CONSTRUCTION & REAL ESTATE BLOG

In Seta Artunian Nassif, et. al. v. Jelmac, L.L.C., No. A-4100-10T2 (N.J. Super. Ct. App. Div. July 11, 2012), the Appellate Division of the Superior Court of New Jersey was presented with the following legal issue: what constitutes a fraudulent transfer under the New Jersey Fraudulent Transfer Act (Act)? N.J.S.A. 25:2-26.

That case involved a business that was late in paying its rent. The landlord alleged that the entity that was responsible for the rent had transferred its assets to insiders who were individuals that had a relationship to the entity. The plaintiff alleged that the purpose had been to frustrate the landlords ability to collect a judgment for the rent. The Court was asked to determine whether the admitted transfer of those assets constituted a fraudulent transfer under the Act.

The Act sets forth the following factors to determine whether a fraudulent transfer occurred:

The Court determined that no fraudulent transfer had occurred. In reaching that holding, it focused on the fact that no evidence had been adduced as to when the transfers took place. Therefore, there was no way
of knowing whether the transfers were done knowing that they would render  the tenant insolvent. As the court stated, [i]n  other words, no evidence demonstrates whether the alleged cash transfer was made before or after plaintiff’s claim arose. Id. at 20.

This case is instructive for those individuals who control entities that may owe money to others.  The Act should be taken into account when moving funds from such an entity to be sure the transfer does not run afoul of it.

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2012 Nissenbaum Law Group, LLC

In Great Am. Restoration Services, Inc. v. Patricia Lenti, et al., 2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012), the Supreme Court of New York, Appellate Division (Second Judicial Department), addressed whether, under New York City’s Administrative Code, a contractor is required to possess a license to perform work on a house.

The facts were straightforward. After a fire at the defendants’ house, they hired Plaintiff to temporarily “cover holes in the roof, remove water from the premises, remove both salvageable and unsalvageable personal property, store such property, and remove debris.” Id. at 2.  One of the issues was whether the Plaintiff needed to be licensed under the NY Administrative Code.

In that case, the Supreme Court (Nassau County) had granted the Contractor’s (“Plaintiff”) motion for summary judgment on the issue of liability in an action to recover damages for breach of contract.  The lower Court also denied defendants’ cross motion to dismiss the complaint pursuant to CPLR 3211(a)(7).  The Plaintiff appealed.

The Appellate Division upheld the lower Court’s decision because the Appellate Division felt Plaintiff established its prima facie entitlement to judgment as a matter of law. Id.  Plaintiff submitted the contract between the parties that laid out the work that Plaintiff was to perform.  The contract clearly stated that defendants would be responsible for any charges not covered by the defendants’ insurance policy.  Plaintiff also submitted proof that it satisfactorily completed the work and never got paid for that work pursuant to the contract.  Id.

The Appellate Court stated that since the defendants failed to “raise a triable issue of fact in response [to the evidence Plaintiff submitted for review], the Supreme Court properly granted the plaintiff’s motion for summary judgment on the issue of liability.” Id.   The Appellate Division also stated that the lower Court properly determined that the work Plaintiff performed on the defendants’ home did not constitute “home improvement” as defined in Administrative Code of City of New York (“Code”) § 20-386(2).  Under § 20-386(2), “home improvement” is defined as

“The construction, repair, replacement, remodeling, alteration, conversion, rehabilitation, renovation, modernization, improvement, or addition to any land or building, or that portion thereof which is used or designed to be used as a residence or dwelling place and shall include but not be limited to the construction, erection, replacement, or improvement of driveways, swimming pools, terraces, patios, landscaping, fences, porches, garages, fallout shelters, basements and other improvements to structures or upon land which is adjacent to a dwelling house.  “Home improvement” shall not include (i) the construction of a new home or building or work done by a contractor in compliance with a guarantee of completion of a new building project, (ii) the sale of goods or materials by a seller who neither arranges to perform no performs directly or indirectly any work or labor in connection with the installation of or application of the goods or materials, (iii) residences owned by or controlled by the state or any municipal subdivision thereof, or (iv) painting or decorating of a building, residence, home or apartment, when not incidental or related to home improvement work as herein defined.  Without regard to the extent of affixation, “home improvement” shall also include the installation of central heating or air conditioning systems, central vacuum cleaning systems, storm windows, awnings or communication systems.”

Administrative Code of City of New York § 20-386 (2).

As determined by the lower Court, since Plaintiff did not perform work that rose to the level of that constituting home improvement, it was not required to possess a license pursuant to the Code § 20-387(a).  Consequently, Plaintiff was not required to plead that it was duly licensed by the Department of Consumer Affairs of the City of New York as a home improvement contractor.  This finding justified the lower Court’s denial of defendants’ cross motion to dismiss the complaint “pursuant to CPLR 3211 (a)(7) for failure to plead that it was so licensed.”  Great Am. Restoration Services, Inc. v. Patricia Lenti, et al.,  2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012).

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© 2012 Nissenbaum Law Group, LLC

In 1561 Irving, LLC v. Francisca Lopez, A-1150-10T3 (N.J. Super. Ct. App. Div. August 2, 2012), the Appellate Division of the Superior Court of New Jersey was presented with the following question: if a landlord makes renovations to commercial property that it leases, preventing its tenant from conducting business and the tenant stops paying rent, will the tenant still owe the landlord rent for that period?

In that case, defendant Francisca Lopez (defendant) appealed from a judgment by the Superior Court of New Jersey, Law Division, that awarded plaintiff 1561 Irving, LLC (plaintiff) $1155.31 for unpaid rent, late fees and court costs.  The Law Division court also dismissed defendant’s counterclaim.

Defendant signed a commercial lease with plaintiff for a term of just under two years.  As owner of the business that was a party to the contract, defendant personally guaranteed payment of all sums due and owing to plaintiff in accordance with the lease. See id. at 2.  The terms of the lease were as follows:

[defendant] was to pay $500 per month for the first year of the lease and $525 per month for the second year of the lease, together with a late charge of five percent, as additional rent, for each payment that was more than ten days late; 1561 Irving was entitled to reasonable attorney’s fees incurred to enforce the terms of the lease; and if [defendant] remained in possession of the property past the end of the lease term, the monthly rent would be 250% of the last month’s rent under the lease.

Id.

During the same month that the lease was set to terminate, plaintiff began making renovations to an apartment located above defendant’s store. In response to plaintiff’s allegation that defendant breached the lease agreement by failing to pay the rent, defendant alleged that the renovations caused her to suffer business losses in the amount of ten thousand dollars ($10,000.00) because she was constructively evicted from the premises.

During the bench trial, an employee of the property management company (employee) hired by plaintiff testified that defendant owed twenty-five dollars ($25.00) for rent because its five hundred ($500.00) security deposit was applied to the unpaid rent amount of five hundred and twenty-five dollars ($525.00).  The employee also testified that the renovations only took approximately six (6) weeks to complete and plaintiff only entered defendant’s space three different times to do plumbing work. Id. at 3.

Although defendant’s investor testified on defendant’s behalf, claiming that defendant was unable to conduct business during the renovations, the Superior Court of New Jersey, Law Division, ultimately decided in favor of the plaintiff.  Defendant was ordered to pay plaintiff the monies that was owed pursuant to the guarantor provision of the lease, and pay five hundred and fifty dollars ($550.00) in back rent, together with late fees.  The Trial Court found that the employee’s version of what happened was the accurate version, but gave defendant a three day credit for the time when the renovations interfered with defendant’s premises.

The Appellate Division found that the Trial Court carefully reviewed the evidence and made detailed findings of fact . . . [and] correctly calculated that 1561 Irving was entitled to a judgment in the amount of $1155.31, and [] correctly determined that [defendant] was personally liable as guarantor. Id. at 4-5.  Ultimately, the Appellate Court upheld the Trial Court’s findings.

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� 2012 Nissenbaum Law Group, LLC

In Frontier Ins. Co. v. Nat’l Signal Corp. et. al., Civ. Action No. 98-4265 (E.D. Penn. November  9, 1998), the Federal District Court for the Eastern District of Pennsylvania addressed the circumstances under which  a party who is not domiciled in the forum state may overcome a motion to dismiss for lack of personal jurisdiction.

In that case, Frontier Ins. Co (“Plaintiff”) brought a diversity action seeking to recover monies paid and expended under the terms of a Performance and Payment Bond (“Bond”). It was filed after judgment was rendered against Plaintiff in a prior suit.  The prior suit was filed against Plaintiff by a supplier of National Signal Corp. (“National”) seeking payment for equipment sold to National.  National contracted with another company for “design, refurbishment, and construction work on several railroad grade crossing signals in Pennsylvania” Id. at 1, and Plaintiff issued a Bond as security for that work.  Plaintiff had a General Agreement of Indemnity (“Agreement”) with National, Joseph S. Banasiak and Kimberly A. Banasiak (collectively “Defendants,” individually “Defendant”). The Defendants were the owners, officers, and directors of National. The Agreement held National and the Defendants liable for indemnifying Plaintiff from any claims, payments or judgments that Plaintiff may incur because of the Bond.  Id. at 2.   As a result, Plaintiff initiated a lawsuit and Defendants filed a motion to dismiss, for among other things, lack of personal jurisdiction.

The motion was denied for the following reasons. The Court noted that when a defendant raises the defense of the court’s lack of personal jurisdiction, the plaintiff bears the burden of showing that there are sufficient contacts between the defendants and the forum to justify proper jurisdiction. See id. at 3.  Under Pennsylvania law, “a court exercises jurisdiction to the fullest extent permitted by the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States.” Id. at 3; 42 Pa. Con. Stat. Ann. § 5322(b). Pursuant to the Due Process Clause, the Defendants were responsible for establishing minimum contacts with Pennsylvania, the forum state, to establish that allowing the suit to continue forward in Pennsylvania would not “offend traditional notions of fair play and substantial justice.” Id. at 3.

To do this, the Defendants needed to first show that they acted in Pennsylvania thereby purposefully availing themselves of the benefits and protections of Pennsylvania law.  See id.  The Court mentioned that establishment of minimum contacts came when the connection and conduct within the forum state was such that the Defendants could reasonably anticipate being brought into court there.  The court found that the Defendants had minimum contacts with Pennsylvania because the Defendants entered into the Agreement in their individual capacities thereby “stepp[ing] into [Plaintiff’s] shoes and themselves guaranteed the Pennsylvania construction work performed by National.  Serving as a guarantor may amount to minimum contacts where, as in the instant case, the guarantor has a financial interest in the business or person whose obligation it guarantees.”  Id. at 5.  The Court noted that “[t]he Agreement itself is a contact by both of [the Defendants] individually with the construction work and therefore with Pennsylvania, and is sufficient to establish specific jurisdiction on a lawsuit arising out of the Agreement.” Id. at 6.  Further, because performance of the Agreement was centered in Pennsylvania, the very purpose of the Agreement focused on Pennsylvania, and the Bond that was issued to support the transaction between National and the other construction company came as a result of that transaction being for work to be performed in Pennsylvania, the Court found that it was reasonable for the Defendants to have anticipated being haled into court in Pennsylvania in a “dispute over the indemnity Agreement.” Id. at 7.

Once minimum contacts were established, the Court needed to address whether assertion of personal jurisdiction comported with “fair play and substantial justice.” Id. at 7.  To do this, the Court evaluated the “burden on the defendants, the forum’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the states in furthering fundamental substantive social policies.” Id. at 7.  The burden was on the Defendants to evince that rendering jurisdiction in the forum state would be unreasonable. It was found that the Defendants did not carry their burden and did not offer any reason why being subjected to jurisdiction in Pennsylvania would be “so burdensome or so offensive to the interstate judicial system as to offend fair play and substantial justice.” Id. at 7.  Ultimately, the Court concluded that Pennsylvania had personal jurisdiction over the Defendants and dismissed the motion on that ground.

The contacts a defendant establishes with a state in which a plaintiff seeks to file a complaint is important when assessing that states jurisdictional right over that defendant.  If a defendant purposefully conducts business in a state and avails himself of the benefits of that state’s laws, he may have difficulty later contesting that state’s jurisdictional power.

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© 2012 Nissenbaum Law Group, LLC

In Emigrant Mtge. Co., Inc. v. Greenberg, NY Slip Op 50387(U) (D. Nassau County, 1^st District March 8, 2012), the court considered a very important issue for co-op owners: whether the co-op owner could be evicted if he no longer owned his shares in the co-op itself.

The difference between owning a co-op and owning a condominium is that the co-op owner is given shares in the cooperative itself.  On the other hand, the condominium owner is given a deed for the actual apartment that he purchases.

In the Emigrant case, the co-op owner pledged his stock as collateral for a debt.  He defaulted and the creditor obtained the stock.  The question was whether that also allowed the creditor to evict the former owner.

The Emigrant court first held that it had jurisdiction to evict the former co-op owner, notwithstanding the fact that the co-op itself (as opposed to the stock) was not owned by him.  Even though the actual ownership solely involved stock, not realty, the court cited a number of cases that indicate that the ownership of stock in a co-op is effectively the same as ownership of real estate.

The court cited such examples as the fact that the sale of a co-op has been held to require writing under the Statute of Frauds, because it is a conveyance of realty.  See Statute of Frauds (General Obligations Law 5-703); Maloney v. Weingarten, 118 AD2d 836, 837, 837, 500 N.Y.S.2d 320, lv. to appeal denied, 69 NY2d 608, 516 N.Y.S.2d 1023, 509 N.E.2d 358.  Likewise, the shares of a co-op are not deemed to be securities for purposes of The Securities Act of 1933 and The Securities Exchange Act of 1934.  See United Hous. Found v. Forman, 421 U.S. 837, esp854-860, 95 S.Ct. 2051, 2061-64, 44 L.Ed.2d 621 reh. Den., 423 U.S. 884. 96 S.Ct. 157, 46 L.Ed.2d 115.

In sum, the court held [a]s between the secured party and the defaulting tenant, the secured party has a superior right to the apartment and may seek to evict the defaulting tenant when his/her interest has been extinguished. Id. at 5.

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2012 Nissenbaum Law Group, LLC

What constitutes a “pay-if-paid” construction contract clause? The United States Court of Appeals for the Third Circuit recently addressed this question in Sloan v. Liberty Mutual Insurance Company, 653 F.3d 175 (3d Cir. 2011).

That case involved a waterfront condominium in Philadelphia.  Isla of Capri Associates LP, the developer of the condominiums (“IOC”), contracted with Shoemaker Construction Co. (“Shoemaker”) to be the contractor for the project (“Contractor Contract”).  Subsequently, Shoemaker hired subcontractor Sloan & Co. (“Sloan”) to perform construction involving drywall and carpentry (“Subcontract”).  Liberty Mutual Insurance Co. (“Liberty”) issued a surety bond guaranteeing payment for the subcontractors work.  After the work was completed, IOC refused to pay Shoemaker for monies owed under the contractor contract because IOC was unhappy with some of the subcontractors’ work.  As a result, Shoemaker withheld the remaining balance due to Sloan.

Sloan filed a claim against Liberty for payment pursuant to the surety bond. Id. at 177.  Liberty denied any payment obligation under the premise that Paragraph 6.f of the subcontract contained a provision that conditioned Sloan’s right to payment on IOC’s payment to Shoemaker (a pay-if-paid clause). See id.  Therefore, Sloan was not entitled to payment since Shoemaker never received payment from IOC. Id.  The United States District Court for the Eastern District of Pennsylvania entered partial summary judgment for Sloan, rejecting Liberty’s view of the contract. Id. at 178.

The dispute here centered on the interpretation of Paragraph 6.f of the subcontract, which dealt with final payment.  The first subparagraph provided: ‘Final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment . . .’ Id. at 179.  There were seven (7) conditions precedent, one of which was that ‘[IOC] shall have accepted the Work and made final payment thereunder to [Shoemaker].’ Id.  Another provided that Shoemaker “shall have received final payment from [IOC] for [Sloan’s] work.’ Id.

Paragraph 20’s liquidating provision in the subcontract further clarified the extent of Shoemaker’s responsibility for payment to Sloan:

“In the event [Sloan] asserts a claim for payment of the Subcontract Sum or a portion therof . . . and in the event that [Shoemaker] in its sole, exclusive and arbitrary discretion submits said . . . Claim to [IOC] . . . for a decision or determination, then all decisions and determinations made by [IOC] or its representative shall be binding upon [Sloan] even though [Sloan] may not be a party thereto.”

Id. at 182.

When Liberty appealed the United States District Court for the Eastern District of Pennsylvania’s judgment, the Third Circuit was satisfied that the contract stipulated a pay-if-paid compensation policy for Sloan. See id. at 184.  The Third Circuit concluded that “Paragraphs 20 and 6.f create a mechanism for passing through Sloan’s remaining claims for final payment and peg Sloan’s recovery to the amount that Shoemaker receives from IOC for Sloan’s work.” Id.   Sloan, therefore, received a proportional/pro rata share of the recovery Shoemaker gained from its separate lawsuit against IOC rather than receiving the full balance it was owed under the contract. See id.

The lesson here for subcontractors is to be aware of the pay-if-paid issue when drafting the subcontractor agreement.

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© 2012 Nissenbaum Law Group, LLC