ Motion to Dismiss Defendants now seek to dismiss Plaintiff’s cause of action for trust fund diversion of the Equity Funds, OCIP Premium Refunds and Security Deposits on the basis that such are not trust assets under Article 3-A of the Lien Law since New York Wheel is only an “owner” under the Lien Law and not a “contractor.” During oral arguments, Defendants conceded that New York Wheel is an “owner” for purposes of the Lien Law. Defendants also seek to dismiss the trust fund diversion cause of action relating to the Building Loan and the Unpaid Accounts because these funds do not exist. Defendants additionally argue that the trust fund diversion cause of action must be dismissed as a matter of law, since New York Wheel expended more trust funds than it received. In opposition, Plaintiff argues that Defendants’ motion must be denied since New York Wheel is both an “owner” and “contractor” under Lien Law Article 3-A and therefore the identified funds are “trust assets.” Gilbane also argues that New York Wheel’s Verified Statement under Lien Law §76 contradicts Defendants’ claim that it did not divert trust assets. According to Gilbane, as of May 31, 2015, more than $183 million was initially deposited among three of the subaccounts established under the Loan and Security Agreement. Such amount was withdrawn as of May 31, 2016, leaving the Junior Loan and Equity Sponsors as the funding sources of the costs of improvement. The Verified Statement allegedly shows $455,113,723.02 was “made available for costs of improvement” and that $8,380,235.29 is “Remaining Draw to be Paid”, which would bring the total available for costs of improvement to $463,493,958.31. Gilbane argues while Defendants identify a total of $257,237,065.00 as having been paid to contractors ($189,597,690.00 to Gilbane and $67,639,375.00 to Mammoet- Starneth LLC), “the fate of the remaining $200,000,000.00 from the $455,113,723.00, admitted as having been generated for the costs of improvement, is unexplained.” (Memorandum of Law In Opposition, Page 3). The Court’s Supplemental Request Oral arguments on Defendants’ Motion were held before this Court on October 31, 2019. The Court then issued a letter to the parties dated November 18, 2019 requesting answers to nine questions regarding the issue of whether New York Wheel LLC is both a “owner” and “contractor” under the Lien Law and held further oral arguments on January 7, 2020. DISCUSSION Summary Judgment Standard “Summary judgement is a drastic remedy which should only be employed where there is no doubt as to the absence of triable issues.” (Stukas v. Streiter, 83 AD3d 18, 23 [2d Dept., 2011]). Under CPLR §3212, a motion for summary judgment “shall be granted if, upon all papers and proof submitted, the cause of action or defense shall be established sufficiently to warrant the court as a matter of law in directing judgment in favor of any party” and the motion “shall be denied if any party shall show facts sufficient to require a trial of any issue of fact.” (see CPLR §3212). When deciding a summary judgment motion, the court must view the evidence in the light most favorable to the nonmoving party. (see Stukas v. Streiter, 83 AD3d 18, 22 [2d Dept., 2011]). If the moving party meets its initial burden of demonstrating its prima facie entitlement to the relief requested, then the burden shifts to the party opposing summary judgment to tender evidence, in a form admissible at trial, sufficient to raise a triable issue of fact. (see Roos v. King Constr., 2020 N.Y. App. Div. LEXIS 257, *3, 2020 NY Slip Op 00317, 2 [2d Dept., 2020]). Lien Law 3-A Under Lien Law §70, designated funds received by owners, contractors and subcontractors in connections with improvements of real property are trust assets; the trust begins “when any asset thereof comes into existence, whether or not there shall be at that time any beneficiary of the trust.” (Mount Vernon City School Dist. v. Nova Cas. Co., 19 NY3d 28, 37 [2012]; RLI Ins. Co. v. N.Y. State DOL, 97 NY2d 256, 263 [2002]). The statute sets forth conditions for an “owner trust” and a “contractor trust”, including the types of assets held in each and how the funds can be used. Under Lien Law §70(5), the assets of an owner trust are the funds received by him and his rights of action for payment thereof: (a) under a building loan contract; (b) under a building loan mortgage or a home improvement loan; (c) under a mortgage recorded subsequent to the commencement of the improvement and before the expiration of four months after completion of the improvement; (d) as consideration for a conveyance recorded subsequent to the commencement of the improvement and before the expiration of four months after the completion thereof; (e) as consideration for, or advances secured by, an assignment of rents due or to become due under an existing or future lease or tenancy of the premises that are the subject of the improvement, or of any part of such premises, if the assignment is executed subsequent to the commencement of the improvement and before the expiration of four months after the completion of the improvement or if it is executed before the commencement of the improvement and an express promise to make an improvement, or an express representation that an improvement will be made, is contained in the assignment or given in the transaction in which the assignment is made; (f) as proceeds of any insurance payable because of the destruction of the improvement or its removal by fire or other casualty, except that the amount thereof required to reimburse the owner for premiums paid by him out of funds other than trust funds shall not be deemed part of the trust assets; (g) under an executory contract for the sale of real property and the improvement thereof by the construction of a building thereon. Lien Law §70(6) sets forth the assets of a contractor trust, which are funds received by him and his rights of action for payment thereof (a) under the contract for the improvement of real property, or home improvement or the public improvement; (b) under an assignment of funds due or earned or to become due or earned under the contract; (c) as proceeds of any insurance payable because of destruction of the improvement of real property including a home improvement or public improvement or its removal by fire or other casualty, except that the amount thereof required to reimburse the contractor for premiums paid by him out of funds other than trust funds shall not be deemed part of the trust assets. It is well established that “once a trust comes into existence, its funds may not be diverted for non-trust purposes [and] [u]se of trust assets for any purpose other than the expenditures authorized [by statute]…constitutes an improper diversion of trust assets, regardless of the propriety of the trustee’s intentions.” (Mount Vernon City School Dist. v. Nova Cas. Co., 19 NY3d 28, 37 [2012]. See RLI Ins. Co. v. N.Y. State DOL, 97 NY2d 256, 263 [2002]). The use of trust assets for a nontrust purpose — that is, a purpose outside the scope of the cost of improvement — is deemed “a diversion of trust assets, whether or not there are trust claims in existence at the time of the transaction, and if the diversion occurs by the voluntary act of the trustee or by his consent such act or consent is a breach of trust.” (Aspro Mech. Contr., Inc. v. Fleet Bank, N.A., 1 NY3d 324, 329 [2004]). The Court of Appeals has “repeatedly recognized that the ‘primary purpose of Article 3-A and its predecessors is to ‘ensure that “those who have directly expended labor and materials to improve real properly [or a public improvement] at the direction of the owner or a general contractor” receive payment for the work actually performed.’” (Aspro Mech. Contr., Inc. v. Fleet Bank, N.A., 1 NY3d 324, 329 [2004] (quoting Matter of RLI Ins. Co. v. New York State Dept. of Labor, 97 NY2d 256, 264 [2002] (quoting Canron Corp. v. City of New York, 89 NY2d 147, 155 [1996]))). The legislative history behind Lien Law 3-A demonstrates that “enactment of the trust provisions was prompted by the frequency of cases in which laborers and materialmen were in fact not paid. The trust concept was intended precisely to forbid that an owner, contractor, or subcontractor act merely as entrepreneur and was intended to require that he act, instead, as a fiduciary manager of the fixed amounts provided for the operation. (1959 Report of NY Law Rev Commn, at 214, reprinted in 1959 NY Legis Doc No. 65, at 30).” (Aspro Mech. Contr., Inc. v. Fleet Bank, N.A., 1 NY3d 324, 328 [2004]). New York Wheel As Owner and Contractor Under the Lien Law There are a few key cases that discuss the designation of “contractor” under the Lien Law, including the seminal case of McNulty Bros. v. Offerman, in which the Court of Appeals explained that “the contractor whom the Lien Law has in view is one who would be so characterized in the common speech of men. He is one who, in the usual course of trade, has undertaken to improve the property of another. If he happens to have some interest in the land himself his interest is an accident, and not the source and origin and occasion of his tenancy, either at his own expense or with contributions from the landlord, has covenanted for betterments…” (McNulty Bros. v. Offerman, 221 NY 98, 105 [1917]). In Canron v. City of New York, the City of New York leased a terminal to Defendant Northeast and exercised its option under the lease by engaging Northeast to oversee necessary repairs. Northeast retained Plaintiff Canron Construction to perform the bulk of the work; the First Department found that Northeast acted as the contractor under the Lien Law, as it was paid and treated in all respects by the City and Plaintiff as a contractor. The Court noted that all invoices submitted by Plaintiff Canron Construction were approved for payment by Northeast, as lessee and contractor, and further found that “to indulge in the fiction that Northeast is not a contractor and thereby place Northeast beyond the scope of the statute is both contrary to its protective intent and offensive to principles of equity.” (Canron Corp. v. City of New York, 214 AD2d 115, 123 [1st Dept., 1995], affd, 89 NY2d 147 [1996]). In Burns v. Elec. Co. Inc. v. Walton St. Assoc., Walton St. Assoc. (“Walton”) was contractually obligated to improve property owned by the City of Syracuse Industrial Development Agency and entered into an agreement with Burns Electric Co., Inc. (“Burns Electric”), under which Burns Electric would provide work, labor, services and materials for renovation on the property. The Fourth Department rejected Walton’s argument that it could not be found to be both an “owner” and “contractor” under the Lien Law and found “there is nothing contradictory about an owner also being a contractor. It is common for an owner to enter into a series of contracts for improvement of his property thereby acting as a general contractor.” Burns Electric Co. v. Walton Street Associates, 136 AD2d 291, 295, affd, 73 NY2d 738 [1988]. The Court also stated that the labels or terms used in a contract are not always controlling, especially with respect to the term “contractor” since a court must look at all the facts constituting the relationship, not only to the terms by which the parties refer to themselves. Id. In OTG JFK T5 Venture v. IBEX Const., LLC, the trial court found that the petitioner, OTG, was both an “owner” and a “contractor” under its sublease and that all of the facts demonstrated it had “the same type of oversight responsibilities as had been undertaken by the contractors in Burns and Canron…” (OTG JFK T5 Venture, LLC v. IBEX Const., LLC, 24 Misc 3d 1244(A) [Sup Ct 2009]) (“OTG JFK”.) The Court was unpersuaded by OTG’s arguments that it was not a contractor since separate agreements were made for the subject lease and the contracting work and found that the relevant question was whether the general contractor was also a tenant whose premises were the subject of its work under its lease. Based on the discussions set forth in McNulty, Cangro, Burns and OTG JFK, the Court finds that New York Wheel is both an “owner” and “contractor” for purposes of the Lien Law. Despite characterizing its role at the Project as “limited”, New York Wheel had many oversight responsibilities that render it a “contractor”. In connection with the Project, New York Wheel hired Broadwall Consulting Services (“Broadwall”) as the Owner’s Representative. During oral arguments, New York Wheel represented that in addition to having a maintenance or operation individual on site two to three times per week, New York Wheel’s presence on site, primarily through Broadwall, involved attending regular meetings, on-site coordination meetings involving Gilbane and other subcontractors, requisition meetings regarding payment of subcontractors and meetings with design professionals. New York Wheel was also in communication with Gilbane regarding the progress of the work and, together with Broadwall, hired Special Inspectors to perform special or controlled inspections. Similar to the contractor in Canron, New York Wheel was responsible for approving requisition proposals through Broadwall and/or its COO Andrew Ratner, who is also an officer of Broadwall and part of the Feil Organization (a defendant in the parallel action). New York Wheel was also responsible for approving all subcontractors hired by Gilbane, who would choose subcontractors from a “pre-approved” list and submit recommendations to New York Wheel. During oral arguments, New York Wheel noted that Gilbane generated the “preapproved” list and that New York Wheel allegedly approved 99.9 percent, if not 100 percent, of Gilbane’s recommendations. The Court finds that whether New York Wheel approved 1 percent or 100 percent of Gilbane’s recommendations is not relevant; the requirement that New York Wheel approve Gilbane’s hiring of subcontractors demonstrates that New York Wheel is indeed a “contractor” for purposes of the Lien Law. According to the affidavit of Daniel Tess, Gilbane’s Senior Project Manager for the Project, New York Wheel “maintained a daily and ongoing presence at the Project construction site” and its CEO, Richard Marin, attended most weekly meetings at the Project. New York Wheel’s on-site personnel would review trade contractors’ work and direct corrective measures. New York Wheel also required Gilbane to interface with Mammoet-Starneth LLC (“Mammoet”) via Broadwall and actually forbade Gilbane from meeting with Mammoet alone. New York Wheel, itself and through Broadwall, was also “directly and consistently involved in the preparation, review and approval of Project schedules” and New York Wheel interacted with Gilbane, itself or through Broadwall, for schedule issues on a “daily, weekly and continuous basis.” The record also shows that New York Wheel ensured that the Project remained on schedule; New York Wheel Owner brought a separate action against Mammoet for delay damages in connection with the Project (Case 1:17 cv-04026-JMF, United States District Court, Southern District of New York) (“Mammoet Action”). In a declaration filed in support of the Mammoet Action, Ratner stated that New York Wheel LLC (and later, New York Wheel Owner LLC) was formed for the purposes of development and construction of the Wheel. New York Wheel Owner alleged that Mammoet was responsible for designing and engineering a working Wheel while New York Wheel was obligated to make payments and “to design and build the Pad upon which the Wheel would sit.” (Dreste Affirmation in Reply, Exhibit A, Page 3). To minimize the impact of Mammoet’s delays, New York Wheel “took several aspects of the Work itself, including the construction of the embeds that link the Wheel to the Pad at a cost of more than $8.25 million.” (Page 3). New York Wheel alleged that it suffered $15,621,753.00 in out-of-pocket expenses to keep the Project on track. According to Ratner, New York Wheel took extraordinary measures to minimize the timeline for the Project and although Mammoet was solely responsible for Wheel design and construction, New York Wheel spent more than $8.25 Million to construct the Wheel embeds that connects the Wheel to the Pad. The Court finds that based on the evidence, New York Wheel is both an “owner” and a “contractor” for purposes of the Lien Law. As the Court found in OTG JFK, New York Wheel had the oversight responsibilities that had been taken by the contractors in Burns and Canron. In looking at the facts and relationships between the parties, New York Wheel acted as the “contractor” for this Project under the Lien Law. The Court is unpersuaded by New York Wheel’s arguments that it is not a “contractor.” The evidence demonstrates that it did not have a “limited” role at the Project or that it served merely as the financial backing for the Project. New York Wheel’s lack of supervision of Gilbane’s employees is also irrelevant; in Matter of Ovadia v. Off. Of Indus. Bd. Of Appeals, the Court of Appeals explained that practically, a general contractor does not usually hire or supervise the workers employed by their subcontractors or keep employment records for them. Rather, “the primary objective of a general contractor is to keep the project on schedule and to coordinate the work among subcontractors in order to avoid costly delays in the completion of the project.” (Matter of Ovadia v. Off. Of Indus. Bd. Of Appeals, 19 NY3d 138, 143 [2012]).1 Here, New York Wheel was required to ensure the Project was complete by designated dates under the Lease Agreement, supervised all communications between Gilbane and Mammoet and took “extraordinary measures” to minimize the effects of Mammoet’s delay on the Project, including issuing a Change Order to Gilbane to complete some of Mammoet’s work. The Court has reviewed the remainder of Defendants’ arguments in support of their Motion and find them to be unavailing. As stated by the First Department in Canron, to find that New York Wheel is not a contractor and place it beyond the scope of the statute is “both contrary to its protective intent and offensive to principles of equity.” Therefore, the Court finds that New York Wheel is both an “owner” and “contractor” under Lien Law Article 3-A. Based on this Court’s finding that New York Wheel is a contractor for purposes of the Lien Law, the Court denies Defendants’ Motion to dismiss the trust diversion cause of action on the basis that the Equity Funds, OCIP Premium Refunds and Security Deposit with the City of New York are not trust assets. The Court finds that the remainder of Defendants’ Motion is premature and Defendants have not eliminated all issues of material fact under CPLR §3211 regarding whether the identified funds are trust assets under Lien Law 3-A and whether, and to what extent, if any, trust funds may have been diverted. (see J. Petrocelli Constr., Inc. v. Realm Elec. Contrs., Inc., 15 AD3d 444, 447 [2d Dept., 2005]). Defendants may renew their Motion to Dismiss after discovery is complete. Accordingly, it is hereby ORDERED that Defendants’ Motion be denied in its entirety; and it is further ORDERED that all parties are to appear before this Court on February 24, 2020 at 11:00 AM at 10 Richmond Terrace, Room 220, Staten Island, NY 10301. CONCLUSION Dated: January 28, 2020
