SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 3
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AMERICAN HOME ASSURANCE COMPANY,
Plaintiff,
-against-
Index No. 601042/98
Sequence No. 001
GEMMA CONSTRUCTION COMPANY, INC.,
FRED CARCHIETTA, THOMAS CARCHIETTA,
JAMES CARCHIETTA AND MAFALDA
CARCHIETTA, I.V.S. CONSTRUCTION CO., INC.
and IVAN SARGEANT,
Defendants.
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BARRY A. COZIER, J.:
In this action alleging breach of indemnity agreements, plaintiff American Home Assurance Company ("American") moves for: (1) partial summary judgment, pursuant to CPLR 3212, against defendants Gemma Construction Company, Inc. ("Gemma"), Fred Carchietta, Thomas Carchietta, James Carchietta, and Mafalda Carchietta (collectively, "the Carchiettas"), I.V.S. Construction Co., Inc. ("I.V.S."), and Ivan Sargeant ("Sargeant") in the amount of $7,129,638.96; and (2) an order dismissing the counterclaims asserted by Gemma, the Carchiettas, I.V.S., and Sargeant.
FACTUAL ALLEGATIONS
Plaintiff commenced this action on March 4, 1998, alleging that Gemma, I.V.S., and Sargeant entered into numerous contracts to perform construction work on various projects, some of which are affiliated with the New York City School Construction Authority. The projects are referred to as Margaretville, P.S. 171-ECC, Newburgh, Liberty, P.S. 721, P.S. 54, and P.S. 121/225.
American, as surety, issued bonds for the projects, naming Gemma and I.V.S. as principals and various entities as obligees. Gemma and the Carchiettas executed a General Agreement of Indemnity on June 15, 1994, which provides in part:
In consideration of the execution of any such Bonds for Principal and as an inducement to such execution or continuation of suretyship by Surety, the Undersigned, jointly and severally, agree as follows:
INDEMNITY TO SURETY: Undersigned agree to pay Surety upon demand any premium due and all loss and expense, including attorney fees, incurred by Surety by reason of having executed any Bond. An itemized statement of loss and expense incurred by Surety, sworn to by an officer of Surety, shall be prima facie evidence of the fact and extent of the liability of Undersigned to Surety in any claim or suit by Surety against Undersigned. Separate suits may be brought under this agreement as causes of action accrue, and the pendency or termination of any such suit shall not bar any subsequent action by Surety.
Geraci Aff. in Support, Exh. E, General Agreement. The agreement defines "bond" as, "[a]ny and all bonds, undertakings or instruments of guarantee and any renewals or extensions thereof by Surety." Id. "Principal" is defined as, "[a]ny one, combination of, or all of the Undersigned, or any present or future subsidiary or any subsidiary of a subsidiary of the Undersigned, whether alone or in joint venture with others not named herein, and any corporation, partnership or person upon written request of any of the Undersigned." Id. On July 21, 1994, Gemma, I.V.S., and Sergeant executed a General Agreement of Indemnity, which also includes the above-quoted language. See, Id., Exh. F, General Agreement.
The New York City Department of Environmental Protection ("DEP"), the owner of a project in Margaretville, New York, notified Gemma on December 23, 1996 that it was intending to declare Gemma in default for a lack of progress. Id., Exh. G, Letter. Gemma's request to assign the remaining work on the Margaretville Project to another contractor was subsequently questioned on the ground that the proposed assignee lacked the necessary experience. The DEP did notify Gemma, however, that a default could be avoided by assigning the Margaretville Project to a qualified contractor. Id., Exh. H, Letter.
By letter dated January 29, 1997, Fred Carchietta, the President of Gemma, informed American that it was experiencing cash flow problems and requested assistance in funding in order to avoid default. In response, American entered into an agreement with Gemma, the DEP, the Carchiettas, and Parsippany Construction Company, Inc. ("Parsippany"), assigning the Margaretville Project from Gemma to Parsippany. Id., Exh. J, Assignment.
In addition, on March 26, 1997, Gemma and the Carchiettas entered into an agreement with American, wherein the parties agreed, inter alia, to the following: (1) American agreed to provide Gemma with up to $100,000 in financing to enable Gemma to complete the Liberty Project and up to $400,000 to complete the P.S. 171/ECC Project; and (2) Gemma agreed to provide American with assignments of proceeds on the bonded projects except Newburgh, which were to be placed into a separate trust fund account and utilized first to pay subcontractors, laborers, and materialmen who furnished labor and materials on the projects. Id., Exh. K, Agreement. Pursuant to this agreement, Gemma subsequently executed assignments transferring to American all of the proceeds on existing projects due to Gemma from the owners of the projects. See, Id., Exh. L, Assignment Letters.
A number of developments subsequently occurred contrary to the terms of the March 26 agreement. Although the agreement provided that Gemma would complete the Liberty Project with financing of up to $100,000 and the P.S. 171/ECC Project with up to $400,000, American provided Gemma with over $130,000 and $1,800,000, respectively, pursuant to Gemma's request. In addition, Gemma did not assign the P.S. 54 and P.S. 121/225 projects to other contractors by the agreed-upon date of May 15, 1997. P.S. 54 was ultimately assigned on January 8, 1998, with a claimed loss of at least $2,276,815.20. P.S. 121/225 was assigned without an expected loss to American. In total, American maintains it has sustained $7,129,638.96 in losses on the bonded projects, for which the defendants are jointly and severally liable pursuant to the signed agreements. American has submitted copies of the payment drafts from the trust account, lists
referencing each of the checks paid on the projects, and monies recovered on each project. See, Id., Exh. O, P.
American further contends that the defenses and counterclaims asserted by Gemma and the Carchiettas should be dismissed. Specifically, American claims: (1) the third affirmative defense that American breached its duty of good faith by failing to mitigate Gemma's losses and the claim that the assignments were made under great duress is meritless, as Gemma and the Carchiettas executed the March 26 agreement and assigned the Margaretville, P.S. 54, and P.S. 121/225 projects by their own free will and without any duress; (2) the fourth affirmative defense that American's conduct requires it to be estopped should be disregarded, as no facts have been demonstrated that American engaged in any conduct to estop it from seeking indemnification and reimbursement; (3) the fifth affirmative defense that American's unmitigatable losses were less than $3,750,000 ignores the fact that Gemma agreed to the assignments of the contracts and the payments made by American; (4) the seventh affirmative defense and the first counterclaim that American refused to permit the substitution from another surety fails to state a cause of action, as American was never provided with the name of a surety who was willing to provide additional financing or issue replacement bonds; and (5) the second counterclaim that as a result of American's actions defendants defaulted on certain construction loans is meritless, as Gemma has acknowledged that its own cash flow shortage and inability to complete the projects were the reasons which caused it to sustain losses.
American also seeks to dismiss I.V.S. and Sargeant's defenses and counterclaims alleging that: (1) the second affirmative defense disclaiming liability on the bonded projects is contradicted by the plain language of the indemnity agreement; and (2) the first counterclaim, which seeks $10,000,000 in damages allegedly sustained as a result of American's failure to make payment for labor and materials, are consequential damages arising out of Gemma's failure to honor its subcontractor agreements with I.V.S. and Sargeant.
Gemma contends American's motion for summary judgment is premature because no discovery has yet taken place. Gemma maintains discovery is warranted to determine, inter alia, what American knew about Gemma's overall financial condition, American's decision-making process in deciding how to handle claims, the reasons American refused to bond liens on projects, and the reasons certain contractors were accepted as assignees of Gemma's work.
According to Gemma, unforeseen difficulties arose with the Margaretville Project, resulting in a seven month delay by DEP in deciding how to proceed. Gemma maintains American failed to assist in defraying unanticipated costs and required the assignment of the contract to Parsippany, rather than to Kokolakis, another qualified contractor who was able to complete the contract for substantially less money. Gemma further asserts American wrongfully refused to bond subcontractor liens placed on Gemma's projects.
In addition, Gemma contends that it was under economic duress when it agreed to the March 1997 agreement, and that American subsequently acted in a grossly negligent manner by compelling unnecessary assignments, choosing overly expensive assignees, and multiplying losses. Gemma further questions the propriety of the assignments of the projects, as American International Group, the umbrella of companies of which American is a part, provides the School Construction Authority with general liability insurance. Gemma claims American wrongfully rejected Gemma's proposal for a replacement surety. Gemma also questions a number of payments made by American.
I.V.S., whose sole employee is Sargeant, maintains that in 1994, it obtained a municipal contract to perform renovations at the New York Botanical Garden. I.V.S. subsequently hired Gemma to perform carpentry work as its subcontractor and, pursuant to American's direction, obtained a co-applicant for a $331,093 bond on the Botanical Garden Project. See, Sargeant Aff., Exh. A, Application for Bond. Gemma agreed to be the co-applicant for the bond application, and the parties subsequently delivered the July 21, 1994 General Agreement of Indemnity. The Botanical Garden Project was eventually completed and no claims were made with respect to the bonds.
I.V.S. contends that in 1997, it was not receiving payment from Gemma for three other projects. After requesting payment from Gemma to no avail, I.V.S. contacted American to obtain payment pursuant to the bonds. In May 1998, American informed I.V.S. that as a result of the documents I.V.S. had completed in connection with the bond for the Botanical Garden Project, American was seeking to have Sargeant and I.V.S. indemnify and discharge American from any claims made by I.V.S. or its subcontractors. I.V.S. argues that evidence of American's overreaching and bad faith is demonstrated by its claims against I.V.S. In this regard, I.V.S. points out that although the General Agreement of Indemnity signed by I.V.S. was the result of an application for a bonding on a single project with a $331,093 bonding limit, American now seeks to hold I.V.S. and Sargeant responsible for alleged losses in excess of $6 million arising from unrelated projects.
I.V.S. further maintains that prior to the filing of this motion, it had not seen and is not familiar with the voluminous documents provided by American. Consequently, I.V.S. contends it must conduct discovery to determine its liability, if any. I.V.S. also claims the indemnity agreement was obtained by fraud and that the bond application clearly relates only to the Botanical Garden Project.
DISCUSSION
Summary Judgment
It is well established that summary judgment may be granted only when it is clear that no triable issue of fact exists. Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 325 (1986). Although the papers submitted in support of and in opposition to a summary judgment motion are examined in a light most favorable to the party opposing the motion (Martin v. Briggs, 235 A.D.2d 192, 196 (1st Dept. 1997)), mere conclusions, unsubstantiated allegations, or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980). Upon the completion of the court's examination of all the documents submitted in connection with a summary judgment motion, the motion must be denied if there is any doubt as to the existence of a triable issue. Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223, 231 (1978).
Although a party opposing summary judgment should be able "to obtain further discovery when it appears that facts supporting the position of the opposing party exist but cannot be stated," it should not be permitted where there has been a failure to demonstrate that the discovery sought would produce relevant evidence to support the allegations. Frith v. Affordable Homes of America, Inc., ___ A.D.2d ___, 676 N.Y.S.2d 513, 513 (2d Dept. 1998). Thus, where relevant facts essential to justify opposition to a summary judgment motion are within the exclusive knowledge and control of the moving party and may be revealed through discovery, summary judgment should be denied. MBL Life Assurance Corp. v. Shorenstein Co., 237 A.D.2d 160, 161 (1st Dept. 1997). However, mere hope that discovery may reveal evidence is insufficient to defeat a summary judgment motion. Marine Midland Bank v. Hakum, 247 A.D.2d 345, 345 (1st Dept. 1998).
Indemnity agreement clauses similar to the one at issue in the present case have been consistently enforced by courts, and payments under such provisions are scrutinized only for good faith and reasonableness as to the amount paid. See, Acstar Ins. Co. v. Teton Enterprises, Inc., 248 A.D.2d 654, 654 (2d Dept .1998); International Fidelity Ins. Co. v. Spadafina, 192 A.D.2d 637, 639 (2d Dept. 1993). Defendants maintain American acted in bad faith by failing to mitigate damages, declining to bond outstanding liens, or agreeing in principle to a substitute surety on certain projects. Defendants also raise the issue of why American insisted upon the assignment of the Margaretville Project at a substantial cost, despite a report from their own auditors indicating that Gemma's difficulties could be overcome at a significantly smaller cost. See, Carchietta Aff., Exh. B.
Rather than merely stating conclusory allegations of bad faith, defendants have demonstrated in papers submitted to the Court that the discovery sought would produce relevant evidence as to the allegations. See, e.g., Geraci Aff. in Support, Exh. B, Gemma Answer, at ¶ 42 (although the analysis of American's own auditors indicated the Margaretville Project could have been completed by Gemma with a loss of $1 million, American failed to mitigate damages by requiring the assignment of the project, resulting in losses in excess of $4 million); Id., Exh. B, I.V.S. Answer, at ¶ 10 (American committed fraud by inducing I.V.S. to execute documents in connection with the bond application which renders the General Agreement of Indemnity void). Because summary judgment "is not justified where the existence of essential facts depends upon knowledge exclusively within the possession of the moving party and which might well be disclosed by cross-examination or examination before trial," the necessary discovery must first take place. Baldasano v. Bank of New York, 199 A.D.2d 184, 185 (1st Dept. 1993).
Accordingly, in light of the fact that no discovery has yet taken place and that defendants' claims are more than conclusory, the Court concludes that the summary judgment motion should be denied. The Court notes that due to the "drastic" nature of summary judgment, which "'deprives the litigant of his day in court," it should only be employed when there is no doubt that there are no triable issues. Martin, supra, at 196 (quoting Andre v. Pomeroy, 35 N.Y.2d 361, 364 (1974)). Because the counterclaims are directly related to the bad faith allegations made by defendants, the motion to dismiss the counterclaims is also denied without prejudice. American may renew its partial summary judgment motion and motion to dismiss the counterclaims if, following discovery, such motions are warranted. See, Metcalfe v City of New York, 223 A.D.2d 410, 411 (1st Dept. 1996).
Accordingly, it is
ORDERED that plaintiff's motion for summary judgment is denied without prejudice; and it is further
ORDERED that plaintiff's motion to dismiss the counterclaims is denied without prejudice.
This constitutes the decision and order of the Court.
Dated: March 31, 1999
ENTER:
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J.S.C.