State Finance Law ยง137 Allows Subcontractors' Assignees to Recovery Payment from Bond Sureties
April, 2005
The New York Court of Appeals recently held that a subcontractor’s assignee may file suit to recover payment from bond sureties pursuant to State Finance Law § 137. Quantum Corporate Funding, Ltd. v. West Industries, Inc., 4 N.Y.3d 311 (2005).
Facts
State Finance Law § 137 requires general contractors on public works projects to purchase payment bonds. The payment bonds work like insurance policies designed to guarantee payment to general contractors’ suppliers, employees and subcontractors. However, the statute was silent on who may actually sue on the bond.
This lawsuit was filed by a factor against a surety, with the subcontractor and general contractor uninvolved. Atlas Concrete Cutting LLC (“Atlas”) served as a subcontractor for Westway Industries (“Westway”), a general contractor hired to complete various public works projects in Westchester and Queens counties. After completing the work, Atlas sold its accounts receivable to Quantum Corporate Funding, Ltd. (“Quantum”). Westway failed to pay its debts and went out of business.
To recover on Atlas’s claim, Quantum pursued United States Fidelity and Guaranty Company (“Guaranty”), the surety for the section 137 payment bonds that Westway had purchased. Guaranty refused to honor Quantum’s demand for payments due to Atlas. Subsequently, Quantum brought suit in New York Supreme Court, Westchester County and obtained a default judgment as against Westway. Quantum was able to establish that Atlas’s invoices to Westway were proper and payable. However, the trial court granted Guaranty’s motion for summary judgment under section 137 against Quantum in reliance on the Appellate Division, First Department’s holding that the subcontractor’s right to recover on payment bonds is non-assignable. See Quantum Corporate Funding v. Fidelity & Deposit Co. of Md., 258 A.D.2d 376, 685 N.Y.S.2d 688 (1st Dep’t 1999).
On appeal, the Appellate Division, Second Department, reversed the lower court’s dismissal. It acknowledged that its holding conflicted with the First Department’s decision in Fidelity.
In order to resolve the split between the Appellate Division departments, the Court of Appeals granted Guaranty’s motion for leave to appeal (see CPLR 5602(a)(1)(ii)). The Court of Appeals affirmed the decision of the Second Department, Appellate Division.
Analysis
Whether parties may sell an enforceable right to receive payments under bonds required by State Finance Law § 137 was an open question before the Court.
In relevant part, section 137 provides the following:
1. [The Comptroller or other appropriate public official may] nevertheless require prior to the approval of any [public works] contract a bond guaranteeing prompt payment of moneys due to all persons furnishing labor or material to the contractor or his subcontractors in the prosecution of the work provided for in such contract….
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3. Every person who has furnished labor or material, to the contractor or to a subcontractor of the contractor, in the prosecution of the work provided for in the contract and who has not been paid in full thereof before the expiration of a period of ninety days after the day on which the last of the labor was performed or material was furnished by him for which the claim is made, shall have the right to sue on such payment bond in his own name for the amount, or the balance thereof, unpaid at the time of commencement of the action….
In construing the statute, the Court referred to two background and guiding principles. First, claims are typically transferable. See General Obligations Law § 13-101 (“Any claim or demand can be transferred”); see also Restatement [Second] of Contracts § 317 [2] (setting transferability rights as the default and outlining narrow exceptions). Second, the original section 137 and every subsequent amendment was designed to protect workers, material suppliers and subcontractors from the hardship that accompanied the previous instability in financing of public works.
Guaranty argued that since a subcontractor’s right under Lien Law Article 2 (to place a lien on the general contractor’s process) is not assignable, the same restriction should be applied to bonds under section 137. However, Guaranty acknowledged that section 137 is aimed at providing greater protection to laborers, suppliers and subcontractors than the Lien Law. The Court was not persuaded and stated that if it adopted Guaranty’s analogy, then it would set the statutory beneficiaries back to the financial inflexibility and risk they endured before section 137’s passage.
Second, Guaranty argued that by explicitly granting labor trustees the right to stand in place of the actual workers, suppliers and subcontractors under section 137 (5)(b), the Legislature intended to make that grant exclusive. The Court disagreed and the better interpretation of the clause was that it was the legislature’s way of allowing parties not connected to the project to sue on behalf of the named beneficiaries.
Guaranty further argued that affirmance would not be consistent with the legislative goal of reducing the cost of state projects, because sureties would have to raise the premiums charged for bonds to cover the increased risk. Quantum countered that argument by stating that sureties set the price of the bond before the general contractor begins work on the project as the bond is a prerequisite to hiring subcontractors. The sureties, in effect, argued that by having to pay out money rightful due to those who earned it and who are entitled to it by statute, the sureties will have to raise rates because they are no longer able to keep the money. The Court would not construe the statute in the manner suggested given the legislature’s interest in protecting suppliers, workers and subcontractors.
Finally, the Court rejected Guaranty’s related contention that making sureties liable to a factor like Quantum would generally expand the class of claimants, and thereby increasing the sureties’ risk of payment on the bonds.
Therefore, the Court held that a subcontractor’s assignee may file suit to recover payment from bond sureties pursuant to State Finance Law § 137.
Learning Point:
In Quantum, the Court looked to balance such factors as the continued successful functioning of the public works and surety market and the legislature’s interest in protecting suppliers, workers and subcontractors. This case makes clear that an assignee has standing to sue on bonds issued pursuant to State Finance Law, thus resolving the split between the Appellate Division departments. •
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