FLINTLOCK CONSTRUCTION SERVICES LLC v. Morris Miller et al., Defendants. (2024)

Judgment, Supreme Court, New York County (Melissa Crane, J.), entered on December 21, 2022, awarding plaintiff $451,326.00 with statutory interest pursuant to Lien Law § 77(3)(a)(i) from October 13, 2012 until the date of entry, plus costs, for a total award of $647,085.29, for diversion of trust assets under Lien Law Article 3–A, and denying plaintiff's demand for an award of punitive damages, unanimously affirmed, without costs.  Appeal from the bench trial order, same court and Justice, entered on or about December 2, 2022, which, insofar as appealed from as limited by the briefs, denied plaintiff's demand for punitive damages, unanimously dismissed, without costs, as subsumed in the cross-appeal from the judgment.

As previously found in the decision on the motion to dismiss (Marcy S. Friedman, J., entered November 25, 2014), plaintiff has standing to assert the diversion of trust assets claim here based on its status as subrogee of defendants’ suppliers (see Wallkill Med. Dev., LLC v. Sweet Constructors, LLC, 83 A.D.3d 695, 695–696, 919 N.Y.S.2d 905 [2d Dept. 2011];  J. Petrocelli Constr., Inc. v. Realm Elec. Contrs., Inc., 15 A.D.3d 444, 447, 790 N.Y.S.2d 197 [2d Dept. 2005]).  In any event, plaintiff's subrogee status was established here by the trial evidence showing that plaintiff, a general contractor, made involuntary payments to defendant subcontractor's unpaid suppliers and vendors.

An award in favor of plaintiff is supported by the trial evidence.  We find no basis for disturbing the court's credibility determinations as to the witness testimony.  Given its determination that defendant Haddad's trial testimony lacked credibility as a result of inconsistencies with prior statements, the court correctly found that the otherwise applicable Lien Law § 75(4) presumption as to the diversion of funds was not rebutted by Haddad's explanation for the missing books and records (see Medco Plumbing, Inc. v. Sparrow Constr. Corp., 22 A.D.3d 647, 648, 802 N.Y.S.2d 730 [2d Dept. 2005]).  The court properly admitted the key documentary evidence that supports the award to plaintiff, including the invoices of defendants’ suppliers and vendors that defendants provided to plaintiff.

Moreover, the court, crediting testimony of plaintiff's managing member, found that plaintiff's payment to defendants in connection with “Requisition 8” included a $111,992.01 payment to defendants’ supplier, Dolphin Equipment Corporation.  We find that this conclusion was supported by a fair interpretation of the evidence and rests largely upon the court's determinations of witnesses’ credibility;  thus, it should not be disturbed on appeal (see Mestel & Co. v. Smythe Masterson & Judd, Inc., 215 A.D.2d 329, 329, 627 N.Y.S.2d 37 [1st Dept. 1995], citing Thoreson v. Penthouse Intl., 80 N.Y.2d 490, 495, 591 N.Y.S.2d 978, 606 N.E.2d 1369 [1992]).

The court also properly found defendant Haddad personally liable on the diversion claim based on the evidence that supports the conclusion that he knowingly participated in the diversion (see Ippolito v. TJC Dev., LLC, 83 A.D.3d 57, 59, 70–71, 920 N.Y.S.2d 108 [2d Dept. 2011];  Edgewater Constr. Co. v. 81 & 3 of Watertown, Inc., 1 A.D.3d 1054, 1057, 769 N.Y.S.2d 343 [4th Dept. 2003]).  Haddad admitted that he was the only person with authority to issue checks and wire transfers to suppliers.  The trial evidence showed a $350,000 payment to a settlement escrow account that was transferred to Haddad's spouse's law firm and then released back to one of Haddad's companies.  This diversion of trust assets makes any purported lack of knowledge implausible.

While punitive damages are available for Lien Law Article 3–A trust diversion claims (see M.A. Angeliades, Inc. v. Hill Intl., Inc., 150 A.D.3d 607, 608, 52 N.Y.S.3d 634 [1st Dept. 2017]), we decline to adopt a rule that would make such damages recoverable whenever there is a violation of Lien Law article 3–A that involves a diversion of trust assets (see Sabol & Rice, Inc. v. Poughkeepsie Galleria Co., 175 A.D.2d 555, 556–557, 572 N.Y.S.2d 811 [3d Dept. 1991]).  Moreover, we find that plaintiff has not shown that an award of punitive damages is warranted under the circumstances presented.