DICKERSON, J.
The plaintiffs owned a home at 273 Park Avenue in Babylon (hereinafter the premises). They entered into a contract (hereinafter the agreement) with the defendant TJC Development, LLC (hereinafter TJC), pursuant to which TJC was to perform substantial home improvement renovations to the premises. The defendants Gerald Pointing and Joseph Torto were officers, directors, and/or shareholders of TJC. Ultimately, the plaintiffs terminated TJC's involvement with the project for numerous alleged failures and shortcomings. The plaintiffs demanded arbitration against TJC, proceeded to arbitration, and were awarded the sum of $121,155.32 by the arbitrator. At approximately the same time the plaintiffs filed their demand for arbitration against TJC, the plaintiffs commenced this action pursuant to Lien Law article 3-A against TJC, Pointing, and Torto. In the order appealed from, the Supreme Court, inter alia, granted that branch of the defendants' cross motion which was to dismiss the complaint pursuant to CPLR 3211 (a) (1) and (5), concluding that the plaintiffs' Lien Law claim was not viable. We disagree. Contrary to the Supreme Court's determination, the plaintiffs, as homeowners contracting for the performance of certain home improvements, were beneficiaries of the trust created by operation of Lien Law § 70, and they had standing to assert a cause of action pursuant to Lien Law article 3-A against TJC, or its officers or agents, alleging that the funds they paid to TJC were improperly diverted within the meaning of Lien Law § 72. However, as we will also discuss, the plaintiffs' cause of action insofar as asserted against TJC is barred by the doctrine of res judicata based on the prior arbitration proceeding.
By notice of motion dated February 4, 2009, the plaintiffs moved to certify this action as a class action, defining the class
The plaintiff Anthony Ippolito (hereinafter Anthony) submitted an affidavit in support of the plaintiffs' motion, asserting that after TJC's alleged breach of the agreement, the plaintiffs were compelled to commence an arbitration proceeding against TJC. During the arbitration proceeding, the plaintiffs demonstrated that TJC breached its contractual obligation, which was to complete the relevant construction project between August 2004 and December 2004. The plaintiffs further demonstrated that TJC abandoned the project by failing to provide sufficient manpower to complete the work, and by failing to complete the project within a reasonable time.
The arbitrator, in his award, found, among other things, that TJC breached the contract. Accordingly, the arbitrator determined that the plaintiffs were justified in declaring that TJC had breached the contract, and in retaining others to complete the project. According to Anthony, the arbitrator awarded the plaintiffs the principal sum of $102,674, plus interest, for a total award of $121,155.32.
The plaintiffs alleged that the money they paid to TJC constituted trust funds pursuant to Lien Law article 3-A, and that TJC, through its corporate officers, Pointing and Torto, failed to hold and apply the trust funds for the benefit of the trust beneficiaries, including the plaintiffs, but rather misappropriated the funds. In addition, TJC failed to maintain the required records concerning the trust.
The plaintiffs also submitted the arbitrator's award in the arbitration proceeding between the plaintiffs and TJC. The award stated, in pertinent part:
The amount awarded consisted of an estimated reasonable cost to complete the project in the sum of $164,340, less the balance remaining to be paid to TJC ($61,666), for a subtotal of $102,674, plus interest from December 7, 2006, through December 7, 2008, in the sum of $18,481.32, for a total award of $121,155.32.
By notice of cross motion dated February 10, 2009, the defendants cross-moved, inter alia, pursuant to CPLR 3211 (a) (1) and (5) to dismiss the complaint.
In support of their cross motion, the defendants observed that, in or about November 2007, the plaintiffs filed a demand for arbitration pursuant to the arbitration clause incorporated into the agreement between the plaintiffs and TJC. The demand sought only to recover damages which the plaintiffs claimed resulted from TJC's alleged breach. In the demand, the plaintiffs did not refer to any claim against TJC pursuant to Lien Law article 3-A based on diversion of trust funds. Further, during arbitration, the plaintiffs did not advance any such claim.
The defendants asserted, among other things, that the plaintiffs' claim was within the scope of the claims subject to arbitration pursuant to the arbitration clause incorporated into the agreement between the plaintiffs and TJC. Relying on the doctrines of res judicata and collateral estoppel, the defendants asserted that the plaintiffs waived their right to proceed against TJC on a "trust fund diversion" theory because they did not advance such a claim against TJC at arbitration.
The defendants asserted that TJC, and not its officers, would be the only statutory trustee of funds received from the plaintiffs under the Lien Law. The defendants contended that there could be no claim against the principals of TJC for participating in the diversion of the funds without proof that the corporation received and misapplied trust funds. Accordingly, the defendants asserted that the plaintiffs had no claim
Also in support of their cross motion, the defendants submitted a copy of the plaintiffs' demand for arbitration. The plaintiffs were named as the claimants, and TJC was named as the respondent. The claim was described as "[f]ailure to complete the work provided for in the contract in a timely manner and consistent with contractual deadlines and failure to perform work in a reasonable, proper and workmanlike manner." The arbitration clause was reproduced in the demand for arbitration as follows:
The plaintiffs submitted a reply affirmation in further support of their motion and in opposition to the defendants' cross motion. The plaintiffs asserted, among other things, that their trust fund claims were not barred by the prior arbitration proceeding. The plaintiffs claimed that Pointing and Torto were not parties to the arbitration, and, therefore, that they could not rely on the doctrine of res judicata to bar the plaintiffs from asserting their Lien Law article 3-A "trust fund diversion" claim against them. The plaintiffs reiterated their position that, as officers, directors, or agents of TJC, Pointing and Torto may be liable under the Lien Law regardless of whether the plaintiffs may effectively assert a claim against TJC.
As to TJC, the plaintiffs claimed that the defendants failed to demonstrate that the doctrine of res judicata barred the plaintiffs' Lien Law claim on the ground that they could have asserted that claim at the arbitration proceeding, but failed to do so. The plaintiffs further argued that the claims advanced in arbitration and those that are the subject of this action are sufficiently different to preclude the application of res judicata. The plaintiffs described the claim in the arbitration proceeding
The plaintiffs also observed that they could not have named the individual defendants as respondents in the arbitration proceeding. Accordingly, they argued, it would have been "nonsensical" to require them to pursue a Lien Law claim against TJC in the arbitration proceeding, and then require them to assert the same claim against the individual defendants in a separate action.
In the order entered October 21, 2009, the Supreme Court, Nassau County, granted that branch of the defendants' cross motion which was pursuant to CPLR 3211 (a) (1) and (5) to dismiss the complaint, and denied, as academic, the plaintiffs' motion, inter alia, to certify this action as a class action pursuant to CPLR article 9 (2009 NY Slip Op 33253[U] [2009]).
The Supreme Court concluded that the claims at issue here and those addressed in the arbitration proceeding involving breach of contract were the same, as both arose out of TJC's alleged nonperformance of its agreement with the plaintiffs. The claims only differed in the legal theory the plaintiffs employed and the remedy sought. Accordingly, because the claims were the same, the Supreme Court concluded that the plaintiffs were barred by the doctrine of res judicata from seeking to recover trust funds from TJC. However, the Supreme Court stated that this did not necessarily prevent the plaintiffs from asserting their claim against Pointing and Torto, who were not parties to the agreement and, who, under the circumstances, could not have been compelled to participate in the arbitration. As such, Pointing and Torto were not in a position to raise a defense based on the doctrine of res judicata.
With regard to the applicability of Lien Law article 3-A, the Supreme Court reviewed the purpose of that article. The
On appeal, the plaintiffs assert that the Supreme Court erred in granting that branch of the defendants' cross motion which was to dismiss the complaint. The plaintiffs argue that, as owners, they are beneficiaries of the trust funds created by operation of Lien Law § 70, and, accordingly, they have standing to assert a cause of action pursuant to Lien Law article 3-A against the defendants alleging that the funds they paid to TJC were improperly diverted within the meaning of Lien Law § 72. The defendants did not file a brief on appeal. We agree with the plaintiffs, and hold that the Supreme Court erred in concluding that the plaintiffs lacked standing to assert their Lien Law article 3-A cause of action against the defendants, or that the claim, as asserted by these plaintiffs, was not viable.
"Article 3-A of the Lien Law creates `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'" (Aspro Mech. Contr. v Fleet Bank, 1 N.Y.3d 324, 328 [2004], quoting Caristo Constr. Corp. v Diners Fin. Corp., 21 N.Y.2d 507, 512 [1968]; see Lien Law §§ 70, 71). "[T]he primary purpose of article 3-A and its predecessors [is] to ensure that those who have directly expended labor and materials to improve real property [or a public improvement] at the direction of the owner or a general contractor receive payment for the work actually performed" (Aspro Mech. Contr. v Fleet Bank, 1 NY3d at 328 [internal quotation marks omitted]; see Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 N.Y.2d 256, 264 [2002]).
Section 70 of the Lien Law defines trusts created thereunder. That section provides, in pertinent part,
"An article 3-A trust commences `when any asset thereof comes into existence' and continues until all trust claims have been paid or discharged, or all assets have been applied for trust purposes" (Matter of RLI Ins. Co., Sur. Div. v New York State Dept. of Labor, 97 NY2d at 262, quoting Lien Law § 70 [3]).
Synthesizing the foregoing sections of the Lien Law,
Thus, "Lien Law article 3-A mandates that once a trust comes into existence, its funds may not be diverted for non-trust
Contrary to the Supreme Court's determination, as a general matter, the foregoing provisions enable the plaintiffs, as owners, to assert a cause of action pursuant to Lien Law article 3-A against the defendants. Whether the doctrine of res judicata bars such a claim insofar as asserted against TJC, however, is discussed below.
It is undisputed that the plaintiffs are owners within the meaning of Lien Law article 3-A. It is undisputed that the funds paid by the plaintiffs to TJC qualified as trust funds within the meaning of Lien Law article 3-A (see Lien Law § 70 [1]). In the complaint, the plaintiffs alleged that the defendants each participated in diverting the trust assets in violation of Lien Law article 3-A, and specifically Lien Law § 72 (1). As the plaintiffs argue, pursuant to Lien Law § 71, the trust assets of which TJC was a trustee were to be held and applied to, among other things, "payment to which the owner is entitled pursuant to the provisions of section seventy-one-a of this chapter" (Lien Law § 71 [2] [f]). Under Lien Law § 71-a, those funds remained the property of the owners, the plaintiffs here, until the proper payment of such funds by the contractor to the purposes of the home improvement contract, breach by the owners relieving the contractor from its obligation to perform (not alleged here), or substantial performance of the contract (see Lien Law § 71-a [4] [d]).
Thus, under these provisions, the plaintiffs have standing to proceed with an action pursuant to Lien Law article 3-A, and, contrary to the Supreme Court's determination, as alleged, the plaintiffs' action is viable. We note that, theoretically, it may be that the project reached substantial completion while TJC was involved, but there is no proof of substantial completion in the record, and the defendants did not assert that they substantially completed the project.
The cases on which the plaintiffs rely to support their contention that they may assert a Lien Law article 3-A cause of action
Indeed, the Bill Jacket for the 1987 amendments, discussed in Hollowell, is replete with references to the fact that the purpose of the relevant amendments was to protect consumers and homeowners. For example, in a letter to Counsel for the Governor, Paul Kehoe, then-Chairman of the Senate Standing Committee on Consumer Protection and the sponsor of the bill in the Senate, described the bill as "an attempt to provide a meaningful measure of protection for our citizens" (Letter from L. Paul Kehoe, July 24, 1987, at 1, Bill Jacket, L 1987, ch 421, at 6). Kehoe continued, "this bill represents a significant step toward improving the protection of the state's consumers and does so in a fashion which provides little, if any, burden on legitimate
Stern v H. DiMarzo, Inc. (19 Misc.3d 1144[A], 2008 NY Slip Op 51163[U] [2008]), on which the plaintiffs also rely, contains an extensive and persuasive discussion of the applicability of Lien Law article 3-A to an action such as this, including a discussion of standing. The discussion concerning standing emphasizes the amendment of the Lien Law "to protect consumers who contract for home improvements" (2008 NY Slip Op 51163[U], *20). The court in that case specifically addressed the amendment to Lien Law § 71-a (4) pertaining to the fact that the trust funds remain the owners' property until one of three events occurs, as set forth above, as well as the addition of subdivision (2) (f) to Lien Law § 71 to provide that
"Consequently, where a home improvement contract is entered into after the March 1, 1998 [sic] effective date of the amendments, a home owner has a valid trust claim against the moneys advanced by the owner for a home improvement" (Stern v H. DiMarzo, Inc., 2008 NY Slip Op 51163[U], *20).
To the extent that the defendants argued in the Supreme Court that the Lien Law claim was not the plaintiffs' primary claim in Stern, or was somehow not "central to the Court's holding," in order to distinguish that case, that contention is without merit. The court's analysis in Stern is persuasive, and the fact that the Lien Law cause of action was but one of many
To the extent the defendants relied on Langston v Triboro Contr., Inc. (44 A.D.3d 365 [2007]) before the Supreme Court, that case is readily distinguishable from the facts presented here. In Langston, the plaintiff's claim was solely "that he is entitled to return of the money paid to defendant simply because the money, paid over time with checks, admittedly was never deposited into an escrow account in a bank, as required by Lien Law § 71-a (4), but instead was immediately cashed" (id. at 365). Here, the plaintiffs' claim relates to the alleged diversion of trust funds, not the mere manner in which the funds were handled.
Whether the plaintiffs may assert their Lien Law article 3-A cause of action against the two individual defendants, Pointing and Torto, presents an issue of first impression before this Court.
While it is not expressly stated in Lien Law § 79-a (1) (b) that the individual officers or agents of a corporation, as Pointing and Torto are alleged to be, may be liable in a civil action pursuant to Lien Law article 3-A for the improper diversion of trust funds, there is authority for this position. In Fleck v Perla (40 A.D.2d 1069 [1972]), the Fourth Department determined that a corporation's officers could be liable to the beneficiary of a trust for the diversion of the trust funds. The Fourth Department noted that "the Lien Law does not specifically provide for personal liability on the part of an officer of a corporate transferee" (id. at 1070). However, in determining that an officer
Accordingly, we conclude that the plaintiffs, as a general matter, have standing to assert a Lien Law article 3-A claim against the defendants. Contrary to the Supreme Court's determination, their claim is prima facie viable.
The Supreme Court also concluded that the plaintiffs' claim insofar as asserted against TJC was barred by the doctrine of res judicata based on the prior arbitration proceeding. The plaintiffs do not expressly argue that their claim insofar as asserted against TJC is not barred by res judicata. However, they do request that the order appealed from be reversed in its entirety. Accordingly, the Supreme Court's determination that the plaintiffs' claim insofar as asserted against TJC is barred by the doctrine of res judicata is properly before this Court. We conclude that the Supreme Court properly determined that the plaintiffs' claim insofar as asserted against TJC is barred by the doctrine of res judicata, as the plaintiffs should have asserted this cause of action, arising out of the same transaction or series of transactions, in the prior arbitration proceeding.
"Under the transactional analysis approach to res judicata, `once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy'" (CRK Contr. of Suffolk v Brown & Assoc., 260 A.D.2d 530, 530 [1999], quoting O'Brien v City of Syracuse, 54 N.Y.2d 353, 357 [1981]; see Silberstein, Awad & Miklos, P.C. v Spencer, Maston & McCarthy, LLP, 43 A.D.3d 902, 903 [2007]).
"The doctrines of res judicata and collateral estoppel apply to arbitration awards with the same force and effect as they apply to judgments of a court" (id.).
As the plaintiffs observed before the Supreme Court, the doctrine of collateral estoppel is inapplicable to the circumstances here, as the plaintiffs' Lien Law claim was not an issue necessarily decided in the prior arbitration proceeding which is determinative of the issues disputed in this action, and the parties did not have a full and fair opportunity to contest matters related to that issue (id.).
As to the doctrine of res judicata, the plaintiffs and TJC were parties to the prior arbitration proceeding. Moreover, the issues presented in the prior arbitration proceeding and the plaintiffs' Lien Law article 3-A cause of action asserted here constitute claims arising out of the same transaction or series of transactions, even though they may be based upon different theories, and even though the plaintiffs purport to seek a different remedy.
In the prior arbitration proceeding, the plaintiffs sought to recover based on TJC's alleged "[f]ailure to complete the work provided for in the contract in a timely manner and consistent with contractual deadlines and failure to perform work in a reasonable, proper and workmanlike manner." The arbitrator determined that TJC breached its contract with the plaintiffs, and, thus, that the plaintiffs were "entitled to an award equal to the reasonable costs to complete the work under the contract, and the reasonable value of the work needed to correct any deficient work performed by [TJC], less the amount remaining to be paid under [TJC's] contract."
Here, the plaintiffs seek to recover trust funds improperly diverted by the defendants in connection with the same home improvement project. The precise remedy the plaintiffs seek in this action is different, as is the legal theory pursuant to which the plaintiffs hope to recover. However, it is clear that both claims arise out of the same series of facts and transactions, and involve largely the same determinative issues. Accordingly, because the plaintiffs' Lien Law article 3-A claim insofar as asserted
It is clear to this Court that, contrary to the Supreme Court's determination, as a general matter, the plaintiffs may assert against the defendants a cause of action pursuant to Lien Law article 3-A, and their claim is prima facie viable. However, their cause of action insofar as asserted against TJC is barred by the doctrine of res judicata. Accordingly, the order is modified, on the law, by deleting the provision thereof granting those branches of the defendants' cross motion which were to dismiss the complaint insofar as asserted against the defendants Gerald Pointing and Joseph Torto, and substituting therefor a provision denying those branches of the defendants' cross motion, and by deleting the provision thereof denying the plaintiffs' motion as academic; as so modified, the order is affirmed, and the matter is remitted to the Supreme Court, Nassau County, for a determination on the merits of the plaintiffs' motion.
Ordered that the order is modified, on the law, (1) by deleting the provision thereof granting those branches of the defendants' cross motion which were to dismiss the complaint insofar as asserted against the defendants Gerald Pointing and Joseph Torto, and substituting therefor a provision denying those branches of the defendants' cross motion, and (2) by deleting the provision thereof denying the plaintiffs' motion as academic; as so modified, the order is affirmed, with costs payable to the plaintiffs by the defendants Gerald Pointing and Joseph Torto, and the matter is remitted to the Supreme Court, Nassau County, for a determination on the merits of the plaintiffs' motion.