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MEMORANDUM
SUPREME COURT : QUEENS COUNTY
CIVIL TERM IAS PART 3
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By: Justice John A. Milano
ALFA MECHANICAL CORP.,
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Index No. 7180/98
Plaintiff,
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Motion Date: February 22, 2000
- against -
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Motion Cal. No. 33
CARL F. SCHWARTZ, et al.,
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Defendant.
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Plaintiff Alfa Mechanical Corp. Inc. has moved for summary judgment against defendant Carl
F. Schwartz, defendant Louise Fisher, defendant Mark Rubenstein, defendant Brad
Rubenstein, defendant Adam Arnott, and defendant Tracey Arnott. Defendant Carl F. Schwartz
has cross-moved for summary judgment dismissing the complaint against him. Defendant Adam
Arnott and defendant Tracey L. Arnott have cross-moved for summary judgment dismissing the
complaint against them.
The defendants are or were officers, directors, and shareholders of X-Air New York, Inc., which acted as a subcontractor on various construction projects in New York State. X-Air, in turn, sub-subcontracted heating, ventilation, and air conditioning work to the plaintiff for a price of $1,027,005. The plaintiff allegedly performed the work required by its sub-subcontract, but X-Air allegedly failed to pay the sum of $1,027,005, even though the latter received payment for its own work. On or about October 1, 1997, X-Air filed for bankruptcy relief. On April 1, 1998, the plaintiff began this action pursuant to Article 3-A of the Lien Law and, on or about September 2, 1998, served a demand for a verified statement pursuant to section 76 of the Lien Law. Although defendant Carl F. Schwartz, defendant Louis Fisher, defendant Adam Arnott, and defendant Tracey Arnott answered the demand, they could not produce any relevant records or documents. Defendant Mark Rubenstein and defendant Brad Rubenstein failed to answer the demand. Defendant Schwartz alleges that he was merely the chief operating officer in charge of field construction contracts and that he was "never involved with the financial aspects of the corporation." Defendant Adam Arnott alleges that he was merely the director of sales and marketing and that he retired from the company in 1995, prior to the time that the company became indebted to the plaintiff. However, at his deposition defendant Adam Arnott admitted that he remained a shareholder after his retirement. Defendant Tracey Arnott alleges that he was merely an assistant project manager who was not involved with the financial aspects of the company.
"Article 3-A of the Lien Law (Lien Law '' 70-79-a) 'create[s] trust funds out of certain construction payments or funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as specified taxes and expenses of construction ***.'" (Canron Corp. v City of New York, 89 NY2d 147, 153, quoting Caristo Constr. Corp. v Diners Fin. Corp., 21 NY2d 507, 512.) "The contractor must hold and apply those trust assets for certain expenditures arising out of the improvement and incurred in the performance of its contract including the 'payment of claims of subcontractors' (Lien Law ' 71[2][a]). The subcontractor's claim for payment for work performed on the improvement is thus deemed a 'trust claim' (Lien Law ' 71[3][b]) and the subcontractor is designated a 'beneficiary' of the contractor's 'trust' (Lien Law ' 71[4]). An improper diversion of the contractor's trust assets occurs when any such trust asset is paid, transferred or applied for a nontrust purpose, that is, for any purpose other than the expenditures authorized in section 71(2) before all of the trust claims have been paid or discharged (Lien Law ' 72[1])." (Canron Corp. v City of New York, supra 154.) Section 70 of the Lien Law also makes funds received by a subcontractor "under or in connection with a subcontract made with the contractor for such improvement of real property" trust assets. The subcontractor must apply the trust assets held by him in the manner specified by Lien Law ' 71(2). As used in the Lien Law, the term "subcontractor" includes a sub-subcontractor. (Lien Law ' 2[10]).
Lien Law ' 75 provides in relevant part: "2. Every trustee shall keep books or records with respect to each trust of which he is trustee ***." "In exquisite detail, in section 75 of the Lien Law the Legislature has set forth bookkeeping requirements relative to trust funds which are receivable, payable, received, paid, transferred or assigned. These requirements include, inter alia, names, addresses, dates of payment or receipt, dates sums become due or are earned or become payable, conditions of payment, nature of claims paid, whether payment is by check or cash, and numerous other relevant details. The clear purpose of the section is to protect persons entitled to payment of funds for improvement of realty and to prevent the unscrupulous from diverting the funds to other channels ***." (People v Rosano, 69 AD2d 643, affd 50 NY2d 1013.)
Lien Law ' 75(4) provides: "Failure of the trustee to keep the books or records required by this section shall be presumptive evidence that the trustee has applied or consented to the application of trust funds actually received by him as money or an instrument for the payment of money for purposes other than a purpose of the trust as specified in section seventy-one of this chapter." (See, Cadin Const. Corp. v Adam Jay Associates, 112 AD2d 395; Frontier Excavating, Inc. v Sovereign Const. Co., 30 AD2d 487.)
"[T]he proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact ***." (Alvarez v Prospect Hospital, 68 NY2d 320, 324.) In the case at bar, the plaintiff failed to carry this burden. Contrary to the plaintiff's contention, the individual defendants are not made trustees by Article 3-A of the Lien Law. Section 70(1) of the Lien Law by implication makes owners, contractors, and subcontractors trustees of certain funds, but it does not make shareholders, officers, or directors of those parties trustees. Thus, the plaintiff has erroneously relied on the presumption of diversion created by Lien Law ' 75(4), which by its express terms applies only against a "trustee." The statutory presumption of diversion is not applicable against the principal of a company made a trustee pursuant to Article 3-A of the Lien Law. (Forest Elec. Corp. v Karco-Davis, Inc., 259 AD2d 303.) While a corporate principal who knowingly participates in the diversion of assets made trust funds by operation of Article 3-A of the Lien Law is individually liable for such conduct (see, Atlas Building Systems, Inc. v Rende, 236 AD2d 494; South Carolina Steel Corp. v Miller, 170 AD2d 592; Scriven v Maple Knoll Apartments, Inc., 46 AD2d 210), liability under Article 3-A of the Lien law may not be imposed on individuals solely because they were corporate principals at the time a diversion occurred. (See, Mandel v Neuman-Geller, Ltd., 202 AD2d 647; Ace Hardwood Flooring Co. v Glazer, 74 AD2d 912.) The statutory presumption of diversion is not available to the plaintiff against the individual defendants, and the plaintiff failed to make on its motion for summary judgment an adequate evidentiary showing that they actually caused or participated in the corporation's unauthorized payments. Summary judgment against the individual defendants is precluded by issues of fact. (See, Forest Elec. Corp. v Karco-Davis, Inc., supra; Mandel v Neuman-Geller, Ltd., supra; Ace Hardwood Flooring Co. v Glazer, supra.) On the other hand, the moving defendants also failed to demonstrate their entitlement to summary judgment. Despite being officers, directors, and shareholders of an apparently small, closely held company, they failed to account for the disappearance of over one million dollars in trust funds. Their affidavits merely raised issues of fact and credibility which should be left for the trier of fact. (See, Dayan v Yurkowski, 238 AD2d 541; T&L Redemption Center Corp. v Phoenix Beverages, Inc., 238 AD2d 504.)
Accordingly, the motion and the cross motions are denied.
Settle order.
Dated: May 11, 2000
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Justice John A. Milano