QUANTUM CORPORATE FUNDING LTD v. FIDELITY DEPOSIT COMPANY OF MARYLAND

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Supreme Court, Appellate Division, First Department, New York.

QUANTUM CORPORATE FUNDING, LTD., Plaintiff-Appellant, v. FIDELITY & DEPOSIT COMPANY OF MARYLAND, et al., Defendants-Respondents.

Decided: February 23, 1999

SULLIVAN, J.P., NARDELLI, RUBIN and MAZZARELLI, JJ. Amos Weinberg, for Plaintiff-Appellant. John P. Ruggiero, for Defendants-Respondents.

Order, Supreme Court, New York County (Barry Cozier, J.), entered on or about May 29, 1998, which denied plaintiff's motion for summary judgment on its first cause of action and which granted defendants' cross motion for summary judgment dismissing the complaint, unanimously modified, on the law, to the extent of granting plaintiff's motion and denying defendants' cross motion as to the first cause of action and, except as so modified, affirmed, without costs.   The Clerk is directed to enter judgment in favor of plaintiff in the amount of $95,123 together with interest from January 30, 1997.

Defendant Constantine D & B, Ltd. contracted to perform renovation work for the City of New York at the Hamilton Avenue Highway Yard in Brooklyn, New York.   Defendant Fidelity & Deposit Co. issued a labor and material payment bond as surety to defendant Constantine pursuant to State Finance Law § 137.   Constantine thereafter entered into a subcontract with Middletown Structurals, Inc. for the erection of structural steel at the project site.   The subcontract provides that neither the agreement nor any sum to become payable thereunder is assignable without the prior written consent of defendant Constantine.

After commencing work, Middletown Structurals requested that Constantine sign an estoppel letter authorizing payment directly to plaintiff Quantum Corporate Funding under Middletown's invoice in the amount of $95,123.   Defendant's attorney responded by letter dated January 27, 1997, directing plaintiff's attention to the non-assignment provision of the contract.   However, on January 30, 1997, Constantine Ioannou, defendant's president, signed the estoppel letter, which was received by Quantum.   Thereafter, in April 1997, Middletown Structurals fell behind schedule on the project and, by letter dated May 2, 1997, defendant Constantine terminated the subcontract pursuant to a failure of performance provision.   This action by Quantum ensued.

Quantum moved for summary judgment on its first cause of action, stating that Middletown Structurals performed work in furtherance of the project, that the subcontractor issued an invoice in the amount of $95,123 for payment and that Constantine is obligated to remit that sum to Quantum by virtue of a valid assignment, acknowledged by Constantine's president.   Constantine and Fidelity cross moved for summary judgment dismissing the complaint, alleging that there was no valid assignment absent Constantine's prior consent.   In his affidavit, Constantine Ioannou asserted that he signed the estoppel letter only after being assured by Middletown that it owed no money to its suppliers and laborers, an allegation that is belied by subsequent lawsuits filed on behalf of such parties.

 As noted by this Court in Quantum Corporate Funding v. L.P.G. Assocs., 246 A.D.2d 320, 323, 667 N.Y.S.2d 702, lv. denied 91 N.Y.2d 814, 676 N.Y.S.2d 127, 698 N.E.2d 956, defendant Constantine's obligation to plaintiff is contractual.   Defendant acknowledged that “all payments on the captioned invoices are to be made only to Quantum Corporate Funding, Ltd.” and that “there will be no claims against the funds paid” under the subject invoice.   The Court further noted that defendant's “assurance gives rise to an estoppel predicated upon the factor's reliance on that assurance in purchasing the assignment” (id., citing Hammelburger v. Foursome Inn Corp., 54 N.Y.2d 580, 587-588, 446 N.Y.S.2d 917, 431 N.E.2d 278 [estoppel in pais] ).

 On appeal, defendant Constantine relies on the non-assignment provision in its contract with Middletown Structurals and its counsel's letter to Quantum advising it that, in the absence of prior written consent, the assignment of the invoice is defective.   Whether viewed as an equitable basis to invalidate the estoppel certificate or assignment with knowledge of a defect in how the certificate was obtained (Quantum Corporate Funding v. L.P.G. Assocs., supra, at 323-324, 667 N.Y.S.2d 702), there is no merit to defendant's position.   As plaintiff points out in its reply brief, the contract provision violates UCC § 9-318(4).   That statute renders void any term in a contract between an account debtor and an assignor prohibiting assignment of an account or the creation of a security interest or requiring prior consent to assignment or the creation of a security interest (Aetna Cas. & Sur. Co. v. Bedford-Stuyvesant Restoration Constr. Co., 90 A.D.2d 474, 475, 455 N.Y.S.2d 265).

Having inserted a provision into its contract with plaintiff's debtor in violation of the Uniform Commercial Code, defendant Constantine will not be heard to raise that provision as an equitable bar to plaintiff's contract claim under the estoppel certificate.   Nor can plaintiff's awareness of an invalid contract provision be asserted as the foundation for its “knowledge” of a defect in the manner in which the estoppel letter was obtained.

 As to plaintiff's second cause of action seeking payment under the labor and materials bond issued by defendant Fidelity to Constantine, it is clear that security provided pursuant to State Finance Law § 137, like that provided under article 3-A of the Lien Law, is for the benefit of statutory beneficiaries.   The protection of the statute extends only to “subcontractors, materialmen and laborers” (Tri-City Elec. Co. v. People, 96 A.D.2d 146, 149, 468 N.Y.S.2d 283, affd. 63 N.Y.2d 969, 483 N.Y.S.2d 990, 473 N.E.2d 240) and confers no further rights upon a subcontractor's assignee (see, Quantum Corporate Funding v L.P.G. Assocs., supra, at 323, 667 N.Y.S.2d 702 [“ ‘no legislative intent to make a contractor a guarantor of payment to the creditors of his subcontractor’ ”], quoting Engineered Air v. LeCesse Bros. Contr., 192 A.D.2d 1053, 1055, 596 N.Y.S.2d 248 [concurring memorandum by Boomer, J.] ).

MEMORANDUM DECISION.