Scott E. Mollen

Construction—Utility Interference Work—Contractor Sued Utility to Recover Costs of Construction—Utility’s Motion to Dismiss Denied—Parties Waived Arbitration Pursuant to “Section U” Procedure

This action was commenced by a general contractor (contractor) and involved a lawsuit involving “capital municipal work with New York City and its agencies,” against “a private utility company that owns and/or operates surface and subsurface utility facilities within New York City,” and a subsidiary thereof (Utility). The contractor sued the Utility to recover costs for construction. The Utility moved to dismiss an amended complaint, pursuant to CPLR §§3211(a)(1) and (a)(7). The court denied the motion to dismiss.

The contractor and the Utility had signed an agreement with a non-party New York City agency (agency), pursuant to which the Utility agreed “to cooperate with and compensate the contractors working on [agency] projects for moving, protecting, and securing (Utility’s) existing utility facilities that impact [agency’s] work.” The contractor and the Utility had also entered into an agreement with the agency for construction of a culvert. The contractor’s work “interfered with…underground… utility lines owned by [Utility], requiring [contractor] to move, protect, or secure those facilities” (interference work).

The Utility had prepared “specifications, details, and methods for a plan for [contractor] to place the utility lines above the culverts.” The contractor’s estimated cost for the interference work was $900,000. The Utility rejected the estimate as too expensive and proposed “a new plan to place the utility lines below the culvert (new plan).” The contractor estimated that the new plan would cost $375,000. Based on such estimates, the contractor signed an agreement with the Utility “to perform the ‘interference work’…for a ‘lump sum’ of $375,000.”

The contractor alleged that the Utility knew that the new plan was “impossible at the lower price due to the specifications of their utility lines” and the Utility had “allegedly induced [contractor] to agree to the lower amount by withholding this information.” The contractor further alleged that the method proposed by the Utility was “purposely out of compliance” with “city construction regulations.”

The contractor contended that soon after work commenced, it became evident that the new plan could not be executed as originally agreed. For approximately one year during which the Utility “refused to provide alternative methods for project completion, [contractor] continued to perform” interference work pursuant to the new plan. The contractor claimed that for the completed interference work, the Utility owes the contractor $1.3 million and asserted claims for “fraudulent misrepresentation/fraudulent inducement,” “breach of contract,” and “quantum meruit.” The Utility moved to dismiss each cause of action.

The court noted that the interference work contract embodied a binding arbitration provision which stated that “[a]ny and all disputes arising out of this agreement or a breach thereof shall be submitted to arbitration in accordance with Section U.” The contract also had a merger and integration provision, which provided that it could not be modified or rescinded except by a writing signed by each party. The Utility had not addressed the arbitration clause in its answer or motion to dismiss and both parties had “orally expressed their willingness to waive their right to arbitration.”

The court explained that an oral waiver of arbitration clause is enforceable. The court found that the contractor had waived its right to arbitrate by commencing litigation and the Utility had waived its right to arbitrate by participating in the litigation. Thus, both parties waived their right to arbitration.

The Utility argued that the fraudulent inducement claim should be dismissed because the fraud allegations lacked the requisite particularity, i.e., the contractor had failed to specify a material misrepresentation of fact with the requisite detail, had failed to properly plead the Utility’s “knowledge of falsity and intent to induce reliance” and had failed “to allege sufficient facts supporting justifiable reliance.” The Utility also argued that the fraudulent inducement claim was predicated on “false allegations.” However, the court rejected such arguments and found that the contractor had adequately pled a claim for fraudulent misrepresentation and the Utility had failed to meet the CPLR § 3211(a)(1) “standard for false allegations argument.”

The Utility asserted that the contractor failed to provide details explaining when it had been “misled, how it was misled, which individuals made the allegedly false representations, and how or why” the alleged misrepresentation was “fraudulent.” The contractor countered that the complaint explained why the subject misrepresentation was “fraudulent, and delineates the supporting details and circumstances surrounding the false representation.”

Pursuant to CPLR §3016(b), a plaintiff must “allege ‘specific facts with respect to the time, place, or manner’ of the defendant’s purported misrepresentations.” The complaint alleged that the Utility had “prepared an alternative plan with specifications, details and methods for the protection and relocation of the utility lines at the project where the utility lines would be placed underneath the culverts…, received by [contractor] on or about Feb. 24, 2015” and that “the new plan contained misrepresentations because ‘the details and methods proposed by [Utility] in the new plan were woefully inadequate, deficient, incorrect, and impossible to implement.” The complaint further stated that the Utility, as the owner of the utility lines, “knew or should have known the utilities lines’ dimensions and the requirements for the protection and relocation thereof, and that placing them under the culverts was not feasible.” Additionally, the contractor further alleged that the Utility had “falsely represented that ‘the new plan would eliminate the cost associated with raising the road and related work.” The court found that such “allegations sufficiently allege ‘the time, place, or manner’ of the…purported misrepresentations.”

Furthermore, the contractor argued that it had alleged “knowledge” with sufficient detail. The contractor emphasized that information regarding the “dimensions and requirements for protecting and relocating over the cables was readily available” to the Utility and that the complaint illustrated that the Utility “actually did review such information and relied on records to create the new plan.”

The court explained that pure conclusory “knew or should have known” allegations are insufficient to comply with CPLR §3016(b). However, that statute is satisfied when “the facts suffice to permit a ‘reasonable inference’ of the alleged misconduct” and in making such determination, “less than plainly observable facts may be supplemented by the circumstances surrounding the alleged fraud.”

The court concluded that an inference of the Utility’s knowledge of falsity “can be drawn” and therefore the contractor had adequately pled “knowledge of falsity at this stage.” Moreover, the complaint alleged that misrepresentations were made “with the intent to obtain an unreasonably low contract price,” and in context, that is “sufficient to plead intent to induce reliance.”

The Utility had asserted that the contractor could not have justifiably relied on information provided by the Utility, since the contractor “immediately realized the plan to go under the culvert was impossible.” The contractor countered that it “could not have discovered the ‘impossibility’ of (Utility’s) plan until it began performing under the already-agreed-upon new plan.”

CPLR §3016(b) requires that a wrong be stated in detail, but does not require “unassailable proof” at the pleading stage. Here, the contractor alleged it was impossible to verify the feasibility of the new plan prior to performance, and that the Utility had made the misrepresentations in order to induce the contractor to reduce the price from $900,000 to $375,000. The court found that such allegations sufficiently pled justifiable reliance with specificity at this stage. The court also found that the contractor’s allegation that its reliance on the Utility’s misrepresentations caused damages of $1.3 million, met the damage requirement for fraud.

The Utility had further argued that the complaint should be dismissed based on “documentary evidence,” citing two emails which allegedly showed that the negotiation of the lump sum price was not a product of fraud but “simply arm’s-length bargaining.” The contractor countered that the Utility had not established that the contractor’s $900,000 proposal to place the lines over the culvert had been submitted after the Utility’s new plan had been presented, and that the negotiation lump sum price was not fraud, but merely “arm’s-length bargaining.” The contractor argued that the aforementioned emails did not provide that the $900,000 proposal was in response to the Utility’s new plan.

The court found that the emails did not conclusively prove that the $900,000 proposal was in response to the new plan, and noted that even if the court accepted the Utility’s allegation as true, such allegation “still would not defeat” the contractor’s “fraudulent inducement claim.” The contractor had alleged that the Utility knew that the new plan was impossible at the lower price because of the specifications of their utility lines, and that the Utility had “allegedly induced (contractor) to agree to the lower amount by withholding this knowledge.” The court explained that even if the contractor’s $900,000 proposal was in response to the Utility’s new plan, the Utility “could still have induced (contractor) to agree to a lower amount by withholding the knowledge that plan to go under the culvert was impossible at that price.” Thus, the Utility failed to meet the CPLR § 3211(a)(1) standard and the court denied the motion to dismiss the fraudulent inducement claim.

The court then denied the Utility’s argument that the breach of contract claim for $1.3 million was barred by the express terms of Section U of the interference work contract. The Utility argued that “Section U” limits the contractor to a “lump sum” payment of $375,000, and the only exception permitting additional payments on a “time and materials” basis is inapplicable to the current situation.

In rejecting this argument, the court noted that a motion to dismiss based on documentary evidence will only be granted where “the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.”

Here, the Utility cited the interference work agreement which required the contractor to provide “all necessary utility interference work” for the lump sum of $375,000 and a contract provision which provided that “extra interference work caused by the city issuing change orders and/or requested by (Utility) in writing anywhere within one block of the stated contract limits…shall be paid on a time and material basis in accordance with the city contract.” Under such provisions, the contractor could only obtain “time and materials” payment if either the city or the Utility issued a written “change work order” permitting additional payments for work. The contractor presented a letter sent by the agency to the contractor, wherein the city stated that it had “received a series of proposed changes from (contractor) regarding its interference work and, ‘did not take any objections to the proposed changes.’” The court found that although such letter did not appear to constitute “an explicit ‘change-work order,’ it nevertheless raises an issue of fact as to whether plaintiff had the required permission to alter the scope of its work, such that it would become entitled to additional ‘time and materials’ pay under the interference agreement.” Accordingly, the court held that the aforementioned contract provisions had not conclusively established the defense that the “plaintiff is not entitled to ‘time and materials pay’ under the contract.”

Finally, the court held that since the fraudulent inducement claim survived the motion to dismiss, the contractor had raised a “bona fide dispute” as to the “validity of the governing contract such that quantum meruit may be pled in the alternative. Accordingly, the court also denied the motion to dismiss the quantum meruit claim. Accordingly, the court denied the motion to dismiss in its entirety.

Disclosure: My firm has done unrelated work for the Utility.

Primer Construction v. Empire City Subway Company, Sup. Ct. N.Y. Co., Docket No. 652203/2016, decided Sept. 6, 2017, Bransten, J.

 

Foreclosures—Referee’s Sale Set Aside—Owner and His Lawyer Were Advised the Night Before the Sale that the Sale Would Be Postponed – Mutual Mistake

This decision involved a residential foreclosure action. The defendant (owner) sought to set aside the referee’s sale, and stop the conveyance of the mortgaged premises to the intervenor, who was the non-party purchaser at the referee’s sale. There were no allegations that “the sale had been properly conducted by the referee on March 9, 2017, or that the upset price was not reasonably related to the fair value of the subject property.” Rather, the owner contended that he had been “mistakenly led to believe that based upon a conversation he, and his attorney, each separately had with a representative of plaintiff on the evening of March 8, 2017, that it was reasonable for him to assume that the sale would be postponed.”

The owner alleged that since January 2017, he had been working with “A,” a representative of the plaintiff’s loan servicer, to complete a “loan modification agreement, leading to the reinstatement of the mortgage held by plaintiff.” The loan modification process was delayed by the need to clear “liens filed against the premises by third parties.” By March 8, 2017, the liens had been satisfied. However, “A” had allegedly advised the owner that he needed to forward proof of filing with the county clerk. The owner spent in excess of $116,000 in his efforts to save the premises during the pendency of the action.

The owner had “forwarded the proof as to the lien clearance to [‘A’], and that at approximately 6:05 p.m. on March 8, [‘A’] called” to advise the owner that “the sale of the house had been suspended, that his application was complete, and he would be contacting [owner] with details….” “A” had also called the owner’s attorney and advised the attorney that the sale had been suspended.

The owner asserted that on or about the morning of March 9, 2017, he received a telephone call from “A,” who advised that he had attempted to call the owner’s attorney, “but wanted to assure him that he had checked and the sale was suspended and that all of [owner’s] paperwork was in order.” The owner’s attorney submitted an affirmation that, inter alia, stated that “A” had called the attorney on the evening of March 8, 2017 and said that “the sale had been suspended.” Apparently, no one alerted the plaintiff’s attorneys or the referee that the sale had been suspended. “B,” the intervenor, appeared at the referee’s sale and successfully bid $498,205. “B” provided a deposit of $55,000. “To date the referee has not been paid the balance of the bid price, nor has he delivered his deed to [‘B’].”

Neither the plaintiff nor “B” contested the foregoing facts. Rather, they argued that the owner should have sought judicial relief earlier, “as he had in the past, and that his attorney should have reached out to plaintiff’s attorneys rather than relying on plaintiff’s representative.” The plaintiff acknowledged that the owner had “taken all steps required to complete the workout and the reinstatement of the mortgage.”

The court explained that in the exercise of its equitable powers, “a court may set aside a foreclosure sale where there is evidence of fraud, collusion, mistake, or misconduct. Absent such conduct, the mere inadequacy of price is an insufficient reason to set aside a sale unless the price is so inadequate as to shock the court’s conscience.”

Since the owner had not argued the “inadequacy of the bid amount, or fraud, or collusion, or misconduct,” the salient issue was “whether there was a mistake, and if so, whether the mistake was unilateral, or otherwise.” The court explained that “[a] unilateral mistake on the part of a mortgagor does not provide him with recourse to avoid the consequences of the referee’s sale.” Prior judicial precedent involved mistakes “made solely by the party allegedly aggrieved by the conduct of the sale.” Here, “the mistake was not unilateral.” The plaintiff’s representative, “A,” “had been dealing with [owner] over the course of a two-month period and assured both [owner] and his attorney on the eve of the scheduled sale that it would be ‘suspended,’ because, as plaintiff acknowledged, [owner] had completed all of the steps required to entitle him to the reinstatement of the mortgage.”

The court found that “as a matter of equity, in the exercise of its discretion, and in good conscience, that [owner] is entitled to be relieved of the sale of the premises to the intervenor.” The court further ordered that the non-party intervenor receive a “refund of her down payment, with interest at the rate of three (3 percent) percent, from March 9, 2017 to the date of repayment” and that the parties execute documents necessary to reinstate the mortgage loan.

Hudson City Savings Bank v. Woodard, 55553/2014, NYLJ 1202796730695, at *1 (Sup., WE, Decided Aug. 17, 2017), Ecker, J.

 

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.