Court Opinion

ID: 9837515
Source: CourtListenerOpinion
Date Created: 2023-09-02 03:39:32.434343+00
Date Added: 2024-06-11T07:45:26.300545
License: Public Domain

Gische, J.
(dissenting in part). While I am in agreement with most of the majority’s decision, I depart with respect to its conclusion that defendants’ Completion Guaranty is an appropriate undertaking that satisfies the requirements of Lien Law § 5. It is for this reason that I partially dissent and would reinstate subpart (f) of the first cause of action based upon defendants’ alleged failure to post a bond or other undertaking as required by Lien Law § 5.1
The Atlantic Yards Project2 is a sprawling $4.9 billion mixed-use mega-development encompassing 22 acres of underdeveloped public land. The New York State Development Corp, doing business as Empire State Development Corp (ESDC), a public benefit corporation created by the State of New York, partnered with defendant Forest City Ratner Companies, LLC (FCRC), a private developer, to implement and effectuate this ambitious redevelopment program, which was partly funded by the City and the State of New York. This appeal only concerns that part of the project involving the construction of a modular *15residential building located at 461 Dean Street in Brooklyn, referred to as the B2 tower. Defendant Atlantic Yards B2 Owner, LLC (B2 Owner) is an FCRC affiliate, as are many of the other entities involved at various stages of this project. Despite its description as “owner,” B2 Owner does not, in fact, own fee title to the land upon which B2 tower is built. The land, which is publicly owned, was ultimately triple net leased by ESDC, as landlord, to another FCRC affiliate, FC Atlantic Yards B2, as tenant (Development Lease). The Development Lease, which gave the tenant the right to develop the land, was assigned to B2 Owner.
Many details of the overarching improvement project are set forth in the March 4, 2010 “Development Agreement” (Development Agreement), among ESDC, Atlantic Yards Development Company, LLC (AYDC), Brooklyn Arena, LLC, and AYDC Interim Developer, LLC (Interim Developer), an affiliate of B2 Owner. Plaintiff (Skanska) is not a party to this Development Agreement. One goal of the project was to have four towers built using modular units, because modular construction was believed to be an easier, faster, and more economical way to build than conventional construction. The B2 tower, now completed, is, at 32 stories tall, reportedly the world’s tallest modular building.3 Ultimately, it was the only tower at the project erected by modular construction.
Pursuant to a “Construction Management and Fabrication Services Agreement” (Construction Agreement) dated October 31, 2012, between B2 Owner and Skanska, it was agreed that Skanska would be responsible for the fabrication, delivery and erection of the modules; Skanska was also to perform and provide the attendant construction and construction management services necessary to erect the tower. There is no express requirement that B2 Owner comply with the Lien Law, although there is a general requirement that the parties comply with New York law. To further effectuate the terms of the Construction Agreement, FCRC and Skanska (and/or their respective affiliates) entered into a series of additional agreements. In one agreement, the parties joined forces to establish a new company, FC+Skanska Modular, LLC (FC+S). In a second agreement, the intellectual property of fabricating the *16modules, which belonged to FCRC, was transferred to FC+S. Skanska also executed another agreement, a subcontract with FC+S, making it the sole source subcontractor for fabrication of the modular units. The fabrication would take place offsite at a factory leased by FCRC; Skanska would then transport, deliver and stack them using cranes to form the tower. Skan-ska is not a party to the Development Lease that was subsequently entered into as of December 14, 2012. The Develop.ment Lease expressly required the tenant, which had the rights of development, to comply with Lien Law § 5. It also expressly required that FCRC provide ESDC with a guaranty, which was made as of May 13, 2013 (Completion Guaranty).4 The Completion Guaranty was a condition precedent to the commencement of work. In addition to guaranteeing completion of the work, FCRC also guaranteed that it would “use any and all amounts disbursed from time to time by the Construction Lender, solely to fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work.”
Additionally, FCRC guaranteed that
“the Guaranteed Work shall be and remain free and clear of all liens, encumbrances, claims, chattel mortgages, conditional bills of sale and other charges of any and all persons, firms, corporations or other entities furnishing materials, labor or services in constructing or completing the Guaranteed Work, provided that the Guarantor’s obligations . . . shall be limited solely to the extent Tenant or Guarantor shall have received a disbursement from the Construction Lender or otherwise, for the payment of such materials, labor or services”
The B2 tower was beset with production problems from the outset, and the deadline that had been set for its substantial completion (July 25, 2014) was not met, with each party blaming the other for the delay. In December 2013, FCRC announced that it was abandoning modular construction and that the next scheduled residential tower (B3) would be built using *17conventional construction methods. In August 2014, Skanska notified B2 Owner that B2 Owner had breached the Construction Agreement in numerous specific ways, demanding that the breaches be cured or it would stop working on the tower and terminate the contract. Unable to settle their differences, this and other related litigation ensued.
Insofar as the Lien Law claim is concerned, the motion court’s basis for dismissal was that there is no provision in the Construction Agreement expressly requiring defendants’ compliance with the requirements of the Lien Law. In reaching the question of whether the Completion Guaranty satisfies Lien Law § 5, the majority implicitly accepts that the law applies to the parties’ project, and I agree. This is a real estate development project involving publicly owned land improved by a private developer. The express terms of the Construction Agreement provide that the project is governed by the laws of the State of New York. That includes the Lien Law (see Dolman v United States Trust Co. of N.Y., 2 NY2d 110, 116 [1956]).
Defendants argue that even if Skanska can assert claims against them under Lien Law § 5, they are in compliance with the statute because, pursuant to the Development Lease, they provided ESDC with a Completion Guaranty. I disagree that the Completion Guaranty is a form of undertaking that satisfies the Lien Law. In general, the primary purpose of the Lien Law is to ensure that contractors, subcontractors, laborers and those who furnish materials in connection with the improvement of real property are promptly paid. Because the statute is remedial in nature, it is to be construed liberally to secure the beneficial interests and purposes thereof (Lien Law § 23). It is intended to protect financially those who have directly expended labor and materials to improve real property at the direction of a general contractor or owner of a construction project (West-Fair Elec. Contrs. v Aetna Cas. & Sur. Co., 87 NY2d 148, 157 [1995]). Although, depending upon whether the improvement is made to public or private land, the Lien Law provides for different means of protection, the objective of making sure that protected parties are promptly paid is the same.
A private improvement is any improvement of real property not belonging to the state or a public corporation, whereas a public improvement is an improvement of any real property belonging to the state or a public corporation (Lien Law § 2 [7], [8]). If the improvement is made to private property, a mechanic’s lien for the amount owed to the protected party *18may be filed upon the property improved, affecting the owner’s right, title and interest in that real property. A mechanic’s lien cannot, however, be filed against improved publicly owned land (see Albany County Indus. Dev. Agency v Gastinger Ries Walker Architects, 144 AD2d 891, 892 [3d Dept 1988], appeal dismissed 73 NY2d 1010 [1989], Iv denied 74 NY2d 605 [1989]; Matter of Paerdegat Boat & Racquet Club v Zarrelli, 83 AD2d 444 [2d Dept 1981], revd 57 NY2d 966 [1982] [for the reasons stated in the concurring in part and dissenting in part opinion by former Justice James D. Hopkins at the Appellate Division (83 AD2d 444, 449-452)]). Instead, pursuant to Lien Law § 5, a protected party owed monies for improving public property may file a lien that attaches to the monies of the state or public corporation funding applicable to the improvement (Lien Law § 5; Matter of Paerdegat, 57 NY2d at 968, citing 83 AD2d at 449-452).
There are, however, situations where a protected party provides labor, or materials, etc., to a private entity that is improving publicly owned land for the benefit of the private entity. In those situations, a protected party is still not entitled to file a mechanic’s lien against the public property, notwithstanding that the benefits inure to a private entity (Matter of Paerdegat Boat, 57 NY2d at 968, citing 83 AD2d at 449-452). Nor can the protected party attach any public funds applicable to the improvement, because no state or public corporation funding for the project has been established.
In order to address this gap in protection, Lien Law § 5 was amended in 2004 to provide the following:
“Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.”
The allegations in the complaint implicate the type of hybrid public/private improvement project contemplated by the 2004 Lien Law amendment, because a private entity has leased *19property from a public corporation, and constructed a tower. Although the parties disagree about whether the beneficial interest inures to the benefit of the public or the private entity, there are facts alleged supporting Skanska’s claim that this is a hybrid improvement project primarily inuring to FCRC’s benefit (see Davidson Pipe Supply Co. v Wyoming County Indus. Dev. Agency, 85 NY2d 281 [1995]).5 Thus, under the facts pleaded, Lien Law § 5’s requirements in situations where there is no public fund apply, thereby obligating the public owner to require the private entity to “post, or cause to be posted, a bond or other form of undertaking.”
Defendants argue that even if Lien Law § 5 applies to this project, ESDC can accept some form of security other than a bond. Furthermore, they maintain that the nature and extent of the security is completely within the discretion of the public owner, claiming that in this case ESDC could have, had it wanted to, simply accepted the private developer’s representations of creditworthiness as a satisfactory undertaking. Defendants maintain that FCRC’s Completion Guaranty is, therefore, an acceptable and suitable “other form of undertaking,” within ESDC’s exercise of discretion.
B2 Owner is correct that Lien Law § 5 does not exclusively require the filing of a bond as security in these circumstances, because the express statutory language permits another form of undertaking. Not just any form of alternative security, however, will suffice. In order to achieve the objective of the Lien Law, and consistent with the legislative history of the amendment, any alternative undertaking must provide substantially equivalent protection to that provided by a bond. The alternative undertaking should be a financial arrangement that would afford an unpaid contractor, subcontractor, laborer, or provider of materials, a fund of money, or an asset, available for predictable and prompt payment. An identifiable fund of money, or a bond, or a lien against real property, are Lien Law remedies available in other contexts where services and materials are provided but not paid for, each having characteristics of ready availability.
A letter of credit, the alternative undertaking contemplated by Governor Pataki when the 2004 amendment was passed, *20would also fulfill these requirements. In vetoing an earlier bill to amend Lien Law § 5, Governor Pataki recommended that any new proposal should allow the public owner to require the private entity to “post” another form of undertaking, specifically suggesting a letter of credit as one possible alternative (Governor’s Veto Message No. 1 of 2004 [Posting of Payment Bonds], vetoing 2003 NY Assembly Bill A5805 [Tocci], 2004 NY Legis Ann at 475).6 A letter of credit is an obligation undertaken by a bank to make a payment if the beneficiary fails to obtain direct payment from the applicant obtaining the letter of credit (Nissho Iwai Europe v Korea First Bank, 99 NY2d 115, 120 [2002], citing FDIC v Philadelphia Gear Corp., 476 US 426, 428 [1986]; see also BasicNet S.p.A. v CFP Servs. Ltd., 127 AD3d 157 [1st Dept 2015]). “[T]he issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the . . . contract and separate as well from any obligation of the issuer to its customer under their agreement” (BasicNet S.p.A., 127 AD3d at 167). Thus, a letter of credit is “superior to a normal surety bond or guaranty because the issuer is primarily liable and is precluded from asserting defenses that an ordinary guarantor could assert” (id.).
The Completion Guaranty that FCRC provided in this case was a requirement of the lease and a condition precedent to commencing the work. It guarantees that B2 Owner will substantially complete the project and apply money disbursed by its lender to do the work. Although the Completion Guaranty generically states that the work will be kept “free ... of all liens,” it is unclear how a mechanic’s lien could be filed against the property, given its public nature, because “real property owned by a public corporation is immune to mechanic’s liens” (Albany County Indus. Dev. Agency v Gastinger Ries Walker Architects, 144 AD2d at 892). A completion guaranty such as FCRC’s merely “guarantees the completion of a project (usually a construction project) should the borrower be unable to do so” (Turnberry Residential Ltd. Partner, L.P. v Wilmington Trust FSB, 99 AD3d 176, 177 [2012], lv denied 20 NY3d 859 [2013]).
*21The Completion Guaranty is not the functional equivalent of a bond or other form of undertaking, because it is no more than FCRC’s contractual promise to complete the project and pay its account, which, if not honored, requires a lawsuit to secure a judgment and a collection process to obtain satisfaction (see Crown Tire Co. v Tire Assoc. of Fairport, 177 AD2d 974 [4th Dept 1991]). Moreover, recovery is dependent upon a guarantor’s particular financial circumstances at the time a protected party is in need of the remedies that the Lien Law provides. This is hardly the streamlined and predictable process Lien Law § 5 calls for in “guaranteeing prompt payment of moneys due to the contractor ... in the prosecution of the work on the public improvement” where there are no public funds. Nor is it an identifiable fund or asset on which a protected party can draw down payment. In other words, contractors and subcontractors on hybrid construction projects would be in a worse position in terms of a remedy than their private and public improvement counterparts, eviscerating the underlying purpose of the 2004 amendment. While I agree with the majority that it is permissible under Lien Law § 5 for FCRC to satisfy its obligations by means other than a bond, the Completion Guarantee FCRC provided does not fulfill that obligation. I would, therefore, modify the order to deny dismissal of subpart (f) of the first cause of action.
Saxe and Webber, JJ., concur with Acosta, J.R; Gische and Kahn, JJ., dissent in part in an opinion by Gische, J.
Order, Supreme Court, New York County, entered July 20, 2015, modified, on the law, to deny defendants Atlantic Yards B2 Owner, LLC and Forest City Ratner Companies, LLC’s motion to dismiss subpart (h) of the first cause of action and to grant their motion to dismiss the third cause of action, and otherwise affirmed, without costs.

. I do not reach plaintiff’s request for partial summary judgment because this appeal concerns only Supreme Court’s disposition on defendants’ CPLR 3211 motion to dismiss. Plaintiff did not appeal Supreme Court’s denial of its request for summary judgment treatment under CPLR 3211 (c).

. The project has since been renamed and is now called Pacific Park, Brooklyn.

. Philip Stevens, SHoP Tops Out World’s Tallest Modular Building in Brooklyn (May 15, 2016), designbloom, available at http://www.designboom-.com/architecture/shop-architects-461-dean-street-pacific-park-brooklyn-new-york-05-15-2016 (accessed Sept. 27, 2016).

. There is also a December 14, 2012 “Completion Guaranty” by FCRC in favor of the Bank of New York Mellon, the bank that extended almost $93 million in credit. The parties primarily direct their argument to the May 13, 2013 guaranty, referring to it as the “Completion Guaranty,” which nomenclature I adopt in this dissent.

. Unlike Davidson, which involved a public agency that had only temporary status as an intermediary owner solely for tax purposes, here the land upon which B2 tower was constructed is still publicly owned (Davidson, 85 NY2d at 286).

. In an internal memorandum dated July 20, 2004, sent by Governor Pa-taki’s deputy counsel to the governor’s counsel, reference is made to the governor’s prior veto, because the prior bill “did not provide for security interests other than performance bonds (such as letters of credit)” (see Letter from Governor’s Deputy Counsel, July 20, 2004 [in support of 2003 NY Senate Bill S595-A], Bill Jacket, L 2004, ch 155 at 10).