Pavarini McGovern, LLC v. Waterscape Resort LLC (In re Waterscape Resort LLC)

Citation: 514 B.R. 384Docket: Case No. 11-11593(SMB); Adv. Proc. No. 11-02248(SMB)

Court: United States Bankruptcy Court, S.D. New York; August 15, 2014; Us Bankruptcy; United States Bankruptcy Court

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Waterscape Resort LLC filed a motion to discharge certain mechanics liens against its property, opposed by its general contractor, Pavarini McGovern, LLC, and subcontractor John Civetta & Sons, Inc. The motion was denied as a matter of law, but Pavarini was ordered to fulfill its contractual obligations. Waterscape, which owns property in Manhattan, entered into a Construction Management Agreement (CMA) with Pavarini in 2007 to construct a hotel and condominium. Disputes arose when Waterscape terminated Pavarini in 2010, alleging wrongful withholding of payments, leading Pavarini to file a secured claim of over $10 million related to its mechanics lien in 2011. By this time, approximately $20 million in mechanics liens had been filed against Waterscape’s property, although only about half was legitimately owed. Waterscape confirmed a reorganization plan on July 21, 2011, establishing a Trust Fund Account with $11 million to address Class 3 claims, which included Pavarini’s lien, deemed released upon funding. However, the plan did not affect the subcontractors’ liens, and all Class 3 claims were marked as disputed, allowing for their resolution in non-bankruptcy forums. Claims could be paid from the Trust Fund Account or Waterscape’s assets once liquidated by a competent jurisdiction’s order.

Pavarini contested the definition of the Final Payment in the Construction Management Agreement (CMA), leading to a modification that allowed claims to be resolved through various forums, including the Dispute Resolution Board (DRB). Consequently, Waterscape was required to pay Pavarini once the DRB issued its Final Accounting, which determined that Waterscape owed Pavarini $8,093,655.92. Following the DRB's ruling, Pavarini sought to enforce this payment, which the Court granted on April 24, 2014. Subsequently, Waterscape filed a motion on May 5, 2014, requesting an order to discharge mechanics liens of Class 3 creditors and to dismiss all remaining claims from Pavarini. Under New York Lien Law, subcontractors can assert liens regardless of privity with the owner, but these liens cannot exceed the unpaid amounts on the prime contract. The subcontractor's recovery rights are derivative of the general contractor's, meaning if the general contractor is fully paid, the subcontractor cannot recover unless they have valid claims. The case law illustrates that a subcontractor’s lien remains effective until satisfied, even if the owner completes payment to the general contractor.

The Appellate Division reversed the Supreme Court's decision, determining that Trane’s mechanics lien was unaffected by a deposit, as the Supreme Court conflated an unpaid materialman’s right to a mechanics lien with the limitations on funds to discharge that lien. The minority opinion found this outcome unfair, arguing that the mechanics lien should attach to the bond securing the debt, thereby relieving the owner from the burden of multiple undertakings for materials previously secured. The Court of Appeals affirmed the Appellate Division, asserting Trane's unqualified right to a mechanics lien on the property. It clarified that a Final Payment to Pavarini does not discharge the mechanics liens of unpaid subcontractors, even if it prevents them from collecting further from Waterscape. Additionally, the Final Accounting is still subject to review, and if appealed, Waterscape might owe more, allowing subcontractors to maintain derivative rights against Waterscape through their mechanics liens.

New York Lien Law 20 states that a mechanics lien can be discharged by depositing money with the county clerk, but since Waterscape paid Pavarini directly without making such a deposit, the liens remain intact. Waterscape argued the Plan eliminated all claims by Pavarini and subcontractors, asserting that payment to Pavarini satisfied the subcontractors’ mechanics liens. However, the Plan explicitly discharged Pavarini’s lien but did not address the subcontractors’ liens, which remain enforceable until liquidated by a Final Order.

Lastly, under the Construction Management Agreement (CMA), Article 4.24.1 requires Pavarini to act to discharge any mechanics lien filed against the project if the owner has already compensated the Construction Manager. The CMA mandates that upon notice from the owner, Pavarini must begin the discharge process within five days and complete it within thirty days, with associated costs being allowable as a contingency expense.

Waterscape did not meet the conditions outlined in CMA Article 4.24.1, specifically failing to pay Pavarini for work and materials provided by mechanics lienors at the time the liens were filed. Additionally, Waterscape's claim that Pavarini supported it through asserted back charges against subcontractors lacks substantial evidence, relying instead on an unsubstantiated remark in its reply memorandum. Waterscape failed to demonstrate a bona fide dispute with any subcontractor or that Pavarini's back charges were linked to Waterscape's disputes rather than Pavarini’s own issues with subcontractors.

In its reply, Waterscape referenced CMA Article 12.7.3, which mandates Pavarini to confirm payment of all work-related obligations before final payment is made. However, Pavarini contended it was not obligated to fulfill these requirements due to Waterscape's material breach by wrongfully terminating the CMA, which excused Pavarini from further performance. While Pavarini's legal stance is valid, the law also states that a non-breaching party cannot demand benefits under a breached contract without meeting corresponding obligations.

Following Waterscape's breach, Pavarini invoked the alternative dispute resolution (ADR) procedures outlined in the contract and argued that the CMA required Waterscape to immediately satisfy an $8 million debt per the Final Accounting. Pavarini maintained that Waterscape could not appeal or seek review of the Final Accounting until payment was made, thereby affirming its position regarding the ADR provisions and the implications surrounding the Final Payment.

Pavarini is obligated to fulfill its contractual duties under the CMA following the Final Payment, despite Waterscape's claims regarding CMA Article 12.7.3. Pavarini did not repudiate its obligations before the Final Payment, and any breach occurred afterward, nullifying Waterscape's ability to present a claim to the Dispute Resolution Board (DRB), which lost jurisdiction upon the Final Payment as per CMA Article 18.1.7. The Final Payment does not discharge mechanics liens under New York law, but enforces the terms of the CMA between the parties.

Separately, Pavarini seeks to amend its complaint to include a punitive damages claim related to alleged diversion of trust funds by Waterscape and Solly Assa. Waterscape opposes this amendment, asserting that Pavarini delayed unduly, would suffer prejudice, and that the amendment is futile due to its conclusory nature and prior law of the case. Waterscape also contends that the claim is moot under the bankruptcy Plan, which bars payments for claims already settled. The Court noted the potential discharge of the punitive damage claim by the Plan and invited further argument from Waterscape, which was not provided. The Court will review Waterscape's arguments against Pavarini's amendment in a forthcoming decision.

The Court finds that the parties' remaining arguments lack merit and orders a settled order on notice. The Construction Management Agreement (CMA) is included as Exhibit 2 to the affidavit supporting Pavarini McGovern, LLC’s motion for partial summary judgment. New York Lien Law allows subcontractors to place a lien on real property for unpaid labor or materials, with specific limits on the lien amount relative to the unpaid contract sum. A lien can be discharged by depositing the claimed amount with the county clerk prior to foreclosure action, and such a deposit shifts the lien from real property to cash, although the requirement to commence foreclosure within a year remains.

Previous cases cited by Waterscape regarding lien discharges through court payments are distinguished, as they do not apply to the owner’s payments to the general contractor. Additionally, Pavarini's claims against subcontractors do not support the owner's position under the CMA, which is ambiguous. Waterscape's late reference to a specific CMA article is addressed but does not alter the outcome. The Court concludes that the dispute resolution procedures within the CMA survive any breach, particularly in cases of non-payment, and that Pavarini did not claim that such procedures were conditions for final payment. The Supreme Court's decision regarding the dispute resolution is also noted, ensuring all creditors receive full payment under the Plan, including any punitive damage claims unless discharged.